環球健康 (UHS) 2010 Q3 法說會逐字稿

Good morning. My name is Carnissia and I will be your conference operator today. At this time, I would like to welcome everyone to the third quarter 2010 earnings release conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a Q&A session.

(Operator Instructions)

Thank you. I would now like to turn the call over to Mr. Filton. Sir, you may begin.

Thank you. Good morning. I'm Steve Filton and 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, 2010.

As discussed in our press release last night, the Company recorded adjusted net income per diluted share of $0.55 for the quarter compared to $0.52 during the third quarter of 2009, as calculated on the supplemental schedules included with last night press release. We are revising guidance for the full year with earnings per diluted share expected to be $2.45 to $2.55 from the previously provided range of $2.45 to $2.65 per diluted share.

This guidance range excludes the impact of our acquisition of Psychiatric Solutions Inc and the items indicated on the supplemental schedules included with our press release. 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, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our form 10K for the year ended December 31, 2009 and our form 10-Q for the quarterly period ended June 30, 2010.

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 care division, revenues increased 1.9% during the third quarter of 2010. Adjusted admissions to our hospitals, owned for more than a year, were up 1.6% for the quarter.

On a same facility basis, revenue per adjusted admission increased slightly over last year's quarter. However, excluding the impact of the charity care recognition change implemented during this year's quarter, that I will discuss momentarily, our revenue per adjusted admission increased 2.1% over last year's third quarter. We define operating margin as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense, and provision for doubtful accounts, divided by net revenues. The impact of the items included on the supplement of schedules is not included in our divisional operating margins.

On a same facility basis, operating margins for our acute care hospitals decreased to 12.9%, during the third quarter of 2010 from 13.1% during the third quarter of 2009. Our acute care hospitals provided charity care and uninsured discounts based on charges, and established rates amounting to $214 million and $169 million during the three-month periods ended September 30, 2010 and 2009, respectively.

Our charity care and uninsured discounts during this year's third quarter includes approximately $17 million related to reclassification of certain patients who met specific financial or economic criteria as charity care rather than as provision for doubtful accounts. This change had no impact on our net income.

On a same facility basis, revenues in our behavioral health division increased 5.7% during the third quarter of 2010. Adjusted admissions to our behavioral health facilities owned for more than a year, increased 3.1% during the third quarter, and revenue per adjusted admission was up 2.6% compared to the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 25.9% during the quarter ended September 30, 2010, as compared to 24.7% during the comparable prior year quarter, primarily due to the powerful operating leverage created by the robust revenue growth. The continued strength of our behavioral business reinforces our enthusiasm for the previously announced acquisition of Psychiatric Solutions Inc. We have obtained the necessary shareholder and regulatory approvals and have reached an agreement with the Federal Trade Commission staff to clear the PSI acquisition, subject to divestitures in a small number of markets.

However, this agreement is subject to approval by the FTC commissioners. We still expect to complete this acquisition in November. Our cash flow from operating activities was $180 million during the third quarter of 2010, as compared to $183 million in the third quarter of 2009. Our accounts receivable days outstanding remained unchanged at 42 days during the third quarters of 2010 and 2009.

At September 30, 2010, our ratio of debt to total capitalization, excluding restricted cash, was 28%, and the ratio of debt, net of restricted cash to EBITDA was 1.1 times. We spent $56 million on capital expenditures during the quarter included in our capital expenditures were the construction costs related to a new, 171 bed hospital in Palmdale, California, which is scheduled to be open in late 2010. We will be pleased to answer your questions at this time.

(Operator Instructions)

Your first question is from Sachin Shah with Capstone.

Hi, good morning. Just to clarify, so you did receive FTC approval, and when do you expect them to get back to you in regards to completing the transaction? Getting official approval from the FTC?

Yes, just to reiterate what I said, we have reached an agreement with the FTC staff but still require the approval of the FTC commissioners. Our expectation is that such approval should be forthcoming in a week to two weeks, and that we should be able to close the deal in approximately 10 days to 20 days.

Up from today?

From today, correct.

Thank you very much. Have a good day.

Your next question is from Justin Lake with UBS.

Thanks, good morning. First question, just on the Vegas market, looks like you might have seen some improvement there in the quarter at least on a year-over-year basis. Can you walk us through the third quarter results of Vegas and what you've got embedded in guidance there for the fourth quarter?

Sure, Justin. We have -- we never really talked about the precise results and in specific markets but, as most people do, they look at our minority interest line, and you can see that it's up in the third quarter of 2010 compared to last year's third quarter, and while that number is definitely not exclusively Las Vegas, certainly it's an indication that our earnings in the third quarter were up in Vegas quarter-over-quarter. We generally, I think, have in our guidance for Q4 sort-of flattish performance in Vegas. We were pleased by the third quarter results. We're pleased by the fact that payer mix increased a little bit in the third quarter but, obviously, you're probably reading the same data that we are, the same time unemployment data was announced in the Vegas market, and it's now at the 15% level, so we remain cautious about the immediate prospects there. So, good -- better results in Q3, and we're taking it quarter-by-quarter. Our market position and our franchise in the market remains very strong, however.

