環球健康 (UHS) 2007 Q3 法說會逐字稿

Good morning. My name is Bobby Joe, and I will be your conference operator today. At this time I would like to welcome everyone to the third quarter 2007 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question and answer session. (OPERATOR INSTRUCTIONS)

Thank you, Mr. Filton, you my begin your conference.

Good morning, I am Steven Filton. Alan Miller, our CEO, is also with us. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2007.

As discussed in our press release last night, we reported net income of $0.54 per diluted share during this year's third quarter. After adjusting for the various items disclosed and quantified in our press release and related schedules of nonGAAP supplemental consolidated statements of income information, our adjusted income from continuing operations was $0.64 per diluted share for the quarter ended September 30, 2007, as compared to $0.54 per diluted share for the quarter ended September 30, 2006.

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 sections on risk factors, and forward-looking statements and risk factors in our Form 10(K) for the year ended December 31, 2006.

I would like to highlight just a couple of developments and business trends before opening the call up to questions. Revenues for the third quarter increased 13% over the prior year. Exclusive of the impact of new facilities, most notably Texoma and the revenues related to a construction management contract, whereby we are building a new hospital for an unrelated third party, revenues have increased by 7%.

On a same facility basis in our Acute care division revenues increased 7.6% during the third quarter of 2007. The increase resulted from admissions growth and an increase in revenue per admission. Admission to our hospitals owned for more than a year increased 2.5% for the quarter. On a same facility basis, revenue per adjusted admission rose 3% during the third quarter of 2007. We define operating margins as operating income or net revenue as salaries, wages and benefits, other operating expenses, supplies expense, and provision for doubtful accounts divided by net revenues.

On a same facility based operating margins for our Acute care hospitals owned in both the third quarter of 2007 and 2006 increased to 12.6% in the quarter just ended, as compared to 11.8% in the prior year's quarter. Our Acute care hospitals provided charity care and uninsured discounts based on charges at established rates, amounting to $149 million and $99 million during the three-month periods ended September 30, 2007 and 2006 respectively. On a same facility based at our Behavioral facilities admissions increased 3.4% during the third quarter of 2007 over the comparable prior year quarter, and net revenue per adjusted admission increased 5.1%.

Operating margins for our Behavioral hospitals owned for more than a year were 22.4% in the quarter ended September 30, 2007, compared with 22.6% in the quarter ended September 30, 2006. Cash flow from operations for the third quarter of 2007 was approximately 164 million, as compared to 61 million during the third quarter of 2006. Our cash flow from operations during the third quarter of 2007 was favorably impacted by a $48 million favorable change in other working capital accounts, primarily due to the timing of certain accrued payroll and accounts payable disbursements which were funded in early October.

We also expect to disburse approximately $50 million of cash during the fourth quarter of 2007 for the payment of interest expense on our bonds and income taxes. Our cash flow from operations during the third quarter of 2006 was unfavorably impacted by the payment of 2005 income taxes that were deferred pursuant to a Hurricane Katrina related deferral, and by certain Medicare and Medicaid receivables that were collected during the fourth quarter of 2006.

At September 30, 2007, our ratio of debt to total capitalization was 37.1%, and the ratio of debt to EBITDA was 1.84. We spent $79 million on Capital Expenditures during the third quarter of 2007. Included in our Capital Expenditures were the construction costs related to do our new 170-bed Centennial Hills Hospital in Las Vegas, that is scheduled to be completed and opened early in 2008, and a new 171-bed hospital in Palmdale, California, that is scheduled to be completed and opened in 2009.

In California we are underway with a major expansion of our Emergency Room and Women's Services at our Rancho Springs campus. During the third quarter we acquired Foundations Behavioral Health in Doylestown, Pennsylvania, which has 54 acute behavioral beds and 48 residential beds, and Cottonwood Treatment Center in Utah which has 78 beds.

Our Behavioral facilities have operated at a very efficient 76% available occupancy rate for the quarter. These high occupancy rates are suppressing our admissions growth in certain markets, but we have multiple projects that add capacity to our busiest behavioral facilities. We opened a total of 50 new behavioral bed at existing facilities during the quarter.

As indicated in our press release last evening, the government's investigation of our South Texas Health Systems affiliates remain active and ongoing. At this time, we are unable to evaluate the existence of extent of any potential financial exposure in connection with this matter, and we are unable to provide any additional information beyond that which was discussed in our third quarter earning release.

We are pleased to answer questions at this time.

(OPERATOR INSTRUCTIONS) First question from the line of Darren Lerich.

