Ladies and gentlemen, thank you for standing by, and welcome to the HealthSouth Corporation Fourth Quarter 2011 Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded. Thank you. I would now like to turn the conference over to Mary Ann Arico, Chief Investment Relations Officer. You may begin your conference.

Thank you, Paula, and good morning, everyone. Thank you for joining us today for the HealthSouth Fourth Quarter 2011 Earnings Call. With me on the call in Birmingham today are Jay Grinney, President and Chief Executive Officer; Doug Coltharp, Executive Vice President and Chief Financial Officer; Mark Tarr, Executive Vice President and Chief Operating Officer; Andy Price, Senior Vice President and Chief Accounting Officer; Ed Fay, Senior Vice President and Treasurer; and Julie Duck, VP of Financial Operations. Before we begin, if you do not already have a copy, the press release, financial statements, the related 8-K filing with the SEC and the supplemental slides are available on our website at www.healthsouth.com. Moving to Slide 2, the Safe Harbor, which is also set forth in greater detail on the last page of the earnings release. During the call, we will make forward-looking statements which are subject to risks and uncertainties, many of which are beyond our control. Certain risks, uncertainties and other factors that could cause actual results to differ materially from management's projections, forecasts, estimates and expectations are discussed in the company's Form 10-K for year-end 2011, which will we filed yesterday, and other SEC filings. We encourage you to read them. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented. Statements made throughout this presentation are based on current estimates of future events and speak only as of today. The company does not undertake a duty to update or correct these forward-looking statements. Our slide presentation and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measure is available at the end of this slide presentation or at the end of the related press release, both of which are available on our website as part of the Form 8-K filed last night with the SEC. [Operator Instructions] And with that, I will turn the call over to Jay.

Great. Thank you, Mary Ann. Good morning, everyone. We appreciate you joining us this morning for the call. The fourth quarter was a strong finish to another solid year for HealthSouth. Total discharges grew 2.1% while same-store discharges were up 1.7%. These were healthy results given the 5.9% growth achieved in the fourth quarter of 2010. Our growth compares favorably to the rest of the industry. As shown on Page 24 of our supplemental slides, discharges from non-HealthSouth hospitals reporting through the UDS reporting system were down 0.5% in the quarter. This suggests our superior outcomes, focus on high-quality patient care and our TeamWorks sales and marketing initiative continue to drive market share to our hospitals. Our volume growth coupled with the continued shift of our patient mix towards more Medicare patients, the continued shift of our program mix towards more patients with neurological conditions, a modest Medicare pricing update, in-line managed care pricing increases and the sustained benefits from our Care Management initiative generated $518.1 million of net operating revenues, an increase of 5.5% compared to last year's fourth quarter. As a reminder, our Care Management initiative was designed to standardize best practices at all our hospitals in the areas of preadmission screening, post-admission care coordination and discharge planning. These best practices have resulted in fewer acute care transfers, which in turn has resulted in fewer partial Medicare payments. We were especially pleased that our efficient operating platform allowed us to leverage this topline growth to achieve $122.9 million of adjusted EBITDA and generate $99.2 million of adjusted free cash flow in the quarter. We chose to invest this excess cash in strengthening our balance sheet by paying down approximately $73 million of debt and purchasing the assets of one of our joint-ventured hospitals, whose lease had expired in Morgantown, West Virginia. This debt repayment brought our year-end leverage ratio to 2.7x, well within our 3x target. Finally, our earnings per share for the quarter was $0.50 per share. Unfortunately, this number may create some headline noise because it reflects an effective tax rate of 22%. While most analyst models use a 40% tax rate, a 40% rate would have yielded $0.39 per share. As a reminder, HealthSouth does not pay federal taxes because of our substantial NOLs. Our cash taxes for the quarter were $2.3 million. Doug will now provide a more thorough review of the quarter and the full year results.

Thank you, Jay, and good morning, everyone. I'll focus my comments on the fourth quarter, but also highlight certain results for the full year and elaborate on a number of assumptions underlying our 2012 guidance. As Jay mentioned, Q4 represented a strong finish to a strong 2011. Revenue increased 5.5% in Q4, driven by inpatient revenue growth of 6.1%. Inpatient revenue benefited from both volume and pricing increases. Beginning with volume, our discharges increased 2.1% in Q4 '11 over Q4 '10, inclusive of 1.7% same-store growth. As a reminder, we were up against a tough comparison, having generated discharge growth of 5.9% in Q4 '10. For the full year 2011, we grew discharges by 5.2%, 3.3% same-store, demonstrating our ability to continue to gain market share. Moving to pricing. Our revenue per discharge for Q4 increased by 4% over Q4 '10. As anticipated, we realized a 1.6% increase in our Medicare reimbursement rates. Our Q4 revenue per discharge was also aided by a shift in our payor mix, 72.8% Medicare for Q4 '11 versus 71.6% in Q4 '10, and a shift in our patient mix. Neurological cases comprised 17.5% of our mix in Q4 '11 versus 15.4% in Q4 '10. Stroke was unchanged, 16.4%, and replacement of lower extremity joints declined from 9.8% in Q4 '10 to 8.6% in Q4 '11. Our outpatient and other revenue declined 1.6% Q4 '11, primarily as a result of the closure of 6 satellite clinics during the course of 2011. At the end of 2011, we continued to operate 26 outpatient satellites. Please be reminded that the vast majority of our outpatient revenue comes from our hospitals and not from the satellite clinics. Our continued focus on expense control, combined with the 5.5% revenue increase, resulted in 110 basis points of incremental operating leverage…