Got it. And, on the other operating costs line, it looked like you saw a little bit of an increase there sequentially versus what I would've expected. Can you walk us through that, and maybe just spike out what you're spending on the CMS investigation in getting that facility recertified?

Yes. We had disclosed in Q2 that we probably had been running, in 2010 at least, somewhere in the neighborhood of $3 million to $4 million a quarter in what I would describe as excess cost at our Southwest facility in California, to ensure compliance with the regulatory agencies with whom we've been negotiating, et cetera. So, that level of expenditure, which probably crosses both the salary and the other operating expense lines, will likely continue into the early part of 2011, at least until the full and complete survey takes place that hopefully will end successfully for us.

Any other costs on the other operating lines sequentially, given that that was their second quarter and third quarter, that we should think about?

None that I can think of off the top of my head Justin; quite frankly, that other operating expense line was right in-line with our own internal budget, so it's possible that we'll will go back and look and see if we had any, maybe, unusual offsets or anything last quarter, but, no, nothing in that number stands out to us this quarter.

And just last question, you open two replacement facilities this year, or will have opened, when Palmdale opens in December, I think you said. And, you've got the Summerlin Tower as well, so a fair amount of new capacity coming online; probably not the best environment to do it, but as far as -- can you tell us what that contributed this year? I would assume it probably was flat to maybe even a little bit of a drag, but what that could contribute next year as far as the pick-up in getting that ramped-up?

Yes, I think that, Justin, if you go back to our original 2010 guidance, we spiked out, as you enumerated these three large new projects that we had; the Texoma Replacement Hospital and Summerlin Tower both opened right around January 1 of this year. We anticipated at the beginning of the year that Palmdale would open in the spring; it is still not open, and now we expect will open in early December. We thought in our guidance, that those new projects would probably be a push as they ramped up in 2010. I think the reality, as you've suggested, is that they wound-up being a little bit diluted, particularly the Summerlin Tower, because we opened that in the teeth of the worst recession that Vegas has probably ever seen.

And, frankly, in the fourth quarter, in December, the opening of Palmdale will probably be a little bit of a drag in the fourth quarter. But, other than that, we believe that these are all very, very solid fundamentally sound projects that, particularly as the recession improves some and the economy improves some, that we'll start to see the benefit from those projects that we anticipated when we first undertook them. And certainly, for instance, at Texoma we're starting to see that improvement. That's the first to the projects we're actually starting to see some accretive results.

Great, thanks for all the color.

Your next question is from Tom Gallucci with Lazard Capital.

Hi, good morning. This Is Colleen Lang on for Tom. Steve, I was just wondering if you could talk about some of your other key markets; namely, South Texas and California, and some of the trends you saw there during the quarter?

Sure, Colleen. As you know, we had said in Q2, people were very focused, appropriately so, in Q2 on the weakness in Las Vegas, and we were -- went to efforts to point out that it was not the only market demonstrating weakness, and we called out South Texas and California. Those markets continue to have a rough time with their local economies; unemployment is rather high in those markets as well, particularly in South Texas we've seen both volume and payer weakness -- payer mix weakness.

In California, as I mentioned to Justin, most of our weakness are, at least in financial performance, has been on the expense side as we incur some additional expenses to comply with the regulatory requirements that we've been facing, but those are two markets where we've seen slower performance or worse performance than we have in the overall portfolio.

Okay, great. Thanks for the color. And a quick one, can you give us an update on your managed care contracting for 2011 and any that you've done for 2012?

Yes. While I think that the tone perhaps of the managed care contracting environment is getting, maybe, a little bit more contentious. The ultimate outcomes and the ultimate results remain fairly consistent. We definitely are still seeing increases in the 5% to 7% range in our 2011 contracts, and in whatever cases, we're negotiating in out-years beyond that, so not seeing tremendous changes in the ultimate outcome; although, again, I will say that probably the tone is getting a bit more difficult.

Great, thanks so much.

Your next question is from Ralph Giacobbe with Credit Suisse.

Thanks, good morning. Steve, can you maybe talk about the change in charity policy, maybe what the new targets are to qualify for charity, and why and when the decision was made?

Yes, Ralph. What we had done historically is had different charity care policies in different markets; mostly, to allow each market to tailor their policy, and mostly to tailor who qualified as a charity patient, to maximize, frankly, in their market what they thought were collectible dollars from patients. We felt that in certain markets -- in reviewing this over time -- that in certain markets they were being sort-of unnecessarily restrictive in who they qualified as charity patients and, in our minds, were attempting to collect money that really was never practically collectible. And, as a result, we were incurring bad-debt expense that really was, in our minds, more appropriately characterized as charity care, and uncollectible at the outset.

So, we attempted in Q3 of 2010, to bring greater standardization to our charity policy across the Acute Care portfolio and, as we disclosed in both the press release and in my comments, that had the impact of increasing charity care by $17 million in the quarter, and decreasing bad debt by a like amount and, frankly, will have that effect over the next three quarters. We think it will add some stability to our bad-debt reporting, and be a little bit better of a picture of what the true bad debt and charity is. Although, we continue to encourage people, as we do internally, to look at the two buckets combined in thinking about our uncompensated care expense.

