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Universal Health Services, Inc. (NYSE:UHS)

Q2 2012 Earnings Call

July 27, 2012 09:00 a.m. ET

Executives

Alan Miller – Chairman, Chief Executive Officer

Steve Filton – Chief Financial Officer

Analysts

Tom Gallucci – Lazard Capital

A.J. Rice – UBS

Ralph Giacobbe – Credit Suisse

Gary Lieberman – Wells Fargo

Darren Lehrich – Deutsche Bank

Kevin Campbell – Avondale Partners

Gary Taylor – Citigroup

John Ransom - Raymond James

Frank Morgan – RBC Capital Markets

Kevin Fischbeck – Bank of America/Merrill Lynch

Operator

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

Thank you. I would now like to turn the call over to Mr. Steven Filton, Chief Financial Officer.

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 30, 2012.

During the 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 and our Form 10-Q for the quarter ended March 31, 2012.

We would 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 reported net income attributable to UHS per diluted share of $1.10 for the quarter, after adjusting for the prior year impact of several reimbursement items recorded during the quarter, and the revenues and expenses associated with the implementation of electronic health records applications at our acute care hospitals, our adjusted net income attributable to UHS per diluted share for the quarter ended June 30, 2012, was $1.12.

On the same facility basis, revenues in our Behavioral Health division increased 4.1% during the second quarter of 2012 over the comparable prior year quarter. Adjusted admissions inpatient days who are behavioral health facilities owned for more than a year increased 3.3% and 0.2% respectively during the second quarter.

Revenue per adjusted patient day rose 3.5% during the second quarter of 2012 over the comparable prior year quarter. Operating margins for our behavioral health hospitals owned for more than a year increased to 28.6% during the quarter ended June 30, 2012, as compared to 26.9% during the comparable prior year period.

On a same facility basis in our acute care division, revenues decreased 2.2% during the second quarter 2012. The decrease resulted primarily from a 1.3% decrease in adjusted admissions and a 0.9% decrease in revenue per adjusted admissions who are hospital’s own for more than a year.

The revenue decline reflects a difficult comparison to the prior year quarter when our net revenues were favorably impacted by positive changes in payer mix, especially stabilization in uninsured volumes.

On a same facility basis operating margins for our acute care hospitals decreased to 16.3% during the second quarter of 2012 from 17.8% during the second quarter of 2011. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $266 million and $239 million during the three-month period ended June 30, 2012 and 2011 respectively.

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

Our cash from operating activities was approximately $246 million during the second quarter of 2012, as compared to $173 million in the second quarter of 2011.

Our accounts receivable days outstanding decreased to 54 days during the second quarter of 2012, from 56 days during the first quarter of this year as we collected a portion of outstanding Medicaid receivables from the State of Illinois.

At June 30, 2012 our ratio of debt-to-total capitalization was 57.7% and debt to EBITDA was 2.99. We spent $90 million on capital expenditures during the second quarter, included in our capital expenditures during the first half of 2012 were the construction cost related to the construction of a new acute care hospital in Temecula, California, a new bed tower at our Wellington facility in Florida and 222 beds added to facilities within our behavioral health division.

Against the backdrop of a sluggish economic recovery and based upon the operating trends and financial results experienced during the first six months of 2012, our revised estimated range of adjusted net income attributable to UHS for the year-ended December 31, 2012 is $4.25 to $4.35 per diluted share. This revised guidance, which represents a 2% to 3% decrease from our original 2012 guidance excludes the estimated favorable impact associated with the implementation of electronic health records applications at our acute care hospitals and the impact of the other items reflected on the supplemental schedule for the six months ended June 30, 2012 as disclosed in last night’s press release, as well as any incremental impact resulting from our previously announced acquisition of Ascend Health Corporation, which we expect to complete during the fourth quarter of this year.

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

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from the line of Tom Gallucci with Lazard Capital Markets.

Tom Gallucci – Lazard Capital

Thanks, good morning. Two quick questions I guess. Steve, first on the acute care side, given the trends you are seeing in the changing guidance, just wondering what you did to your guidance as we think about the second half of the year versus first half trends?

Steve Filton

Tom, in our original guidance, if people recall, was that acute care revenues would grow in 2012 by somewhere in the neighborhood of 3% and I think – we believe because of the comparison through ’11 that was backend loaded. So we grow by let's say 2% in the first half of the year and by 4% in the back half of the year. I think the revised guidance is frankly almost exclusively a reflection of the fact that we think that 4% growth that was embedded in the back half of the year and the original guidance is now probably 1.5% or 2% and is reflective just of the existing operating trends that we are seeing.

