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Universal Health Services Inc. (NYSE:UHS)

Q4 2007 Earnings Call

February 29, 2008 9:00 am ET

Executives

Alan Miller - CEO

Steve Filton - CFO

Analysts

Justine Lake - UBS

Ken Weakley - UBS

Darren Lehrich - Deutsche Bank

Tom Gallucci - Merrill Lynch

Christine Arnold - Morgan Stanley

Erik Chiprich - BMO Capital Markets

Adam Feinstein - Lehman Brothers

John Ransom - Raymond James

Jeff Englander - America's Growth Capital

Kemp Dolliver - SG Cowen

Bill Bonello - Wachovia Securities

Gary Lieberman - Stanford Research

Shelley Gnall - Goldman Sachs

Operator

Good morning. My name is Hamilton, and I will be your conference operator today. At this time I would like to welcome everyone to the fourth quarter 2007 earnings 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, Mr. Filton, you may begin your conference.

Steve Filton

Thank you and good morning. I am Steven Filton. Alan Miller, our CEO, is also joining us this morning. And welcome to this review of Universal Health Services results for the full yea rand fourth quarter ended December 31, 2007.

As discussed in our press release last night, the Company recorded income from continuing operations per diluted share of $3.18 for the year and $0.75 for the quarter. After adjusting for certain operating and recovery expenses of our acute facilities in New Orleans resulting from damages sustained from hurricane Katrina, our adjusted income from continuing operations per diluted share for the quarter ended December 31, 2007 was $0.74.

During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecasts, 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, 2007, which we filed with the SEC last night.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. Revenues for the fourth quarter increased 12% over the prior year. Exclusive of the impact of new facilities, most notably Texoma and the revenues related to a construction management contract, whereby we have built a new hospital for an unrelated third-party, revenues have increased by 8%.

On a same facility basis in our Acute division revenues less provision for doubtful accounts increased 7.4% during the fourth quarter of 2007. The increase resulted primarily from an increase in revenue per adjusted admission. Admissions to our hospitals owned for more than a year were flat for the quarter. As we have previously indicated that we expected during the fourth quarter of 2007, newly constructed capacity at the physician-owned hospital in the McAllen, Texas unfavorably impacted our admissions in that market.

On a same facility basis, revenue per adjusted admission rose 4.8% during the fourth quarter of 2007.We define operating margins as operating income or net revenue as salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenue.

On a same facility basis, operating margins for our acute care hospitals increased to 13.9% during the fourth quarter of 2007 from 12.1% during the fourth quarter of 2006. Our acute care hospitals provides charity care and uninsured discounts based on charges at established rates, amounting to $130 million and $117 million during the three-month period ended December 31, 2007 and 2006 respectively.

On a same facility basis, revenues in our behavioral health division increased 9.5% during the fourth quarter of 2007. This increase resulted from admissions growth and an increase in revenue per adjusted admission. Admissions to our behavioral health facilities owned for more than a year increased 7.3% during the fourth quarter and revenue per adjusted admission rose 2.8% over the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 23.4% during the quarter ended December 31, 2007, as compared to 22.8% during the comparable prior year period. Our cash flow from operating activities was approximately $26 million during the fourth quarter of 2007, following the third quarter when it was $164 million. As we discussed last quarter, we were favorably impacted in the third quarter by a $48 million change in other working capital accounts, due primarily to the timing of certain accrued payroll and accounts payable disbursements, which were funded in early October.

At December 31, 2007, our ratio of debt-to-total capitalization was 40% and the ratio of debt-to-EBITDA was 1.98. We spent $76 million on capital expenditures during the fourth quarter. Included in our capital expenditures were the construction costs related to do our new 165-bed Centennial Hills Hospital in Las Vegas, that opened in January and a new 171-bed hospital in Palmdale, California, that is scheduled to be completed and opened in 2009.

Also in California, we are underway with a major expansion of our Emergency Imaging and Women's Services at our Southwest Healthcare Campuses in Riverside County, California. Our behavioral facilities have operated at a very efficient 77% available occupancy rate for the year. These high occupancy rates are suppressing our admissions growth in certain markets, but we have multiple projects to add capacity to our busiest behavioral facilities. We opened the total of approximately 400 new behavioral health beds during 2007 and expect to open a similar number in 2008.

During the fourth quarter of 2007, we repurchased approximately 1.2 million shares of our Class B common stock and we repurchased another 1.7 million in the first quarter of 2008. We currently have 3.9 million shares remaining under the previous authorized share repurchase program.

We will be pleased to answer any questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from line of Justine Lake.

Justine Lake - UBS

Thanks. Good morning. A couple of questions. First, on the behavioral health side, the admission there were probably much hard then I think most of us were looking for. Anything you can tell us as far as what you saw thee right in the quarter and how sustainable you expect that to be -- that run rate to be at 2008?

Steve Filton

I mean, obviously, we were extremely pleased with that growth rate, Justine. I don't know that I would venture to say, we're sustainable at that level. But our admissions have been strong. They average there a little over 4% for the year. We've talked about being able to sustained behavioral same-store admissions in the 3% to 4% range.

And I think that, we should be able to -- I mean that 7% number I think reflected the strength throughout the portfolio. It wasn't really just focused on a few markets. I think it reflects the benefit that we're getting from this ongoing capacity expansion program that we've been talking about now for several years. It reflects our efforts in certain cases to convert residential beds to acute beds in one of that Keystone facilities we did that with great success. So, I think it's a function of just a lot of the strategy execution that's been in place for a number of years and just general strength throughout the portfolio.

Alan Miller

Let me add something to that. The business since it's largely directed by managed care and various governmental authorities, it's a trust business in part. People have to get to know you and trust that the company is a solid company. It does a very good job quality wise and that's how I view this. It's just a compliment to the professionalism of all of our people and the trust that they have in their markets.

