Universal Health Services, Inc. (UHS) Q4 2013 Earnings Report, Transcript and Summary

Good morning. My name is Brendan, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services Fourth 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 your host today, Mr. Steve Filton, Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the full year and fourth quarter ended December 31, 2013. During the 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. 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, 2013. 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 recorded net income attributable to UHS per diluted share of $5.14 for the year and $1.24 for the quarter. After adjusting for reduction in malpractice reserves relating to prior years, and the incentive income and expenses associated with the implementation of electronic health record applications in our acute care hospitals, our adjusted net income attributable to UHS per diluted share for the quarter ended December 31, 2013 was $1.03. On a same facility basis, revenues in our behavioral health division increased 4% during the fourth quarter of 2013. Adjusted admissions and patient days to our behavioral health facilities owned for more than a year increased 2.4% and 0.8% respectively during the fourth quarter. Revenue per adjusted patient day rose 3.2% during the fourth quarter of 2013 over the comparable prior year quarter. We define operating margins as operating income or net revenue less salaries, wages and benefits other operating expenses and supplies expense divided by net revenues. Operating margins for our behavioral health hospitals owned for more than a year increased slightly to 27.9% during the quarter ended December 31, 2013 as compared to 27.8% during the comparable prior year period. On a same facility basis in our acute care division, revenues increased 1.1% during the fourth quarter of 2013. Adjusted admissions were unchanged, while revenue per adjusted admission increased 2.1%. On a same facility basis, operating margins for our acute care hospitals were 14.1% during the fourth quarter of 2013, and 14.4% during the fourth quarter of 2012. Although not included in our same facility basis results, our consolidated operating results during the fourth quarter of 2013 included the operating losses related to Temecula Valley Hospital, a newly constructed acute care hospital located in California that opened in October of 2013. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $234 million and $206 million during the three month period ended December 31, 2013 and 2012 respectively. As a percentage of acute care net revenues bad debts, charity care expense and the uninsured discount in this year's fourth quarter were at levels higher than those experienced during the fourth quarter of 2012. However, due primarily to the increase in behavioral health revenues in the very low levels of bad debt and uninsured discounts in that business, our overall percentage of bad debt to charity care and uninsured discounts were lower than those experienced during the fourth quarter of 2012. Our cash generated from operating activities was approximately $293 million during the fourth quarter of 2013 as compared to $264 million in the fourth quarter of 2012. Our accounts receivable days outstanding remained unchanged at 56 days during each of the 12-month period of 2013 and 2012. Our accounts receivable as of December 31st of each year includes substantial Medicaid receivables due from the state of Illinois and our accounts receivable as of year end 2013 also includes substantial Medicaid receivables due from the state of Texas. At December 31, 2013, our ratio of debt to total capitalization was 51%. During 2013, we opened a total of 327 new behavioral health beds including 168 beds opened at two de novo hospitals and 159 beds opened at some of our busiest facilities. Our acquisition pipeline is very busy in the behavioral division, in fact we have entered into an agreement to purchase the 48-bed Palo Verde Behavioral Health services facility in Tucson, Arizona and it's our current expectation that this acquisition will close in the very near future. We have also entered into an agreement to purchase another behavioral health facility that is pending regulatory approval. In addition, our goal is to add approximately 600 new bed including two de novo hospitals and convert approximately 100 beds from residential treatment care to acute behavioral care in 2014. We spent $79 million on capital expenditures during the fourth quarter of 2013 and $358 million during the full year of 2013. During 2014, we expect to spend approximately $360 million to $385 million on capital expenditures which includes expenditures for capital equipment, renovations, new projects at existing hospitals and construction of new facilities. Excluding the unfavorable $0.05 per diluted share, electronics health record impact described in our press release, our estimated range of earnings per diluted share attributable to UHS for the year ended December 31, 2014 is $4.80 to $5.10. This guidance range represents an increase of approximately 6% to 12% over the adjusted net income attributable to UHS of $4.55 per diluted share for the year ended December 31, 2013 as calculated on the attached supplemental schedule. This range includes an estimated increase of approximately 3% to 7% approximately $0.15 to $0.30 per diluted share related to the patient protection and Affordable Care Act, the lower end of the estimated Affordable Care Act impact range consist of the estimated favorable impact to only our acute care hospitals during 2014. The upper end of the ACA impact range provides for a slightly increased estimated favorable impact to our acute care hospitals as well as an estimate for the potential favorable impact to our behavioral health care facilities. The guidance range also provides for an aggregate pre-tax unfavorable impact of approximately $34 million or about $0.21 per diluted share resulting from anticipated reductions in 2014 as compared to 2013 in supplemental revenues earned from various state based programs. Approximately $10 million of that reduction relates to California Medicaid supplemental payment programs, which although approved by California in October of 2013 to continue through 2016 are still pending subject to approval by the centers for Medicare and Medicaid services. During 2014, our net revenues are expected to be approximately $7.89 billion to $7.94 billion representing an increase of approximately 8% to 9% over our 2013 net revenues. Included in our estimated 2014 net revenues are revenues associated with the above mentioned behavioral acquisitions and de novo projects as well as full year revenues for the recently opened Temecula Valley Hospital. Alan and I would be pleased to answer your questions at this time.

