環球健康 (UHS) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Natasha and I will be your conference operator today. At this time I would like to welcome everyone to the Universal Health third quarter 2006 earnings release conference call. [OPERATOR INSTRUCTIONS] Thank you.

It is now my pleasure to turn the floor over to your host, Steve Filton. Sir, you may begin your conference.

Thank you. Good morning. Alan Miller, our CEO, is also with us this morning. Welcome to this review of Universal Health Services results for the third quarter ended September 30th, 2006.

As discussed in our press release last night we recorded income from continuing operations of $2 per diluted share for the quarter. As indicated on the schedules of nonGAAP supplemental consolidated statements of income information included with our earnings release, our income from continuing operations and net income for the three and nine month periods ended September 30th, 2006, and 2005, include various items such as hurricane related expenses, net of minority interest and income taxes, hurricane related insurance recoveries, net of minority interest and income taxes, prior period effect of supplemental reimbursements from certain states and contractual settlements net of income taxes, a previously disclosed charge incurred during the quarter to record the aggregate present value of a future funding of a portion of the gift to the college of William and Mary. A favorable tax-- income tax adjustment to reduce reserves due to the expiration of statute of limitations in a foreign jurisdiction, and gains on divestitures net of income taxes recorded during the 2005 nine month period.

After adjusting for the above mentioned items applicable to each period, our adjusted income from continuing operations was $0.54 per diluted share for each of the quarters ended September 30, 2006, and 2005. The results for the third quarter of 2006 include approximately $0.02 per diluted share of stock option expense.

During this conference call we will be using words such as believes, expects, anticipates, estimates 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, we recommend a careful reading of the section on risk factors on pages 24 to 30, and the section on forward looking statements and risk factors on pages 39 and 40, of our form 10K for the year ended December 31, 2005.

I'd like to highlight just couple of developments and business trends before opening the call up to questions. As previously disclosed, we implemented a formal Companywide uninsured discount policy on January 1st which has had the effect of lowering both bad debts and net revenues by approximately $17 million in the third quarter without any significant impact on net income. The third quarter of 2005 included approximately $40 million of revenues from our acute care facilities in New Orleans which remain closed as a result of damages sustained during hurricane Katrina. Exclusive of the impact of the uninsured discount and the loss of New Orleans facilities, revenues would have increased by 14% over the last year's third quarter.

Effective July 1, 2006, pharmacy services for our acute care facilities were brought in-house from an outsourced vendor. During the third quarter this transition resulted in increase to supply expense of approximately 27 million or 260 basis points, and increased the salaries, wages and benefits expense of approximately 11 million or 100 basis points, and a decrease to other operating expenses of approximately 38 million or 360 basis points.

On a same facility basis in our acute care division revenues less provision for doubtful accounts increased 7.9% during the third quarter of 2006. The increase resulted from admissions growth and an increase in revenue per adjusted admission. Excluding the hospitals in New Orleans, admissions to our hospitals owned for more than a year increased 1.9% for the quarter. On a same-facility basis revenue per adjusted admission rose 6% during the third quarter of 2006.

We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues. On a same-facility basis operating margins for our acute care hospitals remained unchanged at 11.8% during each of the third quarters of 2006 and 2005. On a combined basis, the total of bad debt, charity care and the uninsured discount as a percentage of revenue increased substantially during this year's third quarter as compared to the same prior year period.

On a same-facility basis, revenues in our behavioral health division increased 7.5% during the third quarter of 2006. This increase resulted from admissions growth and an increase in revenue per adjusted admission. Admissions to our behavioral health hospitals owned for more than a year increased 3% during the third quarter and revenue per adjusted admission rose 4.4% over the comparable prior year quarter. The revenue increase was aided by another scheduled increase in Medicare rates effective with the January 1st second year phase-in of the PPS system.

Operating margin for our behavioral health hospitals owned for more than a year increased to 24.7% during the quarter ended September 30, 2006, as compared to 22.7% during the comparable prior year quarter. Our cash flow from operating activities was approximately 61 million during the third quarter of 2006, as compared to 126 million during the third quarter of 2005. Reducing our operating cash flow during this year's quarter was 85 million of income tax payments relating to 2005, that were deferred pursuant to a postponement granted by the IRS for companies that owned Katrina affected businesses in the most severely damaged parishes of Louisiana.