Tom Gallucci – Lazard Capital

Okay. And then on the behavioral health side, obviously a very good trend there for 18 months or so that were above average is I guess the way we looked at them, which sort of came back down to earth a little bit this quarter. Can you point to anything in particular what they have changed and I guess what is your long-term growth outlook for that business at this stage?

Steve Filton

Yeah, I think Tom that we have said a number of times that we think that going forward a reasonable growth rate, revenue growth rate in the behavioral division is probably in the 5%, 5.5% range and we have been pretty consistently meeting those targets. We were a little lower than that in Q2. As we looked at the detail of it I think we identified a number of facilities where because of ongoing either new construction projects or ongoing construction projects to convert residential to acute beds, we had to close down some capacity and we think that cost us maybe 50 or 60 or 70 basis points revenue growth in the second quarter. So I think when adjusted for that I think we feel like again that sort of 5%, 5.5% growth rate is reasonable, and the other piece is that beginning in July of 2012, the severe Medicaid reductions that we saw at this time last year of 3% to 4% moderate to something like flat to down 1% and so that’s a helpful comparison as well.

Tom Gallucci – Lazard Capital

Okay. Thank you very much.

Operator

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

A.J. Rice – UBS

Hi, everybody, just maybe I’ll ask two questions as well. Following up on the behavioral business, can you point to is the moderation, I mean albeit you have great margins, is it basically a capital constraint issue in the second quarter that somehow gets a little better in the back half of the year, how much of it was that or how much of it is just natural ebb and flow from Q1 to Q2?

Steve Filton

A.J., just following on what I was saying to Tom. I think that 50, 60, 70 basis points that I alluded to is exactly what you’re talking about, it’s – we had beds that we had to have out of service for these construction projects. I think our sense is two-fold. Once we are able to get those beds back in service and once the new beds that we’re building or the converted beds that we’re building go back online, we’re very comfortable that the demand is actually there to support the sort of 5%, 5.5% growth rate.

A.J. Rice – UBS

Okay. Back on the acute side, I guess, I’m seeing here, again cost control wise you guys have done a good job. I can’t remember the last time I’ve seen someone post a negative same-store revenue growth in acute business, but obviously you had a very tough comp a year ago. One of the things we’re seeing from some of the other guys is as they report soft in-patient volumes, it seems like they are getting a little help from revenue per adjusted admission being somewhat stronger and the argument that at least it’s being made is that the soft volumes tend to be in cases that have lower revenues associated with them and therefore it’s not impacting the overall revenue growth or 3%, 4%, 5% revenue on a same-store basis.

It doesn’t seem like that dynamic is a play here in your case, I just wondered if you had any thoughts about it in terms of where you’re seeing the softness in the volume and the revenue per adjusted admission being a little sort of flattish or only slightly up.

Steve Filton

Yeah, so I think if you look at the difference between our admissions or unadjusted admissions and our adjusted admissions, there is a measurable difference which obviously implies that our out-patient revenues are growing faster than our in-patient. So we are certainly experiencing some of that same shift that you’re alluding to A.J., that I think the other companies are referencing. What it does also highlight however is that the unadjusted admissions that is really the straight in-patient admissions are rather weak and remain rather weak and we think that’s largely a function of these sort of very difficult economic conditions in certain of our markets, most notable Vegas and South Texas. But I think that’s the major explanation. I think other than that we feel like – as we look at what the other companies are reporting in general and directionally we’re experiencing much of the same trends.

A.J. Rice – UBS

I guess the point I was making is, the point upper respiratory, OB/GYN cases which sometimes can be lower revenue cases and then obviously your surgery and so forth suggest – maybe they not losing as many of the in-patient hiring cases. Is that – when you look at where the softness is on the in-patient volume, is that observed across the board or does it tend to be in those types of cases?

Steve Filton

Well, I think that’s a valid observation and I think the way we would or I would sort of prove that if you will is by saying that our acuity has changed very little, and that our acuity has remained consistently high which sort of suggests that we continue to get the most tertiary and the most severe and acute cases and that the business that we’re losing tends to be the less intense business that is shifting to either to out-patient or just shifting to a non-admitted status.