Justine Lake - UBS

That's all from me. Just may be a couple of bigger picture questions. I mean the 10-K you put out last night gave some color around Las Vegas and so and McAllen obviously Vegas is doing extremely well given that the Sierra impact that benefited '07 as well as some Centennial of that maybe you have a little bit of a drag in 2008, at least in the first half.

Can you tell us if that built up facility base in Las Vegas has been growing for something like 20% a year over the last couple of years given what you saw in '07, which you know, it's going to happen in '08? Can you tell us what kind of growth do you expect to see out of Las Vegas when you put out your 10-K last year?

Steve Filton

Well, I think you've touched on sort of the moving parts in the market Justin. We've talked for sometime in our 2007 guidance, we had anticipated that San Antonio would actually open a little bit earlier than it has and we had included in our 2007 guidance $0.08 to $0.10 of dilution for San Antonio. We've probably realized a couple of cent of that in the fourth quarter just with pre-opening cost and now I think have shifted $0.07 or $0.08 of that into 2008.

San Antonio has gotten off to a fast start in its first few weeks. We were very bullish about its prospects. But it's certainly is going to incur operating losses in the first half of the year and we fully anticipate that and we've embedded that in our guidance. But again, generally feel very bullish about its long-term prospects.

As far the Sierra situation, that's a little bit much more up in the air. We need to renegotiate our contract and we're in the process of doing that with Sierra by late spring, early summer. And I think our view is we're relatively well positioned regardless of how that turns out. If we renew our contract at reasonable rates and HCA remains out of the network then I think that will be a positive for us.

If however, Sierra and HCA decide to renew their historical relationship and HCA gets back in their network, I think we feel there is an opportunity for us to go out and replace some Sierra business with other Medicare, Bluecross, other managed care business that we had lost by accommodating that Sierra business. And frankly, as we've talked about for a while now, that other business is better paying business.

So, we'll have to manage through all that. And we don't know at this point exactly how that's going to sort out, but we're relatively pleased with our position. Now, obviously we can't replicate in 2008 the same earnings surge that we had from the incremental Sierra volume that we got in '07, but we think we can maintain that profitability. And then, we've talked about the dilution we'll get from San Antonio in the short-term.

Justine Lake - UBS

Okay. Just one last big picture question for Alan, the other piece that you disclosed in the K is the McAllen facility and obviously about seen its share of issues, and it looks like it continues to deteriorate is there anything you could tell us as far as a timetable for when you expect some of the initiatives you put forth to see improvement or when you would make a decision as far as whether you want to continue in that market given that it looks like it's now at a net operating loss for you in 2007 and probably continues that way in '08?

Alan Miller

Justin, let me try and answer that question. I think that as we've talked about before there is still a great deal that we like about the McAllen market. It remains a fast growing market. It is not necessarily an over bedded or a market that has an excess of capacity. The facilities there operate relatively full.

So, the challenge for us is to regain some of the better paying commercial and better paying and better margin Medicare business has been lost over the last few years. We think we've strategies in place to do that. But we're very conscious of the fact that McAllen has turned into a negative contributor for us and is something we're watching very carefully as we employ these strategies and execute our plan.

Justine Lake - UBS

Okay. So, no specific thought that you could share with us?

Alan Miller

No. I don't think so. I mean I think that in general we rarely said to the firm, hard and fast deadlines for ourselves. But I can assure you that in terms of the dynamics that you've noted, we're very well aware them and following them closely and they are refracting how we think about investments in the market etcetera.

Justine Lake - UBS

All right. Great. Thank you very much.

Operator

Our next question comes from the line of Ken Weakley.

Ken Weakley - UBS

Thanks, and good morning, everyone. I was curious, we spend a lot of time on bad debt over the years, but in looking back at my model, labor cost of 43% is, I think relatively high over history. So if I went back to 2000, your labor costs were only about 39%. I know some of that's going to be because of pricing deceleration in some of the gross charges issues. But can you maybe disentangle the pricing declaration versus what's ever happening on the labor side? Help us understand that 400 basis points of erosion, if you will, on labor margin?

Steve Filton

I mean, Ken, it sound to me like your question is more a long-term question, I think you rapidly....

Ken Weakley - UBS

Yeah.

Steve Filton

Going back to 2000, I think, clearly, few things that happen since 2000 more so sort of from the 2003 time period, we've seen as an industry kind of a deceleration in volume and as well as an increase in uninsured that has driven revenue down and that has made it more difficult to gain the sort of efficiencies that we're regaining in the 2000, 2001, 2002 time period. Clearly, that's also a time period in which there has been significant wage inflation.

Again, to remind everybody, I think the industry really saw an explosion in its use of temporary nurses and registry nurses in that kind of 2000, 2001 time period. I think those pressures have at least moderated, but they certainly have resulted in just higher base level wage rate structure for our nurses. I'd also point out to people who are sort of following us specifically that when we brought our pharmacy services in house in the middle of 2006, we obviously moved to significant salary expense from other operating expenses to salary expense.

Ken Weakley - UBS

All right.

Steve Filton

But I think the other factors that we have mentioned certainly has all -- had a factor in squeezing those margins in that time period.

Ken Weakley - UBS

Do you have any expectations or goal to get that back down over the next few years or is it something that's sort of gets embedded into the cost structure and you just have to learn until revenue growth accelerates?

Steve Filton

I think that some of the factors are probably beyond our control in terms of the nursing shortage and the shortage of other clinical personnel. And while I think that those are factors that should again moderate as the years go on and we see that nursing enrollment figures have increased. And so, we'll see a greater pipeline of nurses coming into the system. None of that I think happens immediately. I think we're back to -- and I think you see it in the periods when we have decent volume growth and better payer mix or salaries as a percentage of revenue look better. And I think that will be the dynamic that continues to, sort of, be visible at least in our results.

