環球健康 (UHS) 2009 Q3 法說會逐字稿

Good morning, my name is Nickecia and I will be your conference operator. At this time I would like to welcome everyone to the third quarter 2009 earnings release conference call. (Operator Instructions) Thank you.

Mr. Fillton, you may begin the conference.

Thank you, Nickecia. Good morning, I'm Steve Filton. Alan Miller our CEO is also joining us this morning. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2009.

As discussed in our press release last night, the Company recorded net income per diluted share of $1.03 for the quarter, representing a 41% increase over the net income per diluted share earned during the third quarter of 2008. As adjusted, we earned $3.84 per diluted share during the nine months ended September 30, 2009 representing a 28% increase over the adjusted net income per diluted share during the first nine months of 2008.

During this conference call, we will be using words such as believe, 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, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2008.

We would like to highlight just a couple of developments and business trends before opening the call up to questions. On a same facility basis in our acute division, revenues increased 5.3% during the third quarter of 2009. Adjusted admissions and revenue per adjusted admission were each up 2.6% for the quarter at our hospitals owned for more than a year. We define operating margins as net income less salaries, wages, and benefits, other operating expenses, supplies expenses and provisions for doubtful accounts divided by net revenues. On a same facility basis, operating margins for acute cute hospitals increased to 13.0% during the third quarter of 2009 from 11.6% during the third quarter of 2008. The margin improvement results mainly from the rebound in volumes and the continued cost controls realized throughout the acute care portfolio.

As a percentage of revenues, our acute care facilities experienced number one, reductions in salaries, wages and benefits expense, due to a moderation of increases caused by general economic weakness, as well as productivity improvements, at certain of our facilities. Number two, reductions in other operating expenses, due primarily to various cost reducing initiatives, as well as the impact of the disinflationary economy which has limited our vendors and service providers ability to increase their prices. And three, reduction in supplies expense, due primarily to the cost savings realized from a new group purchasing agreement that commenced in April of 2008.

Our acute care hospitals provided charity care on uninsured discounts based on charges at established rates amounting to $169 million and $154 million during the three-month periods ended September 30, 2009, and 2008.

On a same facility basis, revenues in our behavioral health division increased 3.6%, during the third quarter of 2009. This increase resulted from increased patient volumes, and an increase in revenue per adjusted patient day. Adjusted admissions to our behavioral health facilities owned for more than a year increased 2% during the third quarter, and revenue per adjusted admission rose 1.5% during the third quarter of 2009, over the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 25.2%, during the quarter ended September 30, 2009, as compared to 23.5% during the comparable prior year period.

Our cash flow from operating activities was approximately $183 million, during the third quarter of 2009, as compared to $205 million in the third quarter of 2008. The decrease during this year's third quarter as compared to last year's quarter was primarily due to the timing of accounts receivable collections. Cash flow from operating activities increased $69 million, to $484 million during the first nine months of 2009, as compared to $415 million during the comparable nine-month period of 2008.

At September 30, 2009, our ratio of debt-to-total capitalization was 33%, and the ratio of debt to EBITDA was 1.31%. We spent $96 million on capital expenditures during the third quarter. Included in our capital expenditures were the equipment costs related to a new bed tower at our Summerlin facility in Las Vegas and the 220-bed Texoma replacement hospital both of which are expected to be completed late in 2009. And a new 171-bed hospital in Palmdale, California, that is scheduled to be completed and opened in the second quarter of to 2010. A little less than half of our capital spending in the third quarter related to these three projects. We also opened Springwoods Behavioral Health Facility, an 80-bed facility, in Fayetteville, Arkansas on September 1, and added 45 additional beds to existing behavioral health hospitals during the quarter.

Before opening the call to questions, I have just one other comment I want to make. As many of you know, obviously there has been an extremely vigorous reform about health care, or extremely vigorous debate about health care reform over the past few months. Alan has been a big part of that. He has made a number of TV and radio appearances. He had an op ed piece in "The Wall Street Journal" a month or two ago about tort reform. As a result of that, a publisher approached him and asked him to write a book on health care reform in a very short period of time, which he has done. And, that book is now available on both online, and Barnes and Noble and Amazon's websites, It's called "Healthcare Reform that Makes Sense" so if any of you find yourselves as you approach the holiday season in need of a gift for one of those hard-to-please people, I just want to make you aware of that.

Nickecia, we are happy to take questions at this point.

(Operator Instructions) You have a question from Darren Lehrich.

Thanks. Good morning everyone. Do I have to pay for an autographed copy, Alan?

No they're absolutely gratis.

A couple of questions here. I guess I wanted to start with the uncompensated care which was up I guess. The way we're looking at it, with the charity about 11% year-over-year, and about 2% sequentially, which I guess suggests that your're still seeing a trend in uninsured growth. But I don't think it has changed a whole lot. Could you just help me think through that, and just Steve, in relation to the bad debt that you've provisioned, in the period, which jumped a lot more than the uncompensated care. Can you just discuss that a little bit, and shed some light on the inter-play between charity and bad debt this quarter?

Sure, Darren. And I'm sure, as you remember, the second quarter results were almost the mirror opposite. Bad debt was rather low and charity care was rather high. But I think that we've always encouraged and continued to encourage people to look at the total uncompensated care figures together, and in total, the way you've done it and the way you described it. I think the way you described it is exactly the way we look at it. We're certainly higher than we were last year. We're a little higher than we were in the second quarter. All that is consistent with, frankly, the overarching economic environment that we find ourselves in with greater unemployment, and people finding it a little bit more difficult to pay all their bills, including their health care bills.

I can provide, I think what we believe is some rationale for the shift to bad debt in the third quarter. And that is in certain markets we have reports of increasing numbers of people failing to qualify for Medicaid. Again, I think all reflective of the economic environment. Those people tend to then wind up in the bad debt category, rather than in charity care. But in fairness, I think we've said many times over the years that the classification between charity and bad debt is not always terribly precise. So the bottom line instruction we give to people is to look at them all in total.

