環球健康 (UHS) 2011 Q3 法說會逐字稿

Good morning. My name is [Deketria] and I will be your conference operator today. At this time, of I would like to welcome everyone to the Q3 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. (Operator Instructions). Thank you. Mr. Filton, you may begin your conference.

Thank you. Good morning. I am 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, 2011. As discussed in our press release last night, the Company recorded net income per diluted share of $0.86 for the quarter compared to the as-adjusted $0.55 per diluted share recorded during the third quarter of 2010, as calculated on the Supplemental Schedules included with last night's press release.

During this conference call we will be using words such as expects, believes, 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 on the section on risk factors and forward-looking statements in our Form 10-K for the year ended December 31, 2010 and our Form 10-Q for the quarter ended June 30, 2011.

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, revenue increased 3.1% during the third quarter of 2011. Adjusted admissions to our hospitals owned for more than a year were essentially flat for the quarter. On a same facility basis, revenue per adjusted admission increased 3.5% over last year's quarter.

As expected, the robust acute-care revenue growth experienced earlier in the year has moderated as improvements in payer mix weakened in the third quarter. We also should note that UHS recorded no high-tech revenues in the third quarter.

We define operating margins as operating income or net revenue less salaries, wages and benefits, other operating expenses, supplies expense and provisions for doubtful accounts divided by net revenues. The impact of the prior-year items recorded during the 2010 periods and as reflected on the supplemental schedules are not included in our divisional operating margins.

On a same facility basis, operating margins for our acute-care hospitals decreased to 12.3% during the third quarter of 2011 from 13.0% during the third quarter of 2010. As noted previously, the margin decline resulted mainly from a weaker payer mix.

Our acute-care hospitals provided charity care and uninsured discounts based on charges and established rates amounting to $246 million and $233 million during the three-month periods ended September 30, 2011 and 2010 respectively. As a percentage of gross revenue, the combined total of bad debt charity care and uninsured discount was slightly lower than last year's third quarter.

On a same facility basis, revenues in our behavioral health division increased 6.8% during the third quarter of 2011. Adjusted patient days at our behavioral health facilities owned for more than a year increased 3.8% during the third quarter, and revenue per adjusted day increased 2.9% compared to the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 26.2% during the quarter ended September 30, 2011 as compared to 26.0% in the comparable prior-year period, despite the temporary closure of some capacity at one of our Pennsylvania facilities to repair certain physical plant problems. In addition, the results of the recently acquired PSI facilities largely met our financial expectations for the third quarter.

Our cash flow from operating activities was $207 million during the third quarter of 2011, as compared to $185 million in the third quarter of 2010. Our accounts receivable days outstanding increased to 47 days during the third quarter of 2011 from 42 days in the 2010 third quarter.

Favorably impacting our cash flow from operating activities was a postponement of third quarter federal estimated income tax payments granted by the Internal Revenue Service to certain taxpayers located in areas that were impacted by recent flooding. This postponement deferred an estimated federal income tax payment of approximately $30 million to $35 million from September 2011 to October 2011.

Regarding the FTC required divestitures, we have signed an agreement to sell the Puerto Rico assets including San Juan Capistrano hospital and affiliated outpatient centers, and expect to enter into an agreement to sell Monte Vista and Red Rock hospital located in Las Vegas shortly. Provided the divestitures are approved by the FTC, we anticipate completing the divestitures in both markets late in the fourth quarter or early in 2012.

At September 30, 2011 our ratio to of debt to total capitalization was 62% and the ratio of debt to EBITDA was 3.4 times.

We spent $79 million on capital expenditures during the third quarter. We have opened or expect to open by the end of the year a total of approximately 350 new behavioral health beds at some of our busiest facilities during 2011.

During the quarter, we spent $38 million to repurchase approximately 1,000,000 of our own shares. At September 30, we had approximately 700,000 shares remaining under our existing share repurchase authorization, a portion of which has already been exhausted in the fourth quarter.

We are pleased with our third-quarter results, which continue to support our unique and proven the model of diversification. In a challenging acute care hospital environment, we're fortunate to have the benefit of continued strong demand for behavioral services. When we combine or two business segments, our same facility revenue increased 4.1% and adjusted admissions increased 3.4% over last year's quarter.

As we approach the one-year anniversary of the acquisition of PSI, our integration efforts are on track and we are encouraged by the many areas of opportunity, including bed expansions in several markets.

Alan and I will be pleased to answer your questions at this time.

(Operator Instructions) Adam Feinstein, Barclays Capital.

Thank you. Good morning. Just -- maybe a starting point, Steve, if you could, just elaborate more on the payer mix comments earlier about a less favorable payer mix. And just help us understand, just in terms of the impact of that and comparing it to the first half of the calendar year and just -- and then maybe a couple of follow-up questions.

