環球健康 (UHS) 2004 Q3 法說會逐字稿

Good morning, my name is DeShanta, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Universal Health Services third quarter 2004 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. If you want to ask a question during this time, simply press star and then the number one on your telephone keypad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Filton, you may begin your conference.

Good morning, I'm Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2004. As discussed in our press release last night, the Company recorded earnings per diluted share of 62 cents for the quarter. Excluding the impact of a property write-down resulting from damages sustained from a hurricane, which are not covered by our insurance due to deductibles, adjusted earnings from continuing operations per diluted share were 65 cents for the quarter.

During this conference call, Alan and I will be using words such as believes, expects, anticipates and similar words that represent forecast, projections and forward-looking statements. For the risks and uncertainties inherent in those forward-looking statements, I refer you to the factors set forth in forward-looking statements and risk factors on pages 17 and 18 of our Form 10-Q for the quarterly period ended June 30, 2004, and pages 22 and 23 of our Form 10-K for the year ended December 31, 2003, which apply to all such statements that we may use in this conference call.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. UHS recorded approximately 16 percent of revenue growth in the third quarter of 2004. The majority of the increase resulted from newly opened or acquired hospitals. Admissions to our acute care hospitals located in the United States and Puerto Rico owned for more than a year decreased approximately 2 percent in the third quarter. Additionally, activity, particularly out-patient volumes, were adversely impacted in the quarter by several hurricanes in Florida, Louisiana, and Puerto Rico. Although the precise impact is difficult to quantify, and operations have been subsequently restored to full capacity, we believe there was moderate unfavorable impact from the hurricanes in the third quarter, perhaps a couple of pennies in the quarter. We did not make any special provision in our operating results for the 3 and 9 months ended September 30, 2004. As we have previously noted, we believe the economy has induced lower health care consumption trends in many of our markets. Unfavorable economic conditions are more prevalent in certain markets such as Puerto Rico and Amarillo, Texas. Additionally, the opening of two new hospitals in the Las Vegas markets since last October, including our Spring Valley Hospital, has adversely affected same store comparisons in that market. We estimate that the impact of the Spring Valley Hospital opening and cannibalization of admissions from our existing hospitals was 125 basis points in the quarter.

We also identified the erosion of some business, including surgeries and better paying higher acuity patients in certain markets, such as McAllen, Texas as a result of increased physician competition. In McAllen, additional inpatient capacity at a physician-owned hospital is expected to open in late 2004 or early 2005, which may further erode some of our higher margin business, including cardiac procedures. While same facility surgeries throughout the acute business were only down approximately 3 percent in the quarter, this lost business represents some of our better paying and higher acuity patients. To replace certain lost business, newly recruited physicians are already in place in a number of cases. In others, doctors will begin practice shortly and in a few others, including McAllen, Texas, aggressive physician recruiting is in process. Finally, in some cases, the volume declines are a result of conscious operating decisions. At George Washington, for example, we terminated a managed Medicaid contract whose rates had dropped precipitously. Despite a negative impact on our same store volumes in the quarter, George Washington's results would have been less favorable had the contract not been terminated.

We believe that the slowing economy has accelerated health benefit design changes in which employers shift costs to employees in the form of higher cost sharing. While these changes may continue to have a noticeable affect on health care consumption going forward, we believe that as the economy improves, our acute care hospital volume should start to recover to a more normalized trend line of modest growth. Admissions to our behavioral health hospitals owned for more than a year increased by 5 percent in the third quarter. The strength in admissions was reflected largely throughout the entire portfolio, and in some cases, reflected previously undertaken capacity expansion and certain newly implemented programs. Our acute care hospitals recorded a 4.6 percent increase in revenue per adjusted day in the third quarter. Managed care contractual increases were solid. We continue to see increases in managed care pricing of 6 to 7 percent on renewed contracts. Our behavioral health facilities experienced an increase in revenue per adjusted day of approximately 1 percent in the third quarter of 2004. Earnings before depreciation and amortization, interest, and tax, or EBITDA, were 115 million, a slight increase over the prior year quarter. Net income in earnings per share diluted for the quarter were 38 million and 62 cents, respectively. Cash flow from operations for the quarter was 92 million. With this cash flow we made approximately 56 million of capital expenditures. At quarter end, our ratio of debt-to-total capital net of cash was 40 percent, and the ratio of debt to EBITDA was 1.66.

