環球健康 (UHS) 2003 Q3 法說會逐字稿

Good morning. My name is Amanda and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Universal Health third quarter earnings release conference call. (Operator instructions). Thank you.

I would now like to turn the conference over to Mr. Steve Filton, CFO. Please go ahead, sir.

Good morning. I'm Steve Filton. Alan Miller our CEO is also on the line with us although he is at a remote location. So, our timing and coordination might be off just a little bit this morning.

Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2003.

For the quarter, the company earned 76 cents per share diluted after recording after-tax non-recurring gains on divestitures of 7 cents per diluted share and a charge to record the affect of a cumulative change in the accounting principle of 3 cents per diluted share. Excluding these items, the company earned 72 cents per diluted share during the quarter, which represents an 11% increase from the earnings per share in last year's third quarter.

During this conference call, Alan and I will be using words such as "believes", "expects", "anticipates" and similar words that represent forecasts, projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend the careful reading of the section on page 24 of our 2002 annual report to shareholders.

We'd like to highlight just a couple of developments and business trends before opening the call up to questions. The following data excludes the impact of the non-recurring gains and the cumulative accounting change.

Revenues for the quarter were $896 million, an increase of 10% from the revenues in last year's third quarter. EBITDA or earnings before interest, tax, depreciation and amortization, was $115 million, 10% higher than last year's third quarter. Adjusted net income of 44.7 million was 8% higher than last year. The adjusted diluted EPS of 72 cents was 11% higher than the prior year's quarter. Year-to-date revenues are 11% higher. EBITDA is 14% higher. Adjusted net income is 13% higher and adjusted diluted EPS are 16% higher than in the prior year's nine-month period.

Cash flow from operations in the quarter was $103 million. We spent $57 million of this cash on our continuing capital expansion projects, which Alan will discuss in a moment and repaid approximately $56 million of debt. Year-to-date UHS has generated $313 million of cash from operating activities. We've spent approximately $156 million on capital expenditures and we have repaid $65 million of debt, spent about $54 million repurchasing shares and $48 million on acquisition.

Our credit statistics continue to improve with bad debt net of cash to total capital at September 30th, 2003 of about 38%, improved from 42% at the beginning of the year and debt to EBITDA on a four quarter trailing basis of 1.3. Our $400 million bank credit agreement is essentially unused. Standard & Poor's upgraded the company's debt rating to triple B during the quarter. UHS clearly has the financial means to continue to finance growth both through capital expenditures and through acquisitions.

Commercial pricing trends remain strong. In the quarter ended September 30, 2003, net revenue per adjusted admission in our Acute Care Hospitals rose 7.2% and net revenue per adjusted patient day rose 5.6%.

Operating margins or EBITDAR margins of our Acute Care Hospitals owned in both the third quarter of 2003 and 2002 were 17.0% in the quarter, just ended compared to 16.7% in the prior year. Net revenue per adjusted admission to our behavioral health hospitals rose 3.8% in the quarter ended September 30, 2003 while net revenue per adjusted patient day increased 3.2%. Operating margins for our behavioral health hospitals owned for more than a year were 22.3% in the quarter ended September 30, 2003, compared to 19.2% in the third quarter of 2002.

Our bad debt expense as a percentage of net revenues continues to remain stable, as do our DSO, which were 50 days in the quarter as compared to 53 in last year's third quarter. Revenue increases have been strong despite no growth in admissions. In our acute care hospitals owned in both, the third quarter of 2003 and third quarter of 2002 admissions decreased approximately 1%.

The change in strategic direction related to the scope of services in one of our Puerto Rico hospitals impacted acute admission by about 70 basis points in the quarter. After considering the impact of the Puerto Rico change and intentional elimination of two other uneconomic service lines, acute admissions would have been essentially flat for the quarter.

We believe, that the sluggish economy is the key driver to the admissions weakness and are hopeful that a strengthening labor market will drive volume growth to a more positive level in the newer term. Over the long run, we believe that the factors with the biggest effect on in-patient volume are the aging of the population and the population growth within UHS’s specific markets, which we believe significantly, exceeds the national average. Admission to our behavioral hospitals owned in third quarter both, 2003 and 2002 increased 1%. Alan will now discuss some of our opportunities for additional growth and some significant legislative developments.

Thank you, Steve. Steve mentioned that I was at a remote location, I'm in Boston. We continue to look selectively for acquisitions, where we think our skills and knowledge can improve the quality of care and financial viability of a hospital. As we previously announced, for instance, we intend to acquire a 90% ownership interest in Pendleton Memorial Methodist Hospital in Louisiana and three acute care hospitals in California.

