環球健康 (UHS) 2002 Q3 法說會逐字稿

At this time I would like to welcome everyone to the Universal Health Services third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question and answer period. To ask a question press star then the number one on your telephone key pad. If I like to withdraw your question withdraw the pound key. Mr. Gorman, you may begin your conference

Good morning, I'm Kirk Gorman. Alan Miller our CEO is with us this morning. Welcome to this review for the third quarter ended September 30th, 2002. For the quarter, the company earned 65 cents per share on a diluted basis. These earnings represented 35 percent increase for the earnings per share for last year's third quarter. During this conference call Alan and I will be using words such as believe, anticipate that represent forecast, projections and forward looking statements. For any one not familiar with the risks and uncertainties in these forward looking statements I recommend careful reading on the section of page 32 on our 2002 annual report to share shoulders. Let me begin by reviewing some of the numbers and statistics for the quarter then Alan will delve into of some of those forward looking statements. Revenues were 813 million dollars, an increase of 13 percent from the revenues in last year's third quarter. Dot or earnings before interest tax and depreciation was $104 million, 16 percent hire than in last year's third quarter. Net income of $41.5 million was 37 percent higher than last year and diluted earnings per share of 65 cents was 35 percent higher than in the prior year. Year to date revenues are 15 percent higher. EBITDA is 16 percent hire. That income is 33 percent hire and diluted earnings per share are 31 percent hire than in the prior year. Obviously we're pretty pleased with the performance of the company so far this year. Cash flow from operations in the quarter was $111 million about an 11 percent increase from prior year. We spent $60 million of this cash on our continuing capital expansion projects which Alan will discuss in just a moment and we repaid approximately $45 million of debt. Early in the quarter we also repurchased approximately 126,000 shares of UHS stock for a total of $5 million. Year to date UHS has generated $245 million of cash from operating activities. We have spent approximately $155 million on capital expenditures, more than we spent all last year which was the highest capital spending year in the company's history. We have repaid $90 million of debt. So forth this year and spent about $9 million repurchasing shares. Our credit statistics continue to improve with net total capital September 30th, 2002 of about 40 percent, improved from 46 percent at the beginning of the year and debt to EBITDA on a trailing basis of 1.56 times. Our $400 million back credit agreement is essentially unused. UHS clearly has the financial means to continue to advance growth from capital expenditures and through acquisitions. We have not experienced this wrapped growth in pricing and yet our pricing has been adequate for us to maintain and even expand margins. In the quarter ended September 30th, 2000 works (ph) net revenue per adjusted admission in our acute care hospital rose 1.5 percent. Net revenue per adjusted patient day rose 3 percent. Operating margins are EBITDA margins of our acute care hospitals owned in both the third quarter of 2002 and 2001 were 17 percent in the quarter just ended compared to 16.9 percent in the prior year. Because of the acquisition of too low margin hospitals at the beginning of the year, margins for the entire acute care division slipped two tents of a percent compared to a prior year. Net revenue per adjusted admission to our behavioral health hospitals rose 1 percent in the quarter ended September 30th of 2002 while revenue per patient adjusted day rose 2.7 percent. Operating margins for our behavioral health hospitals opened for more than a year were 19.2 percent in the quarter ended September 30th, 2002. Compared to 18.2 percent in the third quarter of last year. Alan, will now discuss our current operations and plans for continuing growth.

Good morning. Revenue growth all year has been driven by strong increases in admissions. Admissions in the quarter in both our acute care and our behavioral health hospitals continued to increase rapidly. We have seen strong growth in admissions all year long and, if anything, this growth rate seems to be accelerating. Our acute care hospitals benefit from being located in some of the fastest growing communities in the country. In our acute care hospitals owned in both the third quarter of 2002 and the third quarter of 2001, appeared missions increased 7.9 percent and adjusted admissions increased 7.1____ 7.1 percent suggesting our inpatient care actually grew slightly more rapidly than our outpatient care. Year to daylight admissions to these acute care hospitals increased 6.6 percent and adjusted admissions increased 4.3 percent. The occupancy rate of our available acute care beds was approximately 70 percent in the quarter traditionally the road way (ph) occupancy rate quarter of the year. Not only does this wrapped growth in admissions allow us to spread fixed operating costs over more patient days, it creates attractive investment opportunities. Admissions to our behavioral health hospitals owned in the third quarters of both 2002 and 2001 increased 6.4 percent and adjusted admissions increased 5.8 percent. Year to date admissions to these hospitals increased 6 percent and adjusted admissions increased 6.8 percent. As in our acute care hospitals, these numbers suggest an increase in intensity of care reflected in higher inpatient care growth than outpatient care growth. Our behavioral health hospitals have achieved wrapped admission growth for many years and operated at a very efficient 76 percent available occupancy rate in the third quarter. Demand for behavioral health services has expanded sharply and we continue to see solid opportunities for additional growth. During the quarter we opened the new 371 bed George Washington university hospital in Washington, dc. This facility increases our affective bed capacity by about 120 beds but more importantly, gives our doctors and nurses modern efficient facilities to provide the highest quality of care to their patients. We have equipped a new hospital with some of the newest imaging cardiac and wireless communication technology available. The medical community in Washington, dc, has received this new hospital with great thumb. We have attracted 160 new R.N.'s to work at the hospital over the last several months. We have expanded the medical staff largely by - not on the faculty of the George Washington medical school to nearly double the number that it was five years ago. Kirk mentioned we have been in investigate e investing heavily in our existing hospitals to provide new technology and increased capacity to meet the growing demand for health care in the communities we serve. In addition to the new George Washington hospital, we have four other major projects under way. Together these five projects will increase our acute care bed capacity by 12 percent by year end 2003. The 56 bed expansion at Auburn regional hospital should be completed in just a few months. Our new 175 bed hospital in Las Vegas is scheduled to open in the third quarter of 2003. Either in the third quarter of 2003 or the fourth quarter, the new 90 bed expansion to our Northwest Texas hospital in Amarillo, Texas, will also open and we're about to break ground for the construction of a new 120 bed hospital in Manatee county, Florida, which should be in operation in late 2003. We're also investing in other hospitals. We built a new Kansas center at doctors hospital in Larado, Texas, and George Washington university hospital. We expanded our operating room capacity at Wellington regional Medical Center in Wellington, Florida and at the Medical Center in Las Vegas. We're investing approximately $7 million to expand capacity at a couple of our fastest growing behavioral health hospitals. All of these investments should provide the basis for continued profitable growth for UHS. We actively seek opportunities. We have had a - targeted approach through growth and acquisition. We acquired two acute care hospitals right at the beginning of the year and hope to acquire a behavioral health facility before year end. We are actively engaged in other acute care and surgery center acquisition discussions currently but it is difficult to predict the outcome of these conversations at this time. Clearly, UHS has the financial wherewithal to take _advantage of good luck opportunities as we find them. We continue to be pleased with the performance of our company this year. We are grateful to the dedication of the physicians who recommend our hospitals to their patients and our over 30,000 employees who constantly strive to improve the quality and safety of care available to our patients. We anticipate a solid fourth quarter for UHS. We have not finalized our budgeting for 2003, so it is a little early for us to offer guidance for the company's performance next year. However, we do feel the company is in good position to continue to grow profitably just as it has for many, many years now. Kirk and I will be pleased to respond to questions at this point.

