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Executives

Mary Ann Arico – SVP, IR and Corporate Communications

Jay Grinney – President and CEO

John Workman – CFO

Mark Tarr – EVP, Operations

Analysts

Adam Feinstein – Barclays Capital

Gary Lieberman – Stanford Group

David MacDonald – SunTrust

Rob Hawkins – Stifel Nicolaus

Chris Rigg – Soleil Securities

Derrick Dagnan – Avondale Partners

Kemp Dolliver – Cowen & Company

Pito Chickering – Deutsche Bank

Miles Highsmith – Credit Suisse

John Ransom – Raymond James

HealthSouth Corporation (HLS) Q3 2008 Earnings Call Transcript November 5, 2008 9:30 AM ET

Operator

Good morning, everyone, and welcome to HealthSouth’s third quarter 2008 earnings conference call. At this time, I would like to inform all participants that your lines will be in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period. (Operator instructions) Today’s conference call is being recorded. Your participation implies consent to our recording this call. If you have any objections, you may disconnect at this time. I would now like to turn the conference over to Ms. Mary Ann Arico, Senior Vice President of Investor Relations and Corporate Communications. Please go ahead.

Mary Ann Arico

Thank you, Julian. Good morning, everyone. Thank you for joining us today for the HealthSouth third quarter 2008 earnings call. With me on the call, in Birmingham, today are Jay Grinney, President and Chief Executive Officer; John Workman, Chief Financial Officer; Mark Tarr, Executive Vice President of Operations; John Whittington, our General Counsel; Andy Price, Senior Vice President of Accounting; and, Ed Fay, Senior Vice President and Treasurer.

Before we begin, if you do not already have, a copy of the press release, financial statements, and the related 8-K filing with the SEC are available on our Web site at www.healthsouth.com. In addition to the required information, we have also provided a robust set of slides, which are available on our Web site. The slide deck is intended to give you a better understanding of the business dynamic, and answer many of the day to day questions on HealthSouth from this financial community. We will continue to refine these slides going forward.

Moving to slide one, the Safe Harbor, during the call, we will make forward-looking statements, which are subject to risks and uncertainties, many of which are beyond our control. Certain risks, uncertainties, and other factors that could cause actual results to differ materially from management’s projections, forecasts, estimates, and expectations are discussed in the company’s Form 10-K for the fiscal year ended December 31st, 2007, and the other quarterly SEC filings, including the Form 10-Q for this third quarter scheduled to filed today. We encourage you to read them.

You are cautioned not to place undue reliance on the estimates, projections, guides, and other forward-looking information presented. Statements made throughout the presentation are based on current estimates of future events and speak only as of today. The company does not undertake a duty to update or correct these forward-looking statements.

Our slide presentation and discussion on this call will include certain non-GAAP financial measures. For such measures, reconciliations that are most directly comparable GAAP measure is available at the end of the slide presentation or at the end of the related press release, both of which are available on our Web site, and as part of the Form 8-K filed last night with the SEC.

And with that, I will turn the call over to Jay.

Jay Grinney

Great. Thank you, Mary Ann. We are very pleased to report the results of another solid quarter. Same store discharges were up 8.1%, compared to the prior year, reflecting the continued benefits of our TeamWorks best practices initiative, which focused on sales and marketing.

Our pricing remains fairly consistent, which contributed to 6.5% increase in quarter-over-quarter net operating revenues. Adjusted consolidated EBITDA was essentially flat with prior year when you consider two factors. Third quarter 2007 benefited from an $8.6 million gain related to our investment in Source Medical, and the impact of three hurricanes in the quarter that disrupted the operations of some of our Texas and Louisiana hospitals. The increased revenue driven by higher audience was offset by our labor expenses, which I will address in a moment.

Hurricanes reduced adjusted consolidated EBITDA for the quarter by approximately $1 million due to costs associated with protecting our hospitals during the storm and sustaining them in the recovery phase, disrupted stays and the inability to discharge many patients resulting in a reduction of net operating revenues, and costs associated with higher than normal overtime hours.

On a side note, I want to take this opportunity to complement our employees for their efforts and sacrifices during these devastating storms. Not only did employees from these hospitals perform heroically, but employees from throughout Texas and Louisiana traveled to these hospitals to provide needed assistance in getting things back to normal. It was a real team effort. And I’m extremely proud of how these folks stepped up to meet these challenges.

Finally, our adjusted earnings per share on a fully diluted basis was $0.15 per share, compared to a loss of $0.07 per share for the third quarter of 2007, or an increase of $0.22 per share for quarter-over-quarter. As we have noted previously, our focus during the Medicare pricing rollback days has been on driving EPS growth through our operational and de-leveraging strategies. And we are pleased to see continued positive results from these efforts. Year-to-date, adjusted earnings per share are $0.50 per share, compared to a loss of $0.63 per share for the same period last year, which represents an increase of $1.13 per share.

With those highlights in mind, I want to spend a couple of minutes discussing what we’re doing to address our labor costs. As me mentioned on the second quarter call, our strong volume gains have presented with a high class challenge, the need to adjust our core staffing levels to reflect this higher demand, while simultaneously managing the contract labor and overtime required to serve these patients as we recruit, hire, train, and orient permanent employees.