All right, that's helpful. And then, in terms of guidance, it implies at least at the midpoint, a little bit of a softer Q4. Is there anything you're seeing, or how do you view the lower-end of the top-end of the guidance in terms of your thought process?

You know, Ralph, to be perfectly honest, I think we viewed it as a largely mechanical exercise. I think we felt like we had certainly, based on the trends that we've experienced now through the nine months, that it was fairly clear that the top-end of our guidance was not achievable and, therefore, we just wanted to validate that and manage expectations in that regard. We were not trying to signal any particular weakness in Q4. I think a few people have noted that some of the surveys or comments coming out of the industry, in general, is that Q4 volumes are a little weaker, our --- and this is all on Acute Care observation -- we would sort-of share that view that October has started a little slowly from an Acute Care volume perspective.

I will remind people, not that I need to, because I know they're well aware of it, that on October 1, the Medicare updates are certainly the lowest we've seen in a number of years. We have that in mind as we think about our Q4 performance and, certainly, I think as I mentioned in response to a question that Justin had, we're expecting a little bit of a drag from opening Palmdale in December, but other than that, we were not attempting to signal any specific weakness that we anticipated in Q4.

Okay, and then, just my last one. Do you have the payer mix numbers for the Behavioral and Acute business?

I don't have precise numbers in front of me, Ralph. I mean, I will say that just in generally commenting, as we've said for many quarters now since the recession began, we continue to see a decline in our commercial utilization in the number of patients who are coming to our hospitals with commercial insurance. We've also certainly been calling out for many quarters an increase in Uninsured business. I will say that the decline in Commercial business continued -- seemed to continue at the same pace in Q3. The growth in Uninsured seemed to slow a little bit, so if there was any encouraging sign, that would've been it.

And, what about on the Behavioral side? Is Commercial also down or is that actually up?

Yes, I think we're seeing those same trends in Behavioral; although, not as -- well I should say the same trends vis-a-vis Commercial. Although, the Acute business in Behavioral -- the Acute Behavioral business remains rather strong and, frankly, most of the weakness that we have seen and continue to see on the Behavioral business is on the Residential side where you have much more of an emphasis on Medicaid and Medicaid-like programs. And, obviously, a much smaller percentage of Uninsured business and Uncompensated business, which is reflected in a much lower bad-debt expense on the Behavioral side.

All right, perfect. Thanks very much.

Your next question is from Adam Feinstein with Barclays Capital.

All right, thank you. Just, I guess, Steve, maybe just a starting point, just with the PSYS deal. You guys have had more time since the last conference call to really look over the assets. I guess just maybe give us an update in terms of point-of-view, in terms of just things you guys have [not] learned and, obviously, the numbers in [Psyche] Solutions had been very strong since you guys first announced the deal back in May. But, just curious in terms of any updates that you may have in just -- in terms of as you think about the synergies and the margin opportunity. Just any updated thoughts?

Sure, Adam. When we announced the deal in mid-May, we made a few basic assumptions in guiding to what we thought would be the accretive effect of the transaction. Those assumptions included $35 million to $45 million of corporate overhead savings and, on several occasions, we've sort-of revalidated or reverified that number as we've continue to do more work and what-not. I think we're perfectly comfortable with those estimates. We disclose what we thought would be our blended borrowing costs or interest costs for the $4 billion-plus worth of debt that the transaction would require, and we have certainly indicated in more recent weeks and months that, that number will likely be somewhat lower than the 7% that we originally estimated and probably closer to the 6%, 6.25% range, so that's a substantial savings from our original estimates.

We, obviously, talked about closing this deal in the fourth quarter, which we still think we can do, and we have always sort-of highlighted, as you know, that there is a difference in our operating margins, historically, of probably 200 to 250 basis points. We -- partly because of the FTC, I think, close review of this transaction, both companies have been very sensitive to continue to operate very discretely and separately, and PSI and PSI's management has certainly been focused on doing that. And so, we haven't gotten a lot of really detailed valuable information that would allow us to evaluate that margin gap and how closable it is. Obviously, they've reported very, very strong earnings in Q3, which would sort-of imply that gap is already closed. While we remain a little bit skeptical about how that's really possible in such a short period of time, we're certainly very pleased with those earnings and, obviously, if the gap has been closed, no one will be happier about that than us.

So, we're extremely excited to close the deal, to have access to more of the detailed financial information, to have unfettered access to employees at all levels of the company, and just to start the integration both financially and personnel-wise, et cetera, of the asset and the people into the organization. Because we remain extremely bullish on the business; the underlying business itself and on this portfolio of assets.

Okay. That was a very detailed answer, thank you. Maybe just one quick follow-up in the interest of time here, so I guess just as you guys think about that -- and you talked about operating as two separate companies for now, but once you close in the next 10 to 20 days, you'll be able to start integration. I guess one question I have is just on the systems portion of it, Steve; how challenging is that going to be? Are the systems pretty similar based on what your understanding is? So, certainly, you've talked a lot about synergies and such, but just in terms of some of the blocking and tackling in terms of just integrating the systems for the different companies, just how different are they?