Great. Thanks, Doug. Before we take questions, I'd like to discuss in a little more detail our initial 2012 guidance and highlight some underlying assumptions and considerations. This information is summarized on Pages 13 and 14 of our supplemental slides. Discharge growth remains the most important performance metric. Our 2012 guidance is based on the assumption discharges will increase between 2.5% to 3.5% compared to 2011. Same-store discharge growth is expected to be approximately 2% to 3% with the balance coming from our 2 new hospitals, Cypress and Drake. Our hospital in Ocala is not expected to open until December, so its contributions to discharges and earnings will be seen in 2013. We also have several other projects in our development pipeline that will come online in 2013. From a de novo perspective, we have 3 new hospitals that will begin construction in 2012: a new 34-bed hospital in Martin County, Florida, with our joint venture partner, Martin Health System; a new 40-bed hospital in Littleton, Colorado; and a new 40-bed hospital in Southwest Phoenix. These hospitals are expected to be opened in 2013, but the exact timing will be dependent on securing appropriate permitting in a timely fashion this year. We're also defending appeals against 2 of our certificates of need: one in Williamson County, Tennessee; the other in Middletown, Delaware. In both instances, we have land under contract and have begun the design phase to enable us to move quickly once we have successfully litigated these appeals. Finally, we're completing due diligence and market assessments of 2 additional de novos that we expect to announce in the next 90 days. We anticipate these projects will be under construction by year end. In addition to these de novos, we're exploring several potential partnerships and acquisitions that, if consummated, also…

[Operator Instructions] Your first question comes from the line of Ann Hynes of Mizuho Securities.

So my 2 questions. One, I want to focus on cash flow. Obviously, you're generating a lot of it and you have been clear about your cash flow deployment opportunities. But I really want to focus on short-term cash deployment over the next 12 to 18 months since the presidential election does create some uncertainty in Washington. So besides the bad debts and de novo projects you've already outlined, could you actually rank in priority the short-term cash deployment over the next 12 to 18 months, acquisitions, debt repayments, share repo or dividend? And my second question is on the clinical information rollout. I assume going high-tech will create a lot of efficiencies at the hospitals over time. Do you actually have an estimate for hospital potential savings once everything is rolled out?

Okay. I'm going to take the second question, first. We have not included any savings in the presentation that we delivered to the board on a clinical information system. And quite frankly, the reason is when we went out and we looked at other health care systems that installed these similar electronic clinical information systems, we really didn't see a lot of demonstrated cost savings. And frankly, we are not going to simply take the projected savings that the various vendors were throwing around because it's easy to put a number out there, it's another thing to actually achieve those savings. We see this as an investment in our business and an investment in our future. And I think everybody would agree that today, it's not a matter of should you put in an electronic clinical information system, it's rather when are you going to put in an electronic clinical information system. When you think about establishing tighter connections with our referring hospitals, when you think about the potential for moving into some kind of ACO environment or potentially going into bundled payments, the transfer of clinical information electronically is absolutely the way the industry is going, and we don't want to be left behind. We don't think we are investing too late, we think the timing is perfect. The only regret that we have is that we're not eligible for the high-tech payments. The good news on that, for all of the analysts on the call, is you don't have to try to figure out if we've got real earnings or high-tech facilitated earnings. Our numbers are going to be a lot easier to figure out than those who get the high-tech payments. In terms of the cash flow and prioritization, our first, second and third priority is to…

Your next question comes from the line of Adam Feinstein from Barclays Capital.

And Jay, as you were reflecting back, and having covered the company the whole time, it really has been an outstanding job. So just wanted to say that. You guys have done a phenomenal job, and just seeing the leverage down to where it is, it's great to see.

Thank you. It's very comforting to have it. We'd much rather have it at 2.7x than 5.7x or even 4.7x.

