Good morning, everyone, and welcome to HealthSouth's first quarter 2008 conference call. (Operator Instructions). I would now like to turn the call over to Mr. Jay Grinney, HealthSouth's President and Chief Executive Officer. Please go ahead, sir.

Great, thank you, operator, and good morning, everyone. With me on the call today are John Workman, Chief Financial Officer, Mark Tarr, Executive Vice President of Operations, John Whittington, General Counsel, Andy Price, Senior Vice President of Accounting, Ed Fay, Senior Vice President and Treasurer, and Tyler Murphy, Senior Vice President of Investor Relations. Ed is the newest member of our senior management team, having recently joined us from Regent's Financial Corporation, where he held several senior executive position including Senior Treasury Officer. Ed brings a tremendous amount of knowledge and expertise to our team and we are very pleased with this addition. Before we begin, I would like to ask John Whittington to read the obligatory cautionary statements.

Thank you, Jay. There are a number of disclaimers, risk factors, and other cautionary statements set forth in the Form 10-Q we will be filing with the SEC later today. And in the press release we filed yesterday in connection with the filing of our Form 10-Q. We will not review these disclaimers, risk factors and other cautionary statements, but we urge you to read them and the risk factors set forth in the company's annual report on Form 10-K for the fiscal year 12-31-07 carefully. I would, however, like to highlight the following. Some of the information provided today may include certain estimates, projections, guidance and other forward-looking information that reflect our current views with respect to future events and financial performance. You are cautioned not to place undue reliance on the estimates, projections, guidance and other forward-looking information presented today, as they are based on current expectations and general assumptions that HealthSouth believes as of the date hereof are reasonable and such forward-looking information is subject to various risks, uncertainties and other factors, many of which are beyond our control, that may cause actual results to differ materially from the views, beliefs and estimates expressed here today. All such estimates, projections, guidance and forward-looking information speak only as of the date hereof. HealthSouth undertakes no duty to publicly update or revise such forward-looking information, whether as a result of new information, future events, or otherwise.

Thank you, John. The results of the first quarter signaled a strong start to the New Year for HealthSouth, and reaffirmed that our strategic and operational agendas are yielding their intended results. Adjusted consolidated EBITDA for the quarter was $89 million, representing a 29.2% increase compared to the first quarter of 2007. Operating earnings also increased dramatically on a quarter-over-quarter basis to $87.6 million, up from $32.6 million last year. As we have previously stated, volume growth will be an important measure of our success in 2008 and I am very pleased to report that discharges were up 2.7% quarter-over-quarter and 5.3% sequentially. This quarter-over-quarter increase was well within our guidance of 2% to 4% and indicates our investment in the team works initiative is gaining traction. As a reminder, we anticipate our volume growth will strengthen throughout the year as we implement this initiative across all of our hospitals. At the end of the first quarter, we had 63 of our 94 hospitals utilizing the team works template, with 44 of these hospitals having been fully implemented for at least 60 days. We are confident that once all hospitals are on this enhanced sales and marketing platform, by the end of the third quarter, we will have an excellent foundation for sustained organic growth on a go-forward basis. Our patient mix continued to be comprised of those needing specialized rehabilitative services. In the quarter, we saw significant increases in the number of patients requiring care as a result of strokes, lower extremity fractures, primarily hip fractures, non-traumatic brain injuries, spinal cord injuries, and other neurological disorders. These patients require sophisticated levels of care and are not the types of patients who can be successfully treated in lower acuity settings. As a consequence of our focus on treating these higher…

Thank you, Jay. First, I would like to talk about the income statement and dealing with revenues. Our inpatient revenues increased by 7.7% over last year. The items that benefited revenues were higher discharges, as Jay has commented on. There was one added business day this year, but Easter was also earlier, which we believe largely offset each other. There were two additional hospitals, but they generated limited discharges in the first quarter of '08. Revenues also benefited from the price increase effective October 1, 2007, which will go away in the second through the fourth quarters of 2008. As Jay had mentioned, outpatient revenues were down 8.9% with 20 fewer satellites than a year ago. Next, turning to operating expenses, and first talking about those that are hospital-related, salaries and benefits as a percent of revenue increased by 50 basis points over the same quarter a year ago. The increase reflects merit increases generally granted in the fourth quarter of 2007, as well as our investments in our employees from the items that we mentioned on our last call, namely the increased 401(k) match, instituting part-time benefits, and enhanced medical benefits without increasing the employee contribution. Looking at the other operating expenses, and for this purpose, as I'm combining three captions, which are the ones on the income statement labeled other operating expenses, supplies and occupancy costs, all of these are generally hospital related and totaled $110.2 million, or 23.5% of revenues this quarter. A year ago, those totaled $105.6 million, or 23.8% of revenue. As a percent of revenue, this equates to a 30-basis point reduction, meaning we were largely able to offset the increase in salaries and benefits in the first quarter of 2008 and this is similar to what we have seen and what we've been…