A.J. Rice – UBS

All right. Thanks a lot.

Operator

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

Ralph Giacobbe – Credit Suisse

Thanks, good morning. Steve, do you have the payer mix in the quarter, if possible the percentages by payer maybe this quarter versus a year ago?

Steve Filton

Ralph, I don’t have the specific metrics in front of me, but I will tell you that the trend that we saw in the quarter was very similar to what we have been seeing which is taking whatever metric you like, if you take the 1.3% decline in adjusted admissions that commercial and Medicare admissions declined more than that and Medicaid and uninsured admissions increased more than that and that unfavorable shift is one that’s been underway for some time and continues and quite frankly until we believe the economy is improving, our local markets, etcetera, it’s going to be difficult to sort of reverse those trends.

Ralph Giacobbe – Credit Suisse

And then can you remind me of the drag on Medicaid from the cuts that started last July and then the headwind or I think tailwind that you see for fiscal ’13?

Steve Filton

Yeah, so in July of ’11 we said that Medicaid rates on average were decreasing 3% to 4%. Our guidance for 2012 presume that in July of ’12 Medicaid rates would be flat to down 1% and given all the states that we have been able to get results from etcetera, and have their rates in place, we believe we are in that range.

Ralph Giacobbe – Credit Suisse

Okay, great. That’s helpful. And then just the last one. I think there has been questions in the past on sort of the margin in EBITDA growth and behavioral and revenue trends have been higher. Revenue was obviously a little bit lower this quarter but you had better margins in growth. So I guess is that related CSI synergies incrementally coming on board or is it just more broad based maybe sustainability of that going forward?

Steve Filton

You know, I think the answer is sort of two-fold. One, again as you alluded to Ralph is, I certainly think that we continue to improve the PSI legacy margins if you will, and in short order we are going to stop using that term. But, I also believe and we have made the case that if we are able to grow revenues by 4% or 5% in what amounts to a fixed or largely fixed and semi-fixed cost business we should be able to continue to expand margins. Again, I think you saw that in Q2, it’s not always absolutely linear. So there are some quarters in which revenue grew by a little bit more and margins didn’t increase quite as much, and in Q2 of this year revenue was a little more moderated but cost controls were better. In general, I think if we can have that 5% revenue growth that I have mentioned a few times on the call, we should continue to generate expanded margins in the behavioral business.

Ralph Giacobbe – Credit Suisse

Okay thank you.

Operator

Your next question is from the line of Gary Lieberman with Wells Fargo.

Gary Lieberman – Wells Fargo

Good morning. Thanks for taking the call. Alan I would be interested to get your perspective on Washington heading into the elections and with the fiscal [inaudible] coming up, the potential that congress addresses sequestration either in a lame duck or in a new congress?

Alan Miller

Yeah. Thought you were going to ask about anything that is new. Nothing happens before the election, and lame ducks are difficult. So we don’t really have any indication except that – Vice President Cheney came out a sort of seclusion and went up on The Hill and talked about the defense. So I think they are going to have to try and address something but we don’t have any indication as to where and how we accept that. The other thing I will say is that we all are in good shape with the administration. The hospitals are and I think we have got them on the defensive a little bit because of the state’s reaction to Medicaid. So I think that – I know for a fact that the administration is going to try and be helpful to hospitals.

Gary Lieberman – Wells Fargo

Okay. Since you brought it up, is there anything new?

Alan Miller

In what regard?

Gary Lieberman – Wells Fargo

Just in general.

Alan Miller

You mean legislatively?

Gary Lieberman – Wells Fargo

Yeah, anything that you are aware of or anything that’s come across your radar screens that you find particularly interesting?

Alan Miller

No nothing – no, I think that, you know, it is the law. But a lot of people don’t like it and a lot is happening at the state level as you are well aware with regard to the Medicaid, and it’s going to be a very brutal challenging situation legislatively in Washington regardless of who wins. I think it’s unlikely that Republicans can have a sweep of all three, house, senate, Whitehouse. But it’s going to be a really very interesting year next year. But as I said, I think we are in as good as shape as we can be because of I think very smart moves on the part of some of our representatives. I don’t mean legislatively. Representatives in different organizations. I think the administration is very strongly on our side for whatever good that is.

Gary Lieberman – Wells Fargo

Thank for your thoughts.