Absolutely. So Jay, you talked a little bit about the competitive landscape. I mean, clearly, you guys are showing strong volume growth. And so just looking at some of the industry data, obviously, you guys are taking market share. But let me just talk a little bit about the competitive landscape in terms of other freestanding rehab hospitals, hospital-based units and even the competition from nursing homes, with some of the reimbursement cuts they're dealing with and changes they're going through. So just curious to get your thoughts in terms of the overall competitive landscape. And how will you see that playing out over the next 12 to 24 months?

I think that what we have said for the last maybe 1, 1.5 years is emerging as the operating environment that we're in, and that is from a rehabilitation competitive landscape. The hospital units are increasingly under pressure because their acute care sponsor, the acute care hospitals that they're in, they are under pressure from a reimbursement standpoint. They're getting less dollars from managed care. They're having to deal with the Obamacare pay for. They are looking at sequestration next year. There is the various cuts that occurred as a result of the DOCSIS, there could be more. And so what we're seeing is that the acute care hospitals and systems that are more forward-thinking, they're not just looking at today, they're looking down the road, are asking themselves, "Can we really afford to be all things to everybody the way we have in the past?" And increasingly, the answer is no. So what we're seeing, and it's slowly emerging, is an interest on some of the more progressive health care systems to say, "Okay, in the past, we had to own and operate everything. Tomorrow, we're not going to be able to afford to do that, especially if there are continued CapEx needs in our core acute care business." Okay, so with that in mind, what are we going to do? Either we monetize the noncore assets or we consider partnering with someone who can come in, we can offload some of the risk on the post-acute space and monetize a portion of those services but still have control. And that is probably the biggest difference, Adam, between February of 2012 and February of 2011. In 2011, we said that's what we think was going to happen. In 2012, that's what we're seeing beginning to happen. In terms of the SNF, there's really not a big difference there. The fact that they are not getting as much for the therapy services probably is going to put a little more pressure on them to try to make it up with more patients. But they are under some pressure. And so they have a very difficult situation to deal with while trying to meet this demand. At the same time, you see companies out there, nursing home companies talking about having to take out costs. Well, the costs are going to be taken out primarily through labor costs. And with the labor cost reductions, ultimately, you're going to put some pressure on being able to maintain any semblance of quality. So we don't see the SNF environment changing that dramatically. However, we do think that it will be more challenging for them to maintain any semblance of quality in those higher acuity patients that we treat and that could conceivably be admitted to a nursing home if there is no IRFs available or if the admitting physician may have a medical directorship arrangement or some other factor. Does that help?

Yes. No, that's very helpful. And maybe just one quick follow-up question, either for you or Doug here. Just the opportunity to purchase leased properties. I mean, you guys called that out as something that you would be interested in. And Doug, you made some reference earlier to 2 recent properties. But just as you think about that, how big of an opportunity is that over the next several years? I guess, can you just frame that for us?

Certainly. Not as big as we would like, of course. There's is 1 lease that is up for renewal in 2012 that has purchase options. So we'll take a look at that to see if it makes sense to either extend the lease or exercise that option. And then there's about half a dozen over the next several years.

Your next question comes from the line of Colleen Lang of Lazard Capital Markets.

Jay, just on the pricing front. Do you expect the mix shift towards more Medicare to continue into 2012? And if so, is that included in your guidance along with the dynamic of you treating more neuro and less lower extremity fractures that you've done, especially in the second half of '11?

We haven't forecasted in a significant shift away from what we saw in 2011. So it's hard to know what that's going to really look like in terms of the movements out of managed Medicare and into traditional Medicare. We'll probably start to see that in the first and second quarter. And no, we have not anticipated any major shift in our program mix.

Okay. Great. And then on your comment about the evolving health care landscape, are the hospitals and physicians in your market ramping up discussions about forming ACOs or ACO-like arrangements? Or do you think that's still further down the line?

It's a very mixed with the preponderance of our referral hospitals declining to participate at this time. We do have a partner in one of our markets that is looking to develop an ACO, and we are in those discussions with them to participate on the rehab side. Obviously, they are a 50-50 partner. So obviously, they are very incentivized and excited about us being at the table. We're not just seeing a lot of it. And I just -- I keep going back to what we've said before, which is, I think this is really going to be an evolution, it's not going to be a revolution. And as such, it's going to take a while for this to really be proven to have long-term benefit and therefore to be accepted within the industry. I mean, when you think about it, it's just -- it's a little bit stronger version of capitation, which we saw back in the '80s and '90s. And capitation is not around as the predominant model today for a lot of different reasons that we all know about. So the question is has the landscape changed, the dynamics changed, have patients' willingness to deal with some of the downside of being in a closed network and having the physicians paid on a capitated basis and providers paid on a fixed basis? That's just -- it's going to take a while to play this out. The good news is we do have 1/3 of our hospitals are in partnerships today. So to the extent that those markets start to move, as we saw in this one example, into either an ACO on a pioneer basis or some other basis, we'll be able to be there at the table, we'll be able to participate. We're confident we can bring value to the ACO. But we'll also be able to learn from that as we see this thing evolve over the next 5 to 7 to 10 years.