[Operator Instructions] Your first question comes from the line of Justin Lake with JPMorgan.

Thanks. Good morning. First question, can you talk a little bit about the core EBITDA growth that you see in both businesses and some of the assumptions around that?

Sure. So I think that from an acute care perspective the basic assumptions are an expectation that acute care same-store revenue growth in the kind of 3% to 4% range with result in EBITDA that is sort of flat to slightly up. And then, we get a bump from the turnaround in Temecula EBITDA or as I will sort of call it the Temecula market EBITDA, we had $15 million or $16 million drag this year. And we believe we will get something close to breakeven in 2014. So that's a significant EBITDA turnaround, although its largely offset at the pre-tax line by increased depreciation and interest expense associated with that project. On the behavioral side, I think that we continue to expect that the revenues of that business to grow and that kind of 4%, 4.5% range, which should result in EBITDA growth in the mid-single digits fairly consistent with what we have been running in that division. And obviously, again, in both divisions as I mentioned in my prepared remarks on top of or sort of incremental to those assumptions we then have to factor in the drag of the $34 million reduced UPL/DSH and provider tax payments, which I think are split relatively evenly between the two divisions.

Got it. And specifically on Las Vegas can you spike out what you saw there in the fourth quarter, and what you are assuming for 2014?

So I think as we’ve talked about in previous calls and we started to see some recovery in the Las Vegas economy both volumes and payer mix have improved in Q2 and Q3, so a little bit of a backslide in Q4. And I think as we suggested in earlier quarters we would guess that the recovery in Vegas, while over the long-term will be an upward trajectory is likely to be sort of bumpy along the way much as it was on the way down. I think that's what we are seeing. So my sense Justin in 2014 is that the metrics I gave about overall revenue and EBITDA growth in the acute division will be slightly better in the Vegas market. But, not dramatically better.

Okay. Great. Last question on your reform assumptions, can you give us an idea of what you are assuming for coverage expansion there. Maybe what you've done on the frequent flyers, any incremental utilization? And then lastly on the psych side, any benefit that you got in the high-end of that range from psych parity on the benefit side? Thanks.

Thanks. I'm actually going to defer the reform question, I'm sure there will be other reform questions, just to give other people a chance to ask their questions. So operator can we take the next question.

Okay. Thanks.

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

Okay. Great. Thanks. I guess, if you can just talk a little bit more about the reform assumptions, when you think about the benefit that you put into your guidance, is it purely just a reduction in – and your market resulting in a similar reduction in volume or do you make any assumption about covering some of the sickest and frequent flyer into your market in your assumption?

Sure, Kevin. So I think that as I indicated in my prepared remarks, the low end of our guidance presumes effectively an acute – an impact on the acute care business from reform but not for the behavioral. And then I think the high-end of the guidance reflects an impact on the behavioral business and obviously, the range of the continuum of the guidance shows that progressively. I think we have always suggested in our own modeling internally is that the ACA impact on the acute care business is an uninsured issue meaning that we have ignored any increased volume or increased utilization, which I know others have speculated there will be – I don't know that we would argue that there won't, but we just have not included. So what we have done from a modeling perspective, which I'm sure is not terribly different than our peers, it’s gone out, looked at the enrollment data that HHS has published state by state, in the states that we operate, made some judgments about how many of our currently uninsured will get covered, I know one of our peers cited an estimate of their 2014 model including 7% to 9% of uninsured becoming insured and we think that's a reasonably – a reasonable number and something close to what our model yielded. And then we think that such result, if you get there yields for us 4% to 5%, 3% to 4%, 5% increase in acute care EBITDA. On the behavioral side, the impact is almost exclusively on volumes if in fact there is significant commercial enrollment and newly insureds we believe there is an opportunity to see increased volume. Maybe some on the expanded Medicaid side as well. So again, the high-end of our guidance I think presumes something like maybe a 1% increase in our overall volumes as a result of the surge of newly insureds.

Okay. That's helpful. And then just to clarify couple of points in your guidance. So you are saying that your guidance for supplemental payments is $34 million that $10 million from California could be reversed to get approved by the Fed that could be $10 million incremental positive versus your guidance? And then just to confirm the deals, [a few bigger] [ph] deals are those in your guidance, or if they close, would they be upside?