Despite the softer admissions, the operating margin of our acute care hospitals owned for more than a year remained unchanged at 17.5 percent for the third quarter of 2004 and 2003. However, the operating margin for all acute care hospitals in the third quarter was negatively impacted by a much lower combined operating margin experienced at 3 acute care facilities purchased during the first quarter of 2004, and 2 newly constructed acute care facilities, Spring Valley Hospital and Lakewood Ranch Hospital, which opened during the fourth quarter of 2003 and the third quarter of 2004, respectively. We define operating margins as earnings before depreciation and amortization, rent, interest, and minority interest, and taxes divided by net revenues. Bad debt expenses at hospitals owned for more than a year showed signs of stabilizing during the quarter, but remained higher at the newly acquired and built facilities. We believe that bad debts will improve as the jobs recovery continues. Operating margins in our behavioral health facilities owned during both periods remained strong at 22.2 percent during the third quarter of 2004, as compared to 22.4 percent in the prior year third quarter. Alan will now discuss some of our recent activities and outlook.

Thank you, Steve. UHS spent approximately 56 million on capital expenditures in the third quarter. The new 120 bed Lakewood Ranch Hospital in Manatee County, Florida, opened on September 1, and shortly thereafter was hit with 2 hurricanes. Additionally there are a number of smaller projects designed to add capacity in our existing markets. Our Spring Valley Hospital in Las Vegas opened last October and continues to progress nicely and has sequential admissions growth each quarter this year, even with the new opening of the new HCA facility in March. Even as Spring Valley improves, our other remaining hospitals in the market continue to backfill the cannibalized volumes, and in the third quarter, for the first time since Spring Valley opened, our same store admissions in Las Vegas were positive. Our behavioral health hospitals in particular, have operated at a very efficient 78 percent available occupancy for the quarter. And we have undertaken projects at one-third of our busiest behavioral facilities to either add or replace capacity.

In the regulatory area, we still expect that the final rule on psychiatric PPS will be forthcoming very shortly. While we cannot definitively predict the ultimate implementation schedule, we continue to press very hard for CMS to implement this rule as quickly as possible. It has already delayed far too long. We continue to look selectively for acquisitions where we think our skills and knowledge can improve the quality of care and financial viability of the hospital. So far in 2004, for instance, we've acquired a 90 percent interest in Methodist Hospital, as well as Lakeland Medical Center in Louisiana, strengthening our competitive position in the east New Orleans market. Now we've operated Chalmette Medical Center there for many years. We hope for improvement in this market as we head into 2005. In California, we acquired Corona Regional Medical Center in Riverside County, where we already have a successful existing presence with 2 other hospitals. Corona has been exceeding our expectations all year long. We are currently reviewing additional opportunities in our acute care behavioral health and French operations. We will consider additional buy-backs of UHS shares, and we have approximately 1 million shares remaining under our existing stock purchase program.

The last few quarters have been challenging as the overall economic sluggishness has kept volumes low and the level of uninsured patients high. Along with pricing pressure, we expect those dynamics to suppress results over the short term, although we are still expecting to earn the 275 to 285 per diluted share from continuing operations for the full year of 2004. We believe, however, that our hospitals have rapidly conformed their operating strategies to meet the new volume trends, and we have reconfigured the overall hospital portfolio to make it more competitive. The changes in the health care market landscape, including things like a shift to more consumer driven plans, reinforces our belief that our strategy of market dominant positions in rapidly growing mid-sized markets positions us well to respond to the continuing challenges of the business. Steve and I will be pleased to respond to questions at this time.

[Operator Instructions]. Lori Price, J.P. Morgan.

Thank you. You were good enough in your release to break out growth hospital revenues for us. I was hoping you could break out bad debt for the acute hospitals from the behavioral and tell us what your charity care expense was, so that we can look at your total uncompensated care ratio.

The acute hospital bad debt was 10 percent in the quarter. Behaviorals was 3, and I believe our total charity care was approximately 72 million.

