環球健康 (UHS) 2005 Q3 法說會逐字稿

Good morning. My name is Jody and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Universal Health third quarter 2005 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks (Operator instructions). Thank you. Mr. Filton, you may begin your conference.

Thank you. Good morning. I'm Steve Filton. Alan Miller, our CEO is also with us. Welcome to this review of Universal Health Services results for the third quarter ended September 30th, 2005. For the quarter, the company earned $0.15 per diluted share. Included in the reported result for the quarter ended September 30th, 2005 was a net loss of $28 million related to the write down of certain assets and the recording of various operating and recovery expenses at our acute care facilities in New Orleans, resulting from damages sustained from Hurricane Katrina. These facilities have been closed since the hurricane and no revenues are reflected in the accompanying financial statements for the post hurricane period. These hurricane losses have been recorded net of what we believe to be the minimum level of expected commercial insurance proceeds.

We should note that our ultimate insurance claims will far exceed the recoveries we have recorded to date and we hope to collect substantially more in insurance proceeds than we have currently recorded. Also included in the reported results for the quarter ended September 30th, 2005 was $8 million of net favorable adjustments related to various supplemental government reimbursements or contractual settlements received during the quarter relating to prior periods. Our adjusted earnings per diluted share as calculated on the schedule of non-GAAP supplemental consolidated statements of income information included with our earnings release decreased 18% to $0.54 during the quarter ended September 30, 2005 as compared to $0.66 during the comparable prior year 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 a careful reading of the section on pages 17 and 18 of our Form 10-Q for the quarter ended June 30, 2005. I would like to highlight just a couple of developments in business trend before opening the call up to questions.

Cash flow from operations for the third quarter of 2005 was approximately $115 million as compared to $89 million during the third quarter of 2004. The increase in cash flow during this year's third quarter as compared to last year's quarter is due primarily to favorable changes in working capital accounts including accounts receivable and a cash settlement received from a commercial general and professional liability insurance carrier. Cash flow from operations for the nine months ended September 30th, 2005 was $346 million, as compared to $314 million during the nine months of 2004. At quarter end our ratio of debt net of cash to total capitalization was 27% and the ratio of debt to EBITDA was .94. On the same facility basis revenues of our acute care hospitals increased 4.9% during the third quarter of 2005 as compared to the comparable prior year quarter. Revenue growth in the acute care division came namely from admissions to our acute care hospitals owned for more than a year. Excluding the month of September for the New Orleans market in both years admissions increased by 2.4% in the third quarter and revenue for adjusted admission increased by 2%.

Admissions growth was particularly strong in Las Vegas market which continues to benefit from increasing occupancy rates at its Spring Valley and Semoline facilities. We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and provisions for docile accounts divided by net revenues. Exclusive of the hurricane impact in prior period items described previously, operating income at our acute care hospitals owned in both quarters ended September 30, 2005 and 2004 declined approximately $29 million or 25% during this year's third quarter as operating margins declined to 11.8% in the quarter just ended as compared to 16.4% in the prior year's quarter. The large majority of the decline in operating income can be attributed to an increase in the level of uninsured patients reflected in the significant rise in our combined bad debt and charity care expenses and to a continued decline in operating income in the McGowan Edinburgh market. On same facility basis based on gross charges we provided $73 million of charity care during the third quarter of 2005 as compared to $71 million during the third quarter of 2004. The increase in uninsured patients has been felt across our portfolio of hospitals and seems to reflect a growing phenomenon of the working uninsured.

That is people who have jobs but who do not have health insurance either because their employer does not offer it or because they make it so expensive that the employees opt not to carry it. For the second quarter in a row, the McGowan Edinburgh market experienced profitability that was substantially weaker than the comparable prior year quarter, reflecting market share losses to the physician-owned hospital competitor. On a same facility basis of our behavioral health hospitals, revenues increased 10% during the second quarter of 2005 over the comparable prior year quarter. Admission to our behavioral hospitals owned for more than a year increased by 8.2%. The robust admissions growth was clearly impacted by capacity additions in certain key markets. Net revenue for adjusted patient day increased 5.1%. Operating margins for our behavioral health hospitals owned for more than a year was 22.7% in the quarter ended September 30, 2005 compared with 22.2% in the quarter ended September 30, 2004 reflecting the higher admissions. Alan will now discuss some of our recent activities and our outlook.