And just in terms of the underlying volume trend, for the uninsured patient base, what was that growth, and how much above your reported numbers on a consolidated basis were the uninsured volume growth?

Sure. I think that the trends we saw in Q3, vis-a-vis payer mix, were very similar to the trends we saw and discussed in Q2. That is, we saw a slightly higher growth in uninsured admissions, in our overall admissions. So in other words, uninsured admissions were growing by 50 or 100 basis points faster than overall admissions.

Commercial admissions, on the other hand, were growing at a slightly slower pace meaning they were 50 or 100 basis points lower than our overall admissions. And the third trend that we continue to see is a continuing shift of traditional Medicare and Medicaid patients into managed Medicare and Medicaid plans. I think we discussed each of those trends in Q2, and we saw them continuing in a very similar way into Q3. Okay.

And then my other question here is just about Vegas. Can you update us there, it looks like just focusing on the minority interest line, there was a big deceleration sequentially. Maybe something else is going on in Washington. But could you shed some light on that? And then one thing I also wanted to ask, Steve, is just as we think about the volume and the earnings that you picked up, relative to the Sierra business a couple of years ago. Can you remind us what the impact was at that point, post that event, and really just in relation to the possibility that HCA may have a contract at some point in the future again with Sierra?

Sure. So let me first make a few over-arching comments about the Las Vegas market. We don't generally provide specific information on individual markets, but as folks look at our minority interest line and often draw conclusions from that, and the appropriate conclusion to draw in this quarter is that results in the Vegas market are down. Not surprisingly, by the way, I think that given the very tough economic environment in Las Vegas, we've been trying to manage people's expectations to say that it was going to get tougher there.

In addition, I think we made the point in the last few calls that as our Centennial Hills facility matured, and began to approach market-wide margins for us, the rate of improvement at Centennial would slow and that would hurt our comparisons. So all that has happened.

I think in addition to that, we're seeing other pressures around the margins in Las Vegas. For as long as I can remember, we used to receive a couple of million dollars in county indigent funds in the third quarter every year. Those funds were not available this year because the county simply ran out of money. We've seen some pressure on length of stay amongst our managed care providers in that market. In virtually all of our managed care contracts in that market are per diem contracts, so reduction in length of stay results in some level of lower reimbursement.

So, all those together which, frankly, I think are all part and parcel of the weaker economy in that market are contributing to our weaker results there. Again, not in our minds at least terribly surprising, and certainly in our minds, the real positive story of the quarter is that we were able to overcome those weaker results in Las Vegas with stronger results in the behavioral segment and some of our other acute care markets.

As far as your Sierra question, first let me preface by saying that we really don't have any specific news to report in terms of HCA getting back into the Sierra network. We hear all kinds of rumors every day, and by the way, we will often hear diametrically opposed rumors in the same day. They are definitely back in. They're definitely not back in. So we're in no position to really predict which way that is going to go.

I will remind everybody that back in 2007, when the HCA contract first terminated with Sierra, we tried to estimate the impact for 2007, and back then said we thought it was about $0.06 to $0.08 of EPS for the year. What we explained at the time, and I think it would be true in reverse, that while we benefited significantly from additional Sierra business, we also wound up losing some other better-paying business, like Medicare and Blue Cross, and other commercial payers. And frankly, I think that we would likely see the opposite effect happen. If and when HCA got back in the network, we would lose some Sierra market share but we would certainly make every effort and we have continued plans to try and replace that market share with some of the other better payers in the market.

Thanks a lot.

Your next question is from the line of Ralph Giacobbe.

Thanks, good morning. Just, Steve, any change to the accounting policy around that charity in uninsured discount just given the lower number this quarter? Did you feel like maybe last quarter, you left some money on the table? So maybe a little more stringent in booking that revenue and showing it in bad debt and maybe trying to go after that revenue, any change there?

Ralph, absolutely no accounting change in the quarter.

Okay. That's helpful. And then I did want to ask about guidance, two parts to it. First, for 4Q, obviously even the upper end implies a sequential drop-off. Historically, we've not seen that drop-off. I know you've been pretty consistent with how you've approached guidance all year. Is there anything outside the norm, though, that we should consider for 4Q?

I don't think so. I mean first of all, we always of have to have the discussion that our guidance and our quarterly expectations are based on our own budget, and not necessarily on the street's estimates. They are not always the same. Our guidance for the fourth quarter largely implies that we will meet our original expectations for the quarter. Much I think as we said in the third quarter. You might view those conservatively if you assume that uncompensated care won't increase dramatically in the quarter. If you assume that the Vegas market won't continue to be pressured in a significant way. Those, in my mind, are probably the two biggest contingencies out there.

So far we've weathered both of those contingencies fairly well through the first three quarters. But they certainly remain a risk, and from our perspective, we want to be conservative as we think about those numbers.

And I know you haven't given 2010 guidance. Any general thoughts, whether it is top line or just margin, given what we've seen so far this year?

We will, as you suggest, I mean we will give our 2010 guidance as part of our fourth quarter earnings call, which is traditionally what we do. We're just really starting to get into the budget process in earnest. So I'm not going to make any specific comments. I think, in general, 2009 has been obviously an extremely successful year, and I think it has been so because uncompensated care probably has not risen as much as some people expect it, although it certainly has risen. And I think secondly, everybody has been pleased or surprised, however you want to look at it, by the ability of the Company and some of our peers, to control expenses.

I think 2010 is likely to be a year in which uncompensated care continues to rise. I think it is going to be difficult to replicate some of the cost controls and gains in cost controls we had in 2009. So my guess, just in general, is that 2010 growth is going to be more challenging than it was in 2009. But the specifics of that, we will wait until our Q4 call to address.

Okay. And just my last one. Let me throw out the acquisition question. Obviously, a lot recently out there. More entrants looks for deals. I guess what are your updated thoughts and maybe if you could put it in the context of uses of cash at this point and maybe even share repo.

Sure. I think that our view has not changed dramatically. I know some of our peers have said that there are perhaps, at least numerically, more deals out there in the pipeline. I don't think we would necessarily take issue with that. But we continue to be I would say a little disappointed by the quality of those opportunities.