Sure. Well, just to remind folks, earlier in the year and particularly in the first quarter we had highlighted the fact that our acute-care revenue growth was stronger than expected, a pleasant surprise, mainly because of a dramatic -- and to a large degree, a surprising drop in uninsured volumes particularly in the Las Vegas market, although we saw the trend throughout the portfolio.

In the Las Vegas market, we attributed it in large part to a dramatic reduction in unemployment rates there. Unemployment earlier in the year dropped from like 15% to 12%. But as the year has progressed, unfortunately, the unemployment rate has crept back in Las Vegas, back up to 14%. And in that market we, not surprisingly, have seen our payer mix deteriorate.

And again we have seen the trend throughout the portfolio as well. Just generally, we continue to see less commercial business.

This quarter we saw little less Medicare business and we continue to see more Medicaid and managed Medicaid. And obviously the sum total of all of that is a weaker payer mix, and that is reflected in a slower revenue growth number.

Okay, great. And then just to follow-up on Vegas, so you mentioned that you saw the payer mix fall off some, but maybe just talk about the overall trends out there. It seems like you guys have done a good job with cost management. So just as you think about -- besides just looking at payer mix, can you give us some other highlights from Vegas?

Sure. Again, I think the payer mix issue is just reflective of the fact that the market has suffered economically a little bit disproportionately to the overall national economy. But our overall position in the market remains very good. We are the largest market share provider by a significant amount.

We have finalized, as we suggested that we would, our contract renewal with Sierra. That is now good for another three years beginning in July, this past July. So, the contract with our biggest payer is in good stead.

And just generally, I think in terms of the market share trends we feel very confident and comfortable in our market position. And we believe that when the market begins to recover economically, we will certainly benefit from that.

Again I don't want overstate the case. Vegas was way ahead earlier in the year, kind of flat in the third quarter, but overall still ahead for the year. And we're feeling pretty good about that.

Okay, great. And then just final question, maybe just on the psychiatric side. Maybe if you can just provide some more color in terms of just what is going on there? Obviously it seems like things have really gone very well there over the past year with the acquisition of PSI. But maybe if you can just elaborate in terms of what integration you still have left.

And then just curious, just in terms of some color around [Resolution]. They had a few outstanding issues at a few sites when you guys acquired them. Just curious if any of those issues have been resolved, which would in effect help volume growth.

Sure. And I think there's a couple of stories to the behavioral segment, Adam. One is just the overall underlying strength of the business, which is reflected in our same-store metrics. Patient days were up 4% in the quarter, and in this sort of an economic environment, I think that kind of a volume increase is really pretty impressive.

Pricing was up 3%, again in light of the fact that Medicaid cuts in many, many of our states took effect in July or sometime in the third quarter, also a solid number. And those metrics largely apply, at least directionally, to both segments -- both our legacy portfolio and the PSI portfolio of assets.

We have made some improvements at the PSI facilities from an operating perspective. We have mentioned on a number of occasions that we thought the majority of those improvements still to be effected will be effected in 2012 and 2013, and we still believe that to be the case.

I also alluded in my prepared remarks just to opportunities from a bed expansion perspective and from a marketing perspective in terms of developing new business. We've talked previously about focusing on the military and behavioral problems in the military as a source of growth, again in both portfolios. We will continue to focus on that.

And as far as some of the problems that PSI had, I think we have been making progress in most cases and resolving those. And I think your suggestion that there is an upside to that is accurate. But that is a process and it will continue for some time. It's not sort of an on-and-off switch. But obviously we're just feeling generally very positive about the trends in behavioral.

Adam, let me add that you have always recognized the benefit of the diverse nature of our business, if not the wisdom of having both. So has Darren, A.J. at times. But I think this quarter shows that where there is a little weakening on one side, in a bad economy if not generally, behavioral health services are more in demand. And we know how to provide them efficiently.

And even before the Psych Solutions acquisition, which has turned out to be what we had expected, there is wisdom in having a diverse base like this. And I know you recognized it early on.

Thank you, Alan, appreciate that. And really great, great job of building up the overall business model.

Thanks.

Tom Gallucci, Lazard.

Good morning, guys. Thanks for the color. Maybe two questions. First, late yesterday it seemed that the federal government had approved some of the Medicaid cuts that were requested out in California. I was wondering if you the chance to look at that at all and if you had any color on -- or perspective on how that may or may not impact you all.

Tom, I believe that those cuts affect providers other than hospitals. We don't think they have any impact on UHS.

Okay, good. That's what we saw, too, but wanted to make sure. And then, you mentioned, Steve, in your prepared remarks no high-tech revenue in the quarter. Hopefully that makes things a little more straightforward than we have seen with some of the other companies, at least for this quarter. Can you remind us about how you intend to handle high-tech from an accounting standpoint and sort of what your expectations are going forward?

Sure. Well, two things; first of all, just substantively -- and I think we've been through this before. But just to remind people, where we are at in terms of implementing an EHR, electronic health record, is we implemented our first hospital this past July. We have subsequently implemented another couple.

