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Executives

Brent Turner – EVP, Finance and Administration

Joey Jacobs – Chairman, President and CEO

Jack Polson – EVP and Chief Accounting Officer

Analysts

Adam Feinstein – Barclays Capital

Thomas Gallucci – Merrill Lynch

Kevin Campbell – Avondale Partners

John Ransom – Raymond James & Associates

Mark Arnold – Piper Jaffray

Ryan Daniels – William Blair & Company

Darren Lehrich – Deutsche Bank Securities

Whit Mayo – Robert W. Baird & Co.

Dawn Brock – JPMorgan

Kevin Fischbeck – Banc of America

Chris Rigg – Soleil Securities

Gary Taylor – Citigroup

Andreas Dirnagl – Stephens Inc.

Jeff Englander – Standard & Poor’s

David Bachman – Longbow Research

Gary Lieberman – Stanford Group

Psychiatric Solutions, Inc. (OTCPK:PSYS) Q3 2008 Earnings Call Transcript October 31, 2008 10:00 AM ET

Brent Turner

Good morning. I’m Brent Turner, Executive Vice President, Finance and Administration, for Psychiatric Solutions, and Id like to welcome you to PSI’s conference call for the third quarter of 2008.

Today's call is being recorded and will be available for replay beginning today through November 15th by dialing 719-457-0820. The confirmation for this replay is 3767845. The replay may also be accessed through November 15th at our website, which is psysolutions.com and at earnings.com.

To the extent any non-GAAP financial measure is discussed in today's call, you may also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP on our website by following the ‘Investors’ link to ‘News Releases’ and clicking on yesterday's press release.

This conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Psychiatric Solutions' expected financial performance for 2008 and 2009. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements.

Without limiting the foregoing, the words believes, anticipates, plans, expects, and similar expressions are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by the important factors, among others, set forth in Psychiatric Solutions’ filings with the Securities and Exchange Commission and in our third quarter news release, and consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

At this time, for our opening remarks, I'd like to turn the conference over to our Chairman, President and Chief Executive Officer, Joey Jacobs.

Joey Jacobs

Thanks, Brent, and good morning. As you know from our release, PSI continued to perform very well for the third quarter. We produced growth of 8.7% in same-facility revenue for the third quarter, the third consecutive comparable quarter increase. This growth drove a 13% increase in revenue for the quarter and also a margin improvement that resulted in a 38% increase in earnings per diluted share. As a result of this growth, we are on track to achieve our earnings guidance for the full year 2008.

We are very pleased with our same-facility results. Earlier this year, we discussed our focus on expanding same-facility patient days. For the third quarter, patient days increased 3.7%, a rate, which is now also increased for the third consecutive quarter. This improvement helped us produce our highest rate of same-facility revenue growth since the fourth quarter of 2006.

As expected, the operating leverage created through this substantial growth resulted in higher profit margins. In addition, we are continuing our initiatives to improve quality and efficiency in each facility. As just one example, we are currently engaged in a process to standardize our automated dispensing machines for medication and to add these ATMs to facilities that don’t currently have them.

ATMs have already proven their ability to enhance the quality of care, increase efficiency by automating the distribution, tracking management and security of medications. They contribute to a greater patient safety and reduced pharmacy cost. This initiative is representative of our continuous efforts to identify and implement best practices within our facilities of within the industry that are relevant to all of our facilities.

Through our combined focus on growth and increased efficiency, both same-facility EBITDA as a percent of revenue and the EBITDA margin for all facilities increased 60 basis points over the third quarter last year. In addition, consolidated adjusted EBITDA grew 18% quarter-over-quarter to $80.6 million for the third quarter. This growth represented an 80 basis point increase as a percentage of revenue to 18% versus 17.2% for the third quarter last year.

In an industry with steady growth in demand, a significant portion of same-facility growth reflects the addition of new beds to existing facilities. We are currently continuing to make progress on our plans to add nearly 600 beds to existing and new facilities during 2008. We continue to have many opportunities to expand our beds organically.

Complementing the impact of these beds on total revenue for the third quarter, we also benefited from the acquisition of five facilities with more than 400 beds from United Medical Corporation in the first quarter of 2008. Industry dynamics remained favorable for the continued success of our proven facility acquisition strategy through which each year we seek to buy at least six inpatient facilities that are leaders in their markets, and that have long-term growth potential.

The industry continues to be highly fragmented. A majority of the facilities that we operate and we evaluate for purchase are the sole providers in their markets. While new beds are coming on to the market primarily through additions to existing facilities, we expect the industry to remain capacity-constrained. At the same time, demand has increased steadily for more than a decade. The long-term prospects [ph] for continued demand growth are strengthened by the recent passage of Mental Health Parity legislation, which will become effective in the fall of 2009.

Our scale and expertise positions PSI well to (inaudible) in this environment and to benefit from growth in demand. Despite the condition of the credit markets, we also retained our financial ability to act. With our substantial cash flow from operations, $45 million of cash on hand on our balance sheet and our existing revolver ability, we are positioned to fund our anticipated growth for 2009.

Before closing, let me update you on a few items of interest. First, Hurricane Ike that struck the Houston area did impact three owned facilities and two management contracts. We estimated a $0.01 earnings per share hit because of the loss of revenue and additional expense for Hurricane Ike.

We have received questions concerning the $2.2 million charge to discontinuing operations. During the third quarter, we reached an agreement to sell our Compass facility operations. Compass is a 36-bed LTAC, not a core competency of PSI. We expect to receive $2.5 million in cash at closing in the fourth quarter. $1.8 million of the $2.2 million charge is a write-down of the assets of the Compass facility. The remaining $0.4 million loss is the operations of the LTAC through 09/30/08 and final settlement of two discontinued juvenile justice contracts that we recorded in the second quarter of ’08. Compass generated $2.3 million in revenue for the third quarter. I hope this detail helped you in your analysis of the third quarter.

Bad debt as a percent of revenue was 2.3% for the third quarter and 2% year-to-date. As I have stated previously, you should model our bad debt expense at 2%. PSI has budgeted bad debt expense for 2009 at 1.9%. Our payer mix is very stable. A contributing factor in the third quarter was billing issues that were a result of two new provider numbers.

Riveredge Hospital in Chicago, which as we’ve discussed in our conference call last quarter, had an admissions hold placed on it by the Illinois Department of Family Services in July. During the third quarter, our same-facility patient day growth was negatively impacted by approximately 70 basis points due to the lower census levels resulting from this DCF admissions hold. This hold is still in place, however, we expect it to be lifted in the current quarter.

The financial impact of the admissions hold in complying with the DOJ investigation caused us approximately $0.02 to $0.03 earnings per share hit in the third quarter.

To conclude my remarks today, I will repeat what you’ve all heard me say, our confidence in the long term growth potential of PSI remains very strong. We are the leader in a growing capacity-constrained industry. Our business model and growth strategy have been continuously refined and successfully proven over the six years that we have implemented them as a public company.

As a result, our scale, our resources, our management depth and capabilities have all increased, enhancing our ability to execute. With continued strong execution, we expect to expand through both additional facility acquisitions and through the development of beds for existing and new facilities. We also expect to drive enhanced profit margins through growth in same-facility revenue at a target rate of 7% to 9% annually.