Ken Weakley - UBS

One last question on the acquisition side, it has been a while since you have acquired an asset or done, or at least had an active profile in that regard. Do you, I mean, is the cost per bed getting to a range where you're comfortable looking at more assets? Is the marketplace more interesting? I know there are a lot of companies out there trying to sell assets. So just curios about your Acute care expansion plans going forward.

Steve Filton

Our last acute care acquisition of note was just about a year ago when we bought Texoma. And we were pleased with that and like the prospects of that asset. But, I think, you know our history, Ken, we are pretty disciplined and opportunistic acquirer. We're going to acquire assets either acute or behavioral when we think they make sense, when we think they fit our profile, when we think there are reasonably priced. And we're not going to acquire assets that don't fit those criteria. So, we continue to look for asset potentials and asset opportunities. Most of the assets that have been for sale but you kind of alluded to have been other for-profit assets.

Ken Weakley - UBS

Yeah.

Steve Filton

Historically, that has not been a great interest of ours. We just don't view them as having great opportunity. Though, there has been a handful for-profit deals that we've done over the years like in Aiken and Rancho Springs, California that we've done quite well with. But generally, we prefer to look not-for-profit assets. So we'll continue to look, but part of the reason that we became aggressive acquirer on shares again in the fourth quarter of '07 and the first quarter of '08 was that, we viewed the acquisition of our own earnings stream to be the most -- certain prudent economic investment that we can make. So, we're constantly sort of reevaluating all of our opportunities and we'll continue to do so.

Alan Miller

And you're really talking about growth as well and in Las Vegas, San Antonio and -- we're going to really this. Other than being concerned about your bedroom with fees for the acquisitions, this a 165-bed acquisition developed, no fee and you're going to like the results.

Steve Filton

I am very excited about it.

Alan Miller

And next year we have another one.

Ken Weakley - UBS

Yes.

Alan Miller

Service at Palmdale. So, we view it as both. We view it as either development or acquisition as long as there is growth in the company. And you also know that we made a few acquisitions in behavioral health end of this past year. But we do that again, very selectively. We're not looking to just pile in numbers. We do it very selectively.

Ken Weakley - UBS

Thanks so much. Take care.

Operator

Our next question comes from line of Darren Lehrich

Darren Lehrich - Deutsche Bank

Thanks. Good morning, Alan and Steve. This the second year in which you've commenced slightly above your annual guidance and I guess, in fact, both years you left that guidance untouched unlike most of our peers. My question is do you think this is the result of any kind of improving visibility in your markets and just Steve could you help me think about whether there has been any noteworthy changes to your budgeting or planning process that gives us anymore precision than you had before?

Steve Filton

Well, I think, you know Darren -- some of what has caused the volatility in our space in general over the last few years certainly has affected back in 2003, 2004. We saw our volumes decline on the acute side. And we certainly have seen an increase in our insured and our volumes have come back, I think stronger than just about any of our peers. But we still, although we did well in the fourth quarter, we still have some unpredictability and volatility that occurs with our uninsured volumes.

Some of the stuff that's been specific is cause of volatility. I think has clearly moderated or mitigated itself. We've lost significant profitability in the McAllen market in '04 and '05. But it has been relatively stable in the last couple of years and that's been helpful to our result. We obviously had a significant loss of EBITDA in '05 in the New Orleans market, when we lost two facilities as a result of hurricane Katrina. We obviously view that as a nonrecurring item.

So, I think things have stabilized in the acute portfolio, and then half of our earnings are thereabout come from the Behavioral business, which has been more stable. So, I think in that sense, as you point out I mean we've met or slightly exceeded our annual guidance in '06 and in '07 and are just feeling generally that the business is a little bit more stable and predictable at least on a longer-term basis. There may still be quarterly bumpiness, but on a longer-term basis I think we sense greatest stability than we did a few years ago.

Darren Lehrich - Deutsche Bank

Okay. Thanks. And then with regard to your new group purchasing organization, how quickly do you expect to convert and can you give us a sense for some of the higher value supply cost items like implants that what kind of percentage savings might be possible?

Steve Filton

We'll change our group purchasing organization affiliation effective April 1. And as you suggest Darren it is driven almost entirely by an expectation in our part that we'll get improve pricing by doing so. It will be a little bit of transition to do that. I think we're making every effort to transition as completely as possible, but it does take a little while to do so.

So, we think -- I think we'll enjoy some modest improvements in our supply pricing in 2008, but probably get the full benefit of that frankly in 2009 and going forward. But I think is largely across the board, I don't know that in any particular supply category or any particular service line.

Darren Lehrich - Deutsche Bank

Okay. And that's helpful. And just back to Las Vegas, Alan, I know, it sounds like you're there. When it comes time to renew the Sierra contract do you have a sense from your people there whether United will bring you the combined business and products to re-contract or is it still just the Sierra business at this point?

Alan Miller

Most of the current conversations and as you know obviously the merger was just effective in the last few days. Most of the current conversations however have really been about the legacy Sierra products. United does not have all that bigger presence in Las Vegas and our expectation I think, Darren quite frankly what will happen overtime is that the United products will probably sort of face out and most of those people will move into Sierra products in one form or another and that's the way that the United-Sierra entity will achieve their savings and achieve their goal. So, we see that as kind of more something that takes place over a little bit of an extended timeline rather than something that kind of -- there is an on and off switch to.

Steve Filton

We've a very good relationship with Sierra and they are going to be driving the combined business here. So, we feel good about that.

Darren Lehrich - Deutsche Bank

How is the San Antonio, how it's ramping Alan and I'll jump back here?

Alan Miller

I'd say ahead of expectations. And I think this is extraordinarily well placed in terms of growth of the community and generally all around everybody, who has been involved with this very bullish.