But then we have the remaining 20-some odd hospitals to go over the next couple of years. And obviously, as we implement, we would hope that shortly thereafter we will meet the meaningful use standards and will begin to qualify for high-tech revenues.

Now, we also said in our second-quarter 10-Q, that we did expect something in the neighborhood of $10 million or $15 million of Medicaid high-tech revenues which don't, in many cases, require you to meet the meaningful use hurdles that Medicare requires. We would expect to get them by the end of the year or early next year.

But we also, I think, discussed in our second-quarter call that our intent, which seems to be somewhat different than our peers, is to do our best to match our revenues and expenses so that as we get those revenues, as we receive them, our intent would be to essentially defer them and amortize them over a comparable period to how we're amortizing the expenses associated with implementing the EHR. So, in the third quarter of 2011, we had some very minor amortization expenses as we just implemented the system and began to amortize it in a few hospitals. That number will grow a little bit in Q4 and obviously will grow more in 2012.

When we give our 2012 guidance, we intend to be very transparent about the amount of revenues we have included in our guidance and the amount of related expenses.

Okay, great. Thank you very much.

Justin Lake, UBS.

Thanks. Good morning. I know you're not going to give guidance for '12 until the fourth quarter, but I was curious if you have any initial thoughts on how we should think about any kind of headwinds or tailwinds here for next year that should be considered, maybe such as an update on [PSYO] synergies. And, Steve, maybe if you even want to opine on your current comfort level with the 2012 consensus estimate of [450] --?

I will choose not to do that, Justin. We will give our guidance in February as we normally do. We're going through the budget process in great detail now and I think we've always felt more comfortable completing that process before being real specific.

But I think that to a large degree the third-quarter results are fairly emblematic of what things should look like going forward. I think that an acute-care revenue growth rate in the sort of 3%, 3.5% range seems reasonable in this sort of an environment.

The behavioral growth rate of 6.5% to 7% that we saw in the quarter I think is actually very impressive. And we would be hard pressed to keep that up. But we should do something close to that as we move forward, just again because we continue to find opportunities to expand capacity, etc.

That is my general sense of it. I don't see any great pressure on expenses. Our operators have done generally a good job in controlling expenses and managing. And I don't see that changing dramatically in 2012.

Any update on PSYO synergies? I think you talked about the potential there for maybe 100, 150 basis points of improvement over 2012 and 2013. Any change in your thought process or timing there?

As always, Justin, you are more confident about our performance, which is I think why the operator said that you work for Universal Health Services. (laughter)

I only wish I did.

But I (multiple speakers) is an opportunity for 50 or 100 basis points of improvement. Again, I think what I was saying in some of my comments Adam, is we actually achieved a little bit of that in 2011 -- what I will sort of call the low hanging fruit. I think there remain opportunities both from an operating efficiency and a business development standpoint in 2012 and 2013. And I think what you're getting at, and I appreciate it, is that those -- if we are able to achieve those opportunities, they are sort of above and beyond the underlying metrics that I just mentioned.

(multiple speakers) We'll obviously be far more specific about that when we give our 2012 guidance.

Okay, great. Thanks for all the color.

Sure.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning. How is acuity mix in the quarter?

We talked in the first half of the year, Ralph, about the fact that our acuity as measured by our Medicare CMI was at the highest levels in our history. We saw sequentially a very slight drop-off in Q3, but are still ahead of last year and I think just generally are not seeing any real softening of acuity to the degree that some of our peers have alluded to.

Okay. And then just as it relates to the payer mix number, do you actually have the payer mix numbers, maybe for this year versus last?

First of all, I'm not exactly sure how I would describe it. But again, I think in my comments to Adam, I outlined -- we have been seeing pretty consistently a 5% or 6% decline in commercial admissions. That certainly continued into Q3.

The trends up to now have been slight, very slight growth in Medicare. In Q3 we actually saw a slight decline in Medicare volumes. I'm not sure that I would read a whole lot into that, since I don't tend to believe that Medicare volumes are all that economically sensitive.

Probably the one element that maybe stood out a little bit in the quarter was that Medicaid and managed Medicaid admissions picked up. I think that contributed, along with some continued uninsured pressure, to the step down in our acute revenue growth.

Okay, and just on that point, on the managed Medicaid side, have you guys -- you know, what is the percentage -- remind us maybe with a percentage of total revenue that is, because that is in the managed care bucket. Is that right?

It is. I'm not sure that I have that. (multiple speakers)

We can follow-up. I guess my question was basically could you help us understand the profitability? As more of that fee for service Medicaid goes into managed Medicaid, is there a differential on sort of the topline and how we should think about profitability?

I don't think it general we view a shift to managed Medicaid as -- again, it's a general comment that may vary in specific situations. But as being terribly impactful, I think I should note that in behavioral most of our Medicaid business or a lot of the large chunks of it have been managed for years. As I think about it, Medicaid has been a managed program in states like Massachusetts and Pennsylvania for many, many years and they are among our largest Medicaid states for behavioral.