Thank you, Steve. As you know, our Chalmette method of hospitals remain closed and nonoperational. They have been severely damaged and their assets have been written down significantly. We continue to assess the damage and the likely recovery period for both our facilities and the surrounding communities. Our River Oaks hospital behavioral facility in New Orleans has reopened and already regained much of its pre hurricane volume. We previously announced that we acquired Keystone Education and Youth Services. Through this acquisition, we have added a total of 46 facilities in ten states, including 21 residential treatment treatment facilities with 1,280 beds, 21 nonpublic therapeutic day schools and four detention facilities. This acquisition is expected to generate approximately $165 million of annual revenue and the operational effective date was October 1, 2005. The net purchase price was $207 million and was paid in cash.

We previously announced that our Board of Directors authorized an additional 2 million share repurchase program to supplement the 2.1 million share remaining on the previous authorizations. That's a total of 4.1 million. UHS spent approximately $62 million on capital expenditures in the third quarter. The 108 bed replacement for our Ft. Gunker facility in [inaudible] Texas should open early next year. A major renovation to our Manatee facility in Florida will be completed in the summer of 2006. The first phase of our project in Akins, South Carolina which adds critical care beds has opened and the second phase which will expand our emergency room capacity will open later this year. The new pediatric facility in McGowan should open 2006. Our new and expanded replacement behavioral health facility also in McGowan will open later in 2006. We also have multiple projects in process to add capacity to our busiest behavioral facilities. Those facilities have operated at a very efficient 83% of available occupancy rate in the third quarter.

And we broke grounds on our fifth hospital Las Vegas. This facility is scheduled to open with 120 beds in the spring of 2007 in the northwest part of the city. As you know, we previously issued full year 2005 earnings guidance between $3.10 and $3.20 per diluted share from continuing operations. After announcing our second quarter results we cautioned the uninsured trends and profitability in the McGowan market would have to improve to achieve these levels. Given that no such improvement has occurred and the loss of revenue from the New Orleans market, these earnings targets are certainly no longer achievable. The last two quarters have been challenging as the level of uninsured patients has risen, and the competitive pressures in McGowan has persisted. We believe these dynamics alone with the continued loss of revenue in the New Orleans market leaves us unable to provide more precise earnings guidance at this time for the balance of 2005. Steve and I will be pleased to respond to questions at this time.

At this time I would like to remind everyone (Operator instructions). We'll pause for just a moment to compile the Q&A roster. Your first question comes from Darren Lehrich of Deutsche Bank.

Thanks. Good morning. I just wanted to learn a little bit more about your insurance programs. Steve if you could just talk a little bit about the business interruption insurance and just how you expect the losses to be covered and what that time period will go for. And then I know in your press release you indicated that you reserve for a minimum level of insurance proceeds. I'm just wondering if you could give us a range in terms of the maximum level and then I guess Alan, if you could, just give us your thoughts on the probability for the potential for funding the New Orleans assets -- they wouldn't be reopened or your plans to open everything or not.

Darren, let me answer your insurance question first. We have several hundred million dollars of insurance -- commercial insurance coverage in place that we think is relevant in the New Orleans market. There are a number of issues to be resolved, including cause of loss, et cetera. As we noted in our remarks, we have accrued for what we believe to be the minimum amount that we will recover. And in fact, of the $81 million that we had on the -- as a receivable on the balance sheet at the end of September, we have already been paid $50 million of that supplement to the end of the quarter. But our actual claims will far exceed that and we believe that there is a high likelihood that we will collect substantially more money, both for property losses, for business interruption insurance as you've suggested as well as for other operating and recovery costs. But as is often the case, I think in these significant loss situations, I'm not sure that those -- the resolution of those claims will been resolved any time soon. It may take an extended period of time and from an accounting perspective we feel like we've been reasonably conservative in our current period financial statements. I'll let Alan talk to you a little bit about the market itself.

The situation in New Orleans with regard to our facilities, in fact with regard to the city overall is very uncertain. We have one hospital that would need to be totally replaced. It is most likely -- any action there would have to replace the hospital in total. The other hospital -- these are two acute hospitals that are closed. The other hospital could be repaired but the repairs would be extensive and the cost would be substantial, and we're not sure about that one either. So those two have yet to be determined. As I mentioned, the River Oaks hospital behavioral health facility received some damage but it is in operation and it's really ramped up very quickly. We had two other smaller facilities which -- which would be lost. We have to see what happens to the repairs in New Orleans. We have to see what the population is and how they come back. As you may know, the city was 450,000 at one point, and there's going to be a substantial loss of people who relocate elsewhere and it's quite a discussion now about what gets rebuilt in certain areas, whether they would be rebuilt at all and that's a political issue. So we're waiting to see what checks out in New Orleans. And I don't have any more information for you at this point.

Okay. And then just Steve, just to clarify what you've said that we shouldn't expect any accruals for business interruption on a regular basis going forward. And then just to clarify also you said in your remarks you had insurance proceed that benefited cash in the quarter. What did that relate to?

