環球健康 (UHS) 2013 Q3 法說會逐字稿

Good morning, my name is Brandy and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services third quarter 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. Steve Filton, you may begin your conference.

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, 2013. During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates, and similar words that represent forecast projections and forward-looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements and risk factors in our Form 10-K for the year ended December 31, 2012, and our Form 10-Q for the quarter ended June 30, 2013.

We would like to highlight a few developments and business trends before opening the call up to questions. As discussed in our press release last night, during the third quarter of 2013, the Company recorded net income attributable to UHS of $1.15 per diluted share. After adjusting each quarter's reported results for the items disclosed on the Supplemental Schedule included with last night's earnings release, adjusted net income attributable to UHS increased to $1.10 per diluted share, during the third quarter of 2013, as compared to $0.91 per diluted share during the third quarter of last year.

As discussed in last night's release, included in the adjusted net income attributable to UHS during the third quarter of 2013 is $0.10 per diluted share resulting from additional revenues recorded in the quarter that are applicable to the period of October 1, 2012, through June 30, 2013 earned in connection with the Texas Medicaid disproportionate share and uncompensated care program. On a same facility basis, net revenues in our behavioral health division increased 3.4% during the third quarter of 2013. Adjusted admissions to our behavioral health facilities owned for more than a year increased 5.8%, and adjusted patient days increased 1.5% during the third quarter of 2013, as compared to last year's comparable quarter. Revenue per adjusted patient day rose 1.9% during the third quarter of 2013, over the comparable prior year quarter. Operating margins for our behavioral health hospitals owned for more than a year were 27.5% during the third quarter of 2013, as compared to 27.9% during the third quarter of 2012.

On a same facility basis in our acute care division, excluding the impact of approximately $16 million of the additional the revenues earned in connection with the Texas Medicaid disproportionate share and uncompensated care programs covering the period of October 2012 through June of 2013, revenues increased 6.6% during the third quarter of 2013, as compared to the third quarter of 2012. The increase resulted primarily from a 3.6% increase in adjusted admissions to our hospitals owned for more than a year, and a 2.9% increase in revenue per adjusted admission. On a same facility basis, operating margins for our acute care hospitals decreased to 12.8% during the third quarter of 2013, from 13.4% during the third quarter of 2012.

Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to approximately $276 million and $259 million, during the three-month periods ended September 30, 2013, and 2012 respectively. And approximately $766 million and $840 million during the 9-month period ended September 30, 2013, and 2012 respectively. In addition, the provision for doubtful accounts at our acute care hospitals increased to approximately $291 million during the third quarter of 2013, as compared to approximately $167 million during the third quarter of 2012, and increased to approximately $725 million during the first nine months of 2013, as compared to approximately $456 million during the comparable period of 2012. As a percentage of acute care net revenues, the provision for doubtful accounts, charity care, and in the uninsured discount in this year's third quarter were at levels higher than those experienced during the third quarter of 2012.

Our cash from operating activities increased by approximately 15%, to $186 million during the third quarter of 2013, as compared to $162 million in the third quarter of 2012. For the 9 months ended September 30, 2013, our cash provided by operating activities increased by approximately 11% to $592 million, over the $535 million generated during the comparable nine-month period of 2012. Our accounts receivable days outstanding increased to 59 days during the third quarter of 2013, as compared to 57 days during the third quarter of 2012. At September 30, 2013, our ratio of debt to total capitalization was 52.9%. We spent approximately $104 million on capital expenditures during the third quarter of 2013. Included in our capital expenditures were the construction costs related to the recently opened 140 bed Temecula Valley Hospital, a newly constructed acute care facility located in Temecula, California.

Late last week, we completed an amendment to our $275 million accounts receivable securitization program, which extended the maturity date of this program for 3 years to October of 2016. This year, 48 UHS hospitals, that's 43 behavioral health and 5 acute care, were recognized by the Joint Commission as top quality performers. This acknowledgment publicly demonstrates the long-standing commitment of UHS to provide care to our patients that is based upon evidence-based practice to ensure positive outcomes. Several sets of quality indicators are measured and compared across the entire population of accredited hospitals. In 2012, 32 UHS hospitals were recognized. This year's achievement recognizes that these facilities have sustained excellent quality performance for the past several years. Alan and I will be pleased to answer your questions at this time.

(Operator Instructions)

Chris Rigg with Susquehanna Financial.