While salaries, wages, and benefits increased as a percent of net operating revenues, in part because of higher costs for certain benefit plans, we saw a 2.4% improvement in our productivity as measured by employees per occupied bed or EPOB. So from an efficiency standpoint, our employees are responding to the additional volumes, and we are very pleased with the productivity gains we’ve realized.

Against this backdrop of improved productivity, our primary operational focus is on our labor costs, which on a per discharge basis year-over-year due to four factors, an average 3.7% merit increase given to employees on October 1st of last year; range adjustments in select markets; recruitment and orientation costs for new hires; and, the higher cost of benefit plans, some of which involve higher accruals for paid time off. Accordingly, we are reviewing our benefit programs to ensure they are competitive in today’s environment. We’ve already made some adjustments, like eliminating the automatic enrollment to our 401(k) plan and reducing the number of paid time off days for new hires. Beginning in 2009, we will make further refinements to our paid time off program, and also, we’ll share the increase in our medical benefits for the first time in four years. We are confident these actions, coupled with continued productivity improvements, will allow us to manage our labor costs effectively, while continuing to provide high quality patient care.

With that, I’m going to ask John Workman to provide a more thorough review of our third quarter results. I’ll then come back with some concluding remarks about four issues, how HealthSouth is positioned to weather these challenging economic times successfully, our revised guidance, the recent UBS settlement, and our November 10th investor conference in New York. John?

John Workman

Thank you, Jay. In addition to the press release and as Mary Ann mentioned, we have filed some supplemental slides on Form 8-K, which will be used as we discuss our results. I will reference the slide numbers in some of my comments.

Turning to the income statement and first looking at revenues, on slide four, in our inpatient hospitals, our inpatient revenues increased by 8.2% over last year’s quarter to $411.5 million. The current quarter included some revenues from the three acquisitions and consolidations completed namely, Vineland, Midland, and Arlington. Discharges increased 8.1% on a same store basis. We had a slight decrease in pricing for discharge to $15,539 per discharge, generally related to a slight drop in acuity. I will remind you that CMS pricing was the same in this quarter as it was a year ago.

Our length of stay was six-tenths a day shorter than the same quarter a year ago. But even with a short length of stay, we improved our occupancy percent to 65.6% from 62.4% in the third quarter of last year.

In looking forward, we want to remind you that the fourth quarter of 2007 and the first quarter of 2008 had a pricing benefit in them, which will make our comparables more challenging for the next two quarters. This was the result of the pricing rollback that was used to pay for the permanent compliant level being set at 60%.

Turning next to our outpatient facilities, our outpatient and other revenue declined 6.7% compared to the same quarter a year ago, primarily as a result of 15 fewer outpatient satellites. We continue to monitor underperforming satellites, and expect some additional closures before the end of 2008 and into 2009. I will remind you this is not a large proportion of our revenue base.

Turning next to operating expenses, in slide six in the supplemental deck, as Jay has mentioned, salaries and benefits continue to be challenging in the quarter. We did see an improvement in our employees per occupied bed, a productivity measure we have started including in this quarter and can be found on slide seven. This measure is also reflected on page 12 with the press release. It includes full time equivalents for contract labor, and looks at the number of FTEs we are using per occupied bed. This points out that the larger driver to higher costs is benefits and not productive time, including paid time off, in addition to normal merit increases and market adjustments.

As we mentioned to you at the beginning of 2008, we made some decisions to improve benefits, examples include the increased 401(k) match. And at that point in time, we did not pass along the healthcare increase to our employees. We also attempted to standardize certain paid time off and vacation plans, which were fragmented. Some of these efforts have provided unintended increases in expense. As Jay mentioned, we are taking corrective action in the area of benefits and non-productive time while still remaining competitive for the skills we need to operate our hospitals. The key take away here is not a productivity issue, which is harder to change and execute upon, but something we can change going forward. These steps also provide applicable changes to ensure the preservation of jobs to our 22,000 employees.

Turning next to the caption on the income statement of other hospital related expense, expressed as a percent of revenues, this ratio went up 0.3% compared to a year ago. We are seeing higher drug and supply costs as well as higher expenditures on utilities. Some of the increase in drug and supply costs is related to our high patient volume, but some of it is just a rate increase. We also saw increased internal expense related to pursuit of development opportunities, and higher repair and maintenance costs, some of which are related to our refresh programs.

Net debts were slightly higher than the same quarter a year ago as a percent of revenue, but we were then to a 1.5% to 1.8% run rate that we have previously mentioned. Overall, expenses related to hurricanes were approximately $1 million in the quarter.

General administrative costs were down slightly, but our comparable, as to the best (inaudible), were primarily completed by the third quarter of 2007. Stock compensation costs in the quarter was $2.5 million. As a reminder, our goal is to get to 4.75% of revenues, excluding the non-cash stock compensation costs as we end ’08 and start into ’09.