At this time I would like to remind everyone in order to ask a question, please press star than the number one on your telephone key pad. We'll pause for just a moment to compile the question and answer roster. Your first question comes in Lori Price of JP Morgan.

Can you tell us relative to the 400 million bank line that I think you said is essentially unused and the cash flow that you have generated year to date, what are your commitments for the four remaining development projects under way and how much of your total capital budget is being dedicated to inpatient activity geared towards outpatient growth

Lori, I'm not sure I have the numbers on the top much my head. Obviously in patient is more expensive than out so -- but I don't have the exact break down. We would anticipate that the fourth quarter would see approximately the same cap ex expenditures as the third quarter, maybe a little bit lighter because George Washington is now behind us although we're ramping up a couple of new project, too. Next year on a very early preliminary basis it would look like our cap ex might be 225 to 250 next year, but that is really preliminary. As Alan mentioned, we have not really gone through our final round of budgeting so it is a little preliminary. With cash flow from operations this year of about 300 million, assuming we don't even grow cash flow from next year, we would have 75 million or so of free cash after cap ex next year, assuming no growth which sounds to me to be a bad assumption. We would have $75 million of free cash flow after cap ex next year so debt would again fall next year unless we find acquisitions or unless we start purchasing our stock. I don't see us tapping our bank revolving credit agreement unless we find some good growth investment opportunities.

That sounds great. Can you also just real quickly update us on what is happening to physician malpractice costs in your markets? Are you having to extend loans to any of the doctors there? Can you update us on state level reforms related to that?

Kirk Gorman (?): The story on state level reforms state by state is a long and somewhat sorry tale. We have certainly seen some improvements in Nevada today. there has been a recent improvement in the situation in Pennsylvania to prevent plaintiff attorneys from venue shopping which ought to help a lot. The county of Philadelphia is one of the worst counties in the country and the law just signed by the governor here in Pennsylvania will prevent people from moving cases from all over eastern Pennsylvania into Philadelphia county so that should help quite a bit. There will be additional state level reforms in states, obviously, the Federal effort re-sponsored by June Greenwood (ph), in part out of the house hasn't quite made it through the senate yet. I don't know that there is too many people expecting the Federal level reform to make it through the Federal Government, but this -- we always thought was more of a state by state fight any way. We're seeing some progress but it is slow p had and, you know, I don't know that we have seen a big change in the availability of commercial insurance in any states yet; however, that should begin to crop up next year. We haven't really seen anything in our own malpractice experience to cause us any new concerns. Obviously, the environment has worsened over the last couple of years. If anything, our incidence so far this year are a little bit better than we might have anticipated. Now it's only October and, you know, we could get clobbered by the end of the year. But so far this year we're doing a little bit better than we might have anticipated and the prior year issues related to us perhaps having to fund claims that our former insurance company FICO should have paid on our behalf, those, too, seem to be in pretty good shape much we put a big claim behind us recently and so forth I think our reserves look to be at least comfortable, maybe a little bit generous.

Alan Miller (?): There is a Federal law prohibiting hospitals paying the premiums for doctors. You weren't implying that we would. You questioned if we would be lending them money which we're not doing.

Great quarter. Thank you.

Next question comes from Adam Feinstein of Lehman Brothers.

Good morning, guys. I just wanted to ask a couple of questions here. Just first, could you give us an update on the Las Vegas, market, obviously a very big market for you guys. Just curious what the latest is there and certainly with the big volume growth in the quarter would just be curious to know how much Las Vegas added to that. Secondly, I know you guys signed a new contract with Sierra in Las Vegas. I wanted to get your thoughts whether you have seen -- I guess it just started a couple of weeks ago but how much of a benefit would you accept in that 2003 from that. Thanks.

I don't know, I don't have numbers on Las Vegas broken out. I mean, we have them but I don't have them right here.

Sure, sure.

The market continues to be strong. We're doing very well in Las Vegas. The economic situation in Las Vegas is good. They had a little slow down after 9/11 but it has picked up. In fact, people getting increasingly concerned about traveling outside of the country, I think, are making both Las Vegas and Hawaii, for example, we don't have a facility more attractive for their business so that I think over time should be good for us. And we like it so much as you know we're building a hospital in the southwest part of Las Vegas. That is a new area that is growing rapidly and we bought land there a number of years ago in anticipation of costs rising, which they have, so we are very happy with our location and we're under construction. So all and all I think Las Vegas market continues to move ahead and we're moving with it.