Great. Thank you, John. Before we open it up for questions, I would like to comment on 2008 guidance. Clearly we are very pleased with the start to the new year and while we don't have full visibility on the impact of the pricing rollback, we do believe, as John mentioned, that our continued growth in the higher acuity case mix groups, or CMGs, will allow us to achieve the higher end of the EBITDA and EPS ranges previously provided. In conclusion, I believe the results of our first quarter provide continued evidence that our strategies are working. Discharges are up, net operating revenues are up, earnings are up. We're generating strong operating cash flow. We're taking down our debt, and we're adding to our portfolio of hospitals. We are pleased with these results and we'll remain focused to ensure continued success throughout the remainder of 2008 and beyond. With that, operator, we'll begin the Q&A. But in order to give us as many people as possible a chance to ask questions, we will need to limit each person to one primary question and one follow-up question. So if you have more than one, please prioritize them. We'll try to respond to as many as we can and go through the queue as often as we can in order to answer all of your questions. Operator, could we open up the lines, please?

(Operator Instructions). Our first question is coming from Ann Hynes of Leerink Swann.

Good morning.

Good morning, Ann.

So thanks for that explanation on the EPS because I think there was a lot of confusion. So just to go back to it, your $0.20, is that comparable apples-to-apples to your $0.30 to $0.38 guidance, using the fully diluted shares. I think some people are using basic shares, some people are using dilutive shares, but so I guess everyone's on the same basis. It's that $0.20 is on fully diluted, you're excluding the preferred -- I guess that includes the preferred in the share counts.

It includes the preferred in the share counts.

Share counts, okay.

And that is the apples-to-apples, and we did the $0.30 to $0.38 a share, we did fully diluted. We did fully diluted because as you look in the out years, we think that's the most appropriate determination. It does get a little bit complicated in quarters in which you have a loss.

Loss, yeah.

Ultimately on a reported basis, you can have abnormal impact, if you look at reported numbers and start to normalize between primary shares and fully diluted, so everything that we've given is on a fully diluted basis, but to your point, it is $0.20 on a full fully diluted basis, and that compares to the $0.30 to $0.38 for the year.

Okay.

We'll continue to try to make it uncomplicated but not having it.

No, it's helpful. I think everyone on the first call is using different assumptions, so it gets confusing.

No, I think that's a great question, and we do hope that everyone will understand that explanation and then we'll be able to, as you said, look at things on a consistent basis. Okay. Next question?

Our next question is coming from Adam Feinstein of Lehman Brothers.

Okay, thank you.

Good morning.

Good morning. Just maybe just get you to comment on the recent proposed reg that came out, CMSA a couple weeks ago, looked like there was something major in there, but there were some minor changes around outlier payments and just some changes in the relative weights for the CMGs. Just curious in terms of your initial read? Thank you.

First question. As the CMS had indicated, the attempt was to make this budget-neutral, and as we evaluate these changes against our operating base, we find that to be basically the case. The outlier issue is going to be de minimus for us. We look at that and we've calculated that to be about a $250,000 issue. So I mean it's not even a rounding error. And I think that that reinforces the notion that we are treating patients that need inpatient rehabilitative care and that we're treating them in a timeframe that is appropriate for their needs. So overall, Adam, this is going to be a neutral event, if the proposed regs come out in final form. To your point, you're right, really no surprises, and even on the CMG re-weighting, that might be a little bit positive for us, but, again, at this point, we're essentially looking at this as a nonevent.

Okay. And then if I could just follow up here with a follow-up question. Just with the -- you talked a little bit about mix earlier on in other call. Could you just provide some more details. You had said that within the higher acuity areas, you saw higher growth,but just curious if you can just give us some metric or some what you think about your mix of business for the quarter? Thank you.