Answering your second question, the insurance benefit which I think was approximately $8 million that benefited cash in the quarter unrelated to the hurricane goes back to frankly our malpractice -- the bankruptcy of our malpractice carrier back several years ago. And a related insurance policy there. So that's unrelated to the hurricane. I think your -- the way you've posed the business interruption situation is correct. Until there is much more clarity around how we will ultimately settle with our commercial carrier, we don't intend to book any further insurance proceeds for business interruption or for any other losses related to the hurricane.

Okay. Thank you.

our next question comes from the line of Ralph Giacobe [ph] with Credit Suisse First Boston.

Good morning. Can you guys drill down a little bit bad debt, maybe by market? Is there -- maybe are there any areas that aren't so bad, and sort of what's the outlook for '06? I know you obviously haven't given guidance but anything to sort of point to that would suggest improvement or maybe stabilization on that front? And then secondly, you guys have been aggressive with share repurchase and have significant amount left on your authorization. I was just wondering what your thoughts were on the acquisition front, outside of behavioral. Is there anything on the acute side, sort of what are you seeing there and sort of what's the outlook?Thanks.

Ralph, I think that as is often the case, it's not a single consistent story for bad debt across the portfolio. There's certainly some markets that are not as effective as others, but obviously, the overall numbers paint a picture of increased levels of uninsured. And frankly we are feeling that throughout the portfolio. We certainly feel it in a market like McGowan where we've talked about the dynamics there which is that -- not so much necessarily that we've seen an increase in the absolute amount of uninsured business, but clearly, the percentage of uninsured business in that market total for us has grown as we've lost some of the better paying and commercial and Medicare business to our physician-owned competitor. But even in markets where we don't have that sort of competitive dynamic and we have a relatively robust local economy like in Las Vegas or Southern California or South Florida, we've seen increases in uninsured, the number of uninsured patients in those markets as well, and as I noted in my prepared remarks, I think it tends to be this growing phenomena of the working uninsured. As far as providing sort of guidance for the future and where this number moves, I think it's a little disingenuous for us to presume that we can do that.

I think that we, along with many of our hospital peers have been fairly inaccurate over the last quarters and year or two in predicting the trends and bad debt. I think we all felt that the end of last year and the beginning of this year, that data indicated our bad debt situation or uninsured situation was stabilizing and certainly had for a few quarters and then has really spiked up in the last quarter or two. And so it's difficult for us to know. I think that things that may well impact it going into next year are the impact of these high deductible plans. And how many people enroll in those and to what degree they may help provide coverage for people who didn't have health coverage before. But there's a number of variables and for us to give, I think precise guidance I'm not sure how useful that would be in any case. As far as your question about share repurchase and other use of capital, I think that we have said over the last few quarters that we continue to look for opportunities in both our acute and behavioral businesses. We have said again over the last few quarters that the number of opportunities on the acute side has been somewhat limited. There seems to be more competition for those assets.

Pricing, we believe, is higher. On the behavioral side, however, we said that we thought there were opportunities. And obviously, the Keystone acquisition which is one of the largest acquisitions we've done as a company in recent memory points to that. We did also acquire some properties from the Brown Schools. One -- some of which were closed but have already reopened to take students. We think that there are other behavioral opportunities, probably small opportunities that we will be able to announce in the near future. So I think we view the behavioral area as one that continues be right for acquisition opportunities and expansion and obviously that expansion includes internal growth as we noted in our comments as well. And then obviously share repurchase remains another option for us. We've been a repurchaser of our shares and we'll continue to look -- look in that direction in the future.

Thanks.

Your next question comes from the line of Adam Feinstein of Lehman Brothers.

Hey, thank you. Good morning, Alan and Steve. Just several questions here. I guess I wanted to start with the McGowan, Texas market. Last year you told us that McGowan was done about $10 million a year over the year in terms of operating profits. Do you have a similar number for the current quarter states?

It's probably not quite as high, Adam, but also not terribly different.

Okay. And with that said, I guess did McGowan generate I guess profit share in the quarters on a pre-tax basis? Did you have positive pre-tax income from -- from McGowan?

I'm not sure I can remember the pre-tax numbers off the top of my head.

Any way you want to quantify it.

No, EBITDA margins were sort of in the single digits during the quarter.

Okay. Great. Okay. And I guess just -- next question here. I know it's hard to look at market by market but just for this specific one, I guess how much of the bad debt issue was related to McGowan? Last quarter you did a good job of breaking that out or giving us some rough way to think about it. Can you give us any commentary there?