So the answer is, your first statement is correct, if the $10 million gets approved by CMS for California then we will obviously sort of update our guidance and include that in our results. And secondly, the acquisitions that we've referenced are included in our guidance and in our – both in our revenue and EBITDA guidance.

Okay. Is there a reason why you didn't include California because some of your peers are including California because it's approved by the state; you have undue – or not undue, but you have high concern that it may not be approved?

No. I think it's just a – I mean, it's just the sense that because CMS haven't approved it, it's not an approved program yet.

Okay. All right. Thanks.

Your next question comes from the line of Josh Raskin with Barclays. Mr. Raskin please ensure that your line is not on mute.

Got it, sorry about that. First question just on volumes, it sounds like Vegas is sort of in line with the overall, my guess Riverside was a little bit of a drag, but I'm just curious if Riverside was a drag overall, or if it was just the existing hospitals sort of changing same-store number? And then any color on procedures or anything that you're seeing that could help give a little bit more color on the volumes in the fourth quarter?

Sure. So the question that Riverside, which just for everybody's benefit is the Southern California Riverside County market including the new Temecula Hospital. So I think to your point, when you look at our same-store volumes in Q4 Josh that market is a bit of a drag because the Temecula admissions and the Temecula volumes are not included in our same-store numbers, but we've seen some cannibalization as we would have expected at our existing facility and those continue to be included in our same-store admission metrics. So a little bit I think of the Q4 acute weakness can be attributable to that cannibalization. I don't have the exact numbers in front of me in terms of the absolute overall impact. But my sense is that, if you have the Temecula numbers in there, it’s probably 40 or 50 basis points worth of admissions. And from a procedures perspective, I'll just mention I think surgical procedures, I think surgical procedures were relatively flat in total in the quarter although they were skewed more towards some growth in outpatient procedures, and somewhat of a decline in, inpatient procedures, which put a little bit of pressure from a revenue perspective lot of attention by our operating folks on – focused on driving those inpatient numbers higher. Josh Raskin – Barclays: Okay. That's helpful. And then I guess you guys are two months in as of today in terms of 2014 and I'm just curious, you guys get admission data obviously very quickly. So was there any color on the level of uninsured that you're seeing in the first two months of 2014 versus the first two months of 2013, I mean any sort of quantitative analysis that you've been able to do to seek where we are in terms of reform with the obvious understanding that this is a full year process or multiyear process, I should say?

I think that challenge Josh, when trying to look at any relatively short period and I certainly would think that this first couple of months is a short period is that there are so many variables at play that its difficult to isolate one in this case the impact of reform and really draw any terribly meaningful conclusions. Just to your point, I mean we really only have one month worth of payer and insurance data January was a pretty good month in terms of payer mix but to be fair January is usually a pretty good month in terms of payer mix. So I would really be loath to draw any great conclusions from that. On the volume side, again, difficult to do, particularly on the behavioral side and particularly this year when there just have been a lot of other exogenous factors clearly January volumes in our behavioral business were affected by the weather in a number of places. So difficult to sort of parse that dynamic out from any reform impact et cetera, so I think it's a little too early. Honestly, we may well get to the first -- the end of the first quarter and have reported results where its still going to difficult to cheese out with great precision the impact of the Affordable Care Act. Obviously, the longer we go on and the more periods we have to look at in the more data we have to look at, I think the better and the more sound the conclusions will be. Josh Raskin – Barclays: All right. I guess, I'll try again after the first quarter.

We'll be here. Josh Raskin – Barclays: Thank you.

Your next question comes from the line of Brain Zimmerman with Goldman Sachs.

Hi. Thanks and good morning. I was wondering, if you could give us a bit of an update on any initiatives you might have towards identifying targeting patients new market to increase the take up rates for the exchanges?

Sure, Brian. My sense is that we're doing all the same things that both our for profit and not-for-profit peers are doing that is, we've always as the hospital industry had a very focused and directed effort to qualify any uninsured individuals, who come to our hospitals for potential insurance that they might get. Historically, that has been mostly directed to a Medicaid effort in getting people qualified for Medicaid, if they can be and that effort continues in the same way. Obviously, now with the commercial exchanges, there is another alternative potentially for people who don't have insurance and come to our hospitals. So we have Certified Application Counselors at all of our hospitals. We go through the exercise of helping anyone who doesn't have insurance familiarize themselves with their options and et cetera. We've done a significant amount of outreach that is letters and phone calls to patients who had a history of coming to our hospital frequently and we've reached out to them proactively. And the challenge, I think with all these activities is, it's difficult, again, in the broader sense to draw real meaningful conclusions from that activity. So we've signed and we know that certain people have signed up but a lot of enrollment sort of takes place if you will outside of our purview. So I think we are really relaying on outside sources either the government, mostly the government or to some degree the insurance companies to really tell us how that overall and overarching enrollment process is going.