Darren Lehrich - Deutsche Bank

Great. Thanks very much.

Operator

Our next question comes from the line of Tom Gallucci.

Tom Gallucci - Merrill Lynch

Thank you. Good Morning. May be just following up on the last part of that last question, Steve, obviously when you open a new facility there are some probably cannibalization from some of your existing. So, can you, is there anyway to sort of put in perspective or measure the ramp up at San Antonio how much of an impact that's having as we think about same store numbers for your volume trends versus maybe you just taking market share from others?

Steve Filton

Our expectation Tom is that there will be some cannibalization, but probably not as much, when we opened Spring Valley four years ago. When we opened Spring Valley the nearest hospital to us was one of our own Summerlin. Whereas when we opened San Antonio the nearest hospital I've noticed is an HCA facility. So, I think we're just in a better position this time around not to cannibalize quite as much, but there will be some of that.

It's little hard to tell, San Antonio has been open for few weeks. There is no sort of precise way to know exactly where your business would have gone, had it not come to San Antonio. We're seeing a little bit of softness in the market all around in Vegas in the earlier part of '08, I don't know that it's due to San Antonio's opening. Some of it is -- we are seeing record ER volumes throughout the market, but not necessarily seeing that all convert into admissions. And I suspect that may just be a temporary issue and maybe a function of a flu season that's resulting in lot ER traffic but not in kind of admissions.

Also, another dynamic is that, there is Blue Cross contract in the market that now includes Catholic Healthcare West as a provider and they were not a provider before. I think we feel like we've lost a little bit to Blue Cross business to that. But, generally as Alan said, the San Antonio volumes are very strong. They don't seem to be affecting our other hospitals in any great way. And so, that's pretty consistent with our expectation. And we're pleased with the way it's gotten off the track in the first few weeks.

Tom Gallucci - Merrill Lynch

Okay. Good. Maybe just on the behavioral health side, two things there. You're obviously adding significant amount of beds and that's fostering the growth, is there any particular services or programs that there is a real demand out there for or it is just sort of vary by market? And then I am wondering what you're seeing on the pricing side in that business?

Steve Filton

Well, as far as pricing goes, our pricing in the fourth quarter was pretty strong. And frankly, throughout the year, we've been pleased with the admissions, but there've been few quarters where we would have liked the pricing to be a little bit higher. But certainly the pricing in the fourth quarter is well within, kind of, what we think are the sustainable levels for the next couple of years. So, we were pretty pleased with that.

I think as to your first question, it is really a market-by-market issue. I mentioned in one of our Keystone facility, we converted residential to acute bed and have seen a really dramatic increase in admissions as a result of that. But we've got other residential programs that are doing quite well. And quite honestly, I don't think you can have 7% same-store admission growth amongst 85 inpatient facilities unless you don't have relatively strong performance across a pretty wide slot of facilities. And I think that's what we've got.

So, I don't think it's specific to any particular program and I would echo what Allen said, I think we feel like we've got some real solid franchises. And in a quarter like this, we just feel like all that blocking and tackling that you do, and choosing the right facilities, etc etera pays off.

Tom Gallucci - Merrill Lynch

And maybe just one last one. The investigation down in Texas, and I am sensing, sort of, maybe some progress there?

Steve Filton

I mean as our 10-K disclosure indicates, we are having conversations with the government and I would say, probably for the first time really since the investigation began, Tom, we feel like we maybe at least seeing light at the end of the tunnel. Meaning that, I was saying, maybe we're at the beginning of it, says, of trying to bring this to a conclusion. I think it is still way too really for us to predict precisely or even remotely what the outcome would be. But we at least seem to entering that phase where the government is ready to talk about a resolution and we're anxious to do so under the appropriate term.

Tom Gallucci - Merrill Lynch

Okay. Thanks a lot.

Operator

Our next question comes from the line of Christine Arnold.

Christine Arnold - Morgan Stanley

Good morning. A couple of questions. Earnings progression, a moral challenge, where it looks like behavioral health year-over-year, kind of, first half of the year looks strong, San Antonio with some dilution but looks good. Do you see first half earnings in kind of in a way you're looking at things up year-over-year in the first half of '08?

Steve Filton

I think you raise the couple of issues, Christine. We will have that San Antonio dilution. It will clearly be front half loaded in 2008. Particularly in the first quarter our comparisons with last year are difficult. We had a very, very strong first quarter in 2007, largely as a result of surge in Sierra volume at our facilities without sort of any commensurate losses or other volume, which occurred later in the year. And we had a very positive bad debt performance, which then kind of weakened in the second and third quarter and then approved again in the fourth quarter.

I think our underlying guidance presumes that uninsured volumes will rise again modestly in 2008. But we don't give quarterly guidance and we are not about to start, I think particularly in this environment where sort of quarter-to-quarter changes can be a little bit tough to predict et cetera. So, we're sort of comfortable with our annual guidance, obviously and would caution people that we do have tough comparisons in the first quarter. And just to keep that in mind, the San Antonio dilution will be front end loaded. But other than that, we're not going to give a whole lot more precise guidance about how the quarter is going to look or how the first half is going to look.

Christine Arnold - Morgan Stanley

Okay. And then coming out just from a different angle and so far you say that you don't want to comment, it's just something that I'd like to know. As you look at kind of your guidance for '08, you're kind of guiding up relative to consensus expectations. Where do you see the upside relative to that models that you've are seeing from the sale side?

Steve Filton

And I'll answer the question I think a little differently Christine, in that. When we give our guidance and we're doing our budgeting, our models in deference to you all, we're not paying much attention. I rarely look at sell side models. We've enough trouble running our own business well alone keeping track of how other people view it in that sense.