You know, Adam, I think that again and I'll describe it in broader term as the uninsured issue because in McGowan it tends to be more of a charity or reflected in charity rather than bad debt. But probably 30% or so of the increase in uninsured patients throughout the portfolio comes in the McGowan market for reasons I think that we discussed at fairly great length, but obviously that leaves a fair amount of the problem that exists elsewhere in the portfolio. So McGowan is probably the single biggest pressure point we have. But certainly we have felt the pressure on uninsured patients elsewhere in the portfolio. Including, as I mentioned in some of our better performing markets.

Right. Okay. And just, the charge in the other quarter, just wanted to see if you could give us more clarity about the components of the charge, the $78 million. I guess -- just wanted to kind of break out the property damage from the operating costs in other quarter related to the New Orleans market. Could you give us any -- any details there?

Well, the $129 million of hurricane related expenses is somewhere around 100 -- a little bit more than 100 asset and property write downstairs which are obviously noncash items and accrual for our obligation on the Chalmette lease which was discussed in the press release. And then probably the remainder, $25 million or so are operating expenses incurred mainly in September, the salaries and wages that we continued to pay employees during the month, recovery expenses we, as you heard us talk leased helicopters and that sort of thing during the month. Most of those operating expenses have been terminated. We've done what we can to put an end to most of those so that on a continuing basis, operating expenses in the market will be far less than you see in these financial statements.

Okay. All right. You brought up the issue before of the lease for Chalmette with UHT. Could you just give us more clarity there? I guess you guys have to restore the property or else you have a few different options here. Can you just provide some more charity in terms of the lease terms?

Well, I think that the press release sort of lays out the three options that UHS as a lessee has. We have -- UHS has accrued $25 million in its financial statements. In that $129 million number that I was just discussing. As an estimate of what its obligation will be under those options, either to restore the property or to acquire it or to use a substitute property, and we're currently evaluating out those options and which makes the most sense for us.

Okay. Okay great. And just one final question. You said that volumes in Vegas were pretty strong and just looking at the overall volumes and assuming volumes were weaker in McGowan, Texas, I guess just wanted to get a sense, would margins have been up in the Las Vegas market in another quarter?

I know our operating profitability was up in the quarter. I don't know that our margins were quite as strong in Las Vegas as they've been in the first half of the year. We are starting to anniversary some of the newer capacity at Summerland and obviously Spring Valley is maturing, so Vegas which had a very, very strong first half of the year, continued to look good in the third quarter although its relative performance may have dipped a little bit. But clearly, the two ends of the spectrum from a volume perspective, our strongest volume signs have been in the Vegas market. Our weakest volumes have been in McGowan. But we're getting decent volumes in some of our other markets as well, particularly California and South Florida.

Great. Thanks very much. Appreciate it.

Your next question comes from the line of Kemp Dolliver of S.G. Cowen.

Thanks and good morning. What is the structure of your business interruption insurance? Are you filing -- continuing to file for ongoing expenses or is this going to essentially be a replacement of the estimated income?

I think our business interruption insurance camp would cover the lost net income in the market for extended period of time as well as recovery or -- unusual operating expenses that are a direct result of the hurricane. Again, I think the issue which is true of property as well as operating expenses as well as business interruption, whether those claims will be allowed, et cetera, gets back to cause of loss issues, et cetera, so, we'll -- as I said, I think as there's more clarity, our accounting probably will change or reflect that in the future.

And when you say an extended period of time, are we talking about several quarters or potentially a couple of years?

The policy extends for a couple of years, the interruption extends for a couple of years.

Okay. That's great. Thank you.

Your next question comes from the line of Gary Taylor of Banc of America Securities.

Hi. Good morning. I wondered if you could update us in your original release after the hurricanes you had said your New Orleans operations were about 7% of revenues, But River Oaks was included in that which is now sort of back up and running. So of the four facilities that are closed indefinitely what would that revised percent of revenue be?

River Oaks is obviously the smallest piece of that, Gary. So maybe 6% is the number that our acute care facilities contribute or contributed.

And just going back to the business interruption insurance. I guess when we look at this quarter, X all the nonrecurring items, you say 54, but we proforma for the preferred, we take 52, but in that low 50's range that obviously includes two months of earnings out of New Orleans, so on a forward basis if you're not going to book any business interruption in the quarter, then the run rate is lower than that 54%, correct.

I think it's fair to say the New Orleans market, the acute care hospitals contributed roughly 10 to $0.12 a year in earnings for us. And that obviously is gone for as long as they remain closed. In terms of thinking about the market, obviously, we did not include in the month -- we did not include into the hurricane line, the disruption at River Oaks. We probably lost a penny of earnings at River Oaks that we believe we will get back in the future, et cetera. So I'm not sure that there's a whole lot of modifications to be made for the two months of acute care earnings that are in the quarter.

