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Executives

Steve Filton - SVP and CFO

Analysts

Adam Feinstein - Lehman Brothers

Justin Lake - UBS

Tom Gallucci - Merrill Lynch

Ralph Giacobbe - Credit Suisse

Shelly Knoll - Goldman Sachs

Erik Chiprich - BMO Capital Markets

Gary Lieberman - Stanford Group Company

Darren Lehrich - Deutsche Bank Securities

Kevin Fishbeck - Bank of America

Jason Gurda - Bear Stearns

A. J. Rice. - Merrill Lynch

Kemp Dolliver - Cowen & Company

David Bachman - Longbow Research

Jeff Englander - Standard & Poor's

Dawn Brock - JP Morgan Securities

Universal Health Services (UHS) Q3 2008 Earnings Call October 28, 2008 9:00 AM ET

Operator

I would like to welcome everyone to the Universal Health Services third quarter 2008 Earnings 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.

Steve Filton

Thank you. Good morning. I am Steve Filton. Alan Miller, our CEO, is traveling this morning, and due to some logistical difficulties could not join us. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2008.

As discussed in our press release last night, the company recorded net income per diluted share of $0.73 for the quarter, representing a 14% increase over the adjusted net income per diluted share earned during the third quarter of 2007, as calculated on the supplemental schedules included with last night’s press release. We earned $3 per diluted share during the nine months ended September 30, 2008, representing a 29% increase over the adjusted net income per diluted share earned during the first nine months of 2007.

During this conference call, 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, 2007.

I would like to highlight just a couple of developments and business trends before opening the call up to questions. Revenues for the third quarter increased 7% over the prior year's quarter. Exclusive of the impact of new facilities, most notably Centennial Hills in Las Vegas, and the revenues related to a construction management contract, revenues have increased by 5%.

On a same-facility basis in our Acute Care division, revenues increased 2.5% during the third quarter of 2008. The increase resulted primarily from a 3.7% increase in revenue per adjusted admission. Admissions to our hospitals-owned for more than a year were down 0.8% for the quarter.

In the Las Vegas, Nevada market, although the opening of the Centennial Hills has negatively impacted our same-store admissions comparisons to the extent it cannibalized some volume from our existing facilities, the better than expected operating results at Centennial Hill, contributed to a greater than 10% increase in total admissions in the market during the third quarter of 2008, over the comparable quarter of 2007.

In addition, as we have previously disclosed, newly constructed capacity at the physician-owned in McAllen, Texas; opened during the fourth quarter of 2007, unfavorably impacting our admissions in that market.

We define operating margins 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. On a same-facility basis, operating margins for our Acute Care hospitals decreased to 11.8% during the third quarter of 2008 from 12.6% during the third quarter of 2007. The margin decline resulted primarily from the slightly negative admission growth, and increases in uncompensated care expense.

Our Acute Care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to $154 million and $148 million during the three-month periods ended September 30, 2008 and 2007. Even adjusting for certain re-classes between charity care and other discounts, the percentage of net revenue, bad debts, charity expense and the uninsured discount in the third quarter were at levels higher than those we experienced for the third quarter of 2007.

On a same-facility basis, revenues in our Behavioral Health division increased 9.5% during the third quarter of 2008. This increase resulted from increased patient volumes and an increase in revenue per adjusted patient day.

Admissions to our Behavioral Health facilities owned for more than a year increased 8.5% during the third quarter, and patient days increased 3.9%. Revenue per adjusted day rose 5.3% during the third quarter of 2008 over the comparable prior year quarter.

Operating margins for our Behavioral Health hospitals owned for more than a year increased to 23.7% during the quarter ended September 30, 2008, as compared to 22.3% during the comparable prior year period.

Our cash flow from operating activities was approximately $197 million during the third quarter of 2008, as compared to $164 million in the third quarter of 2007.

At September 30th, 2008, our ratio of debt-to-total capitalization was 38% and the ratio-to-debt to EBITDA was 1.69. We spent $84 million on capital expenditures during the third quarter. Included in our capital expenditures were the equipment costs related to the new 165-bed Centennial Hills Hospital in Las Vegas that opened in January, and construction costs related to a new 171 bed hospital in Palmdale, California that is scheduled to be completed and opened in 2009.

In Las Vegas, we are also underway with a major bed tower expansion of our Summerlin Hospital and in California; we are in the process with a major expansion of emergency room, imaging and women's services to our Southwest Health Care campuses in Riverside County, California.

I am pleased to answer questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) We will pause for just a moment to compile the Q&A roster. Your first question comes from Adam Feinstein.

Adam Feinstein - Lehman Brothers

Thank you. Just, maybe to starting with Las Vegas, I assume I heard that the numbers that you highlighted before, as you said with Centennial Hills but to a 10% increase in total volumes but on a same-store basis. I just wanted to make sure, I got the right number?

Steve Filton

Sure. I didn’t give the same-store number but on a same-store basis the Vegas admissions were up modestly better than our overall Acute Care performance but, obviously still depressed somewhat by the Centennial cannibalization.

Adam Feinstein - Lehman Brothers

As we think of that kind of EBITDA growth or EBIT growth for Vegas, just wanted to figure out if margins moved higher in other quarter? So if admissions were up slightly was EBITDA up slightly as well?

Steve Filton

No I think, over all profitability was relatively flat meaning that their operating margins were down slightly. I think as we would expect with the opening of the Centennial, clearly our operating margins in Vegas prior to the opening of Centennial were better than our average Acute Care operating margins. Once Centennial opens, even though Centennial was very slightly EBITDA positive in the third quarter, it clearly drags the margins of the market down.

Again, I think those are dynamics that we saw when we opened Spring Valley in late 2004 or 2003, I'm not remembering exactly, but I think what we saw is within four or five quarters of its opening its margins and the margins of the market got back to normalized level and we would expect the same with Centennial early in 2009.

Adam Feinstein - Lehman Brothers

Okay. All right and just one more question on Vegas. Clearly it seems like you guys are holding a pretty well even with the economy being some what tough out there. So it seems like your market share growth is not really helping. What else are you guys doing out there? Are there opportunities to cut costs? Are there still some pricing opportunities? Curious as how you guys are thinking about weathering the storm in terms of how we should think about that important market?

Steve Filton

I mean in fairness, Adam, I don't know that we are doing, our approach in Las Vegas is wholly different and then it is everywhere else. Our volumes as we discussed with your sort of opening comments and questions are actually holding up fairly well. So, it's difficult to cut expenses in a very significant way.

Adam Feinstein - Lehman Brothers

Sure.

Steve Filton

We are seeing, again as we have seen throughout the portfolio, little bit in the third quarter, some incremental decline in payer mix quality. There's not a ton that we can do about that, beyond what we are already doing in terms of upfront collections etcetera.

So, I mean the interesting dynamics in Vegas are all negative statistics. It's leading the nation and foreclosure rates, unemployment is higher than the national average, but the absolute amount of employed people in the market has remained relatively steady, which mean that, I think people continue to move into the market, perhaps not at the same rate as was happening a year ago, but there's definitely a positive population growth factor in the market, and I think that's helping us support overall volumes.