Okay. That's helpful. And then on the behavioral side, it looks like your length of stay, still saw some pressure but did improve from third quarter to fourth quarter. Can you just give us an update on your thoughts on how you are viewing might say at the behavioral business?

Brian I think that your observations are right on. I think we saw a little bit of easing of that pressure in Q4. The challenge to say whether that's really the beginning of a turn or the beginning of an absolute leveling out is tough to do and I'm especially reluctant to do it because I predicted that turn prematurely a couple of times in over the last few years. So I think we're going to wait and see I think, or when I laid out the behavioral expectations, or metrics for 2014, they include quite frankly a continued at least incremental decline in length or space. So we're prepared for that although hope that we don't necessarily experience it.

Okay. Thanks a lot.

Yes.

Your next question comes from the line of Tom Gallucci with FBR.

Good morning. Thank you. I guess two quick one Steve, first, just on the acquisition side, I think you mentioned some of the activity on the behavioral side. Just curious your thoughts on the landscape on the acute care side?

We've talked I think a lot over the course of the last few quarters and even last year or two about the idea that we think that there is a significant realignment occurring in the acute care space, I mean we are aware of -- it seems to us almost every not-for-profit system of any size and quite frankly those who that are even smaller are having conversations and going through processes about thinking how they're going to position themselves in the post reform landscaped doesn't mean that they're all going to be sellers by any means. But it certainly means that they're going through those conversations and I will tell you that on both sides of our business that is on acute and behavioral. We're trying to participate as much as we can in those conversations to see what opportunities we might have to do any number of things to buy facilities to joint venture to manage behavioral services really to – really span the gamut of what can be done. So in terms of being able to say with great precision come what's going to happen and what we're really expecting, I think it's difficult to do, but we're – obviously we've got balance sheet that is attractive from a leverage perspective, so that if there are really attractive and compelling opportunities we can add, but we'll continue to be as we always have been judicious and how we do that.

Right. And then just as a follow on to that I guess thoughts on the use of cash to the extent, more material acquisitions don't come to fruition because we've been talking about this I guess for a while to your point, but there is a lot of activity out there, but doesn't seem like there has been anything yet at least at this point that if you want to pull the trigger on.

Yes. I think that just to be fair, in most of the activity particularly on the acute side in the last few years has been on the more rural end of the spectrum, which I think is why the more rural companies have been the most active, that's never really been our sweet spot. And so I think that so again, it's a fair comment, but I think that the reason that we have been I think patiently waiting is the notion that at some point that activity is going to move along the spectrum and start to encompass more of the suburban and urban players that we probably have a greater interest in. So from – purely as sort of mechanical guidance perspective, the way that we think about cash generation is we just presume that we use our cash to repay debt, but from a more practical perspective, I think we're looking – we're always looking at whatever external uses we have for our cash as well as whether at some point it becomes more prudent for us to become a more aggressive return of capital to shareholders.

Okay. Helpful perspective. Thanks Steve.

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

Hi, everybody. Two questions I guess really, first, coming back to the behavioral comments about seeing more deals out there traditionally at least in the last few years maybe go back further it's been different but last few years your big – your deals in psyche have been bigger deals. Now, it sounds like you're seeing opportunities on a one-off basis to be more active. Can you give us a little more flavor as to, is that just a change in your posture or is the market giving your more opportunities on a one-off basis and beyond the two you've announced, do you think you see more in the next year or so?

Well, I was sort of stating the obvious, A.J. I mean you're right, we've done the two biggest deals in the space in the last three years when we bought PSI back in 2010, and then we bought Ascend back at the end of 2012. And so I think from a practical perspective, it certainly nothing left on the size or scope of the PSI deal. And even from an – from a comparative perspective, there is only a handful of companies besides Ascend. So I think a lot of the remaining opportunities are smaller one-offs. We've done our share of those deals over the last few years as well, I just don't think they've been – they've gotten the attention or the highlight given the much larger deals that we've done. So, I think the – I think there remains a tremendous amount of opportunities for consolidation in the behavioral space, but it's a more fragmented space with some of those bigger deals having now been done. I think the other piece of it as I was alluding to a little bit before is that, there is a lot of activity on the acute care side of the business meaning acute care hospitals that have behavioral components to them either behavioral units or freestanding behavioral facilities. We're looking to get into that business or out o it, and we are having a number of I think very promising conversations with some fairly large acute care providers that we view as again, very promising. And we believe this will constitute a significant component of our growth in the behavioral business over the next few years.