We have most of our patients are going to be stroke patients. As you know, we've put a primary focus on treating stroke patients. We think that we have the right clinical protocols. We think that we have the advanced technology that allows us to differentiate ourselves from our competitor from a quality and from an outcome standpoint. So we've put a big focus on stroke. The next largest would be the, the hip fractures. Again, that's a very important service line, as the patient population gets older and as we see more falls and more hip fractures, again, we think this is a very important service for us and one that we have provided a lot of clinical protocols around and treatment modalities to ensure that those patients get in and out very quickly. And then we have replacement of knees and hips would be probably our next category, but that's again, at 10% and then the balance would be in spinal cord injuries and other orthopedic cases.

Okay. Thank you very much.

Does that help?

Yes, thank you.

Okay, next question.

Our next question is coming from David McDonald of SunTrust.

Good morning, guys.

Good morning.

Jay, kind of a two-part question on the discharges. I'm wondering, one, if you run back through the TeamWorks implementation numbers, I didn't catch all of those. And I was wondering if you could also give color around January. Did you guys see any lumpiness as you got into January just as your hospitals were kind of moving from playing defense with the 75% rule to kind of playing more offense in terms of picking up discharges? Just some color around that, and then I have one follow-up.

Sure. On the numbers, we have 94 hospitals. Three of those hospitals had the TeamWorks implemented in them, but we use 60 days as sort of our internal measure for determining full implementation. In other words, we roll it out. It's fully installed. We then provide 60 days for it to be fully integrated into the operations of that hospital. So one metric is how many hospitals have been touched, and then the second would be how many are fully implemented. So we had 63 of our 94 hospitals were at some form of implementation and then 44 of those 63 were on at least 60 days or greater. So that clarify that. In terms of January, yeah, there was probably a little bit of a slow start and to your point, and we mentioned this when we were on the call, going from defense to offense did require a mindset change. However, we are very, very encouraged by the results in the first quarter, from a discharge growth standpoint. We're encouraged by the continued results into April and as we compare our hospitals, those who are on and those who are not on the TeamWorks, we remain absolutely convinced that this was an excellent investment and we'll continue to see great results from this on a go-forward basis. So, yeah, there was a little bit of lumpiness. Some of it was just coming out of the holiday season as we traditionally do, but the balance of the quarter, as you saw, was very strong.

Thank you.

You're welcome. Okay.

Our next question is coming from Frank Morgan of Jefferies & Co.

Good morning, Frank. Frank Morgan - Jefferies & Co: Good morning. Hey, a follow-up on this volume question and the ramp up. I was just curious if you could give us a little more granularity. How did volume look across the first quarter, as it ramped up? And then any color that you can give us so far on maybe how the April month has gone specifically, and then -- so that's my volume question. The other is a pricing question, which is do you have a case mix index for rehab facilities? Are some equivalent acuity measure is there such a thing? And then if so, what would those numbers be and how quickly do you think you can drive that acuity higher to perhaps offset the payment freeze? Thanks.

I'll take them in reversal. Yes, we do have case mix indices and our CMI traditionally has been in the 1.26, 1.28, occasionally get up to 1.3. And as we look to the volume building strategies, we're going to continue to drive the higher acuity, stroke, spinal cord, hip replacement types of patients into our hospitals, again, because we think we've got the services and the capabilities to provide a superior level of care. I wouldn't use that, Frank, as a measure, though, of the, strong corollary to our ability to overcome the pricing rollback. We think, that the CMI is going to stay in that 1.28, 1.30 range. So it really kind of goes back to your first question, which is on the volume, and the volume was pretty consistent throughout the quarter. February was a very strong month. We saw good results in March, and as I mentioned a minute ago, we're very, very pleased with what we're seeing coming into the beginning of the second quarter. So, you know, I don't want to get too far out ahead of ourselves here, but we are very pleased with our volume building initiatives. As we said consistently, that was going to be a real important measure of our success, not only in 2008 and beyond, but it's certainly what we've seen has allowed us to not only reaffirm guidance, but I think it's very important to emphasize that as you look at the EBITDA range that we provided, and the EPS range that we provided, we're directing everybody to be looking at the higher end of those ranges, and we would not be, we wouldn't be directing you there unless we he felt pretty good about the volume opportunities that are there for the balance of the year. Frank Morgan - Jefferies & Co: Okay, thanks.

Thank you. Our next question is coming from Gary Lieberman of Stanford Group.

Thanks, good morning.

Good morning, Gary.