As I said earlier, I mean I think we'll benefit just as Centennial continues to ramp up, its margins will improve to market wide margins as we experienced with Spring Valley, and I think that will all be helpful as that occurs.

Adam Feinstein - Lehman Brothers

Okay. My final question just on the psychiatric side, things were very strong on the quarter. Just curious to get your thoughts in terms of what was driving that and how much of a benefit you guys would have received in the quarter from new beds?

Steve Filton

I mean, actually, the amount of incremental new beds in the quarter was relatively small. We don't add beds ratably, so we had a fair amount, a couple hundred added in the first half of the year, not too many in the third quarter. We'll add some more in the fourth quarter. But we are still benefiting from beds that have been added over the last few years, and again, we had 9.5% same-store revenue growth.

We have talked about a sustainable number being in the 6% to 8%. So obviously, we are exceeding our own expectations there. At those levels we would expect and we did improve margins. I think if we continue to sustain that kind of growth for even a couple of quarters we'll continue to expand margins.

Demand in that business continues to grow. Pricing holds steady. Probably the single greatest risk in the behavioral business is the threat of Medicaid price reductions investment in various states. We have seen some already, but obviously even to the degree we have seen some, our pricing is holding up fairly well. Results in that business, I would say, seem to be proving to be if not recession proof, certainly fairly recession resistant.

Adam Feinstein - Lehman Brothers

Okay. Thank you, Steve. I appreciate the detail.

Steve Filton

Thank you.

Operator

Your next question comes from Justin Lake.

Justin Lake - UBS

Thank, good morning. Just a couple of questions on the volumes first. Steve, can you f walk us through the trajectory of volume growth, monthly for the third quarter and then maybe give us an update on October?

Steve Filton

I think as we had discussed in various conferences, etcetera during the quarter before our quiet period, it was a little bit of a volatile quarter. It started off in a fairly, normal way in July. August volumes were quite weak. I don't know if that was a function and just of the calendar, but then volumes rebounded in September, and finished as you can see obviously slightly down from where we were in the first half of the year but not terribly off.

October also started off a little bit soft, but seems to be strengthening as the month goes on and my sense is we'll finish October with same-store volumes, that are relatively as good as if not a little better than the third quarter comparisons.

Let me just make a couple of comments. I think we touched on this before. We've disclosed previously that we've seen a significant decline in volumes in the McAllen market mostly OB related volumes since the fourth quarter of '07.

We attribute somewhere between 100 and 150 basis points of overall volume decline to that change. That change will anniversary at the end of the third quarter and so we'll get back to the same-store numbers in the McAllen market beginning in the fourth quarter.

And then the Centennial cannibalization, we estimate its worth about 50 basis points. So our general sense is that rather than a 0.8% decline that we report, actual admission growth throughout the portfolio is more like 1.5% or so for the quarter, Which is still a little bit less than it was in the first half of year but not really too bad. I think once we anniversary McAllen in next quarter and we anniversary Centennial in the first quarter of '09, we will start to get back to hopefully the 2% to 3% same-store admission growth that we have really kind of been basing our models on.

Justin Lake - UBS

That's helpful. And can you kind of walk us through the inpatient volumes by payer type which was a big help in the first half of the year and may be moderate it a little bit. Can you just give us those numbers volumes by commercial versus Medicare, Medicaid and uninsured?

Steve Filton

Sure. So we discussed, I think in fairly a great detail in the first two quarters, that one of the things that drove our outsize and better than expected performance in the first half of the year was the fact that our commercial volumes were rising faster than our overall volumes and our uninsured volumes in the first half of the year were rising a little slower than overall volumes.

I think what we saw in the third quarter was a bit more of a reversion of all volumes to the mean; and all of our volumes seem to sort of track fairly consistently. So Managed Care volumes were going up at about the same rate as overall volume, uninsured were going up at about the same rate. As a result, you can see that clearly in the decline in revenue per adjusted admission was down to 3.7% from a number that was in the 6% to 7% range in the first half of the year.

Justin Lake - UBS

Steve, what does that mean for next year? Can you give us an idea of what we think about '09 and its little early to give guidance, but with all of those, with little benefiting in the first quarter and first half benefiting significantly from what seems like a significant payer mix shift to the positive. Can you give us an idea of what kind of headwind that will create as far as earnings growth for the first half of '09?

Steve Filton

When I think that, we have sort of thought about our Acute Care model for some time now. The sustainable model being same-store admission growth in the 2% to 3% range and same-store pricing growth in the 4% to 5% range and obviously I think that $64,000 question for us and for the industry is to what degree those metrics might be impacted by deepening recession. Will we see lower commercial volumes? Will we see more uncompensated care? Will we see so more uncompensated care? Will we see some greater pressure on elective or discretionary procedures?

I think that we saw incremental effects of that in the third quarter, but not terribly significant and to be honest, part of why we don’t normally give guidance during this quarter. We normally give this in our fourth quarter call. But partly why we wouldn't do it in this year is trying to get a better sense of really how confident we are in those metrics that I just outlined and how much we think it is likely that they will be affected by the overall and overarching economic conditions.

Justin Lake - UBS

Okay. Just a last question on cash flow, I think you bought back a lot or paid down a lot of debt in the quarter. But given where the stock is now versus where it was in the third quarter, can you give us an idea of what your capacity would be as far as share repurchases and what you are thinking there as far as how aggressive you want to be once, and let us know when the window opens for you to start buying back again? Thanks.

Steve Filton

Sure. I do - I will make one point as somebody did ask me this question earlier today about why we were not more active acquirers of our own stock in the third quarter. And I just reminded somebody that when we entered our quiet period in mid September our stock was trading in the mid-60s. So, over the last six weeks as our stock valuation has declined considerably along with everybody else, we have been unable to buy shares because we were in our quiet period.

Our quiet period will end two days after the press release. We certainly have not made any commitments about how we are going to spend our free cash, but we do have slightly less than 4 million shares under previous buy-back authorizations. With our stock trading, depending on how you want to look at it, but somewhere in the 4.5 to 5 times EBITDA range. I would say that it is hard to imagine.

We will find a lot of other opportunities to buy other earnings streams at more economic prices. So, certainly share buy-backs are going to be something we are going to look at and consider very carefully in the fourth quarter and going forward.

Justin Lake - UBS

Great. Thanks a lot, Steve.

Steve Filton

Okay.

Operator

Your next question comes from Tom Gallucci.

Tom Gallucci - Merrill Lynch

Good morning. First, Steve, I guess I'm not sure if I missed it there, but did you comment on guidance at all?

Steve Filton

No, we did not mention guidance in the press release. I thought that it was made clear that we were simply reiterating the guidance that we've given at the end of the second quarter, but I'm glad you asked the question because clearly some people were a little confused. So, we are simply reiterating the guidance we have given at the end of the second quarter which was 380 to 390 for 2008.