Yes. Not terribly so. First of all -- and I say this as somebody who doesn't have to do any of the hands-on work, but the information systems in the Behavioral business tend to be a bit more streamlined and a bit simpler than they are on the Acute side. They're mostly financial systems by nature; billing and collection and general ledger systems, and you don't have the wide array of clinical and related systems that you do on the Acute side, so it is a simpler process. We do use different systems; meaning, UHS and PSI use different systems. We do plan to standardize the systems, and that will be an effort on the part of the folks who are charged with doing that.

But, frankly, both companies have done it many times before; we've both been very acquisitive over the years and have integrated a large number of facilities, so I think that personnel in both companies, are quite accustomed to doing that. So, I don't view it as any sort-of a challenge that is likely to really trip us up. It's, as I said, it's going to be a lot of work for the people who have to do it, and we'll give them all the resources, hopefully, they need to accomplish it, but I don't think it's going to be any sort-of an insurmountable hurdle by any means.

All right, thank you. Sounds great.

Your next question is from John Rex of JPMorgan.

Thanks. So, first, on Acute Care, I just want to come back to the payer mix commentary. So, I think you said -- you said in the past that the payer mix shift is characterized as (inaudible) managed care volumes down, to say, 2.5% to 3% and self pay about the same. Is that --then is that same that you saw in the Q3, and is that your assumption going into the Q4 also, that it's about that same range?

Yes, so -- just to make sure or characterize -- recharacterize it so we're on the same page, John, I think what we've said in the past, and particularly in Q2, is that Commercial volumes were declining probably 200 or 300 basis points faster than our overall volumes, and Uninsured volumes were increasing 200 or 300 basis points faster than our overall volumes. And, I think in this quarter, we find that the Commercial decline rate has been the same. I think the actual Uninsured increase rate has been more in-line with our overall volumes, so as I commented before in response to somebody's question, that was the one encouraging element of the payer mix dynamic in the third quarter.

And, that's kind-of what's embedded in your expectation for Q4, that we kind-of hang-in at that same level then?

Yes, that's correct John.

Okay. So, assuming status quo on payer mix, and just if you're thinking maybe flattish Medicaid rates, what you already know about Commercial pricing and Medicare pricing. And just think about -- for the Acute Care business, as you think about '11, on a same-store basis, what are your levers to get EBITDA growth as you think about the Acute Care business, and can it be meaningful if you assume the status quo on the mix and and the [Medicaid] pricing and such?

Yes, obviously, John, if we wanted to give 2011 guidance on this call we would, and so we're not going to do that. But I will say this, I think going into 2010, we had this notion that our Acute Care revenue per unit or pricing needed to grow at about 3%, 3.5% in order to have modest margin expansion. We haven't hit those numbers; we came pretty close to them -- closer to them in Q3 than we have, but we haven't hit those numbers yet, and my gut reaction is, you're talking about and thinking about the same kind-of dynamics for 2011.

And, we're right now going through our detailed budget process to try and get a handle on a sense of to what to degree we can hit those targets in 2011, and when we give our 2011 guidance at the end of February, we'll provide, I think, a lot more color and visibility on that. But, to me it's that payer mix and pricing dynamic which was so important in 2010, that will be the real variable in 2011, because I think most of the other volume and cost metrics are -- have been relatively stable and don't pose a lot of threat of variability.

And, when you think about it, are there real meaningful incremental levers that you think you can pull on the cost side, in terms of when you're looking at that?

Honestly, I think that we certainly have tried to pull the easy levers and pick the low hanging fruit in the last year-and-a-half, and I'm always -- you know, loath, to frankly describe it that way, because I think cost cuts of any kind are always extremely difficult for operators to make, and I think they've done a Yeoman's job of it in the last year-and-a-half or so. But, we're certainly thinking and rethinking and reengineering our business all the time to adjust to this new environment; this new, what I'll sort-of describe as low-revenue environment, as well as to an environment where, I think, the focus is going to be on continuing to -- continuing pressure on revenues for some time now.

Certainly, on the supply side, we've mentioned before that we have a host of initiatives to drive supply costs lower, and one of our main focuses is how to do that effectively and as quickly as we possibly can across our entire portfolio. So, I think there are some opportunities; none of them are immediate in nature where I can point to a dramatic reduction in costs in the next quarter, but we're very focused on reengineering our business to be as cost-effective as possible as we move into the future, because we believe that's what will absolutely be required by the payers.

Okay, and then just last; timing -- you've laid out a lot of timing on the Psych deal, and so, when do you think you'll be able to update your view on accretion on that post-closing? How many weeks do you think you need before you can do that?

Yes, and this is absolutely a tentative reaction on my part, John, and not one that we've discussed and agreed to throughout the Company, but my gut is that we'll certainly need six to eight weeks to get into the portfolio of assets and to look at some more detailed data. So, maybe end of December, early January we'll be able to make some broader comments about our thoughts on PSI accretion impact in 2011, and then our full-year and more robust guidance we'll give at the normal time, which will be at the end of February when we announce our fourth quarter and full-year 2010 earnings.

Okay, thank you.

Your next question is from Kevin Fischbeck with Bank of America.

Okay, thank you. Good morning. I guess one of the numbers that jumped out at me on the Acute Care side -- was it the volumes were particularly strong? Is there any market in particular that you would highlight there, or is that kind-of broad-based volume growth?