Right. And then on the business interruption, I think I understand the debate being whether the cause of loss is flood or hurricane, but if -- if your claims were really determined to be cause of loss was flood, why wouldn't you accrue even sort of the low end of what business interruption insurance you might have? I mean I think that would imply a substantially lower level of coverage, but wouldn't there been some minimum level of coverage you'd be confident in being able to book an accrue during '06?

Again, and I think what we've said, Gary, is that is we have accrued a minimum amount that we expect to recover. That's obviously something that had to be agreed upon with our external auditors, et cetera. I understand what you're saying and as we said, we think that our claims will be far in excess of what we've recorded and we think we will have a decent chance of prevailing on a good portion of those claims. But at the moment we've taken a fairly conservative position.

So in the $81 million you've accrued for insurance recoveries, some of that is property damage recoveries, but there is some business interruption accrual that's in there?

It is for the most part property damage and we have not presumed in this estimate that we will have any business interruption recovery.

Okay. And then just my last question, $13 million extra reimbursement related to prior periods, I assume that's in your revenue line and is that primarily attributable to acute or behavioral?

About $10 million of it is receipt of various state reimbursement funds, upper payment limits, disproportionate share type monies. It's up in revenue. I think of that 10, 7 is acute and 3 is behavioral as I recall. And then the other $3 million is in operating expenses. It's the settlement of a dispute with a vendor that we received a $3 million settlement for that reduced operating expenses.

Okay. Thank you.

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

My question is, New Orleans represents 10 to $0.12. What are your ongoing costs there? How many people are you going to keep on the payroll indefinitely and should we net that against the 10 to $0.12 number to arrive at sort of a true kind of carrying costs untill you start booking business interruption? Thanks.

John, I think that there are virtually no employees left in New Orleans because we're not operating and because we don't have any imminent plans to reopen. There are only really employees in New Orleans who are involved in the recovery and remediation efforts on the property. The ongoing expenses again are relatively limited. They relate to sort of fixed expenses like the lease expense on Chalmette. Or the benefits expense for employees which has been extended to the end of the year but they're not significant. And obviously, we will continue -- to whatever degree we have them, we will continue to break them out separately.

So we should think about then the lease cost plus -- if you take the $0.12 out and you include the lease costs, that's kind of the carrying costs, I guess if you will?

Yea and I mean maybe another million or two dollars in a quarter, something like that.

Okay. And I guess the second question is, I mean is this any scenario under which you wouldn't not receive business interruption?

Yea, I mean again, the issue I think, John, is that from the insurance company's perspective if coverage is not available because of cause of loss or any other reason, then it's not available for property damage or operating expenses or business interruptions. From our perspective, the policy is favorable from a sort of cause of loss interpretation and therefore, it will be available for business interruption and property and continuing expenses. So, it's really -- that question is the question that has to be resolved.

I'd say. And when do you expect -- what's the outer limit of time that you expect to have this determined?

You know, John, that's very difficult to say. I mean there's lots of -- this issue has gotten a lot of play and -- in the press and the Wall Street Journal, the New York Times. There have been other sort of high profile insurance issues that frankly have taken years to resolve, so it's hard to know. We will certainly aggressively work with our carrier and hope that our carrier will work aggressively with us. But it's very difficult for us to predict at this point in time.

And do you have any concerns about the policy of your carrier relative to this size of a claim load they have? And do you have -- do you have some policy issues with that?

We believe that our insurance carrier -- we know that our insurance carrier is an A-rated carrier that we do not believe has any risk of insolvency.

Okay. And I guess the other thing, so 10 to $0.12 cents. If we think about the, just simplistically, a worst case and perhaps to you would be delivering another hospital -- attaching that lease to another hospital so the lease cost continues, you lose 10 to $0.12. And you don't get any more money from the insurance company. I realize all of that is kind of highly improbable. If we're thinking about the down side of that, is that a way to think about it?

I think that's a fair characterization of what you would describe as a worst case scenario.

Okay. And then my last question, relative to your large psyche acquisitions, do you expect that to be materially accretive to earnings in '06?

I think we expect Keystone to be accretive to earnings in '06. Probably to the tune of EPS in the high single digits of 7, 8, $0.09. That -- that would be our expectation.

So you -- I guess you've almost replaced New Orleans then in a way, as far as thinking about it.

In some ways, John, it's obviously not intentional but there's about $30 million of EBITDA loss in New Orleans and we think Keystone will contribute about $30 million of EBITDA in 2006.

Okay. And -- all right. And just finally, given your operational issues, have you guys had material turnover at the hospital, CEO level, have you replaced any large system CEOs in the last twelve months for performance reasons?

Not that I can think of. I think we've disclosed before that when we began to have problems in the McGowan market, we replaced the management team down there, but that was at this point probably a year and a half or two years ago. Off the top of my head, I can't think of any other significant management changes that we've made in key properties.