We hope to complete both of these acquisitions during or shortly after the fourth quarter. Both transactions strengthen our position in markets where we already have a successful existing presence. We are currently reviewing additional acquisition opportunities in our acute care, behavioral health and French operations. We spent about $57 million on capital expenditures in the third quarter compared to $60 in the third quarter of last year.

Just a few weeks ago, we opened a 176-bed Spring Valley Hospital in Las Vegas, our fourth hospital in this market, which continues to enjoy robust growth. The hospital is well situated in the rapidly expanding Southwest section of the city.

At the same time, we opened 90-bed addition to our Northwest Texas Hospital in Amarillo, Texas. We believe this expansion will secure an improved position for our hospital in the cardiac-care market and potentially lead to expanded relationships with certain local payers. The new 120-bed Lakewood Ranch Hospital, (inaudible) Florida are, is under construction should open in the spring of 2004. Our behavioral health hospitals have operated very efficiently at 78% available occupancy rate For the whole year, and we have undertaken several projects to add capacity at our busiest facilities.

In the regulatory arena, we believe that a draft rule on psychiatric PPS will be published shortly. Our expectation continues to be that this rule change could be effective in 2004 or possibly first quarter of 2005, and it will be positive for UHS.

Legislatively, we believe that passage of a Medicare prescription bill is probable and that if such a bill passes; it will likely include several favorable provisions for providers, including an increase in reimbursement for hospitals in Puerto Rico. In recent months, meaningful tort reform legislation has passed in both Nevada and Texas, which should positively impact our malpractice expense in future years. This is an interesting event.

We were very pleased to learn this quarter that the Texas Supreme Court has reversed the judgment by a lower court which had held that a UHS subsidiary did not have the right to shut down a women's hospital that we had operated in Austin. UHS had recorded a liability for this original judgment in 2001 and has been recording interest expense on the judgment since then.

At such time that either the plaintiff's appeal rights or the court rejects their appeal, those rights lapse or the court rejects their appeal. We will reverse the liability we have recorded which currently approximates $9 million. This could occur as early as the filing of our third quarter 10-Q.

We are on balance satisfied with the performance recorded in the third quarter of 2003, especially in this challenging environment of soft volumes and are looking to earn between 310 and 315 per share on revenues of 3.5 to 3.6 billion for the full year of 2003. We are grateful for the dedication of the physicians who recommend our hospitals to their patients our over 30,000 employees who constantly strive to improve quality and safety for all of our patients. Steve and I will be pleased to respond to questions at this time.

(Operator instructions). Your first question comes from Darren Lehrich with SunTrust Robinson Humphrey.

Thanks. Good morning. I was Just hoping you could shed a little bit more light on the bad debt number that you reported and discuss your overall experience with uninsured, self-pay collections? I guess it appears your low bad debt number relative to your peer group is a business mix issue. But, we didn't expect it to be lower than last year. If you could talk a little bit about that and then also, Steve, if you could provide the allowance for doubtful that is on the balance sheet this quarter. Thanks.

OK, Darren, you asked several questions. Hopefully I get them all. Starting in reverse. I think that our allowance for doubtful accounts, which was at $59 million at the beginning of the year, ended the third quarter at approximately $61 million. You referred to our bad debt percentage, which tends to be lower than our peers as a business mix issue. I think that is correct. Our bad debt percentage of net revenue in our acute care division has been in ranging in the 8.5 to 9% range, which has historically been within the peer group.

The overall percentage obviously is brought down by our psychiatric business, which is about 20% of our revenues. They run about a 2.5% bad debt expense as percentage of revenue. Although not terribly important in our other businesses in France there is virtually no bad debt and in our radiation and in our surgery center business and combined with France, that is probably about 5% of our revenues, bad debt is also in the 2% range. So, combined that all works to bring our overall percentage down.

In terms of the question that you asked about comparisons, I think comparison to third quarter last year is misleading since the third quarter last year was very high for us. The reality is our third quarter bad debt expense as percentage is pretty consistent with where we were in the second quarter and sort of reflects our view things are continuing kind of down the same path.