$23 million of cash received in early October related to Medicare payments that were temporarily suspended by CMS in late September. And 16 million of cash received in early October related to Texas supplemental Medicaid reimbursements earned as of September 30, 2006. As of September 30, 2006, approximately $95 million of income tax payments relating to 2006 remain deferred pursuant to the Katrina affected postponement and were paid in October.

It's previously announced during the quarter we received an additional $188.5 million of insurance proceeds representing the final amounts due to us pursuant to our agreement with the insurance carrier in connection with damage sustained from hurricane Katrina by our facilities located in Louisiana. Approximately $44 million of the proceeds received during the quarter are included in our cash provided by operating activities for the third quarter of 2006.

We spent approximately $80 million on capital expenditures during the third quarter. Included in our capital expenditures were the construction costs related to our new 170-bed Centennial Hills in Las Vegas, that is scheduled to be completed and opened in the fall of 2007. And a major renovation to our Manatee facility in Florida that is scheduled to be completed and opened in early 2007.

Our behavioral facilities have operated at a very efficient 84% available occupancy rate year-to-date. These high occupancy rates are suppressing our admissions growth in certain markets, but we have multiple projects to add capacity to our busiest behavioral facilities. We opened a total of 255 new behavioral health beds at existing facilities during the quarter. During the fourth quarter we plan to open a 32-bed residential treatment facility in Oklahoma City, and a 30-bed [GRO psy] facility in Las Vegas.

Also during the third quarter we acquired the academy at Canyon Creek a 128-bed Behavioral Health facility located in Springville, Utah. And Highland Behavioral Health system an 86-bed facility in Denver, Colorado which is being renovated and is expected to open in early 2007. In addition, we have entered into letters of intent to purchase Lincoln Trails Behavioral Health hospital, a 77-bed facility located in Radcliff, Kentucky, which is expected to be finalized during the fourth quarter of this year. And St. Jones center, a 50-bed Behavioral Health facility located in Dover, Delaware, which is expected to be finalized during the first quarter of 2007.

During the third quarter of 2006 we repurchased approximately 2.8 million shares of our Class B common stock, and we repurchased an additional 1.8 million shares during October. We currently have 2.6 million shares remaining under the previously authorized share repurchase program. At September 30, 2006, our ratio of debt net of cash to total capitalization, was 23%. And the ratio of debt to EBITDA was 1.05. We'll be pleased to answer questions at this time. Thank you Natasha.

[OPERATOR INSTRUCTIONS] Your first question comes from Adam Fienstien of Lehman Brothers.

Great thank you. Good morning, Alan, good morning, Steve. A few questions here. Maybe if you could just talk about volumes and what's going on there. You guys continue to see better than industry average volume growth. And maybe if you could just talk specifically about some of the key markets, [assuming] Las Vegas, McAllen, just give us a general sense for what's driving the volumes in some of the markets? And then I have a quick follow-up question. Thank you.

Adam, I think sort of as has been the case for awhile now, our volumes in Vegas continue to be rather strong in the mid sort of single-digits in terms of growth. We-- volumes in McAllen continue to improve as we have now anniversaried sort of full impact of the opening of the physician hospital down there, and while volumes continue to improve, I think patient mix remains our biggest challenge in that market. And then elsewhere in the portfolio, there's sort of up's and down's. A little bit of weakness in California in the last couple of quarters, but other than that I think that relatively solid throughout the portfolio.

Okay. And then with respect to bad debt expense, a lot of noise this quarter. We've seen what companies boost their reserves. So how comfortable are you with your reserving methodology here and just maybe walk us through just your process there and just any update perspectives about bad debt?

Sure. I think as we've talked about before, we I think like many of our peers have modified and updated our reserving policies over the last few years. Instead of using really a cliff policy now, we track literally period-by-period, month-by-month, quarter-by-quarter, our uninsured volumes, and we reserve a very significant portion of those, somewhere in the neighborhood of 97 or 98% at any time of our self-pay receivables are reserved for.

To make sure that those reserves are adequate, we also do every quarter a hindsight test of our reserves, making sure that our subsequent write-offs are not exceeding our reserves, and so with those sort of policies and tests in place, we're comfortable that we're adequately reserved, obviously we do face the same issue that our peers face, increasing levels of uninsured. It seems to us the rate of uninsureds, the rate of growth in uninsured patients is slowing some, but it still continues to increase.