Depreciation and amortization was below last year, but it will increase as a result of three acquisitions, Vineland, Midland, and Arlington, that were completed in the third quarter. Government class action and related settlements included our mark-to-market non-cash impact for the 5 million shares and 8.2 million warrants with a 4140 strike price that we agreed to contribute as part of litigation settlements. We believe these shares and warrants will be distributed some time in 2009.

Professional fee generally relate to amounts being spent in pursuit of the derivative claims against UBS, Ernst & Young, and Richard Schrushy. As you know, we recently announced a preliminary settlement of the UBS litigation, which Jay will comment on later. I will remind you, the proceeds we expect to receive in the UBS settlement will be after legal fees to the derivative attorneys, and after those are agreed to, an after payment of 25% of the amount to the plaintiffs associated with shareholder litigation. We have been expensing our costs in pursuit of these claims, and has been reflected in our property and law statement.

Next, turning to items that are below operating expenses, interest expense is down due to lower debt levels and lower rates. I’m going to speak more about debt later. The mark-to-market charge on the interest rate swap was because LIBOR was lower at the end of the third quarter than it was at the end of the second quarter. As a reminder, our swap covers $1.121 billion of notional amount, and is at a 5.22% fixed rate, and is profiled on slide 15.

We have a $22.5 million benefit on the income tax line this quarter. You will notice, we increased the income tax receivable by approximately $20 million from the balance sheet at the end of the second quarter. I will talk more about this when I comment on the balance sheet.

Turning next to adjusted consolidated EBITDA, this can be found on page eight of the press release, and was $79.3 million for the quarter. As Jay mentioned, the third quarter of 2007 includes an $8.6 million gain from Source Medical that related to the sale of our stock in Source, and effectively eliminated the last ownership linkage with Source, which is a relationship entered into by the prior management team. If the Source gain is excluded, adjusted consolidated EBITDA is basically flat to last year.

Next, turning to net income earnings per share, which can be found on slide 11. In discussing net income and EPS in the quarter, we believe there are some adjustments that should be considered. These items are either non-cash or non-recurring when you’re looking at income – when you’re considering income from continuing operations. The adjustments to EPS are similar in nature to adjusted consolidated EBITDA, but not quite identical. The adjustments to EPS generally relate to obtainments on litigation, mark-to-market or fair value adjustments, to liabilities, and the removal of our income tax benefit. We have added an estimated state income tax expense to reflect a run rate for this element.

Considering these items, adjusted income from continuing operations is $14.7 million in the quarter, representing a $21.2 million improvement in income from the same quarter a year ago. Adjusted EPS is $0.15 per share, representing a 22% share improvement in EPS over the third quarter of 2007.

Next, turning to the balance sheet, available cash was $24.9 million at September 30th, 2008. There was an additional $30.3 million in restricted cash, which was paid into escrow at the last day of the quarter, and then used to retire tenant three-quarter bonds that were due on October 1st, 2008 in the same amount. Intangible assets increased in the quarter as a result of the acquisitions. Vineland did include, in addition to debt, of $11 million for a long term flood lease, which met the criteria for capitalization.

As I mentioned earlier, our income tax receivable on the balance sheet increased from the second quarter to $62.9 million at September 30th, 2008. Approximately $46 million of this receivable was received on October 1st, 2008, which was a refund for taxes paid plus interest related to our 2000 to 2003 tax years. These funds were generally used to reduce debt. The remaining receivable represents additional expected recoveries for amended federal and state income tax returns for years related to 2003 or before. We expect some portion of this remaining receivable by the end of the year. As a reminder, we have available $2.5 billion of tax NOLs or future deductions already reflected in the books. Thus, we do not expect to pay federal taxes for many years.

In looking at long term debt on slide 14, it was $1.877 billion at the end of the third quarter of 2008. Due to the tax refund received on October 1st, 2008 and the bonds that were paid off on October 1st, 2008, we have provided supplemental information as of the end of October that you can also see on slide 14. Through the end of October, debt has been reduced by $208 million, representing cash payments, cash repayments of $232 million and $24 million of capitalized lease obligations added during the year. I would remind you that $150 million of the year-to-date debt reduction was a result of our block trade transaction at the second quarter of 2008.

Our credit agreement contains covenants, namely a leverage covenant and an interest coverage covenant. We are in compliance with these ratios as of the end of the third quarter. The interest coverage ratio is based on interest expense, excluding amortization. For the third quarter, this was – this amount was $38.8 million. Annualizing this amount equates to $155.2 million. Further debt reductions made in the fourth quarter should reduce interest expense, but these maybe somewhat negated by an increase in rates. As we have disclosed previously, to violate our interest coverage covenant, we would need to miss it four consecutive quarters. It would be our intent to disclose a miss in the ratio even it was only for one quarter.

In addition, with the uncertainty in the economy, we have also included a liquidity schedule, which can be found on slide 13. Based on our available cash and undrawn revolver, we had $373.5 million of liquidity at the end of the quarter. This will be increased by $33.6 million as a result of the letter of credit requirement being removed with the final UBS settlement. We did draw another $40 million in our revolver in October for seasonal needs, which includes being able to make the bond interest payment due in December of 2008. The debt reduction mentioned earlier of $208 million included this additional draw.