So, the way I think about it is, we've got two businesses and our behavioral business, we've said we kind of expect and our guidance implies 3% to 4% same store volumes, 3% to 4% pricing on the Acute side, 2% to 3% volumes, 4% to 5% pricing that I think translates to the sort of right around double digit EBITDA growth that was embedded in the guidance and that's how we're thinking about the business.

With the San Antonio dilution in there etcetera but that's how we get comfortable with the guidance that we've given and again not we don't do a whole lot of reconciliation. I'd venture to say we do really do no reconciliation with what the sell side models are.

Christine Arnold - Morgan Stanley

Okay, fair enough. And then final question on the economic outlook and what we're seeing in terms of the consumer restricted access to credit, the housing crisis, the economy, how do you think about that when you put together your expectations?

Alan Miller

Well, we certainly are watching the overall -- watching economic situation nationally and then in our local markets closely. But so far, feel like it has not had in most of our markets, a terribly significant effect, I'd say probably the markets in which we've seen the most softness so far have been in Florida, where we've a couple of markets.

But even though Vegas has been kind of very visible sort of nationally with headlines about leading the foreclosure rate crisis and everything else. And the Vegas economy seems to be holding up and at least from our perspective, we don't seem to be suffering as of yet. We're doing okay in California even though that's also started as a market that's been hard hit by the credit and housing crises.

So, we're watching carefully. I mean one suggestion has been and I think it's too early to tell whether it was true or not, but one suggestion has been that if there is a softening economy and people loose their jobs that some of those people, who loose their jobs in industries like construction and related businesses are people who probably are most likely, who have lost their health insurance over the last few years anyway.

And so, we maybe somewhat more insulated in this economic downturn has an industry than we've been historically. But I don't know if that's intuitively that makes sense to me, but we'll wait and see. But at least so far, and again, I think our fourth quarter results will speak to that we've not seen a tremendous correlation between softness in the housing markets and the subprime crisis in our results.

Christine Arnold - Morgan Stanley

Great, thank you.

Operator

Our next question comes from the line of Erik Chiprich.

Erik Chiprich - BMO Capital Markets

Good morning. I was wondering if you could just give us a little bit of an update on Manatee, how's that's ramping up and the accretiveness of the Texoma assets now?

Alan Miller

Erik, I think as far as the Manatee market goes, we talked about a fairly disruptive construction project there that finally finished up at the end of the second quarter. As I just mentioned to Christine or in response to Christine's question, the Florida market is one in which we sense some of sort of underlying softness. Interestingly in that Manatee market when we talk to our peers down there, we feel like we're probably doing a little bit better than most of the other sort of reported numbers we get from our peers.

So, we feel like that's clearly a benefit of this construction project it's finally finished. As far as Texoma, I think Texoma is pretty much meeting our expectations. Again, the structure in the Texoma deal is that -- we acquired a profitable hospital and expected to make some modest improvements there but the big improvements we expect to occur when we open a replacement facility, which at this point is probably in early 2010. So, we're improving a little bit there but expect the opportunity to take real amounts of incremental market share, when we open the new facility.

Erik Chiprich - BMO Capital Markets

Great. And then could you talk a little bit on the construction projects that you guys were conducting during 2007. How the revenues and costs matched up? Was there anything in the fourth quarter that allowed more profitability to flow through on that project and maybe early in the year.

Steve Filton

I don't think. So, I mean I think that ultimately we round up recording maybe $6 million or $7 million of EBITDA in connection with that project most of it in 2007. But I think pretty ratably -- pretty much ratably over the year.

Erik Chiprich - BMO Capital Markets

Okay. And then finally on the San Antonio Hills. Could you talk about expectations, where you think maybe in a year's time target for revenue or EBITDA margin on that facility?

Steve Filton

I mean, I think our expectations Erik are that, again we've said a couple of times in the call that San Antonio will be EBITDA dilutive in the first half of the year and maybe through the summer and then by the backend of the year probably becomes EBITDA positive. If we sort of go back to our Spring Valley experience and even our Summerlin experience 10 years ago. I think within 18 to 24 months, we think that the facility is operating at market-wide average EBITDA margins and that's kind of been our experience in the market. And I think as Alan's remarks sort of indicated anything, we might be hopeful that San Antonio gets there little bit earlier. But I think it gives you a sense of what sort of timeline looks like.

Erik Chiprich - BMO Capital Markets

Okay. Thanks for the information.

Operator

And our next question comes from line of Adam Feinstein.

Adam Feinstein - Lehman Brothers

Okay. Thank you. Good morning. I guess Steve just a question here. I am just trying to think about the fourth quarter. I heard your outlook and everything for Vegas, but was there kind of thing about the overall volumes for Vegas in the fourth quarter relative to the flat number you reported. I assume Vegas would have been higher than that, but just want to get confirmation.

And I guess in answering that question, I guess my thought just being hear that your revenue per adjusted admission accelerated. So, I was just wondering if you had back held some of the non-Sierra patients and maybe saw less Sierra volume which help to be higher revenue per adjusted admits, so any comments there?

Steve Filton

As I kind of alluded to in my opening remarks, probably the single biggest driver of the flat admission was our experience in the McAllen market in the quarter as we have talked about expecting now for any number of quarters that the physician owned facility in McAllen opened up their OB service early in the fourth quarter, and we have seen our OB volume declined. Now, most of that decline is in not all that profitable business, so it hasn't really affected our profitability as much as it does be just the visibility of admissions.

But if you take out the McAllen admission for the quarter, we were up about 1.5%, and I think the Vegas admission were sort of consistent with that, probably up by about that amount. We didn't really see any shift in Sierra volume during the quarter. And I think that your question about what really contributed to the better revenue per unit in the quarter is a function of their payer mix, which we've talked about a few times now.

And then, a couple of other small things, some better Medicare management, Medicare utilization in a couple of markets are more effective. At Manatee, we're actually in the back half of the year. We had a Medicaid rate increase that was specific to the hospital, not broad rate increase in the state. Actually, we've seen a rate decline over on the state, but so we see -- there were couple of other things that really push that revenue a little bit but payer mix is probably the main issue in the quarter.