Okay. And then just lastly, if you could just adjust the margins in the psychiatric business. It just seems like the acquisitions are bringing those down. I guess, just any perspectives in terms of your thoughts there?

We've talked a few times, I mean, as anticipated we expected that the acquisition of the Brown School Facilities, which were closed, would certainly dilute our earnings for the year although not materially because there are only a handful of facilities. Those facilities have been reopened and have been ramping up I think close to our expectations.

We've also previously disclosed that clearly the Keystone Facilities have performed under our expectations. We continue to believe that sort of the basic business model that we had in place for Keystone is still achievable, and it's just a timing question that we're -- it's taking a little bit longer to get to some of our improvements particularly on the revenue side than we expected, and obviously that's apparent in our consolidated margins, obviously not our same-store margins on the Behavioral side continue to improve.

Okay. Thank you.

Your next question comes from Glen Santangelo of Credit Suisse.

Hi yes thanks, Steve, just a couple quick questions. First on the Las Vegas market, Sierra basically said earlier this earnings season that they were having a contract dispute with HCA and they wouldn't include those HCA facilities in their network. Do you read through that to be a positive for your admissions trends in Las Vegas for 2007? Could that impact your business, do you think?

We've discussed before the fact that HCA has a long-term contract with Sierra that is expiring at the end of this year, and I think that all observers including the two affected parties have sort of agreed all along that the contract would never be renewed under its current terms, which provide for HCA as the preferred Sierra provider in Las Vegas. I think that everybody conceded all along that if the contract were renewed HCA would sort of be a provider as would everybody else in the market, and there would be some reallocation or redistribution of patients from HCA facilities to other facilities in the market, and we would certainly benefit from that as the leading market share provider in the market.

Obviously if HCA and Sierra do not renew their agreement at all, then there will be an even more dramatic redistribution or reallocation of patients that the other hospitals in the market including us would clearly benefit from. Obviously in the last couple months the rhetoric has clearly ratcheted up between HCA and Sierra, and they both say that they're not close to a deal to renew. We'll wait and see. I think there's certainly posturing going on on both sides, but it's not like I have any inside information that would allow me to predict what's going to happen. But clearly I think no matter what happens there will be some Sierra patients that will move out of HCA facilities come the first of the year and into other facilities in the market.

Okay. Thanks. On your behavioral business, it seems like your admission trends this quarter on a same-store basis they uptick nicely from June, but you're still trending kind of below the level where you were at last year and the beginning of this year, and you talk about all of these expansion and development projects. I mean should we anticipate sort of a reacceleration back to those sort of 2005 levels once these expansion projects come on and how soon do you think that can be if at all?

I think that the levels of growth that you're referring to of 6 and 7% same-store growth, we-- I think have said for awhile now are difficult to sustain. I think that 3 to 4% growth is a realistic objective, and I think with our capacity expansion, etcetera, we ought to be able to achieve that. I mean there may be quarters when we do a little better than that. But I think that it's probably unrealistic to think about the 6 and 7% growth as a sort of a long-term sustainable sort of trend.

Okay. And then just my last question and I'll jump off. I mean you haven't updated guidance since the beginning of the year 260 to 265. I mean how should we still-- should we still think about that as the right guidance given there is only one quarter left and are you having any better visibility today versus maybe six months ago?

As you recall there was a lot of discussion about guidance after the second quarter. People asked us a number of questions about why we were not revising guidance upward. I think we look relatively pressing at this point in not doing so. We're certainly not about to revise guidance at this point. I think as this earnings season certainly has proved, we remain in a very volatile environment. It's difficult to predict, particularly the levels of uninsureds coming into our facilities, and so I think we thought that guidance was pretty good at the beginning of the year and certainly at this point it looks like it's still a reasonable estimate.

Okay. Thanks for the comments, Steve.

Your next question comes from Bill Bonello of Wachovia.

Good morning. I just want to go back to the managed care question, not the Las Vegas situation, but just in general in any of your markets. Are you seeing any significant payor consolidation and if so, or even if not, are you seeing payors taking a tougher negotiation stand than they have been in the past with you?