Tom Gallucci - Merrill Lynch

You can never be too careful in this market. So, obviously relative to consensus you were a little bit lower in the quarter, can you comment at all how you were versus your internal budget in the quarter and thinking and sort of how you are think about the fourth quarter then as a matter of perspective?

Steve Filton

Sure. I mean again, before our quiet period began in mid September and a couple of times that we spoken, the third quarter we obviously note that we don't give quarterly guidance but intimated that our own internal projections were generally lower than the street in the third quarter and higher than the street in the fourth quarter. We actually met and frankly exceeded our third quarter internal expectations by a couple of pennies and again to be purposely honest with you I have not checked recently given all of the volatility, but at least a month ago or so our own internal expectations for the fourth quarter were a little higher than the streets.

Tom Gallucci - Merrill Lynch

Thanks. On Medicaid you mentioned before, obviously there's some risk there given state economies. Can you talk about anything that's on the table right now in the states that are meaningful to you and maybe also remind us in order of magnitude what the couple of top states are in terms of your Medicaid exposure specifically?

Steve Filton

Sure. Well I think the good news is that our state with the number one Medicaid exposure is Texas. It is primarily acute care exposure in that state. The good news is that amongst the 50 states, Texas is generally ranked among the highest in terms of its economic performance and lowest in terms of budget pressures and budget shortfalls.

Texas has talked little about needing to do any budget cutbacks and in fact while we haven't seen our Medicaid rates and disproportionate in dollars finalized for the fiscal year beginning that actual began in September of 2008. Our general sense is that we are doing pretty well and we'll do pretty well from a Texas Medicaid perspective.

The states that follow that in order of exposure or maybe not necessarily exactly in this order but California, Florida, Nevada, every one of those states has implemented Medicaid cuts, all I think in July of '08. We have commented before that each of those states have an impact, the cuts in each of those states have an impact of a couple of million dollars a year annually each.

At least California and Nevada have talked about going back and having special legislative sessions and taking another crack at further budget cuts, presuming that, again their order in the same order of magnitude, you have a sense of how meaningful that is to us.

Obviously, we have a lot of Medicaid exposure in a lot other states. Most of the other states its behavioral exposure. There have been a lot of states that have looked at their Medicaid budgets. Some have implemented cut backs. I don’t think anywhere else that is either had Medicaid cut backs or contemplating them will prove to be individually material.

Obviously, from a cumulative perspective if 25 states go back and cut Medicaid pricing, it’s likely to have an impact on us, but not in sort of way that if Texas went and implemented a 10% Medicaid reductions.

Tom Gallucci - Merrill Lynch

Thanks a lot, Steve.

Steve Filton

Okay.

Operator

Your next question comes from Ralph Giacobbe.

Ralph Giacobbe - Credit Suisse

Thanks, morning. So, just going back to the pricing, you mentioned obviously a big drop off on the Acute Care side of the business and you talked a little bit about payer mix contributing to that decline or that deceleration. Can you maybe just talk about acuity mix in the quarter if there's anything there?

Steve Filton

Ralph, I think our acuity mix has been pretty stable and as we looked at it in the third quarter it seemed to be within about a hundred or two hundreds of where it has been running in the first six months. So we are not sensing any significant change in acuity.

Ralph Giacobbe- Credit Suisse

So, I think for the first half of the year it was up a couple of percentage points in terms of the acuity mix.

Steve Filton

Yeah.

Ralph Giacobbe- Credit Suisse

So that sustained in the third quarter?

Steve Filton

Well, it is like my same comment about payer mix. I think you kind of reverted back to the mean in the third quarter maybe dropped down those couple of hundred of points that we saw rise in the first-half. It dropped a little, back down to sort of where we have been running in the third quarter, but nothing terribly material.

Ralph Giacobbe- Credit Suisse

Okay. Was there any material hurricane impact for the quarter?

Steve Filton

No. I mean we had a few hurricanes come by in facilities in Florida and Texas. I don't think that certainly in any one market it was material, probably measured more in the hundreds of thousands, rather than millions of dollars and even cumulatively I would have to say I don't think it was material.

Ralph Giacobbe- Credit Suisse

Okay. Then just in terms of going back to the margins, same-facility margins obviously saw a little bit of a decline both sequentially and year-over-year. I guess, is there something that we should think about that maybe skewed that number or is this, is that the type of sort of margin we should expect if volumes sort of maintain in kind of a flattish range?

Steve Filton

I think it is absolutely the function of having same-store acute revenue rise by 2.5%. I think it is very difficult to have margin expansion at those levels. I think our hope as we move forward is that both volumes and payer mix could improve a little bit.

Again back too the metrics, I think, I outlined when in answering Justin's question before. I think it will level of say 2% to 3% same-store admission growth, which is a level we've sustained for most of the last four, five years, and 4% to 5% pricing growth, which again is a level that we've sustained for most of the past four, five years.

I think we ought to be able to have margin expansion or certainly keeping margins at least steady. I think the reason you didn't see it in the third quarter was we fell short of both those metrics by at least just a little bit.

Ralph Giacobbe- Credit Suisse

Okay. My last one. Going back to sort of use of cash, it sounds like share repurchase would be a top priority if the shares held in at these types of levels, but I think last quarter you talked about – you were talking more about acquisitions and there was a sort of fairly large number of players out there looking to acquire. My guess is that number is significantly down now. Can you maybe talk about if you have seen anything, maybe early but in term of where valuations are out there in terms of acquisitions? How much that dried up just given the market?

Steve Filton

Sure. I mean, I think you captured our mood correctly Ralph. We were fairly active acquirer of our own shares in the first quarter of this year, and then after that we said, we were going to take a breather and take a look at the M&A market. We certainly were conscious of the fact that credit markets were tightening at that point. We thought that being as to how we are, we were in pretty good shape and that the tightening of the credit markets would cause not-for-profits to struggle a little more than they have been over the last few years, and would cause them perhaps to think more about potential sale alternatives. It would eliminate some of our more highly levered competitors from participating in that M&A process, which has been fairly competitive over the last few years.

The reason, I am a little less enthusiastic about those opportunities today is obviously public valuations of hospital companies which have come down dramatically, and my experience in history shows that those sorts of changes in valuation don't necessarily percolate their way to the not-for-profit sector quite as quickly.

I am just guessing and it is purely a guess at this point that there's going to be an expectation gap between what sellers think their EBITDA streams are worth as they go to sell them and what we or others might be willing to pay and so that’s why, I suggested in a response earlier that at 4.5 or 5 times EBITDA, at least in my own mind, its going to be hard for us to find other opportunities, again more attractive or more compelling than our own shares.

Ralph Giacobbe- Credit Suisse

Okay. Great. Thank you.

Steve Filton

We are certainly open to it, but -- and that's just my gut reaction.

Operator

The next question is from Mathew Borsch.

Shelly Knoll - Goldman Sachs

Hi. This is Shelly Knoll on for Matt Borsch, just a quick question, Steve if I could on Las Vegas. Can you confirm that you are taking market share from your competitors in Las Vegas or what is driving the 10% growth?