And just one more question if I could. It looks like your trailing 12 month cash flow weakened a bit sequentially. And I know you've had some on going challenges that you spoke of in McAllen, Texas, and Las Vegas and so on. Has there been any further reduction that you have seen or observed in your collection rate on self-pay accounts, or is that stabilizing now?

No, I don't think we see any real change either in our collection rates on self-pay or on any of our payers or any dramatic changes in the level of self-pay that we see, Lori. Our self-pay ticked up slightly in the quarter, but we're not seeing the dramatic increases that we have seen -- that we saw for several quarters in a row. Just one comment about the cash collections. Our cash was very strong in the second quarter of 2004. We commented on that in our second quarter call. I think that the third quarter dropped expectedly given our strong performance in quarter 2. As I look at the full 9 months, our EBITDA has dropped slightly from last year's 9 month period, and our cash -- operating cash is essentially flat. So to me cash looks like where it should be for the full 9 months.

That's great. Thank you.

David Dempsey, Avondale Partners.

Good morning, guys. On the behavioral side I noticed that the net revenue per adjusted patient day was up 7/10 of a percent. Length of stay also increased from 12 to 12.3. Does that indicate more residential treatment center beds, or are there other reasons why the revenue per day be that kind of -- that low?

David, I think that it might be some slight shifts in -- in mix among the hospitals and particularly over the summertime we see a little bit less acute business. But I don't think anything dramatic that as we look across the portfolio in the quarter -- any dramatic shifts in business.

And I guess, Alan, on PPS, do you think that when they do come out with rules at long last, do you think there will be some kind of a retroactive statement that would go back to the first part of 2005 if it's later than January?

Actually, and I'm obviously we can't be certain of anything. We've very -- we are hopeful that it will start January 1. We have not gotten into if it doesn't, but we're very -- we are hopeful that it's very imminent. We are hopeful that it will get published immediately and will be effective then. And than if not, we will obviously lobby for a retroactive to the first.

Sure. Thank you very much.

A.J. Rice, Merrill Lynch.

I'm going to ask, Steve, do you have on your same store comments, do you have the bad debt? What was the trend year-to-year on the bad debt on the same store basis, and if you would comment on your uninsured volumes, year to year and sequentially, what's the trend there as a percent of the total? And then do you have, by any chance, Spring Valley and Lakewood, if you think about them in terms of the drag on the bottom line. How much of a drag are they this quarter and versus last quarter, and what's the prospects for when that drag would turn positive.

I will try to answer your questions in reverse order if I can remember them all.

Okay.

Remind me if I -- as far as -- Lakewood Ranch clearly had the biggest drag in the quarter opening in September. So we had a couple of months of preopening startup costs, probably a couple million dollars of preopening startup cost in the run-up, and then you have the operating losses of the first month. And as Alan alluded in his comments, we literally opened the place in the middle of a hurricane, so it wasn't a terribly strong start. Probably the total drag by Lakewood in the third quarter was 3 or 4 cents in the quarter. Spring Valley is and has been EBITDA positive, although it continues to have a dilutive effect on our margins, it's running margins that are lower than the rest of our Las Vegas hospitals, as well as our average acute care margins. Mainly, I think because as a new hospital it tends to get a disproportionate share of its business from emergency room patients, and therefore has a higher bad debt than our average in the market. As far as our overall uninsured volumes, I think I commented to Lori before that we are not really seeing a significant change in the quarter in uninsured volumes. Slightly ticking up sort of sequentially as well as -- well, just sequentially we are slightly ticking up. But where we were at a few quarters ago where we were seeing these dramatic increases quarter to quarter, those clearly have stabilized. And my guess is that bad debt will sort of gravitate around this 8-1 level that we ran in the third quarter, certainly for the next couple of quarters, maybe a tick or two up or down from there. But no dramatic changes one way or the other. Bad debt on a same store basis was 8-5 in the quarter for the acutes, which obviously indicates, again, sort of what I was saying that in that newly acquired hospitals and the newly built hospitals, like Spring Valley, our bad debt percentages are running higher. I mentioned Spring Valley, Methodist in New Orleans has a fairly higher bad debt than our comparative average, and that hurt its performance in the third quarter.

Was that 8-5 comparable to either the second or a year ago, do you have either one of those by any chance?

Yeah, a year ago same store was 8-6, so it was comparable.