Okay. And then what about that new payer (ph) contract?

Like you say, that is relatively new. I don't know that we have seen a lot of business under that contract yet.

Okay. But what is your outlook for it though, I guess?

I was about to say, we would anticipate the volume under the Sierra contract to rise a little bit. I don't know whether it will become a major contract for us. Part of the hospital in that market along with Sierra, there was another provider contract that was canceled and Sierra was looking for a replacement for that provider. So we're able to enter a contract on reasonably favorable terms. We haven't seen a lot of volume yet but we certainly anticipate that it should grow a bit. It may not be our largest contract out there but it should be noticeable.

Okay, great, thanks.

Your next question comes from Gary Lieberman (ph) of Morgan Stanley.

Gary Lieberman (ph): Thanks. I was hoping you would talk a little more about pricing. Seems like some of the hospital companies with a pair mix similar to yours are experiencing pricing, you know, stronger than you have as you said and was just wondering if you could drill down into that a little bit more. Is it a market share issue? Are you cautiously keeping pricing low in order to drive the volumes or is it something else? Thanks.

I would agree that your obvious is correct, Gary. Looks like there are others in our industry that are raising prices much faster than we are. We're pleased with the very modest price increases. We're still able to maintain and grow margins. We kind of look at it that way. I think it is hard to analyze from kind of an averaging standpoint or a consolidated standpoint the differences in the markets. One of our largest markets, for instance, in South Texas is almost all government pay so where we might have very strong negotiating position, there is no counter party with whom to negotiate because most of the business is government pay. So you have to really look at it market by market by market and I don't think there is any nationwide or global sort of strategy until pricing or any sort of an average comment that kind of explains it. We look at each hospital and each community as its own market and obviously we're trying to be conscious of making sure we are getting paid fairly. In some markets that means we're able to generate reasonable returns without really running the prices up.

Gary, our strategy is not to be the most highly priced hospital in the market. We think that it is more sustainable over a longer period of time that way than being the highest priced hospital. I think focusing on the volume is something that is much more sustainable than outsized price increases.

Gary Lieberman (ph): Okay, thank you.

Your next question comes from Darren Lerich (ph) of Benson, Robinson. Hunphrey.

Darren Lerich (ph): Thanks, good morning. I just want to follow up on Gary's question here. When you look at the revenue per equivalent admission, how much of that one inform percent in the acute care side and the 1 percent on the Psycho is for charity care? I want to get your sense of what the real pricing effect is when you X that out. I guess we'll be answering that in Q4 and I have a follow up?

As we did last quarter, the best we can do is estimate. We only have one accounting system that is going to have to go back and run the accounting both ways at the same time. But we would estimate that the price increase would be perhaps 200 basis points higher on the old accounting system if we had not switched the charity accounting methodology.

Darren Lerich (ph): Great. That is helpful. And I wonder if you can discuss your labor cost in a little more detail. I -- First I think you made the observation, Kirk, at least we have been make that go K this year that you increased your full-time equivalent staffing somewhat in order to, you know, improve moral and kind of route out the temporary staffing cost. Can you give us a sense for what your staffing ratios are on whatever me trick you look at, is your head count up in fact on a full-time equivalent basis year to year. And on the temporary staffing side, I know you have had a good morning trend line through July in your temporary staffing cost per patient day and then in August it was slightly up. Do you have September and then what is your read on the August number regarding the temporary labor? Thanks.

I don't have all the numbers in front of me, Darren, so I can't really answer some of the other questions that you had. We had a bit of a increase in August in our reliance upon temporary labor. I guess for a good reason. August is normally a really slow time for hospitals and as you can see from our admission numbers, we didn't have much slow time during this quarter. We had very wrapped admission growth all quarter long. Normally in August is when a lot of nurses take vacation or are encouraged by management to take vacation so we're at full staff by the time we get to September and October when the volume starts coming back up. So in August, I think part of what happened was we had a lot of people who had already scheduled vacation in anticipation of normal seasonality and August is pretty strong and we had to backfill some with temporary labor. That -- I do not have any September numbers yet. That will be coming in -- as to what our regular industry expense looked like in September but, you know, we do (ph) continue to expect to see a decline in registry expense per patient day. That has been declining on a fairly steady basis since July of 01. We have been successful. We mentioned the success we had at GW attracting 160 full-time R.N.'s. We're seeing all sorts of success around the country in reducing registry expense and investing those dollars in full-time nurses where we think at a minimum we get a big increase in patient safety and quality of care simply by having full-timers working together as a team instead of having a lot of institutes trying to integrate into a full-time care team.

Darren Lerich (ph): Okay. That is helpful on the August number. And then maybe just one last minute question for you, Kirk. Can you help me understand why DNA was down with PP up about 26 million sequentially? I just wanted to reconcile that?

Well, the biggest effect there, Darren, would have been the change in accounting for goodwill. So goodwill amortization isn't occurring this year. That is not just for us. That is obviously for the world. And that is order of magnitude about $6 million a quarter

Darren Lerich (ph): I was looking at it actually sequentially. I don't know but it appears to be down a couple of hundred thousand sequentially if I'm looking at the numbers right. I can follow up off line.

You know, what happens is that as you get to the end of the accounting life, maybe not the useful life but the end of the accounting life on equipment for the extent the equipment still has life to it, we may not be replacing it but the depreciation of that equipment ends. So we normally have fairly quick depreciation amortization schedules and it is often the case that our equipment still has good functional value even after we've stopped depressure eight it. We depressure eight to zero and it is still around a little bit. I think that is all that has happened on a sequential basis

Darren Lerich (ph): Great. Thanks. Great quarter.