On the acute side, there will be a change as Texas in particular moves to a managed Medicaid model because that is our biggest state from (technical difficulty) perspective. But in general I think what we find to be the dynamic is that payment rates generally start off around the same, and the way that the managed companies make their profit is by doing a better job of controlling utilization.

I think there may be some sort of temporary disruption in the beginning. But at the end of the day, I think we appreciate the fact that commercial companies sort of set the rules in advance. And you know what they are and you are able to run your business that way, as opposed to the government, which tends to manage utilization by doing retrospective audits two and three and four years down the road, which is a much more difficult way, quite frankly, to manage your business.

So I don't think we are terribly concerned with a shift to either managed Medicare or Medicaid. We've been dealing with it on both sides of the business for a long time. And again, once we have an opportunity to adjust to it, I think we would be just fine.

Thanks. And just last one, DSOs seemed to tick up a little bit in the quarter. Maybe help us understand what is going on there.

Yes, I -- no one single explanation. I think we had probably a handful of situations where receivables ticked up in the quarter. The state of Illinois, which for us is a behavioral state, slowed considerably in making Medicaid payments in Q3, and quite frankly we expect that to continue into Q4.

We have had that experience in Illinois before. We have a much bigger presence in Illinois after the PSI acquisition, however, so it is more apparent. But we expect that those payments will resume and will be caught up sometime in 2012.

There's been kind of similar slowdowns with California Medicaid, or Medi-Cal. We have had some slowdown in VA payments, the Veterans Administration payments in South Texas where we are an exclusive VA provider. In every one of those cases, we expect that the government will make good on its payments, although it may be a bit of a process.

I should also note that I don't think in every case it is a function of simply government budgetary pressures. I think there is some processing issues, etc., that the government is working through.

And then in Las Vegas I alluded, I think, in my responses to Adam that we signed our Sierra contract. But during the quarter while we were still negotiating the final terms, we weren't getting paid. So, that pushed our AR days up. And that'll get -- frankly has already largely been resolved as we signed the new contract and Sierra has caught up on their payments.

That is helpful. Thank you.

A.J. Rice, Susquehanna Financial.

Hi Alan and Steve; a couple of things, if I could ask. Justin's looking ahead to 2012. I just was going to actually make sure we're up to date on 2011. You didn't say anything about the guidance. I'm assuming that's since you are reaffirming sort of your full-year guidance essentially that point. And is there any early read on -- sometimes I know you comment on what you're seeing volume-wise or otherwise in the early part of the quarter. Any thoughts on that at this point?

So two things, A.J., yes. I think generally our practice has been, when we don't comment on guidance, we are just reaffirming what is out there. As far as trends in Q3, again, they seem to be reflective -- more of the same from a volume perspective. It is obviously still early in the quarter.

Look, I think that the critical piece, as this year has demonstrated in our acute-care performance, is payer mix. And unfortunately -- or I shouldn't say fortunately or unfortunately -- but this early in the quarter we're not going to have a real read on that. So, to me, that is the open-ended variable in terms of acute performance.

Sure. And then maybe just one other question, broadly on capital deployment; you obviously stepped up this quarter [and] took advantage of a pullback in the stock. Are we going to -- is that something that maybe has moved up as a priority a little bit?

And then, I guess you guys have also been mentioned in some of the local press reporting as looking at a couple of these big nonprofits -- deals that are out there. What are you seeing really on both sides? But I guess you haven't been as active on the acute side. Are you seeing some things that maybe are interesting at this point?

A couple of things, A.J. We have said, since the PSI acquisition was completed, that our major focus of free cash flow was going to be the repayment of debt and that has been the case. We've done a nice job, I believe, of generating cash in the last year and in repaying that debt. And that has created a significant amount of financial benefit and leverage.

On the other hand, we have also said we will explore opportunities as they arise, as we have historically done, so we will be judicious in doing that. As you commented, we took advantage during the quarter of what we thought was a historic decline in our stock price below valuations that -- or at valuations that we thought made share repurchase a pretty compelling move in the quarter. And we will continue to look at that.

I think we have commented on this before. There are lots of opportunities out there. I think the environment, the uncertain environment has created a number of sellers out there who might not have previously been sellers or potential sellers, and we look at a lot of opportunities. But again, I think we will be judicious in doing that.

The one thing I would say about local press is it is often unreliable. So I don't think you can read a lot into what the local press reports. But, I think UHS's history will sort of speak for itself. We will respond to opportunities if we think if we think they're compelling.

Okay, thanks a lot.

Darren Lehrich, Deutsche Bank.

Thanks. Good morning everybody. I guess just a couple of things left on my list here. First, can you just comment a little bit on residential in the context of what is going on at the state level? Any new trends there to talk about? Your length of stay has been I guess tracking down about 4% basically all year. But if there's anything more to say there, would be interested.