Thank you again for your time this morning, and now Jack Polson, our Chief Accounting Officer, will review our financial results in more detail.

Jack Polson

Thank you, Joey, and good morning. PSI produced revenues of $448 million for the third quarter of 2008, up 13% from the third quarter last year. As a result of the margin improvement Joey discussed, income from continuing operations increased 39.1% to $28.5 million for the latest quarter from 20.3% for the third quarter of last year. Income from continuing operations per diluted share increased 37.8% to $0.51 from $0.37.

On a same-facility basis, for the comparable quarters, revenue increased 8.7% due primarily to a 4.8% increase in revenue per patient day, and a 3.7% increase in patient days.

For the first nine months of 2008, same-facility revenue increased 8.1% versus the same period in 2007 on a 5.1% increase in revenue per patient day and a 3% in patient days, all three of which are within our longstanding targeted annual increases.

Same-facility EBITDA increased 60 basis points to 20.6% and EBITDA for all facilities increased by the same amount to 20.5%. Consolidated adjusted EBITDA for the third quarter rose 18.1% to $80.6 million for the third quarter of ’08 while the margin increased to 18% of revenue from 17.2% for the third quarter of 2007.

Cash flow from continuing operations for the latest quarter was $36.4 million. PSI completed the third quarter with $45 million in cash and cash equivalents. We expect to continue producing solid cash flow from operations, which combined with our cash and the availability under our (inaudible) positions us to fund our anticipated growth for the next year.

Based on our results for the first nine months of 2008 and our outlook we are affirming our guidance for 2008 earnings from continuing operations in a range of $2.02 to $2.03. In addition, as the news release indicates, we are establishing our guidance for 2009 earnings from continuing operations in a range of $2.40 to $2.44. Our guidance does not include any impact from any future acquisitions or for any change in interest rates associated with refinancing the Company’s revolving credit facility that matures in December of 2009.

This concludes our prepared remarks this morning. Operator, would you please open the floor for any question?

Question-and-Answer Session

Operator

Yes, thank you, sir. (Operator instructions) We go first to Adam Feinstein with Barclays Capital.

Adam Feinstein – Barclays Capital

Alright, thank you. Good morning, everyone.

Joey Jacobs

Good morning.

Adam Feinstein – Barclays Capital

Just a few questions here and I guess just may be start, same-store growth was really solid in the quarter and then you (inaudible) that Riveredge brought that down some as well. So, seems like you’ve seen a nice acceleration there so – and this is the first quarter with (inaudible) same-store number. So just trying to understand in terms of what’s driving that. I know the number bounces around from quarter-to-quarter, but anything that would have really benefited the numbers this quarter, anything to highlight there?

Joey Jacobs

No, no, really it was just – as we’ve been building the beds over the past year, I think you are seeing the impact of the beds that we have built and it was just good operations and once again the demand for the services is there and we have great markets that we operate in and great facilities.

Adam Feinstein – Barclays Capital

Alright. And then there were a few facilities that were having – I mean besides Riveredge that you guys talked about over the past year such as The Pine, just curious, did some of those sites ramp back up?

Joey Jacobs

Yes, in the third quarter, Adam, The Pines contributed about 30 basis points to the same-store patient day growth. They are now about 20 patients a day over what they were this time last year and ramping up. And West Macon is doing a fantastic job for us there. Also, I was going to mention at the end, but I will go – I will mention it now, our Manatee Palms facility has come back very strong for us and is doing a great job and Dave Guymon, unfortunately for his death, but Dave and Manatee Palms just received the TRAUMA award from the University of South Florida for being the best in Florida. And it’s just a terrific story about where we took a facility that had some issues and now we’ve turned it into the best.

So, those things are happening and in Riveredge hold we expect to get it lifted in the fourth quarter and so we are doing well and whenever we find an issue that we need to address, we are addressing it.

Adam Feinstein – Barclays Capital

Okay, great. And I guess on the reimbursement side, obviously it’s a little bit early, but just curious in terms of what you guys are hearing, clearly with state budget issues there are concerns about Medicaid and other state programs. Anything that you are hearing from any key states suggest – kind of a broad question I know but just curious to – if you have any feedback.

Joey Jacobs

Well, there is no new activity I guess in the third quarter, Adam. We are reading and hearing the stories with the states and their budgets and we are just waiting like everyone else to see what happens there. Fortunately for you the – for the ones that know our story, about 60% of our patient days are child and adolescent patient days and our Medicaid business for that book of business is very stable. And I don’t really see them, this is just my personal opinion, I don’t really see states going after children in their budget cuts. Could they go after the adults? Sure. But I think the kids, the child and adolescents, especially for mental health issues, they need to be with us, they need to be in a safe environment. And that need doesn’t go away. So, we’ll just watch as everybody else watches and we’ve completed our budget because of the guidance that we put out for next year and we think we have been somewhat conservative in walking through the revenue increases, but once again we expect 3% to 5% revenue increases next year and 3% to 5% same-store – I mean patient day growth. So, once again, we are going to look for 7% to 9% revenue growth for us next year. So – but we do watch and read and listen about what’s happening with Medicaid.

Adam Feinstein – Barclays Capital

Sure. Absolutely. Alright. And then just since you had mentioned the guidance, just a quick question there, may be for Brent, but just with the revolver coming due next year I know it’s kind of – it’s early to know the impact. But maybe just talk about your thought process in terms of that item for 2009.

Brent Turner

Sure. We do have the revolver maturing at the end of December next year. So, at some point between now and then we will be refinancing and extending that revolver. And given the changing dynamics in the credit market, I think it’s absolutely obvious that it’s going to be a more expensive revolver for us. And so therefore we were just disclosing that. When we do that, the cost of that revolver is going to be a little higher in terms of our interest rate. However, it’s not certain whether we make that extension April or June, so we would just update the impact of our refinancing at the point where that event occurs next year.

Adam Feinstein – Barclays Capital

Okay, great. Okay, and final question, I will get back into queue, just on the bad debt side, just saw it kick up a little bit but clearly off a very low base. But just looking at the balance sheet, the reserve on the balance sheet has been moving higher. So, are you guys just being a little bit more conservative there based on the current environment or just in terms of – how are you thinking about that?

Joey Jacobs

Well, Adam, we think we keep our books conservatively, so nothing special there on the third quarter there. We book our bad debts as we think it’s appropriate. But to the – I think to the conservative side, so nothing unusual is of costing people about other items inside PSI. One quarter for us does not make a trend and we’ve stated – 2% is about where our bad debt runs and we budgeted 1.9% for next year. If we thought it was going to deteriorate or get worse, we would have budgeted that way, but we think it’s going to still be about 1.9%-2% bad debt for next year.

Adam Feinstein – Barclays Capital

Alright, thank you very much.

Operator

We go next to Tom Gallucci with Merrill Lynch.

Thomas Gallucci – Merrill Lynch

Good morning. May be just following up on that last question regarding bad debt because just given the economy we’ve got some questions about it. Is there a way to sort of measure even the percent of your business that would be exposed to sort of individual cash pay, whether it’s co-pays, deductibles, things like that in this sort of environment?