I think those of you who have followed us for a long time know that we're not going to feel compelled to do acquisitions or any M&A activity unless we think it makes sense, it fits our market profile, at the right price, et cetera. And that's still going to be the case. So while there may be more facilities in the pipeline, I would say that we're not overwhelmed by the quality of those opportunities.

At the same time, we have been, over the last few years, a fairly active acquirer of our own shares. I think that has been a very good investment on our part. As you look back with the benefit of hindsight. And I think we're happy to continue to be an acquirer of shares at what are historically low multiples for our stock price, where we return to money to shareholders in other ways. I think all of that is on the table as we go into 2010. We will continue to survey the M&A market. We will continue to look at the best way to maximize our shareholder returns.

Okay. Thanks.

Your next question is from the line of Tom Gallucci.

Thank you. Steve, you mentioned that sometimes the street consensus is a little different than your budget. Could you give us an idea relative to your budget where the upside, both for the quarter and for the year is coming from?

Yes, Tom, I don't think in that sense that the beat of consensus estimates for the year is wholly different than the beat of our own internal budget. It is, as we said before, lower than expected uncompensated care to some degree, although much more so I think attributable to the cost controls that we've been able to achieve during the year. And I think we've made that point in each one of our quarterly calls. That's probably the most unanticipated variable of the year. The amount of beat in each quarter may be different, et cetera. But I think the underlying metrics or the underlying causes remain the same.

Sure. Okay. And then I guess geographically, could you hit a few of the bigger markets and tell us how they may differ versus what we're seeing on a consolidated basis?

Sure, well, I mean obviously we do, at least, report at the operating margin level, the behavioral health segment, and obviously that continues to perform very strongly, with significant improvement over last year. That's, I think, a portfolio-wide phenomenon.

And on the acute side, I think I mentioned before, I mean we're seeing strong performance in markets like Washington, D.C. We've talked about stronger performance in the South Texas or McAlan market, for a couple of quarters now. Our Amarillo market has shown some significant improvement. So there have been a number of markets, along with the behavioral segment, that have stepped up to the plate to help offset that little bit of weakness that we've seen in Las Vegas.

Is the bad debt, other than in Vegas, fairly even across the other markets? Are there any other markets that are markedly better or worse than what we're seeing?

I think it is worth noting that certainly the uncompensated care trends are pretty omnipresent throughout the portfolio. They're fairly pervasive. Virtually everybody's uncompensated care expenses are up. Some markets are up more than others. But, I think, generally we see everybody up, some a little built more than others, some less. But clearly the trend, as you would expect, with rising unemployment, in every single one of our markets, is the higher levels of uncompensated care.

Final question. Obviously we had some news from Site Solutions about the increase in charity care in a couple of markets. Are you seeing anything or in your markets, or do you see any indications that there may be some issues like that on the horizon for you?

I think it is worth noting that there is obviously people are aware that there is charity care in the behavioral segment, just as there is in the acute. It is a much smaller number both on an absolute basis and on a relative basis.

We have certainly seen some increase in charity care in our behavioral facilities. It has been generally around the margins, certainly not risen to the level of materiality that Site Solutions disclosed in their third quarter release. I think, in general, Tom, and I think you know this, we have been talking for a year now about the fact that pricing pressures from the uninsured, from Medicaid, from county programs, would increase in the behavioral segment. And they have. At least from our perspective, they have.

We have been adjusting our behavioral business model for the last 12 months to anticipate that, to be responsive to that, et cetera. I think the results are clear. We, despite the difficult operating environment and behavioral, have kept our margins growing, have continued to report very reliable steady results. It is a tribute to our operators that they've been able to do so, because it is a difficult operating environment, and we predicted that it would be a difficult operating environment, particularly as pricing is concerned and payer mix is concerned.

Thanks a lot.

Your next question from the line of Shelly Gnall.

Thanks. I was wondering if I would go back to Ralph's question and make sure I'm clear here. This is a more pronounced shift between the charity care and the bad debt bucket. I understand there are no accounting changes. But was there just a policy change as far as which segments of the population you are billing, or how are you defining charity care in your market?

Shelly, as I indicated to Ralph, we have had no policy change, no accounting change, nothing of the sort.

Okay. And then I guess one follow-up on behavioral health. As you look at the industry, is the risk of funding to these state or these public psychiatric hospitals a risk in the industry. Is it an evolving trend which is this is the trend which impacted your peer?

Again, Shelly, and as I responded to Tom's question, virtually every state, Medicaid often, lots of county, I alluded to the Clark County funding issues in Las Vegas. We're seeing almost every state and every county and municipality in which we operate experience budgetary issues. That's reflected in lower Medicaid rates and lower county rates. It is reflected in some utilization control trends that we've seen that we have talked about in previous calls. And I think that risk is going to be present as long as the economy remains under some pressure, which as you know, most people predict will be certainly for at least another few quarters. So, I think that those risks exist. We've managed our way through those risks.

We've continued to report, like I said, fairly steady and reliable results in behavioral as well as in acute. I think we feel that if management's proactive, we can continue to do so. But the challenges are there. And they're likely to persist for some time.

Okay. Thank you.

Your next question is from the line of Gary Lieberman.

Thanks. Good morning. Maybe just a follow-up, one question on the behavioral side. Steve, you made a comment about adjusting the business model to take into account the changing conditions. Could you elaborate on that a little bit and talk about what some of the things you can do to adjust the business model are there?

Sure, Gary, I think one thing that we certainly feel our operators are very good is knowing their markets, anticipating changes in their market so that if there is a reduction in capacity in their markets, and there is going to be a shift in patients, they are able to anticipate that, to work with community mental health centers and other providers, and markets, to find appropriate places of treatment for the uninsured population. To find other sources of funding for the uninsured population. To manage our own payer mix within our facilities, to try and minimize the amount of uncompensated burden that we will have to bear.