I think that obviously there is a trend towards payor consolidation. We read the same merger announcements that you do, probably the one that most affects us is the merger of United and Pacificare out west, that has an effect on us in Nevada and California. In those cases clearly I think you see the managed care payors looking to exercise their leverage. I mean I think frankly that's the driving motive behind the consolidation.

Other than that, I think in our sort of normal routine managed care negotiations I think we find our managed care payors to be their usual selves. I mean they're certainly seeking to pay us as little as possible. But as you can see from our revenue per unit statistics, our revenue is still pretty solid, and we're getting generally pretty decent price increases from our managed care payors.

Okay. And to the extent that you do see some in the markets where there has been consolidation where you do see a little bit more pressure, would that be predominantly on the acute care side or does that carry over on the behavioral side as well?

I can't say that we've really seen the impact on the behavioral side of mergers. Our behavioral market share in so many markets is significant enough that I think we really are able to hold our own in those sorts of negotiations. And as you know, one of the differing dynamics on the behavioral side is that in a lot of cases the managed care payors are subcontracting out the task of negotiating and administering claims to service providers like Magellan and Value Options and what not.

Bill.

Yes.

I think that one of our strategies has been to be an important player in every market we're in. We certainly are in the behavioral and acute care. We tend to have larger hospitals and more important ones, and I think that it's a good offset against consolidation of the managed care people. We always have a very strong position from which to negotiate.

Yes. And then just a totally different question, and, Steve, you touched on this in the call, and if you want to do it offline if you think it's redundant, that's fine, but I guess I got a little lost in some of the cash flow. I'm just wondering, of the hurricane settlements, are there-- is there some cash you have not collected yet?

No. We have fully settled our hurricane claim. The comment that I made from a cash flow perspective is that when we file our 10Q in 10 days or so, you'll see that we've included $44 million of that settlement up in operating cash, and that 44 million is meant to represent the amounts that we've collected in insurance proceeds that relate to sort of operating expenses that we paid in connection with the hurricane. And if you go back and look at our previous filings we've disclosed each quarter that operating cash was reduced by a certain amount of money representing the operating expenses associated with the hurricane, and now we're recouping those amounts and we're simply restoring them to our operating cash.

Okay. So how much was the actual cash collection this quarter from the settlements?

188.5 million.

Okay. So I guess my question is, is there something -- I would have expected that maybe we would have seen a big increase in the cash balance or a big decrease in debt or something. I'm just -- is there something unusual in terms of the cash inflows and outflows?

Well I think we tried to mention them. A good portion in essence of those 188 million in proceeds went sort of almost immediately to a large tax payment that we made in the quarter, which included a significant amount of 2005 taxes, and also to a significant repurchase of shares. We bought back 2.8 million shares in the quarter.

Okay so that's where it was going. And then just the final thing on that, you're saying there will be yet -- there was yet one more tax payment-- cash tax payment in October, too.

We made a $95 million tax payment in October.

Okay. Great. Thank you very much.

Thank you.

Your next question comes from Tom Gallucci of Merrill Lynch.

Good morning, thank you. You mentioned you'll file a 10Q in a week or two. Do you have off hand the allowance for doubtful accounts as a percent of the total AR?

No, I do not.

Not offhand. We'll look for that in the 10Q then. I guess two other quick questions. One, just on the pharmacy situation, you mentioned bringing that in-house and what the adjusted impact might have been had you not done that. It comes out somewhat neutral I guess net. What kind of an impact do you expect that to have longer term? Is it more having your own control over those operations or will it be an ultimate cost savings as well?

No we think that over the long-term, Tom, and the motive for us was that we did think that there would be cost savings, and I think we mentioned in previous calls that we expect those savings to come to the fore more so in 2007. In fact, in the 2005 -- excuse me, in the 2006 third quarter there's probably $3 million or so of kind of one-time expenses related to the conversion as we paid a consultant to help us, to help us through the transition, and we paid bonuses to keep some of our pharmacy staff in place and whatnot, and we don't expect those to recur.

Okay good. And then just a final question on cash, generally speaking I guess pretty conservative balance sheet. I was hoping that maybe you could update us on some of the specific acute care investments that you're doing? I think Manatee was being renovated, a new hospital in Vegas, and then you mentioned share repurchases. How do you think about cash over and above those internal projects going forward?