I think it was fairly broad, Kevin. I think the reality is those volumes are not out of line with what we've been running, and I think we've said a number of times that for us, any issues that we've had in being unable to meet our Acute Care targets, both internally and probably from a street perspective, has much more to do with payer mix than it does with volume. So, we concur with your observation that the volumes were solid, but I don't think they were all that out of line with what we've been running; they were pretty pervasive throughout the portfolio.

Okay. Then, I want to follow-up on that mix question, because what you're saying is not really all that different from what most of the hospital companies are saying as far as seeing Commercial volumes below overall volumes; [underscored] volumes in-line-ish. And yet, your revenue per admission is well below what most of your peers are reporting, even though you're talking about similar Commercial pricing, and to your point, everyone is kind-of working off the same Medicare and Medicaid rates. So, wanted to see if there's anything else that you can point to -- do you think it is mix shift; that it is somehow different here, or is there anything else that you might highlight?

I mean, look, the only thing that I would suggest, Kevin, and certainly not anything new, is that I think we continue to be -- have a greater presence and emphasis in markets that have been harder-hit by the recession; you know, Vegas has -- gets called out more than most because it's our largest market and certainly that's an appropriate highlight, but South Texas, California, all these markets have unemployment rates that are higher than the national average. So, I think, when we say Commercial volumes have declined by 2% to 3%, and you're suggesting that that's what others are saying as well, I might suggest to you that we're starting from a lower base. So, I would think that's why we're in a tougher position in a Vegas market with 15% unemployment than another hospital and another company that maybe in markets averaging 10% unemployment.

Okay, that makes sense. And, I appreciate your commentary about inability to really provide 2011 guidance, but I just wanted to think about -- it was helpful to hear some of the commentary about the extra costs that are related to the Southwest facility. Is there anything else like that that you think is a drag in 2010 that won't be a similar drag in 2011, or maybe vice versa; anything that you're aware of that will be a headwind in 2011, that isn't maybe just besides, obviously, the Medicare rate that you highlighted already?

No, again, I would touch on or maybe retouch on what we were talking about before with the new capacity. I mean, we've added some substantial new capacity in 2010 that we have not gotten a lot of benefit for. We would hope to get more of a benefit from that in 2011. I think that that presumes that there will be some improvement, not only in the national economy, but in the economy in those local markets.

We have actually some unopened capacity at our Southwest hospital in California that, again, is dependent on our resolving and reaching a resolution on some of these regulatory issues, so we would hope that would occur in 2011, if not earlier as well. So, there are a couple of those potential tailwinds, but they do -- they're not certain, and they do generally presume that things have to improve in the economy, or with some external factors, before they can actually occur.

Okay great, thanks.

Your next question comes from Whit Mayo with Robert W Baird.

Thanks. Maybe one more on PSI. I understand you certainly don't own it yet, and you pointed to $35 million to $40 million of synergies, and we've received a lot of questions as it relates to timing, and I understand that the plan may not be exactly concrete at this point. But, Steve, was just hoping you could help us understand how much of that you see as potentially realizable in 2011, and maybe help us understand some of the infrastructure spending that you may have to make to fully realize those cost savings.

Sure. I think that everything that I'm going to say, to some degree, is a repeat of things we've said before, and I'm happy do so. When we originally announced the deal on the $35 million to $45 million of savings, we said those savings would be fully achieved by the end of year two, and I think that's still our view of it. A good portion of those savings are rather immediate, particularly the savings associated with the senior executives of PSI, but a lot of the other savings are more transitional in nature, that is, there is some headcount reduction but some of that is transitional. There are some people who are staying on for periods of time to help us with the transition; they've been very cooperative, and so, those savings won't occur.

There's also, we've disclosed before, a one-time cost to achieve that $35 million to $45 million of savings; that's probably about half of those savings that we'll incur, clearly, in year one and almost immediately, and that's mostly the severance costs for the large population based, and the parachute payments to the executives, et cetera. So, those, I think are the limiting factors, but again, I think we would reiterate our confidence that we can get to that run-rate -- full run-rate of savings certainly by the end of the second year of ownership.

Okay, so maybe, half of that $35 million to $45 million is a decent number to think about in year one, is that a fair --

On a gross basis?

Yes.

Yes, yes, absolutely.

Okay, and maybe one other question, just on Med Mal, that's clearly been trending favorably for awhile, and you usually point out a number in the press release, even though most of your peers don't always necessarily -- or you don't give yourself credit for that all the time. Can you maybe talk about that trend line in the quarter and how you see that playing out over the next few quarters?

Yes, and by the way, this probably actually answers a few different questions that people have asked, so I appreciate you asking it. We had another large balance sheet reversal of malpractice reserves in the second quarter of 2010, and we included in the second quarter of 2010, the first six months of impact of that reversal, which I think alludes back to Justin's question before. So, I do think operating expenses in Q2 were probably, maybe, $2 million lower for the -- in essence, the first quarter's worth of malpractice reversals, and that's part of the explanation of the sequential increase in Q3.