And then clearly, as we've been talking about literally since the third quarter of last year, we have been adjusting our cost structure, again in both of our business segments, to react to an environment where our revenue increases have clearly been lower than they have been historically, in both our business segments. And that has been the case now for a year. But I think because we have proactively adjusted our cost structure, and adjusted the way we manage our payer mix, we've been able to grow throughout that tough environment.

One housekeeping item. I'm not sure if you gave it, but what was the bad debt expense for the acute care segment?

It was just a shade under 14%. It is 13.9 or so.

And then you mentioned stock buybacks and acquisitions. You haven't purchased a whole lot of stock in the past two quarters. Is that because you are actively looking on the acquisition front and aren't sure what the best use is going to be? Or should we expect to see some more stock buybacks maybe in the fourth quarter?

Gary, we've commented I think a few times in the last few quarters that we have had an expectation that the M&A market, or the M&A environment would become more attractive. As we know that our not-for-profit peers, in particular, are finding themselves in far more challenging positions. Their willingness to invest money in large capital projects is clearly diminished. They're struggling with higher financing costs, and capital costs, et cetera. So we thought that would all result in a more robust pipeline of higher quality deals out there. And to your point, we've tried to keep our powder dry in anticipation of that. But I think we're getting to the point where we will decide that either those opportunities are going to manifest themselves, or we will find another way to reinvest our capital.

Okay. Great. Thanks a lot.

Your next question is from the line of Jason Gurda

Holiday gift idea, certainly can use those. Question on cost for next year. Do you think that you will see your rate of labor costs grow, and maybe other operating revert back to normal or do you think we will still have a period where the costs are growing a little bit less than normal.

Jason, I think that while I think there is a long-term inflation threat to the economy, particularly given the level of government debt, et cetera, I think most people expect that the inflationary environment is going to remain fairly muted, at least in the short-term. And I think as long as it does, we're not going to see great pressures on our costs, but - - and I think you saw a little bit of this in the third quarter. I mean, some of the initiatives that we've taken to defer or postpone salary increases and merit increases are by their nature temporary. And in fact, I think a little bit of the rise that you saw in salary expense in Q3 is a result of the fact that we did implement some salary and merit increases that had been postponed or deferred. So I don't necessarily think we're going to see a real acceleration in cost in 2010, but I don't think we're going to be able to replicate the gains and the real improvements that we saw in 2009.

On a wholesale basis. I mean I think and this is a longer more detailed conversation. But I think we see opportunities to continue to reduce supply expense in certain areas. And we could talk about other very specific initiatives that we think there are still some fruit left to, but, in general, I think it would be difficult to replicate the cost gains in 2009 into 2010.

Okay. Helpful. More near-term, your expectations for the flu season for this fall. How is that impacting your staffing for the fourth quarter?

Jason, hospital staffing tends to be done pretty much in realtime. As volumes increase, particularly from a nursing bedside perspective, staffing levels are increased and vice versa. So we don't really staff up for anticipated increases in volumes two or three months down the road unless they're seasonal in nature and we have really good reason to expect that they will occur.

So the answer is I think we've been dealing - - we've had, as I think a couple of our peers have reported, we have had a lot of or a big increase in ER activity related to either the swine flu or the psychology that surrounds the swine flu. We've had not too many admissions as a result of the swine flu. And I think, at least so far, we would report that the increase in the ER visits has not necessarily resulted in increased staffing or any significant or material changes in our staffing levels. Obviously, as some predict, the flu becomes more severe, there are more admissions, there are more critical cases. That might change that dynamic. But so far, we're not seeing it. And we don't have any plans to proactively react to it.

And just lastly. Your receivable balance is down to the lowest level in about two years. Just wondering if you could add some comments to that.

I mean I think it is a function of two things, Jason. One is that we continue to refine our collection efforts. We now have the great bulk of our receivables being billed and collected through regional central business offices, where I think we feel like we've gotten some efficiencies, and are utilizing our talent pool to the maximum degree. We've done a lot of different things again which is a much longer conversation to try and collect every collectible penny that is out there. And I think our folks have done a good job of it.

At the same time, I think we've been very cautious in what - - we certainly acknowledge the difficult environment with our accounting policies and our reserve policies. So I think those two trends together have driven down our days outstanding, as you suggest, so their lowest levels. So we're certainly pleased and very comfortable with those numbers.

Okay. Great. Thanks.

Your next question is from the line of Adam Feinstein.

Thank you. Good morning, everyone. Alan, I was very impressed with what you wrote in the journal so I'm very excited to go out and get the book. I'm going to go to look for it on Amazon here and maybe send it out to Steve for a holiday gift.

But just wanted to ask about your thoughts, though, on health care reform, before we go out and get the book here. But just a lot going on in the past week, a lot of noise in the house. Just curious to get your updated thoughts on how you see it playing out.

It is really hard, Adam, because it is changing daily, and I looked at this morning's paper, and you got Pelosi on one side and Harry Reid on the other and some of the things they come out with are just hard to imagine. So we will have to just play it out. There really is no way - - I was in a lot of conferences on this and we just have to see. Harry Reid is under pressure to win his own election, re-election in Nevada, So he is playing to his liberal base, unions, et cetera. And Nancy Pelosi she is from a very, very, very liberal area in San Francisco, so I don't know. The public option is not likely to get much support in the Senate, enough to do what they have to. So you really have to see.

The danger in writing a book by the way, the book was finished about three weeks ago, and it is hard to keep up with what has been happening. But it's got a lot of generalities which, I think, still pertain.

Okay. Well you may have to write a second one by the time everything is done. But maybe just a different subject here. Just Steve, I appreciate your comments about Vegas before. It is helpful to know what is going on. And I know you can only provide so much detail but just wanted to go into a little bit more. I guess when you say when things were weaker, would total operating profit dollars be down on a year-over-year basis? Or would that still be up with Centennial Hills ramping up and the margins were down? Just trying to better understand your comments before.

I think as the minority interest line would suggest, Adam, operating profits were actually down in the third quarter, for frankly the first time in certainly in a while, So again, I think it is just where you see the pressures across the board. The volumes are a little softer. Payer mix is a little weaker. And I cited a few other exogenous issues but I think they're all roughly tied to the pressures of the weaker economy out there. But no, I think as the minority interest line would suggest, we would acknowledge that operating profits are down in the quarter in that market.