Next, turning to cash flow, which can be found on slide 12, free cash flow adjusted for interest rate swap payments and dividends on preferred for the nine months ended September 30th, 2008 was $69.1 million. In the quarter and for the nine months ended, $32.8 million was spent on acquisitions. Capital expenditures, not of a maintenance nature, were $14.3 million on a year-to-date basis. These were primarily in the third quarter, and represented payments towards already announced new de-novos or costs related to reconfiguring the corporate office and some IT infrastructure. Maintenance capital expenditures of $25.2 million on a nine months basis include monies spent on our refreshed programs in our hospitals.

As Jay mentioned in his comments, we will be focused on de-leveraging the balance sheet in the future. As such, we will be looking to finance the real estate on new De-novos from inception.

Lastly, I just to make a comment relative to the fourth quarter. Since we confirmed adjusted consolidated EBIT guidance of $330 million to $335 million, which has moved to the upper end of the range at the end of the second quarter 2008, and since we reported $254.1 million on a year-to-date basis, this means the fourth quarter amount of – is a range of $75.9 million to $80.9 million. This is less than reported in the fourth quarter of 2007. A few items to mention though, last year had the benefit of a pricing increase, which we profiled before is in the range of $7 million to $8 million worth of EBITDA impact. Secondly, as Jay has mentioned, we gave merit increases of – averaging 3% to non-executives effective October 1st, 2008. And lastly, the changes to benefits including PPO will have the majority of the savings beginning 1/109.

With that, I’ll turn it over back to Jay.

Jay Grinney

Great. Thank you, John. Before we take questions, I’d like to touch on those issues I mentioned previously.

First, with respect to our ability to grow and compete in these challenging economic times, I offer the following. First, we do not anticipate a reduction in the demand for our services. While some healthcare spending is discretionary, only a small portion of the patients we treat have non-discretionary illnesses. The majority of the patients we serve have medical conditions that require inpatient rehabilitative care. People don’t choose to have a stroke. They don’t choose to break their hip, and they don’t choose to have debilitating neurological conditions. These conditions require medical intervention and follow-up care in a rehabilitation hospital. And we are pleased to be able to meet this demand. Additionally, we believe our TeamWorks initiative will allow us to continue to take market share and drive solid organic growth for the foreseeable future.

Second, Medicare is our largest payer, which essentially eliminates any payment risks. And because virtually all of our services are covered by Medicare, our exposure to a spike in bad debts is negligible unlike other healthcare providers who have to collect a lot of deductibles and co-pays.

Third, most of our competitors are units within acute care hospitals. And many of these hospitals have relied on investment income to help fund operations. As their investment income declines, some of these hospitals may choose to close or sell rehab units, which in turn may allow us to consolidate these markets.

Fourth, while we are leveraged, our debt does not have any near term maturity, and we have excellent liquidity. And you will note when you read the 10-Q, our revolver matures in 2012, our credit agreement in 2013, and our bonds don’t come due until 2014 and 2016.

Fifth, our cash flow remains strong. And we have a great deal of flexibility with respect to how we invest it. Our annual CapEx spending is discretionary. We anticipate needing approximately $25 million per year to maintain our hospitals. CapEx above the $25 million per year allocated to our refreshed program can be curtailed, or if necessary, suspended going forward. And we will be very disciplined with respect to development projects. To preserve cash for debt repayment, we will not pursue any new De-novos unless we have a developer lined up to finance the project from day one. Furthermore, targeted acquisitions will be carefully evaluated against our de-leveraging priority.

For all of these reasons, I believe HealthSouth is very well positioned to continue to grow profitably and to expand our market share. Our confidence in this is reflected in the revisions to our guidance for 2008. Our TeamWorks initiative continues to generate strong same store discharge growth. Year-to-date, we are averaging a 5.8% increase in discharge, and anticipate the fourth quarter will be in this range as well. You’ll recall, we began the TeamWorks rollout in Q4 of last year. So we would expect the fourth quarter volume increases to be less robust than what we saw in the third quarter of this year, but still significantly ahead of initial projections. The lower interest expense year-to-date due to our de-leveraging efforts will yield an improvement in our earnings per share, which we have reflected in our revised EPS guidance.

With respect to the recently announced UBS settlement, we are very pleased to have this matter behind us. By getting this resolved before the January trial date, we are able to reduce professional fees while focusing on the binding arbitration with E&Y It’s worth noting that binding arbitration has no appeals process. Once the decision has been made, E&Y will have 30 days in which to settle the claim.

Finally, we are very pleased to be hosting an analyst and shareholder conference next Monday, November 10th, at the Grand Hyatt in New York beginning at 8:30 a.m. Eastern Standard Time. This conference also will be webcast so anyone wishing to listen may do so. I will provide an overview of the company, an assessment of the competitive and regulatory landscape, and outline the compelling value proposition we believe HealthSouth provides investors. Mark Tarr will present a refresher on the basics of our business, including a more thorough explanation of TeamWorks. And finally, John Workman will walk everyone through our balance sheet, discuss our swap, explain the value of our significant NOLs, highlight our strong cash flows, and the success of our de-leveraging strategy. We believe this conference will provide investors with an in depth understanding of HealthSouth and why this management remains confident in the future of this great company. We hope you will be able to join us on November 10th.