Adam Feinstein - Lehman Brothers

Okay. And with respect to bad debt expense, I guess, clearly, you saw some improvement here in the quarter relative to the third quarter. So just as -- we think about the run rate going forward, just trying to think about, what your expectations are? And I am not sure if you had an uninsured volume number for the quarter, I heard you say something about, but I didn't hear a number.

Steve Filton

Uninsured volumes are actually down in the quarter. I think our self-pay or non-pay admissions were actually down about 2% in the quarter compared to last year's fourth quarter.

Adam Feinstein - Lehman Brothers

Okay.

Steve Filton

Adam, I think I was getting into this -- I think in my answers to Christine, I mean it's a little bit hard to do this with great precision, certainly on a quarterly basis. But at the end of the day, I think our 2007 uninsured experience was relatively consistent with what our expectations were and that was we said going into 2007 that we expected a modest increase in uninsured volumes, not nearly as dramatic as we saw in '05 and '06 but still going up a little bit. And I think that that's how we go into 2008 with that same expectation and we'll see a modest increase in uninsured, probably along the lines of what we saw in 2007, but not nearly as dramatic as '05 and '06.

Adam Feinstein - Lehman Brothers

Okay. And then on the psychiatric side, just I guess a couple of questions. In term of adding new beds -- you guys are adding some new beds, psychiatric solutions is also, what are you seeing, are you seeing other providers adding new beds? I am just curious in terms of whether you think you're going to see a big increase in beds in the next couple of years, so any thoughts there? And then, at the same, I want to know how the schools that you guys purchased a couple of years ago are doing, that was a new business for you. So, I am just curious in terms of how the numbers have shaped up there?

Steve Filton

Right. As you know, Adam, because I know you followed the behavioral industry pretty closely, I mean, there was virtually no new capacity added to the free standing behavioral industry for probably 15 years, from the early 90s until 2004 when I think we really sort of were on the cutting edge of providers who started to add capacity for the first time.

Yeah. There are as you suggest now some other providers who are jumping into that as well. But I don't sense that it's having a significant effect on overall capacity in the behavioral industry, certainly in our markets in which we operate we don't sense. Frankly, as we do on the acute side, there is just a general upsurge in capacity additions all around. So I think people are still doing it relatively selectively and the fact that it's occurring after so many years of no expansion at all, means that it's not really being overdone the way that it was 15 plus years ago.

Alan Miller

Adam?

Adam Feinstein - Lehman Brothers

Yes.

Alan Miller

Let me add in also that every provider is not exactly the same. And there have been couple of startups that have looked at how well we've being doing over the past few years and what we're seeing is that they are buying up facilities to get started that we've no interest in at prices that we would never pay. So, that's what they are doing rather than adding capacity. It's really a change of ownership.

Adam Feinstein - Lehman Brothers

I got you, I got you.

Alan Miller

I'm sorry Adam. I was just going to try and answer your school question.

Adam Feinstein - Lehman Brothers

Yes, please. Thanks.

Alan Miller

So, we acquired some day schools in California as part of the Keystone acquisition back in October of 2005. I think we've said a few times that was a business as you indicate Adam that was sort of new to us. We're experimenting with it. It has been not something that frankly we've found and particularly successful and I certainly don't think we've any desire to expand that business. It was a relatively small part of Keystone's business and obviously as a result is a very small part of our overall Behavioral business. But again not something that I think we'll look to expand in any significant way.

Adam Feinstein - Lehman Brothers

Okay, thank you for the comments.

Operator

Our next question comes from the line of John Ransom.

John Ransom - Raymond James

Hi, good morning. Behavioral health bad debt was up a little bit, is there anything to note there?

Steve Filton

No. I don't think so, John. I think bad debt in the Behavioral business it's a little bit different dynamic than it is in the Acute. We sometimes make decisions to take patients who don't have insurance as an accommodation to referral sources or because we think we might be able to qualify somebody etcetera and we can't. But now, I mean I think we're very judicious about how we handle that. I looked at bad debt expense for the quarter it wasn't up in any particular market and it didn’t seem to be a bad result in any event obviously given the overall result.

John Ransom - Raymond James

Okay. Can you remind me I guess you've taken a $0.07, $0.08 hit this year for the San Antonio? What is your expected hit '08 over '07 for your construction management revenue on those kinds of little line item? But do you have a little pressure there this year?

Steve Filton

Not much -- not too much measurable. I mean I mentioned before that we probably recorded $6 million or so of EBITDA related to that contract which will finish up in the first quarter of '08. But we're in the process and I think pretty far long in negotiating a second contract, which we'll have going in 2008 or we expect to have going in 2008. And while I don't think we'll be able to replicate those exact same EBITDA numbers. We should be able to replicate probably at least half of that may be a little bit more. So, there shouldn't be any real material fall off in the contribution of that little business.

John Ransom - Raymond James

May be a couple of million?

Steve Filton

Yeah.

John Ransom - Raymond James

Okay. Thirdly, what's your share count assumption for 2008 and how much do you've left under your buyback?

Steve Filton

As I said in my opening remarks we bought back approximately $3 million shares between the fourth quarter of '07 and the first quarter of '08. We've included those buybacks in our assumptions. We've a little under $4 million left on our authorization and as is our practice we've not assumed any of those shares that bought back as part of our guidance.

John Ransom - Raymond James

All right. So, if we were to do end of the quarter share count fourth quarter end of the quarter share count first quarter just based on what you've announced, what -- can we just -- can you just get some numbers there make sure we're straight?

Steve Filton

$51 million at the end of the first quarter with the $3 million shares bought back between fourth and the first quarter.