Okay. Thanks a lot.

Your next question comes from Ken Weakley of UBS.

Thanks and good morning. Alan, I was wondering if you could give us -- you've given UHS a sense of its very foundings and its seen lots of ups and downs in the sector over time. I was wondering if you would put the current environment into some sort of historical context.

Well, you're right about up and down. I don't know that -- I don't know that -- I could. I think one thing that -- well, there's two factors I think that maybe are a little different than usual. The government reimbursements and the government view of the business has been generally positive for a long period of time. I think it's going to continue that way, even though we're in a war and we have all kinds of problems. A rich country, and I think that with the aging population, we've seen some really good understanding on the part of legislatures that it's an important business. And we've had very decent and I say almost reliable. I hate to put it that way. Solid reimbursement. And prior years it was up and down.

I think it's more consistent these days, last number of years. And the other thing that we're seeing is the bad debt issue. I'm not exactly sure how that gets resolved because as Steve pointed out earlier, it got a little better and then it got a little worse. It seems like it's up and down. And we have a large uninsured population, and we have a large population that is working and underinsured. So that, I think, is the problem for the whole industry going forward. How does that get resolved and will it moderate, et cetera? And as Steve pointed out also, we have a particular situation in McGowan that makes it more difficult, but it seems to be across the board and I've read the other companies as well. It just seems like the level of bad debt uninsured, underinsured across the board is -- has just risen. It used to be a lot less than we're seeing this days.

Do you believe UHS can be a growth story without a correction in the bad debt situation without a correction in the uninsured situation or does that need to be corrected before this can be a growth vehicle again?

I think we're going to continue to grow. I don't see why not. I just think that it makes it a little more difficult because you've got a higher level of bad debt and we are working very diligently on trying to find ways to work our process to cut down on that. There's a lot of things we're doing in the financial area and the operational area, so we may be able to bring that back down, but sure, the industry is going to continue to grow. We're going to continue to grow.

Okay. Let me ask you this one, I guess simple real estate question. I'm still trying to figure out the -- the exposure here on the -- for UHS. You rent a facility from UHT, and if this facility gets destroyed, you have to rebuild it basically. I mean that's like if I rented a house at the Hamptons and the storm destroyed it and the landlord told me I had to rebuild the house, that doesn't seem to be a good business proposition. So what's the history behind the risk exposure to leasing facilities and how does that make good business sense from your perspective?

You also have other opportunities which have been listed. You can buy the facilities, so -- you can buy the facility. There's three different things that were listed. One of the things that you could do is you could buy the facility, you can replace the facility, you could substitute a facility. So there's --

Ken, the other thing I wanted to point out is just the one flaw in your analogy obviously is we're in complete possession of this facility as the lessee. We're responsible for its maintenance, et cetera, so I don't think -- I think in those sort of sale leaseback type of situations where the tenant is in possession of the entire facility, et cetera, it's not as unusual as you imply that the tenant is then responsible for the risk of loss for the property.

But you have other alternatives, I think, which is also something to think about. It's not -- it's just not one situation. There are three alternatives.

Okay.

And obviously, I'd also add, Ken, that we know that going into it and so we carry insurance for that.

Sure, sure, sure. Okay. Very good. Thanks so much.

Your next question comes from the line of Christopher Mcfadden of Goldman Sachs.

That you and good morning. I was hoping relative to the $128.9 million pre-tax charge for hurricane related expenses, if you could break down some of the specific items that are inside that charge in terms of trying to understand specific, for example, depreciated assets to help us kind of drill down on sort of what's operating, if you will, versus what's capital or facility costs in that number? Thank you.

Okay. Perhaps you didn't hear me before Chris, but I think before I said that of that $128 million, a little over $100 is asset and property writedowns which is noncash and then the remaining $25 million or so are operating expenses, salaries, supplies, the lease expense, et cetera, that we incurred in September when we had operating expenses but no revenues.

Thank you for the clarification. And then final question would be, could you just kind of give us a more, a drill down update in terms of what are the prospects for some, perhaps, incremental reimbursement or financial support in Louisiana either at the state or at the federal level. I know there are some proposals going around Washington. Is that something you factored into your outlook? And I guess what are the prospects you see for some potential additional relief? Thanks.