That's helpful. And I guess going forward, just in terms of strategy, clearly guys have done a great job the last couple of years in terms of taking market share. So with the new hospital opening up, it is certainly a help in doing that. So any update in terms of what the strategy is going to be with some of those pressures? Yyou guys I'm sure have something going on in terms of managing through, it so just curious as you're thinking about it.

Adam, I mean I think as is the case in all markets, there is certainly both short-term and long-term strategies. And in the short-term, we're trying to respond to the economic pressures, by right-sizing the business, by making sure that if, for instance, I alluded to a reduction in length of stay by our managed care payers, that is all appropriate, and that we're not discharging patients sooner than is clinically justified. We're doing all those things.

I think on a long-term basis, it is a bit different story. We, as we have mentioned any number of times, we love the position that Centennial Hills has taken on, and think its long-term success really has - - I don't want to say no limit, but by definition, it certainly does. But I think it has a lot of room to grow, just as Summerlin has over the years. We are adding and opening, I mentioned in our remarks, a bed tower at Summerlin. I think Summerlin has been somewhat impaired in the last year or two by capacity constraints. And I think opening this capacity, even in a difficult environment, is certainly going to help their performance both in the short-term and the long-term.

I think our longer-term strategies are in-place to continue to enhance and solidify our market share gains in that market. And in the short-term we're going to do everything we can to make sure that we're operating as absolutely efficiently as possible in this very difficult environment.

Just final question here, I guess just you mentioned that the McAllen market has gotten better. I know that's been the theme. Can you provide some more details in terms of magnitude and what exactly you're seeing there with respect to the competitive environment?

I mean I think the McAllen story continues in much the same way as we framed it I would think over the last three or four quarters. And that is, while we have lost some of our lower paying OB business as a physician-owned hospital has opened an OB service, we have continued to grow some of our more profitable service lines and market shares and some of our more profitable service lines like cardiology. We've continued to regain market share in that business.

In addition, that is a market where our operators I think have done an outstanding job of right-sizing the business for this difficult environment, and therefore our margins in the McAllen market. While they're not back to our all time highs are close, which is, I think, a real again tribute to the operators, given how far they fell when the physician-owned hospital first opened. So I think all those trends continue. The one thing we mentioned in the last call and we've seen more in the third quarter is Texas is starting to catch up with some of the other states in the country in terms of getting hit by the recession. They were I think one of the last states to be hit. We're seeing that impact at the moment. But again, I think we will work our way through that.

Okay. Thank you very much.

Your next question from the line of Frank Morgan.

Thanks. A couple of questions. On the pricing side, I was wondering if you could talk a little bit about what happened with case/mix How much was acuity up? And what happened with surgical volumes both inpatient and outpatient and give us where you are with your managed care pricing, your book for 2010. Thanks.

Okay. I will try and go backwards, I don't always do a good job doing this, Frank. But I think managed care pricing, a good three quarters of our 2010 pricing is in the books at this point. And I think we continue to be in that 6%, 7% range, very comfortably, in terms of what we anticipate for our managed care price increases next year.

Surgical volumes, outpatient surgeries were up a little bit in the quarter, maybe up a percent or so. And inpatient surgeries were down a little bit, maybe down a percent or so in the quarter. And like I said, I'm now forgetting what your initial question was. Oh, case mix. The case mix, I think we said this in last quarter's call, Frank, has been rising very, very gradually, maybe 1.5% a year. And I think we just continue to see that trend occur. It doesn't seem to move much in any particular quarter. But I think if you go back and you look at it over the last few year, it is up somewhere in that 1.5% range annually over the last few years. And that trend seems to be continuing.

Okay. One final. Other operating expense ratios seem to go down fairly significant year-over-year. Any reasons there that you can identify? Thanks.

The one confusing thing we always have to talk about is we have this construction management contract or contracts which can sometimes distort that line. So there is about a $12 million or $13 million decrease in other operating expenses in Q3 of 2009 compared to Q3 of 2008, related to that contract, or contracts. There is a similar decline in other revenue as well. But I think it is always more visible on the expense line. Other than that, Frank, I think that we've been able to hold the line on other operating expenses.

I mentioned in response to somebody's question before, that we've seen our salary goes up a little bit in the quarter. And I think what you can really take from looking at our various functional lines on the income statement is that we've held a harder line with our third party vendors in terms of giving them price increases than we have with our own employees which I think is a perfectly appropriate thing to do. So as the business has remained sound, we've gone back and given those merit increases, et cetera, on the salary side, but on the other operating expense and supply side, we've held the line pretty tightly with most of our vendors. And, again, I think our operators have done a real fine job of that.

Okay. Thanks.

Your next question is from the line of Kevin fishbeck.

Thank you. Good morning. I wondered if you could talk about cash flow. Cash flow was pretty strong this year so far is. Is this a good number to be using as a base going forward? Or is there anything in there that we should be thinking about when we think about 2010?

No, I think particularly the year-to-date numbers, Kevin, are good solid numbers. There is some movement quarter-to-quarter in terms of good collections or just timing of collections, and payments and things. But I think that the year-to-date strong cash numbers are a good basis or foundation to think about.

Okay. And then I guess just thinking about the Q4 number, I guess seasonally, it ends up being a little bit weaker. Should we expect that same trend to happen this year?

Well, yes, I mean I will say, because I'm not sure if your fourth quarter question is an earnings question or a cash question.

A cash flow question.

Okay. Well, I mean the one thing you do need to think about in the fourth quarter, as we disclosed, it we've made this $27.5 million payment to the government. So that will be reflected in Q4. But other than that, no, I don't think we expect anything unusual from a cash perspective in Q4.

And as far as CapEx goes, you guys have been probably the most dedicated spending money on your own facilities and either through bed expansions or replacement hospital, spending 7%, 8% of revenue on CapEx. Is that a good number to be thinking about going forward? Can you just remind us beyond Palmdale if there is other projects like that will continue next year or should that CapEx number start to come down?