We're not seeing as some of the other companies have mentioned, a real increase in uninsured or at least uninsured after insurance patients or a difficulty in collecting from those patients. We are seeing a slight uptick in truly uninsured patients. That tends to roll through to the Charity Care Line and did put some pressure on our net revenue per unit in the quarter, but not really so much on bad debt. So, I think that's where we stand. Hopefully I got it all Darren, you asked me several questions, I tried to get them all.

Just One more quick question on the cost side. Can you just talk a little bit about what your pharma expense is running out as a percent of revenue and it's (inaudible) in other Opex piece and just remind us what exactly where the changes that occurred with the McKesson contract? Thanks.

Sure, our pharma expense runs between 3 and 3.5% of revenue on the acute side and what we have talked about in the past was that about a year ago in August of 2002, we entered into a new out sourced pharmacy contract arrangement with a subsidiary of McCasten. And what that arrangement did was lock in our then pharmacy prices in the summer of 2002 for 7 to 9 months, really through the second quarter -- part way through the second quarter this year.

So, for several quarters in terms of as a percentage of revenue, we were really getting a lot of juice if you will out of the operating expense line because we were able to hold our pharmacy cost pancake flat. We had some scheduled contract increases at the end of the third quarter and so that has made the comparison of pharmacy expense in the third quarter to last year's third quarter, little less favorable, certainly not unfavorable, but not we are not getting the same sort of bang that we were getting in the last couple of quarters.

Thanks.

Your next question comes from Lori Price with J.P. Morgan.

Hi, couple things. One, I wanted to follow-up on Darren's question. If you look at what the bad debt ratio is in the acute division stripping out the behavioral health hospitals and France, it looks like it comes out to around 8.7%. Is that right?

That's right, Lori.

Good. The other question that I had is if you can just maybe elaborate on some of the factor that contributed to the high labor ratio in the quarter. I know that Spring Valley was one contributor. How much did that cost in terms of added labor expenses and then some of the other expansions, what did that contribute?

Sure. I think there are a few factors that contributed to the inching up of salary expense in the quarter. One, as you mentioned we had some start-up cost associated mostly with Spring Valley in Las Vegas, but also with the Lakewood Ranch project in Florida, a little bit with our 90-bed project in Amarillo that opened on October 1. We had about $2 million in start-up cost in the quarter for all three projects combined, most of it at Spring Valley and most of it on the salary line.

Additionally, I think we're seeing while registry expense is remaining relatively flat and may be improving a little bit, the comparisons we are starting to get with last year are not as dramatic as we've seen over the last few quarters. Because it was around this time last year we really started to make a dent in the use of our temporary nurse labor.

And finally, what we're seeing in the quarter is some pressure not just on the salary piece of the line, but on the benefits piece of that line. I think our benefit expense for the quarter was up about 40 basis points. And that really relates to our own health claims. We're self-insured for that. That is just a reflection of some increased utilization that we are experiencing.

OK. On the wage rate increases. What were they up in the acute hospitals year-over-year and how did that change?

I don't know that our wage rates really changed in the quarter. I think we are seeing across the acute care division, wage rates going up at a 4 to 5% range overall, with obviously nursing salaries a little bit higher than that. The remainder of the workforce is a little bit lower than that. I don't know that changed in any significant way during the quarter. Again what you saw in the quarter was offsetting that in the last few quarters has been a more dramatic reduction in registry expense. That comparison ran out in the third quarter. We didn't get as much as the offset.

Thank you.

Your next question comes from Ken Weakley with UBS Warburg.

Good morning. A couple of questions Alan, you mentioned the outlook for ’03 -- 310 and 315. I don’t know if I missed it, but What are your thoughts now on the '04 earnings outlook? I do not know How big the range is anymore?

We have not put out a range until our budgets are done for the following years.

OK. Understood. Do you have any comment perhaps on the long-term growth outlook might be given some of the softness in the sector? People have been expecting 15 to 18%, is that a long-term growth forecast you are still comfortable with?

I would guess -- it's hard to know when the economy is going to pick up.

OK.

We think that a lot of this is related to unemployment, the economy. So when that picks up, we'll be in good shape.

Lastly, can you give any specifics on HMO pricing? I know what the revenue per admission growth is but What are you thinking for contracts, what is happening out there in negotiations?

We have talked 6 to 8%. We're going to have to see when the budgets come in if that range is still what we are getting from the field. We'll let you know after we do the budgets. In fact, we started – we have already started doing our budgeting.

OK, the last question. Do you tell us what case mix is in the quarter?

