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Eight analysts and top management from eight sector firms examine the healthcare facilities sector in this special 73-page Healthcare Facilities issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info547.htm

TWST: Adam, what’s driving inpatient admissions and length of stay? Are there any markets that are supply-constrained?

Mr. Feinstein: The biggest driver to admissions has been the dramatic shift in mindset in the health benefits market. We constantly go through these periods of extremes where we either overutilize or underutilize the system. I would argue we are now in a period where we are over-utilizing the system again. Back in the mid-1990s, managed care benefits were very restrictive, following the healthcare cost crisis of the early 1990s. After the failure of the Clintons to fix the problem, corporate America empowered managed care to control costs. The biggest shift at that time was to move employees into very restrictive networks with all sorts of gatekeepers. The perception is that managed care did a bad job. The irony is that the managed care companies did the job too well, in my view, leading to an extreme distaste for HMOs throughout the country (everyone wants a lot of choice with little costs, but that is not a reality). Thus, in 1999 we started to hear about litigation to sue payors for restricting access to the healthcare system. As a result, this led to a dismantling of the cost control mechanisms that were in place. Managed care payors began to offer less restrictive products, but told employers that these benefit packages would cost more. With the strength of the economy at the time, or the “perceived strength of the economy,” employers were more than willing to offer these benefit packages with no incremental costs to employees. As a result, hospital utilization trends have improved dramatically. At the same time as this was occurring, we experienced a reduction of capacity with consolidation in the hospital sector back in what I call the “Columbia Era.” Providers were merging in that environment, due to a perceived need to keep up with Columbia and the fear of managed care. Thus, we now have less hospital beds and increased demand for hospital services. In some high growth markets, such as Las Vegas, there are severe supply constraints. Also, the labor shortage helped to excerbate this problem, leaving hospitals not operating at full capacity. In other words, hospitals do not have all of their beds in service, due to the labor shortages.

TWST: Adam, are there any other companies that you’d like to highlight, companies that investors should at least have on their radar screen?

Mr. Feinstein: I would like to highlight our top small cap pick, which is United Surgical Partners International (Nasdaq:USPI). The company operates freestanding outpatient surgery centers, a fast growing area within the healthcare facilities sector. We believe USPI has significant growth potential over the next several years, reflecting both revenue growth and margin expansion opportunities as existing facilities mature and from selective acquisitions. We note that it typically takes two to three years for a surgery center to reach its true level of profitability. A majority of USPI’s centers are still in the ramp-up phase, suggesting attractive growth over the next couple of years as these facilities mature. In addition, USPI brings a unique model to the market with partnerships with marquee non-profit institutions, helping to improve its market positioning and pricing. We suggest that additional partnership announcements may create future excitement for the shares. We also believe that this organization is well positioned to benefit from the advent of a secular change in healthcare delivery throughout Western Europe, due to its ownership interest in hospitals in both the United Kingdom and Spain. Lastly, future acquisitions, both in the US and abroad, and de novo construction projects provide the potential for upside earnings surprises over the next two years.

This special issue includes:

1) Healthcare Facilities - In an in-depth (13,700 words) Analyst Roundtable, B. Kemp Dolliver, Managing Director at SG Cowen Securities Corp., Adam Feinstein, Vice President in Equity Research at Lehman Brothers, John Hindelong, Managing Director of Credit Suisse First Boston, Frank G. Morgan, Managing Director at Jefferies & Company, Inc. and Michael Yellen, Senior Portfolio Manager at AIM Capital Management Group, examine the outlook for the sector including earnings guidance, stock performance and share specific stock recommendations.

2) Hospitals & Healthcare Facilities - In an in-depth (3,500 words) Analyst Interview, Gary Taylor, Vice President, Equity Research at Banc of America Securities LLC, examines the outlook for the sector and shares specific stock recommendations.

3) Assisted Living & Healthcare REITs - In an in-depth (5,200 words) Analyst Interview, Jerry L. Doctrow, Managing Director, Equity Research at Legg Mason Wood Walker, Inc., examines the outlook for the sector and shares specific stock recommendations.

4) Long-Term Care & Specialized Service Providers - In an in-depth (6,700 words) Analyst Interview, Matthew Ripperger, Vice President and Equity Research Analyst at JP Morgan, examines the outlook for the sector and shares specific stock recommendations.

5) CEO interviews (average 2,500 words). Top management of eight sector firms examine the outlook for their firm and the sector.