Thanks a lot .

Ken Weakley, UBS.

Thank you, good morning. Steve, I was wondering if you have this data in hand. One thing that's interesting to think about is what's happened to the mix of patients over time. Like heart disease, that accounted for 15 percent of admissions last year. What percentage is it this year? I am trying to really fine tune where we are in terms of patient mix shifts because of what's happening in the broad economy. Do you have that data at hand?

I don't have that kind of data in front of me, Ken. I think as we've looked at that sort of data over the last year and a half or so, what we have found is that the procedures that tend to be missing from the hospital, if you will, are the more sort of elective and discretionary procedures, service lines like ENT and GI, and some of the more basic orthopedics, et cetera. Whereas the more tertiary stuff, like cardiology, as you suggested, and oncology and the heavy duty orthopedics, total hips and knees and that sort of thing, has remained relative -- levels of those things have remained relatively constant, which sort of I think is consistent with the notion that as people have lost health insurance or have higher co-pays and deductibles, they are deferring or postponing the more discretionary elective stuff, but obviously, if you have an MI or you break your shoulder or whatever, you're going to be treated at the hospital, and may well wind up being a bad debt if you've lost your insurance. But those procedures, I think, are less likely to drop.

Given that -- given the answer, that would imply case mix should have gone up probably more so than it has in a long time. Is that factually correct? Can you give us numbers there?

Case mix has gone up very slightly in the last 6 to 8 quarters. I think to some degree, case mix is -- not to some degree, case mix is an in-patient measure and a lot of the trends that I have sort of described to you are more reflective of outpatient activity.

Another question I have for you, I think Alan had talked about the dominance that you do have in your markets on a relative market share basis. Is it your guess at this point that your results in terms of pricing power, in terms of admission growth are in anyway better than what others in the local market have? In other words, with the weakness in the markets, are you beginning to pick up share because of the strength of your local hospital presence? Or is it too difficult to quantify at this point?

I think it is difficult to quantify, but -- and obviously our operators tell us when they don't do that well on admissions that the whole market is off. But we do go back and check that and a number of the markets are off. For example, Amarillo, for example, a number of markets -- Puerto Rico. The markets are off. And we were anxious about it and looking towards a pickup in the economy. I really think things, hopefully, will get -- after the election, get that out of the way and the economy is picking up, and we will see the home markets come back, and then our dominance and our shares will prevail.

And to your point about pricing leverage, Ken, I don't think we have the data in terms of how our pricing in every market compares to others, necessarily, and also I don't know that pricing is the only measure by which you'd measure leverage. I think that there are exclusivity issues and other sorts of issues that we hope that our market positions allow us to press for in managed care contractual negotiations that we believe we have been successful in doing because of our market share presence.

And the last question relates to capital spending. If trends remained relatively sluggish as they are now, what sort of priority -- how will your priorities shape out your capital spending going into the next couple of years? Do you expect to shift out of certain projects and into others? How should we look for capital spending mix shift, if you will, to change?

I think we think about capital spending as much more of a long term issue. And we make capital spending decisions based on that. Obviously to the degree as you suggested that there are structural shifts in the business, if outpatient has shifted. We will take that into consideration, et cetera. But I don't think that we're necessarily taking this weakness in volumes, particularly in-patient volumes, that we have seen in the last 4 to 6 quarters and translating it into major changes in our capital spending approach. We are looking at our markets. We are looking at the long term growth prospects in our markets. We are looking at the service demands in our markets as we make those capital spending decisions. And not so much really at the short term volume fluctuations.

Let me add that I think where we compete with a single hospital, typically a nonprofit, and they do have problems and they have problems in getting capital. That hospital in Texas just closed. I think it's indicative of difficulty of independence, getting capital, and that gives us an opportunity. Fortunately, we don't have any of those kind of problems. As Steve said, we invest in the long run, and this gives us an opportunity to improve our position.

Thank you.

Oksanna Butler, Smith Barney.

My question relates to pricing on the managed care front. Are you seeing any kind of shift in terms of, for example, an encroachment of lower paying plans in your market?