I don't have the case mix numbers in front of me. I know that Medicare case mix was flat for the quarter. Medicaid was up like 5 to 10%, which actually is a trend we've seen the last couple of quarters. I do not have the absolute figures in front of me

OK, thank you.

Your next question comes from John Ransom with Raymond James.

I just wanted to ask a quick question about your Behavioral health business, looks like a little bit of diminution in the volume growth there . Is there anything going on there, either positive or negative or neutral to what has been going on the last couple of years?

John, my view of it is I have been a little bit surprised, pleasantly, obviously, the last couple of quarters that behavioral growth has been outpacing the acute care growth in a market where they are subject to all the same sort of economics factors that the acute business is.

I think what you saw in the third quarter was they are just backing off a little bit in some of their markets. I think they are feeling a little bit more the economic pinch. We were pretty pleased that in a relatively down environment they were still able to grow admissions by 1%. You know, still like our market position very much in those markets and think that that business will remain strong for the foreseeable future.

Do you see -- as maybe we edge down the other side of a more constrained payer environment if you look out a couple of years -- in the last cycle obviously behavioral health a lot of excesses were wrung out. Length of stay collapsed. Do you see behavioral health being treated more like the rest of the industry if we do slide down another slope of another constrained environment?

I am seeing behavioral health in our physician area being very strong and getting stronger and people become selective of which facilities to use. In many cases we don't have a competitor, because as you mentioned they have been squeezed out of the industry. You look at our available occupancy climbing up to 78%. I mean that's a very substantial number.

Sure.

I think it shows that over time, people are very confident of the kind of care we give and our facilities are very strong. So, I think we just continue to benefit from it. And as Steve pointed out, even in this environment our margin is up -– we are up to 78%. I mean, that's very good performance.

Great. And just one final thing, just to underscore the obvious, then your start-up costs $2 million bucks after tax, a couple of cents then, you had a couple of cents of start-up cost this quarter, that maybe weren't in the second quarter?

That's correct, John.

OK, thank you.

The next question comes from Gary Taylor with Banc of America Securities.

Good morning. Couple of questions, One, I noticed that your net revenue per adjusted admission on a dollar basis was down a touch sequentially. Is there anything that would be impacting that sequentially or is that just the outpatient? Looks like it was a little stronger sequentially.

I think it was a couple of things Gary, as I mentioned before, I mean there was an slight uptick in charity care, so that drives that number down a Little bit, I think, the reality was in the second quarter in particular we were hitting on all cylinders.

So on the government side of things, our length of stay was about as good as we could get it, I did see a little bit of slippage in the third quarter at some facilities on both Medicaid and Medicare length of stay. So that impacts it a little bit. In -- you know, I think the commercial side remains pretty strong. So I think most of the slippage we saw in the quarter was a little bit in charity care, and a little bit of length of stay increase.

OK. And on the pharmacy contract increase, it sounds like you said that the increases kicked in at some point during the third quarter. So, does that imply we're still going to see a sequential uptick in the Q4 as you get a full quarter's worth of impact there?

I think, the increases kicked in in the second quarter, at the end of the second quarter, but I think your question is still relevant, I still think in essence, you will see a little bit of an uptick in the fourth quarter, because our pricing was flat in last year's fourth quarter, and we will have this scheduled contractual increase, reflected in this year's fourth quarter.

OK. And then just finally, for the benefits cost or the higher benefits cost that you discussed as running through the labor line this quarter. Is that all current period? Is there any catch-up for seeing, I guess a tail from prior periods? Is there anything built in for anticipating that continues to pick up?

That is largely a current expense. I mean there is a little bit of a lag there. You know, the lag is really only a couple of month's worth. So, we obviously have incurred, but not reported accrual for that, and then pretty much recognize the current period activity as it comes in. But there is not the kind of lag you see in malpractice expense, that sort of thing. It is a pretty current expense.

Have you made changes in benefit design here? Was there any clear reason why your, own employees’ utilization was softer?

Depends on how you look at it. Our own employee utilization was higher, which caused us a problem.

I mean in first half of the year, I gues it sounds like it has picked up some sequentially.

That's actually, I think a trend that occurs often, in terms of as people exhaust, co-pays and deductibles, they use more services. But the reality is we have seen a jump, from where we were last year, and there is no sort of discreet and distinct explanation that I can offer, Gary.

Thanks.

Your next question comes from Kemp Dolliver with SG Cowen.

Thanks. Couple of questions. With regard to the start-up costs, you know what should we expect in terms of the match between revenue and incremental expenses over the next few quarters, particularly now that the two facilities have opened?