Good morning. Thanks for taking my question. Was just hoping you could provide some additional color on the bad debts and what if anything, or what additional color you might be able to provide with regard to the increase, both sequentially and year to year?

Sure, Chris. So as we I think talked about in the middle of last year, we changed our charity care policy across the division, frankly to make it a little more difficult to qualify for charity care, and we suggested at that time that the cosmetic result of that on our income statement would be to shift uncompensated dollars from charity care to bad debt. And in fact, I think that's what you're seeing occur in the significant increase in bad debt and the reduction in charity care in 2013. As noted in my prepared remarks, I mean the total amount of the items that we consider to be uncompensated care has remained relatively stable. And again, I think it is largely in our minds a cosmetic change.

Okay. But I guess that makes sense year-over-year, but relative to the second quarter, it does look like it crept up a little bit. There is nothing notable to isolate there?

I don't think so. I mean obviously, if you look at -- after you adjust for charity care, or uncompensated care, our net revenue metrics were quite strong in the quarter, in the acute division. So it doesn't seem to be having -- it doesn't seem to be any underlying or substantive change in our payer mix.

Okay. And then just change gears quickly here, on Temecula, can you give us a sense for in the operating expenses, how much expenses in there were related to the Temecula without any corresponding revenue in the quarter? And I will leave it at that. Thanks.

Sure. So just to provide a little bit of context and to remind people, in our original guidance for 2013, we included $15 million or $16 million of both pre-opening startup costs, as well as opening startup losses for the Temecula facility, and we indicated that those would occur in quarter three and quarter four. We incurred something like $6 million or $7 million of startup costs in quarter three, across all of our operating costs. And we think we're on track generally to incur the sorts of losses that we included in our original guidance with the fourth quarter opening of the hospital.

Okay, thank you.

A.J. Rice with UBS.

Thanks. Hi, everybody. Just maybe mention, obviously with the nice pickup in volume on the acute care side you had, did you end up running, having to make any short-term adjustments that would have maybe mitigated some of that flowing through to the bottom line, either in the way you dealt with the nurses et cetera?

Yes, think that is correct, A.J. And the fact is, because volumes picked up as quickly as they did in Q3, I think as we went through the detailed results, we found that there is probably $4 million or $5 million of what I would sort of describe as the inefficient salary expense, in this case meaning higher uses of registry and overtime as we responded quickly to the increase in volumes. And I think the good news from our perspective is that those increases should be fixed in relatively short order and we should return to kind of a more normalized salary and staffing pattern. So we would expect that issue to largely be resolved in Q4 and going forward.

Okay. And I might switch gears and ask you about the behavioral business. Obviously, there has been some discussion about bumping up against capacity constraints in various markets. Are we at a point now where you would actually look into at even a denovo facility and do you have any of those on the drawing board that are worth highlighting?

The easy answer to the question is yes. I mean we have opened denovo facilities in the last few years. We opened denovo facilities in Arkansas and in Illinois and in Texas, all in the last few years. We have a couple, another one or two that are absolutely on the drawing board, so I think our view of capacity expansion as we move forward is that it includes both expanded beds at existing facilities, as well as denovo projects.

Okay. And maybe the last question on the pressure on the length of stay in the RTC segment which continued this quarter, I mean we don't have a lot of competitors anymore to look at to benchmark you against, but it does seem like the other public company isn't seeing exactly the same, at least they're saying they're not. And is there anything about the particular programs you have or particular geographies that would make the facilities a little more susceptible to that length of stay pressure? And then I know it is a hard call, but do we see any signs of that starting to ease up a little bit?

No, I mean, as you know, we have been discussing this pressure on length of stay for some time, and I think in response to previous questions, we have always talked about the fact that although it was relatively isolated to our residential business, that within the residential business, it was fairly widespread, that this was not just a phenomena at a small handful of facilities. So again, it has been a pervasive kind of phenomena for several years, why another company, or other hospitals might not be experiencing it is really a question that is difficult for me to answer. And as far as sort of indications of a turn, while I know lots of people have heard me say for a long time, and I certainly concede that I'm the main proponent of this, that there seems to be a natural trough to this length of stay issue. To be fair about it, we have not yet seen it yet, we have not seen it yet, and I don't know that we have really seen any leading indicators of it.

Okay. All right. Thanks a lot.

Joshua Raskin with Barclays.