I think the answer to that is, yes. I don't necessarily think that's a new development per se. I think that certainly for the last couple of years as employers have faced the pressure of increasing health care costs, they've looked for many ways to reduce their health care costs. We discussed some of those in great detail before in terms of benefit plan design changes and increasing co-pays and deductibles. I think they also look to move business from either higher cost PPOs to lower cost HMOs, or frankly, from higher cost HMOs to lower cost HMOs, and I think to some degree, you see that in the consolidation in the HMO marketplace and in the strengthening market position of certain HMOs. So the answer to your question is, yes, I think we see that. I don't know that we would sort of ascribe it or think of it as kind of a current phenomenon or something that really impacted the quarter. It's also difficult to quantify. We do think about it and talk about it as we look at our various markets and respond to shifts in business as business moves from one HMO to another, from one PPO to an HMO. I view that as more of a gradual phenomenon than a new and dramatic one.

And you aren't seeing any type of acceleration?

No, I don't think so. Plan -- moves of plans -- I think, first of all, you tend to see that among smaller employers. Larger employers don't jump from one plan to the next year to year. It's -- for a variety of administrative reasons, it's not easy to do. You are more likely to see it among smaller employers, and obviously, that will have less of an impact on us. Obviously, when a large employer does, it would have more of an impact, but I just don't think it happens as frequently. So, no. I wouldn't say that we have seen a real acceleration of that.

And with respect to the share buy back, you said you would consider them. There is anything in particular that you are looking for in terms (inaudible)?

No. We look at when we think it's a good opportunity, obviously. Most managements always think their shares are undervalued. But we will look for an opportunity and we have capital. We evaluate it on an ongoing basis.

But is there any change in your perspective in that regard?

What did she say?

There is any change in our perspective?

No, I don't believe so. Well, I mean obviously, stock price has a large part to do with it.

Okay, thank you.

Gary Lieberman, Morgan Stanley.

Thank you, good morning. I think the number you gave out for outpatient volumes was down 3 percent in the quarter. I was wondering if you could elaborate a little bit more on that number. Is that weakness that you are seeing because of an overall slowdown of utilization in the market, or is that because of a -- of share shifts or some of your competitors or some of the newer outpatient facilities picking up volumes here?

That number, Gary, which is outpatient surgery specifically has moved over the last year and a half or so pretty much -- within a point or two directionally of our in-patient volumes. I think that the change that we have seen this year in particular has been not so much the numerical change as we have seen an acceleration in the patient surgeries, as much as -- as we've talked about in certain markets like McAllen. Doctors taking better paying, more profitable business away from us, and we're obviously -- we're responding to those threats. I would say that overall the outpatient volume decline seems to be largely consistent with the in-patient across the portfolio.

Okay, thanks.

Adam Feinstein, Lehman Brothers.

My first question is on labor costs here. Labor costs seemed to be very high in the quarter. I know you guys cut back some labor earlier in the year, so I was a little bit surprised by the increase in labor costs. Could you provide some color there? And I have a follow-up question.

I think generally the increase in labor costs, Adam, has pretty much been consistent with the way we described the operating margin issue. I think that the increase in labor costs has largely come at the newer facilities, which are obviously running less efficiently than our same store facilities. I think that we had some additional labor costs in the quarter due to the hurricane as we staff up for that and moved -- transferred patients in some markets, et cetera, and had to incur some additional costs. So I think if you look at -- again, if you think about same store acute care margins remaining constant with a 2 percent volume decline, we obviously operated pretty efficiently in those hospitals. So I think it's centered more on the newer hospitals, the preopening costs of Lakewood Ranch, et cetera.

So based on that, Steve, when do you think we will start to see some improvement in the newer facilities? Is that going to be a 12 month process, or do you think we'll see some sort of turnaround sooner?

Again, I don't know that there is an inflection point. I think that if you look for instance at the Spring Valley experience, we will see a gradual improvement in a hospital like Lakewood Ranch which just opened. It will benefit from the season down in Florida in the fourth quarter this year and the first quarter of next year. And it's a gradual ramp-up. We hope that by 12, 15 months of maturity, a hospital gets close to normal operating margins. But it's not a -- it's a step process along the way. The same is true for some of the newer acquisitions I mentioned. Methodist in New Orleans, that was a not-for-profit hospital that clearly requires some transition to our mode of operation, and I think that has been gradual. We have been making improvements in our operating efficiency there and should continue to do so until the end of the year.