No, Darren, our behavioral segment itself breaks down into two broad segments itself, which is the acute behavioral segment and then the residential segment. The residential segment, as you know, is the segment that has the vast majority of our Medicaid revenue. And so it has been the portion of our behavioral business that has been under the most pressure, both from a rate perspective and a length of stay perspective as you alluded to. And quite frankly, I don't really see an end to that as long as these state budgets remain under pressure.

But it should be noted that the residential business is definitely the smaller component of our behavioral business, probably in the 30%, maybe 35% range. And we've talked before, to the best of our ability, actually trying to shift residential capacity to acute capacity where that is possible.

We have done that in a couple of places with some notable success. I think we have mentioned Winston-Salem, North Carolina before as a good example where we have converted beds, and we will continue to do so. But the residential business is a tough business in this environment. But we continue to do well in it.

Okay, that is helpful. And I guess just back to the payer mix. The questions were more on the acute side. But on behavioral, we heard Magellan talk a little bit about their pressure that they are seeing on MLR in their behavioral business.

I'm just wondering if you have seen any notable trends with regard to commercial managed care growth inside your behavioral business, and whether that might perhaps be an offset to some of the Medicaid pricing. Because I think 3% was probably a little bit better than what I would have expected on the pricing side there.

I think Magellan's comments were sort of very specific to this notion that healthcare reform in 2011 made - -extended the age of dependents up to 26 years old. Again, I didn't follow very carefully. But I think they quantified that had some impact on their MLR.

We don't sort of cut our utilization that fine or in that same way. But I think in general, your question is a good one in the sense that -- and I think we have said this before. I believe that our behavioral business has benefited from a payer mix, a favorable payer mix shift that is a result of benefit plan design.

We tend to focus on the fact that it is mostly a result of mental health parity legislation that passed late in 2009, but obviously I think we get some benefit from the fact that there are -- I think the estimates are 1 million more eligible who are currently eligible because of that age 26 change, etc. So I think in general we've seen a more favorable shift in our commercial business on the behavioral side that, again, is a favorable change that we have not seen on the acute side.

Yes, well, I think that is it. I just would make one comment, Alan. I certainly would not have expected you to be stock back inside of a year from the PSI deal. So, good job getting your leverage down and being able to do that too.

Thank you, Darren.

Christine Arnold, Cowen & Co.

Hey there. A couple of follow-ups. You've reopened Pennsylvania. Can you speak to what impact that might have going forward? I think it was supposed to be opened third quarter but was delayed, and that might have impacted some the metrics. And then, could you expand on the military opportunity you see in the behavioral health business that you alluded to?

Sure, Christine. We discussed in our second quarter that we had a facility here in Pennsylvania that had some physical plant problems, required us to close some capacity because it was a relatively short-term closure. We didn't really have an opportunity to reduce our costs by much, so we had about a couple of million dollars of operating losses.

I think you are correct. We thought we might be able to get it reopened sometime in Q3. It turned out we really didn't get a chance to reopen the capacity until early in Q4, so that couple of million dollars of operating loss replicated itself in Q3.

We are sort of ramping back up, so there may be a small piece of it that continues into Q4. But in effect, I think it should be a tailwind and a positive for us in 2012 as the capacity is fully open and remains open for all of '12. And your second question was about --

Military opportunity that you alluded to.

All right. We have a number of behavior hospitals that are located very proximate to military bases. There are a lot of returning veterans who have issues as a result of their service. We have designed programs that are responsive to those needs.

We've got sort of a whole complement of people focused on that, and focused because it tends to be a base by base sort of an issue on responding to local needs. And I think that has been an upside.

I want to be fair. It's a niche program. It's still not huge as a percentage element of our overall behavioral revenue. But in terms of growth opportunities, I think it is a significant growth opportunity.

Do you go to the TRICARE contractors? Could you go to DoD? Could this be expanded to something kind of more macro for you? Or is it going to be base by base forever?

To the best of my knowledge, it remains a local -- sort of a locally-run kind of a program. As best as we can tell, that's the way the military prefers it and I think we have been responsive to that and we have aligned ourselves in that way. So we are comfortable, obviously, responding and offering the service in however the military wants to do it. And that's what we are doing right now.

Kevin Fischbeck, BofA Merrill Lynch.

I just wanted to confirm, you mentioned before that you (inaudible) $10 million to $15 million of high-tech payments in Q4 or Q1. But that is the cash payment, and then you would take that and you would amortize that benefit as revenue over time.

That's correct, Kevin.

Okay. And then just looking at the margins in the business, I am actually a bit surprised about the size of the margin compression in the acute care business and maybe the lack of more margin expansion in the psych business. I think historically you've talked about needing 3% to maybe 4% of revenue growth to be able to show some margin expansion. And it sounded like historically like you didn't really care how that revenue came through, whether it was volume or price.