Steve Filton

Well, yes, Shelly, I think clearly, there is publicly reported data out there. I am sure there are a number of sources we use in Telemed data and I think the Telemed data shows that we took a significant amount of market share when Sierra terminated their contract with HCA back at the end of 2006. I think even since then we've really seen our market share continue to increase, obviously a little bit more incrementally, but every quarter since then we have continued to take additional market share. Now the gap which for many, many years was very small between our market share and HCA, is now probably a good 10 percentage points.

Shelly Knoll - Goldman Sachs

And do you see that opportunity continuing to present itself, can you see further market share from here?

Steve Filton

You know, again I think that the growth of Centennial and the continued ramp up of Centennial will help us. I mentioned in my prepared remarks that we are doing some major expansion, the third major expansion of our Summerlin facility in its ten-year history. I think volumes at Summerlin at the moment are depressed a little bit because of all of the construction activity on the campus, but I think it will l be helpful.

I mean, think essentially we're really doing all of the capacity expansion in the market and so I do think that will help us to at least try and increase our market share. Obviously our competitors are certainly going to work hard to keep market share but I do think we are very well positioned in the market.

Shelly Knoll - Goldman Sachs

Okay. That's very helpful. Thanks. Just one follow-up if we think about margin expansion or pressure. If we do see admission slow down from here, can you talk a little bit about fixed versus variable cost especially in the SG&A and other operating expense line?

Steve Filton

Again Shelly, I think that we run what is largely a fixed and semi-fixed cost business. And so like in the first half of the year we saw the positive leverage that one gains from that when you have same-store revenue growth in the Acute division in the sort of 65 to 7% range and in the Behavioral division at the 8% to 9% range. You saw how much operating leverage there is in the first half of the year with expanding margins etcetera.

In fairness, you have the same dynamic working the other way. If you can't have some modest same-store admission growth and some descent pricing growth, which is not generally been a challenge in the last few years, you're going to have trouble. We certainly have efforts underway at every one of our hospitals that is facing some either volume or payer mix softening, to look at any cost that we can to reduce or try and eliminate.

But in fairness it is not like we have a universe of variable costs that can easily be cut. There's a certain amount of supply costs that is easily associated with every incremental patient and there's a small amount of salary expense, that's clearly incremental but after that it becomes a lot more challenging.

Shelly Knoll - Goldman Sachs

Yeah. Okay. I appreciate it. Thank you.

Operator

Your next question comes from Erik Chiprich. Your queue line is open.

Erik Chiprich - BMO Capital Markets

Just want to see, if you could, give the breakdown on the $154 million, how much was charity care and versus the uninsured discount?

Steve Filton

I will find that. If you have any other questions want to go ahead.

Erik Chiprich - BMO Capital Markets

I sure do, thanks. I was curious on the pricing side, can you talk a little bit about managed care rate, renegotiations? What percentage is done for 2009? When does 2010 start and what kind of rates are you seeing or would you expect to see?

Steve Filton

Sure. Well, a couple of things. I think that the vast majority of our contracts for 2009 are fixed at this point. I am guessing, I don't actually have the information in front of me but I am guessing somewhere between probably a quarter and third of our rates for 2010 are fixed.

I think from a managed care pricing perspective, the environment remains very positive, we've talked about getting managed care pricing rates in the 6% to 8% range for some time now and I think we'd been on the high-end of that range for a while now, and again, I don't necessarily see that changing as we move forward.

I certainly think that managed care companies will attempt to control utilization and reduce medical costs in other ways, but I think pure contractual pricing is not likely to be a pressure point. Let me also just give you those numbers while I have them in front of me Eric. So charity care for the quarter was $123 million, and the uninsured discount was $31 million.

Erik Chiprich - BMO Capital Markets

Great. Thanks. Could you talk a little bit on the supply expense as a percent of revenue that looks like that was flat year-over-year. And I think, you guys have entered into a new group purchasing agreement. I want to see if there's still room for savings there or kind of what was offsetting that in the quarter if acuity was kind of holding steady?

Steve Filton

We entered into a new group purchasing organization arrangement in April of 2008. I think we have benefited from that to the tune of probably a couple of million dollars in each of the second and third quarters. As I look at operating expenses broadly, meaning salaries, supplies, other operating expenses in the third quarter, exclusively of bad debt expense they rose about 3.5% per day. And I think that's pretty good.

And I don't know that we can do a whole lot better than that. So, this sort of gets back to Shelly's previous question, the reality is the way you get operating leverage is with more volume a little better pricing but in term of sort of absolute costs, 3.5% per day increase in cost is going be hard to better.

Erik Chiprich - BMO Capital Markets

Okay. That's helpful. Just one last bigger picture question. I was wondering if you can just discuss what is different in this recession versus the last recession in your opinion that would make volumes fall greater or be more resilient?

Steve Filton

Well, first of all, Erik I mean you are asking me to be smarter than most in terms of telling you exactly what this recession is going to be like. I certainly am not sure that I am nearly that smart. I would say though the one difference that I see, between this and the recession in 2000-2001, is that in those intervening five or six years from a hospital provider perspective, we've seen a dramatic decline in the number of people who have health insurance through their employer.

Either there are far less people who have it through their employer and those that have it, certainly have responsibility for a much larger share of the hospital bill, meaning they have higher co-pays and deductibles. So, I do think it is possible that as we enter into this recession, that the amount of incremental impact from having people lose their health insurance from their employer or have less health insurance to their employer may be less than it was in the last recession just because I think the underlying market infrastructure and benefit plan infrastructure has changed some.

I think I've mentioned this to many people who I've talked to, like in the Las Vegas market where a lot of the weakness in that market at least initially was in the construction trades and the construction industry. Our own operating folks have said to me, they don't necessarily view that as incrementally impactful to them, only because these are people who for the most part didn’t have health insurance through their employers anyway.

So if they got laid off the incremental impact on us was not going to be wholly different. Again, I'm not smart enough, Erik to tell you how that dynamic translates into what we might expect to happen on compensating care or what we might expect to happen to volumes. But I do see that as the one significant change from the last recession that we went through six or seven years ago.

Erik Chiprich- BMO Capital Markets

Great. Thanks for the perspective.

Operator

Your next question comes from Gary Lieberman.

Gary Lieberman - Stanford Group Company

Thanks. Good morning. It sounds like you have about 144 million of potential stock you could buy back, the number of other capital budgets, can you just remind us on the credit lines that you have available, that you might, you would be willing to use to potentially repurchase the stock?

Steve Filton

Well, again, Gary I'm not going to make any commitments about what we might repurchase or not but at the end of the quarter we had at least $0.5 billion, $500 million of unused credit facility either under our revolver or under our commercial paper facility. We have approximately $1 billion under those facilities and only about half borrowed maybe little bit less in that at the quarter.

Gary Lieberman - Stanford Group Company

Do you think you are likely heard or not you likely but your potential willingness to use it has changed at all in the tighter credit market?