Thanks, good morning everyone. A few things here. I guess, Alan, just wanted to ask you about the M&A environment. I know we have asked you this before.

But it looks like you were relatively quiet on the buy back front, just want to gauge where you are, where you see the M&A opportunities now versus say three, six months ago, and whether it is reasonable that you will deploy more capital in 2008 to grow with acute care acquisitions?

We have capital as you can see, and we are just being careful and opportunistic, we made a couple of good acquisitions in the psych field, and we are looking and waiting and talking to people. But we really don't have anything on the horizon at this moment. There has been a lot of, I won't call it turmoil, a lot is happening in the industry, and we expect that opportunities will present themselves, Darren.

Okay. And, Steve, just as relates to the uninsured trend, obviously the charity care number was up significantly. Can you help us understand what the actual self pay volume growth was on the Acute side, and can you just talk about that trend if it was concentrated in any particular regions?

Sure, Darren, as you know, we had pretty favorable uninsured experience in the first quarter. We saw it spike up in the second quarter, and we saw those trends continue again in the third quarter, in terms of where we saw it, I think it was largely throughout the portfolio as it has been over these last few years.

But we certainly did see specific pressures in some of the markets that others have noted in Florida, and California, and Las Vegas, markets that I think have been particularly hard hit by the housing and the real estate crises, we seem to be feeling perhaps a little bit more pressure. But for the most part we just continue to see the uninsured trends and pressures that we saw in the second quarter continue on to the third.

And just the overall economic conditions in your market as you look into 2008, how should we think about bad debt and the uninsured, and how are you guys thinking about it at this point?

One of the challenges I think that everybody, both providers in the industry and those who follow it have had over the last few years has been, and have been to find sort of leading indicator that would allow us to predict when we would see spikes or we would see stabilization in the uninsured volumes, and I think frankly no one has really done a great job of identifying what would be the best leading indicators. So we certainly are watching some of these trends like the reduction in housing starts, and the number of foreclosures in some of our markets.

But in all honesty, Darren, I am not sure we know exactly how that data relates to what we are going to see, in terms of people coming to our hospitals and particularly to our emergency rooms, and the level of health insurance or no health insurance that they might have. So we are watching all that carefully but it is difficult for us to predict what those relationships are.

And just one last thing and I will jump back in the queue here. But as far as 2008 goes, I know you typically provide your guidance in I think February. It looks like '07 has progressed more or less in line with what you laid out at the beginning of the year. But just thinking about '08 conceptually, I guess, you have some start-up losses that gets pushed out in Vegas into 2008, and you may have, I don't know your view about the UPL situation in Texas, that might be a pressure point for you.

But looking into 2008 do you think you can grow earnings and I don't know if you can put a framework around it, but it would be helpful to get your thoughts on whether you think you can grow in '08.

Well, I think, Darren, the metrics in both of our businesses have been fairly apparent and relatively stable for some time now. I think we think about sustainable behavioral same store admission growth in sort of the 3 to 4% range going forward as sustainable pricing growth, 3 to 4%. So we certainly see growth, and as I indicated in my prepared remarks, we continue to expand capacity in that division.

On the Acute side, same thing, 2 to 3% same store admission growth is what we have been reporting, 4% or so pricing growth I think looks sustainable. And so again the wildcard remains on the Acute side the levels of uninsured and, you know, as it always does any reimbursement challenges that we may face, and you mentioned Texas UPL, we did reverse in the third quarter some prior year Texas UPL, just because we anticipate that there may be some challenges to the specific ways that UPL was funded.

But we continue to recognize UPL for 2007, CMS has announced they are going to review some of the programs in Texas. We think some of the programs that we are part of have already been reviewed, and probably won't be part of this CMS review.

And we think other programs even if theory viewed are likely to pass the CMS muster or criteria, although there is certainly no guarantee of that so we will have to wait and see. So we remain having all of our 2007 Texas UPL reported in the financial statements, and continue to believe that that money is safer now, That is the way we are thinking about the future and we continue to obviously watch it carefully.

Maybe just one more here, the behavioral margins, anything to say about that, and whether on a consolidated basis I think they were down a little bit, but any pressure points there? Thanks.

No, I think we mentioned this last quarter. I mean we may be sort of past the period when people can expect those to go up 50 basis points a quarter. But as long as we can sustain the kind of volume growth that I just talked about and pricing growth, I think that we should over time continue to see increasing margins.

One of the pressure points we do have is we are opening new capacity, and we can't build that capacity immediately upon opening. So that is a little bit of a drag. But obviously as you know those margins remain very strong, and I think our outlook for the fundamentals of that business remain very good.