Your next question comes in JJ Rice (ph) of Merrill Lynch.

AJ Rice (ph): It is actually AJ Rice (ph). Just a couple of quick questions. You mentioned on at cute care margin that a principal reason it was down year to year and has been down all year is because of the two facilities purchased in the last month's had lower margins. Would it be your thought that as you anniversary those quarters your margin will improve

I think that is right. As we look at our same store margins in the third quarter for acute we're actually up a 10th or so. And I think when we get to January of '03 and those guys are in the same store numbers, I think it is more likely than not that margins will be creeping up rather than slipping away.

AJ Rice (ph): Okay. On GW just to talk a little bit more about the role out there, my sense is the volumes have been pretty robust there as you have roll it out. Can you give us some flavor for, you know, what the -- is that having a disproportionate impact on the 7.9 percent admissions growth you showed in the quarter, would it have been strong otherwise and then secondarily, just comment on sort of the costs that you incur when something like the replacement hospital rolls out, do you deal with most of the one times sort of a roll out cost or redundant cost on the Q3 opening or is there some going into q4?

All of the costs related to the admission to the new hospital were recognized in q3.

AJ Rice (ph): Okay.

The admission growth at GW has been higher and was higher in the third quarter than the average admission growth for the division. So it certainly had a positive effect on the average. However, if you take George Washington out and just looked at the remaining acute care hospitals, we would still have quite startling growth in admissions. It was hire than average, but we -- we really had a lot of hospitals with very wrapped growth. 70 percent of our acute care hospitals had admission growth in excess of 5 percent.

AJ Rice (ph): Okay. Maybe just on that GW1 last question. Does the ramp up and profit ability, is it coincide with the admissions growth or does it -- does it lag a little bit and so we really have not benefited yet from the hopeful pickup and profitability moving to the new facilities yet?

We have seen better performance really all year long. Admission growth senses patient days all those volume indicators have been growing all year long and we have seen gradual improvement in profitability at the hospital all year this year compared to prior year. We don't think we're any where near the end of that trend. We certainly hope not. We're looking for a much better p03 than '02. Volume will certain let be a part of it. The efficiency in the new building is much better than the operating problems we faced in the old building both because of volume growth and some inherent efficiencies being in a new building. We would anticipate not only volumes to be higher next year but also margins to be a little bit higher next year

AJ Rice (ph): Okay, great. Thanks a lot.

Your next question comes from a line of Debra Lawson of Salomon Smith Barney.

Good morning. Two things. One, Kirk, I think you had mentioned last quarter that there was a change in the way that the company books charity care and that had an adverse impact on your revenue per admission on a same facility basis. Can you just refresh our memory about that and then, secondly, can you just comment on I know Medicaid is important to you, at least at a couple of facilities in your portfolio. Can you just comment on that environment and what your expectations are there for '03? Thanks.

All at once we changed our accounting for charity care kind of hospital by hospital throughout the fourth quarter of last year. The effect have that change in charity care accounting was to reduce net revenues and to reduce

I'm sorry, you cut out. We can't hear you. I'm cutting out?

I don't know. Perhaps the operator can identify a problem.

I'm sorry, maybe you could just say the last part of what you said and then I think we'll be back on track.

I'll try it again.

Thanks.

During the fourth quarter of last year we rolled through hospital by hospital a change in accounting for charity care. We used to account for charity care as net revenue and then would back it all out as bad debt expense. Beginning in the fourth quarter of last year we did not include charity care in that revenue and, therefore, there was no receivable created and no bad debt expense related to any of those receivables. The effect of this charity care has reduced net revenues and reduced bad debt expense. It's hard to run our accounting system on the old way and the new way simultaneously but we do believe that if we were still on the old methodology for charity care, all our revenue for adjusted admission, all those statistics would be about 200 basis points higher. That would affect both our -- that we have similar accounting changes in both divisions, both the acute care division an the behavioral health division.

Okay.

And I -- forget you had another question

It was just regarding Medicaid.

Our two big issues in Medicaid always are the disproportion share promises in Texas and South Carolina. We continue to receive signals but nothing more from both states that we should not see any big change in the disproportion share payments that we receive from either state. Both states are past due in providing those final numbers to the hospitals in their respective states. It is not unusual. It's usually October, maybe early November before we get those numbers and they're retroactive to the beginning of the state fiscal years but we don't have those numbers yet. Those numbers go up and down a couple of million dollars ever year and we're not anticipating anything other than a normal bounce in the numbers. We just don't have the final reports yet from the -- from the states.

Okay. Great. Thanks.

Your next question comes from the line of Charles Lynch of CIBC World Markets.

Good morning. This is a relatively small piece of the operational pie. I'm just curious if you could give some color on what is going on in France, what operations are there and what your thoughts are strategically going forward in that market?

Kirk Gorman (?): We've been generally pleased with France. It's only budget. And we're actually looking at an acquisition or two currently. We think France is the best environment in Europe and we have an excellent operating team. We have been growing in France. There are a number of opportunities there for consolidation. A Swedish company has moved in and made a major purchase in our business. Generally as you say, it is a very small part of our revenues but it is growing nicely and we're pleased with it

Great. Just as a quick follow up on some of the expansion projects that you've got lined out, beyond the several that you've detailed, are there any that you have in your sightings maybe to commence sometime next year or looking into 2004?

Well, we are just about to enter our budgeting cycle and one thing that we find is that our operating people come in with any number of projects because we're in these fast growing markets. So we have quite a few projects that we're going to be looking at and we'll try and select out the ones that need more immediate attention. As Kirk pointed out, we have very adequate resources. We could probably do most of them if we thought they were needed and if they provide us a good return but we'll be doing a number projects internally.

That's great. Thanks a lot.

Your next question comes from Joel Wright (ph) from Wachovia Securities.