Joey Jacobs

No, Tom, we don’t have that information, but what people many times forget is once again when we talk about 60% of our business being child and adolescents, and the vast majority of those are Medicaid or state agency, there is no co-pays and deductibles. So, once again, our payer mix and the patients we take care of support us having an experience rate of 2% bad debt. I know nothing about co-pays or deductibles on the commercial side that are causing us any unusual issues as compared to this time last year.

Thomas Gallucci – Merrill Lynch

So, you are basically saying 50-60 something – not less than 60, but 50% of your business or something doesn’t even have any co-pay or deductible?

Joey Jacobs

Correct.

Thomas Gallucci – Merrill Lynch

Right, okay.

Joey Jacobs

People (inaudible).

Thomas Gallucci – Merrill Lynch

Right. And then I guess acquisition outlook, you tend to be very optimistic typically on that, just want to confirm A, what you are seeing in the environment today, B, your capacity there to do some deal still, given the credit environment and, well, I will leave it at that.

Joey Jacobs

Okay. We have capacity to make the acquisitions. Our Board met yesterday and we have an active pipeline and transactions and we have several over (inaudible) out in various due diligence negotiation stages. So the ability to make the acquisitions are there finding the opportunities and also our balance sheet and access to capital we believe gets us there to where we – our target is six – at least six facilities a year and I think it’s there.

Thomas Gallucci – Merrill Lynch

And just to clarify, no unannounced acquisitions in guidance, right?

Joey Jacobs

Correct. There is no acquisitions in the guidance. This is existing business today.

Thomas Gallucci – Merrill Lynch

Right, okay, thank you.

Operator

We go next to Gary Lieberman with Stanford Group. Well, Mr. Lieberman, your line is open, please go ahead, sir. We’ll move to Kevin Campbell with Avondale Partners.

Kevin Campbell – Avondale Partners

Thanks for taking my call. I want to ask if you guys will go into a little more detail just on the expansion bed numbers, the number that you did in the third quarter, what you expect to open in the fourth? I think 2009, you’d previously talked about 400 beds, is that still the same? And do you have any early outlook on 2010 at this point?

Joey Jacobs

Kevin, I can give you some updates there. As you know, for the first six months we’ve done over 300. We did not complete construction on any new beds in the third quarter. We do have high covenants of at least 163 beds that will be coming on in the fourth quarter with some of those beds already on. We do have three projects – our Holly Hill project, our Canyon Ridge, and our Sierra Vista project. Those things could hit in December or hit in January of the first year – of ’09. So, we’re hoping to have a good construction period during the next 60 days but weather, delay of material, workers, we have those three big projects there that would put us well over 600.

Our 400-bed goal for next year is well in place. And, quite frankly, two days ago I was visiting one of our facilities and we just approved a 24-bed expansion in that facility. That will actually get done in ’09, might lead into 2010. So – but we have already projects on board for 2010. So, I think 2010 could be another 400 plus year for us on beds, as it looks right now. But, once again, expanding our facilities, meeting the need is a good thing to have.

Kevin Campbell – Avondale Partners

Yes, absolutely. Could you talk – you’ve talked a little bit about budgets and mainly looking at the Medicaid side. Managed care, I know you guys have historically talked about roughly a 5% to 8% sort of annual rate increase there. Has there been any change in your negotiations over the last couple of weeks as the economy clearly has soured? Has there been any, again, change from managed care and what they are willing to accept in terms of a typical rate increase.

Joey Jacobs

No, Tom, well we right now – our outlook for next year is 2% to 4% on governmental payers and that 6 to 8 – 5 to 8 on the other payers, and we still see that, but as everybody we watch it and worry about it and – but our negotiations have been pretty positive so far with managed care organizations. So, I think they know that there is 3%-3.5% inflation out there on the souring wage line, which is our biggest area of expense. So, I think they recognize the need to – we would get a reasonable rate increase.

Kevin Campbell – Avondale Partners

And are there any thoughts on limiting utilization either coming from states or managed care, is there any push back there?

Joey Jacobs

Not at all, not at all, not at all.

Kevin Campbell – Avondale Partners

Okay. And could you talk about the Compass facility that you are selling, what was the – what would have been the impact of that facility in the same-store mix, it would have been marginal at best?

Joey Jacobs

Oh absolutely. I think the difference in the patient day was may be less than 12–

Kevin Campbell – Avondale Partners

Okay. And you said the revenues associated with that were roughly $2.3 million?

Brent Turner

Yes.

Joey Jacobs

And it’s only 36 beds and quite frankly it had done – we, quite frankly, when we started selling the facility, operations dropped off a little bit in the third quarter, but we didn’t start trying to sell it in the third quarter. So – but it’s immaterial.

Kevin Campbell – Avondale Partners

Okay. And are there any other facilities that you are at least considering selling such that there might be goodwill write-offs that we might be prepared for down the line at this point or not?

Joey Jacobs

I do not see any more this year. I think as we did the previous year, we sold Desert Springs, Compass this year, I think we will probably fine tune our portfolio of assets and could we sell one to two facilities that really don’t – paid us well, could that happen? I think it could. So I would think that we – for the past two years, we have sold one facility each year. So I think we could sell one next year, may be two. But it would be facilities that we thought we – that would not be meeting our criteria. So I think that’s the outlook there.

Kevin Campbell – Avondale Partners

Okay. And lastly, could you talk about the provider number issue, I think you attributed that as part of the pickup in the bad debt expense as a percentage of revenues, is that just new facilities where you are applying for provider numbers and you are having trouble getting those and so collections are being delayed?

Joey Jacobs

Well, we’ve got the numbers. They were delayed – they took a few months to get the numbers. And we still would be conservative in recording the AR even though we think once we get it all billed and whatever that – some of this bad debt may come back to us in recoveries. So, it took a few months to get those numbers. So we are now being conservative, but we do have the numbers. Lot of people working on the billing process. So, once again, I think our bad debts are 2% for the Company.

Kevin Campbell – Avondale Partners

Can you explain why those facilities need a new provider number because one of them was one that you recently opened.

Joey Jacobs

New facilities.

Kevin Campbell – Avondale Partners

Yes, okay, thank you very much.

Operator

Now we’ll go next to John Ransom with Raymond James and Associates.

John Ransom – Raymond James & Associates

Hi, good morning. In the fourth quarter, what effect do you expect from Riveredge?

Joey Jacobs

Probably $0.02, John. I’ve just – I haven’t – comfortable a lot to that $0.02. May be up to $0.03, but it could drop down to $0.01. So, our range is $0.01 to $0.03, I guess.

John Ransom – Raymond James & Associates

Okay. And what about for calendar ’09? What are you putting in for that or is that too–?

Brent Turner

No, no, no, no. We have that coming back strong in ’09. So, we would not have any talks [ph] there.

John Ransom – Raymond James & Associates

And I guess the other thing, if you look at the third quarter versus fourth quarter, what effect are you getting positively from Manatee and The Pines in the third quarter and what effect do you expect in the fourth quarter?

Joey Jacobs

We expect both of those to continue to grow their census and that is probably 50, 70 basis points may be for us.