Operator

Your next question is from the line of Darren Lehrich with Deutsche Bank

Darren Lehrich – Deutsche Bank

Thanks. Good morning, everybody. A few things here. Just as it relates to the M&A activity, Steve we saw that the deal termination and the cash flow statement. I just want to confirm you have exited that South Texas situation. Is that what that was?

Steve Filton

Yes. As we have disclosed at the end of last year we had a tentative agreement to buy that medical center in the South Texas market. Subsequent to reaching a definitive agreement the seller discovered some limitations they had in being able to sell the facility, and as a result of that they were unable to resolve those and the agreement was terminated.

Darren Lehrich – Deutsche Bank

Right. And then you said just a refund of your money. And then Auburn, we’re still on track for the September clause there, and then I just wanted to also ask about Ascend timing, is there anything different that we should be thinking about there?

Steve Filton

No. As you suggest we – our intent is to close Auburn in the third quarter, late in the third quarter, and our intent, which is a little less precise and specific as it involves FTC approvals is that we will close or be able to close Ascend sometime during the fourth quarter.

Darren Lehrich – Deutsche Bank

Okay. And if I could just Alan, we’d love to just get your thoughts on the acquisition outlook for the company. Obviously Ascend is in a really unique situation for you in Behavioral. How are you thinking now about acute and the outlook in that pipeline, the opportunity for more behavioral like Ascend, just would love to get your updated thoughts there.

Alan Miller

I think Ascend is very unusual in that the quality of it, nine facilities, every one of them is really good. There is new beds coming on, they’ve been very well managed, but there is a lot of growth in it. So we think Ascend was unusually good quality wise. We’re very happy with it, very happy with it. And we think we can see a lot of growth coming from it. I don't think there are networks that we know of that are similar to Ascend, so I think Ascend was – we think Ascend was just a great acquisition.

With regard to other acquisitions, we're seeing a lot. And I think in this environment it’s a question of what you want to direct yourself towards, but there are a lot of opportunities. And we are going to close Ascend and move onto look at other opportunities, both acute and behavioral. But I just want to stress, I think the Ascend deal was really an excellent deal for us, unusually excellent.

Darren Lehrich – Deutsche Bank

Thanks for that. And then just the last thing here, we’ve heard your commentary a lot about just the comps and obviously going in to this year that was going to be a challenge particularly in Vegas, given the success for staff in Summerland [ph]. I guess, the thing I’d like to just ask is, is there anything new or different beyond the macro, you are seeing in Vegas competitively the way physicians are being organized, anything that we ought to also consider?

Steve Filton

I don't think so Darren I mean I would make the comment that obviously, when a market is contracting the way that Vegas or South Texas has been that, it’s natural to sort of see competition ramp up. People are competing for a smaller base of patients and it becomes sort of more intense and more severe and yeah, I think we’ve that in both markets. But I think our market position remains largely the same. There are small shifts in market share et cetera, but I think that the overarching issue again in both of those markets has been market softness that quite frankly we have been struggling for a long time now.

Darren Lehrich – Deutsche Bank

Okay. Thanks a lot.

Operator

Your next question is from the line of Kevin Campbell with Avondale Partners.

Kevin Campbell – Avondale Partners

Good morning, thanks for taking my questions. Just a couple of quick ones on guidance. Can you give us an estimate of the impact that moving Auburn Regional Medical Center out of continuing ops had on the earnings guidance?

Steve Filton

Just to be clear because of its relative immateriality we do not show or report Auburn as a discontinued op, we just sort of removed the detailed revenues and expenses and recorded the EBITDA loss of Auburn, which was a couple of million dollars in the quarter in the other operating expense line. Because we expect to dispose off Auburn in the third quarter, we’ve included in our guidance a comparable amount for Q3 and then assume that it’s no longer owned by us.

Kevin Campbell – Avondale Partners

Okay, that’s helpful. And as you look at your volumes particularly in the fourth quarter and the new readmission rule sort of coming into play, are you anticipating any sort of unusual difference+ in sort of volumes in fourth quarter this year versus prior years because of the new readmission rules or do you feel like you already have a pretty good hand on readmissions and therefore it’s not going to be a material impact on your volumes in the fourth quarter?

Steve Filton

No. I think Kevin as you sort of suggest that the attention to the readmission rules has now been present for a while, the government regulations and rules about the incentive penalties in that regard have been well known now for a while. I don’t sense that we are likely to see any significant or impactful change as we move forward.