I think, as I mentioned in my remarks, a decent portion of our capital spending in the last 12, 18 months has been dedicated to these three very large projects, the Summerlin tower, the Texoma replacement facility and the Palmdale replacement facility. When those projects are finished, and Palmdale won't be finished until well into 2010, there are, at the moment at least, no other projects of that scale to replace them.

So I think at that point, and we will certainly give more precise guidance when we give our 2010 guidance about capital spending, but I think the expectation should be that you will see capital spending ratchet itself down in 2010, and potentially further in 2011, if there are no other like-sized projects that come up. And at least at the moment, they're not there. Now we certainly are evaluating those kinds of opportunities all the time.

Okay. And then just switching gears here. On the behavioral health side, you made a lot of useful comments about charity care, and pressures on rates. And I guess year-over-year the growth rate and rate per day was pretty good but sequentially, it was down in absolute terms, even though length of stay came down, which implied that you have seen some mixed shift to the higher acuity business. Is what was going on there just pure rate increases or was there anything funny about true-ups or anything that might have skewed that number down?

No, first of all, I don't think there is anything material. I mean again, around the margins, we see these same pressures in Texas. We saw maybe a half a million dollar reduction in our disproportionate share payments to our behavioral facilities, which aren't all that large to begin with. But that thing, we continue to see Medicaid rate pressures in certain states. Individually, all of these individual items are relatively small. Cumulatively, they start to add up. And that is what I think cumulatively causes the sequential decline in pricing. But I don't think there is any catch-up or true-up, as you suggest, or any one material change that has occurred.

Okay. So the Q3 number is probably a good number to use as a base going forward?

Yes, I think that is fair.

And then I guess just last question, since you mentioned addition in Texas. You can give an update on Medicaid outlook and any states you're keeping an eye on particularly?

I think as we always answer this question, I mean first and foremost, we get by far the greatest Medicaid payments in Texas. We're likely to see some reductions in our Texas, disproportionate share, UPL payments, et cetera, in 2010. Which, again, I think we will give more color on when we give our 2010 guidance. But I don't know that any of that is extraordinary or extraordinarily different, frankly, than the Medicaid pressures we're seeing in other states. It is just the fact that we have more of it in Texas than anywhere else.

Is that the only state that you focus on right now?

I think it is the only state that individually is material to us to in terms of the changes that we might see, Kevin. Certainly, I don't mean to imply it is the only state that is entertaining Medicaid or similar cuts, but it is certainly the only state where such a change would in and of itself be material.

Okay. Great, thanks.

The next line is from the line of AJ Rice.

Hi, everyone. And congratulations on the book, Alan. A couple quick questions just to flush out a little bit more of what you have already said. The labor expense line, any comments around, away from wage, productivity, turnover rates, how they have turned over in the year, given the backdrop of the economy and to what degree that has been a help for you?

AJ, I think, as I've read about any number of businesses, I mean I think the turnover rate in our business has slowed, I know it has slowed in other industries as well, and, I mean, that is certainly helpful. Our use, for instance, of temporary labor has declined. And I know a lot of folks on the phone follow some of the companies that are in that business. And I know they have struggled quite a bit, because I think hospitals are using less and less of that temporary labor. Our use of overtime has declined. So, in essence, we have the same number of nursing hours, but we're paying those hours at more normalized rates not at the registry premium, not at the overtime premium, et cetera. So that is a portion of the savings that you see. In addition to just lower, normal merit increases, and the merit deferrals, and postponements, et cetera. But that is certainly a piece of the savings you've seen in 2009.

Okay. On the supply expense side, you pointed to getting a new contract. How does that benefit flowing through over the year? Did you realize the benefit day one you think? Or did that ramp up? And what point - - I guess I'm trying to think of when you anniversaried the benefit of that. And also maybe any commentary around particular initiatives in the supply area that might benefit you going forward, if there is anything to call up there.

I think as we've talked about before, the new GPO contract took effect in April of 2008. So the great bulk of the conversion savings, I think, took place in the period from April of 2008 to March of 2009. But I think we've continued to see additional efforts on the part of our supply chain folks to move more and more contracts and to raise the level of compliance, and to work on specific high cost implant type contracts in the cardiac rhythm management, orthopedic, neuro areas where I think there is still some savings opportunities. And I think we will still see some of that into 2010.

So I referred in an answer to somebody before, I think we can't replicate all of the gains from 2009, but in certain area, and I think supplies is one of them, we still think that there are efficiencies to be had and we're working hard to achieve them.

Okay. And then just to go back to Vegas one more time. Two things I would be interested in getting additional comments on. Obviously someone raised the possibility of maybe the Sierra contract goes to more dual source preferred provider, at some point in the future. I guess you haven't been sitting still is my sense of it, while you've had that contract. You've added capacity. You've added, certainly, medical office buildings. Can you give us some flavor, do you feel like those doctor pattern, those doctor referral patterns have shifted at this point? And wouldn't necessarily go right back, even if someone came in, or you just can't really say that?

No, I think it is a very fair point, AJ. I think it is worth noting that Sierra has now been out of the HCA -- excuse me, HCA has been out of the Sierra network for it will be three years in December of 2009. That's a long time. And lots of things change in that period of time. Physician practice patterns change. Ambulance patterns change. Individuals ER choices change. So, I think we absolutely have the benefit of three years of patterns that are now directed towards our hospitals that are in-place and won't just change back overnight, even if HCA were to get back in the network tomorrow.

On the other hand, there is no question that physical proximity matters to people, and if you live a block away from an HCA hospital, and you get sick, the likelihood that you will go to their ER rather than drive an extra 15 minutes to our facility is certainly there. So I think it is a mixed bag. There is no question that if they were to get back in the network, it would have an impact on us, but I think your point is well taken, that the shear passage of time has worked in our favor, and a lot of patterns have changed. And as you point out, we proactively work to have them changed.