Hi, thanks. Good morning. First question just simply on the admits number, not adjusted admissions but actual admits in the quarter, same store based on the acute care side were obviously very strong and I'm just curious, any color on that and whether that is geographically focused or any other sort of things that you could point out there.

Well, I think from an admissions perspective, by far the greatest strength in admissions in the quarter was in Las Vegas, which is kind an interesting turn from the second quarter in Q2, much of the strength in Vegas was from a payer mix perspective, as opposed to volumes. And now in Q3, volumes were stronger. But I will make the point that I think the overall revenue strength in the acute portfolio was fairly widespread, which I think means that while volumes were strongest in the Vegas market, the payer mix and therefore the pricing metrics were stronger throughout the rest of the portfolio as well.

Okay. But no specific types of admits or facilities or anything that it sounds like it is generally picking up and Vegas was the big driver, is that fair?

I think that is a fair characterization, Josh.

Okay. And then Temecula, just a quick follow-up on that, I think I got the answer in the last question, it sounds like you're on pace for sort of a $9 million EBITDA hit in 4Q, I'm just curious, expectations for EBITDA break even at Temecula. When do you think that happens?

I think we've said before that our general expectation is that Temecula itself would likely get to break-even for the full year of 2014. And progressively I think what that implies is that we will have some losses in the beginning of '14 and then that should turn around by the end of the year. The more difficult call for us, quite frankly, is how Temecula affects the other hospitals in its Riverside County market. It has been a while since we had an opening like this, that is an opening in a market where we had existing hospitals, but when we opened Centennial Hills in Las Vegas, it clearly, in the early I would say, first 12, 18 months cannibalized our own hospitals a lot more than it took market share away from other hospitals in the market. I think to some degree we're expecting some of that same dynamic in Temecula. But after that, Centennial really started to take market share from its competitors and really came into its own and again, I think we would expect that same sort of phenomena in Temecula. So a little bit of an unknown as to when we say we expect Temecula to break even, what the impact on the rest of the market is, but we are certainly very upbeat about the long-term prospects of the hospital.

Okay. So it is possible that Riverside overall in '14 may not be break-even in light of the impact on the cannibalization on other facilities but Temecula itself would be break-even.

Incrementally break-even. Certainly the other hospitals are already profitable and we wouldn't expect them to decline in that sort of material way to make them break-even but yes, from incrementally break-even from the market, maybe a bit more of a hurdle.

And last question, Steve, on the guidance, coming up midpoint to about $0.12 or $0.13, I'm curious how much -- was that mostly Texas? Was any of the Texas dish -- I think the whole amount was $0.13, was any of that expected? I know only $0.10 was out of period, but was any of the $0.13 expected or is that the boost in guidance. And I guess just a little surprised based on the strength of the actual quarter and the final IPPS rule came in a little bit better et cetera.

So I think that basically the raise in guidance was largely in our own minds a mechanical exercise to reflect the Texas dish and UPL amounts, or uncompensated care amounts that were in fact not expected and not included in the original guidance. As well as the adjustment for, we had originally included in our original guidance the Medicare dish cuts that were imbedded in the ACA that have since largely been eliminated. The reason why the guidance raise is a little bit less than those two items together is that I think that through the 9 months, our results for the 9 months are probably a few pennies shy of our own internal expectations, so that we are reflecting that in the guidance change as well.

Okay. Got you. So there were some modest head winds that offset those two positives?

Correct.

Okay. Thanks.

Tom Gallucci with FBR.

Good morning. Maybe just following up on that last point that you made, Steve, am terms of maybe a few pennies weaker than you were looking for, are there any particular areas that you could point to that have been a little bit different than you were initially expecting?

Well, I think probably, in the broadest sense, we have already touched on those. I mean I think that our behavioral revenues have grown by -- pretty steadily at around this 3.5% mark for the year, and I think our own expectations were for slightly stronger behavioral growth. And I think it largely really gets down to this length of stay issue that we've discussed quite a bit before. And on the acute side, struggling a little bit, I mean we're very pleased with the way revenues have rebounded. But struggled a little bit with getting those margins up as quickly as we might have hoped to get them up given the revenue increase, so I think those are the two phenomena. Obviously, as on the acute side, as we mentioned I think we feel like those are fixable sorts of items that turn around pretty quickly and on the behavioral side, while we think there is a natural trough to this length of stay, where we're still finding it difficult to predict when we hit it.