And since you're doing a lot better than that on the psych and there is potentially Psych Solutions cost cutting, I'm surprised we didn't see more flow through there. Again, if you're in that ballpark and you saw acute-care margins down 70 basis points -- just give a little bit of color there.

Sure. I think on the acute side, Kevin, you have to -- and certainly the way we look at it is that we include bad debt expense in our net revenue growth picture. And when you include bad debt expense in net revenue for the quarter, our net revenue growth is sort of more in the 2.3%, 2.4% range. And again, I think your comments are fairly accurate.

I think we believe if we get to 3%, 3.5% and we have the opportunity for, at a minimum, keeping our margins stable if not growing them. But 2.5% starts to really push the envelope, and you clearly saw that in the quarter. The hope would be that we can improve that payer mix as the economy improves and we get some rate increases, etc.

On the behavioral side, again, I think it is a little more difficult when you get up to those 26% margins that we showed in the quarter for the same store, the legacy facilities. I think this notion that some people are accustomed to going back several years that we're going to have 40 or 50 or 60 basis points of margin expansion a quarter is a little unrealistic. I think over time, though, I would agree with the notion that with 6.5% to 7% revenue growth we should be able to expand our margins.

I think if you look at the overall margins that include the PSI facilities, again, we had a couple of smaller drags on the portfolio. We seem to have a dark cloud over us here in Pennsylvania. But we had a PSI facility that was flooded as a result of a couple of the floods that we had in September and had to close.

Again, there's probably a couple of million dollars of losses there. Again, I wouldn't necessarily call that out generally. But it is dragging the margins down a little bit.

We would share the hope that with that sort of margin -- excuse me, with that sort of revenue growth, that in the future we might be able to squeeze out a few more basis points of margin expansion.

Okay. That's helpful. So the 3%, 3.5% is a cash revenue number when you think about margin expansion opportunity. And I guess next year we're going to change the accounting on bad debt. So when you talked about 3%, 3.5% growth in revenue, I guess is kind of the baseline assumption heading into 2012. Is that under the current accounting and so the cash (multiple speakers) a little bit less or --?

That is a cash accounting number, in fairness. And I realize it can be confusing, because obviously the GAAP accounting doesn't follow. But we've always looked at it that way because, at the end of the day, we can only do what we can with the cash that comes in the door.

So, yes, when I talked before about 3% to 3.5% revenue growth in acute, that was a cash number that, beginning in 2012, will be consistent with the reported number.

Okay, that is helpful. And then as far as the proceeds from the asset sales that you expect to get in the next three, four months, is there a thought process on where that capital should go? Is that viewed as unusual in some way and maybe more deployable?

No. Again, I think my comments from before would still be relevant, and that is our first priority is debt repayment. To the extent that we have exceeded our sort of scheduled debt repayment schedule, like I said, we took advantage of a share repurchase opportunity in the quarter. And we will continue to explore those sorts of opportunities with what I will describe as excess cash.

But again, in this environment, we think we've done pretty well by kind of sticking to our knitting and paying down our debt rather rapidly.

Okay, thanks for the clarity.

Gary Lieberman, Wells Fargo Securities.

Thanks for taking the question. There's been some discussion that Medicare might consider rebasing the behavioral PPS. Could you just share your thoughts there, and any thoughts or analysis you have done in terms of the amount that you think it could be rebased by?

Well, Gary, I think as you know, there was a MedPAC meeting in the past month or so to talk about the issue. From our perspective, the meeting went kind of largely as we expected it would.

I think MedPAC made some important observations. One, that from an overall program perspective, the behavioral PPS methodology that was introduced in 2005 or implemented in 2005 has largely played out the way that it was expected to. That is the overall program spend, the amount of capacity, the amount of beds available, the amount of utilization and emissions, etc. all have tended to play out as MedPAC and CMS expected. And that is generally a good thing.

What MedPAC commented on or observed, again nothing new to this, was that there was a difference in margins between the freestanding facilities and the units within acute care hospital. And what they suggested was that that differential merited further study. And I think the whole thrust of the meeting for the most part was how do you gather that data and how do you do that meaningfully?

The industry, not just UHS, but the industry I think is a full participant in that. We have engaged a consultant to help do that. We think there are perfectly reasonable, rational explanations for the margin difference, most of which I think center on the size of the hospital. So the freestanding facilities tend to be larger and therefore more efficient, which we think is intellectually intuitive. And we are prepared to share that information with both MedPAC and CMS.

Our sense of it is that the process of studying this issue is not an immediate one. It will take some time. Like I said, we will participate in it, but we are not of the mind that there are any sort of imminent or immediate changes to the Medicare reimbursement system. And I will also remind you that Medicare is less than 20% of our behavioral revenues.

Great. Thanks a lot for the color.

Frank Morgan, RBC Capital Markets.

Good morning. Just a couple quick ones here. Steve, you mentioned you had bought stock since the end of the quarter. I was wondering if you could comment on how much you bought. And what is that updated number on remaining shares available?