We've said recently that I think that looking at the recent history of how we've invested and reinvested our cash is probably a pretty good guide to the future. We have not done a great many acute care acquisitions recently, but we certainly continue to look for them, and I think we think that as some of the larger players for a variety of reasons have put themselves on the acquisition side lines in recent months and quarters, there may be more opportunity to acquire an acute care facility or two at reasonable prices.

Obviously I think our experience indicates that we continue to find behavioral facilities that we believe are being acquired at reasonable prices, and we continue to talk to other potential sellers. And also as we've disclosed, we've been an active buyer of our own shares and we continue to view them as a good investment for the Company. So, and as you also indicated, we continue to reinvest pretty heavily in our facilities, both acute and behavioral building new capacity, upgrading our capacity, so I think we're going to continue to do all those things selectively as we move into the next year or two.

And then just some of those acute care investments, Manatee, Vegas, how are those things going?

Well I think that there're two different kinds of investments. We're building a fifth hospital, a new facility in Las Vegas. And when that opens late next year, I mean my guess is that we'll be as our previous openings have been, sort of slightly dilutive in the short-term, but in the long-term the growth in Las Vegas is very strong. I think that Centennial Hills will be opening at good time, in terms of if there is a shift of Sierra patients, there are a lot of Sierra patients that live up in that northwest part of Las Vegas. It's a very robustly growing area. So I think we'll do well there in short order.

And Manatee, frankly, as we've described it, our investment there is a renovation. It's not really new capacity, but it has been quite disruptive in during the period of construction, so we're hoping that when we get it done in the first quarter or so of next year, that we'll get back to a little bit more normal operating mode and regain a little bit of some of the losses we've suffered in the interim.

Great. Thank you.

Your next question comes from Jason Gurda of Bear Stearns.

Good morning.

Hi, Jason.

Steve, if I look at your operating income in the third quarter, relative to what you guys put up in the second quarter, it was a little weaker than you would historically show. Was there -- how would you explain that from an operations perspective? Was there a particular market?

No. I mean, if you recall from our second quarter conversation, I mean our revenues in the second quarter were extremely strong, and we said at the time and our revenue per admission grew about 8% in the second quarter after a 4% move in the first quarter. And what we said in our second quarter call was what we can't really explain -- we thought four was on the low side. We thought eight was on the high side. We thought six was kind of a normalized number. In fact that's what we ran in the third quarter, and I think that's probably the single biggest difference between the third and the second quarter, other than the third quarter is sort of seasonally and historically been our softest quarter. As I think it has largely been in the industry.

Okay so there's more of the second quarter being the unusual quarter here?

I think so, yes.

Okay. And you mentioned uninsured volume trends were showing some signs of decelerations. Do you have any numbers on that?

Well, our uninsured admits in the third quarter continued to grow at probably 3 or 400 basis points above our overall admission growth rate, but those numbers frankly had been 6 or 700 basis points higher at times over the last year or two. So again it's not a trend that is completely hardening at this point, but it does seem to be slowing.

Okay. And just I'm not sure if you touched upon this, but minority interest expense was up sharply in the quarter?

The biggest piece of the increase in minority interest expense, about 6.5 million of it relates to our minority partner in New Orleans, and in essence is their share of the insurance proceeds that we received during the quarter.

Okay. Okay so that should revert to more normalized trends next quarter?

That's correct.

Thank you.

Okay.

Your next question comes from Darren Lehrich of Deutsche Bank.

Thanks, good morning. A couple questions here. Just wanted to go back to Vegas for one second with regard to the new hospital project. Is there any way or any discussion internally to accelerate that project given the situation with Sierra and HCA? I don't know if that's possible, but is that something that you would consider?

There's an old cats skills jokes that it's punch line is we're dancing as fast as we can, and I think that goes for Centennial and we're building the facility as quickly as we can, Darren. I don't think we really have any reasonable chance of getting it open before the fourth quarter of 2007.

Fair enough. All right. As far as McAllen goes, you've talked a little bit about earnings growth in that market and it was a negative second half of last year. Can you just update us -- I am sorry if I missed this in your earlier comments, but just talk about McAllen in terms of earnings growth or stability.

Yes, and I think I alluded at least in terms of sort of the volume question that Adam had sort of started off with that, while volumes look better in the McAllen market and have turned positive, we continue to struggle with patient mix issues. We've talked many, many times before about how we've lost our best business in that market to the physician hospitals, so our earnings continue to lag in that market as we struggle to find kind of new and different ways to improve our patient mix in the market.