I think going into next year with -- and we don't have our actuarial estimates for next year, but I think we anticipate that malpractice costs may provide a relatively small benefit into next year, and our ongoing malpractice costs could be a few million dollars lower in 2011; we won't know that until we get our actual actuarial estimates. But, to your point, that number has been trending more favorably and, hopefully going forward, we'll have a more real-time measure of that benefit.

Great, thanks a lot.

Your next question is from Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everybody. Maybe I'd just start out with a question for Alan, if he's still in the room there. And, really just relating to physician employment in the Acute Care markets, Alan, I know you've had some times in the past, like in McAllen where there were developments within the physician community that maybe got a little bit away from you. And, I'm just curious to get your thoughts on -- in some of your more competitive markets whether physician employment is something you're having to react to any differently, and just sort-of how you're approaching that particular trend?

We're really looking at it market-by-market. We don't have a policy of employing physicians all over, other than the hospital-based physicians, of course. But, market-by-market, we have some situations where we do employ physicians, and we buy a practice here-and-there, but we don't have a corporate program. It's a one-off basis, and it's up to the local people, plus our senior management and the operating end to determine what makes sense.

Okay. Maybe just shifting gears to the PSI deal, and I just had one question. I know you're probably somewhat limited in what you can say, but you've described here the number of market divestitures as being small, and can you just help us out thinking about that? Is it less than a handful, in terms of how we ought to be thinking that from a modeling perspective?

Look, I think, Darren, we are trying to be as respectful as we can of the FTC process and not make any specific disclosures. We have said for some time that we've thought the most likely result was in the mid-single-digit number of divestitures; 4, 5, 6, and that if we did a little better than that we'd be pleased, and if we did a little less -- worse than that we'd be a little disappointed. We are absolutely in that range and then, henceforth, our use of the word "small" number of markets and, obviously, that detail should be forthcoming as soon as we get the FTC commissioner's approval, which should be shortly.

Okay. And then, maybe just one last question. There have been some recent developments on their side with regard to DOJ, and I'm sure the information you have is somewhat limited, but I guess I'd ask the question this way; just given some of the ongoing nature of some of their facility investigations, will you be required, or do you need to higher-up additional compliance to respond to some of those situations, and how is that contemplated in your synergy number?

Darren, we certainly have known, obviously, since the deal was announced five months ago or so, that PSI has some facilities that have had some high-profile issues. They also have a large internal staff dedicated to quality and risk issues, as do we. We've spent a good portion of this interim period planning for the appropriate integration of those two staffs, and coming up with a plan to integrate our quality assurance and risk management policies; introduce them and integrate them into the PSI portfolio. So, we think we're prepared to do that; we're actually anxious to get started, and I'm not sure that this past week's -- or last week's announcement changes that in any sort-of measurable way. I think our plan is adequate and contemplated these sort-of issues.

Very good. Okay, thanks a lot.

The next question is from A.J. Rice with Susquehanna Financial Group.

Hello, everybody. A couple questions if I could ask. First of all, Steve, I guess some of the other companies are talking about the extent to which this California Medicaid provider tax waiver is going to -- is helping them or will help them in the fourth quarter. Have you -- where do you guys stand on that; have you called out the benefit, and where is there -- will that be reflected this quarter or next quarter or what's your thoughts?

I think we have said before, A.J., that for our California hospitals, the net impact of this new California provider tax will be a push, and so, there is no benefit or impairment to be had this quarter, next quarter, et cetera; it's going to have a neutral effect on us.

Okay. Can you just give us some flavor about the year-to-year trend and acuity at your facilities? I know we're seeing some divergence in surgical volume trends year-to-year in OB, H1N1; I don't know if you have a Medicare case mix number, but some flavor around those things in the Acute Care business?

Yes, I think our acuity has not changed dramatically over the last couple of years; it has inched up a little bit. We've certainly seen some softness in some service lines, again, I think since the recession began. Cardiology, certainly to a degree, some of the heavy-duty orthopedic procedures, but actually another one of the encouraging signs in Q3 is that surgical volumes picked up a little bit; inpatient surgical volumes which were probably down 3%, 3.5% in the first half of the year were kind-of flattish in Q3; and outpatient, which were up 2% to 3% in the first half of the year were up maybe 3.5% in the third quarter. So, not a needle-moving change, but a little bit of a recovery which may be begin to indicate that consumer behavior in the healthcare space and the hospital space might be just starting to improve. Other than that, I don't think -- you know, our case mix index was, I think, sequentially up just a tad from Q2 and pretty flat with last year's third quarter.

Okay. I know there are pushes and gives-and-takes on the -- at the individual facility level on some of the -- on the inpatient Medicaid rate, but some of the ancillary things get factored in. What is your assumption for your Acute Care business on the year-to-year change, the start of October 1 in your average Medicaid -- Medicare rate? And, just remind us what percentage, roughly, of your revenues get affected by that?

And, A.J., I'm sorry because I may have misheard you, but are you asking me about Medicare or Medicaid?

Medicare, I'm sorry.

Medicare?

Yes. Just, I mean -- people are saying it's down 0.5% to 1%; I just want to make sure what -- when you make all the adjustments for the outlier and so-forth, do you have a rate -- an effective number for your portfolio, and exactly what percentage of the business gets affected that way?