You know, Chris, I think as Alan indicated before, I mean the situation is in a tremendous amount of flux, particularly again in the markets in which we operated, the eastern New Orleans markets and Orleans and St. Bernard Parish. There was an interesting article in Time Magazine last week about St. Bernard Parish, specifically and I think the caption was nobody's home. They're literally, the population has been completely displaced in the areas in which we operate in. Mayor Nagan got in some trouble testifying to congress a week or two ago in talking about the fact that the eastern portions of the city wouldn't be rebuilt all that quickly, et cetera, so there's just a lot of back and forth. There's a lot of issues about where the government may put its rebuilding monies and resources et cetera, and it -- it's very impossible for us to predict how it's going to affect us because I think as Alan said, it's just not at all clear how the communities in which we operated will be rebuilt or when they will be rebuilt. So -- and this is really not UHS question. It's a much, much bigger public policy question, that frankly, I don't know that we have any great insight into the answers.

Great. Thanks for the clarity.

Your next question comes from Mitch Lester of Lester Brothers Capital.

Question for Alan again. Talking about earlier, you were unsure how the bad debt issues were going to resolve themselves. As you kind of, as an organization, mine information from the consumers that are creating the bad debt, how has the answers that they've given you changed over time, specifically are you now hearing that the high energy courts cost are turning up in the results, are you hearing that the breakup of unions, whether it be airlines, automotive, is contributing results? What kind of intelligence have you picked up from your population of customers?

Mitch, let me take a shot at trying to answer that. I think as I said before, historically, I think we and I think most of our hospital peers viewed the uninsured and bad debt issues as relating to people who are unemployed and therefore did not have health insurance because the vast majority of employed folks had health insurance through their employers or obviously through government programs, like Medicare or Medicaid. And I think what has really changed structurally in the last few years has been the increased number of working uninsured and I think that has occurred for a variety of reasons. It has occurred because companies are pressured, employers are pressured by rising healthcare costs. I mean obviously, we've read a lot over the last few weeks and I think this is part of what you're suggesting about the automobile companies that have been particularly stressed by their healthcare cost, et cetera. So I think for a variety of reasons, companies have either reduced healthcare coverage or on the flip side, is they passed a lot of it along to their employees. And employees have then opted to say that healthcare coverage is too much -- too big a part of their disposable income or healthcare insurance and they've opted not to carry it. Again, I think when you ask for our intelligence in the area, that's the major trend that we certainly have detected in -- in recent months and recent quarters.

Thank you very much.

Your next question comes from the line of Gary Lieberman of Morgan Stanley.

Thanks. Good morning. It's now been -- I guess a year that McGowan has been negatively impacting operations and I wanted to wonder where -- or ask where you are in terms of the strategy that you've employed to try to get the market share back there. Do you still believe that that strategy is on track and that that strategy can succeed in terms of bringing some significant portion of the share that you've lost in McGowan back or I guess at some point would you consider the possibility that you need to do something more strategic there, perhaps trying to consolidate the market.

Gary, let me make one point. We did -- we have disclosed obviously that the physician-owned hospital opened up their substantial new capacity, essentially opening up a full scale medical surgical hospital right at the beginning of this year, so even though it seems like -- it certainly seems like it to us, we've been talking about McGowan for a long, long time. The reality is we're going to have to make it through 2005 before we even begin to anniversary the impact of that new capacity. I think beyond that, we have talked about the things that we've done in the market to respond in terms of physician recruitment and working with managed care companies and expanding some of our own facilities, pediatric and behavioral, et cetera. I think it's fair to say that it's been a tough love. Everything we've done in the market has taken a little bit longer than we expected to have an impact, et cetera, but we continue to like the underlying demographics and fundamentals of the market. We believe that we will begin to recapture market share ultimately from the physician-owned hospital and that our tactics and strategies that we have sort of relentlessly pursued now for several quarters will begin to pay dividends although it's hard to predict exactly when and how quickly. I think our general sense is that McGowan is going to continue to be a tough love.

So I guess that raises the point, so at some point do you decide it would be certainly faster, if not even cheaper to maybe try and consolidate the market and take out one of the players in that market?

We're not going to exclude anything but we are dead certain we're going to prevail in that market. We're doing a lot of things and we mentioned two new facilities that are opening. We purchased a portion of a surgical hospital there. We're continuing relentlessly to move out on this. And we will do whatever we have to do if it makes good sense. But we're ultimately going to fix this situation.

Thanks a lot.

You have a follow-up question from Gary Taylor of Banc of America Securities.

Thanks. Just one follow-up. Steve, I think before you've given some kind of approximate breakouts on where bad debt is running in acute versus behavioral. I wonder if you could do that again and if you have the year ago comparisons also that'd be great.

Gary, I think that the acute number, same store for the quarter was 12.7. I'll try and calculate the behavioral while we're sitting here. But it's not materially different than it's been.

Okay. Do you happen to know the acute from a year ago or not? I can go back and check it, probably.

I think that 12.7 compares to 9.8 from a year ago and the behaviorals were at 3.5 for the quarter compared to 3 a year ago.

Thank you.