Mary Ann Arico

Julian, will you now give instructions for the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) We ask that you please limit yourself to one question and one follow up question. Your first question is from the line Adam Feinstein with Barclays Capital.

Adam Feinstein – Barclays Capital

Okay. Thank you. Good morning, everyone.

Jay Grinney

Good morning, Adam.

Adam Feinstein – Barclays Capital

A very strong quarter here. I just wanted to talk about the volumes. I mean clearly, you’re running well ahead of what you had anticipated earlier in the year. I’m just curious in terms of your thoughts in terms of what’s leading to the acceleration. Is it market share gains? Have you seen a big acceleration? Is this in overall utilization for the industry? Just additional thoughts would be great, and just – and I’m just curious, I know you’ll probably cue later today, but if you can talk about the mix between the different types of patients and maybe just highlight where you saw the highest growth. That would be great. Thank you.

Jay Grinney

With respect to what’s driving the volume growth. We really do attribute that to our focus on the standardized sales and marketing initiative TeamWorks. We, as you know, in the third quarter, had the TeamWorks platform rolled out across all of the hospitals with the exception of the recently acquired Vineland Hospital, Vineland, New Jersey hospital. So it’s really just committing ourselves to going out, looking at a wider range of potential referral sources for patients who require inpatient rehabilitative care.

In terms of taking market share, we do believe that that is exactly what’s happening. As you know, we report from time to time on how our volumes compare to those participating in the UDS data system. And for the second quarter this year, if you recall, our discharges were up 5.6%. The UDS sites participating in that data source was actually down 2.4%. So there’s clearly market share shifts that are occurring, and we are very pleased with the efforts of our TeamWorks. And now, are actually putting out a sustainability module to make sure that the lessons learned, the standardized approaches, and so on continue into the future.

I’ll ask Mark Tarr to talk about our program mix.

Mark Tarr

Hey, good morning, Adam.

Adam Feinstein – Barclays Capital

Good morning.

Mark Tarr

Our program mix, the single largest program mix category that we have is our stroke programs. The strongest growth that we saw for the quarter was in neurological non-traumatic brain injury, and then other ortho. And another positive sign is we continue to grow our neuro programs. We continue to see a decrease in the joint replacement. So our efforts to better grow our neuro program, our staff for neuro programs, is stringing recent benefits.

Adam Feinstein – Barclays Capital

Okay. Great. And then I just want a quick follow up, if I may, so was – just back to the volumes and the revenue growth here. So I’m just curious, the revenue per discharge, you have the Medicare impact. But this carries in terms of what you’re seeing on the managed care side and whether the decline in the length of stay suggests a change in your acuity in another quarter. Thank you.

Jay Grinney

Yes. In terms of the pricing, we’ve said pretty consistently throughout the year that we envision a 3% to 5% increase in our managed care portfolio. We don’t have all of the contracts that are up for renewal completed at this point. We have a substantial number of them completed. And we do believe that that 3% to 5% on the managed care portfolio is still a very good number.

And I think that the length of stay, the slight decline there, is really, in our opinion, it’s not a huge factor. It’s not something that caught us off guard by any stretch of the imagination. And as you know, our length of stay will vary slightly from quarter to quarter. But it’s still staying in that range of about 15 days per – 15 days per stay. And our managed book of business is also actually hanging in there as well. So we’re really not seeing a whole lot of change. In fact, if you look at our managed care portfolio, our acuity within that segment is actually going up, because as you know, the managed care admissions do require a pre-authorization, pre-certification. So those patients who do make it into our hospitals that are managed care, tend to be quite sick and really do need the expertise and the specialized services that we can provide.

Adam Feinstein – Barclays Capital

Okay. Thank you very much.

Jay Grinney

You’re welcome.

Operator

Our next question is from the line Gary Lieberman with the Stanford Group.

Gary Lieberman – Stanford Group

Thanks. Good morning.

Jay Grinney

Good morning, Gary.

Gary Lieberman – Stanford Group

I was hoping you could talk a little bit more about the productivity gains on the labor side. The 2.4% number was very helpful. Can you talk about what you think the opportunity there is? Can you improve the productivity on – another 2.4%, 5%, 10%, and kind of what the timeframe is for those improvements?

Jay Grinney

Well, we always believe that there are opportunities to improve the mix of employees that we have in our hospitals, and to improve the overall productivity measure. We don’t want to focus exclusively on that number because quite frankly, there maybe a time, as we go forward – and in fact, I envisioned this, that we will see a change in our skill mix where we may have fewer of the RNs and more LPNs and nurse assistants that may actually cause our EPOB number to go up. But that should then see a corresponding decline in our labor costs.

So I don’t want to go out and say that there’s a specific target because I think when it comes to productivity, especially when we’re talking about increased volumes, that’s going to be a process that we are always going to be focusing on. We’re always going to be trying to improve that. We know that there are improvement opportunities out there. But I would hate for us to focus on just one metric when it comes to labor cost management. We did think, however, that it was important to put that out there because clearly, the increase in our overall labor cost, which is a function of not only the amount that we’re paying, but the number of employees. And you saw that there was an increase due to the higher volumes. But the labor cost is really where we’re focusing on right now. And most of that labor cost focus is on our benefit plans and the changes that John and I talked about.