Let me add, AJ, I think that our management out there is very strong and very stable. And I think, as you can see from quarter-to-quarter, our share has continued to grow. And Centennial was a home run and on top of Summerlin, I think we understand the market the best and I think we're very, very solid in that market. So we're going to benefit from the growth when the market turns around. And as Steve pointed out, the patterns are not transitory in three years. And I think we're in a very strong position, no matter what happens.

Right and just one other aspect on Vegas, I guess you had obviously the impact on the sub prime and some negative fallout and your business held in there pretty well through that. It seemed like it was when the casinos and all started to have layoffs, and where you had people that were covered, clearly mostly through the Sierra contract that were getting impacted that we saw some dip in that. I know in the last few weeks, even, they've opened the City Center project which is huge. Is that a meaningful enough to pick up slack? And I guess I would also want to confirm that most of the workers associated with that - - those complexes are, again, union workers that are covered by the contract that you have with Sierra Is that right?

I think it's 7,000.

I think your point, the city center project that is opening on the strip, AJ, is an enormous project and I think if you heard Alan, he talked about, we understand at least initially, it is going to employ some 7,000 or 8,000 workers. And our understanding is that they are mostly union employees with good health care benefits. So I think that is both a shot in the arm to the overall Vegas economy, and certainly could wind up being a little bit of a boost for us. It is hard to know how that is going to fit into the overall environment in Vegas. But certainly the opening of that business has to be viewed as a good sign, again, both for the economy and for our business.

Okay. All right. Thanks a lot.

Your next question is from the line of Gary Taylor.

Good morning. You wouldn't think there would be any questions left. I have a few. Steve, I want to go back to a comment you had made really early when you were asked about uninsured admissions growth and you had said 50 to 100 basis points faster than overall admissions. I just want to make sure I'm thinking apples-to-apples the way you are. Inpatient admissions were up half a percent, so you're saying the uninsured admissions were up 1% to 1.5%. Is that what you meant?

Yes, that was absolutely my intent.

Okay. So when we look at total charity and bad debt, total uncompensated care, up 11% or 12%, or whatever it was year-over-year. The difference between that and the uninsured admissions growth would be charge growth and outpatient?

I don't think it is quite as clean as that, Gary, but certainly, a big portion of the difference is just the increase in gross charges. But you also have the increase in co-pays and deductibles in that number. You have an increase, I think, just in general, in the patient portions, being paid. That is the other missing piece that is not quite as clean as you would suggest. But otherwise, I think that is the right way to think about it.

So you've said explicitly a couple of times no change in policy or accounting. What do you attribute the shift to - - I mean it does ebb and flow, talking about the charity being down sequentially, it does ebb and flow a little bit quarter-to- quarter. Do you have any theory on why it ebbed a little more this quarter, or just in your view, it just is what it is?

Two things. I mean to some degree, I think we are unable to explain the changes. And I think we said the exact same thing last quarter, when bad debt was low and charity care was high and we just encourage people to look at the totals. The one, the only explanation - - and I think it is a reasonable one, and I think it does explain some of the move in this quarter.

I mentioned earlier in the call was - - and we definitely have objective data on this a higher number of people failing to qualify for Medicaid benefits in certain markets. So those people generally, if they can qualify for Medicaid, they're generally not going to qualify under our charity care guidelines and would likely end up in bad debt expense as opposed to charity care. That has certainly accounted for at lost some of the shift, but we have to acknowledge that's not all of it.

Can you give us the AR allowance, balance sheet allowance?

I'm not sure I have that, Gary, so I will have to do that offline.

The Q will be out, I guess.

In about a week.

Final question, I think, is on the behavioral side, you had mentioned some utilization control issues. It is not the first time you've talked about it. Is that primarily impacting RTC, or that is also impacting your hospital days as well?

I think that it will probably has more of an impact on the RTC business, just because so much of the acute business is real emergent and trauma-related, as somebody has tried to commit suicide, or has overdosed, et cetera. Those are not real discretionary admissions.

On the residential side, I think there is a little bit more ambiguity as to the appropriate treatment setting and exactly how long somebody, particularly an adolescent should be in a facility, et cetera. There is a little bit more clinical ambiguities. So I think it tends to be an RTC issue. Although we could certainly point to some instances where it has had an acute care impact as well.

And when you think about this business where the same store days, for a few years were pretty consistently growing in the 3% to 4% range, sometimes even better than that, and slower now. Is that drag primarily happening on the RTC side or is it pretty even on the acute and RTC?

I think it has been more on the RTC side. I mean, let me also make one other comment. I mean our behavioral admissions grew by some 2% in the quarter. That is on a comparison of 8% growth in last year's third quarter. To be perfectly honest, I found that to be an astounding number. I felt that given the very difficult comparisons, we would never get as high as 2%. I think that the real difficult comparisons for us end in Q3 and they become much easier as we move forward. So I think it is entirely possible, Gary, that we return to a more normalized level. But again, in direct response to your question, I think we've seen more weakness on the RTC side than on the acute side.

Great. Thank you.

Your next question is from the line of Kemp Dolliver.

Hi, thanks. Two questions. First, you had referenced briefly the length of stay pressure and seemed to suggest it was mainly in Las Vegas. Could you go into that in a little more detail? Is it mainly in Las Vegas, and what service lines are the payers focused on, since it has been a while since real comments have been made about incense by utilization management.

Two things, Kemp. I didn't necessarily say we only saw that in Las Vegas. I was talking about some of the operating issues that have affected Las Vegas and I cited some amount of length of stay pressure in that market, as contributing to a slight decline in reimbursement.

I don't exactly know how to frame it other than to say that I suspect that our managed care payers are under some of the same pressures that others find themselves in this economy. And again, given the fact that most of the contracts in that market are per diem based, one way that they can better control costs is by reducing utilization. Now again, I think we're talking about a tenth of a day or .2 of a day. But that can translate, given the level of managed care volume we have in that market, no a couple of million dollars.

Okay. That makes a lot of sense and is very helpful. The other topic relates to ER volumes, and flu, and pair mix and to the extent you've seen any change of substance in payer mix with your ER volumes and some of the hype about flu, and I'm thinking more in terms of whether the uncompensated care components increased.