Thank you.

Next question, Christine Arnold.

Good morning. Continuing on kind of the same line of questioning on '08, how do we think about the incremental volume that you got this year and what is likely to happen when United mergers with Sierra which is targeted by year end? Do we think that some of that line is to be lost, and the volume trends to temporarily turn south?

It is hard to say, Christine. Obviously Sierra and United will have a big say on what happens to that volume. So we are certainly not the only opinion that counts in all of this. I think we said all along that we thought that over time the Sierra/United network, or the Sierra/United volume would probably gravitate back to a situation where all providers were in the network in some form or fashion.

So I think some of that Sierra business maybe is at risk, but as those of you who follow us know, at having the Sierra volume has not been a wholly positive issue, it has squeezed out some higher paying business, and it has challenged our operators to manage their mix of business very carefully in an environment of very strained capacity.

So we have a contract that is coming up for renewal with Sierra in the middle of next year. We will negotiate those rates carefully. As I am sure they will, and I am sure the market may undergo some changes, but I think it is a little too early to the predict exactly how that is all going to sort out. Then could you talk a little bit about McAllen, and what you are seeing there, and when you expect Renaissance to open, and what that might mean in terms of extra capacity? Renaissance has opened its OB service and OB capacity I think some time in October, and we clearly have seen some impact on that.

It's too early to the tell at the end of the day what sort of a bottom line impact that financial will have on us, and as we have said before, we think it will probably a greater proportional impact on our competitor ACA Hospital, just because they have a better mix of business historically than we have in the OB service. But our expectation is that it will have some impact.

We are used to that competitive environment now in the McAllen market, and we are working hard to do a number of things on our end to regain some of the better paying commercial and Medicare business, and we will continue to do that. But Renaissance continues to build and expand and open new services, and as best as I can tell, they are going to continue to do that as well.

Final question. As you think about the volumes and the pricing here, it looked like you got back some of that lost higher priced good business in Vegas this quarter. Is that true? Is that what we are seeing in the better pricing and the better volume, and is that sustainable? Do you think will you hang on to that?

I think so. When we had fairly depressed pricing in the second quarter, and we really attributed that to two factors. One was a higher level of uninsured, and two was to a less favorable mix of business in Las Vegas, I think in the third quarter we were able to correct the mix of business or modify it in Las Vegas, so that we had a better experience than we had in the second quarter, although probably not as good as we had in the first. Unfortunately our uninsured volumes continued to remain high.

I think that the better mix of business in Las Vegas is sustainable certainly for the next couple of quarters, until we get to the point where we renegotiate our contract where the United/Sierra merger is completed, and there may be some configuration in the market and we will have to see how that all sorts out.

Next question, Gary Lieberman.

Thanks, good morning. Just wanted to go back to one of the questions that was asked earlier, in terms of you see capital and the pay down of debt in the quarter it sounds like you are still fairly optimistic that there might be a deal out there that you would be interested in. So given that, should we expect that in the fourth quarter, I guess for the near term future, that the use of cash would be similar in terms of paying down debt as opposed to purchasing stock?

We had the similar conversation in the second quarter conference call. We clearly entered 2007 with the notion that there would be more properties for sale at more reasonable prices, particularly on the Acute side than we have seen for a number of years. The reality is we haven't seen much of that, and at the same time we continue to look at our own shares as an attractive buy.

We did buy some $11 million or so of our own shares in the second quarter, and we are going to continue to sort of go through this evaluation on a continuous basis, and look at the opportunity to buy earnings streams externally, as well as buy our own earning stream which we find very attractive right now. I don't think that we can sit here right now, Gary, and say we are going to go in one direction or another. It is going to be something that we are going to continue to reevaluate literally if not on a daily basis, certainly on a weekly, or fairly frequent basis.

Okay. And then one housekeeping item. Do you have the bad debt at the Acute care hospitals? I didn't see that in the release.

We do. We will find it, and I will provide that information as we continue to answer questions, Gary.

Okay. Thanks a lot.

Your next question comes from the line of Erik Chiprich.

Good morning. A question on the Other operating expense that continues to creep up. Are you seeing any pressures there, is that professional fees or doctor recruiting, or is it seasonality going on in that line item?

I would just caution a couple of things, Erik. One is we did in the quarter as we disclosed in the press release have a couple of non-recurring items that affect that line. The legal issue as well as the write-down of the joint venture asset, both on a combined basis provided about 6.2 or $6.3 million of Other operating expense, additional Other operating expense in the quarter.