Right, we are definitely in that range of down a 0.5% to 1%, beginning with the Federal Fiscal Year that starts in October of 2010, and we disclose those numbers every quarter in our Q, but our Medicare percentage is a little bit more than one-third of our overall utilization in the Acute segment.

But, that would be -- that would include the outpatient right? The outpatient you're still getting 2% plus increase on, so I'm just -- do you know what the inpatient portion would be?

Yes, I'm sorry; the down half to [1%] is really the inpatient portion. We are getting a 2% blended increase on the outpatient side, but that's a much smaller piece of our business.

So, you think you're like 20% or something is the right number, roughly, or --

Probably.

Okay. All right. Anything -- you didn't, specifically, spend much time on labor supply, and if there's -- if trends are pretty steady we don't need to, but is there anything different to call out in turnover rate, wage expectations or initiatives on the supply side?

No, I mean again, we announced in our Q2 call, that we had implemented a headcount reduction across our Acute portfolio in the late second quarter, early third quarter; I think our salary expense for the third quarter reflects the impact of that. Our supply expense for us was a little bit under our own budget for the quarter, but as I indicated in previous remarks, we still think that's an area of a lot of opportunity, and it's just a question of how quickly we can get to it and how effectively we can get to it, and we're very, very focused on that.

Okay. All right, sounds good, thanks a lot.

Your next question is from Gary Lieberman with Wells Fargo Securities.

Thanks, good morning. You mentioned some of the Medicaid weakness impacting RTC business. Can you just talk a little bit about, is that rate, is that coverage that it's impacting, and then, how should we think about that going into 201, I guess, particularly the second half of the year when some of that [FMAP] money may not be there?

Yes, I think it gets reflected, Gary, in our business; in our Behavioral business, mostly in lower rates which, again, I don't think is any different than it is on the Acute side or anywhere else in the healthcare space, but also, in declining length of stay, we definitely see our length of stay lower in the Behavioral business as Medicaid and Medicaid-like providers look for lower-cost avenues of care, and elements of care for their patients, with mostly adolescents.

And, what might some of those other revenues be?

Like, group homes and outpatient and home care, and all sorts of things. Now, I mean, clinical -- the clinicians in our business will tell you that they think it's kind-of a short-term solution, because none of those lesser intense elements of care really can be effective for certain kids and, ultimately, those kids will require inpatient treatment, but certainly in the short-term, we see a lot of payers again at the Medicaid and Medicaid-like level looking for those alternatives as a way to reduce their immediate costs.

Okay, and then, maybe into 2011; how are you thinking about Medicaid and how that environment might shape-up?

I think our notion is certainly in the first half of the year, that Medicaid should be relatively flat to maybe modest declines. I think that as we get into the second half of the year, it gets a little more uncertain as the states, depending on whether the economy improves, as the states deal with, perhaps, bigger budget deficits, so I think it's a little bit harder to tell. I think our overall view is, be sort-of flat to down, maybe, 1% or 2% for Medicaid-blended rates next year.

Okay, thanks a lot.

Your next question is from Gary Taylor with Citigroup.

Hi, good morning. A couple questions, going back to early in the call, Steve, but for -- when you were talking about Las Vegas, in particular, I think in response to Justin's question, you had said Q4 guidance sort-of contemplates Vegas performance; financial performance being roughly flat. And, I assume you meant sequentially there, as opposed to year-over-year?

No, I think I really did mean year-over-year.

Okay. And, then when you were talking about the third quarter again -- I think this was specifically for Vegas for the third quarter, you talked about the payer mix improving somewhat, and I suspect you meant year-over-year there as well?

Yes.

Okay. And, sequentially in Vegas, [does] the payer mix look much different than what you saw in the Q2? I know, I can understand you hit much easier year-over-year comps, and that was anticipated, but sequentially much different?

No, that's a good point, Gary, and I probably should've called it out myself. I mean, I think there probably is a little bit of sequential improvement and, by the way, I think this is true for the whole portfolio, but also no question that the comps definitely become easier, or became easier in the second half of the year, so we're getting that benefit as well. So, I think there was real substantive and sequential improvement, but also, the comparisons definitely helped.

And, should help in the fourth as well?

Should.

And then, two other questions just flipping to Behavioral; on this DOJ subpoena that PSYS received in Philadelphia last week -- you know, I understand, and I heard your comments on that before. I have a -- We haven't been able to find a public copy of that subpoena to actually see what it pertains to; have you guys been able to actually see what it is that is being in question or alleged?

PSY -- PSI has shared the subpoena with us, so we have seen the subpoena. I do not -- and I'm not an expert on this, but I don't believe that these DOJ subpoenas are generally public information.

Occasionally, we can hunt them down, but we've been unsuccessful on this one thus far. Okay, so that's helpful; you guys have seen it.

Yes.

Then, my last question is, a couple weeks ago, DOJ, [state of] Georgia, announced in ADA Settlement related to people with developmental disabilities being treated in inpatient psychiatric hospitals in the state of Georgia, and it requires the state to actually set-up specific targets to treat those folks in community settings, and eventually not admit any of those developmentally disabled folks into inpatient psych hospitals. And, I'm pretty sure if I'm not mistaken, you guys have at least one hospital in Atlanta, if I recall. So, I guess the question is have you -- what is your -- and I think there's some other ADA suits in some other states along these lines. Do have a view that that creates any sort-of measurable risk for the inpatient psych business? Is that a material piece of the population, or is it really going to be feasible to try to proactively restrain some of those admissions and re-admissions?