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

So Doug, you obviously commented about the use of working capital. And I guess, I just wanted to touch on the medical necessity reviews here, creating a lot of headaches for you guys, administrative burden and obviously, delay. I guess, just a couple things to ask. First, could you comment on what kind of denials you're seeing at this point, and as they sort of step up the activity levels and broaden the scope of that, maybe just characterize how that's impacting your ability to ultimately get paid? And then secondly, as I understand it, I think you have an opportunity at some point to elect other MACs as those MACs are awarded new contracts. So what's the plan there? And how might that play out?

Darren, let me try to answer that, and then I'm going to ask Doug to fill in, in terms of the collection activity. On the MACs, when the MAC structure was first unveiled, multisystems like ours had to make a decision. Either we put all of our eggs in the MAC that received the contract for the geographic area where the corporate office was located or we went with the decentralized, and every hospital then went with the MAC that won the contract for that geographic market. We chose the latter. Unfortunately, the fiscal intermediary that we have most of our relationships with today is a very difficult FI to deal with. And we've tried to improve relationships. I think we're making some progress. But it's a tough environment in that particular case. So we have made the decision, we're going with the decentralized FI or MAC configuration. But as you know, those things are really -- they're way off schedule, and so it's going to take a while for this to play out. But that was a decision we made a couple years ago. And what we find today, what we see today in terms of the issues with Cahaba, all that does is reinforce that we made the right decision when we went down that direction. In terms of the -- just a comment I'll make on the denials. What happened was they added an additional diagnosis code. So they've expanded the reviews. The biggest issue is that there's a backlog of these claims being adjudicated because there is a shortage of administrative law judges. So what we're seeing is, in part, a slight increase because now we've got more -- we've got one more code that they're going to go and quibble over. And so some of…

Just to put a little bit of context around this, recognize that although this is certainly a nuisance, the total number of our discharges that will typically wind up in the denial process, even with this heightened activity, is somewhere between 1% and 1.5%. What causes us to have the discussion is the year-over-year fluctuations in the activity because that then has an impact on our working capital. If you think about our total bad debt, which even next year with this increase we're suggesting will be at 1.3% of net operating revenues, because of our payor mix and because of where we are in the health care life cycle, this is really the primary source of our bad debt. And even when discharges are subjected to denial process, we openly have a relatively high degree of recovery on those. So we're pointing this out simply because the on-again, off-again nature that has occurred over the last several years causes these rather substantial fluctuations in our AR balance. As it smooths out over time, it's just not that big an issue, it's a nuisance. Frankly, it's not something that consumes a lot of assets or detracts from our ability to focus on the core operating business.

That's really helpful context. And if I could just follow up with a clarification on the response you gave to Ann just about sort of capital. I guess, you've sort of hinted here now that you've got, I guess, 8 de novo projects in the hopper, a couple you still haven't announced and a few under appeal. But how would you describe your M&A pipeline? I just want to get an updated thought, Jay, briefly on what the acquisition pipeline looks like because it seems like that might be the swing factor relative to guidance. There's no M&A in the guidance, I believe.

Yes, you're right. There is no M&A beyond what we have in '12 is Drake and Cypress. And obviously, we haven't provided anything for 2013. The M&A pipeline is certainly more robust this year than it was last year. Some of those, frankly, are systems looking to monetize and get out. But there's a good number looking at least initially at the possibility of entering into some kind of partnership arrangement. And again, the fact that we have 1/3 of our hospitals that are already in some kind of partnership arrangement, I think makes us at least attractive and we should be at the table with these systems. The fact that we can demonstrate that we are the nation's leading provider of inpatient rehabilitation, that helps us out as well. So we're pretty excited about the opportunities to expand our presence and provide our higher level of care to new markets and to new communities. And so it's certainly a better environment today than it was last year. And that's why when I answered Ann's question, I did it the way I did. Because if you go to Slide 18 on the supplemental, you can see what we've got in terms of bed expansion, and that's a pretty good number, $20 million, $25 million to add another 80 to 100 beds in those high-growth markets. And you think about it, that is another 2 hospitals, the equivalent of 2 hospitals. And then just looking at the $50 million to $70 million that we've got in there, complete Ocala and start 4 others, obviously, if some of the things that we talked about earlier come to fruition, that number is going to go up a little bit. So we've got a lot of opportunities to invest in the core business, and we still think that, that's what makes sense for the long term.