The Amarillo facility I think is a little bit different story. That is a 90-bed addition to an existing facility. So, you don't really have increased overhead or anything like that. You are really talking about largely direct costs, so I don't think that has much an impact. In Spring Valley, I do think that certainly in the fourth quarter that likely will be dilutive. The facility has ramped up quickly, et cetera. But, I think it is unrealistic to expect a freestanding acute care facility to be EBITDA positive in its first quarter of operations. So, I think we will see little bit of dilution from that in the fourth quarter.

OK, when you refer to start-up -- when we think of start-up expenses obviously in Q3 you had expenses, but no revenue, have there been expenses related to the start-up that start to go away so that there is some change or delta there that we begin to pick up?

I am Not positive I absolutely understand Kemp. I think the bulk of start-up cost you see in the third quarter and again it's mostly related to Spring Valley is you know, opening an acute care hospital you don't go from 0 to 60 in 10 seconds. You staff up most of the nursing department, most of the ancillary departments, even quite a few of the overhead departments at least a couple weeks in advance if not you know in some cases a little bit more in advance.

You have got to train people, all that kind of thing, so you get a lot of that. Obviously, once we open in October, we do have some revenue offsetting that, although again the bottom line impact is somewhat dilutive. Start-ups in Florida, et cetera, you know, just a couple of people you have working in advance of getting the facility ready for opening in the spring.

OK, super. Can you give us update on DSH Texas and South Carolina?

We did get our preliminary DSH notification in Texas, which would leave us at rates equal to if not a little bit higher than what we received in Texas' last fiscal year which starts on September 1. That was good news. In South Carolina, whose fiscal year actually begins on July 1, we still have not received notification, although we believe that the State's methodology is going to remain the same, et cetera. We're hoping to receive dish in comparable amounts, but we have not received notification yet.

OK and is South Carolina dependent on them having their budget worked out?

I don't think so, Kemp. Because in large part Medicaid dish dollars are essentially federal matching dollars. So, I don't think that the State's own budget issues generally affect Medicaid dish the way that it affects for instance regular Medicaid payments.

That's great. Thanks very much.

The next question comes from -John Sutter (ph) with Susquehanna.

Thanks, a question on pricing with respect to the increases expected from payers here. When do you anticipate would have clarity on this 6 to 8% pricing goal?

I think, John, that as Alan eluded to, we have been renewing some of our contracts for next year, a lot of them have been renewed. And I think we felt (inaudible) comfortable within that 6 to 8 range. There is still I think some significant contracts to be renewed and some of them I think will be clarified in the next month or two. We're just kind of waiting to see how those turn out to give sort of final guidance.

Would you say maybe two thirds of the contracts have been resigned?

I would say that's probably fair (indiscernible).

Great. Thank you.

The next question comes from Adam Feinstein with Lehman Brothers.

Great. Hello, everyone. Just one comment if people are utilizing more health care make sure you send them to your own hospitals. I guess, just one word there. What kind of volumes do you, are you guys assuming for the fourth quarter? Just you gave a guidance range for the year, but just, what kind of volume would that imply for the fourth quarter and then I just have a couple of follow-up questions.

Adam, we do send our patients for the most part to our own hospitals, but--.

Very good to hear.

That doesn't help so much, anyway but, you know, I think, as far as volumes go, our view is that, volumes remain sluggish. They have been sluggish in the last couple of quarters and you know, early indications in the fourth quarter are that, the fourth quarter will continue that way. There has been encouraging news in September about jobs growth going up for the first time in 8 or 9 months. That's certainly, like I said, encouraging, but, you know, I think that will -- if that is a trend, it will probably take a little while to work its way through the healthcare system. So, I don't know that, we would predict or project an immediate recovery from kind of the volume lows at the moment.

OK. And just a follow-up on that volume, since I know you don't break out market-by-market, but obviously Vegas is a big market for you guys. It would be really helpful just to get any color whether Vegas is doing in line with the corporate average, better than the corporate average or worse. Would you give any comments or feedback there?

Well, I think, you know, as folks have asked about in the last couple of quarters the minority interest line is reflectiveof that fact that the Vegas facilities have been doing well. The market is growing. It's obviously why we opened a new hospital there. So, I think, we have said all along that volumes in Vegas have held up pretty well.