Joel Wright (ph): Good morning and congratulations on a great quarter. I was wondering I have a few questions. First, I didn't know if had a feel for what type of case mix here you're achieving with this strong growth in volume. That is, are we seeing an influx of maternity cases versus say orthopedic and coronary type cases. Secondly, an old name, Puerto Rico, how are things looking there and, third, I was wondering if you could elaborate on acquisition outlook.

Let Alan do the fun stuff. I don't know, Joel that we have seen much case in case mix index. Generally we're seeing a gradual increase in intensity. The OB business is one of the higher risk businesses that hospitals are in. We have seen some growth in that business but frankly we're trying to be a little circumspect how fast we allow that business to grow. That is not changing the overall numbers and we continue to see more complex orthopedic surgery, cardiac business, more cancer business, we're seeing a little bit of an increase in our case mix index numbers, nothing explosive. Okay. Alan, do you want to talk about Puerto Rico and acquisitions?

Yeah, Puerto Rico has been on bucket for the last three months. All of the hospitals. We have weather channel devoting a lot of attention to Puerto and I think we're making progress there. The big hospitals are not doing to bad the other two are the problem. Revenue problem. The hospitals run efficiently. They do a very fine job quality wise. They're certainly the nicest looking facilities on the island, among the nicest looking on the island. But the question is revenues. And we have been working actually with the Federal Government trying to get some increased Medicare money and we're looking at some changes in services in Puerto Rico and drop those which don't give us more revenue than others that are up to what we like to see. So we're working on Puerto Rico. As I mentioned, the last few months all hospitals have been on the budget. You also asked about acquisitions. Artistry with acquisitions has been a disciplined approach. We are very reluctant to pay above what we think it is worth going forward and in spite of that we have been able to make quite a number of acquisitions actually in the last couple of years. So we're always looking. The market is competitive but now I think it is starting to segment just looking at the HCA acquisition. They seem to have come out not letting tenant take all the big systems by themselves. So I think those guys are going to fight it out with the big systems. We're not about to bay a billion and a half dollars all end for a system. But on the smaller scales of one off we're very active

Joel Wright (ph): Very good and congratulations again.

Your next question comes from the line of Frank Morgan of Jeffries and Company.

Good morning, just a couple here most of mine have been answered. Kirk, will you remind me, with GW finished won't we see a pick up in amortization and if that is still the case, what would we expect to see incrementally off of that one project. And I was also curious on the related to the dish payments, you don't have any indication yet what this will be but how do you handle that from an accrual standpoint? Do you accrue any of that in terms of what you're expecting? Thanks.

Yeah. With the opening of GW on August 23rd, we did then begin to depreciate that building. The incremental depreciation you'll see in our income statement is about a million dollars a quarter. An increase in depreciation about a million dollars a quarter related to GW. We are currently not accruing for any disproportion share payments in Texas or in South Carolyn until we get the updated figure so we normally accrue, once we get the number we will then accrue even if the cash doesn't appear each and ever month opener each and ever quarter, depending on the state, you know, it does get there. But until we have a firm number, we will not be accruing disproportion share and we stopped accruing disproportionate share revenue in the third quarter even though we anticipate that there will be some retroactive action taken by the states.

Thank you.

Your next question comes from a line of Michael Wiesberg (ph) of ING.

Michael Wiesberg (ph): Two quick things. Have you seen any change in elective surgeries and any dim you in addition of those effect affected by the economy and then in general, what are you seeing in terms of your surgery growth compared to the rest of your procedures?

Michael, I don't have all of the individual case counts yet. We tend to come out with our press releases and conference calls a little bit before all the details operating stuff is available to us. Anecdotally we're not seeing any decline in elective sorts of things. Typically the beginning of a year is when elective procedures are a little bit lower. People have not hit their deductibles, co-pay limits yet and oftentimes both in the surgery center business and in the hospital business you see a little bit lower volume of what you might call deferrable or elective procedures in the first month or two in the year. But we have not really seen anything that is noticeable on an on-going basis this year. I don't really have the full story on all the surgeries yet.

Michael Wiesberg (ph): Great. And then secondly, adjusted for charity it looks like your bad debts ratio was actually slightly higher year to year in the third quarter although I'm really talking about tents. Was there anything there that we should read in terms of, you know, the affect of again the economy on people who may have higher deductibles or is that just you being typically conservative?

Michael, I assume you're making your conclusion that if revenues are up maybe 200 basis points, bad debt is up the same basis points or something. I have not done the arithmetic. I'm not sure your conclusion about bad debt being higher than last year percent of revenue is accurate. I just haven't done the arithmetic. We don't go back and recap it. We actually thought the third quarter was an okay collection quarter. DSO's were okay. Pretty strong cash collections, you know, cash flow from operations was up again A.I think we're trying to beep conservative. We do have a couple of payers that we're watching carefully and we're trying to make sure we have adequate reserves set aside for anything that might happen to a couple of our payers. But on a collection basis, things are going okay and I don't think we feel like we have any great concern about the ability of the hospitals to collect their bills.

Michael Wiesberg (ph): Great. Thanks a lot.

Your next question comes from a line of Ken Weekly (ph) of UBS Warburg.

Ken Weekly (ph): Thanks. Good morning. Just a couple of questions first. Can you talk about with occupancy as high as it is especially on available beds what sort of bottle next you're seeing in the system and how you're managing them?

Well, let bottle necks really crop up, Ken, during the November to March time frames. We're doing okay now. Occupancy rate is at 70 percent at this time of year are pretty high. But 70 percent you can, in our hospitals aren't facing any problems now. As we get into the November through March time frame, we will have several hospitals on divert status, Las Vegas is a good example where we have added beds and capacity, even though we're in the process as Alan said building a brand new hospital in the southwest, we have some capacity problems in Las Vegas during the winter months and we're trying to address that by having opened some new capacity at Summerland

Ken Weekly (ph): What level do you seem is it about 80 or 85?