Kevin Campbell – Avondale Partners

Okay. And then last question on the non-controlling interest, how should we think about that sort of from a modeling perspective going forward? Is that on a pure dollars basis?

Steve Filton

Yeah, as everybody I think knows, the most significant item on that non-controlling interest line is the minority interest in the Vegas market. And, as Darren I think and others have asked about, that’s a market that’s been soft, I think that part of our reason for revising guidance is an expectation that at least in the short run it remains so. To me, the current run rate in that market, and therefore the impact on that line is probably as good a guide to at least the next couple of quarters than anything else.

Kevin Campbell – Avondale Partners

Okay, great. Thank you very much.

Operator

Your next question is from the line Gary Taylor with Citigroup.

Gary Taylor – Citigroup

Hi, good morning. Just a couple of housekeeping things. Steve, on the HITECH payment that you receive and that you breakout in the supplemental tables, I think it’s actually called revenue, but I just want to make sure that being netted in the other operating expense line, that’s not in the revenue line, correct?

Steve Filton

No, it is on the revenue line, Gary.

Gary Taylor – Citigroup

Okay. On the minority interest share attributable to some of those HITECH expenses, I assume that’s down in the minority interest line as part of that line as well, right, not rollup in other op?

Steve Filton

That’s correct. It is on the minority interest line.

Gary Taylor – Citigroup

Okay. I guess my last question is, can you talk a little bit about the length of stay pressure in RTC and any expectations of when that abate or is there a significant state where some policy changes might, anniversary or, when we should expect – or if we can expect reasonably that some of the length of stay pressure is going to ease?

Steve Filton

Again, this is another dynamic that certainly has been present now for – I would say going on for a couple of years where we’ve seen – really since I think the recession began we’ve seen Medicaid programs through the country tighten up on both the rate of payment, which lots of companies discuss, but for us, in the behavioral division, also on utilization which really I think is most notably reflected in length of stay contraction. Actually I thought one of the encouraging, albeit mildly encouraging dynamics in Q2 was that, I thought that the length of stay reduction decelerated a little bit, but I think to your point Gary, and my sense is that just as we talked about rates, Medicaid rate reductions is decelerating in July of 2012, my sense is that length of stay contraction should respond the same way because it quite frankly is emblematic of the same sorts budgetary issues. But I think it remains to be seen. I don’t think we’ve bottomed out yet, but I think the hope is that we’ll at least start to see some deceleration or stabilization in that contraction.

Gary Taylor – Citigroup

Are there – I guess in RTC, are there some hard stops or policy changes or this is just more active utilization management I guess for lack of a better word in terms of number of days, a state of allowance.

Steve Filton – Chief Financial Officer

Yeah, I think much less than hard stops is just kind of a series of initiatives that different states take on in different ways trying to move these kids out sooner, move them into less intensive settings like group homes and stuff like that. So, those are the kinds of things you see as opposed to kind of – as again you described a hard stop where they just say absolutely not after 25 days or whatever the issue is, but it’s just a variety of initiatives. Interestingly, the admission growth level has not really changed, which sort of implies, and to some degree I think it’s remained pretty strong, which sort of implies that clinically the effort to get these kids out sooner in the end is not really meeting the overall objectives in that. They may just be returning to facilities because they’re not completing an effective course of treatment.

Gary Taylor – Citigroup

Okay. Thank you.

Operator

Your next question is from the line of John Ransom with Raymond James.

John Ransom - Raymond James

Hey, good morning. Just based on our estimate, it looks like your profit contribution that’s really behavioral and acute if you factor in Ascend it’s close to 70% behavioral and 30% acute, if we did some estimate allocation. As you look at your mix of M&A and you think about your portfolio, do you think that number is a good number? Is that going to hold or are we at the high watermark in terms of the relevance of behavioral mix in the business.

Steve Filton

John, I think we have said many time over the years that we’ve never set sort of target percentages in the way that you framed your question. As you know, obviously that allocation used to be dramatically different with the key contribution being higher. I think our view always is we’re looking for the next dollar of invested capital to go into whatever investment that is, whether it’s an external M&A investment in acute or behavioral or internal CapEx investment in one of those segments or in buying back our own shares, we are always looking for it to go into place where we it’s going to earn the greatest return and I think that remains our approach and our point of view.

John Ransom - Raymond James

Are you seeing any large acute care deals that you are even close to pulling the trigger on, I know you guys are very sticky and you should be commended for being so. And then conversely do you think it’s possible you might explore anymore acute divestitures?