OK. And then just maybe just a bigger picture question. Alan, just, you know, we're hearing other companies talk about paring back CAPEX, you know, certainly, we have heard about a lot of hospital companies really ingreasing their CAPEX, pretty rapidly over the last few years. We are staring to hear about some change, I guess, you know, just, what is your point of view there? Would you anticipate doing the same? And then, secondly, just, you know, in that same context, we're hearing talk about dividends from companies and just with the cash flow you guys are generating. Is that anything you would think about going forward? Thank you.

Yes. The dividends, we're going to consider that. So, we do have substantial cash flow with regard to the CAPEX, as we had mentioned earlier, we are generating cash and our bank lines are not used currently. Our ratio is down, so that, our debt equity ratio is down. We remain opportunistic and if we see opportunities we're in a position, we have the funds. We are in a position to take advantage of them. And actually if people will be paring their facilities, there may be some good opportunities for us in markets where, we find them attractive and we're ready to go. So, no. We're not planning on cutting back anything.

OK. Great. Thank you.

Your next question comes from Andrew Bhak with Goldman Sachs.

Hello. Good morning. Two quick questions. One, do you have an estimate of the registry cost per patient day in the quarter? As a follow-on to that, do you have any sense of how low it could go, particularly with an eye toward 2004, given that, I would expect that you would never fully want it to be eliminated altogether?

Or, maybe an easier way of answering at it is, given your current nursing infrastructure, how much capacity in terms of volume growth do you have on the infrastructure today? And then, Steve, if you could – I know we touched upon this in the past but I think it would be instructive. If you could on the bad debt issue, give us some sense of the key indicators are that you look at, on a realtime basis and for forecasting purposes in terms of getting your arms around the issue. Thanks.

As far as the registry goes, Andrew, we ran, I think, in the third quarter, -- and I do not have the numbers right in front of me -- $23 or $24 per patient day range which, is how we normally talk about it. I don't think that from that level there's a great deal of additional improvement to be had. Certainly, you know, I think work around the edges. But, the reality is there is a time and place for registry and temporary nurse usage in a hospital, especially when there's unexpected spikes in volumes, etc. You don't want to be staffed up for every contingency.

So, we will continue to watch that. I don't think there's a lot of room for improvement on that line. As far as bad debt goes, I think we look at a number of different things. I don't think bad debt is something you can watch and only use one metric. So, we certainly look at as percentage of revenue, as you all do. We track our days outstanding,

We look at our aging; we look at - to see any sort of growth in days outstanding or bubbles in the aging, et cetera. Lastly, probably though the -- the figure that I rely on most is cash. I sort of view that as the figure least subject to manipulation so that when cash from operations is strong as it was in our third quarter. I'm usually feeling pretty good about our accounting for the subjective areas like bad debt.

OK. And --

Capacity question which I'm not sure I understood maybe if you could ask it again.

Yes, it is just the idea that Given your existing full-time employee compliment on the nursing side. Can you accommodate in 2004 a 1% growth or 2% growth without really adding much in the way of FTEs. I am trying to get a sense of where you are staffed to and if we do see a rebound in volumes if that will engender additional hirings or to what extent that would engender, additional hiring?

I think, what you have seen is that obviously with the softer volumes we've lost a little bit of leverage and that shows in terms of the pressure on the salary line as a percent of revenue. I believe that we had at least a couple of hundred basis points of improvement in volumes where we would get some pretty good leverage out of our existing staff, particularly because a good portion of that staff is either on the fixed or semi-fixed side. It is in overhead and it is in ancillaries, it is not on necessary right directly on nursing units. So, I think that when volumes pick up, which we expect they will do at some point in the intermediate term at least, we will get some leverage on the salary line because that is the way this business works.

Great. That answers it exactly. Thank you.

Your next question comes from Charles Lynch with CIBC World Markets.

Thanks. The topic I had has been touched on a lot. Just as a follow-up on some of the capacity utilization and admissions questions. Do you have any other projects aside from those slated for this quarter that we will be looking at in 2004?

I assume you mean Charles, like whole hospital projects?

Yes, either hospital projects or any kind of meaningful capacity additions.

Meaningful capacity additions I think is sort of taking place all the times in terms of adding OR capacity, cath lab capacity. I mean, those kinds of projects are happening all the time. I don't know that there are any real significant 100-bed or new hospital projects that are absolutely, as I think through it, other than Lake Wood Ranch that are kind of on target to be opened in 2004.