John Workman

And I just might elaborate on that, on the PTO, the paid time off. We did have quite a few of our hospitals already on a paid time off program. But we had at least six different varieties and versions. And what we tried to do last – at the beginning of the year was consolidate this. We did that and we actually increased the PTO days, and thinking that was the competitive. We have a lot more analysis, and we dug into the competition. And what we’ll actually be doing is actually changing the number of paid time off days, which will be a direct benefit, just to clarify that issue.

Gary Lieberman – Stanford Group

I just need a follow up on this topic a little bit further. In terms of your – it sounds like you’re taking market share, which is great. I guess as you do that, you do need to – you do need to staff up. So will the higher costs associated with the training and the orientation continue to sort of put pressure on this line item for some time? Or do you think the productivity gains can offset that, and then maybe some?

Jay Grinney

I think that we are seeing that leveling off. And in fact, as we mentioned on the second quarter call, at that time, we were highlighting for everyone, “Hey, we’ve got a lot of new patients coming in, but there is also a lot of costs that we had to load up.” We warned everyone, “Don’t expect to see improvements in the third quarter. Do expect to see it in the fourth quarter. Definitely expect to see it in 2009.” And we are more confident of that today than we were then in part because we have seen, as we exited the third quarter in September, the kind of improved flow through. In other words, the amount of new net revenue that flow through the EBITDA line, we saw that start to improve.

So we really do believe that this is a high class problem. I’d much rather be talking with you guys about the fact that we’ve got such great volumes and we’re adjusting our staffing to get that operating leverage, which we are very confident we will be seeing in the fourth quarter and definitely into 2009. Because as we said, a lot of that cost is benefit related, and we’ve already taken the steps. We’ve already started the communication. We’ve already made the decisions. And we’re very confident that we’re getting on top of this issue.

Gary Lieberman – Stanford Group

Okay. Great. Thanks a lot.

Jay Grinney

You bet.

Operator

Your next question is from the line of David MacDonald with SunTrust.

David MacDonald – SunTrust

Hi. Good morning, guys.

Jay Grinney

Good morning.

David MacDonald – SunTrust

Hey, Jay, just to follow up on that a little bit. I assume on the labor cost side you guys are probably seeing different experiences in different regions. Is there a chance we could see kind of best practices TeamWorks type initiative on the labor cost side to kind of help out on that front? Is that something that you guys have looked at?

Jay Grinney

Were you at our planning session, David? That is precisely one of the two areas that we will be focusing on in 2009. The other is a more clinical orientation, looking for best practices from a clinical standpoint. But yes, there’s definitely going to be that. Now, I will tell you that we’ve the decision, given the economic uncertainty, that we are not going to go out and there won’t be an investment of outside consulting costs for the labor initiative that we saw with the sales and marketing. We believe we have the expertise internally to manage that successfully. And we’re beginning that process today. But we want to be very mindful as we go into 2009 we’re not getting any price increase. We need to make sure that our G&A costs are well managed. And so, we will be addressing this under the TeamWorks umbrella. But we’ll be resourcing that with the expertise that we have internally. And we believe in that area, we really do have the opportunity to manage that with existing resources.

John Workman

It’s John. I’ll just add a follow up to that. There are certain things that we’re doing. We’ve already started doing them foundationally to set that platform in place. But I also don’t want to – want to walk away thinking that’s going to change all of sudden 1/1/09. I mean, we are seeing to put in some new time plot keeping devices in our hospitals. We are in the process of doing that, rolling that out, and again, standardizing the practices that we have. So I don’t want to give you the belief that that’s going to be effective the first of the year. But that is clearly a major issue for 2009.

David MacDonald – SunTrust

Okay. And then just one follow up, can you guys give us an update on the digital hospital. I’ve seen the Trinity’s obviously interested, and looks like some type of deal. Can you give us some sense in terms of timing of CON and what that means in terms of dollars in the door just given your ownership percentage that you still have left there?

Jay Grinney

We believe, from a timing standpoint that this will probably take about a year. There is a risk that it might be longer. I think the factors in Trinity’s favor include the fact that the community at large, and then the local government officials here, are very, very supportive of having a hospital on to a – I think that that’s, unquestionably, a major positive force.

Unfortunately, in the state of Alabama, the certificate of need regulations due allow other providers to object. And we fully expect that there will be objections from some of the other acute care hospitals because as you know, having been here, the 280 corridor leads right into one of the most high growth areas in this surrounding area. So there will be a challenge. We think it might take a year. It might take a little bit longer.

As you know, we’ve maintained a 40% residual interest in the digital. I don’t believe that the Daniel Corporation has revealed the purchase price. So I think it would be inappropriate for us to comment on what we might get from that until they have disclosed that since it really is their transaction with Trinity.

David MacDonald – SunTrust

Okay. Thank you.

Jay Grinney

Yes.

Operator

Your next question is from the line of Rob Hawkins with Stifel Nicolaus.

Jay Grinney

Good morning, Rob.