Steve Filton

We've talked about these dynamics before, certainly one of our overarching goals is to keep a close eye on our investment grade credit rating. We feel frankly more comfortable than ever that we have worked hard to keep that investment grade rating and I think we would be reluctant to give it up in this environment, because I think this is the argument we have made all along, that the difference between the investment grade credit and a non investment grade credit is generally meaningful.

It hasn't necessarily been meaningful over the last few years, but over the long-term it has been meaningful and I think in this market is now become very meaningful again. So we are going to be anxious to watch that. Other than that, like I said we will evaluate share buyback opportunities versus any other opportunities that come along both in terms of internal and external development.

But we feel good about the fact that because of relatively de-levered position we have a lot of flexibility and this is why we have always kept that sort of de-levered position to afford us this sort of flexibility and we think it is going pay off now.

Gary Lieberman - Stanford Group Company

Are there any thoughts on how much of the revolver you would have to tap before you would risk the investment grade credit rating?

Steve Filton

The problem, Gary as I am sure you can appreciate is in this market what you thought of as your operating metrics under your rating agency agreements or rating agency reviews, a week ago maybe different than they are today. So, it's a very fluid situation. So I'd be reluctant to sit here today and say, we know we could borrow this much and not lose our investment grade rating.

So, it is something we'll work closely with the rating agency, and we will watch the credit markets very closely. But again, I think at the end of the day we will have a fair amount of flexibility and view that as a very positive thing.

Gary Lieberman - Stanford Group Company

A quick follow up. You have talked about I guess, a number of the pressures that potentially you could see because of the economy. On the flip side can you talk about any potential benefits you have either seen or might potentially see, and obviously, has your access to labor improved or have any commodity cost or anything else had any material benefit on you so far?

Steve Filton

Sure. Well, again, I'll go back what I was saying to Erik was that our operating costs even in a relatively soft volume environment, we are only up about 3.5% per day. And I think, as you I think sort of intimated in your question, that's probably a function of the fact that we have seen a little pressure relieved from our labor costs, which I think is sort of typical of a recessionary environment.

We have seen supply costs really now for a couple of years after going through a few years of a lot of pressure on particularly our high-end cardiology and orthopedic supplies, we have seen supply costs have ease off, even before we switched our GPOs.

So I think we see that sort of thing. I think we will see as you often do in a recessionary environment as well, some easing up of competition. We have seen a huge amount of capital investment from our not-for-profit peers over the last few years and I certainly believe that that level of spending will decline.

I think we will see some of these niche providers, small physician-owned entities suffer some, if we see pressure on volumes or payer-mix. So, there are some advantages to being a strong, solid player in a difficult environment and we certainly think we're positioned to enjoy those advantages as we go through what I'm sure will be a challenging, at least few next few quarters.

Gary Lieberman - Stanford Group Company

Thanks a lot.

Operator

Your next question comes from Darren Lehrich.

Darren Lehrich - Deutsche Bank Securities

A couple of questions.. I just wanted to ask you a little bit more about your 2009 budgeting process. Maybe if you just step back a little bit for us and give us a sense for where you are in that process, how you see it being different than the prior years, just given the economic backdrop and want to hear from you guys how you are approaching your budgets any differently.

Steve Filton

Well, we've just started the process. Our budget cycle really starts at the end of October, goes through November and early December. Almost through the holidays. It's interesting, Darren, I mean I think, what we ask our operating folks to do is obviously to tell us what they're seeing in their markets in terms of economic conditions, how it is affecting physician practices and what I was saying, just Gary, in terms of the competition and how they're being impacted by the weakening economy.

But again it's a lot to ask, I was saying to Erik before, it's a lot to ask me to project what the impact of this recession going to be on the company. I think it's a lot to ask an individual hospital CEO or CFO to really factor through what they think is going to happen to volumes and payer mix in their markets.

We do ask the question, we try and get the best read that we can and then I think we'll sit down as we accumulate and consolidate and compile all of our budgets and try to make some judgments, at a macro level in terms of how realistic and how accurate those projections are.

It gets back to what I was saying though before, we would certainly love to have a couple more of months of operating results under our belt to have a better feel for it ourselves before we make those projections for next year.

Darren Lehrich - Deutsche Bank Securities

And just to get inside your head and maybe senior management, you've heard what your local operators have to say and what they're seeing I mean, what kinds of things do you think you will be challenging differently in this cycle? I just want to get a sense for, how you might be seeing the world differently than what your local folks might be seeing?

Steve Filton

It is like the movie Being John Malkovich, I don't think you really want to get inside my head. I mean again I think what you get from our local operators is sort of a lot of anecdotal stories about physicians talking about, seeing some slowing down of activity in their offices. Obviously, in every market we'll get stories of some amount of disruption in the market in terms of layoffs etcetera. And obviously, that varies market-by-market.

We've talked about kind of feeling that pinch now for a good three or four quarters in the Florida market, but not so much in Texas. We felt the payer mix decline, I think a little bit more acutely in California in the third quarter than we have felt it before. But not so much from a volume perspective in those California markets. So, it's again, every market sort of has a little bit different narrative.

Obviously, it is hard to find a market anywhere that’s untouched by what's happening. We are trying to take all of these separate and discreet data points and accumulate them in some meaningful way to come up with a more cohesive narrative and ultimately a cohesive budget and financial model for next year. So, this will be more challenging than in it is in a normal year, but everybody is very focused on it.

I think the good news from the third quarter is that, despite all of the overarching disruption, our business continued along well at a relatively steady pace. We saw a little weakness in the Acute business there, we made up for in Behavioral and lower capital cost or interest but generally the business remained steady in the third quarter.

Darren Lehrich - Deutsche Bank Securities

Right. Two more quick items, please. The other segment where we have these management contracts, I guess that was a little bit higher than what we were looking for. Can you just give us a sense for how long that new contract lasts, if its more than one, if you could just identify that and then I guess the pass through cost. We should those going forward at the other OpEx line; is that correct?

Steve Filton

Also I think in the third quarter that was about roughly $25 million or so of other revenues and $22 million of other operating expenses in $2 million or $3 million the EBITDA associated essentially with one construction management contract, we had maybe we had a little bit of profit as we closed out the first contract that we had.

Right now that's all we have, is this one ongoing contract. We continue to work to get some others but nothing firm at the moment. The one contract we do have probably continues in a material way for another material meeting at the revenue and expense line for another two or three quarters from an EBITDA perspective. I'm not sure that it's enough to move the needle in any of those quarters.

Darren Lehrich - Deutsche Bank Securities

Sure. Great. Last thing for me here. Your comment about Vegas is that the earnings were it was roughly flat, the minority interest line that was, also, I guess it was a little it was pretty flat, actually down year-over-year. Can you just comment on GW and how that may have impacted that line item and this performance here?

Steve Filton

I think actually GW had a positive quarter. So I think that whatever weakness you see in our minority interest line other than the flat Vegas results is really just a function of the others sort of miscellaneous minority interest. We have a small minority interest in a hospital in Texas and then a bunch of surgery center ventures that we have probably a dozen or so and I think that business was off a little bit.

Darren Lehrich - Deutsche Bank Securities

Okay. Very good. Thanks.