To Alan’s comment before, Our view is we're going to continue to look for CAPEX opportunities I think you will see our CAPEX drop a little bit in 2004 just because of the dynamics that you are alluding to. We don't have any of these big Spring Valleys finished, the 90-bed facility in Amarillo is finished. 2004, other than the completion of Lake Wood Ranch project, won't have any of those real big projects in it, but will have certainly have capacity expansion in lot of our ERs, ORs, cardiac areas - that of kind of thing you'll see.

Just as a quick -- I know it has only been a few weeks, but any comments on Amarillo how that has been since the beginning of the month?

They've been busy. The reason we did that Amarillo project quite honestly Charles is that we were at capacity in our cardiac care units and in our cardiac care service lines. The problem is we were largely full with the less attractive paying patients. It was impossible for us to attract the commercial market without an expansion in capacity and we sort of knew there was backlog of it. Frankly, as soon as we opened up, doctors started to bring us some of their commercial patients which they had been previously unable to do. It has worked out in the first few weeks exactly as we planned and we hope it continues that way.

Great. Thanks a lot.

We have a follow-up from Gary Taylor with Banc of America Securities.

It was answered. Thank you.

Your next question comes from David Dempsey with Avondale Partners.

Good morning guys. Could we go back to the behavioral side for a minute? The question is have facilities gotten more mature such that we Would we expect the same kind of volume growth going forward? It seemed to me that the trends were all pointing pretty positive for facility, for volume growth. This quarter seems to be a bit of an outlier but Steve, your comments earlier would indicate that maybe the previous quarters were an outlier. Can you give me a little more flavor of that?

It is a couple of things David, again, you know, the facilities are mature in the sense that I think that they are strong franchises in their markets. I don't think that implies there is no continuing room for growth. As a matter of fact, I think Alan mentioned this in his prepared remarks, we have probably got a half dozen projects under way right now in some of our, as you term them, more mature facilities to expand capacity. Because Those facilities are operating at pretty close to capacity.

I think Once we get those projects online, that will help us grow the business some in markets where we are just physically constrained at the moment. I think secondly, the other big piece of competitive dynamics in this business is when site PPS is ultimately implemented sometime in the next 12 to 15 months, you know, you will see, I believe, some of our less efficient providers and competitors leaving the market going out of business, et cetera. It will present a very significant opportunity for us to take market share in a number of our markets.

I don't know if you can clarify it. This has to do with acute care units and acute care hospitals.

Yes, in many cases our competitors with our freestanding hospitals are units within -- within acute care hospitals. We know this from our own experience. It will be difficult for them to compete under a perspective payment system.

OK.

(Operator instructions). The next question comes from Basu Mullick (ph) with Neuberger Berman.

Can you talk about the plan of your growth for next year?

Well, our strategy has been over some period of time and we'll continue into next year, growing our three ways. That's from our existing facilities and growth in those and then we're always looking for additions to those facilities Amarillo is a very good example of that. We have many others where we are adding to our existing facilities, different units, et cetera, and then the acquisition market.

We made acquisitions this year in the psych business, we announced we went over at the Vista and Pendleton and as someone else had mentioned, some of our competitors have said that they may be cutting back a little bit, maybe cash is tougher for some of them and so we're geared up to evaluate and make offers where we find attractive facilities.

I was alluding to maybe you could give us a little granularity into what you see as your revenue growth components in terms of pricing and volumes and net adds in terms of units that you are adding that you expect to be up on average for the year, just a rough idea. It doesn't have to be next year, maybe over the next two or three years.

I think it is difficult to project growth from acquisitions because as Alan has mentioned, we tend to approach those on an more opportunistic perspective. We do have obviously these two big projects coming online in the fourth quarter, Spring Valley and the Amarillo project, those will obviously kick in and I think start to -- the Amarillo project should frankly, start to be accretive almost immediately. Spring Valley should start to be accretive sometime in the middle of next year. We will have the Lakewood Ranch project coming on line in the spring of next year. That will obviously build throughout the year.

Again, you know, I think we will continue to spend somewhere in the $150 to $200 million of CapEx, is I think are foreseeable CapEx plan. We think about two thirds of our CapEx expenditures historically have been revenue producing and we expect them to earn sort of our hurdle rate of return. That gives you some sense of where we look to see the growth in the next few years.

Is there any way to kind of talk -- I understand what you are bringing on. I understand the $150 to $200 million, if you put a number in terms of EBITDA multiple of what EBITDA you can buy with it in a typical year. I am Just trying to get a sense as to whether you have a range of growth plans, some from acquisitions, some from growth that's already built in, in terms of acquisitions completed or in process.