Your next question comes on the line of John Ransom of Raymond James.

Jay, you did a press conference -- or that's a bad word, conference call back in the fall, giving an idea of what Obama's proposals would do to your P&L. I guess, I'm thinking of the 75 percent rule. If that were to resurrect, do you have any updated numbers? Or shall we still assume, if that were to happen, that it has kind of a similar impact that you laid out last fall?

Yes, there's nothing new that we would put in there for that. Clearly, as time goes on, and as you heard us talk about the program mix towards more neurological and fewer knees and hips, our overall compliance is moving north. So we're not in a position to say anything today about what the difference might be. But I think it's very fair to say that what we put out there last quarter would certainly be on an apples-to-apples basis forgetting any additional growth would be sort of a worst-case kind of scenario. Because as we move into a higher overall compliance number for the company, clearly then the downside risk is eliminated. Having said that, the 75 percent rule, what I think is resonating with a lot of people in Congress, is that we've already paid for that. That's come and gone, and I know that, that -- there are people out there and the nursing homes love to flog the 75 percent rule. And if I was in their shoes, I'd probably be doing the same thing because everything else is looking pretty bleak. So you've got to find something. And I just think that, that's something that doesn't have any traction anywhere except the White House. And it doesn't have any traction at CMS. It doesn't have any traction on the Hill. If you bring up 75 percent rule with most members of Congress that have been around for any period of time, they roll their eyes and say, "Please do not. That's dead and gone. That's buried, you paid for it." So it's out there, and every time Obama puts out a deficit reduction plan and puts out a budget, it's going to be there. So everybody just ought to know that it's going to be there. What I say is look at the track record of how many Obama budgets have been passed since he was brought into the administration and made President. This thing is DOA, it's not going anywhere. So we don't spend a whole lot of time worrying about it.

Okay. And it was kind of interesting, the investor reaction this spring versus last fall.

Yes.

The second question, could you update us on E&Y and any progress there?

Well, our General Counsel is up in Delaware trying to move through the log jam in our CON. And I'm sure he's listening in. He's about ready to cringe, I'm sure. But what I can say, and what he's told me I can say is that the process is entirely at the discretion of the administrative law judges. We continue to believe in the strength and the validity of our claims, and we are pursuing them aggressively. What he doesn't want me to say and I always get in trouble when I say this is I still believe that we have much more incentive to get this done than E&Y does. And so every time I say that, we get a nasty letter from E&Y's lawyers, I'm sure we're going to get another one. But I believe that, that there's no incentive for them to get this thing resolved quickly. But we have a lot of confidence in the strength of our claims. We continue to press them hard. But the process, and therefore, the timing of resolution is completely outside of our control. It is exclusively under the jurisdiction of 3 administrative judges, arbitrators who are arbitrating the case. And the only other thing that I would mention is think about how long this has been going on or maybe you don't want to. But it's been going on a very long time. Think about how much information those judges are going to have to wade through in order to make their decision. So who knows? I think the takeaway for everybody ought to be, and we've been saying this now for about 1.5, 2 years, there's nothing in our growth plans, there's nothing in our business plans, either a 1-year or a 5-year, that assumes we're going to get anything. When we get something from this, if we do and we certainly hope that we will and we certainly believe we should, we'll be looking at how to deploy that.

Your next question comes from the line of A.J. Rice of Susquehanna Financial Group.

Maybe an operating question, and then a philosophical one. On the operating question, I know you said the rate increases for the wages is running about 2.5% and the half-day off that you gave people. Maybe can you comment more broadly on, particularly therapists, what you're seeing in terms of productivity, turnover? Is that relatively stable at this point? Or has it -- has turnover crept up? Any comments along those lines?

Yes, A.J., this is Mark. I can tell you that we have not seen a dramatic change of any kind in the marketplace as relative to therapists or nurses. If anything, we've been in pretty good shape. We closely monitor our retention on both nursing and therapy. And we've not seen that pop up nor have we seen a pressure in wages going forward. You've heard us talk in the past in terms of retention, specifically of our nurses, and that's essentially reinvesting in them through education and training, particularly at our CRRN program, where this past year, we're now in excess of 800 CRRNs, which is the rehab certified nursing for RN component. And so having that has certainly helped us on the retention aspect.

Okay. And then my sort of philosophical question. You guys have been asked a lot about capital deployment. And this is a question I don't really have to ask too many people in the services area. But your leverage is getting down to the point where you could almost argue you're starting to be -- question whether you're underlevered at 2.7x debt to EBITDA. Can you just comment, I know -- I've heard your comments about capital deployment. But what about the leverage and where you're going at this point? And maybe that'll drive some comments about bad debt -- about buybacks and dividends and so forth. But you're getting down to a point where you’re pretty -- the leverage is pretty low by health care services standards.