Operator

Your next question is from Kevin Fishbeck

Kevin Fishbeck - Bank of America

Hi. Thanks. Good morning. Just want to follow-up a couple of things, you said about Vegas. How much capacity are you adding to Summerlin?

Steve Filton

Ultimately 140 beds, what we have added right now Kevin is a new emergency room doubling the capacity of our emergency room, but the bed tower itself won't be open until 2010 but it's 140 beds.

Kevin Fishbeck - Bank of America

Okay and then you said that your competitors are not really building new capacity in the market right now?

Steve Filton

To the best of my knowledge there are no other, substantial capacity additions that are underway in the market.

Kevin Fishbeck - Bank of America

Okay and then you talked a little about a negative payer mix shift in Las Vegas in the quarter. Was that the same as you are seeing in the other markets or is that better or worse than you are seeing in other markets?

Steve Filton

I think it was pretty comparable. It was again, I forget whose question I was answering when I said it, but I mean, I think we saw very strong commercial payer performance in Vegas in the first half of the year, very good in uncompensated care performance. I think both of those metrics would have gravitated more toward the mean in the third quarter. Meaning uncompensated care rose a little bit, commercial business came down a little bit. I think our experience in Vegas was pretty comparable to what it was throughout the portfolio.

Kevin Fishbeck - Bank of America

Okay. When you talk about Centennial being flat or slightly positive in the quarter operationally. Does that net out the negative drag on the other hospitals or is that just an isolation?

Steve Filton

That just on a stand alone basis.

Kevin Fishbeck - Bank of America

Then I guess Vegas is been a pretty big driver to the company historically and your 10% growth is a good number, but Centennial adds about 15%, 20% to your capacity in Vegas. At what point does the ramp up in Centennial get you to the kind of 15% to 20% increase in volumes? Is that end of the year, early next year? Give me a sense on that ramp up?

Steve Filton

Well I don't necessarily think that the Centennial's volumes will continue to improve, but the real impact of the ramp up is that as those volumes improve you will start to see Centennial just as Spring Valley did four year ago, start to gravitate towards the market operating margins. So I think the issue is, and I don’t have Centennials financial statements in front of me. But if they had 65 or 70 patients a day in the hospital in the third quarter, the point is that those 65 or 70 patients in Centennial were far less profitable than had those 65 or 70 patients been spread among our other facilities.

Obviously that is a short-term dynamics, and as Centennial grows volume and continues to achieve operating efficiencies, then I think they will get to the operating margins that the other facilities in the market have. Again I remember having these exact same conversations when Spring Valley opened and our margins in the market came down and everybody got very nervous and we kept saying just give us three or four quarters, and you'll start to see those bounce back and I think it happened then and I believe it will happen again with Centennial.

Kevin Fishbeck - Bank of America

Last question. If you look at bad debt at the company level, year-over-year it is up 80-90 basis points year-to-date. With the economy going the way it is, is there a reason to think you won't see a similar type increase going into 2009? Is there reason to think it might be better than that or might be worse than that? Is there anything, I guess, unusual going on in 2008, any reason to feel better about it in 2009?

Steve Filton

Well, two things. First of all, I think it is inappropriate, inappropriate is probably the wrong word, but its far more accurate to look at uncompensated care with all of the buckets together meaning bad debt, charity care, and uninsured discount. There's no question that when you look at all of those buckets together, we are probably 30-35 basis points higher than we would have expected in the third quarter. I think led to some of the pressure on the Acute care performance in the quarter.

I think it is, naïve to assume that if we go through as it appears we're going to a relatively significant and somewhat prolonged recession that we won't continue to see those pressures. What I don't know, and this is what I was trying to say before, are those pressures going to be incremental the same as they were the last time we went through a recession?

That I'm not sure about because I think that some of the very significant uncompensated care expense that we experienced in the last three or four years and as did all of our peers, I think may mute the incremental affect of this recession but, as people lose their jobs, there are clearly are going to people who'll lose their health insurance, after they exhaust co-pay benefits et cetera. I think that will prove to be somewhat of a challenge. I don't know that we are in a position, I don't know that anybody has been in a position to predict the precise impact of that.

Kevin Fishbeck - Bank of America

Okay. Last question on the site business. Have you guys done any work about what mental health parity as it has been outlined might mean to you, I guess 2010 is when that really starts to kick in?

Steve Filton

The reality Kevin is, I think it's very difficult for us to do the work that you talk about, I think frankly the payers are in a much better position to know in essence, if they redesign their benefit plans to make behavioral benefits comparable to acute care benefits, how many more behavioral occurrences or treatments will be covered that weren't covered before?

It is really impossible for us to know in essence how many patients we didn't treat because they didn't have insurance. I mean it's just not it's really not a number that we can have. I've seen difference to the macro analysis. Some project a fairly significant impact of mental health parity, others are more muted. We are clearly taking a wait and see attitude. Obviously demand for that business has been good without mental health parity. So mental health parity, I think can only be a help but it's just impossible for us to quantify that with any precision at this point.

Kevin Fishbeck - Bank of America

Okay. Makes sense, thanks.

Operator

Your next question comes from Jason Gurda

Jason Gurda - Bear Stearns

Hi, Steve. Most of my questions have been answered. I just want to see if you expected any change in CapEx trends for either in the fourth quarter and also '09?

Steve Filton

Well, I know Jason, I mean we went into '08 with the expectation that we spend $420 million to $425 million. We will spend considerably less than that. Certainly it looks like we are in the pace to spend more like $325 million in 2008. I do think some of that shortfall if you will or reduction is a shift into 2009, but I also think just given the economic environment we've just been more prudent about our spending as well. So, my guess is we will spend probably a little bit more in '09 than we did in '08 but not a significant amount more.

Jason Gurda - Bear Stearns

Okay great thank you, Steve.

Steve Filton

Take care.

Operator

Our next question comes from A. J. Rice.

A. J. Rice. - Merrill Lynch

Just a couple of quick questions. First of all, I wanted to make sure one thing you said I understand, you are down 80 basis points in Acute Care on a same-store basis, you said Centennial Hill probably cost you 50 basis points on that admissions number, and Centennial and McAllen OB exiting you would have been at 1.5. So is the McAllen costing you about 1% or even almost 1.5%? Is that right?

Steve Filton

I think I said that before. Yes, that's correct, I think maybe, somewhere between 100 and 150 basis points. The reason that we have identify that in the previous quarters and in this quarter too, is that it is a lot of volume we have lost, but frankly very little profitability. It was not very profitable business for us and as a result and I think I we have said this before I mean, McAllen's profitability is actually up in the quarter and up for the year and its performance has been a pleasant surprise in 2008.

So we thought - we think is appropriate to sort of adjust those volumes because we don't think they're really reflective of softening of our profitability.

A. J. Rice. - Merrill Lynch

Okay. Y ou have commented already on the enviable position with your balance sheet right now, which still has about $950 million had debt. Anything, you are doing strategy wise relative to fixed versus floating, any comments on where you stand with that?