Right. Two cost items, I think that you called out in the past, just wanted to make sure we've got the right numbers for this quarter, the acute care side, sort of physician costs, I think has a bit of drag, just curious where those stood this quarter. And on the behavioral side, you have had continued legal costs, so I just wanted to make sure we call those out, too.

Sure, so on the behavioral side, the legal costs associated with the investigation were about $2 million for the quarter, which is compared to I think about $4 million for last quarter. And then on the acute side, the drag from the incremental increase in our physician, owned physician and acquired physician subsidies is probably $3 million or $4 million in the quarter. Which again I think is a sequential step-down from the last quarter, but still a little bit of a drag.

Okay. Last question, just a big picture. Sort of on the M&A front, we see a fair amount of activity out there. Just curious what your perspective is at this stage of the game, particularly on the acute care side. Thank you.

I think we, as we've said, I think pretty consistently, we remain very interested in any strong and attractive compelling acquisition opportunities and investigating those. I think our sense is at the moment, the market is taking a bit of a pause as we sort of make our way to the other side of health reform, and it seems like that is consuming most hospitals' attention. But our expectation is that at some point next year, the pace of activity is likely to pick up again.

Thank you.

Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everybody. A few things left here in my questions. The length of stay topic obviously has been prominent with you guys over the last several quarters. I guess one thing I just wanted to ask is, I think a lot of the focus has been on the residential side, Steve, in terms of how you've described this issue, but on the acute side, is there anything that we might see in the final parity regs that might help you out a little bit with managed care payers in terms of how length of stay is managed? I was just wondering if that is part of the issue as you see it here?

I think in many respects, Darren, that the parity, the preliminary parity regulations kind of already address the issue, and basically say that insurance plans can't really manage utilization in the behavioral space differently than they measure in the med-surg space. We certainly try and reinforce that point with payers. It can be kind of a nuanced issue at times but I think we think that sort of protection is already there. Certainly I think we have seen small pockets of pressure on length of stay on the acute behavioral side of the business where a particular state has let's say moved from a traditional Medicaid program to a managed Medicaid program. But I think those instances are fairly isolated. And the really broad impact on length of stay pressure has continued to be in the residential business and by definition in the Medicaid side of the business.

Okay. That is helpful. And then just as it relates to your share count, you have been a little bit more quiet on the buyback front. I think your share count has crept up about 2% year-over-year. I guess from options. But can you help us think about how you're looking at buyback, versus other options that you have with capital deployment, particularly as it relates to just managing share count at a minimum?

I think that sort of like what I alluded to before, as kind of a broader industry kind of trend, I mean I think we're very much focused on operating our businesses as efficiently as we can, and preparing for kind of a post-reform landscape. And I think when we get to, sometime well into next year, the middle, the second or third quarter of next year, I think at that point, it would be more prudent of us to sort of sit back and see what the M&A landscape looks like, what other uses for our cash flow there might be, and whether at that point, we want to become more serious about returning capital to shareholders. I think between now and then, we are mostly sort of keeping our head down, sort of literally and figuratively, trying to run the business as efficiently as we can, happy to generate a lot of cash, which we have been doing, and pay down debt in the interim.

Yes, that makes sense. The last thing here is just wanted to maybe get a little bit more visibility, if we could, on HITECH and how you're thinking about how that comes through in Q4, and then for 2014, any broad brush comments on what you think your net benefit might look like. I know it is not in your guidance, but it is certainly a source of cash flow for you as we've seen this quarter.

Yes, so, from a 2013 perspective, while you are correct, we don't include it in our guidance per se, we did estimate that the impact of the HER would be a positive $0.13 or so, in 2013. And I think we are, feel like we're largely on track to get within shouting distance of that number, one direction or another. Which means that the fourth quarter should be a fairly significant positive, mostly because a lot of the revenue recognition occurs in Q4. As we move beyond that, and again, I think we have set the stage for this previously, we have said that the ultimate impact of our HER process is a net investment in the neighborhood of $50 million or $60 million. So ultimately, it would be a net cost to us.

Again, the way our accounting works, and required that it works is that we are recognizing the revenues and the cash tending to be upfront, but we will recognize the expenses more rateably as we depreciate those costs over a five or six year period as we bring these hospitals live. So beginning in 2014, the HER impact will turn negative, when we give our 2014 guidance we will be more specific about the magnitude of that number. But from here on out, it becomes negative. I will make the point that from a cash flow perspective, I think it is only positive from here on out because we have spent virtually all of our, or made all of our HER investment already, so that the expenses that are being recognized from here on out is just depreciation of already expended amounts.