And moving on to a different topic here. In the psych business, margins were down about 20 basis points. I wanted to get some more details about what was driving that. Clearly revenue growth was not very strong. But just wanted to see what was the reason for the decline in the same facility margins in psych.

The margins, obviously, which are strong on an absolute basis in psych. There is really no -- nothing happening. We did see a slight uptick in bad debt during the quarter at a couple of facilities. Nothing that I would ascribe to any overall trends. A little softness in one or two markets. But again the portfolio is very strong and it is pretty hard to argue with the absolute level of those margins.

And then just my final question, do you have a number for a -- for DiSh payments for the quarter? Thank you.

I don't have the precise number, Adam, but I don't think they are materially different than they were in last year's third quarter.

Maybe I can ask the question a little differently. I know you are waiting to see what was going to happen with Texas and South Carolina. I guess I just wanted to see how you guys were accruing, I guess, for DiSh or whether there was update from those states.

Now I get the question better. In South Carolina, the fiscal year ended in June. So we believe the program and have gotten indications that the program is being renewed under much of the same criteria and requirements as in the previous year, although we haven't gotten notice of our new rate of dispro. We've recorded dispro in the quarter in South Carolina at between 80 and 90 percent of the level that we were getting last year. In Texas, it's really only one month, because the program extends through August. So again in September we had to estimate our dispro, and again, we've estimated at 80 to 90 percent of our prior year level reported it. And in both states we are getting indications from the states that the program will be renewed on much the same basis as it was last year, so we think that's a reasonable approach.

Thank you.

Thank you.

Gary Taylor, Banc of America.

Hi, guys. Two questions. The first, the 2.3 million property impairment charge, was that included in the other operating expense I assume?

Yes.

So, that line then, gross dollars, would have been down sequentially which is fairly rare, although it looks -- sometimes it's a little -- happens seasonally in the third quarter sometimes. Any particular item that you've made progress on that has allowed those gross dollars to be down?

Well, I think that as we have discussed in the prior couple of quarters, Gary, there has been an effort all across the portfolio to tighten up on operations as our volumes have been softer. You make a good point that that line includes mostly fixed costs, so it's a little bit more difficult. I think as you point out, there is seasonal, sort of, latitude in that line because either there is some marketing, there's some physician recruitment, et cetera, which generally aren't all that strong in the third quarter, and I think that's probably what caused the line to drop a little bit. But overall there has just been a lot of attention and a relook at all of our fixed costs to see what can be reduced.

Okay. And then just my other question is, can you talk about the decline in other revenue sequentially in the quarter, and was there any material currency impact on EPS?

You are right in thinking about the decline in other revenue is mostly related to France. I think it's a few different things that play. One is -- one is if you are looking at it sequentially, there is obviously a seasonal decline in the third quarter, August in particular is a very, very quiet month in France. Also, if you recall, last year we were a month behind in how we recorded our French revenues. Last year's third quarter in France, if you will, was June, July, and August. This year it's the calendar quarter of July, August and September. And June tends to be a better month than September in France. There was a little bit of a swing that way. And then the last thing is last year if you recall there was this heat wave in France, which caused, frankly, a lot more activity in the hospitals during the summer months than we normally experience there. At the end of the day, the drop in revenue had little impact on the operating earnings of our French hospitals. The French hospitals are very good at adjusting to the lower revenues in terms of their operating costs, particularly salaries. The operating income was relatively flat in France between the periods and despite the drop in the revenue.

And was currency a role at all?

I don't have it in front of me. But I think it had an immaterial impact.

Okay. Thanks.

Margo Martol [ph], Scheinder Capital.

I just wondered, looking ahead at 2005, what are some of the positive factors you can point to? Okay, you've got these new hospitals that are -- have lower margins. Do you have a goal -- what are those margins and what's your goal on ramp-up of those? Would you say that some things -- you talked about a problem in Lakewood. Do you feel good about the progress in Las Vegas? Is that coming along pretty much as you thought? Can you sort of talk about the swing factors in 2005, mostly as it relates to the new hospitals that are kind of not performing up to snuff yet?