I think the other items to keep in mind which we talked about last quarter as well, is that as part of this construction contract, construction management contract that we have in the third quarter, there is about $20 million of revenues and a similar amount of expenses, which again get recorded in Other operating expenses that are inflating that line. So I don't know whether people have that modeled in there. But that is something to keep in mind.

Other than that, the one other thing I will comment about Other operating expenses is we did see a big savings over the last year when we converted from an outsourced pharmacy to an in-house pharmacy, and we are anniversarying that impact. So I think that has somewhat muted as well. Other than that, Erik, I am not sure that we see any particular pressure on the Other operating expense line.

Let me just add in response to Gary's question, we had about $103 million of Acute care bad debt expense in the third quarter of 2007, and running about 11.9% of revenue.

And one additional question. I think you mentioned you opened 50 additional psych beds during the quarter. What is the potential to accelerate that pace going forward?

Well, you know, we have talked about being able to open somewhere in the neighborhood of between 400 and 500 beds a year for the next couple of years, and that being our plan unfortunately, or it doesn't necessarily come on ratably.

So I think we will continue at that pace. There will be quarters when we have more openings, and quarters when we have less. But last quarter I think we opened 115 beds, and the quarter before that we opened 88 beds. So 50 is kind of on the low side but again, I think we are shooting for that kind of 400 as a target. Okay, thank you.

Next question, Matthew Borsch.

Thanks for taking our question, this is Shelley Gnall for Matt. I have a follow-up question on the Acute care bad debt. Steve, I was wondering if you had a breakout into the co-pays and deductibles, versus the uncompensated care buckets for this quarter, and maybe as compared to last quarter and a year ago? If you don't have numbers I wonder if you could speak directionally what are you seeing, and what the key drivers are in each of those buckets?

Shelley, I think historically our sense has been that probably about two-thirds of our uninsured expense comes from folks who have no insurance whatsoever, and about a third of it comes from the portions that are due after insurance. We have seen both of those amounts rise obviously over the last few years, but that relationship has remained largely constant of about two-thirds/one-third. And I don't think we see that changing dramatically in the future.

Great. Thanks. I had a quick question on the labor cost. Is this driven by contract costs in the Las Vegas market, and is there anything you can do to see reign in the contract labor costs, perhaps bring a staffing solution in-house?

I mean, I am not sure sort of what the premise of your question is. I think our labor costs were at least from our perspective kind of in-line with what we expected. We certainly had said before that probably our use of temporary nurses are higher in Las Vegas than they are anywhere else in the country. We do have our own in-house nursing, nurse registry pools in Las Vegas, as we do in many markets. I think frankly we use a lot less temporary nursing today than we did several years ago.

And I think for the most part in today's environment we use it for the right reasons, which is temporary spikes in volume, et cetera, that it is not productive to staff up permanently for. So we continue to look at that in every market we are in. We continue to look for ways where we can to reduce temporary nursing. But we certainly don't view it to be the problem that we viewed it to be five years ago, when it was a real drain on our earnings.

Okay. Great. Thanks.

Next question, Adam Feinstein.

Close enough. Thank you. Good morning everyone.

Adam Feinstein, is that you?

Yes, it is me! Good morning! I guess there are several questions here, Alan and Steve. I guess starting with Vegas, you spent time talking about the Sierra contract and what was going on there. I wanted to see if you could talk a little bit about the competitive landscape in Vegas outside of the Sierra contract, and then at the same time, Centennial Hills is opening up in early 2008, maybe just talk about what the expectations are there, in terms of I know you talked about just the initial impact, Steve, but maybe talk about a little bit more of what you are ultimately expecting from that hospital. And I have a couple of follow-up questions.

Sure, the competitive environment in Las Vegas is, it is competitive. I mean, there are some pretty aggressive entities that we compete with in Las Vegas, including HCA and Catholic Healthcare West. Both have expanded and built new hospitals in the last few years. Both continue to have some capacity expansion plans on the boards although there are, other than Centennial, no other brand new hospitals being built at the moment in Las Vegas.

I think in terms of what the expectations are for Centennial, I think it is worthwhile to go back and look at our experience when Spring Valley opened in the Fall of 2003. We had a couple of quarters where we cannibalized some business from our other hospitals when we first opened, as it caused a little bit of disruption in the market, as physicians changed their practice patterns, and patients changed their patterns for seeking healthcare.

In relatively short order, within about three or four quarters, Spring Valley began to earn healthy positive margins, approach the margins of our, the average margins of our hospitals in the market. I would think Centennial would have as good if not a better experience. It is probably in even a better demographically-situated part of the city than Spring Valley was. So our sense is much the same.