Got it. Okay. That's great. Thanks very much.

Jason Gurda with KeyBanc.

Good morning, Steve. Thank you. With some of the details out now on the exchanges and the health plans, how do you feel with UHS's contracting strategy?

Well, I think that we're fairly confident that we have exchange contracts with most of the payers in our market, in some markets there is a little bit of alignment with certain payers, with certain hospitals, et cetera. But I think we feel reasonably well positioned from a contracting perspective in our market. I think this is going to be a more meaningful question, both asked and answered, months from now, when we have a better sense of how -- what enrollment looks like in those markets and who has got the bulk of enrollment, et cetera. But I think right now, we're very comfortable with our positioning in the vast majority of our markets.

Okay. And have you guys done any more quantitative work on what the potential benefits from the expansion of coverage might be on the behavioral health side of the business?

Not really. I mean honestly, it is difficult to do. We have certainly done what I would sort of call scenario work in which we go through exercises saying if enrollment increases by this, and if there is X amount of admissions per thousand as a result of that, these would be the impacts. But I think it is still very early and really too premature for us to say with any level of confidence what the actual beneficial impact of these newly insureds are going to be and how much more behavioral admissions will result from that increase in insurance.

Okay. Thank you.

Ralph Giacobbe with Credit Suisse.

Thanks, good morning. Steve, could you just give us the payer mix percentages actually in the quarter and maybe versus last year, and then do you have the uninsured volume growth and what percentage of admissions that represents?

Well, what I would say Ralph is I think the most significant change this quarter is really for the first time in a number of years we saw an increase, and albeit it a slight one, in both managed care and Medicare volumes. And really those have been on the decline for several years. So I think that gets -- winds up getting reflected in the strong pricing and the strong revenue growth in the quarter. Uninsured admissions were relatively flattish as well. So I mean it was a quarter in which most of our payer classes were sort of flattish in terms of utilization, but quite frankly, that is the best utilization we've had in a long time and it obviously got reflected in our revenue growth numbers.

Okay. And can you talk about initiatives or strategies you have in place, will put in place, to get more people enrolled in the exchanges, or Medicaid heading into 2014? And also if you can give us a sense of what percentage of success you currently have in getting Medicaid eligibles signed up?

Well, think it is worth noting that the process of enrolling eligible patients as they present themselves in our hospitals in Medicaid is nothing new for us, or I would think for most hospitals, and is something we have been doing for a long time, and quite frankly, in some markets, we have a whole sort of infrastructure created to do that. And in large part, the Medicaid expansion just allows us to continue a process that we're very capable of doing and are very accustomed to doing and will continue to do that. Obviously, the introduction of the exchanges is certainly a new nuance that we haven't dealt with before in this very specific way, and we've trained people for that, we have educated people, we've got people certified as counselors, et cetera. Right now, like everybody else in the world, we're sort of subject to the government ironing out the kinks in their systems before what we're prepared to do I think will have a real measurable impact. So even some of the things that we have thought about doing more proactively, reaching out to patients through mailers and other means, we're for the most part, and I think most of our peers have suggested the same thing, I mean we're really delaying and deferring those sorts of activities until it seems like the system is prepared for those people in a more efficient way than it currently seems to be.

Okay. Fair enough. And then just my last one, can you talk about the two midnight rule? Any concerns there? Do you think it will impact you in any way? And just maybe just general thoughts on the rule itself. Thanks.

I think as again, as I understand at least some of our peers have commented on it, we have some concerns. To the degree at what the two midnight rule suggests is that if a patient is in for two midnights, then that is likely to be a legitimate admission, but by the converse being that if they are less than two midnights, then that is not a legitimate admission. Now I don't know that CMS has really confirmed that that is their view. So I think like other providers we're anxious to get as much clarification and as much specificity from CMS as we can, and until then, we're going to follow this issue very closely. I think until there is more specificity forthcoming from CMS, it is difficult for us to say what the impact is likely to be. I think we will have a better sense of that early in 2014.

Okay. Thank you.

Brian Zimmerman, Goldman Sachs.

Hi, thanks, and good morning. Looking at your acute side of the business, can you make some general comments on what you're seeing in terms of trends on specific business lines, like surgeries, emergency department visits, any trends you saw this quarter?