It has been a while since we have been there for a full year basis. I think most hospital guys say once you get to 85 percent it is pretty tough to operate a hospital on a normal basis. Obviously during the winter months we have a lot of hospitals that are running in the 90's for a period of a couple of months. It puts a little bit more stress on doctors and nurses and patients, but, you know, we've got several markets because we're in such fast growing markets, we have got several hospitals that are on divert status for a couple of months not consistently but during that couple of month period each year they are on divert status for a good percentage of the time.

Ken Weekly (ph): I assume there is a reasonable difference between your bed and service and licensed bed considering your difference in occupancy. Do you have a strategy for converting beds over to get them to bed per service and if you do, how many beds per year (ph) can we expect?

Most of that gap between licensed beds and available beds is not likely to come back into service. A lot of that gap is left over from a period of time when hospitals would have two beds in a room or three beds in a room and that no longer is the standard of care in many communities. So for us to go back to a licensed best e bed capacity equal to what is listed would mean that we would be taking private rooms which in many communities has become pretty standard and putting that extra bed back in the room. That is -- that's not likely to happen in very many places.

Ken Weekly (ph): Can you tell me how you track the non-profits spending patterns and how do you optimize your capital spending so you don't really overinvest in a local market?

Well, obviously after -- that is a trick. It is up to the local guys to keep an idea on their competitors and they're reporting up through their management chain and up to all of us here as to what is going on in their markets. And we're always looking to grow the business and look to go increase our market share and things like that. So it is always a trade off between opportunities we think we see and what the competition is doing and the eyes and ears for all of that and the accountability for the quality investment decisions really reverts back to the local guys and their management in the local markets. We don't really see a lot of construction being done in our markets by the non-profits. Very, very little constitution by the non-profits in our business

Ken Weekly (ph): How much of your premium going up have you held -- your employees this year for your health benefits?

Are you representing our employees in any way, Ken?

Ken Weekly (ph): No, no. I was trying to get a sense in terms of the cost structure here how much you might see because of health care benefits?

We're seeing -- we have two plans. One is an HMO plan that is available in many of our communities and many of our hospitals and we also have a self- insured PPO type plan that we run ourselves. The HMO's we're seeing depending on the market, we're seeing I think the low is a 12 percent increase and we've had some contracts that we canceled because the HMO's came at us at 25 percent increases. We have had probably 12 to 18 percent is where most of the HMO price increases are. We have redesigned our PPO offering quite a bit, changed around the level of deductibles. So depending on what employees do, they can actually see a little bit of a price decline in the PPO product.

Ken Weekly (ph): Thanks so much. Break water.

Your next question comes from the line of Ken Doliver of SG Cowen.

Thanks and good morning. The first question is, if we go back and look at the beginning of the year, you had guidance that was based on the ability to off set about 70 percent of the uptake in malpractice insurance expense that you've seen this year and, you know, the numbers are running nicely ahead of that guidance. So the first question is, you know, what it -- is that 70 percent number higher now 80 percent, 90 percent, just to give us some perspective on what that might mean for next year?

Obviously as you point out, Ken, our numbers are a lot better than what we were expecting and what we were communicating as a reasonable expectations earlier in the year. We don't really track back to how much we were trying to estimate and I think we responded to a question earlier in the year and suggested that 70 percent would be a reasonable target, but I guess if we went back and rethought the algebra we have offset all of it. We have been able to swallow the malpractice increase in whole and showed growth. We are not anticipating growth in insurance anywhere near what we suffered this year. Obviously our insurance expense will be up next year. Next year we're anticipating our insurance budgets across all lines might be 10 or $12 million higher than this year. Just by perspective and perhaps you remember but just to refresh your memory, our insurance budget this year was up about $24 million compared to 2001 so we're able to swallow a $24 million increase next year the increase will be about half of that or a little bit less. On a larger base of business so we're not, you know, challenged. It is certainly something we wouldn't want. It is a lot of work to have the guys overcome that but it is not as big of an issue for us to overcome in '03 as it was in '02

Great. The second question pertains to pricing. Even though the revenue per admit this quarter was up pretty modestly I think in the last call you had indicated that your managed care contracting is -- your yielding about 6 percent price increases. Is that still the case?

Yes. We don't see any real change in the market for contracts when we roll over contracts with the HMO's. It is been fairly constant all year long

That is great. Thank you.

Your next question comes from the line of Sue Lee of Maximus Incorporated.

Kim Purvis (ph): It is actually Kim Purvis (ph) at Maximus. My question has been answered, thanks.

Your next question comes in the line of Tip Huett (ph) of Legg Mason.

Tip Huett (ph): I wanted to follow up on your comment of the 70 percent occupancy in the acute care hospitals. Can you give us any sense of the portion of your costs that are fixed versus variable and as you moved from say 60 percent to 70 percent, what kind of impact that has in terms of going -- money going right to the bottom line on that as you move and then what would you see as the outlook for that occupancy going forward? Is it going to go up maybe two points a year or would you have a sense of it where it might go?

In terms of the trend in occupancy rates it is hard to forecast. You know, it certainly has risen pretty drastically. 10 years our occupancy rate in the acute hospital was 50 percent and our behavioral health hospitals was 49. So the acutes have gone from 43 to 70 and the behavioral health has gone from 49 to 76 in the current quarter and we anticipate because of demo graphics and growing population, aging population, everything everybody has been talking about, those occupancy rates are going to continue to rise. I don't think there is any question about that. The mix of or the split between fixed and variable cost varies from hospital to hospital, depending on the volumes in the hospital and the serves in the hospital, but we probably guess at about 60 percent of our cost are fixed. Maybe a little bit higher than that in our behavioral health hospitals but not much. I would say if you're trying to just get a rough feel if you use 60 percent of our cost fix and 40 variable, that would be a reasonable starting point kind of averaging across the portfolio

Tip Huett (ph): Okay, thank you. Then one other question. Are you seeing deflation on -- well, your supplies as a percentage of your total revenues stayed the same, but are you seeing deflation on major items right now, price deflation and will that work to -- do you anticipate that working to your benefit in subsequent quarters ahead?