Okay. So it's safe to say that the new pediatric hospital and the behavioral hospital has not contributed to earnings growth in the third quarter in McAllen despite better volumes.

The behavioral hospital is probably positive. The pediatric hospital is doing well, but again as we've discussed previously, the real sort of business strategy with the behavioral-- excuse me with pediatric facility is to keep some of the paying business that's leaving the market in town if you will, and we didn't necessarily think that would happen the day we opened, and it hasn't necessarily. We're still pretty bullish about the long-term prospects for that, but our own expectations were that not that when we opened the pediatric hospital we'd all of a sudden be able to keep all that business in town. There's a number of practice patterns that have to be changed before we effect that.

Okay great. And then just lastly, it appears that you really have been focusing your acquisition capital in the behavioral arena, and obviously that's been pretty successful for you. Is Alan, is there any interest at all in something like Horizon which has a slightly different mix of business than your behavioral business, but clearly they're on the block? Just would love to get your thoughts on that particular business.

We have been in touch with them, and we are looking at Horizon, but it would be a difficult acquisition, and I wouldn't put a high probability on it, but we're looking at it. And we're looking at some others as well.

And are there many of size like Horizon that peak your interest at this point?

Well, Horizon is sizable in the mental health business, but there's a lot of sizable acquisitions potential and otherwise in the acute care business.

Okay. And then I guess just last question. As it relates to behavioral, we've been getting-- I guess a little updates on the educational business that you acquired late last year. Can you just bring us up to speed how that's progressing for you and kind of where you are on that business right now?

I assume -- well, I'm not sure what you're asking. We bought the Therapeutic Boarding Schools from the Brown Schools, and there was an education or schools component of the Keystone acquisition. I don't know, Darren, if you're asking about one of those specifically.

It's really both of-- the educational component of both of those acquisitions.

Right. Well, the Therapeutic Boarding Schools that we bought from the Brown Schools, and we have a number of those, and again, I mean the Brown Schools we knew would be a ramp up because they were closed or at least two of three-- three of the four were closed when we bought them. So they're ramping up as I think I said earlier according to expectations. As I also said earlier, Keystone has clearly not met our expectations, and the schools which are mostly located in California are a piece of that. But we don't believe or don't think there's a reason why over the long-term Keystone shouldn't meet our original expectations including the schools.

Okay. Great. Thanks very much.

Your next question comes from John Ransom of Raymond James.

Hi, Steve. So if you had to look at your key acute care markets, obviously McAllen is the old donkey that gets beaten all the time, but McAllen and Manatee are those you're two markets that are giving you the biggest challenges this year, or are there others that we should think about? And I know McAllen is certainly an improvement over last year, but are there any other markets we should think about that are problematic right now?

No, I think, John, what we find in the acute care portfolio now is kind of the normal up's and down's that I assume every company experiences. I mean again I think the one sort of mind set that people have to adapt to is certainly two and three years ago when McAllen started a downturn, people were very focused on it because it was along with Las Vegas, our two-- one of our two most profitable markets. Obviously McAllen's profitability has declined to the point where it is not even sort of remotely in that ballpark any more.

And so there are a lot of other markets in California, in Florida, in Washington, D.C., that are far more important to us. And I don't think we see any up's or down's in the portfolio that sort of rise to the level of the McAllen variance that we talked so much about over the last few years. We see again kind of the normal up's and down's based on competition, based on local economic factors, etcetera, but nothing terribly dramatic elsewhere in the portfolio.

And then my second question is I think arguably you guys have probably been the most consistently responsible stewards of capital in your industry. I mean as a compliment. But I guess I'm looking at you now with debt to EBITDA one times, and I know you're buying back a little stock, but given that you've taken a hiatus from external growth other than the behavioral side, is there an even money chance that you might take this opportunity when your competitors on the sidelines to get a little more aggressive?

As I said, John, I think while we have not done any acute care acquisitions in the last couple years of note, we certainly have been looking. It's not that we don't continue to like the acute care business as a long-term investment. We've been reinvesting in our own facilities pretty significantly and ramped up our own capital investment while we've been a little bit less accusative. As Alan said in his response to Darren, we continue to look at acute care acquisitions. I think that, yes I think there is a good chance now that there are others on the sideline that we may be more active than we've been in the past. So I think between our own internal projects, both on the acute and behavioral side, clearly behavioral acquisitions, I think maybe a little bit more activity on the acute side and continued share buybacks. I think you'll see our leverage levels is slowly gravitate back to where most people are accustomed to seeing them.