We will have a couple of quarters of disruption perhaps, but in the long run Vegas remains an under bedded market, one in which the hospitals operate at very high levels of capacity, and I think that is going to continue in the market, even despite the references I made before to some bumps in the housing market, et cetera, the market continues to grow. People continue to move in. Gaming projects continue to be built, and capacity expands in that industry, which is obviously at the heart of Vegas' economic health. So we just think it remains a very, very robust market for us.

Okay. And just a follow-up question. I guess the minority interest, Steve, was a little bit lower than I what I was thinking for the quarter. I know a lot of that is impacted by Vegas, any sort of true-up there associated with expenditures related to the new hospital? Just trying to get any color there?

No, there is no P&L, a little bit of start-up costs running through for Centennial Hills, but I don't think it is material.

And other than that I think it's just the idea that, I mean the minority interest in the first quarter was extremely high, because we had a very robust quarter when we first got the Sierra volume drop dramatically in the second quarter, and the third quarter we are kind of in between, and as I was saying to Christine before, I think that is sort of where we will settle in it seems to me.

Just, you spoke a little bit before about the Texas upper payment limit. The Texas Dish program, any updates there in terms of just what you are anticipating, and then I guess I have one more follow-up after that.

Actually the Texas Dish payments have remained fairly stable over the last few years, in our expectation we do not have our funding numbers yet for their fiscal year, which actually begins in September, or began in September. But our expectation is that our disproportionate share of funding will remain pretty constant in the state's next fiscal year.

A final question on the investigation. I appreciate the detail that you provided up front. Just wanted you to just talk about it in a little bit more detail. And I know you are limiting in terms what have you can say, but obviously you guys have always avoided these things over the years, and have done a good job in terms of managing through a lot of the regulatory issues, compliance issues in this industry.

I just, any comments, perspectives, anything you can say Alan, in terms of just your thoughts on this matter, and just in terms of just managing through this certainly hits all of the companies from time to time, but since you guys have never really had any sort of investigation, just curious just in terms of how you guys are responding to this.

I will let Alan answer this. I just want to make one quick comment. Partly we were saying relatively little from a detail perspective, because there is not a great deal that we know. I think that as we indicated in the press release, and in the prepared remarks, the message that we want to deliver is that the investigation is active, and it is ongoing and we certainly don't view that as a good thing, but we want to acknowledge that, and keep people aware of that.

But we remain largely in the dark about the substance of the issues that the government may or may not be concerned about. At some point we assume we will know more, and we will be able to comment at that point. But it is difficult for to us comment at this point on the substance of what the government really might have issues with. Certainly Alan can add to that.

No, Adam, the only thing I would say is that you said something to the effect that we are limited in what we can say. I think we have said everything we know. There isn't anything that we know, but it is ongoing and as Steve said, actually you have all the information we have.

Okay. All right. Well very good. So I appreciate the details there, as always. Thank you.

Next question, John Ransom.

Hey, good morning. A couple things. I was just looking for an update in the Manatee market, if you see any daylight in Florida, or if it continues to get worse from a bad debt standpoint? And also just how the two hospitals are performing now that the one down in the Ranch there has been open for a couple of years? Thanks.

Sure, John. Manatee had a major renovation which was completed at the end of June. Unfortunately for the Florida market that is not the greatest timing, so having that renovation for the summer is sort of probably not a good indicator of what sort of an impact it will have. Probably in our next call when we have gone through a busy season, we will have a better sense of what that really has meant to us.

Lakewood Ranch opened in late '04, has been open for a few years, we continue to really like the Lakewood Ranch market. I know, John, you are familiar with it, it's just a very demographically positive market, just a lot of good economics around the market. The challenge that we have there is we are really obligated in order to succeed to take market share from some very large and successful hospitals in Sarasota. I think that is taking us longer to accomplish than we thought.

And so Lakewood remains just a slightly profitable hospital for us. But I think our long-term view of the market in that hospital remains quite positive. And I know you have been down there, and if anyone has been down there, I think they would understand why we continue to have a very good feeling about the long-term prospects of that market. It reminds us in many ways of the Summerland market in Las Vegas, and other markets that we have had experience in.

I think they have a nicer hotel there than we do in the whole huge metropolis of Tampa, so I am probably jealous if anything.

The other question I had was, the states have been in a pretty good Medicaid cycle and a good revenue cycle. Obviously that is starting to turn. Are you, what are you hearing about any pressures from, I know we discussed through the June budget cycle but any states we need to be aware of, that may going in reverse from a Medicaid standpoint?