I don't know that we're seeing deflation. There are a lot of items that are not inflating at all or inflating at a very low rate. The sorts of items that we're seeing big inflation is in anything that is implantable, whether it is a new hip joint or anything to do with orthopedics and obviously anything that gets implanted. All of those are inflating at a pretty good click. But the standard items, the sutures, the rubber gloves, that is really low inflation rate.

Tip Huett (ph): Okay great. Thank you.

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

Good morning of the just a follow up very briefly on the labor costs. You're one of the few hospital companies that is seeing year after year increases in labor costs. I don't know you don't have an '03 budget but do you think that would not be the case at this juncture for 2003?

John, is your statement relevant -- related to percentage of labor -

Percentage of revenues, correct.

Yeah. I'm not -- we're certainly seeing an increase in labor cost in our acute care division but, for instance, and our behavioral health division labor per patient day really hasn't expanded much. What you may be seeing is not so much labor costs trend differences between us and other hospitals but pricing trend differences.

Okay. And, you again, would you think at this juncture those moderating labor costs and malpractice costs is that the potential margin enhancement opportunity for you in '03?

We certainly hope so

Okay, thank you.

Your next question comes in the line of John Hemlong (ph) of First Boston.

John Hemlong (ph): Thanks but my question has been answered many times. Thanks.

Your next question comes from the line of Gary Taylor from Bank of America

Good morning. I had just had a question on RH visits. Could you maybe talk about what you're seeing there year after year in volume increase and is there any change in the percentage of those, ER visits that are turning into hospital admissions. Thanks.

Gary, I don't have that information. Sorry.

Okay. I'll follow up.

That information will get rolled up eventually but I don't have it today

Okay, thanks.

Your next question comes from Ron Osonie (ph) of Pinpoint Partners.

Ron Osonie (ph): Sorry I have been hopping on and off on a couple of calls this morning. Did you provide any Q3 guidance (ph) and I thought I heard somebody say the budget had not been set yet. Can you give us something on Q4 and maybe o3

You are absolutely right the budget has knotted been set and we have not set any guidance. We have not provided any guidance on a quarterly basis. We never really do that. It looks to us as if the fourth quarter is going to be another good solid quarter but in terms of trying to estimate exactly what EPS would be on a quarterly business we try to avoid that knowing we will have no ability to be accurate. We have another good quarter shaping up but what that means in terms of earnings per share, we're not offering

Ron Osonie (ph): Then in terms of earnings per share, can you point to some growth rate that you're comfortable with? Are we looking at low teens now next year?

Well, you know, over the last decade we have grown it a little bit better than 20 percent. This year obviously is a lot faster than that. We're over 30 percent this year. I don't know that 30 percent is sustain abdomen on a long-term basis but given the underlying trends in the business and good growth in admissions and good cost controls, I'm not so sure we just don't keep ticking along like we have over an extended period of time

Ron Osonie (ph): I don't know that it is not

Alan might bet that 30 percent is achievable. You know, everybody is going to have their own been on that and Alan has been in the business longer than most of us so, you know, maybe he's got a better perspective. But it looks to us as if we have good solid revenue growth and our guys do a good job of managing expenses so we're pretty confident that we shouldn't see a good change in historic trends.

Ron Osonie (ph): Great. Thank you, guys.

Your next question comes in the line of Andrew Buck (ph) of Goldman Sachs.

Andrew Buck (ph): Great, thank you. Too quick questions. One, Kirk, how long do you anticipate or do you have any sense of how long we might see inpatient admission trend exceed that outpatient trends and then a follow up to that, what does that imply in and of itself for underlying trend in the EBITDA March un on at cute care systems and secondly, Alan, I was hoping to tap into your experience and tenure in the business. From your standpoint, is there anything in the industry in terms of dynamics or structure or even that of the company's portfolio that changes how you think about growing the business over a three to five-year period say today versus five years ago or even further back. Thanks.

I don't see the business as being fundamentally different than it was some years ago. I think more money is going into technology and there are advances there. The population is aging so I think you have to take that into consideration. But in the markets that we're located for the most part we're in fast growing markets and actually they're growing it at both ends. They have like Las Vegas for example, they have a lot of young people moving in and they have got a lot of retired people there so we try and cover the spectrum. I think we obviously are well aware of the OB side and the cardiac side. We try to locate in faster growing markets and meet the competition with technology. Good service. I think our size is helpful in terms of being agile. We like the idea of being not the biggest organization. And that is pretty much been our strategy for a number of years and, Frankly, I don't see it changing that much.

The drift that we've seen a little bit more towards inpatient I think might be another reflex of complexity and intensity. We have seen growth in cardio (ph) and a lot of the implant business and in orthopedics. You know, 10 years ago we had a lot of weekend warriors, tendon injuries and now we're seeing more joint replacements than we used to. There are in orthopedics, for instance, there is a lot of tendon sorts of injuries that can be done on an outpatient basis. Joints are getting better but they're not really outpatient procedures yet. I'm not really sure how the rising in rents (ph) difficult and shift to a little bit more inpatient than we have seen in the past is going to change the business. We're still sorting that through ourselves. Let possibilities exists, pretty smart guy asked me a question not long ago about whether or not these sorts of trends portrayed a change in where people in rural areas would receive care. I don't know the answer to that question yet. That's a good question as to whether or not rising intensity is going to force people who live in more rural areas to bypass their local hospital that they have always used and relied on to come to a town more kin to where we have our hospitals for the higher tech, higher intensity care. I'm not sure we're seeing that yet, but, you know, those are the sorts of trends that we have to watch. There may well be a broadening of the historic go (ph) graphic spots of our hospitals as intensity, complexity increases, we'll we will drawing from a broader area.