I don't think you gave it. Could you give the number of how much you spent on TeamWorks in the quarter and if you're still sort of on track to the $8 million number you had referenced before?

This is John. We're still on track for the $8 million for the year. It is a little heavier weighted. Obviously as you heard Jay talk about, we should be done by the third quarter, so you can just take it proportionally through the three quarters, a little bit heavier first and second, so I think it's kind of a 3-3-2 kind scenario is the best way to look at it.

Okay, great. And then in the press release, you talked about strong outpatient pricing, is that simply a function of the Medicare increases, or is there a commercial component that you owe some of the strength in the pricing?

Thank you.

Okay.

Our next question is coming from Rob Hawkins of Stifel Nicolaus.

Good morning, Rob.

Hi, good morning. I got to get to my question here.

Okay.

Let me ask you about surgeries, I understand the knees and hips number is now down to kind of 10%. We've seen lower hospital inpatient and outpatient surgeries. We're also seeing -- seems to be a lot more medical management now, we're seeing a shift of about one out of five Medicare patients to Medicare managed care. How much of this is playing into your referral base and to what you guys are seeing in terms of being able to get an admission on, do you have any sense of that right now, what you're hearing from either docs or the hospitals?

I'm not sure I fully understand the question, but if the question is are we some sensitivity to the knee and hip replacement volume as a result of medical management versus surgical intervention, if that's the question, we're really not seeing a lot of that. And as I mentioned, we're really only taking the knees and hips that require a two-week stay in a rehabilitative hospital. And they tent to be the medically complex patient. They tend to be overweight. Maybe they don't have the, meet the obesity criteria for a qualifying condition, but they tend to be overweight, maybe they are diabetic, hypertensive, and so they are not in a position to be able to rehabilitate themselves following the surgery. But we haven't really seen an impact from the medical intervention versus the surgical intervention in volumes.

That was part of what I was intending. I'm sorry I didn't probably word it correctly. The other part of that, how does that maybe play into your new emphasis in neurology, either with medical management, where you're seeing these guys try to put folks on more drugs to maybe try to prevent strokes, or try to put off or put these smaller outpatient procedures, to try to prevent major surgeries related to neurological cases?

I'm going to ask Mark Tarr, who is our executive vice president of operations to respond to that. He's a lot closer to that. But I will tell you in general we are not seeing that impact, and frankly, as you know, with the aging of the population, which is one of the major positive demographic positives for our business, as the population gets older, there is an increasing incidence of strokes and other neurological disorders.

Hey, Rob, it's Mark. The major impact on our hospitals just been, we've been trying to for the past several years now, as we've ramped up to take care of a higher neurological base, a higher acuity patient. We brought on a different skill set on some of our attending and consulting physician staff. We've backfilled in on clinical education and clinical techniques with our, both our therapists and nursing staff. In some cases, we've added additional equipment that we did not previously have and we are so dependent upon an orthopedic case load. So I don't think what you would described has been a huge impact on our hospitals, but we have made the necessary adjustments in all of our hospitals to better accommodate and treat a higher acuity patient, of which the stroke population is certainly fall into.

Thanks, I'll jump in the queue. Thank you.

Thanks Rob. Next question?

Our next question is coming from John Ransom of Raymond James and Associates.

Hi. Good morning.

Good morning, John.

Just a question about couple questions about cash flow. First of all, when you talk about the $108 million for the year, I think that's the right number, I guess you're excluding the preferred dividend and the expenditures on professional fees, as well as state taxes, so would that 108, in terms of cash available to shareholders, would that be more like $50 million, or am I missing something in that calculation?

What we're trying to do, John, is give an indication of what the cash flow characteristics of the company look like, and that's why we do it on a fully diluted number of shares, and that's why we exclude the preferred dividends.

Okay.

Professional fees, we look at as nonrecurring costs. Obviously, we wouldn't also count the derivative proceeds when they come in as a available source of cash going forward. So what we're trying to get is what is the operating cash characteristics of the company and equate that in a per share basis, and looking out for the longer term, that's why we excluded the preferred dividends, but use fully diluted shares.

Okay.

On the professional fees, we do see that as a 2008 expense and…

Maybe a little in '09.

Maybe a little in '09 but,

Depending on when, we would

Yeah, John, whenever we get this settled, right, John?

Right, and we expect to go to trial on UBS in early January, mid-January of 2009. There is a trial date. Discovery is due to be completed at the end of June of this year, so we're moving forward to a trial date and the conclusion of this litigation.