Okay. And then my other question would relate to, I know you don't give guidance around the quarterly progressions but couple of other companies have out of their way to signal that we should take into account the moving parts in the first quarter now, you signal something on whether in the psych business maybe the layout on your acute care side doesn't – yet is impacted by weather, some others, but do you think this is sort of a normal seasonal layout for you guys this year, or would you caution us about the first quarter in anyway?

My comments I think about the progression for the year is that obviously, or maybe not obviously, but I think so the ACA impact is a progressive impact, in theory that should become bigger as the year goes on and the enrollments process continues et cetera. From the weather perspective, yes I mean – we may see I think a few million dollar impact in our behavioral business in the first quarter, but I don't know that in the grand scheme of the year that's a huge issue. My sense is that a lot of the other companies who have sort of cautioned about the first quarter are the companies that are engaged in very significant integration processes with acquisitions et cetera that that's a different dynamic then we'll be experiencing. So from my perspective, I don't know that quarterly progression in 2014 other than the – with the ACA caveat, should be terribly different than what we've historically seen.

Okay. Great. Thanks a lot.

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

Thanks. Good morning. Can you give us the impact do you think the two-midnight rule may have had on volumes in the fourth quarter. And do you have any impact built in the guidance for this and maybe what percentage of your Medicare missions are one day stays?

Sure, Ralph. So I know that it's a typical number to – I think again sort of parse out with great precision. But sort of based on the change in our number of observation days et cetera. I know one of our peers suggested that their impact was maybe 50 basis points particularly on their Medicare admissions in the quarter and that's pretty consistent, I think with what we would guess as well. And I think our sense is that – while, the two-midnight rule is sort of the latest step in this continued shift from in to outpatient, it is part of a larger shift that has been underway for a long time. And I think that we have just taken I think try to budget our admissions for next year in the context to that larger shift. And so, I think when I talked about an acute care revenue growth in 2014 like 3%, 4%, I think that is frankly mostly priced with just modest volume growth.

Okay. And do you have the percentage of your Medicare admissions that are one day stay?

I don't have that in front of me Ralph.

Okay. And then, I guess do you – do you know what percentage you yourself pay volume is in Medicaid expansion states. And then what's your historical success rate been in signing people up from Medicaid that are previously eligible?

So answering the second question first, I think that although it varies by market, historically we've had a two-third success rate that is people who we actually feel we can try and qualify for Medicaid, we historically have converted or qualified about two-thirds of those. I don't have exact percentage of that you've asked for, obviously I thinking a number of analysts I pointed this out, in terms – and these are really acute care comments. In terms of number of beds, we have the most exposure I believe of all the companies to states that are Medicaid expanding states. And that's mainly because of our huge footprint in Nevada, which is expanding but we're obviously also in California and in the District of Columbia, which are also localities that are expanding. The challenge is, is that in those states and localities in the case of the district, they're not necessarily the states in which we have our greatest number of uninsured, clearly from our – from an acute care perspective, the greatest number of uninsured and the biggest uninsured market we have are in Texas. And so in the long run whether or not Texas participates in Medicaid expansion is probably kind of the biggest swing factor from a Medicaid expansion perspective.

Okay. That's helpful. Thank you.

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

Hey, thanks. Steve, I think I've said that in every December for three years, but worth pointing out again that you had a material reduction in your malpractice accrual for three years now. And many of your peers sort of claimed that as earnings, so once again your conservatism is appreciated. And I guess my question is, of the – looking at the 600 beds you're adding this year to the behavioral business, are all those just expansions to existing facilities or does that include the de novos?

Yes. So two things with one is you have consistently pointed that out and two is, I'm consistently appreciate that you do so, so thanks for that. As far as the bed expansions next year, they do include at least one de novo project.

Okay. And anything new that's driving the decision to allocate capital to some of these bed expansion projects, is it still just local market demand, any regional payer should, any new dynamic kind of driving the expansion decisions?

I don't think so, I mean as you know we've been expanding our behavioral footprint organically for now what amounts to probably a good seven or eight year period. I think we're ramping the pace of next year a little bit, but honestly I think that has much to do with sort of some local markets specifics being able to get a CON or zoning in a particular location. I've made the point historically that if we could, we be building behavioral beds even faster than we have and we've been slowed by a lot of these regulatory hurdles. And I just think that in 2014 and 2015, we've overcome some of those and so that pace will pick up a little bit. And also, to state the obvious, I mean we're investing money in that process because it has been a process that has earned us a pretty high return over the last seven or eight years. And so even I though I think we continue to be judicious about it and don't necessarily subscribe to the notion that if you just build it's always going to workout. The fact of the matter is that in most of our endeavors we had worked out very well.

Got it. And along the same lines, just maybe on the acute business. I think you acquired some real estate in Las Vegas for a potential expansion project, maybe can you talk about the potential for that – that project in kind of the decision process around, you maybe building a new hospital?