Okay and then finally, just remind us how much market share Sierra has in Vegas. And secondly, are you essentially an out of network provider for them or just how we should think about that? Thanks.

And I'm not sure I can quote the Sierra market share in Vegas exactly. They're clearly the largest payer in the market I think by, by a long shot. There's probably several people on the phone who have that number more readily available than I do. We are a network provider, and in fact -- but I think the issue is that HCA has been a preferred provider.

The nature of their arrangement is that under this contract which I think is some 10 years old at this point, Sierra promises HCA a certain amount of business or certain amount of volume, and if that's not achieved, then they owe HCA some amount of additional payments. And again I think it's that aspect of their preferred agreement that will clearly go away even if the contract is renewed.

Okay. Do you have, I guess you don't have any hazard a guess as to what kind of volume opportunity that represents for you until you know what HCA negotiates?

Yes. I think that's exactly right, John. It is hard to know. I think there's a lot of moving pieces.

Okay. Thanks a lot.

Your next question comes from Christopher McFadden of Goldman Sachs.

This is [Shelly Mallet] for Chris McFadden. My question is going back to the uncompensated care. Can you tell us, are you seeing any decrease in your Medicaid mix, maybe as they're shifting to south pay? And I'm curious on your thoughts whether this could be due in part to the proof of citizenship documentation that went into effect in July?

I think that probably is most relevant to us in the McAllen, Texas market. It's really our biggest border hospital, although we obviously face the same issues in Laredo and Eagle Pass [inaudible] Fort Duncan facility. No I think our folks down there report that the proof of citizenship requirements are sort of an administrative burden, but have not terribly affected our ability to qualify people for Medicaid at the same rates that we've been doing historically.

And in fact we are big Medicaid providers in all of those three hospitals I mentioned on the Texas/Mexico border, so I think as we've talked about several times in the last six to 12 months that the growth in uninsured I think has more to do with employers either not offering health insurance any longer or making it so expensive that their employees stopped opting for it than it does for people falling off the Medicaid rolls.

Okay. Thanks very much.

Your next question comes from Kemp Dolliver of Cowen and Company.

Hi thanks. A question about Las Vegas, that is a market that historically is run very-- fairly high occupancy rates across the system, and how much additional business would you be able to take on if there were not-- if Sierra and HCA were not able to renew?

I mean I think that, and I think it depends to some degree, Kemp. on your perspective on the market. I mean I've heard Sierra say that they're very comfortable that there's plenty of capacity in the market. I think our hospitals tend to run probably about 2/3 occupancy, 65% occupancy or so on average, and although that's probably higher than our average, it certainly is room for additional -- we certainly have room for additional patients. Frankly that's more a Sierra issue. I think they're not likely to completely terminate that HCA contract unless they're comfortable there's appropriate levels of capacity in the market, but they have said at least publicly that they think there is.

Right. Well I think for you, though, if potentially too much volume too quickly can become disruptive?

Yes. I mean first of all I think that's true, Kemp. I think one of the things that Sierra's angling for is-- and that's why there's been I think so much communication in the market, is that if they don't renew with HCA they're going to start shifting patients sooner than the end of the year. And so I don't think it's sort of like you turn the faucet on or off on January 1st. So I think again Sierra is a very capable company, and I think that they will manage that change if it occurs fairly -- in a fairly measured way, and we'll do the same. I mean obviously we've had plenty of time to think about this and are preparing ourselves for the changes that are about to happen in the market in some way or another.

That's great. Thank you.

Your next question comes from Gary Taylor of Banc of America.

Hi good morning. Steve, I just wanted to clarify a comment you had made. I think I got it right, but had you said the impact of the pharmacy reclass, so to speak, was 38 million of the other and 11 to supplies and the balance into labor?

No the other way around. 11 into labor and 27 into supplies.

Okay. And then I also just wanted to clarify something. So the higher minority interest that we saw this quarter was related to the insurance proceeds, and when you reported $2 of earnings, and then you adjusted that down to 54, obviously you took the insurance proceeds out, but that doesn't reflect the more normalized minority interest run rate?