Which is very good for us because as you -- I think everybody knows, up until recently, this whole derivative action was sort of a, an event that would occur at some point in the future and there wasn't a lot of certainty around that. Now, with the trial date, January 26th, it does start to put that into better focus.

Well, at the rate at which UBS is writing off bad mortgages, I guess sooner better than later.

Well and to that point, one could argue that it would be in their best interest to try to get this settled in 2008. I suspect that a lot of banks will be very happy when 2008 is in their rear view mirror.

Sure.

We're certainly going to be encouraging a settlement, but we feel very, very confident of the position and our argument. So if it needs to go to trial, we will be very happy to make arrangements at the top level of hotel here in Birmingham and invite all of our friends into Birmingham for the trial.

Well, I would buy tickets to the Scrushy trial for sure. The other question I had, looking at the cash flow year-to-date, it looks like all of the net deleveraging has occurred really from the sale of the campus. So I was just trying to balance the $40 million in operating cash flow and the $60 million you got from the sale of the campus to the net deleveraging and the free cash flow, could you just help me with that a little bit? And I'll drop off. Thanks.

I mean so we generated $41.8 million of cash flow from operations. Obviously out of that we did pay some professional fees and some preferred dividends, but to your question on the deleveraging, we did have $60 million of cash on the balance sheet. We did reduce the revolver in April. We do get a little build in working capital in the first quarter.

Okay.

Because with revenues being up 7.7%, typically our first quarter's going to build some working capital so you don't see as much of the working capital flow through as you start to get into the later quarters, it comes rolling in.

And I was looking at net debt, so the buildup in the cash and the change in debt. It looked like net debt got reduced by $60 million and you got about $60 million from the sale, so it looks like--

No, we got $43.5 million on the sale. We did not get $60 million for the sale.

I'm sorry, okay. Wrong number.

If you look AR went up about $15 million, $20 million from year end.

Got you. Okay, thank you.

You bet.

Okay, next question?

Our next question is coming from Kemp Dolliver of Cowen and Company. Kemp Dolliver - Cowen & Co: Hi.

Good morning, Kemp. Kemp Dolliver - Cowen & Co: First question is, there are several projects that you had outstanding that are essentially going through CON battles of one form or another. Do you have any update you could give on those?

Nothing to report except that they are proceeding on course and we still remain pretty positive that we're going to be successful in securing those certificates of need. And one other things that made the Vineland hospital an attractive acquisition for us was because it was a hospital in a CON state. So there was a certain value that we felt not only in adding the third hospital in New Jersey, but also getting one in a certificate of need state. Kemp Dolliver - Cowen & Co: That's great. Second question is I think in certain markets, you have got competitors planning to open facilities. In some cases they may be near you. Other cases, not. But besides TeamWorks, what are the actions you take to head off the impact of new capacity?

Well, in some of those markets, the capacity is coming on and, as you said, they are either planned or they have been announced, but in many of those markets, we haven't seen anything yet. We do believe that our positioning as a specialized provider of inpatient rehabilitative care, will always differentiate ourselves from, say, nursing homes or lower acuity settings that simply can't take the kinds of patients that we're treating and within two weeks get them back out and living independent life. The evidence just isn't there, and as I've said many times before, how many of us on this call would, if our parent or loved one had a stroke, and they were being discharged from an acute care hospital, how many of us would voluntarily put those patients, or that loved one in the nursing home if they had the opportunity to put that loved one in a rehabilitative hospital. And that, that kind of decision-making gets played out over and over and over again. So having a new nursing home open up is not something that we are concerned about. We certainly look at any competitive threat seriously, but we see ourselves as being quite different. As I said before, we don't feel we're vulnerable to the lower acuity patient market share shift to the nursing homes. And I think the evidence is there, that we continue to grow in the higher acuity patients that simply can't be treated in those lower acuity settings. Kemp Dolliver - Cowen & Co: And I would echo, competition isn't something new, every business in the United States has competition and we've been facing competition for years and continuing to grow share and we will continue to address that as we move forward.

One other things that we do believe differentiates ourselves frankly is the quality of our employees. The staff, they are highly trained, they are professional, they are committed to their patients, and you are not going to see a lot of highly qualified therapists wanting to move from a rehabilitative hospital where they are providing a minimum of three hours of care per day to a nursing home environment. You just -- you don't see that. Even if there is a salary differential, you just don't see that migration. So, yeah, there's some new competitors coming into some of our markets. It is interesting to see how many of them are just announced versus actually occurring, but, we don't feel that that poses any meaningful threat to us. Operator?