So I mean obviously, Whit you know that Las Vegas is by far our single biggest acute care market as well as obviously our largest market all together. We expanded our footprint in Las Vegas any number of times over the last decade three or four times in significant ways, mostly to gain greater sort of geographic diversity and to make sure that we can cover as much of the market as possible. And we've talked about for a long time is that one part of the market in which we have no coverage is the southeastern or the let's call the Henderson market in Las Vegas. And we did acquire a piece of land in that market that we plan to develop a new hospital in over the next few years and that's frankly been always a part of our sort of long-term strategy and what is obviously our single most important market.

Got it. And I guess just one last housekeeping one. Can we get a D&A number for the year, and also can you talk about maybe the progression of losses with Temecula just to make sure we get our modeling lined up? Thanks.

Yes. So from a D&A perspective, and I struggled with this a little bit because I never know exactly how everybody else does their models. But I think our – what I would call our GAAP D&A number for next year is somewhere in the $370 million to $380 million range and somewhere between $35 million and $40 million of that is attributable to our EHR activity, we obviously have crossed that $35 million to $40 million about in the $0.05 EPS number that we exclude, but depending on how others do their models, those are I think the two relevant numbers. As far as the Temecula progression goes and actually I probably should have said that as part of the A.J. 's question, yes I mean sort of as you might expect, I think we expect Temecula to continue to improve as the year goes on. So I think while we're expecting a breakeven result in that Temecula market for the full year of 2014 it probably is dilutive in the first half of the year and accretive in the second half of the year for a full year result that's ultimately neutral.

Thanks.

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

Good morning. You called out the AR buildup from Illinois from Texas during the quarter, I'm curious if that has developed since the end of the quarter? And then secondarily, any thoughts surrounding your cash flow from – guidance for 2014?

Sure, Frank. So on the ARPs, the Illinois issue which is an issue with our just sort of a regular Medicaid receivables and quite frankly relates not to just us but to all providers in Illinois and is more about the state zone physical issues. Honestly, that AR balance tends to fluctuate, so it rose a little bit at the end of the year and then it's come down some in January, but we just call it out because it has been a fluctuating number. The piece in Texas is not our regular patient receivables, but UPL/DSH receivable, and again, only call it out because it's become a relatively large number although we have every expectation that it's going to paid at some point in 2014, I think probably in the spring although not yet paid. And I'm sorry you had a second question Frank that I'm completely forgetting. If Frank is not on the line may be somebody else will remember it.

Your next question comes from the line of Chris Rigg with Susquehanna.

Hey. Good morning. Thanks for taking my questions. Just a couple of maintenance ones here. On the CapEx both for 2014 and for 2013, can you give us a sense for how much of that is routine versus construction costs?

So Chris, I mean, I think that generally we would say that our maintenance capital, which I think is what you would, what you have framed or characterized as routine is somewhere in the $80 million to $100 million range mostly related to the acute care business. So somewhere around 25% to 30% of our overall spend is maintenance capital. Chris Rigg – Susquehanna: Okay. And then can you give us a sense for where your Medicare advantage admissions stand as a percentage of total admissions, and how that may have changed in the last few years?

And I'm, I don't have that information in front of me Chris. My recollection is that about 25% of our overall Medicare admissions or Medicare advantage admissions, but I definitely sort of cautioned you taking that number as gospel, but we can certainly get that number. Chris Rigg – Susquehanna: Okay. That's all I got. Thanks.

Your next question comes from the line of Josh Kalenderian with Deutsche Bank.

Sorry, good morning it's Darren Lehrich from Deutsche. Just a couple of follow ups here Steve. I appreciate the D&A commentary for 2014. And I just wanted to go back to what you said there $370 million to $380 million, if the math is right like $355 million or so annualized in Q4. And you're saying $35 million to $40 million from the healthcare IT. So with all the debt extension you have coming on, is there something big that comes off and I guess the question is to put a final point in the modeling why wouldn't that number be even higher?

To be fair Darren that level of detailed question that I can't answer but happy to take look at.

Okay. We'll pick up offline. So my primary question was really just around the expense side, Steve. Same-store margins were just a little bit lower year-over-year in acute, and we have been seeing that progressively improve throughout 2013. I think one of the components was physician employment cost tapering, and I just wanted to confirm that that was indeed a factor in Q4, if there's any other expense trends that you'd highlight and any initiatives that we ought to be thinking about?

I can't really think Darren at anything on the acute side that is extraordinary from an expense perspective. I will mention although not an expense side and there was one non-recurring item from a margin perspective in the acute division that is, we had at a few of our facilities may be $7 million or $8 million unfavorable sort of cost reports last reimbursement adjustment having to do with some of our sub-acute reimbursement at a few hospitals. So and we didn't really have a comparable item last year. So that was $7 million or $8 million drag on margins in the quarter that was certainly a bit out of the ordinary. But on the expense side, I can't really think of any.