John Ransom – Raymond James & Associates

Okay. Okay, an I guess lastly, have prices come down at all yet, are buyers still wanting eight times EBITDA or–?

Joey Jacobs

Buyers may be wanting that, but we are – our offers are less than that.

John Ransom – Raymond James & Associates

Okay, alright, thank you.

Joey Jacobs

Thanks, John.

Operator

We go next to Mark Arnold with Piper Jaffray.

Mark Arnold – Piper Jaffray

Good morning guys. I think most of my questions have been answered here, but just a few more. Just coming back to the patient days, they seemed a little light in the quarter. You’ve explained, I think, a good part of that with Riveredge, a little bit with the Compass facility. Is there anything else in the quarter that may have had a little bit of a drag on patient days because I know the same-store numbers look strong, but the overall revenue just seemed a little light and maybe Riveredge explains it all here, but anything else in the quarter?

Joey Jacobs

I think everyone needs to make sure that they realize that the third quarter is our seasonal quarter and that both July and August schools are out and schools start back at different times throughout the country in our markets. And that would be the only other thing. Now if add 70 basis points back to the 3.7, you are talking about same-store patient day growth of 4.5. 3.7 is fantastic. The 4.5 would’ve been absolutely terrific, but the 3.7 we are very proud of. Once again, it’s sequentially up from the second quarter, so – we do not perceive a weakness there.

Mark Arnold – Piper Jaffray

Okay. And then on the Compass facility, you kind of addressed this before, I just want to clarify, so you are saying it’s not really going to have much of an impact on volumes or pricing metrics here or didn’t have it in the quarter. But how do we look at the impact? That business is a little different than the rest of your business. How much higher was the average revenue per diem and–?

Joey Jacobs

I think when you watch [ph] 30 patients through a base of – same-store base of 7700, you can't tell the difference.

Mark Arnold – Piper Jaffray

Okay. Okay, couple of others. Just on the bad debt, the higher doubtful accounts, why didn’t that just impact your receivables instead of the doubtful account number just given that you didn’t have the provider numbers? I mean do you expect that you are not going to be able to collect–?

Joey Jacobs

No, no, no, no. No, not all. We are working hard to recover that money.

Mark Arnold – Piper Jaffray

Okay. So, we may see a little reversal in Q4?

Joey Jacobs

We are not giving you the Q – the quarter, but we do expect some of that money – that billing process will recapture some of the money we’ve reserved.

Mark Arnold – Piper Jaffray

Perfect. Okay. And then, just on the interest rate, regarding the revolver, does the guidance assume a higher interest rate for next year?

Joey Jacobs

We’ve budgeted these rates – our interest rate for next year under our current ratios. But it assumes some conservative outlook, so we are assuming the – we are assuming the same spreads on our current revolver and obviously both LIBOR and prime have come down since we – just in the last week, so they are down from where they were when we were putting the budgets together, but they don’t assume any (inaudible) it’s not assume any refinanced cost.

Mark Arnold – Piper Jaffray

Okay. So, it’s possible we could even see our interest rates next year slightly lower depending on the interest rate outlook is even if the spread is higher. Just one last question, prime, did you – have you converted any of your term loan or revolver tranches to be based off of that alternative base rate using prime instead of LIBOR?

Joey Jacobs

Absolutely, yes. When the – when LIBOR exceeded prime as well as even now when LIBOR is lower than prime, but the spreads are different by 100 basis points, under which we borrow. We have the – almost all of our floating rate debt is at the prime option, which is prime plus 0.5% spread on the revolver and prime plus 75 basis points on the term loan.

Mark Arnold – Piper Jaffray

Great. Thank you guys.

Operator

We go next to Ryan Daniels with William Blair.

Ryan Daniels – William Blair & Company

Yes, good morning guys. Joey, want to have a follow-up on the commentary you made on Medicaid. It’s my impression that most of the states have done their budgets now for fiscal ’09, so I am presuming you actually have pretty good visibility kind of over the next three or four quarters and then the Medicaid question doesn’t really arise again until midway through ’09, is that safe assumption?

Joey Jacobs

That’s the assumption we use. The majority of the states have July 1st year-end, now it’s beginning years in October 1, so we think the vast majority of – well, what we know, the rate increases that are up through June 30th of next year and some through September 30th of next year. What you worry about is a state doing something out of budget cycle, but those budgets have been put to bed, and we have our rate increases.

Ryan Daniels – William Blair & Company

Okay. And have you seen any states in the past whether it’s – here with PSI or before, (inaudible) did that mid-budget cycle or is that pretty unusual?

Joey Jacobs

I think it would be extremely unusual. We try to go back and think about the year 2003. 2003, I guess was the last big year for the state budgets to be in a crisis, and we came out that okay. So, that’ our latest reference point.

Ryan Daniels – William Blair & Company

Okay. Now, that’s helpful color. And then if we think of – go forward to ’09, I know you are – assuming the nine holes intact. Do you envision it being a little more skewed going forward on the volume side given the success you’ve had in new bed additions? May be the somewhat counter-cyclical nature of the business and then pricing being pressured a bit by PPS, the tail one there running out and little more Medicaid pressure, should we expect that mix, if you will, or sorry growth to may be shift a little bit?

Joey Jacobs

Yes, yes, yes you do. I think that patient days will be at the higher end of our range and that revenue will be in the range, but it could actually end them up being a little bit lower, but it’s in our range. So, once again, any combination of those two get us to seven to nine and I think patient days absolutely has the best chance of exceeding expectations.

Ryan Daniels – William Blair & Company

Okay, great. And then if we look at ’09, a follow-up on the bed growth, if you think of those 400 beds, do you know how many, off the cuff, will be going into same store versus they are going to be de novo facilities?

Joey Jacobs

Quite frankly, I think all of them are same store.

Ryan Daniels – William Blair & Company

Okay, so a similar or even bigger amount to this year?

Joey Jacobs

Yes.

Ryan Daniels – William Blair & Company

And then the last question I had, there is obviously a lot of discussion on S chip [ph] expanding especially with more democratic power in congress. Is that something that you guys see as a big potential benefit next year, may be even larger than the Metal Health Parity, given your amount of RTC and kind of child and adolescent business?

Joey Jacobs

We think that could very well happen in the first quarter of next year and the S chip [ph] expansion be a positive for us. We can't quantify it yet, but it would be a positive for us and it would impact quicker than Mental Health Parity.

Ryan Daniels – William Blair & Company

Right, so safe to say there is nothing in your guidance kind of considering any upside from that or parity bills or anything of that nature?

Joey Jacobs

Once again, when you are $2 billion of revenue even though you might get a little bit more extra money from the S chip [ph] it’s hard – we are now so big, that money, it’s hard to get it – to say all that money went right down to the bottom line. It gets washed through $2 billion of operations.

Ryan Daniels – William Blair & Company

Right, okay.

Joey Jacobs

It is a positive, it will be a positive.

Ryan Daniels – William Blair & Company

Okay, great. Thanks for the color guys.

Operator

We’ll go to Darren Lehrich with Deutsche Bank.