Andrew Buck (ph): Okay. Thank you.

Your next question is a follow up question from AJ Rice (ph) of Merrill Lynch.

AJ Rice (ph): Thank. I had a couple of follow ups but I did want to mention to Alan if we're in an environment where 30 percent growth is untenable than a great time that is different than what we have looked at historically for this industry. But just to get the disproportionate share. I understand the comments you made a little while ago about that. Kirk, you're not accruing any of these disproportionate share payments and when did you stop accruing those?

We get this proportionate share in small amounts in several states. The biggest state for us is Texas. And because of the size of that program, we tend to focus on the accounting for that more than some of the other states. So

I knew it was always Texas and South Carolina

And Texas is by far -- Texas is far bigger than South Carolina. So, for instance, in the third quarter, although we have reasonable assurance from the state of Texas that there is going to be a number similar to what we have had in the past, we did not book a couple of million dollars of revenue that had -- we had a real firm confirmation from Texas. We would have booked. We kept a couple of million dollars of revenue out of the third quarter just to be safe until we had the real number from Texas.

AJ Rice (ph): I was trying to get a feel on the margin. Is it enough to make a difference on the revenue -- the question about the revenue per adjusted admission calculation? Does that hurt you a little bit? Obviously you're not doing that this quarter

It would but I can't do the numbers in my head. It wouldn't be that big of an effect. A couple of million dollars total revenues in the acute care division divided by all those patient days or admissions, yes, it would have a depressing effect but not much.

AJ Rice (ph): Once you actually get the recognition that it is going to be coming there, how will you -- will that be just a one time catch up or how are you going to recognize that?

Yeah, I guess that is probably the way it would happen

AJ Rice (ph): Just I know you have been asked about the wage labor market. I didn't hear you specifically say what is the sort of average labor cost increase or wage rate increase that you're seeing now roughly running?

I think we're running in the four to five percent blended now. Obviously the R.N.'s and techs are getting much higher than that. Most of the rest of us are getting -- I may go back to nursing school or something.

Exactly. There is a lot of analyst going back to nursing school, too.

AJ Rice (ph): How about on the supply cost side. You guys signed a new pharmaceutical distribution contract earlier in the year. Are the benefits of that now pretty much fully reflected or is there some things on that that we should look forward to?

That new contract didn't start, A.J, until the 1st of September. I think we previously said we thought that might be worth a few million dollars a year benefit to us, three to five, something in that range. So I guess we have 112th of -- you know, we may have a couple of $100,000 of benefit in September out of that contract. Obviously it is just started and the numbers are still kind of shaken out so it. It doesn't just turn on and off. It sort of ramps up over time?

That's right. We don't have much of that effect in our numbers yet, very little of it

AJ Rice (ph): Okay. And then finally just to ask, I know Alan alluded to some things on the acquisition project that might be attractive. I know you guys have been in the press and mentioned for this facility in Petersburg, Virginia. Is there anything to say said about it? I don't want to put you on the spot.

I think we can say we're continuing to talk to those people. They like us very much. They have visited some of our facilities and the tax are on-going. That is about all I can say at the moment.

AJ Rice (ph): Any time frame when it might come to or a decision can be made?

My guess would be in the next -- certainly in the next couple of months in terms of having oral having not a transaction.

That process has slowed down a little bit from the track that we were on. At one point it looked as if that decision by the sellers might be made. This calendar year and that may not happen at this point but it would be very early next year, might be a better guess according to our guys who are doing most of the communications with the sellers.

AJ Rice (ph): Okay. Thanks a lot.

Your next question is a follow up from Darren Lerich (ph) of Benson, Robinson. Hunphrey.

Darren Lerich (ph): Thanks I hate to belabor the call here. I just wanted to get your input on the Macusin (ph) transition. Are you still looking for three to 5 million in savings there and how much turnover did you have among your pharmacy staff when you moved over to that and was there any unusual restocking costs or anything like that that you incurred in the quarter? Thanks a lot.

Darren, I think the transition has been pretty smooth. We believe -- we have not had enough history with it to see if our expectations are being met but we anticipated we would save three to five million dollars a year. We are still working with the former vendor to settle out repurchase of some of the old inventories but that is pretty normal stuff. We did have a few pharmacist who decided not to stay at the hospital and have been replaced. Some on a permanent basis and we have a couple of kind of temporary replacements but staffing issues for the pharmacy positions are in pretty good shape. The contract seems to be working with. The doctors report at worse no dissatisfaction and in some cases satisfactory at the change. It seems to be off to a good start.

Darren Lerich (ph): Thanks. One other thing, can you just remind me what your tax benefit last year was and kind of what your tax payments are this year on a year to year basis? I think there has been some difference in your past tax payments. You had an underpayment in '01, if I recall?

Actually what happened, Darren, we had an overpayment in the year 2000 that caused us to have a lower cash tax payment in po1 so now it's (ph) '01. We inadvertently provided an interest free loan to Uncle Sam that we then collected in '01 by reducing the cash payment. But the current year payment is back on kind of a normal basis

And what is the -- I guess what was the overpayment in '00 on -- just from a numbers standpoint, what was that number? I don't recall, Darren.

Darren Lerich (ph): Thanks a lot.

At this time there are no further questions.

Well, thank you very much for joining us. We are certainly pleased with how the year is progressing and we look forward to talking to you in three months or so, four months as we talk about the closeout of the year and at that time we'll have a little better insight what we might expect for the full year of 2003. Thank you very much for joining us

This conclusion today's third quarter conference call. You may now disconnect.