Steve Filton

So, our debts $950 million approximately of debt that we have, at the end of the third quarter, about $600 million of that are fixed rate bonds. Of the $350 million that is extensively floating, another $150 million is hedged through interest rate swops.

So there’s a only about 20% of our debt is actually floating at the moment. We watch it everyday; we could clearly fix additional amounts of our debt at fixed rates. I think right now, the market sort of tells you that may not be the most prudent course. But we will follow that pretty carefully. We certainly don't feel like we have a great deal of interest rate exposure at this point.

A. J. Rice. - Merrill Lynch

Then just finally, you mentioned you're most likely inclined to use your free cash flow to buyback stock at the current price levels of your share. I am just curious on the non-profit side. Obviously, you would be a go-to person to get the call, if nonprofits are selling and given that you have got financial capacity right now. Are you seeing an increase in the number of inquiries you are getting regarding nonprofits that maybe you have faced in a credit squeeze?

Steve Filton

No. I wouldn't say, we are seeing an increase. I mean, there are clearly a couple of deals out there we have looked at. I mean, again I think, the challenge in the short-term and again I forget, whose question, I was answering before. But I think there is going to have to be some rationalization or management of expectations, as the equity markets have contracted.

I think not for profit sellers, they are going to have to narrow their expectations of what their businesses and their EBITDA streams are worth. And my experience, it’s just been that takes a while. They go into a process thinking that their businesses worth X and if there has been a 40% decline in valuations in the equity markets, they are not adjusting for that

So I am just guessing that it will take a while before buyers and sellers gravitate to what I would considered to be a more reasonable sort of market pricing mechanism. So, I am just thinking. In the interim is we are going to find our own stock to be pretty compelling value.

A. J. Rice. - Merrill Lynch

Okay. Thanks a lot.

Operator

The next question comes from Kemp Dolliver.

Kemp Dolliver - Cowen & Company

Hi thanks. Steve you are putting a lot of capital into riverside over the next year and I just want to get your perspective on how you are approaching that market given, I think, a lot of the economic statistics people look at and Las Vegas look almost as bad as riverside. So, are you in parts of riverside that [I would] say better than the average or how are you evaluating your expansion into that market now?

Steve Filton

Well, Kemp I think one of the overarching dynamics of the For-Profit business in general is that the companies are heavily invested in states like Florida, California, Nevada states that have been fast growing states and I think over the long term will continue to be fast growing states. The challenge in those places each one of them is that they are on the leading edge of the real estate weakness and the credit weakness.

I think, what we think about more in riverside rather than sort of what the next few quarters look like is the reason we like riverside so much, as we just have a very strong franchise in that market. I mean in the market that we are in. Riverside County is a huge market. There are dozens and dozens of hospitals in Riverside County. But in the sort of Inland Empire market, which is where we are located.

We have a very significant market share. We are expanding as I indicated in my prepared remarks with significant service expansion and I think our view you is that over time we are just very well positioned and the whole approach for UHS for the last 15 to 20 years has been to really capitalize on those sort of franchise positions, high market share presence in growing markets.

I think, that Inland Empire market is exactly that kind of market. It maybe challenging for the next few quarters, but over the long term, we very much like our positioning in that market.

Kemp Dolliver - Cowen & Company

All right. Then Steve, how about the ramp up of the new hospital there compared to say Centennial Hills and I know that this is a hospital that’s not going to open until the middle of next year. But in terms of say drag on EPS and the like, how would you compare it at this point?

Steve Filton

Just to clarify a little bit. Our new hospital in California is in Palm Dale, which is in northern L.A. County sort of the opposite direction from Riverside. It’s a replacement for our hospital in Lancaster, California. I mean as a replacement facility it doesn't have the same sort of startup drag that a brand new facility has.

Certainly, we feel, we will move all of our business from the existing Lancaster Hospital over to Palm Dale, when it opens in, probably just about a year from now. But beyond that I think, we also think we take a significant market share certainly over time if not immediately from our one competitor, not For-Profit competitor in the market.

The other sort of issue, we have is that in that market currently a lot of business migrates down to the metro L.A. area and we think with a brand new facility, state-of-the –art facility, we keep a lot of that business in the Palm Dale market. I think, we are aided by increasing gas prices and things that are going to have people just naturally want to stay closer to home. So, I don't think it’s as much a drag, a brand new startup by any means. The really question is how quickly we can gain market share when we open.

Kemp Dolliver - Cowen & Company

That’s great. Thank you.

Operator

The next question comes from David Bachman.

David Bachman - Longbow Research

Thanks for as always for all the color and detail. Can you just provide a little bit more color on the bad debt in regards to co pays and deductibles and that patient responsibility, after insurance versus pure self-pay, any changes there, any kind of developments worth highlighting?

Steve Filton

I don't know that I have enough good detailed information to tell you exactly what happened in the third quarter David. But clearly the trend there has been that we have seen over the last few years that insurance companies and that includes the government payers as well are responsible for less of the bills and individuals are responsible for more of it.

Meaning there are individuals, who no longer have health insurance from a government or from a commercial insurer or they just have a bigger co pay and deductible. We have just seen those numbers increased fairly steadily over the last few years. We saw big increases in '05 and '06 less so the rate sort of declined a little bit in '07 and '08.

Again I think that the wild card at the moment is what's going to happen to that rate in '09. I think absent or without a recession, we would have seen that rate of patient responsibility increase less or at a rate that again was relatively slowing in '09. But a recession may speed that up or accelerate it again. So that's I think, one thing we are waiting to see and watching pretty carefully.

David Bachman - Longbow Research

Okay. Great. And then just on pricing, I think you had mentioned a while ago maybe it was in response to Erik about that contractual rates may not be the issue as much as other sorts of backdoor efforts to try to control cost reutilization with commercial payers. And then we also have the recovery audits coming on line for everybody here soon.

Can you just talk about sort of absence that top line rate increase. So how many basis points potentially are there, can you clarify it all what's at-risk from some of these other measures that if payers are just really clamping down on utilization and so forth?

Steve Filton

I think that's difficult to do in a precise way, David. I mean I do think and now let's put the economic pressures aside for a second. I mean, I think, we were headed into an environment, where the overarching seem in our industry over the next few years is clearly going to be an effort by payers of all kinds, meaning government and private payers to try and reduce their spending on healthcare costs.

That will be done through all kinds of mechanisms. And I think the question is from a provider perspective, how well are you positioned to sort of weather that? How well are you positioned, that I think in some cases to partner with payers to help them control their costs in exchange. We are seeing more of their business. I think that the acute care hospitals in general and our acute care hospital specifically are probably better positioned than most.

We are very focused on that. We are very conscious that employers and payers and the government are all looking to spend less money on healthcare and are looking for providers, who are providing the most cost efficient services and cooperating the most with them. And we are doing everything we can and it's probably a whole separate conversation, a lot of our efforts to position ourselves to be the most responsive providers and they are continuing to do that.