Again I would like to remind everyone (Operator instructions). Your next question comes from the line of Joseph Chiarelli with Oppenheimer and Company.

Thanks. Steve, Alan, have you analyzed the type of uninsured by facility, meaning how many are now working uninsured versus the rest? I know you've talked about this is a trend. And then the level of actual uncollectible billings by those types?

I hope I'm answering the question that you're asking, Joe.

What I'm trying to do is get a sense, you've got an increase in the working uninsured. The question becomes in theory they have more disposable income than your typical uninsured. Yes, it's an increase in uninsured and based upon your historical relationships, you would have to reserve more. Are you collecting more? Or are you collecting less in this group versus the other type of uninsured or what you would collect if they came through as a managed care individual.

Joe, I think the answer to your question is that we have found historically that to collect from -- collect on bills from people who have a balance due after insurance, we collect a much higher percentage of those balances, $0.50 on the dollar or $0.$60 on the dollar than we do from people who come in with no health insurance whatsoever. And I don't know that that has -- has changed markedly, et cetera. I understand your question or the presumption that folks who are working but don't have -- but don't have health insurance, at least they have those jobs and we certainly pursue them aggressively and our certainly our up front cash collections have increased both relatively and in absolute numbers on those patients. But once those patients leave the hospital, we find that those who do not have health insurance are still very, very difficult to collect from and our success rate is fairly low, although it seems to be comparable with our peers when I talk to them.

Okay. Thanks.

Your next question comes from the line of Angias Denagle [ph] with J.P. Morgan.

Good morning. Question on the behavioral health care acquisitions, the recent ones, sort of two parts. The first one, Alan, maybe if you could just sort of conceptually talk about the fact that maybe I would guess about half that business appears to be in areas that I would probably characterize as not traditional lines of business for you, i.e., the educational side, and just talk about what you think the synergies possibly are there and where you see that market. And then Steve, maybe just a couple comments on how it's just mechanically going to work as you report in the future. Are you going to sort of be reporting equivalent beds or something like that? Is this in other words going to drag down a little bit your average revenue per patient data, that sort of thing.

I'm going to have to answer both questions because Alan had to step out to take another call. But in terms of the first one and to the change in direction, obviously, Keystone was almost exclusively dedicated to the adolescent market, a market which certainly the UHS market served before this acquisition, but it increases our emphasis there. They had residential treatment centers which obviously we also had. They also had this day school component which we're quite excited about because they -- they really built up this very strong franchise particularly in the California market in this day school area, and we think it's a very nice fit for our continuum of behavioral care from day schools to residential, to more acute settings, et cetera. And we think that it provides a kind of cross directional referral base referring sort of more acute patients up the chain and frankly referring recovering patients down the chain.

And so we think it's an extremely comfortable fit with our existing businesses. To your second question, a little bit more about mechanics, I'll have to be honest and say, we have kind of recognized the challenge that you've mentioned in the day school, for instance, they don't really -- they obviously don't talk about days, because these kids and students do not stay overnight. They talk about shares as a statistic. You know, occupied seats if you will in the school. I'm not sure how we will report that. I don't think we'll distort our day calculations by obviously including that. The question will be whether it's a significant enough part of our business to sort of report those chairs if you will, and those occupancy rates separately. That's something we'll deal with in the fourth quarter when we struggle with it for the first time.

Okay. It may just end up in sort of other or something like that without any operating statistics.

Again, I think in the grand scheme of UHS's consolidated revenues, it will not be a material number.

Right. And then final question would be just -- I believe on the -- at least some, if not all of the facilities that you acquired from the Brown Schools, are currently shuttered. Is that correct? And if so, what's your sort of time frame in reopening those?

It is correct, actually although I know literally will this week we took our first student in the Idaho facilities, so they are essentially imminently about to reopen or they are reopened and we hope to build up that volume fairly quickly.

Okay. Great. Thanks.

Your last question comes from Margo Murtach [ph] of Snieder Capital.

Yes, thank you. I was off the call for a little bit so I don't know if this was asked. But I wondered what was the contribution for the New Orleans hospitals thing? What would it have been this year, and what was it last year? So what kind of -- can you give us any guidance on that, what kind of EBITDA earnings came from those hospitals?

Margo, I've mentioned I think in a response to a question John Ransom had asked, New Orleans was probably set to contribute at about 10 or $0.12 of EPS this year. You can sort of model as being loss at the moment.

Sorry for that. I didn't hear that, thanks.

There are no further questions, sir, at this time. Do you have any closing remarks?

We'd just like to thank everybody as always for their time and we look forward to speaking with you next quarter.

Thank you. This concludes today's Universal Health Third Quarter 2005 earnings release conference call. You may now disconnect.