No, actually you are right, I mean I think we've gone through a few years of pressure in many of our states from the Medicaid program. I think actually most of the data that is out there shows that state budgets are actually looking better, et cetera. I think if anything I think we are expecting maybe a little bit of the loosening of some pursestrings across the country.

Now having said that, our expectations and our own modeling for the next few years are Medicaid price increases in the 0 to 2% range. I mean certainly nothing extraordinary, but even that is probably a little bit better than we have actually experienced over the last few years.

Okay. Thanks a lot.

Next question, Kemp Dolliver.

Thanks. A couple questions. First, is the construction project for the third party still likely to wrap up around the end of this year?

It will probably slip over into the first quarter of next year, Kemp, but I think it is about three quarters done from a construction perspective, and it's set to open in the first quarter, so I am assuming that from a bill paying and bill collecting perspective, we will have some first quarter activity next year, and it should then largely ramp up.

And, Steve, could you quantify the self pay volumes for the quarter?

I realize as I was looking through the material, that was Gary's question before, I am not sure I have that with me, Kemp. Although as I sort of said before, our self pay volume trends in the third quarter pretty much mirrored what we have experienced in the second quarter, and we frankly I think had hoped for a little bit of an improvement and just for the most part saw the trends continue.

That is great. Thanks.

Your next question comes from the line of Tom Gallucci.

Thank you. Good morning. Just a couple of follow-ups to some of the questions that have been asked, I guess. Just on the South Texas investigation. I know that we know what you know. Did they give you any sense for timing at all, in terms of next events or anything like that, that we might be able to find out more?

One of the challenges that we have, Tom, is that the government I think has said a few times that they were intending to try and bring this to a conclusion perhaps by the end of the year, et cetera. But there is no sort of guarantee of that and we can't necessarily count on that. So we sort of continue along according to their schedule, when they are ready to present their findings to us presumably they will do so, and there is little we can do to influence that schedule. We intend to cooperate, and we will essentially move along according to their schedule.

Then just on the leverage again on the balance sheet and uses of cash, if I am not mistaken you are probably somewhere around 3 times debt to EBITDAR. Can you remind us sort of of your comfort level of what you would move up to? And I think you have talked a little bit about being opportunistic on the acquisition side. You did do some share repurchases in the quarter but I might have thought it may have been a little bit more aggressive, so just remind us there where you would be comfortable going, and maybe if you see any more significant uses of cash between now and let's say year end, as opposed to what we have been seeing in the last few months?

Sure. I think as the conversation went before, the, you didn't see the level of share repurchases that perhaps you expected, not because we were necessarily concerned about our debt levels, in fact I think Alan said obviously we have plenty of capacity. But as we said, we have been waiting for perhaps acquisition opportunities that we haven't seen for a few years, and there is no guarantee we will see them.

But our expectation was that we might have an opportunity to see some more of those. We certainly have remained one of the more conservatively leveraged companies in the space as you know. We probably don't intend to take on the LBO, or LBO-like levels of debt of some of our pierce. But we certainly can take on more debt, and for the right transaction and for the compelling opportunity, we are certainly willing to do so.

So I think as Alan said before, we are going to continue to evaluate. We are going to continue to watch. We have been cautious. That has sort of been our history. But we are also going to respond to opportunities as they arise both, in terms of buying back our own shares, as well as any external opportunities that present themselves to us.

Just a final one, the Behavioral Health business pricing was up nicely sequentially, was that more a function of mix, or can you expand on what the dynamics are there? Thanks.

sure. We talked a little bit about in the first six months, I think pricing on the Behavioral side was a little bit lower than we expected, and I think we said that we thought that there were things that we could do, in terms of mix and contractual negotiations and things to push that number up a little bit, and I think to our operators credit we managed to accomplish a number of those things in the third quarter, and that we think I think have said before we ought to be able to sustain 4 to 5% price increases on the Behavioral side. We were kind of at the high-end of that in the third quarter which we were grateful for, but we think we can stay in that range at least.

Okay. Thank you.

Next question, Gary Taylor.

Good morning. Just going back to Las Vegas briefly. Actually from a seasonal perspective it looked like Las Vegas bucked the typical seasonal trend and the margins and the profitability were actually up. You had kind of characterized the first quarter as the 'Best of all Worlds' and the second quarter as specific sort of headwinds, and had thought the third would kind of be in the middle, which looks like where it fell out. Is there anything sequentially different in Vegas outside of just payor mix?

I would just say two things, Gary, one I think the reference you made to seasonality in Vegas, there is some seasonality but just from a personal perspective I can tell you as someone who has now been going to Vegas for 20 years, who used to go to Vegas in the summertime and it would be dead, and that's just not the case any more the the hotels are a lot more busy, and more occupied than they used to be in the summertime. I think there is less seasonality in Vegas than there was historically.