Thank you. Our next question is coming from Miles Highsmith of Credit Suisse.

Hi, guys. Couple questions on a broader scale. Just curious now, a little bit of relief from a legislative standpoint, and on the regulatory side LTACs what you're feeling is there with your 6 LTACs and the potential to grow those? And then secondly, I'm sorry, I actually just hopped off, so I apologize, this was just asked and answered, just let me know, but I'm curious specifically about in recent years building out the rehab extensive services and specifically around that product offering, if there are maybe some examples that you can give us about, for a similar patient, how you differentiate yourself with the IRF versus some of those rehab extensive service offerings? Thanks.

Yeah, and in fact, we just finished answering that second question, and the way we differentiate ourselves is in the clinical protocols that are established to help the patients get back into an independent life-style, and the requirement that we have for patients coming in is not just us. Any rehabilitative provider is that the patient must be able to tolerate at least three hours of therapy per day. And there is no such requirement in a nursing home. So a patient can come into a nursing home and, maybe they get a half an hour, maybe they get nothing, maybe they just languish in the bed, because the services aren't there, the resources aren't there. In our hospitals, we have very highly trained professional therapists who bring those patients and provide the care at least on a 3-hour per day basis. Then if you look at the average length of stay in our hospitals is maybe 14, 15 days. Average length of stay in a nursing home is, 25, 30 days. So there's a big difference between the level of care. There's a big difference between the outcomes and there's a big difference in the length of stay that they have to, or that they actually have to incur during each setting. So that's the first part, second part of the question. Repeat the first part. I'm sorry. LTACs yeah. I still think that the LTAC is a very important part of the healthcare continuum. The three-year reprieve that the industry received I think was certainly very positive. The moratorium makes it pretty hard to develop new, and so it gets back to if we were going to grow that segment, how would we do that? And we, clearly, with the moratorium can't go out and build them, so…

Thanks you. Our next question is from Mike Scarangella of Merrill Lynch.

Good morning Mike.

Hi. Thanks. Good morning guys. Questions for your, I understand, I know in the past you've had some trouble with the fiscal intermediaries. My understanding is that CMS has awarded some contracts to these so-called recovery audit contractors and I would like to know, first of all, do have I that right, and secondly, what do you think that means to your business and your ability to get paid from Medicare?

Well, I don't think it's going to have any impact on our ability to get paid. The so-called rack audits are designed to come in and determine if there's been any over billing, and we feel, first of all, we haven't seen much of an impact at all. We do know that there -- I guess it was last year, there was a lot of controversy, because the rack audit process that was in place was very favorable to the auditors and very unfavorable, in fact, very unfair, to the providers, and we were very pleased to see that CMS responded to an industry-wide outcry about the heavy handedness and the one-sided nature, sort of the guilty until proven innocent approach. And CMS, to its credit, took those criticisms very seriously and have changed the procedures and the methodology that the rack auditors are allowed to go in and do their study. So, one, the process has not been one that has hit us. Two, it's certainly been changed since last year, and we think that the process is more fair. But most importantly, we feel very good about our coding. We feel very good about the way in which we're billing for our services. We're certainly training our people about this, educating them about the rack audit process and what's involved, and so we, we feel that we're very ready for that if they, if someone should come knocking at our door, we're very ready to come in and we don't think that there's going to be any exposure there.

All right. Great, thanks. And just a quick follow-up, you talked a lot about the balance sheet and getting leverage down. In the past, you've also talked about potentially trying to redo or restructure your balance sheet in kind of the current market environment. What do you think your options are? Is there any thought going into replacing any parts of the capital structure at this point?

Well, as you well know, the markets are not subject to a lot of refinancing. I think the good news about our debt structure is we really have no refinancing risk and, we've got several years before we have to address that. So we hope between now and then, the credit markets improved and we have some opportunities. But we're continuing to use our available cash flow, combination to delever the company. We have bought bonds back when they have been opportunistic, but as you well know, they have traded up to higher levels at this point in time. And we will continue just to delever the company and we are expecting some proceeds from the derivative litigation, which we think will be the next big nonoperating source of cash in addition to the -- I think approximately $50 million of tax refund we have yet to come in. So we don't see any dramatic changes in terms of any refinancings, or even attempting to do that in these choppy markets.