Yes, you're right, and we're aware of that. We frankly think that, that's healthy. And we're very content with the level of our leverage today, in part because we really don't know what the future is going to be like. And if you -- since you asked a philosophical question, I'll venture off a little bit, but it's really no different than where we find ourselves in on a federal budget standpoint. I mean, there have been times in the past where, as a country, we spent more than we should have, and now we're saddled with a lot of long-term debt that we've got to deal with. Well, as we look at the 2013 in sequestration, we know that something is going to happen in -- or we believe something will have to happen in 2014 and beyond. The reality is that the course we're on as a country in terms of how much we're spending in health care and so on is just unsustainable. I mean it is unsustainable. So there's going to be some kind of change at some point down the road. And what we've tried to do is try to create a balance sheet that will be able to absorb whatever changes comes our way, and more importantly, creates an environment to then lever up if we need to for purposes that will bring us long-term value. But right now, we don't see anything that's out there on the horizon that we would want to bring more debt onto the balance sheet. We've managed this very conservatively. I would much rather be in the situation we're in today going into '12 and looking at '13 than, as I mentioned a moment ago, than be sitting there with 3.5x, 4.5x, 5.5x leverage, and especially, as you think about the rate environment going forward. I mean, how many -- I don't know about you guys. We don't think that this rate environment is going to be there forever. I mean, it'd be kind of nice if it was on one hand because you can borrow at low rates. I don't know where you invest the money, but I mean, it's just -- it's not a sustainable environment. So we're trying to make decisions that are based on the long term.

I think it is fair to say, A.J., that when we look at our total leverage, we really take into consideration 3 factors. We look at the leverage ratio. And there we are at 2.7x, which is well within our 3x target. Second is we look at the composition of our debt capital and the fact that we have no maturities prior to 2016, well-spaced, diversified sources of funding gives us a lot of comfort there. And the third is we look at the obligations represented by our lease properties there. Because we own such a substantial portion of our properties, we don't have the kind of lease exposure that adds to the overall leverage picture that many of our health care service provider peers do. When you look at all of those for us, it certainly underscores the fact that further debt reduction right now is not a priority for us. We've arrived at the position we would like to be in. It gives us substantial flexibility. So we're not going to be out there, particularly with our debt trading at levels substantially above par, looking to reduce that further.

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

I wanted to circle back on the pricing growth and that clinical mix shift that you've seen specifically in the quarter. I'm just curious, is that something that's happened consciously? Has it been because of service line development in those neuros, those high-acuity areas? Or is that just a natural phenomenon that has occurred?

No, that's been absolutely by design. This has been -- this is something that we've been focusing on really ever since the new 60% threshold came out with the new conditions. As you know, Frank, you don't develop clinical programs and clinical expertise and then roll them out and see the benefits overnight. It's something that you have to do carefully and thoughtfully. You've got to test them and then deploy them. And that's exactly what we've done.

So there's a good argument to be made that this can kind of continue to perpetuate itself and perhaps this shift is not just a one-time blip?

I think that there's certainly logic for that.

Okay. I think you all mentioned about remaining real estate opportunities for buybacks. But kind of on that same subject, what about on just clinic closures, anything else much left out there to clean up on the clinic side? Or are you pretty much there?

Frank, this is Mark. As you know, we continue to look at each one of these clinics every time a lease is come-due. But I think we've probably been through the majority of the underperformers. I think that we'll continue to have a number going forward. But I think that number will decrease over time, and we'll end up with a core group of high-performing clinics.

I got you. One question, and this will go back into that philosophical category. Given the low leverage here, I guess, what do you got to see before you really decide to do something perhaps using your balance sheet to do it from be it a real aggressive share repurchase or -- I guess, what do you have to see before you're really willing to risk levering up again?