And then, layer that, your pricing and volume growth and maybe you could give us a range of what the growth rate you expect for the next two or three years. I don't think that is a very difficult question to answer even given that you already have suffered some growth disappointments. Maybe you could just kind of base line it for us.

I apologize if I'm not being responsive to your question. I think we've touched on most of the components you have talked about. We're somewhat uncertain as to when volumes come back in our existing hospitals. They have been sluggish. We expect them, certainly in the intermediate and long term to come back. I don't know exactly when that happens in 2004.

We've talked about anticipating strong commercial pricing, continuing into 2004. We've had strong commercial pricing in 2003. Government pricing, Medicare pricing looks good for 2004. Medicaid pricing will probably remain flat. You know in terms of what we expect for returns on our invested capital, it is usually in the range of six or seven times EBITDA in terms of our invested capital. I'm not sure that I'm being responsive to your question and I apologize for that. But I don't know that we can provide as you ask for any more granularity than that.

No I think you have done enough. I will take the rest of it off line. Thanks.

Thank you.

You have a follow-up question from David Dempsey with Avondale Partners.

Hello, going back to behavioral issue, not to beat dead horse, can I infer from what you said that the capacity issues help to constrain the growth in behavioral; had you had some additional capacity might have seen some additional growth?

I think that is fair in certain markets for sure David.

Very good. Then, back to other operating expenses, were there other things that caused the operating expenses sequentially to go up 40 basis points in the quarter other than the pharmacy cost that are worth chewing on?

David, I think that the pharmacy costs are probably the lion’s share of the increase. The only other area that I saw cost tick up a little bit and I'm not even sure it is all that material is in what I would describe as business development cost, which are marketing and physician recruitment, et cetera. I don't think those are -- they don't tend to be sort of ratable necessarily throughout the year. They kind of relate to the physician-recruiting season this and that so I wouldn't draw or infer great conclusions from that.

OK. Thank you very much.

You have a follow-up question from Kemp Dolliver with SG Cowen.

Could you give us an update on the process relative to the Vista health acquisition and any strategies with those facilities once you get them in your fold? Thanks.

We really have a major interest in Corona, which is not far from our existing markets in the southern part of California. So, we are focused on that facility. That is our largest one. The other two facilities, we will either operate or we will try to sell them to others. We have been talking to some people about that. That is our general plan. And unfortunately, the Attorney General of California is in the middle of this and we have been talking with them and that's the process we're in at the moment. We need the Attorney General approval to complete the transaction, which is under discussion right now.

How about the creditors?

The creditors are -- I will tell you what I think they stand. They are very much for this transaction. They have already been disadvantaged, but they will get the substantial, if not all the money, from this transaction. So, they are with us. They are generally for it.

Great. Thank you.

Your next question comes from Kenneth Weakley with UBS Warburg.

Just one follow-up here. I was wondering you know, a lot of people are obviously trying to figure out when volume trends are going to start to pick up again. If volume trends stay in this kind of 0 to 1% rate. Steve, what do you think is this the sustainable growth rate of the company? Or maybe I should ask, do you think that you would increase the acquisition pace to make up the delta so you wouldn't have to lower your long-term growth forecast?

I would answer the question a couple of ways, Ken. I don't think that we're in sort of a sustainable or a sustained decline here.

Sure.

I mean, if you look at hospital admissions over literally the last fifty years, they've grown at a 1.5 to 2% rate ratably over that period and my guess is the last couple of years have been extremely high. We are in a down slump here but we will sort of gravitate back more towards that norm so. I don't know that we are going to make any kind of rash, strategic decisions based on concerns about our return to that sustained growth rate. I think we will get there whether it is in the next three months or six months, that is hard to predict. I think, we are confident in the long term we will get back there.

I think as Alan said, I am not sure that our strategy on either CAPEX or acquisitions is really going to change in reaction to the volume decline. It is going to be focused more on the factors that influenced it before and that is competitive factors, growth markets, being able to have dominant positions in either other existing or new growth markets and have them in these rapidly growing mid-sized markets that has been our strategy and has been a good one for us and I don’t see any reason that we will depart from that.

OK, thank you.

At this time, there are no further questions. Mr. Filton, are there any closing remarks?

No, I would like to thank everybody for their time. We will speak to everybody next quarter.

Thank you very much.

This concludes today's Universal Health third quarter earnings release conference call. You may now disconnect.