Steve Filton

I think as Alan suggested we are seeing a large number of deals available out in the marketplace and I think that’s reflective of what our peers say as well. As you suggest John we're quite proud of the fact that we're very judicious in how we evaluate those deals and what we choose to pursue. Our general sense on the acute stuff especially is that those deals are going to be available, not those specific deals, but deals of that kind will be available now for the foreseeable future.

I mean I think the landscape of healthcare is changing in the country and there’s pipeline that is robust at the moment, I think will remain so. And so we'll continue to look at those kinds of deals. Just as we're looking at organic expansion, I alluded to a couple of new projects in my remarks that were underway, and new beds in behavioral. Again all those items are on the table as we think about our business going forward.

John Ransom - Raymond James

I guess I’ve heard there’s plenty of second tier and rural deals, I guess I was curious if there were kind of whole market acquisitions and larger urban market type deals, or if it’s still kind of more one-off a hospital in this market or that market or maybe a market that’s not growing. But are you seeing the upper, likely opportunity to go into a large market and take 30% share or something. Are you seeing any of those kinds of deals?

Steve Filton

I mean it strikes me that there is starting to be an evolution as you suggest of the deals available, but I think for the last couple of years it's been heavily skewed towards the single standalone, more rural providers, and I think that we're starting to see a shift to bigger systems, multiple facility systems, et cetera. Again my sense is that it’s going to continue that we’re no nowhere near the top of the curve on that yet.

Alan Miller

John, you are particularly astute, and I can tell you – and I'm sure you have seen this or you – the industry is going through a real transition, these things take time it’s going to be slow, but it's going to be a real transition, and I think the companies that are experienced and have been successful over a long period of time, and know how to evaluate opportunities and are not impatient, are going to do really well.

John Ransom - Raymond James

Well, I guess that's what I think. I would think that there’s a pretty high probability we’re going to wake up in the next two years and you guys are going to go into a market in a pretty big way. You’ve husband your resources accordingly. I know you’re not going to jump at something just because it’s there. So, anyway, that will be interesting. My other question is I guess there was a little bit of chatter about the revenue multiple that you paid for $0.01 and I know they have very high margins and it’s been a very well run company. But this seems a little bit like a stretch multiple for you guys in particular. So what are we missing, is it the growth is the ability to add capacity on the back end of this, is that what we might be missing here?

Alan Miller

I’ll just say one thing. Really good opportunities are not bargain priced, so I wouldn’t say that this was a bargain price. Cole Hamels just went for $144 million. So there aren’t a lot of really great lefthanders around, so we think Ascend was worth what we paid, in the long run.

John Ransom - Raymond James

Okay. Thank you.

Steve Filton

Great. Next question?

Operator

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

Frank Morgan – RBC Capital Markets

Good morning, thanks. Hey, Steve, I was hoping you could back on the volume side, obviously weak by geographies. But in terms of just service lines can you comment and give some kind of characterization of the volume, between say what looked better worse between say, ortho or cardio or any other specific business lines? And then on the topic of the weak volume, I know Garry asked about tighter utilization management in Behavioral Care, are you seeing anything different in your acute markets, would that be a contributor as well as the weak accounting.

Steve Filton

Sure. Again, I think the trends, Frank, overall remain much the same and that is – and again I think A.J. was asking a similar question kind of from a different angle. But, we continue to see relatively steady volumes in our most tertiary, most severe procedures, as you would expect. Because quite frankly there sort of is no alternative inpatient treatment for those kinds of procedures. Within those kinds of procedures, we have seen a shift, as I think most of our peers have away from cardiac into orthopedics and certain other specialties over the last few years. We have seen the same decline in birth that many of our peers have seen. Again, I don’t necessarily feel like any of the trends that we have seen, other than sort of as indicated by the specific conditions in our markets are terribly different than what our peers say and experienced as well.

As far as the utilization management goes, in effect I would give the same answer. I think we face the same increased pressure on rigorous review of the appropriateness of admissions as every hospital in the country and as a consequence we are feeling that same shift from inpatient to outpatient that again I think every hospital feels. But I don’t necessarily have any reason to believe that in our markets or in our hospitals we are sort of experiencing it in any sort of unique way or any differently than the average hospital in the country is experiencing it.