The other issue I think this whole Sierra issue really has nothing to do with seasonality as much as it does with the major contractual change that was made at the end of the year. And I think what happened is at the beginning of the year, in the first quarter is we got all of this incremental Sierra business, and we were able to keep all of our other business at the same time.

And then as the year went on and certainly the second quarter went on some of that business began to gravitate sort of naturally in some cases to the less busy facility, which I think tended to be the HCA facilities which had lost their Sierra volume, and certainly HCA was proactively trying to attract non-Sierra business, and I think they were successful in doing it in the second quarter, and in the third quarter our own operators responded with a little bit more balance, attracted back some of that business, just managed their business a little bit better, and as I said to a couple of people on the call, I think that is kind of a sustainable level where we are in the third quarter.

Have you been spending a lot of time in Las Vegas?

Not recently.

Okay. So it is pretty, that was your expectation that you had laid out for us, you thought third quarter would be some sort of balance between the trends you had seen in the first and the second.

On the Texas Dish, particularly some of the upper payment limit counties in question, have you changed anything with respect to revenue recognition or accounting treatment on any Dish monies, or I guess essentially in a few counties the state is not paying Dish monies. Is that right?

I think what has happened is, and I think we can confuse the two programs. I don't think there has been any interruption to Dish monies, or disproportionate share monies. About three weeks ago or so, Texas issued a press release saying that CMS was going to look at some of the specific county UPL programs, which is different than the disproportionate share programs. And what Texas said was they were going to defer any new requests for money until CMS sort of cleared those programs. I think the last payments made for UPL were in August. They tend to make those payments quarterly in the state, on the state fiscal year.

So the next payments were scheduled to be in November, we don't know if they will be made on a timely basis or not. CMS has started the progress of gathering information to look at certain county programs. We think that our programs in South Texas are likely to be looked at, because they haven't been looked at before, but our program in Amarillo, where we get two-thirds of our UPL reimbursement is probably not likely to be looked at in this round, because it has been reviewed before by CMS, in the past and has passed muster previously. That is our expectation. We don't know if payments will be made in November on a timely basis.

From but from an accounting perspective as I mentioned before, we have not done anything to change our recording of UPL monies in the September timeframe, which is really the only timeframe that is at issue at the moment, because we were paid through August.

And have you, maybe I missed it then, ex Amarillo, have you talked about what the revenue run rate is from the UPL?

Yes. What we disclosed in I think our, definitely our 10(K) and I think our 10(Q) as well, that we expect to receive in 2007 about $19 million of UPL monies in Texas, about two-thirds of that in the Amarillo market, and the remaining one-third or so from the South Texas markets, McAllen, Laredo, and Maverick County.

Great. My last question, just going back to the construction contract, $20 million of revenue in the quarter winding down by the first, does the revenue amount wind down for 4Q to 1Q? Or does it look stable sequentially?

It is a little hard to predict. I would think it probably remains about the same in Q4, and then I think probably winds down some in the first quarter of next year before ceasing altogether.

Great. Thanks.

Next question, Whit Mayo.

Thanks, good morning. Length of stay in Behavioral looked to be up a little bit for the quarter. Any color you can provide on that, whether or not that was the mix between RTC and new beds, just any outlook or your opinion of where you see that trending over the next year?

Whit, I have to be honest with you, I don't recall sort of seeing that trend, other than if you suggest it's there, it's there. We have obviously weighted the portfolio a little bit more to the residential side over the last few years, so it really doesn't come as a big surprise. But just generally I will tell you on a same store basis we have seen very few changes to our length of stay. If there was a little bit of an increase, I would suspect it was probably a little bit of a shift mix to the residential side.

Great. And similar to many of your peers, it looks like you are likely to come in a little lighter on your CapEx relative to your guidance. How should we think about your spending for the fourth quarter and any thoughts at this point on '08?

I think that we will wind up spending in 2007, just somewhere in the 365 to 375 range, and probably for '08 as we finish the Centennial project, but start up to our Texoma project, I think that 375 range is probably as good a guess as any at this point.

Great, finally I may have blanked out on the call, but I didn't hear any mention of guidance at this time. I don't know if you guys are confirming the range of 3.00 to 3.05 at this point, or any changes there?

We haven't commented on it, Whit, because as sort of has been the case all year we remain comfortable with the original guidance that we issued, so we are leaving it speak for itself, and sit out there.

Thanks, guys. I appreciate it.