John Ransom - Raymond James

$51 million, okay. And but no further just to reiterate no further buyback I assume given the $4 million left you're not assuming any further buybacks in your guidance?

Steve Filton

Right and that's consistent with the way we've always done guidance.

John Ransom - Raymond James

Okay. Two other things these are getting less and less important. I guess in Florida the governors proposed to eliminate CON and also we've been reading about Sarasota Memorial trying to cross the accounting line and encourage a little bit on your Manatee, any comments on either of those two?

Steve Filton

I think that we're sort of evaluating the position to take vis-à-vis CON and although probably our position at the end of the day that will make a huge difference in the grand scheme. I think it cuts both ways. I think you actually know our Florida facilities pretty well, John and we think obviously CONs provide some protection and a barrier to entry. But at the same time, I look at our Wellington Hospital it has prevented us from adding capacity over the years that clearly we felt was needed etcetera. So, again I think it cuts both ways. I don't know that it's going to have a huge impact on us one way or the other. You're right,

John Ransom - Raymond James

But you guys are making some pretty -- pretty scary comments in the papers that's good positioning.

Alan Miller

But don't believe all that paper stuff. The issue with the CON, we're in two markets and we've some pretty good competition there right now. So, I don't think there would be anymore people coming into those markets and you're very familiar with them John.

John Ransom - Raymond James

Sure, sure.

Alan Miller

And Wellington -- Wellington has HCA up the street Sarasota -- and Boca and a couple of others down the street. So, the only thing that I'm looking at frankly is a couple of opportunities that I've been looking at for years in terms of new construction, great growing markets that would enable us to get in, but that's speculating.

John Ransom - Raymond James

Okay. And then I don't had a chance to go through your 10K, but is there any update of note in disproportionate share or any state Medicaid developments that you kept your eye on?

Steve Filton

Disproportionate share, I think at this point has largely been renewed for in the states were it's important to us, most notably Texas and secondarily South Carolina with perhaps some amount of that slight decline in '08 but not dramatic. And again all that's embedded in guidance. What we don't know at this point is what happens at the end of '08, since the state fiscal year is kind of restore at that point.

And as you know, we've been talking about this Texas UPL issue now for three or four months in Texas, where CMS is reviewing the programs in our south Texas counties that we participate in. We've said all along that we think that we're fairly confident that the programs will be upheld and will continue to receive this money, but we still don't have any sort of definitive feedback from CMS. So we await that, but we feel pretty good about that.

John Ransom - Raymond James

Okay. Well, I mean I just want a, as general comment, in a tough industry, you guys have certainly exercised a very good judgment every time, especially relative to your peers?

Steve Filton

Thanks, appreciate that, John.

John Ransom - Raymond James

Okay. Thanks.

Operator

Our next question comes from the line of Jeff Englander.

Jeff Englander - America's Growth Capital

Good morning, guys.

Steve Filton

Good morning.

Jeff Englander - America's Growth Capital

I'm wondering if you can just give a little more color on the other operating expense line and the supplies line, and in particular sustainability of that improvement? I apologize if I miss that, I hop in the call a little late.

Steve Filton

No, I don't think anybody has specifically asked that question. I mean I think, again, the reason that supplies and operating expenses look as good as they do in the quarter is because revenues look good. It was a good pricing quarter on both ends and good volume quarter obviously on the behavioral end especially.

But I think generally, we think the risks, if you will, are on the topline in terms of volumes and in terms of uninsured volumes and uninsured risks. I think we feel pretty good about most of our expense categories. Darren Lehrich asked the question earlier about a change in our GPOs and we certainly think that will help us to continue to sustain some improvement in the supply line. And again the other operating expense line is largely our fixed costs. And so I think how that line looks is very much dependent on how revenue looks more than what's happening on the line itself. So, we're feeling generally good about expenses and our ability to control expenses in general.

Jeff Englander - America's Growth Capital

Anything in terms of the supply line, in terms of that's going on -- a number of your competitors have reported similar experience, maybe in terms of your implantable devices or anything like that that's going on, that you're seeing there?

Steven Filton

No. I think we saw for a while a decline in drug-eluting stent usage that I think was being reported industry-wide. And then, in recent months that volume has started pick up again. But I don't know that that's significant enough to really move the needle. Other than that, I mean, again, I think acute care hospitals in general have really, because we've faced a lot of competition on the less sort of intensive side of the business.

We've intended to focus on more supply intensive parts of the business, in cardiology, cardiology surgery, orthopedics, neurosurgery, and all those are supply expense and intensive lines of business. And I think we'll continue to see that trend occur, but I don't know that it will necessarily put pressure on our supply as a percentage of revenue. I think we feel pretty good about our ability to improve that relationship.

Jeff Englander - America's Growth Capital

Great. Thanks very much.

Operator

Next, we have Kemp Dolliver.

Kemp Dolliver - SG Cowen

Thanks. Main question relates to your self-pay trends. Have your outpatient self-pay volumes deviated much from what you've been reporting on inpatient?

Steven Filton

Kemp, I don't have those numbers in front of me at the moment. But historically, we found that I think they moved pretty similarly, mainly because the real outpatient volumes from a self-pay basis is a emergency room and usually, however, that volumes moving or inpatient or admission volumes tend to move the same way.

Kemp Dolliver - SG Cowen

Okay. The other question relates to there is something structural in your market because you are in state such as Nevada and Texas and Florida, which have above average uninsured population yet once you got through the issues in McAllen your uninsured volume growth sounds have been nearly dramatic. There are many of your peers who overlap with you geographically. Have you looked at what it may account for those differences? Is it just simply better zip codes or something more subtle?

Steven Filton

I mean always you think -- and you already mentioned why that come to mind at least in the last few years is obviously, we benefited in Vegas market by obviously a very significant increase in Sierra volume. So, we have this kind of unusual increase in paying volume, that's not accompanied by commensurate increase in nonpaying volume.