Yes, I think surgeries clearly, also along with payer mix, took a bit of an uptick this quarter. Now again, everything is relative, so I think our surgical volumes both in and outpatient, were up this quarter, albeit it slightly, but I think that is the first time they have both been up in a number of quarters. And again, I think that the strength in surgical activity is another dynamic that is reflected in that overall strong revenue growth. ER admissions or ER visits tend to track admissions pretty closely, and obviously ER visits ticked up with the increase in admissions or I would almost sort of suggest it goes the other way, that admissions tick up as ER activity ticks up.

Okay, and then I appreciate your comments on Vegas and the admission trends you're seeing there. What about Texas? And any update you can provide on trends you are seeing in the Texas market?

It is worth noting first of all that we are in a number of significant marks in Texas.

Right. McAllen is the one I was thinking of.

McAllen has been a market that was sort of slow to be impacted by the economic downturn, and conversely, has been slow to recover and I think remains that way. So where we are seeing strength in the acute care portfolio, I don't think McAllen is really driving that much.

Okay. And then my final question, just a follow-up, how many of your hospitals are now meaningful use compliant that you have been tested for?

All of them are compliant from a Phase I perspective.

Okay. Thanks a lot.

Kevin Fischbeck with Bank of America.

Okay, great. Thanks. Just wanted to follow up on Las Vegas, because just looking at the minority interest line, it looks like the overall results of Vegas maybe weren't as strong. You mentioned that the volumes were good. Was there a cost offset that was flowing through there? Is there something skewing the minority interest line? How do we think about the profitability of Vegas during the quarter?

Well, what I did say before, Kevin, was that in Q2, what really drove the bottom line Vegas performance was an improvement in payer mix. And what I suggested before was that even though volumes improved, in Q3, in Vegas, payer mix actually deteriorated from the second quarter. And I think probably more than anything else, that drives what I think is kind of an over arching sort of dynamic in the acute division in Q3, which was stronger revenue performance, which didn't necessarily translate dollar for dollar to the EBITDA line. And I think in Vegas, the main explanation for that is payer mix, whereas I think for the rest of the portfolio, there were more -- tended to be more operating cost explanations.

Okay. Because I guess I'm having a little bit of difficulty reconciling I think the comment you made earlier, maybe it was Chris' question about the bad debt and the charity care, because looking at the numbers, it looks to me like your charity care and discounts were up about 7%. And that bad debt was up 74%, which is due to the classification issue you mentioned before. But if you add them together, they're up 33% in the quarter. So that to mean feels like a big number but you kind of characterized it as more flattish. Is there something -- am I missing something in that analysis?

No, I mean, I think the issue obviously is, to me, the ultimate test is what is happening to our overall paying revenues, which are clearly up in the quarter, and the strongest performance that we have had in some time. And that is reinforced, or in my mind, validated by our cash performance, so no, I think, and I have made this point before, we don't do a lot of analysis of bad debt and charity care in the sense of what we're not collecting. We're far more focused on what we are collecting. And I thought in Q3 those numbers were actually pretty strong.

Okay. I think that makes sense. And when you think about then the payer mix that you're talking about, that is just Medicaid growing as a percentage or what is causing the payer mix issue?

In Vegas?

Yes, I guess specifically.

Because Vegas I think is really where we had the payer mix issue. Yes, I mean I think what we saw in Vegas was an uptick in emergency room business, and that led to an increase in volumes, but unfortunately, the mix of those patients was more uninsured than more Medicaid specific in that market.

Okay. And then how do we think about the Texas dish program? Because in some ways, it is very helpful to feed a spike out, what happened in the quarter versus out of quarter, but is this something that you would expect to continue next year? Or is this something that we are going to have to wait until this time next year before it finalizes again, and then we will find another one-time, or maybe not one-time, but out of period item that we have to account for? How do you think about that number going forward?

So our expectation at the moment is that these couple of programs that we spiked out will continue into 2014, and will have a favorable impact in 2014 of about $15 million. And so at this point, we would expect that we would include those numbers in our guidance for next year.

Okay. Do you think you will be able to accrue for them or will it have to be a wait and see item?

No, I think at this point, we would accrue for them?

Okay. And maybe last question, on the psyche, I think the margins were down there year-over-year, even though the revenue growth did improve. Any comments there? I guess maybe besides litigation costs that might have brought down the margins?