Well, there's a lot of clarity in the future that we have to see. We have to see what the election is going to look like and who's going to win. Frankly, I don't think that whoever wins the White House is nearly as important as what happens in the Senate. And when you think about it, either the Senate is just -- is one just big roadblock for getting things done. And so we need clarity there. We need to have clarity on the next debt ceiling discussion, debate, whatever you want to call it. I mean, everything I'm hearing is it's going to happen at some point, and I remember what happened last year when that issue was on the table. So I just think that there is a lot of macro issues that present a lot of macro risks for the country. And since when they're going to be looking at changes or reductions to expenditures, they're going to be looking at Medicare. I mean, they always look at Medicare. So we're just sitting here thinking not for what about this quarter or what about 2012. We're all sitting here -- we're all shareholders, and we're sitting here, what do we need to do to position this company to be successful 3 years from now, 5 years from now, 10 years from now? Not knowing exactly what the landscape is going to look like. But we do know some of the basic fundamentals of managing a company in difficult times, and we're just -- we're not going to resist -- I mean, we are going to resist the temptation to just go out there and take a lot of risks. I mean, you look at some of our -- others in the health care space, they went out and they did a lot of acquisitions. We got criticized, "Why aren't you out there using the balance sheet to acquire these properties in there at all-time lows?" And look at where those companies are today, they're limping along, sitting there going, "Holy cow, look at the debt that I've got, look at the debt service. Am I going violate the covenant?" We don't want to be there. We've gone through -- if you remember what it was like in our company in 2004, '05, '06, '07, not too many people have had to manage in that kind of environment. We did, and we learned a lot of lessons. And so we're going to continue to be focused. We're going to continue to be disciplined. We're going to be conservative in our approach to the risks that are out there. And I think we feel pretty good that we're going to be able to continue to post good numbers and grow. And ultimately, that's what we're doing. We're doing that for the shareholders. We're not doing that for who's trading in the stock today. We're really building this company for shareholders over the long-term.

And Frank, I think it's fair to say that -- specifically you asked about what would cause us to redeploy significant portions of the excess cash flow towards a share repurchase. That type of decision would have to be accompanied with a substantial diminution in the prospects with compelling growth opportunities in the core ERP business. And right now, we see that pool of opportunities increasing, not decreasing.

Your next question comes from the line of Rob Mains of Morgan Keegan.

Yes, I just have one question, and that's labor efficiency. Your EPOB metric continues to improve. Is there a point where you think you kind of hit a sticking point with that?

Frankly, we don't. I mean, obviously, there is going to be, at some point, a point that you can't move beyond. But I guess, our thinking is we always have to find ways to improve. And we don't know today, frankly, what the potential benefits of this clinical information system might yield for us. We're certainly not making this investment to trim labor costs. We're making this investment to increase the efficiency, so we can see more patients. And so there's always going to be a -- that's always going to be part of our business plan is improve productivity, improve productivity, but we're going to do that by giving our employees the technology that will enable them to do that.

Yes, Rob, you may have heard us talk in past about our beacon system, where we're able to provide the field and our managers in the field with virtually real-time feedback in terms of where their labor exists and almost to the point to the prior shift. So as we have volume fluctuations, we're in a much better position to adjust labor to fit the volume fluctuations. And that's really been our key to continued success in finding productivity.

The other factor that will influence EPOB over the longer timeframe is the accelerated de novo activity. In the near-term, because we'll have more hospitals in a ramp up phase, that could put some negative pressure on it. In the longer-term, as a higher proportion of our hospital base becomes these new hospitals, which are built with the same footprint, a prototype, if you will, we should see enhanced labor productivity. There's more variability in the legacy base in terms of the physical plan.

Your next question comes from the line of Whit Mayo of Robert W. Baird.

I was just curious if you made any comments on the commercial mix in the quarter. And Jay, maybe just broadly, what are your contracting terms now? Have they meaningfully changed? And this whole conversation that’s evolving about narrower networks, is it making your way through the door at this point? Just kind of curious on that broader topic.

Our commercial pricing is still in that 3%, 3.5% range. It really hasn't changed that much. We don't see a lot of commercial patients. Because if you look at our payor mix, of that 20%, a good portion of that is Medicare, managed Medicare, and those patients are shifting out of managed Medicare into traditional. So if you look at for 2011, the fourth quarter, we had about 20%, 19.5%, about 8 percentage points of that is managed Medicare. So you're talking about a fairly small amount where patients were not a big spend for the payors. And so what we're seeing is pretty steady pricing environment. In terms of the more narrow networks, I'm going to ask Mark to respond what he's seeing there.

Well, we haven't seen a real change in the overall networks, where all the major payors you would expect out there make up our largest percentage. I will say that over the years, we've put a real effort into just having a better cooperation -- not really cooperation, but relationships and building relationships with each of these payors in all of our major markets. And that's been a key success for us because every time we go out and talk to these payors, we also bring our quality metrics and really make that value proposal to them, where our quality comes into play.

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

You guys have done such a good job on the discharge growth for a while now that it seems like maybe we're starting to take it for granted. Can you talk about, is there a limit? Is there a point where incrementally it becomes more difficult to continue to take share? Or should we really not worry about it and you guys feel comfortable that you'll continue to be able to do it?