And then in McAllen we had an unfavorable payer mix trend in '05 and '06, where we lost paying business but that kind of as leveled out in '06 and '07. And so, I think on both those scores we're probably have maybe perhaps a little bit more moderation in the last year or two than perhaps our peers have had in their markets.

Kemp Dolliver - SG Cowen

That's great. Thank you.

Operator

And next we've Bill Bonello.

Bill Bonello - Wachovia Securities

Just a couple of big picture questions. The first is, can you just comment on the managed care contracting environment outside of the Vegas market is it pretty much status quo or are you seeing any change in behavior?

Steve Filton

No. I mean, I think Bill that generally managed care sort of contracted pricing has been pretty strong remained in that sort of 6% to 8% range of increase probably less of a concerned in contracted pricing because I think -- we think we're doing pretty well there. We're certainly seeing in all markets, a continued focus and attempt by both payers and employers to move subscribers and employees to -- from more generous plans to less generous plans etcetera.

And so, to some degree that can undercut what our contracted price increases are. But you know managed care pricing generally even with those trends are holding up pretty well and so no great changes other than like you said. I mean in the Vegas market and I think anyplace where we see payer consolidation that could threaten to disrupt sort of what is happening in the normal course. But we don't see that happening in too many markets.

Bill Bonello - Wachovia Securities

Okay. That's helpful. And then the other question is just -- you mentioned a couple of times your own stock maybe being your best use of capital right now. And I guess would you guys pretty much executing on all fronts and I might make the argument that stock is not really reflecting that. Would you consider a more aggressive repurchase? I mean you still have a lot authorized, but would you consider doing something at a bigger pace or levering up a little to buy more stock?

Steve Filton

I think honestly answer to that Bill that we always are considering sort of all of our alternatives and one of the things that we should have talked about with the share repurchase in the fourth quarter and the first quarter -- fourth quarter of '07 and the first quarter of '08 was that we would should of complete that what we had planned. And then we kind of sit back and take a breather and look at where we were and what our opportunities were and make some judgment at that point.

Bill Bonello - Wachovia Securities

Okay. Thank you.

Operator

And next we've Gary Lieberman.

Gary Lieberman - Stanford Research

Thanks. Good morning. I guess maybe just continue the last question on the share repurchases maybe ask you just in another way. In the past you've been or I guess relatively rapidly completed the authorizations that you've had. Is there anything that I guess is changed either from a stock price or from a leverage perspective that would make you less aggressive in terms of repurchasing the shares at this point than you were in the fourth quarter and so far in the first quarter?

Steve Filton

Well, I'd make just a couple of comments, Gary. I mean, the last time that we were very aggressive in buying back shares in '04 and '05 when I think between the two years, we bought back something like $11 million shares. We were largely using proceeds from asset sales to do that the sale of our branch in Puerto Rico facility. So, there is no similar dynamic at the moment. So, my only point being, I think you can perhaps read too much into what happened back in '04 and '05.

Other than that, I mean again, I think we try and evaluate and we'll evaluate our opportunities. I'll also say this. I mean if we were to borrow money at this point to do anything to do share repurchases or acquisitions, any material amount, we would see a pretty significant increase in our borrowing costs from where we are now because we remain at the moment in investment grade credit. But a whole lot more of leverage and we'd loose that rating and in this credit environment that would have a pretty significant effect on our borrowing costs. So, it's just another factor that we certainly have to think about as we decide how best to use our proceeds.

Gary Lieberman - Stanford Research

Okay. And then just a quick follow-up on the AR securitization that you guys have done. Is there any impact at all on what you're carrying from a receivable perspective because of that and therefore would any of it actually impact the bad debt line on the income statement.

Steve Filton

No. I mean those receivables are not factored. They are not sold. They are simply used as securitization for the issuance of that commercial paper. So, it has no impact on sort of the underlying level of receivables or our accounting or anything else.

Gary Lieberman - Stanford Research

Okay. Great. Thanks a lot.

Steve Filton

You're welcome.

Operator

And our next question comes from the line of Matthew Borsch.

Shelley Gnall - Goldman Sachs

Hi, thanks. This is Shelley Gnall on for Matt Borsch this morning and just a couple of quick questions. Understanding there is variability quarter-to-quarter in the bad debt and did it come in better than our expectations. And I'm just wondering can you give us an update on your collections, are you seeing some traction there in your upfront cash collections or anything you're doing definitely on the bad debt?

Steve Filton

No. I mean, I think we're doing a lot of things, Shelley and have focused in the last few years on, as you suggest upfront collections and making sure that we do our best in terms of credit analysis upfront and that helps us direct our collection efforts appropriately in all those sort of things. But the reality is when we have a good quarter like we've had this quarter. I think it has more to do with an actual reduction in the number of uninsured patients than it does with improved collection rates et cetera.

So, I think that cut both ways. In the quarter where we seen our bad debt or charity care rise it's because we've seen an increase in uninsured patients, and the quarter like the fourth quarter when we see cut down, I think it is primarily because of reduction in the number of uninsured patients.

Shelley Gnall - Goldman Sachs

Okay. Great. Thanks. And then on the CapEx guidance it looks like it's implying an uptick from 2007 levels, can you talk a little bit about what's driving that largely at the construction cost?

Steve Filton

No. It's really a timing issue. For those of you recall we had originally said that we were going to spend upwards to $450 million of CapEx in 2007. And we spent considerably less than that, $110 million or so less than that. So, it's mostly a shift of committed dollars really from '07 into '08.

Shelley Gnall - Goldman Sachs

Okay. Thanks.

Operator

And sir, you have no further questions at this time.

Steve Filton

Okay. We would like to thank everybody for their time and we looks forward to speaking with you at the end of the first quarter. Thank you.

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