Okay. That's helpful. And just turnaround the physician employment cost, is it safe to say that those arm have been tapering in the second half in terms of the year-over-year expense growth there?

I think they're tapering although I would describe it as a fairly incremental process. So the improvement quarter-to-quarter is not terribly dramatic one quarter over another although we believe the trajectory is a good one.

Okay. And last thing just around the uninsured volumes, I know few people try to get insights from the ACA assumptions just be curious to get any kind of sizing you could provide uninsured admissions and the uninsured ED visits in 2013 in acute either percentage of your acute admissions or any kind of hard numbers you could put to that? Thanks.

Yes. So I think that we have historically said that something around 8% to 10% of our total acute care admissions are have historically been uninsured admissions. And what I was saying earlier is, I think our 2014 ACA modeling presumes that something like 7% to 9% of those admissions or those volumes get some covered in some form or fashion.

Great. And then ED visits, I know, do you have a total number of ED visits in 2013 just help us think about that one?

I do not have in front of me Darren.

Okay. All right. Thanks so much.

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

Well, I get stuck at the back of a call is all you have are dump questions. All the good ones have been asked.

You're not so dump John, I know you.

And I was going to ask you Alan because you've been so quite. The ACA continues to kind of bump along, but it continues to be unpopular. Do you think that matters? Do you see any political changes coming to it after the midterms, or do you think that will just be able to grind through even if it remains unpopular?

You want me to answer Steve?

Please.

Please.

I think it's going to continue to get better and I think the unpopularity is in different areas – different markets. So it's not going to go away. And I think its going to get better as we go along. I also think that there are going to be changes, but I don't see that as bed, I mean I think that there have been so many delays an exemption is that those who will have to be addressed. And I don't see that as necessarily bed, I would have hoped that they would have done this on the front end, which is the way a business people would do it. But, they pushed the thing through and now they're going back to fix the building that doesn't exactly stand straight and some other problems with it. But I don't necessarily -- over time, I think it will be okay.

My other question is, I mean we're hearing increasing talk that they may extend the enrollment period past the end of March, are you hearing that as well?

I mean, I think we have heard that as well, John. I don't know that again, we have any terribly profound insight into how likely that is. But I agree with Alan's commentary, I think you've seen it already, I mean the administration is obviously committed to making the ACA work as best as possible and I think everything they can do within their power to make that happen, they seem to be trying, so our expectation is, I don't know that they'll do that specific issue, I think they're going to continue do everything they can to make this work.

I mean, I think we have heard that as well, John. I don't know that again, we have any terribly profound insight into how likely that is. But I agree with Alan's commentary, I think you've seen it already, I mean the administration is obviously committed to making the ACA work as best as possible and I think everything they can do within their power to make that happen, they seem to be trying, so our expectation is, I don't know that they'll do that specific issue, I think they're going to continue do everything they can to make this work.

Okay. And just couple of others. When you look at your, yes, I guess most of the people are picking several plans and low-cost several plans. Have you had a chance to compare that pricing both considering the price you get plus the difference in deductible, do you have just a basic sense of how those plans compare to your average commercial plan?

No. I think it's probably too early to do that. I mean again, my sense John is that high deductible plans in general. And obviously this become more prevalent with the ACA but it's not like we've never thought about high deductible plans before. Obviously, think high deductible plans have less of an impact, the more acute the more sort of catastrophic you're talking about the illness or the trauma, or the event. And I think we as, particularly, acute care hospitals are less impacted by high deductible plans and some other providers along in the continuum although there is certainly an impact and us. I think for instance the high deductible plan is something, however, that as we think about the behavioral business has more of an impact and I think it has more of an impact particularly earlier in the year when deductibles tend to be intact and they're not exhausted. But when you're talking about $7000 or $8000 charge for an entire stay in the behavioral business, then obviously a $5000 deductible is much more relevant and much more impactful. So again, I think it's one of those dynamics that we're going to have to see play out a little bit more before we have a really feel for what the ultimate impact is to us.

No. I think it's probably too early to do that. I mean again, my sense John is that high deductible plans in general. And obviously this become more prevalent with the ACA but it's not like we've never thought about high deductible plans before. Obviously, think high deductible plans have less of an impact, the more acute the more sort of catastrophic you're talking about the illness or the trauma, or the event. And I think we as, particularly, acute care hospitals are less impacted by high deductible plans and some other providers along in the continuum although there is certainly an impact and us. I think for instance the high deductible plan is something, however, that as we think about the behavioral business has more of an impact and I think it has more of an impact particularly earlier in the year when deductibles tend to be intact and they're not exhausted. But when you're talking about $7000 or $8000 charge for an entire stay in the behavioral business, then obviously a $5000 deductible is much more relevant and much more impactful. So again, I think it's one of those dynamics that we're going to have to see play out a little bit more before we have a really feel for what the ultimate impact is to us.