Darren Lehrich – Deutsche Bank Securities

Thanks, good morning, everyone. I wanted to just follow up again on the ’09 guidance just make sure I understand some of the key components much of which I think you’ve mentioned throughout the call. Can you just may be highlight what your thoughts are, what you built into the guidance for legal expenses related to the investigation, if there is any at all that you’ve built in?

Joey Jacobs

We built in some, but it’s a lot less than we had occur in the third quarter.

Darren Lehrich – Deutsche Bank Securities

Okay. And then you gave us your same-store revenue outlook and that continues to be good, what is the outlook for same-store margins or what kind of margin expansion have you included, and if it’s a range, that’s fine, but just want to get a sense for that for ’09?

Joey Jacobs

You know, we’ve never really given numbers like that out. We’ve always given the 7% to 9% revenue number, but what I will everyone is that we budgeted off of what we’ve done for the past five years. And for the past five years we’ve had margin improvement and you all can go back and look at – see the number of basis points. We would continue that to happen in 2009. So, there is margin improvement in our budget, and we expect it to be similar to what we’ve seen in previous years and so I think that’s probably something you can easily model. But we – once again, we have not given those numbers and I don’t want to start that today.

Darren Lehrich – Deutsche Bank Securities

That’s fair. I mean you’ve been doing about 150 basis points year-over-year in the last few years. I guess this quarter was hit by the hurricane a little bit.

Joey Jacobs

Yes.

Darren Lehrich – Deutsche Bank Securities

And then as far as the quarter itself goes, can you just give us your occupancy rate, maybe Jack has that number, and the same-store base, and the total, what the occupancy rates where.

Joey Jacobs

Sure. I am going – before I do that though, Darren, about (inaudible), I do not agree that’s 150 basis points. Just want to make sure that’s clear for everybody, but Jack, give him the occupancy.

Jack Polson

Total occupancy is 74.1% for the quarter. I don’t have it broken out between same store and other, but obviously most of it is same store.

Darren Lehrich – Deutsche Bank Securities

Sure. That’s helpful. And then, Joey, we heard you – about your acquisition outlook, I guess I wanted to just kind of square that with the refinancing and may be Brent if you have a comment here that would be great. Just what leverage ratio do you think you want to try to manage to going into a refinancing of that, if it’s lower than where you are currently are, what would it be?

Brent Turner

Sure. Our current leverage for the quarter on a net basis, you saw we had $45 million of cash, so if you look at the current quarter, net debt to our cash flow, it’s 4.1. So we’ve brought that down once again by a couple of – 20 basis points. And so we would see our leverage here be below 4. And really when you look at transactions, even though we are looking at transactions, Joey emphasized that prices are changing, and we are more at a 4 multiple and you are looking at a transaction that really isn’t much higher than that multiple. And especially on a relative size basis, when you are buying something much smaller it has no incremental impact on increasing our leverage.

Darren Lehrich – Deutsche Bank Securities

Great. Okay, and then I guess my last question would just be – you talked a little bit about quality, and we noticed the new feature in your website that looks great, you are putting some more information out there. Any updates on your plans to broaden – what you publish about your quality, any updates there? And since you mentioned that how far along are you in installing these automated dispensing machines? Thanks.

Joey Jacobs

Okay, good. Darren, on the automated dispensing machines, we are probably a third of the way there. And so that’s something that we’ll be doing over the next 15 months, probably 12 to 15 months that will be implemented there. Yes, we are expanding our website to include more quality points there – data points there. The next big thing that will be going on the website is that the industry has adopted core measurements and we participated in that pilot, and we are ready to start reporting those out January 1st, just against our sales. So you’ll be seeing core measurement going up on our website and how we are doing there. So, any time we can put more quality oriented information on our website we are going to do that. And an example of something that we’ve just done is an education tape on the prevention of suicide and awareness that’s going out to all of our employees taking care of our patients that was – that we’ve done a terrific job on. Kathy Bolmer, her department has done a good job on – and then also we’ll probably do an announcement or put it on our website that we are about to go – next year we will be going on line with continuing education so that if we need to focus in a certain area we can put those questions, that information, that test out there and have our employees go online and take the test and they are continuing education there. So, we are doing lots of things to continue to improve the quality and – for our patients and the safety of our facilities. So – but we will be sharing more of those highlights on our website and so we are making great progress there.

Darren Lehrich – Deutsche Bank Securities

Great. Thank you.

Operator

We’ll go next to Whit Mayo with Robert Baird.

Whit Mayo – Robert W. Baird & Co.

Thanks. Question just on the recent announcement of the creation of the Co-COO role. Joey, can you just kind of talk about your decision to do that, kind of how this segregation of responsibilities works out and just any benefit or decision kind of really what the impetus was there?

Joey Jacobs

Okay, you know with 95 facilities that’s a lot of direct reports to one person when you have 10 facilities per division. And we thought to keep – Chief Operating Officer is closer to quality and financial initiatives that we have going on under the Company that it made sense to put approximately $1 billion and to – under Terry Bridges, and $1 billion under – of revenue under Ron Fincher, and to goals there, I think response to safety and quality issues will improve and implementation of our plans there. And also that financial performance so that now these people five maybe six people reporting to them versus Terry had 12, 13 people reporting to him. I think it makes absolute sense because of our low span of control and Terry and Ron are both very, very seasoned executives. And I think it’s nothing but a plus for the shareholders.

Whit Mayo – Robert W. Baird & Co.

Okay, well, great, that’s helpful. And just looking at the cash flow statement, it looks like you guys acquired something for a couple of million bucks in the quarter. Just any commentary around that?

Joey Jacobs

Yes, we bought a small work-life product to round out our EAP services and that occurred I think July 1st, and it’s an add-on to our EAP products that we sell and it’s a work-life product and so we made that acquisition. That will be the last acquisition that – for this year for the EAP company. But it was something to round out their – for all services of products that they are offering.

Whit Mayo – Robert W. Baird & Co.

Okay. And just one other question because you ended with a lot of cash on the balance sheet, just any bias for repaying debt? Just a little surprised you guys didn’t pay more debt down in the quarter and just any thoughts around that? Thanks.

Joey Jacobs

Sure. Good question, Whit. I think most folks know that our revolver is committed to us through about 10 different financial institutions, one of which is – was Lehman Brothers. And due to them being in the status – the bankruptcy status, we are not paying down our revolver like we normally do. We are keeping that outstanding until hopefully somebody steps in and takes their in the revolver. The good news is – in that context is Lehman was committed to us for $25 million on a revolver and we have over $19 million of that outstanding. So, it only impacts us on – access in terms of $6 million. But we do not want to pay down our revolver incrementally because every time we pay down the revolver we would their portion of the request when we want to re-borrow. So, that’s why you are seeing cash billed in the current quarter and probably into the fourth quarter until that’s resolved.

Whit Mayo – Robert W. Baird & Co.

Okay. So, have you assumed any debt repayment implicitly within your guidance for next year?

Joey Jacobs

We assume that it’s status quo with what we are seeing now.

Whit Mayo – Robert W. Baird & Co.

Okay, that’s fine. Thanks guys.

Joey Jacobs

Yes.

Operator

We go next to Dawn Brock with JPMorgan.