And then secondly, just more of a mechanical question. With PSI getting close to [lab], will those behavioral results -- will you put that in the same-store in the fourth quarter or just wait until you get the full quarter in the first quarter of next year?

No, we will put it in, and we will have them in same-store in the fourth quarter. I don't have the share repurchase numbers in front of me. Obviously it's not a huge number that is left on the authorization, but like I said in my remarks, I know we have exhausted some of it already in the first month.

Okay. Just one last one and I will hop. In terms of where the third quarter kind of run rate of growth in behavioral reimbursement -- is that a good kind of way to think about the way it will look over, say, the next four quarters? Or would you -- have all the rate cuts that went into effect, are they kind of loaded into the numbers now? And would we expect to see that same type of year-over-year rate growth over the next three quarters?

You know, I think when I was responding to Justin's question about sort of guidance for next year, I commented on the fact that the 6.8% revenue -- of behavioral revenue growth in the quarter was surprisingly strong, and maybe a bit optimistic as you thought about next year for a couple of reasons.

One is, I think as you have alluded to, some of the Medicaid cuts were not fully implemented in Q3. Most states implemented on July 1, but there are some states like Texas that did not implement until September 1, consistent with their fiscal years. So there is -- there may be a bit of a further drop-off in Q4 as we get the full implementation of those Medicaid cuts.

The other issue, I think Darren kind of alluded to it; I think Christine may have alluded to it, is that we have had some favorable offset. We have a favorable kind of commercial offset in our payer mix in the behavioral segment to these Medicaid cuts that we don't, quite frankly, have available in our acute segment. It's a little hard to predict to what degree that can be sustained, etc.

Again, I think we're perfectly comfortable that behavioral growth will continue in kind of 5.5%, 6.5% range. And we will certainly hope to push it to close to what we have been running. But I wouldn't sit here today and guarantee that we can do that.

Thanks.

John Ransom, Raymond James.

Hi. Good morning. Just a couple things, Steve; you mentioned the acute care opportunity, but your stock is trading at a single digit multiple on EPS. What kind of opportunity would you have to see to do a stand-alone acute-care acquisition relative to buying back your own stock? What kind of discount are you looking for?

John, I don't know that you can answer that question sort of entirely kind of on a multiple or discount basis. I think most likely -- and I think frankly, again, this has always been true in the terms of the way we explore opportunities or try to take advantage of opportunities, again both behavioral and acute. We've been particularly interested in opportunities that allow us to enhance an existing franchise, that have an unusual growth opportunity or an improvement opportunity.

But again, I'm going to just repeat. I think for UHS, the history sort of speaks for itself. I think we have been more judicious then maybe I would say most or maybe even all of our peers in selecting those opportunities. I think it is going to be the same as we move into the future.

Have you seen anything out there that looked more interesting than what you might have seen over the past five years, just given what we're hearing about the supply of opportunities in the marketplace?

Again I think there are interesting opportunities out there. The challenge, which I think is how you are framing it, is at what valuations and at what price do they become compelling. And look, you've raised an important point.

We have an opportunity to buy back shares as another opportunity for free cash flow. That is pretty compelling at the moment as well, and that certainly enters into our thinking. But again, I don't know that that is any different than how we think about this process or how we have always thought about it.

Okay, and then secondly, just a minute on the high-tech revenues, you -- it looks like relative to some of your peers, you're qualifying a little more slowly. Was that a strategic decision? Or is your IT consultant maybe struggling a little bit to hit all the meaningful use criteria?

No, I think substantively we're in a little bit different position than some of our peers. We are just implementing an EHR system that we think will qualify. We had essentially or effectively a homegrown clinical system that we were most likely going to replace anyway. But certainly with the availability of the high-tech reimbursement, that became a much easier decision to make.

So, we're just at that point where I think some of our peers already have hospitals that -- and again, I obviously have no direct knowledge of this -- that they believe qualify or have an indication that they qualify. We know that we're just beginning to implement hospitals. So, our revenue recognition and our expectations are going to be based on that.

Okay, and thirdly this is for Alan. Alan what does your crystal ball say on the super committee? And also going from super committee to [doc fix], what do you think is a realistic scenario in terms of what hospitals are going to have to contribute to the [paperwork] for both of those efforts?

Well, first of all, nobody knows. And we don't think -- well, I'm just going to take it back. I was in Washington the other day, and they said they thought it was unlikely that they would get to $1.2 trillion, that it would be something short of that. And so it's a question of what it actually gets to, depending on how much and what hospitals might have to contribute.

There really isn't anything to say beyond that, other than this week is really the week. Although they have to have it done by November 23, in order to process it and do the calculations and get the regulation out, it really has to be finished by this week. So, look at the papers over the weekend and by Monday probably we will see something.

Okay, thanks so much.

Whit Mayo, Robert W. Baird.

Hey, thanks. Steve, do you have any feel for how your UPL is going to change with the new waiver program in Texas? I know it's not a lot, but I'm just curious if you've heard anything new.