Rob Hawkins – Stifel Nicolaus

Good morning. How are you all? Just one thing I’m a little puzzled about on the same store 8.1% number. As I remember, last year, you had a kind of a smattering of the hospitals that were starting to have to get ready for the 65% rule around August and September. Did some of that make the comparable look a little bit better? And is there maybe kind of a way to dig behind the 8.1% in terms of the organic growth number there?

Jay Grinney

I think that that pretty – a pretty good number. We did look at those hospitals that had geared up. And we tried to do a comparison. And there really wasn’t much of an impact there at all.

Mark Tarr

Hey, Rob. This is Mark. We had, I think, nine hospitals that were ramping up to the next high end threshold. And we did go back and took a look to see what kind of an impact they had on this growth, and it was negligible.

Rob Hawkins – Stifel Nicolaus

Okay.

Jay Grinney

I think the thing to recall is that, typically, our third quarter is one of the weakest quarters that we have in the year. And this year, we saw that the discharges from the second quarter going into the third quarter really hung in there pretty nicely. And that’s what I think really accounts for the difference, is that we didn’t allow the summer slump, if you will, to occur. I mean, we really focused on maintaining the effort to bring patients in who need rehabilitative care. And by going outside of the traditional “only go into the acute care hospitals” and looking at other sources, I think helps contribute to – to our ability to have the results that we did.

Rob Hawkins – Stifel Nicolaus

Okay. Great. Can you help me a little bit with the kind of the labor benefits philosophy kind of versus productivity in terms of where you’re with it next year? I understand you might be kind of trimming some of the PTO, and maybe putting a little more of the benefits increases onto some of the employees. But in this market – I spend a lot of time around acute care hospitals. So I apologize, not as much around rehab. I know outpatient is still kind of a difficult environment. But I wasn’t – I haven’t really been hearing too much pressure around rehab hospitals about attracting therapists as I have heard in the past. So can you help me understand a little bit where you guys are going with this – in terms of how it might impact the margins going forward?

Jay Grinney

Sure. I think that the – the overall philosophy is that we want to maintain a competitive compensation and benefit structure that reflects the market realities of the markets where we have the privilege of serving. And so, we’ve actually stepped up our efforts to obtain and analyze that data. And the banks, frankly, the capabilities within the company, they analyze that information. So we really are focusing on being competitive. Within that context, as we looked at the compensation arrangements, we’ve made some headway in bringing people to market levels. But we did that with range adjustments. We did a 3.7% merit increase last year. And we think that that really closed the gap, if you will. And we’ve seen that in our ability to maintain a pretty good level of our folks, therapists. We still have a little work to do on the nursing side. But we are focusing on that. And I think we’re seeing some good results.

On the benefits side, frankly, as John said, when we brought these six plans together, and then we let that settle out. And now, we are comparing ourselves with other – with other competitors, our plan was very rich. And so, we believe that by trimming that, some of the non-cash aspects of our compensation and benefit plan, we’re able to put more cash in our employees’ pockets, but at the same time, managed our enterprise in a responsible way.

And the other comment I would make is you look around some of these markets, and we’re starting to see acute care hospitals have to layoff employees. UPMC in the Pittsburg market announced that they’re going to layoff 500 employees. Why, because their investment income is down. Texas Health Resources in Dallas, a huge player in the VFW market, laying off employees. The Medical University of South Carolina, even in the UAB systems here in our market, is announcing plans and measures that they have to take to tighten their belts. So we think we’re very much inline. We want to be competitive. And we believe that the structure that we have in place will allow us to do.

And I’ll just – the last comment is, although we made a 3.7% increase – merit increase last year, our average that we just put in for this year, starting October 1, is actually 3%.

John Workman

Rob, let me add one thing. I mean, you’ve been following the company for a long time. And I’ll remind everybody that only since about a year ago did we get to start to focus on the operations and one business. And clearly, our first focus was to focus on volumes. And I think you’ve seen the outcome of that. As Jay said, we didn’t have any infrastructure that we inherited. We had to create that back in the ’05, ’06 timeframe. And then get to one business, and then start to look at that business. We focused on lines first. We’re now looking in getting better information, as Jay mentioned, to help us look at the next biggest element, which is salaries and benefits on our P&L. And that’s the approach that we’ve been taking.

Jay Grinney

And what we told our employees is we want to focus on preserving jobs. We don’t want to be like those hospital systems that I just mentioned that are having to lay people off. We want to preserve jobs. We are going to have to tighten our belt. We’re in a tough economic time, and we all understand that. But if we can focus on preserving jobs, focus on putting dollars in our employees’ pockets, making changes on the benefits side, we think that’s the right combination and the right formula.

Rob Hawkins – Stifel Nicolaus

Thanks. I’ll jump in the queue. But can you guys maybe specifically capture it into a range? Are we talking 10 basis points improvements, or hundreds? Or are we talking about one to two quarters to see an impact, or four to six?

Jay Grinney

Well, what we’ll – first of all, we’ll see the impact starting in 2009. And I think, when we talk about our 2009 guidance, clearly, you’ll get a lot better picture on what we think we’ll be able to do in 2009. But I will tell you that based on the preliminary budget numbers that we’ve seen, we’re pretty confident that the steps that we have outlined to you in general terms will yield some very positive results.