Dawn Brock – JPMorgan

Good morning guys. So, I guess my first question is just kind of moving or digging a little bit deeper into the bed expansion, can we anticipate that the acute-RTC split focus will remain 75/25?

Joey Jacobs

Dawn, looking at the schedule, yes, it’s more like 70/30.

Dawn Brock – JPMorgan

Okay, that’s–

Joey Jacobs

70% acute, 30% RTC.

Dawn Brock – JPMorgan

Joey, is there anything to read into – on the acute focus as limiting your – limiting or reducing your Medicaid exposure a little bit simply because we know that the RTC business or I should say the adult business, which is going to be the acute side is not Medicaid at all.

Joey Jacobs

We are not – these projects are not driven by payer mix changes or enhancing the payer mix. These projects are driven by, quite frankly, the facility having a waiting list or trying [ph] away patients. This is demand driven and just right now the acute episodes, the acute book of business is growing compared – if you use these ratios, it’s growing nearly twice as fast as the RTC demand is. So–

Dawn Brock – JPMorgan

Great.

Joey Jacobs

So – and but the benefit of that is that it does diversify the payer mix absolutely. There would be less Medicaid on the acute side versus the RTC side.

Dawn Brock – JPMorgan

Okay, that’s great. And then just on the growth from – organic EPS growth of 20% in ’09, it’s impressive, we haven’t really seen a real pure organic growth on an annual basis or at least close to it with – excluding UMC, in a long time. You confirm the target for (inaudible) Can you give any color around what your thoughts are on potentially adding additional growth through alternative agreements like JVs with local hospitals than have a freestanding facility?

Joey Jacobs

Working on one of those, joint venture agreement, but it will not be – they will not be significant to us unless the first two or three we do are wildly successful, that it has that potential. But for the next couple of years, I think you’ll see us probably do one to two joint ventures with owners that have more than likely Medsearch hospitals, but they have a site [ph] hospital on their campus and we can do a joint venture that way. If we do well with those and that’s successful, that could be – that does open up a lot more hospitals that could be potentially our operations. So, we are just – we are working on one right now, we’ll just see how that does. That one should get completed first quarter of next year and we’ll see how we do.

Dawn Brock – JPMorgan

Okay. Okay great, thank you.

Operator

We go next to Kevin Fischbeck with Banc of America.

Kevin Fischbeck – Banc of America

Okay, thank you. Good morning. I wanted to follow up on the question earlier about the same-store growth and I want to get your thoughts about next year’s growth, if it’s going to be skewed a little bit more toward patient days? And thoughts or a perspective on how that may impact how your same-store profit growth I guess if you can get an extra percent through pricing, that’s basically 100% margin, would be an extra percent through volume there is going to be cost associated with that. Any thoughts or color you can provide about that dynamic going into 2009?

Joey Jacobs

One thing I can do here, Kevin, is probably take you back to Darren’s question about what kind of margin did you assume in the Company for next year and we assumed a margin growth of our prior history and so we will have a good – we have a good margin growth expectation in our budgets and we think we can do that and I do not see that – I do not see the mix of the acute – but those changes in the patient days versus rate increases, I don’t see that really impacting us there. I don’t see that. But what I do see is that the margin improvement will continue as you’ve seen, historically, from PSI.

Kevin Fischbeck – Banc of America

Okay, alright, and then in your release you mentioned that demand intensified in a difficult economic environment and working on the sell side in this current stock market environment I can definitely understand how that would have been, but is there any way to quantify the impact of that, what you see last downturn?

Joey Jacobs

No. What we’ll do is next year, if this continues, we will be able to monitor it by same-store facility growth and we just have anecdotal evidence of it. One of our facilities just did have a person that is in the venture capital area that who knows, maybe the crisis did make him need service. So, there’s a lot of stress out – as we know, there’s lots of stress out there and those people with those mortgages and losing their houses and stuff like that. There’s a lot of stress out there.

Kevin Fischbeck – Banc of America

Okay, And I just wanted to focus a little bit on payer mix. I can see demand intensify. Any change that you would expect in payer mix if people lose their jobs and someone who might have come in last year’s managed care is now coming in as Medicaid. Any thought on that?

Joey Jacobs

No, not at all, we – once again, our bad debt for next year is 2%. We’ve got margin improvement as you’ve seen our payer mix pie chart. I think it will look a lot like that this time next year, and could one of those move 1% either way? Could Medicaid go down 1% and commercial go up 1%? Sure. That goes back to Dawn’s theory about more acute beds are coming on line, but we’ll just have to wait and see. I think the payer mix for PSI has been so stable for so many years, I don’t think that pie chart changes much either way.

Kevin Fischbeck – Banc of America

Okay, great. Thanks.

Operator

And we’ll go next to A.J. Rice with Soleil Securities. Your line is open, please go ahead.

Chris Rigg – Soleil Securities

Sorry, it’s Chris Rigg for A.J. Rice. And this was sort of touched on earlier about the acquisition pricing, but I was wondering if you guys could provide some color as to what you see with the companies you’ve been looking to acquire. Whether it’s deals you’ve done or deals you’ve passed on. I mean, a lot of these companies, highly levered where access to capital really could have a huge impact, thereby creating some significant opportunities in the next couple of months or next year or so?

Joey Jacobs

I think two things are driving some of these – three things. So many owners have put their money at risk and due to these uncertain economic times are looking to liquidate and how can they make that happen and – there’s only a few buyers out there that can make them happen for them. Well, second is that some of these facilities are worried about the debt that they have borrowed on their facilities and that also creates an interest. Also, the outlook on tax increases. If these people have taken a risk and generated value for their facilities and more than likely it’s capital gains to them, how they’ve set up the company, those people – those individual owners are thinking to their tax strategy for their families. And so we have seen comments. We’ve gotten comments and feedbacks both on that – being able to liquidate their facility and then also on the tax structure. So we see those – we get those comments.

Chris Rigg – Soleil Securities

Okay, okay. That’s interesting. Second thing is with the recent Mental Health Parity legislation, the congress does have a cause to associate with this to the tax payers. And it’s over $1 billion for the next five to six years. I was wondering if you guys have thought about how that could impact you. Whether you can quantify it or how should we think about that trickling through to mental health providers?

Joey Jacobs

First, it’s not effective until the October of next year.

Chris Rigg – Soleil Securities

Sure, sure.

Joey Jacobs

But I think, one way we could measure it is that the large self-insured employers – I think there’s a possibility that we could track the number of patients from those employers. There might be some – I go back and think about getting whether our IT people – because you could probably take 10 of the large employers. If we could do that – I don’t know if our IT system would let us do that, but that’s one way we can measure it.

Chris Rigg – Soleil Securities

Okay. But it’s sort of this nebulous thing where congress is going to cost them – I think it was $1.5 billion – so they’re paying more money out to providers and –

Joey Jacobs

Well, no, I don’t think that’s how they cost it. What they cost was loss of revenue that these companies are going to be incurring more mental health benefit cost so they will have less money, and this would be a loss tax revenue to the government.

Chris Rigg – Soleil Securities

Okay.