Okay, well, just to -- this is a matter of semantics, but I wouldn't describe the Lakewood situation as a problem. We opened a new hospital in September. I think that the expectation -- certainly our expectation is when you open, you will have startup costs and you'll have operating losses when you open. And there is, as I mentioned before, I think an expectation of progressively improved results over the next 12 to 15 months with the idea that at the end of that period, you get close to what we would consider to be normal operating margins.

As far as Las Vegas goes, I think the Spring Valley is a perfect example of that. I think as Alan mentioned in his remarks, Spring Valley's admissions themselves have improved every quarter sequentially. The market itself -- our existing hospitals had same store positive admission growth for the first time in the third quarter since Spring Valley opened. And obviously in the fourth quarter we will start to see Spring Valley's numbers included in our same store admissions, which should be helpful. Again, in Las Vegas, I think that the new capacity that came online last year has been absorbed in much the way that we expected in this very rapidly growing market. In terms of some of the other items that we look for positively in 2005, Alan mentioned psych PPS, which we've talked about for some time. There is Medicare increases that went into effect on October 1 for the acute care hospitals that average somewhere in the neighborhood of 4.5 percent, which we obviously view very positively. And as we also talked about, the continuing integration of the newly acquired facilities, particularly the Methodist Hospital in New Orleans, which was a not-for-profit facility that had essentially either break even or even slightly negative EBITDA when we acquired it. We also look for that to get to -- closer to our normal operating margins in 2005.

Let me mention McAllen because we've talked about it. There is a lot of competition in McAllen, but I would hope everyone would recognize the fact that we have been dominant in that market for many, many years. It's one of our strong franchises. And we will continue to be very strong in that market. Recently we have two significant factors. One, we have started a children's hospital, and the beginnings of it was so strong that we have moved our phases along and we're going to go to our full children's hospital as soon as possible. So we will have the dominant children's hospital in that part of the country. In addition, we have a behavioral health hospital that we had been considering expanding, and that hospital's been doing so well, we've been turning some patients away, which we certainly don't like to do, and we are planning now to replace that with a much larger hospital, and we will be dominant in the psychiatric business. We are also doing, as Steve mentioned, considerable doctor recruitment, particularly in the cardiac area. There is a hospital that will be expanding that we have discussed, a competitor. But we are really recruiting in the same specialty that they are expecting to do very well with. And it will be interesting to see how it all shakes out. But we are extremely competitive in that market, and we will hope over a transitional period to really maintain our dominance and profitability.

Okay, do you have any estimate -- I don't know, of how EBITDA margins will be next year in these new hospitals versus this year, so we can get a sense of how much recovery there will be in 2005?

Again, Margo, I have said a few times that our expectation is in both newly acquired and built hospitals that it usually takes somewhere between 12 and 15 months to get up to our average acute care margins. In terms of more overall guidance for 2005, historically, we have not given guidance for the next year until January, and I don't think we are prepared to do that any differently than in the past.

Okay. Thanks a lot.

Darren Lehrich, Piper Jaffray.

Just a couple things here. First, in the New Orleans market, I'm just wondering if you can give us a little bit more of a sense for what you are doing down there, and I guess you alluded to the fact that there was a little bit more of a margin compression in that market. Could you give a sense for what you are doing with the services between the hospitals and how you see that playing out?

Darren, we really -- with the acquisition of Methodist and a smaller hospital, Lakeland from HCA, sort of have captured this east New Orleans market. There really is little competition within the market. There really -- the major competition comes from patients who leave the market to go to downtown New Orleans, where as you know there are many tertiary hospitals. I think the pressure that Methodist felt in the quarter was really a result of 2 things. One is Hurricane Ivan, which although it never actually hit New Orleans, was quite threatening and we probably lost about a week's worth of outpatient business down there, elective business, and that hurt. And the other thing that we've seen in the New Orleans market, again, not unlike what we have seen in others, is a big increase in uninsured business, and I think that's to some degree a function, I think we've mentioned before on these calls, some of the charity hospital in New Orleans tightening up on their procedures and requirements and the way they treat indigent patients. I think in terms of kind of our overall plans in that market, there is some amount of rationalization of services. There's also quite a bit of rationalization of overhead expenses as we combine the business office in that market. But the real sort of business strategy in that market is to grow the market share by keeping more business in the markets and from keeping it from outmigrating to New Orleans.