You know, Gary -- and I absolutely don't pretend to be a clinical person but, to the best of my knowledge, we generally do not treat developmentally disabled folks in our facilities. I think they're separate facilities and, frankly, separate companies that specialize in facilities that treat the developmentally disabled, but we essentially do not treat those types of kids or adults.

That's helpful. Al l right, thank you.

Your next question comes from Bill Kavaler with Oscar Gruss.

Hi, thanks. My questions have been answered. Thank you very much.

Your next question comes from Doug Simpson with Morgan Stanley.

Hi, thanks. Good morning. A lot of my questions have been already answered but, Steve, you talked earlier about the contracting environment with the commercial payers and potentially getting more contentious. Just, you know, if you look out a year or two, how do you see this evolving? And how much of an impact do you think the reform implementation is going to have, and do you expect to see -- I guess, I'd specifically be interested in your comments on provider sponsored plans. You know, what -- how do you see that playing out, and does that hold much of an impact in your markets?

I think in sort-of the most general terms, Doug, and -- you know, certainly, this is not something we have not said before; we believe that payers of all stripes, that government payers, commercial, private payers, they're all going to be looking for ways to reduce their healthcare spend over the next -- over the foreseeable future. And, that we as providers, it will be incumbent upon us to demonstrate to those folks that we can deliver the most cost-effective care that's out there.

And, you know, look, I do think that in some ways that's a challenge to us, and we believe we're prepared to meet it, but also I think it's an opportunity. I think one of the assumptions that has been made in the course of the last few years is that the way to lower healthcare costs has been to move as much business as possible out of the Acute Care setting into all these niche settings, and that that would result in a dramatic decline in the cost of care, and it certainly has not. And, I think that payers have woken up to that dynamic, and it's now incumbent upon us to demonstrate that we can deliver the whole continuum of services that we're accustomed to delivering at our acute care hospitals, outpatient, inpatient, more-intense/less-intense services, that we can deliver them all in the most economic setting. And, we're very focused on that, as I said, so -- and how we're going to fit in the new -- in the continuum I think that it's going, in my mind, make the acute care hospital more central and more important to the delivery of healthcare.

We're very much -- it's very much our focal point over the next couple of years. We have not seen very many provider-based or provider-sponsored plans in our markets. There are few and, frankly, there have been a few for a while. I can think of a couple markets off the top of my head where we've had provider-sponsored plans for a while. Again, at the end of the day, I think they have the same challenges as any plan does, which is to deliver cost-effective care to their participants, so I think the challenges are the same for all of us

Okay, that's helpful. Thanks.

Your next question is from Walter Branson with Regiment Capital.

Thanks, most of my questions have been answered. Just wanted to, though, ask a few follow-ups on the volume and payer mix for the Acute segment. So, your 1.6% growth in adjusted admissions was, as you said, in-line with your historical trend recently, but certainly better than competitors are reporting. Can you give us a sense, if you have one, of the impact that the new capacity would have on that number?

I think that that's difficult to do; certainly, when we give our 2011 guidance, we can be -- provide some more clarity as to what's embedded in that, but, frankly, that the sort-of information that we really spend this budget process trying to glean and better define.

Okay. And then, in terms of the payer mix, you said that Commercial continued to be down, or continued to be 200 to 300 basis points worse than your overall, but Uninsured was in-line with your overall volume. So, what would have been sort-of up in terms of the mix for offsets [of] decline in Commercial? Are you seeing -- I guess, specifically, are you seeing a shift to Medicaid as Medicaid rules have been increasing?

Yes, we've seen a shift to Medicaid for some time now and that has continued; again, the other -- the only other encouraging bit of data in the quarter was that we saw Medicare volumes rise for the first time in a while, so that was a bit of encouragement as well. So, again, there were a few disparate encouraging bits of data in the payer mix landscape in Q3, and that was another one of them.

Was Medicare up faster than your overall admissions growth?

Probably about the same, but it probably has lagged it a little bit.

Great, thank you.

Your next question is from Adam Feinstein with Barclays capital.

Yes, hello, Steve, sorry I just had one quick follow-up. Just wanted to get a clarification on a comment you made to an earlier question about the synergies and the ramp-up. Just can you clarify those comments, and then, you made reference to a gross number and there were two different calls going on, and I just wanted to make sure that I didn't miss the comment there.

Well, the reference to the gross number, Adam, was just that I had called out the fact that we had these severance costs or costs to achieve and, in essence, I think if you think about it from a cash perspective, that wipes out a lot of the savings, if you will, in year one. So, I think it was Whit's question was, can you get half of those savings in year one, and I believe I said absolutely, but I just want to be clear that that mean that you had to eliminate the severance or the cost to achieve from that calculation; that was my comment about gross. I see, okay great. Thank you, Steve.

At this time, there are no further questions.

Okay, well, as always, we thank everybody for their time and look forward to speaking with you in the future.

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