No, Whit, I think you accurately described it. Our general sense is that the changes that have been announced in Texas are unlikely to have much of an impact on the specific UPL programs that we participate in. I know that for some of our peers, there's been a more material affect. But our sense and our understanding is that our UPL programs will not have much of an impact.

Okay. And looking at your free cash flow, you are kind of on a run rate for almost $500 million now at this point. You've consistently said you're going to look at some more psych beds as an opportunity. You've got high-tech coming up over the next couple of years. Maybe just directionally, can you help us think about CapEx and what is going to be required going forward?

You know, I think that is another sort of dynamic where I think our current performance is reflective. We've said, I think, in Q2 that we expected to spend somewhere in the neighborhood of $275 million, $300 million in CapEx in 2011. I could see that number moving up or down a little bit in the future, but it seems to me to be a reasonable run rate as we think about the future. At the moment I don't anticipate material changes to that trajectory.

Okay, so thinking into '12, $300 million could be a decent number to think about?

I think so. Again, we're not giving guidance at this moment. And I reserve the right as we finish our budget process to think about it differently. But again, in terms of a placeholder at this moment, I think it is a good one.

Okay, that is helpful. And maybe just one last thing, I may have missed this. Did you comment at all on the EMTALA demo project for adult Medicaid? I think Debbie said that it started in October, just didn't know if you were participating in that. Just curious if you have any thoughts.

I did not comment on it. Thanks for asking, because we think it is a positive development.

For those who don't know, for the most part Medicaid does not pay or reimburse for adult behavioral treatment. So, for folks who were between the ages of 21 and 65 and who don't qualify for anything other than Medicaid, we're generally not getting paid for those folks.

As part of healthcare reform, there is -- again, in the grand scheme of healthcare reform -- a relatively small program, a demonstration project to allow states to apply for federal funds to start to pay for and reimburse for those -- that age of folks. We know a number -- I think it is at least a dozen states in which we operate, have applied for -- to participate in the demo project. We know that a number of those states have specifically named certain of our hospitals as providers. So we're working with those states.

We view that -- again, the demo project itself is probably not enough to materially -- I'm sure it is not enough to materially affect our results. But if, in fact, it is the precursor to a change in that regulation that would be, we believe, a significant positive for the behavioral business.

Perfect. Thanks a lot Steve.

Thanks.

Justin Lake.

Thanks. I just had one quick follow-up on the Medicare psych side. With the MedPAC analysis and the work that you're going to be doing going forward, I just wanted to check that -- are there any Medicare -- or I should say are there any psych rates that, in the commercial and Medicaid world that are directly tied to Medicare, so that if Medicare to be cut, you would see some corresponding decrease in some of your other rates?

No. There may be some sort of isolated contract out there. But generally, neither our commercial nor Medicaid rates are tied to Medicare reimbursement.

Great, thanks.

Gary Taylor, Citibank.

Okay. I just want to say, Operator, we're going to have to make this our last question. But Gary, go ahead.

Okay. The question is, does the Phillies loss get any easier to swallow if the Cardinals actually win the World Series?

There's a couple of ardent Philly fans sitting with me in the room, Gary. And I would tell you, they think not. When we set the date of the call, we actually were looking at the World Series schedule and thinking this was going to be a real challenge for us. So there's a lot of disappointment in this room.

We (inaudible) (multiple speakers) because I'm ready to let them go.

I probably just jinxed myself, so you can tease me on Monday.

My only real question I think, though, that's left unanswered is when you look at -- can you tell us on a dollar basis sequentially the Medicaid rate hit that you took? So, X million dollars of sequential EBITDA hit from the rate actions in the states on July 1? (multiple speakers) Ballpark even.

You know (multiple speakers) -- in our second quarter 10-Q I think we attempted to quantify the dollar impact of what we've been talking about is a 3% or 4% Medicaid rate cut. And I think that number, as I recall, was approximately $45 million or $50 million. And I think we still feel like we're on that trajectory. Obviously that is an annual impact number.

Right. So you're still on that trajectory. So, end of the day that didn't change a lot. So, of the inpatient acute, inpatient behavioral and RTC, where was the greatest rate impact would you say of those three?

I think from a rate perspective, Gary, the rate impact has been pretty similar across the segments. Most of the Medicaid cuts within a state have been what I call broad-based, or they haven't been terribly nuanced. So I don't know that from a rate perspective we find that they're any different.

Obviously they vary by state and I think as -- in responding to Darren's question from before, we find that in the behavioral residential segment it's a little bit of a double whammy, because we have been impacted not just by rate reductions but by length of stay compression that we don't really see on the med-surge or even on the acute behavioral side of the business.

Okay, perfect. Thank you.

Okay. Well, we would like to thank everybody for joining us this morning and look forward to speaking with you again in the fourth quarter when we will be prepared to give our 2012 guidance as well. Thanks very much.

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