Well, we appreciate the comment on people taking things for granted because it's one thing to say something, it's another thing to actually make it happen. There's a lot of execution, we've got a tremendous focus on doing just that. I think that the market share gains will, in part, continue for really indefinitely. But remember that the underlying demand, unlike acute-care hospitals or other providers, the underlying demand is pretty steady, and it's driven by the aging of the population and the inevitability that occurs. The older you get, the more you have these kinds of conditions that we treat, and in the population as a whole. So if there's a 2% sort of fundamental, underlying growth trend that is embedded simply in the aging of the population, that gives us kind of a baseline, if you will, to build our long-term expectation. And so we think that there's still lot of opportunity out there, and a lot of it is going to be up against other rehabilitation providers. But frankly, a lot of it is also going to be also continuing to take share from nursing homes.

Okay. And then in the quarter, you guys had adjusted the guidance at the beginning of the January for EBITDA to $455 million to $458 million. You still had some nice upside in the quarter. Can you just maybe talk about what specifically was the -- you came in at $466 million. What was the upside to the high end of the adjusted guidance?

It was really -- Gary, it's Doug. It was really in the 2 insurance accrual items that we referenced. We had favorable outcomes regarding our year-end actuarial review on the general professional liability, and then we also had a favorable outcome on the workers' comp. And heading into that investor conference, where we had updated the guidance at the first week in January, we just didn't have a handle at that time on where those accruals would shake out.

Your final question comes from the line of Kevin Fischbeck of Bank of America.

I guess, when we look at the EBITDA on a cash flow growth in 2012, it's a little bit below your targets. But that makes sense, given, I guess, the comp was obviously tough, particularly on the free cash flow side. But you guys feel good about those numbers longer-term. And I just wanted to see if we could talk a little bit about 2013. Just looking at the sequestration cuts that you've targeted, about $30 million, it seems like it's going to be hard to hit those longer-term targets in 2013. Now you mentioned some offsets potentially, I guess, on the de novo side coming in, but I would think that would add more to revenue than it would to profit. Is there something else in 2013 that's going to come in and help offset those cuts that we should be thinking about? Or is it more it might be a little bit soft in 2013 but 2014, '15 will pick up and you feel good about the longer-term growth?

Yes, I mean, you're right. We shouldn't be talking about 2013. And with respect to 2012 guidance, remember what the guidance -- you made it sound like those numbers are already cast in concrete, that 2012 is going to be right on those -- right on the guidance. I mean, as you know, there are -- there's really kind of 2, at least 2 camps for how to handle guidance. Some guys like to go out there and thump their chest and talk about how great the year is going to be, and then they find themselves having to walk down guidance at some point down the road. We've never had to do that. And we don't expect that we're going to start this year because we tried to put out there on a realistic, candid, transparent way, here's what we believe we can do and kind of in a high degree of confidence. And that's the approach that we've taken. So guidance is that. And if you saw the release and heard our comments, it's initial guidance. And it's based on where we ended the year. And now we've got about 5 weeks out of 52 weeks that we have operational knowledge of. So it's always the discussion that we have every time we put out guidance. But again, we never want to be in a situation where we have to walk that back down because getting a short-term pop or an attaboy for great guidance to us is meaningless. What we do is we're building the company for the shareholders and we want the shareholders to appreciate the value that we're creating. 2013, what we said is our business model for the 2012 through 2015 timeframe, that CAGR, those CAGRs are solid. We feel very good based on what we know today. So we're not going to comment on 2013. We're 6 weeks into 2012, and that seems a little bit of a stretch. But let's focus on '12. We had a great year in 2011. We've got a great start to 2012. And we're excited about the opportunities that are out there to continue to grow this business

Yes, I think that's a fair point that going back to things taken for granted, usually you guys do beat your guidance pretty nicely to begin the year. I guess, 2 quick clarifications. You mentioned, I guess, in the press release that your volume assumption assumes some market share gains. And I just wanted -- and then you mentioned in the conference call, you think 2% is kind of what the industry is growing, so your ability to get to 3% on a same-store basis would be -- the delta there would be market share gains. Is that the way to think about it?

Yes. And the 2% is what the underlying 65-plus cohort is growing at. And that, we use that as really sort of as a placeholder for what we think the underlying market is growing at. And so yes, anything above that is going to be market share gains, and then on top of that, any new store contributions that we might have.

Okay. And then the IT expense for 2012, this is a multiyear rollout. So should we expect a similar $4 million per year going forward? Is that weighed toward 1 year or another?

It will increase modestly as the numbers of hospitals that are rolled out on to the system increases in subsequent years.

This concludes today's question-and-answer session. I now would like to turn the floor back over to Mary Ann Arico for any closing remarks.

Yes, as a reminder, we will be attending the RBC Healthcare Conference next week, the Raymond James Equity Conference in early March. And the Barclays Healthcare Conference in mid-March. If you have additional questions today, please give me a call at (205) 969-6175. Thank you.

Thank you. This concludes your conference. You may now disconnect.