But I think it’s very difficult to sort of precisely say okay, managed care companies, I have heard managed care companies a few of them say, look, we are going to try and reduce length of stay. If you were to say, I mean, what sort of impact will that have? I don’t know didn't have much of an impact in the third quarter. I think we saw length of stay go down by 1% over last year. But I don't exactly know what it’s going to be like in the future. But again, I think we are certainly focused on it. We are thinking about it and we are prepared to respond.

David Bachman - Longbow Research

Okay. Are you seeing those sorts of pressures or expect to see those sorts of pressures on both the behavioral and acute care side?

Steve Filton

Sure. I mean, I think that the reality is we saw probably 10 years, 12 years ago an enormous initiative on the part of again payers to reduce behavioral spending and they were quite successful.

I think in terms of inpatient providers, the real crux of those measures, reducing length of stay, reducing the rate of inpatient admissions, we felt years ago, not to say that there is still not going to be some effort to do that. But, and I think that our growth in that business is reflective of the fact that those sort of savings are probably not available to the payers anymore in a very measurable way.

So, I think we maybe a little bit more insulated on the behavioral side. But certainly, the behavioral spending piece of the pie is certainly less for all payers than it is for the acute care. So, I think, there is just some less pressure in that regard. But I think, we will see the same at least order of magnitude pressure on the behavioral side.

David Bachman - Longbow Research

Okay. Great. That's it from me. Thanks.

Operator

Your next question comes from Jeff Englander.

Jeff Englander - Standard & Poor's

Just a quick question, you talked a little bit about what's happening in Las Vegas and kind of inability with volumes there to do more sort of pre-qualifying on the AR front. I am wondering if you could give any color in terms of some of the other states particularly Florida and California, if you are doing anything differently and if you are seeing anything differently anecdotally there in terms of, what you are doing.

Steve Filton

No. Look, I think that the dynamics have been present for sometime. As we have mentioned a few times in this call as more of the responsibility for the ultimate bill shifts to the patient, we have shifted our focus to collecting those amounts from the patient.

We do a lot more as you indicate to collect what we can upfront to understand the creditworthiness of the patient as they entered the hospital either in the emergency room or in an outpatient diagnostic setting to get amounts out to effective collection agencies where as quickly as possible where that’s appropriate. We have been doing all that. As by the way I think most providers are in all of our markets and all of our states and I think we will continue to do it.

Look I think that our collection experience in the third quarter was very positive. We had a very strong collection quarter and cash quarter and I think that's a tribute to our operating folks obviously in a difficult environment. But it’s a reflection of all of these blocking and tackling things that have been on going for sometime.

Jeff Englander - Standard & Poor's

Are you seeing anything, you have mentioned people in Las Vegas, who typically had not had insurance. Since this has been going on for a while, are you seeing any sense that even people without insurance rather would put things off now or no longer at the point that some of these things can be put off and they are trying to find a way to get some things done or is it just none of that?

Steve Filton

Jeff again, as I responded to a previous question, it's difficult, I mean that makes intuitive sense. But when somebody comes to the hospital with gallbladder disease, we have no way of sort of going back through some review of our own records saying well this is somebody who really should have been treated six months ago but wasn't because of insurance issues etcetera. So, it all becomes kind of anecdotal. We don't have any real objective way or quantitative way of saying this is the impact of people, who have deferred care.

Jeff Englander - Standard & Poor's

All right. Thanks. We appreciate it.

Steve Filton

Sure.

Operator

Your next question comes from Dawn Brock.

Dawn Brock - JP Morgan Securities

Hi Steve. Just two quick questions on the behavioral healthcare business. You went over the acquisition environment for the hospitals. Could you just talk a little bit about the targets or the available targets out there on the pricing for the behavioral side of the business?

Steve Filton

I mean the behavioral business has been a bit more fragmented. There are more small entrepreneurial owners of individual facilities or very small multiple facility companies. We have obviously been more active in terms of the M&A on the behavioral side in the last few years then on the acute side.

And my sense is that it’s going to continue although again I mean at the end of the day some of the same dynamics exist and that it's been a long time since we were able to buy behavioral earning streams at 4.5 or 5 times and I am not sure that sellers are going to be of that mindset. So we are just going to have to think hard about what's an appropriate valuation for any earning stream whether it's behavioral or acute given the environment over the last month and a half or so.

Dawn Brock - JP Morgan Securities

Right of course. Secondly there is a lot of [talking] in the market about the impact of the anniversary of the four year PPS phase and for the behavioral healthcare guys. Can you talk about your pricing outlook today with regard to that and the expected annual rate update from CMS?

Steve Filton

Sure. I mean we talked earlier in the call about sort of our underlying operating assumption as we move forward in the acute business. On the behavioral side, I think we have thought about the next three to five years span or time horizon to realistically include 3% to 4% volume growth and 3% to 4% pricing growth. Obviously, we have been beating those volumes metrics for sometime now. And I suspect we may beat them for another few quarters. Although again, as I look from a long term horizon, I think that 3% to 4% same store growth is realistic.

Pricing wise, the 3% to 4% going forward presumes that we don't get the benefit we have had for the last four years from the Psych PPS. But it does assume that we get 3% to 3.5% market basket increases from Medicare. It assumes we do a little bit better on the managed care side. It assumes quite frankly that we don't get a lot of increases from our Medicaid payers at least for the next couple of years. So, I think that 3% to 4% pricing on the behavioral side again which we clearly beat in the third quarter is certainly realistic.

Dawn Brock - JP Morgan Securities

That’s excellent. Thank you very much.

Operator

Your next question comes from Gary Taylor.

Gary Taylor - CitiGroup

Okay, good. Two quick questions, I don't think you gave the acute care bad debt number. Typically we can get that on the conference call.

Steve Filton

We will find it, acute care bad debt number. Do you have any other questions?

Gary Taylor - CitiGroup

My second question is also on the acute care side in terms of FTEs. How do you look sequentially and/or year-over-year ex-seasonality. Have you attempted to do anything with FTE count at all?

Steve Filton

No, and this is what I was saying before. I mean, certainly we prepared ourselves for some economic weakness and softer volumes and a little bit less favorable payer mix. I am not a hospital operator. So I'm going to be a little bit soft on the details.

But I know that our operators are working in a lot of cases really reviewing the processes etcetera to try and see how we can best increase efficiencies with a little bit softer volumes a little bit less favorable payer mix etc cetera.

I was just trying to be realistic in answering somebody's question before and saying that I do think what we can do is somewhat limited. I mean at the end of the day this is still largely a fixed and semi-fixed cost business. But I think that we can make some improvements around the edges. And then, Gary just our same-store acute care bed debt percentage was 12.5% for the quarter?

Gary Taylor - CitiGroup

And Centennial is the only one that's not in there, I think?

Steve Filton

That's correct.

Gary Taylor - CitiGroup

Okay. Thanks.

Operator

And there are no further questions at this time.

Steve Filton

Okay. We thank everybody for their time and we look forward to speaking with everybody on our fourth quarter call.

Operator

This concludes today's conference call.

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Source: Universal Health Services Q3 2008 Earnings Call Transcript
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