Your next question comes from the line of Matthew Ripperger.

Thanks very much. Just a couple of questions. Can you comment on how much CapEx you are going to need to finish the Texoma and Palmdale hospitals, and how that's going to be staged out over the next couple of year in '08 and '09?

Palmdale is somewhere in the neighborhood of 175 to $185 million project, probably there is a decent amount of that spent on that in '07, but the bulk of that will be in '08, and we will finish in '09. Texoma is less costly because it is in Texas, it is probably in the 130 to $135 million range, and that will probably be split between 2008 and 2009.

As you sit here today, are there any other replacement hospitals or new hospital development initiatives that you have got sort of in the plans for the next couple of years?

None that are beyond what we have looked at some new properties in California potentially, et cetera, but certainly none that are in the committed stage.

Okay. And second question just on mental health parity. It seems like there is growing momentum for that. Two things, one is handicap, what you think the likelihood of parity going through, and two is, to see if you can update us on how you and your Behavioral operators could actually impact utilization on the side going forward?

As far as the handicapping piece goes, I think more observationers have commented that there is a better chance than ever that mental health parity legislation gets passed, but I still think it is a 50/50 shot, in terms of whether it can pass both Houses of Congress, it passed the Senate, but is always historically stalled in the House.

In terms of what the impact could be. Hard to know. We do operate in some states where it has, the states have passed mental health parity legislation, and our experience with that is we have had some incremental benefit in those states, but it is not terribly dramatic.

Other observers have indicated they think that there could be a 10 or 15% increase in utilization. I think we take the approach that we will wait and see whether A) As you indicate, whether the legislation passes at all and B) Whether that kind of really measurable impact would materialize. We would certainly be thrilled to see that happen, but we are not predicting it just yet.

In the past you have provided margins for the McAllen market. Did you update those margins today, or is that something that we should look forward look for in the Q?

We generally do in in our filings. I don't have it in front of me, but I don't think our McAllen margins have changed dramatically. They are probably in the mid single digits, and that is kind of what our expectation was for the year, and I think we have been running in that range.

Okay. Thanks very much.

Your next question comes from the line of Ken Weakley.

Thanks and good morning everyone. I was just curious if we could talk about maybe operating margins by payor category. Do you have or are you willing to disclose specifically or maybe just directionally revenue per adjusted admission across your payor categories? I am just trying to get a sense, especially given some of the Medicaid legislation coming, about where profitability might go on different payor classes?

I mean, I don't have that information in front of me, Ken. I do think that the payor classes in most markets have sort of gravitated closer to each other. I still think in most markets that commercial payors are better margin payors, but they are a lot closer to Medicare today than they were just a few years ago, and I think Medicaid in most markets and in most service lines lagged a little behind those two, but I don't have those consolidated numbers in front of me.

If had you to guess given some of the changes with the expansion of the DRG system, as well as to continue roll-out of recalibration, do you think Medicare patients become more or less profitable given your asset mix?

I think we have felt as we look at the expansion of Medicare DRGs, that we will benefit slightly from the expansion. Obviously it's incumbent upon us to make sure we are coding properly, and doing everything we can so that administratively to handle the expansion properly, but our general sense is that we will do a little bit better.

Thanks so much.

Next question, Frank Morgan.

Good morning. Steve, I wanted to follow-up on some comments you made earlier about the trends in uninsured volumes. Could you tell me, you said that the trends are similar, is the trend the growth rate in the number of uninsured, or is the trend of percentage of uninsured as a percentage of total admits, is that staying the same or growing at about the same rates, I guess if you could help me on exactly what you mean by the trend?

And the second question relates to the accounting treatment for these UPL payments, like how do you accrue for that based on what you are expected or do you, how does that work? Thanks.

Sure. I think it is to your first question, all I was saying before was kind of recapping the year, we saw a much lower number of uninsureds in the first quarter than we sort of expected and anticipated for the year. It spiked up quite a bit in the second quarter, and then again the number of uninsureds I think continued at that high level in the third quarter. It is sort of what I was trying to say when I talked about the continuing trend in the third quarter.

As far as UPL revenue recognition goes, when these programs were established you know how much money, we are receiving from Medicaid-like sources, County programs or health district programs, and we also know what the Federal match level is in that particular state. So we have a pretty good sense of how much UPL money we should be receiving every quarter and every month, and that is the amount of money that we do record.

(OPERATOR INSTRUCTIONS) At this time, sir, you have no further questions.

Okay. We thank everybody for their time, and we will speak to everybody next quarter.

That does conclude today's conference call. You may now disconnect.