Okay. And if I could, just, Alan, get your thoughts on Florida. Others have commented on some continued disruption in the state and a little spillover, if you will, from the hurricanes. I just wanted to get your sense, since you have a number of hospitals there.

Well -- I mean, Florida has been hit but it's been hit in certain areas. Just take our few -- the hospitals that we have there. We were hit hard in the Wellington hospital but the volumes were strong. Obviously, we had a lot of expenses. We had a lot of people that slept in the hospital. We sustained a good deal of damage which we have reflected part of that in our statement having to do with our insurance deductible, et cetera. But Wellington is back strong. The construction down there is truly unbelievable. And I see no difference whatsoever. That's going to go ahead as strong as possible. Lakewood Ranch is on the other coast. Bradenton, south of Bradenton, that market is growing at a phenomenal rate. And obviously we are disappointed a little bit in the opening because we had a fabulous opening, a nice sunny day and then we had two hurricanes, and obviously we lost some -- we lost trees and landscaping that were beautiful. I was there and then it's gone. We're putting it back. And obviously we lost a lot of operating time. That market is back and I don't see any structural damage to Florida going forward. I think Florida will continue to grow and from all we're hearing from our people and what's happening down there, it's back to normal.

Okay. That's helpful. One last thing if I could. In Vegas, you've talked about your plans to move forward in the north part of the market. You've obviously been living through a lot of capacity absorption with Spring Valley and the competition there. Can you just give us a sense for whether you've got any change in your view on timing of that project, and if you are still moving as rapidly with that project as we've heard about?

We have a marvelous piece of ground, extraordinarily well located. As is Spring Valley, and we held on to Spring Valley for a number of years. And once we got going, HCA jumped in and bought a piece of ground further west and gave us competition there. And I assume at some point -- I don't know, they will be looking around up north. North is now the big growth area. One of the really big growth areas, and we want to take advantage of it. We know the market well, probably better than anybody else. And that area is -- again, it's exceeding everything we had anticipated. The roads are in. The housing started going in and now it's just escalating. Just an enormous growth. So, we're going to pursue our plans as we have discussed earlier. We will have a hospital up there at some point.

In what proximity are you to the VA hospital that's being planned?

Where?

In Vegas.

I don't know what's being planned.

I'm not sure. Actually the hospital -- I believe the VA hospital is -- I thought it was downtown. But I think it has little impact on us, Darren. We get very little true VA business, and actually, some of the Champas business that we get now is pretty unprofitable business for us, so that it probably wouldn't be -- it wouldn't be a bad thing when the VA hospital opens. It's supposed to be a small hospital, like 60 beds, et cetera, so the tertiary stuff I think we would still get. So, I apologize for not knowing the exact location of the VA hospital, but I think in the end it will have little impact on us.

Thank you very much.

Your next question comes from Andrew Bower [ph] of Stonebrook [ph] Management.

I just wanted to go back real quickly to your views on share buy-backs. I know I don't need to tell you that some of your competition has announced pretty aggressive buy-back programs, and I know you've commented quite a bit over the last 6 months that you feel like equity markets aren't properly valuing your shares. But I think if you are saying that your authorization is still at 1 million, that means that there haven't been any buy-backs over the last two quarters. Can you just sort of help shareholders get a little better understanding of what your view is on the authorization?

Yeah. I think that, you know, the history of the Company is that we have been an opportunistic buyer of our own shares. You are correct. Any buy-backs this year have been modest, at best. We continue to look for opportunities to invest our capital. In the first half of the year, a lot of that capital was invested in new acquisitions and new capital projects. And we know -- as -- when the quarter is over, we will look and see whether there are appropriate opportunities for us both externally as buy-back of shares, et cetera. We view our shares as just another investment, and as Alan said before, and we think the shares are valued at a level right now that they are an attractive investment for us, and we will certainly consider that. As far as the authorization I wouldn't read too much into that. If we believe that an increase in the authorization is warranted, we will certainly seek that from the Board and in short order.

Okay. Thank you very much.

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

No. We don't have any closing remarks. We look forward to speaking to everyone next quarter. Thank you very much.

This concludes today's Universal Health Services third quarter 2004 conference call. You may now disconnect.