Thanks, guys.

Okay. Operator, I think we'll take two more questions. We're running a little bit over, but we would like to get as many questions answered as we can so we'll take two more.

Thank you. Our next question is coming from Derrick Dagnan of Avondale Partners.

Good morning. Thanks for taking my question. I wanted to get on the labor side. Jay, you mentioned the efforts you took in increasing wages and benefits for your employees, and I was wondering if you feel now that you're on par in your local markets with your competitors, from a wage and benefit standpoint?

Yes. In fact, I think that in some of our markets, the benefit package that we provide has been very helpful in recruitment efforts and has been -- it's hit on our objective of reducing our turnover. So, yes, we do feel that we are in a competitive position in our markets. And the increases from a compensation standpoint we are first merit increases and that's sort of the -- what we do every year. And then we did have some selective range adjustments in some select markets, but we certainly were not behind in all markets. There were a couple that we will admit we probably did fall behind in, but we do believe that we are at a competitive level, both from a compensation and from a benefits perspective, and we are encouraged by the trends that we're seeing in the first quarter with respect to retention, ability to recruit, and reducing our turnover.

Okay, and related follow-up is just looking at the full-time equivalent count, looks like it's down about 140 employees year-over-year. And I was just wondering, with the growth in your volume and revenue on the inpatient side, should we expect that to tick up here with employee retention and do you need to go out and find some new hires to really drive this growth?

We will need new hires to continue to grow, but again, we've been very pleased and it was a strategic decision we made back in the fall to enhance the benefits and to ensure that we had compensation structures that were competitive. So clearly our growth is going to be dependent on bringing new patients, new employees on. As you know, though, that first new patient that comes in, you don't have to add a lot of additional staff. You can do that on the margin, but over time, yeah, as the volumes grow, we will see an increase in the number of our employees. We are going to be evaluating and putting under the TeamWorks umbrella our whole human resource utilization area later this year to determine if there are best practices. I suspect that there are, throughout the company that will allow us to show improvement in that area, but they are the business. Our therapists and our nurses really are the back bone of this company. And I know that some see that as just sort of a line item, a cost line item, and we see it as an investment, an investment to be managed, no doubt, but an investment nonetheless. And without our employees, we wouldn't be the great company that we are, and we owe a lot to them and we'll continue to make the right kind of investment and I think that we'll be able to continue to recruit and retain the best and the brightest to come to work HealthSouth.

Okay, very good. Thanks a lot and have a great day.

Okay. Thanks question, operator?

Thank you. Our next question comes from David McDonald of SunTrust.

Hey, guys, Jay, just one follow-up, on the pricing side, I know you guys talked about I think a 3% to 5% range on the managed care business. Can you give us some sense as what you're seeing is kind of in that range, high end, low end, and just general overview of the managed care side on IRF business?

No, no real changes there, David. We're still seeing the 3% to 5%. Clearly we are pushing our folks to get the high end or north of that 5%, but 3% to 5% I think is the right range for you to be using as you model out in your model the company, because I think that is going to be an area that we continue to focus on. We do think that we have some leverage because we are a specialized provider. We don't want to abuse that, so 3% to 5% we think is in the right zone.

And you think that's sustainable for the next couple of years, Jay?

Yeah, we do. We really do.

Okay, thanks very much.

David, on the Medicare pricing, to remind everybody that the price rollback is effective April 1st, and for those of you working on models for that, we would tell you the best indication is to look at our third quarter of '07 revenue per discharge, which was $15,521 for discharge, but then also divided by the length of stay. The length of stay for the third quarter is 15.4, which puts you at about $1010 per patient day, compared to the first quarter of '08, where that the discharge number was $15,951, we have improved the length of stay to 15.2 and we're looking at $1049 on the Medicare part. So as you're thinking about pricing, that's probably an appropriate guideline, if you will, to look at Medicare pricing in the year in the quarters in which the rollback occurs.

So, again, that would be putting it at the 1010.

Right.

Per day.

Per day.

Thanks, guys.

All right, operator that will conclude the call. I want to thank everyone for dialing in today. I think we had an excellent start to the year, and we look forward to reporting on second quarter in a couple months. Thanks, everyone.

Thank you. This does conclude today's HealthSouth's first quarter 2008 Earnings Call. You may now disconnect, and have a wonderful day.