Joey Jacobs

I think that’s how some of that scoring occurred. It wasn’t that they’re paying more money, it’s that they would be getting less revenue because these companies across the country – these loss of self insurers or – would be paying more on mental health benefits, which would have be a tax deduction, so tax revenues would be less going back to the government.

Chris Rigg – Soleil Securities

Okay, okay.

Joey Jacobs

That’s how it was explained to me on the scoring of that. It wasn’t so much that the federal government was going to pay more. That it was going to be – they would lose revenue.

Chris Rigg – Soleil Securities

Okay. Well that’s great color. And last thing, you had said, I guess, some of the legal expenses or litigation expenses around Riveredge are going to come down in the fourth quarter and –

Joey Jacobs

I didn’t say fourth quarter, it was for ’09.

Chris Rigg – Soleil Securities

For ’09, for ’09–?

Joey Jacobs

Yes. But in the fourth quarter, I think will be less than the third quarter but most of the – most if not all of those legal expenses are due to document production. And that’s just a one-time event. So–

Chris Rigg – Soleil Securities

Okay. So I guess – how should we think about where things stand today? I mean, if your expenses are going to be coming down, what’s sort of the next step the investors or data point that investors should be looking for other than a resolution of the issues? Is there something that we just ought to look to?

Joey Jacobs

No. The next thing to look to is the admission hold lift.

Chris Rigg – Soleil Securities

Okay.

Joey Jacobs

And then after that – many times an investigation – they get into it and then it never reaches a resolution, they just close the file. So – but once again, through our due diligence, through our looking back at Riveredge, we think we’ve done a very good job there. Whether it’s a couple of unfortunate incidents? Yes. But we take care of very sick kids there and adults and – could the things we do better? Yes. And have we done them better? Yes. And so – but weren’t looking back to the incidents that have occurred. We feel good about the quality of care at Riveredge and it’s been revalidated by numerous people since the admissions hold. We just basically have one more agency that needs to come through and approve it and lift the hold.

Chris Rigg – Soleil Securities

Okay. All right, great. Thanks a lot.

Operator

We’ll go to Gary Taylor with Citigroup.

Gary Taylor – Citigroup

Hi, good morning. A few questions. First, it sounds like you’re optimistic to lift the admissions hold at Riveredge in the fourth quarter and I know you’ve had some optimism that it was going to be resolved sooner. What’s your level of confidence around that, Joey?

Joey Jacobs

I think it’s 80%.

Gary Taylor – Citigroup

Okay.

Joey Jacobs

I think it’s 80%. I think it’s 80%. It might be January 1st, it’ll be the date. But it could be next week–

Gary Taylor – Citigroup

Would you guys announce that?

Joey Jacobs

This is out of our hands.

Gary Taylor – Citigroup

Will you do a press release when that’s lifted or how will we know?

Joey Jacobs

I’m looking at Brent. Yes, we’ll do a press release. Yes.

Gary Taylor – Citigroup

Okay. Hey, Brent, can you just remind me on your current revolver, you gave us the prime spread, but the LIBOR spread is what?

Brent Turner

On the revolver, the LIBOR spread is 1.5% over LIBOR and on the term loan it’s 1.75% over LIBOR.

Gary Taylor – Citigroup

Okay. And, Joey, I didn’t quite understand what you said, I didn’t catch it. On your – I think you’re saying, overall for pricing in your ’09 guidance is 3% to 5% with commercial at 6% to 8%, then you said a government number, and I didn’t catch what you said, 3% to 4%–?

Joey Jacobs

2% to 4%.

Gary Taylor – Citigroup

2% to 4%. My last question is, one of the nurse staffing companies last night was talking about their locum tenens business, their temporary position placement business, and they had suggested that the behavioral demand was up 20%, it’s small part of the business, but it was kind of the fastest growing physician specialty where they were seeing demand. Is there anything – you think that’s just being demand driven or is there anything happening on the supply of behavioral specialties that would be impacting that? I mean sounds like it’s a good thing. I suppose it’s demand driven but is that a surprising number to you? Does that make sense in any way?

Joey Jacobs

It makes sense. It’s not surprising to me. I think the 20% is probably is a very low base that they’re calculating their percentages off. There is a need of psychiatrists and there is a need of inpatient psychiatrists and absolutely we support the universities that are training – that we need more good psychiatrists, but it’s not any different from other positions. And it’s not surprising me that those – that placement agency is having an increase in people needing locum tenens for psychiatrists.

Gary Taylor – Citigroup

Okay, sure, actually one more last question. Going back to Kevin’s question. Going back to Kevin’s question I think just on the potential for mix shift, if we have some increase in unemployment it may not move the needle much in terms of commercial days turning into Medicaid days, but what’s the revenue impact to you? How material is it if a commercial patient that lost their job and instead of having commercial payer they come in and they are a Medicaid payer? Is there a pretty significant per diem hit that you take on a revenue side?

Joey Jacobs

Usually there is not. It’s usually probably $50 a day. And on a 10-day stay that’s $500. We normally would have been getting $6,500 dollars. We might be getting $6,000. It varies by state but fortunately for us in this industry per diems for Medicaid and commercial payers, they’re pretty close. They’re pretty close in what we’re getting in receivable there. And let me assure you that if we do see – if we do see and if we can quantify our – or document that something like this is occurring in the industry or with PSI, we’ll tell you about it on the next call. We don’t see it now. I don’t think it’s going to happen but if it does we will tell you.

Gary Taylor – Citigroup

Okay. Thank you.

Operator

We’ll go to Andreas Dirnagl with Stephens.

Andreas Dirnagl – Stephens Inc.

Yes. Good morning guys. Most of my questions have been answered, but maybe just a few sort of little cleanup thing. Joey, when you talked about the new beds, I guess what you were saying is that you have 300 so far year-to-date. You were thinking about adding probably about another 165 to may be 200. Focusing in on those 300 that you’ve done year-to-date, can you give us some idea as to – given that these are capacity or expansions at facilities where you are pretty close to capacity, any idea how these beds sort of run in terms of startup? Did they fill relatively quickly?

Joey Jacobs

We’ve told everybody here, Andreas, that you give us 12 months – our goal is once we bring the bed online hat 12 months from now it would be at our occupancy percent, which Jack gave out at 74. So a year from now, we would hope that bed is 74% occupied for the next coming year. So that’s what we do. So that’s how I would ramp them up. Could we build 20 beds and have 15 patients in them the next week? Yes, that does occur. But could we also build 20 RTC patients and it takes us 18 months to ramp it up. That does occur too. So, on average, our guidance here is that once we build the bed and it comes on line, then give us 12 months and we’ll move that occupancy to that bed towards that 74% level.

Andreas Dirnagl – Stephens Inc.

Right, okay but the beds that you are building in general are more skewed to acute than they are residential, correct?

Joey Jacobs

Correct. The 2008 number looks like it’s a 75/25, acute versus residential and going forward it’s about a 70/30 split, acute versus residential.

Andreas Dirnagl – Stephens Inc.

Right. Okay. And then, Joey, maybe just quickly, we kind of touched on every other payer and maybe the one we haven’t touched on is sort of Medicare. As we roll off the transition period, can you sort of give your thoughts as to kind of what’s going to occur? How, if that at all, you’ve sort of prepared yourself for what is likely to be a drop in reimbursement growth?