And what percent of your deductibles are you currently collecting?

I think historically, we have conduced or collected rather somewhere in the neighborhood of 50% to 55% of our balance after insurance which would be both deductibles and copays.

Okay. And finally, we think about you as roughly 70% of your EBITDA from behavioral and about 10% from Vegas, as you look at 2014, do those percentage is still in the ballpark?

Yes, I mean I think – again, if you think about the guidance, I mean if you think about our same-store guidance, certainly we don't expect any significant changes in the same-store mix of a business. Obviously, if we're at the sort of low-end of our guidance meaning that we get a – an acute care ACA impact and no behavioral impact that would skew the business a little more towards acute. So and if we get to the higher end with the behavioral impact, so the ACA variables I think could affect that mix a little bit. But, in terms of that core business, I don't think we see it changing dramatically.

All right. And Ascend had very high margins when you bought it, something like 30%. Have those margins held in there, and has that asset performed like you hoped it would?

We've had a few challenges with Ascend that I think our challenges that we faced in the rest of the portfolio as well Ascend have done a great job of targeting the military business, which is a relatively small but fairly profitable component behavioral business. We certainly have had military business at some of our facilities. That business has clearly come under pressure in 2013, and the Ascend is always probably felt that a little disproportionately. No, other that – that's the one item I would sort of think noteworthy and I have to call out.

I mean in hindsight, I mean it was three times revenue the right price for that asset in hindsight.

Yes, I think that we have a view that what we were buying in that acquisition was 9 high quality facilities that over the long-term would outperform. And also I think would likely be expandable. And I think that remains our long-term view.

Okay. Thanks so much.

Your next question comes from the line of Gary Taylor with Citi.

Hey. Good morning. Just A couple of quick ones. Steve, on the acute care business you had said general assumptions for 2014 were same-store revenues up 3% to 4%, EBITDA flat to slightly up. Outside – I assume some of them DSH/UPL reductions you called out our part of why the EBITDA would not grow as fast as revenue, why you would still see margin degradation. Otherwise, is there still just an assumption about payer mix in the EBITDA forecast?

So I think both comments are true Gary in the sense that the UPL – in the state of the California UPL is a drag on the acute margins. The other piece is that 3% to 4% is sort of the magic line if you will, I think if those acute care growth is closer to 3%, then I think it's tough to have margin expansion as you start to grow beyond that it becomes a little bit easier. So its kind of a very delicate balance right there. We would obviously hope to see that revenue growth pushed to the high-end a little bit where we could get more margin expansion. But that's not what the guidance implies.

And is the 3% to 4% is that fairly evenly split between adjusted admissions and rate?

Yes. I think I mentioned to somebody else before almost in passing, that it is more heavily I think weighted towards price than to volume.

Okay. Sorry, I missed that.

That's okay.

And on the D&A, I heard the overall D&A guidance how much do you right handy there Temecula itself, how much the D&A jumps year-over-year?

So I think the Temecula D&A because we did have a quarter of it in 2013. I think the incremental Temecula D&A is somewhere $11 million, $12 million, $13 million.

Okay. And I think you have given up enough information that kind of back into this now, I just haven't had a chance to do it. But, would you be willing to give an EBITDA range for 2014, or would you rather leave that to us?

I mean historically, we have not – honestly I don't have it in front of me, so I couldn't do it if I wanted to.

Okay. Last question, on the state program where you cited at the negative $34 million, you said $10 million California, is the bulk of the rest primarily Texas?

It's a little bit in Texas, which I think is the rest of the acute, and then across the behavioral division, I think just a bunch of states I know Illinois and Arkansas in there. But, there is probably 6 to 8 states on the behavioral side that can contribute to that decline.

Okay. Thank you.

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

Yes. My follow up question was related to that AR was – what is your implied cash flow from op guidance for 2014. Thanks.

Thanks Frank. Yes, so we – you will see, in our 10-K, our free cash flow after CapEx this year was a little over $500 million. I don't think there is anything that's terribly unusual in that number. So depending on how you are modeling next year, I think we ought to have an increase to that free cash flow, given the fact that our CapEx is relatively flat next year an increase in free cash flow next year that's commensurate with whatever EBITDA increase you are using for next year.

And sir, we have no further questions in the queue at this time.

Okay. Well, we thank everybody for their participation and look forward to talking to everyone after the first quarter.

Thank you. This concludes today's conference call. You may now disconnect.