As you said, I mentioned a couple of million dollars of legal fees before. I think other than that, we saw a tiny bit of pressure on things like supplies and some professional fees for our psychiatrists, but, and our doctors, but nothing terribly specific. I mean honestly, at a 3.5% revenue growth rate, it can be a little challenging to really be able to post margin expansion every quarter at those rates of growth.

Okay. Thanks.

Frank Morgan with RBC Capital Markets.

Good morning. Steve, I hate to go back to this but one more time, so the volumes and the mix improved across the entire portfolio except in Las Vegas, where mix deteriorated. Volume continued to improve there but the mix deteriorated, is that correct?

So I guess what I would say, Frank, is that in Vegas, volumes were very strong and payer mix deteriorated pretty measurably, whereas in the rest of the portfolio, volumes were less robust but payer mix clearly improved.

Okay. But some improvement in volume across the rest of the portfolio?

I don't have it exactly in front of me but I think most of the volume improvement was in the Vegas market.

Okay. Unrelated. I think you mentioned surgical volumes being up, but just general med-surg acuity, was it also up, what was your case mix on the hospital side in the quarter, did it increase?

Our case mix had risen and I think it still is above where we were in the third quarter last year, but over the last few quarters, it has largely leveled out. And it has been pretty consistent this year.

And then with regard to the drag from the owned, the physician clinics, any plans for further acquisition of those type of clinics in the near term?

I think obviously, in sort of a micro way, yes, I mean we are certainly going to continue to acquire and employ physicians where it makes strategic and business sense to us. But I think that the real significant push that we experienced kind of late last year, and early this year, which you are really kind of seeing flowing through our numbers now, is not likely to be repeated.

Okay. So the drag could very well have maxed out and might even decline over time? Is that a fair way of saying it?

What we suggested last quarter was that we would -- we expected that the drag would decline sequentially, and it did. And I think that continues to be our expectation.

Okay. Great. One last question and I will hop. Just on behavioral pricing, your outlook there. And I will hop. Thank you.

Behavioral pricing has been on a per day basis, in that kind of 2%, 2.5%, and I think our general sense is that it should remain around that level.

Thanks.

Justin Lake with JPMorgan.

Thanks. Good morning. Just a couple of quick numbers questions here for me. First, Steve, your interest expense looked a little lower in the quarter than I would have expected. Can you give us an idea of what drove that and whether it was a contributor to the quarter and how to think about that run rate going forward?

Yes, so, Justin, we did receive from the state of Illinois about $4 million or $5 million in interest payments. As you know, we have been talking about for the last couple of years that Illinois had fallen significantly behind in its Medicaid payments, because of budgetary issues, and they did issue some interest payments this quarter. Obviously, I think in the grand scheme, that just offsets the higher interest expense we incurred in these previous periods as we financed that increase in working capital. In the quarter, itself, we didn't really call that item out, because there were some offsets, some of which we've already discussed, like the legal fees, and a couple of million dollars in sort of cost report type adjustments which in our minds largely offset that interest expense benefit.

Okay. Great. And then just lastly, obviously, you're a bit of an outlier among the hospitals that have reported so far in terms of volumes. I know a lot of it is based in Vegas. Can you give us an idea, have you seen that volume improvement continue into October?

I think the trends have largely continued in October. Meaning strength in Vegas. And mostly sort of flattish sort of numbers elsewhere.

Okay, great. Thanks.

Robert Rafe with Centurion. Mr. Rafe, your line is open. The question is withdrawn. We will proceed to the next question. Our next question comes from the line of Gary Lieberman with Wells Fargo.

Thanks, good morning. Maybe just one housekeeping item. Do you have an allowance for doubtful account number available?

I don't. That will be in the Q.

Okay and I guess just going back to the patient mix, were there any service lines that were particularly strong or weak or that you entered or exited in the markets?

No, other than sort of what I alluded to before that I think the surgical service lines were stronger this quarter.

Okay. And then do you have any data or statistics for us in terms of the numbers of certified application counselors that you have available at the hospitals, either sort of on an average per hospital or on an overall number for all of the acute hospitals.

I don't really have any detailed numbers, Gary, other than I believe that we have certified counselors at most of, and certainly all of our larger facilities.

Okay. Great. That's all I have. Thanks a lot.

(Operator Instructions)

There appear to be no further questions at this time.

Okay, thanks, everybody, for your time. And we look forward to speaking with you next quarter.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.