Frank Morgan – RBC Capital Markets

Okay. One more follow-up. You mentioned in your earlier comments on – you had a theory about potential readmissions on the behavioral side of the RTC. Do you have to have a number like what percentage of RTC patients actually end up being readmitted in any given year? Have you ever seen that number or do you look at that number?

Steve Filton

I'm not aware of that. It may well be that we have that data. I mean, really all I was suggesting is that as Medicaid programs try and reduce utilization, one might expect to see a reduction in both admission rates and length of stay and for the most part what we have seen over the last few years is really no decline in admissions. In fact pretty strong admissions on both the residential and acute side. But a contraction in length of stay, and again, my sort of conclusion that I draw from that is that it may be somewhat self-defeating strategy and that you are getting some patients out sooner. But you are not really helping drive down the overall utilization if they are not effectively completing a course of treatment.

Frank Morgan – RBC Capital Markets

Thank you.

Operator

[Operator Instruction] This question is from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay great. Thanks, good morning. I guess you talked a little bit about it. But I guess if you could just talk a little bit more about what was going on in Las Vegas this quarter? I know that we had – a commentary last quarter was that some of the economic data points were starting to firm and that you kind of hope that things might start to turn by the end of the year. We’ve seen some data points get a little weaker in Vegas. What are your thoughts there?

Steve Filton

Kevin I think you have summarized it fairly accurately. I think there were some macro-indications last quarter that there was going to be overall improvement in the market. Some of those indicators have moved sideways or slipped a little bit. But the one thing we’ve consistently said and that I think we would repeat this quarter is that we are not seeing the recovery in the hospital business yet and that’s still the case. Again, I think part of the decision to take guidance down a little bit is tied to that idea that our expectation now at least in the short term is that there is not likely to be a significant recovery in that market.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay. As you did mention earlier you have some CapEx projects coming – that you are starting. But obviously you took down guidance in part because you are concerned about the economy and that kind of things. How do you balance those two things, the desire to invest for growth down the line versus kind of what you are seeing right now as a weaker demand profile? What’s your thought process there?

Steve Filton

Well my general sense Kevin is that CapEx decisions tend to have a longer term perspective to them than operating decisions. So we I thought had very good cost controls as an example in both of our business segments this quarter as we reacted to a more modest revenue growth environment and we react very much in real-time to those kinds of changes. As we think about CapEx and particularly as you think about bigger CapEx, building a new hospital in Temecula, building a new tower at Wellington or adding beds in behavioral, those I think are much longer term decisions and I think we have to think beyond just the current economic recovery and just the market position and what we view as the long term projections in a market and that’s how we do it. So I think that’s why you see sort of more immediate changes in our operating cost structure and less immediate changes in our capital planning.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay I don’t know, maybe I missed it. But you guys are booking high tech revenue differently than your peers. I guess it’s in the revenue number for you. Where does that show up in your same-store metrics? Is that excluded from same-store? Does it show up in other revenue on your supplementals?

Steve Filton

It’s excluded from same-store which – and you guys know this better than I do but I think maybe a reason why sometimes our revenue data compares unfavorably to our peer is because I think they do include it in their same-store numbers.

Kevin Fischbeck – Bank of America/Merrill Lynch

Yeah, now most companies are looking at kind of on a net basis as a contrary expense line. But – okay, so does that number then show up in other revenue for you?

Steve Filton

Yeah it’s a non-same-store acute.

Kevin Fischbeck – Bank of America/Merrill Lynch

Non-same store acute.

Steve Filton

Is where it will show up in the queue.

Kevin Fischbeck – Bank of America/Merrill Lynch

Okay. All right, great. Thanks.

Operator

[Operator Instructions] Mr. Filton, we have no further questions.

Alan Miller

I have an announcement before everybody gets off. Hello, I have been asked by the Republican Party to post the vice president for nomination very, very directly after he is named. I say he, most likely a he and it’s going to be at my home in Philadelphia sometime between August 12 and 23. The convention starts the 24th and of course the 27th. I believe that’s a Monday night is when all the confirmations are done, etcetera. So if you would like to come to Philadelphia and have a really firsthand opportunity to meet the vice presidential prospect, let Steve know. Of course there is a contribution involved. But I will look forward to seeing some of you. It should be really a fun event.

Steve Filton

Okay, thanks everybody for your time and we will talk with everybody next quarter.

Operator

This concludes today’s conference call. You may now disconnect.

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