I don't think so, Kemp. What we have finally found with our ER volume, just in general is that they tend to be representative of our payer mix in total. And so when we see an increase in ER volume, we generally have not seen payer mix change. I would say that has been the case with the flu volumes as well. And I think the other piece that is worth noting is that at least so far, it has been a fairly nonintensive, nonrevenue-intensive increase. So, even to the extent there are some increase in nonpaying patients for the most part, I don't think it has moved the financial needle very much.

Got it. Thank you.

We have a question from the line of John Ransom.

Wow. End of a long line. A couple of things. Med-mal, I mean we've had a reform in Florida, Texas, Pennsylvania. Have we milked most of the year-over-year benefit from that? Or will those premiums continue to fall materially in 2010?

John, if you recall, we had a $22 million or $23 million reduction in our malpractice reserve back in Q2. And I think that represented, at least, a couple of years worth of the benefit of some of the trends that you just mentioned. I think our general sense is that we're likely to see malpractice expense remain under control, in some narrow range of down slightly to up slightly. But no, I don't think there is tremendous gains to be anticipated in that expense item in 2010.

And secondly, given this is the first quarter of the new state fiscal, what would you say your average Medicaid pricing year-over-year change was?

What it was in the past year or what - - ?

No, no, no, this quarter, in September.

Oh, I mean I think we still feel that we are still getting Medicaid increases in some states, et cetera. So I think generally, we still feel that basically our Medicaid price increases are basically flat. We're not getting a blended increase. But therefore, we haven't moved into negative territory.

Okay. And then I guess as we look to 2010, how should we think about your managed care pricing? And how is your blended Medicare pricing? I guess we're hearing flat for most providers on the Medicare side and managed care in the mid to high single digits. Is that true for you as well?

Medicare is certainly in that half to one-half percent increase and managed care at least for us, in that 6, 7 range.

Okay. All right. Thanks a lot.

Thank you.

We have a question from Justin Lake.

This is actually Ken [Lavonne] for Justin. Just had a quick question on the capital structure. You mentioned that debt-to-EBITDA was about 1.3 times now. How do you see the typical debt-to-EBITDA ratio should be from an optimized capital structure? And you can talk a little bit about why you chose to pay down debt in the quarter rather than doing any share repo? Thanks.

Sure. First of all, I mean I don't think that -- and we probably had these discussions a number of times on these call. I don't think we have an absolutely optimal capital structure goal in mind. We do feel that the investment grade credit that we currently have does afford us a much lower capital cost than if we didn't have it, and that certainly has real value to it. We believe that we have at least several hundred million dollars of borrowing capacity available to us. And we could still retain our investment grade rating.

The issue is in terms of how we spend that money, or how we take on that additional debt. And we mentioned before, we're in this holding pattern, waiting to see if the M&A market changes in a material way. If it doesn't, then we will look at other ways of trying to productively invest our cash flow. We're not anxious to pay down a whole lot more debt at this point though. We certainly would acknowledge that.

Okay, great. Thanks.

Your next question is from the line of Darren Lehrich.

My question has been asked. Thanks.

Your next question is from Christine Arnold.

If you've already answered these questions, please tell me to go to the transcript. But in terms of bad debt being up, sequentially year-over-year, how much of that is the fact that charity and discounts were up last quarter? And I think your policy is to write stuff off after 90 days. How much of that was people who showed up last quarter? How much of is gee, we're collecting less in co-pays and deductibles, our collection rate changed and co-pays and deductibles went up? And how much of it is other stuff?

Christine, in fairness, I mean we have actually been asked that a few different times. And you can go back and look. But all I would say is I would encourage people to look at bad debt and charity in total. And we suggested that in Q2. And we would make the same suggestion in Q3.

Okay. And then Centennial, did you talk about the swing year-over-year there?

Only to the extent that I did say that as Centennial continues to mature, the rate of improvement at Centennial, by definition, is declining, and therefore, we're not getting the same bang out of that year-over-year Centennial comparison. Centennial continues to produce very impressive results. But clearly, the year-over-year improvement is starting to slow.

Is $0.02 to $0.03 year-over-year in the ballpark?

In the quarter?

Yes.

Yes. I think that's fair.

Perfect, thank you.

Your next question is from the line of Whit Mayo.

Thanks for letting me jump in at the end. Just one point of clarification, just back to the conversation around the RTC business. And then I think clearly over the past six years we've seen a phenomenon exist where you've been able to get some out of state pricing increases for your RTC. And just curious how that dialogue is going with states now given some of the fiscal pressures, and to what extent you're still able to obtain the same levels of increases? Or has that become more challenging? And maybe if you could just comment around how much of your RTC patient days is really coming from out of state, if it is at all.

I mean. I don't know that I have - - I know that I don't have those specific numbers in front of me, Whit. You're right, that there is some portion of the RTC business, in general, that is based on out of state adolescence, from states that frankly don't have the facilities to treat those kids within the states. I think we're seeing two phenomena. We're seeing both a decrease in the rates we're being paid for those kids and we're seeing more and more states trying to keep those kids in state, as a way of saving money. So again, it is just part of the overall pricing pressure that I think we feel has existed now for a good year or so. So I think that is just another piece of it.

Okay. So I guess is your answer that you're seeing pricing pressure on the - - or you're not getting pricing increases to the extent you were previously for out of state? Or the states that are keeping the adolescents within their states now, are they pushing those more towards outpatient programs at this point? It is probably a combination of both.

Yes, I think it is both. But if I had to guess, Whit, I would say we're feeling it more on the utilization side than we're feeling it on the pricing side.

Okay. That's real helpful. Thanks.

There are no further questions.

Okay. One last comment I will make then. I know a lot of the folks on the call are from New York, so I would extend an invitation that if any of you are down in Philadelphia next week, for our World Series Championship Parade you're welcome to stop by the office. We will be happy to entertain you. Thanks. And we look forward to talking with you at the end of our Q4.

This concludes today's conference call. You may now disconnect.