Joey Jacobs

Okay. As we know, the final year patient [ph] was this year. Our expectations for Medicare is this. That July 1st of next year we will get a cost of living cost adjustment that will be announced I think at the end of April, first of May. I expect it to be in the 3.5% range. So Medicare – once again, we talked about governmental payers next year paying us 2% to 4%. I think Medicare is going to be 3.5% – may be – we will be between 3% and 3.5%. It’s the best data we have today, and I think – the offers, I think, will be closer to 3.5% in July of next year. And that’s the only thing that we see happening to Medicare next year, is that we’ll get the cost of living increase July 1 next year, 3.5%.

Andreas Dirnagl – Stephens Inc.

And to just be clear, I mean, given the current fiscal environment, so even with the current fiscal environment, you don’t – I mean that your 3% to 3.5% appears to be the market basket flat idea. You don’t think that you’re going to be a target for any cuts off of market basket.

Joey Jacobs

I don’t think mental health will be a target. Now, could we get swept off in to an all encompassing deal? It says we’re going to cut all across the board. I think it would be something like that, that would catch us, Andreas. But if it’s a stand alone, they know the mental health cost. This program – Medicare team has done an excellent job of implementing this PPS system for us. They kept their budget neutral. The expense rates, and the expectations that they see, I think, are right on track; and so we’re due, we should be due by 3.5% cost of living increase July 1. I mean, we’ll take us getting caught up in something you’re doing across the board in healthcare at the federal level. I mean, that could happen but I don’t think that’s happening today, and I don’t see that today.

Andreas Dirnagl – Stephens Inc.

Okay. And then one final question. Maybe you’ve said this and maybe I’m just not under – didn’t hear it right but in terms of River Edge, you’re expecting the admission’s hold again to be lifted sometime, let’s call it, soon. I guess what I’m asking is if an admission’s hold, so in other words, there’s not going to be any ongoing census restriction at that facility; once the admission hold is lifted, you can go full bore again?

Joey Jacobs

Yes.

Andreas Dirnagl – Stephens Inc.

Okay, great. Thank you very much.

Operator

We’ll go to Jeff Englander with Standard & Poor’s.

Jeff Englander – Standard & Poor’s

Good morning, guys. Just two quick housekeeping questions. One, Joey, on the hurricanes, you basically said that was a $0.01 earnings per share hit, is that correct?

Joey Jacobs

Correct.

Jeff Englander – Standard & Poor’s

And just to – I’ll just clarify, all those facilities are now back online and fully repaired?

Joey Jacobs

All the facilities are back to full capacity. There are still some fence-building, some – there are some cosmetic fixing going on but that does not impair any beds.

Jeff Englander – Standard & Poor’s

Okay, but they are back to full capacity; that’s the biggest issue.

Joey Jacobs

Yes, they’re back. Yes, absolutely.

Jeff Englander – Standard & Poor’s

Okay, and then just to clarify on Andreas’ question. In terms of getting the new units up to the corporate average occupancy, is that fairly linear or is that somewhat lumpy?

Joey Jacobs

I would do it – I’d divide it by four. That’s how I would model, a fourth each quarter.

Jeff Englander – Standard & Poor’s

Okay, great. And one last question since everybody has asked two last questions, I might as well get my second last question in.

Joey Jacobs

That’s okay.

Jeff Englander – Standard & Poor’s

In terms of the sale prices from what you’ve said about people looking for multiples, I get the sense that you’re still not seeing distress. Was that the correct assumption?

Joey Jacobs

I wouldn’t use the word distress. We’re still sellers that have good reasons to sell.

Jeff Englander – Standard & Poor’s

Right, but you are not seeing sellers that are feeling extreme pressure to sell that have been –?

Joey Jacobs

No, no, no, no, no, no, no.

Jeff Englander – Standard & Poor’s

Okay, great. Thanks very much.

Joey Jacobs

Good.

Operator

We’ll go to David Bachman with Longbow Research.

David Bachman – Longbow Research

All right. Thanks for taking my call and spending all the time. I know you got a company to go run. In terms of length of stay, I appreciate that that’s come down a bit because of the mixture between acute beds and residential beds but is there anything else going on there with, perhaps, just tighter utilization management from, on the payer’s side?

Joey Jacobs

There might be a little but we’ve had tough utilization review for years. That appeared when the length of stay went from 30 to 10, and then it’s been 10 for the commercial pay – I mean, for the acute patient since 1994. And so there might be a little but there’s nothing – if we thought it was significant, we would talk about it; but I don’t see anything significant there. Perhaps with the mix change.

David Bachman – Longbow Research

Okay, so it was mostly mix change. And then for unit management revenue and EAP for next year, I’ve been thinking about the run rate of the last couple of quarters. Is a ballpark number there?

Joey Jacobs

Yes.

David Bachman – Longbow Research

Okay, and then my final last question. Just in terms of the calendar of 4Q, anything to think year over year in terms of where holidays and things are falling this year?

Joey Jacobs

No, still got those bad gum holidays out there. I’m willing to do away with them.

David Bachman – Longbow Research

Again, your way of doing business. All right, that’s it. Thanks again for all your time and nice job in growing volumes.

Joey Jacobs

Thanks.

Operator

We’ll move on to our last question from Gary Lieberman with Stanford Group.

Gary Lieberman – Stanford Group

Thanks. Sorry, I had some technical problems before. I’m not sure if you answered it in the last question but in terms of length of stay, do you anticipate it as staying at the third quarter level or do you expect it grow a little bit from here?

Brent Turner

Gary, this is Brent. I think it’s very hard to predict because again, given that it’s predominantly moving based on the mix; and our absolute goal across this company is to grow volume, whether it’s RTC or acute. Our goal is – so right now, we’re 52%. There’s volume and same store was acute for the last quarter and 48% RTC; and that was up about 2% on the acute. If that maintains year over year for the fourth quarter, you’ll see that the ALOS go down a little bit begin. As long as it is predominantly mix- base, we’ll deal with it as it comes. It’s just the nature of which type of bed is being utilized more heavily.

Gary Lieberman – Stanford Group

And as Riveredge comes back online, how should that impact it?

Brent Turner

It’s the same. I don’t see – there are two things here, Gary. The third quarter is our most seasonal quarter. That wasn’t changed to the acute, and as River Edge coming on board, I don’t think it bothers the number. I think it would be the same.

Gary Lieberman – Stanford Group

And then any benefits from generic drugs in the quarter?

Brent Turner

Well, there are benefits. I don’t have the number, but there are benefits. I just don’t have that number.

Gary Lieberman – Stanford Group

But since it’s in the quarter and so you wouldn’t expect it to increase from here going out.

Brent Turner

No.

Gary Lieberman – Stanford Group

Okay, great. Thanks a lot.

Brent Turner

Thanks.

Operator

And with no other questions, I’d like to turn the call back to Mr. Jacobs for any additional or closing comments.

Joey Jacobs

Yes. We had a great third quarter. We’re very pleased of the 23,000 employees inside PSI and the clinicians that work with us at our facilities.

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Source: Psychiatric Solutions, Inc. Q3 2008 Earnings Call Transcript
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