If you look at the reconciliation schedule that goes from $2 to $0.54, it's-- the hurricane proceeds net of minority interest is the adjustment.

Okay. I'll take a look at that. And that's all I had. Thanks.

Thank you.

Your next question comes from Margot Murtaugh of Snyder Capital.

Thanks. I wondered about the four psychiatric acquisitions you made. Any detail on price paid, revenues, multiples of EBITDA, and accretion?

I think, Margot, that we have not disclosed pricing historically and probably will not do so here, although obviously you'll see the macro numbers in our cash flow statements. And just a couple of words about the acquisitions that we've done, the academy at Canyon Creek which is a facility in Utah, is near our Provo facility and we think sort of complementary to that. It's a facility that actually opened a couple years ago and has run at relatively low occupancy rates, but we think that we've had capacity issues at Provo, so we-- that's sort of the business play there for us.

The facility in Denver is actually a closed facility as we mentioned. We're not going to reopen it actually until the early part of 2007. And so it will take a little while to ramp up, but we think Denver is a pretty underserved market and look forward to that.

Lincoln Trail is a facility that's about 30 miles south of Louisville. We already have several facilities in Kentucky, and we're looking to just strengthen our position there. And the St. Jones center in Dover is a relatively small facility, but we already have a facility in southern Delaware that serves southern Delaware and eastern Maryland, and again we think is just sort of solidifies our franchise in that market.

Okay. Any kind of color on price paid or multiple of EBITDA?

And obviously for the closed facility there is no multiple of EBITDA. I said that for academy of Canyon creek, they were clearly running at relatively low capacity. So I think that the multiple of EBITDA is not terribly relevant there. We'll need to build [this] at both of those places. The St. Jones center is a small one so probably not going to disclose that number.

Okay. You have a good discipline and you're reluctant to pay too high multiples. So do you have any kind of guidance on what-- how you look at acquisitions and what kind of multiple you want to pay for behavioral health and acute? Any color on what --

I think over the last couple of years the multiples that we paid in the behavioral business have been in the probably 7.5 to 8 range. I think that we haven't done an acute care acquisition, so I think that's a sign that the multiples that have been paid over the last few years in acute care acquisitions have been a little bit rich for our taste. But as I said, I mean we think that the-- they're likely to get a little bit more reasonable as a number of players have sort of put themselves on the sidelines.

Okay. And do you have any view about managed care pricing in 2007, pricing has been good this year if you looked out the next couple of years, you see some moderation or any comments there?

I think there's been moderation, Margot, probably since about 2003, when we were averaging managed care price increases I think in excess of 8%. This year we'll probably be in the 6.5 to 7 range. I think our general sense is that next year we'll see maybe a slight demnition in that rate, maybe to the 6, 6.5 range, But I don't think we see a terribly more dramatic change than that.

Okay. That's good. Thanks, Steve.

Thank you.

Your next question comes from Rob Eich of Cleveland Research.

Thank you, and good morning, guys. I just want to follow up on the behavioral acquisition market. I understand that there's some sizable transactions available in the acute care space, but are there any sizable transactions outside of Horizon Health in the behavioral industry?

I think that there are probably a half dozen or so acquisitions in the size of Horizon or something close to that. Obviously there was another kind of high visibility transaction that Psych Solutions had announced and then terminated, so that's another one of the companies -- there's probably about a half dozen of those. I mean I can't necessarily say, Rob, that I know what the intent of the owners of those places are, so when people sort of ask what the possibilities are regarding those companies, obviously the answer to that question starts with the companies themselves and what their intent is.

Okay. And then from a competition standpoint, is it essentially just you and Psych Solutions that are in the acquisition market, or are you seeing any private equity money enter the space?

There was a company, CRC that had methadone clinics, etcetera. That was bought I think within the past year by a financial sponsor, so there is some financial sponsor interested in the space. Obviously in these one-off deals, you're not really-- you're not going up against anybody except other providers or strategic players, so I think it's a little bit of a mix.

Okay. Great. Thanks, guys.

[OPERATOR INSTRUCTIONS] Mr. Filton there appears to be no further questions.

Okay we'd like to thank everybody for their time and we look forward to speaking to everyone next quarter. Thank you.

This concludes today's Universal Health conference call.