Rob Hawkins – Stifel Nicolaus

Thank you.

Operator

Your next question is from the line of A.J. Rice with Soleil Securities.

Chris Rigg – Soleil Securities

Good morning. It’s actually Chris Rigg filling in for A.J.

Jay Grinney

Hello, Chris.

Chris Rigg – Soleil Securities

If I heard you guys correctly, it sounds like you’re going to significantly rate – reign in the De-novos or stop them completely over the near term, and that the acquisitions you’re looking at are going to be able to tuck in nature. And that’s not necessarily a bad thing. I guess what I’m wondering is if you could just provide us a little bit more color as to whether – sort of the reign in on the De-novos side is a function of – that’s just not a great use of your capital or whether the JV partners that you had been pursuing are – they don’t view that as necessary to do a partnership anymore given the changes to the 75% rule.

Jay Grinney

It’s definitely not the latter. Virtually, all of the De-novos, in fact, I can’t think of a single De-novo that we’ve announced that was a joint venture. All of the De-novos were wholly owned hospitals, either in existing markets like Mesa, Arizona or new markets like Loudoun County, Virginia. Now the real – the real reason for that, very candidly, is the fact that these are tough times. The credit markets are tough. I don’t have to tell anybody on this call the challenges that we face. We believe that it is prudent for us to preserve our cash and to use that free cash flow to focus on our de-leveraging priority. Acquisitions that come up, we certainly are going to look at. Any consolidation that might present itself will always be a very, very attractive use of our capital. But those acquisitions are not huge dollar amounts.

The other thing that we’re looking at and we’ve talked about this previously is the ability to add this to our existing portfolio. Now that’s really fueling the organic growth, but the returns that we can get on a 10-bed addition or a five-bed are far, far superior to investing in a De-novo and then waiting – the two years for it to be built, waiting then for six months for it to ramp up. We think it’s the right thing to do long term. There’s no question about that. But in today’s really difficult credit markets and uncertain economic future, we prefer to manage in a more conservative manner, which I think, most everybody on the call, will acknowledge as the way we tried to manage this company all along. And some of the times when we’ve taken conservative action, people kind of second guessed and questioned, and wonder why we’re doing it. But they’ve always turned out to be, in retrospect, the right thing to do.

So we think this is the smart course given where we are today. And it’s preserving the cash; paying down debt; looking for bed additions, and we’re definitely managing that process; and then as acquisitions present themselves, particularly consolidations where we can really consolidate an existing market. We think that’s the best use of our cash flow.

John Workman

And to add on to that point, Chris, I mean, the – we’ve kind of looked at it is when do we get cash back for the cash that goes out. And as Jay mentioned, if we were to do a De-novo, we spend cash now and we don’t get the cash return for a few years out. Clearly, all the other alternatives that he discussed, we’re starting to see cash right away after the money is spent. But we have not given up on De-novos. I don’t want to imply that either. What we’re looking to do is to find developers. And there are still developers who are interested in doing that, who would finance it from day one on a real estate side. And when you do that, and you look at – yes, you’re making a lease payment, but the cash on cash return is still pretty significant if you financed the real estate. So that’s what we’re focused on.

Jay Grinney

It’s a good question. And I’m glad you raised it because it is – it is a shift that we have made. It’s a subtle shift. But it’s also a shift reflective of the current economic realities.

Chris Rigg – Soleil Securities

Okay. And then, I guess a follow on to that. And I clearly appreciate where you guys are today and where so many other companies are today with regards to the acquisitions. But as we were thinking about the inpatient rehab market and other areas, I suppose, if you continue them, I mean you guys, you’ve said in the past that you’re – your goal is to look elsewhere outside of the inpatient business. I mean, are the opportunities today as good or better outside of inpatient rehab? Or I guess I’m just trying to get a sense of this – if there are acquisitions out there, are there better opportunities outside of inpatient rehab today than there were maybe a year ago?

Jay Grinney

Well, I don’t know that there are. I mean, clearly, from a fundamental business perspective, there are different segments that are doing better. But I think that in today’s market, how are you going to finance them. We’re not going to lever up. That’s for darn sure. If anything, what we’ve said is we want to get our balance sheet at a point, and we think that that’s going to be in the 2010, 2011 timeframe, where we get our leverage below four and a half times. At that point, then we feel we have a balance sheet that will allow us to go out and pursue acquisitions.

But today, I think, and I think the management team here believes, that the most prudent course of action is focus on our core business, grow our market share, focus on de-leveraging, strengthen the balance sheet, and use that free cash flow to make sure that we are a very strong company as the credit markets start to improve, as the overall markets start to improve. And it gives us then a lot more flexibility at that inflection point.

Chris Rigg – Soleil Securities

Okay. Thanks a lot.

Jay Grinney

You bet.

Operator

Your next question is from the line of Derrick Dagnan with Avondale Partners.

Jay Grinney

Good morning, Derrick.

John Workman

Good morning, Derrick.

Derrick Dagnan – Avondale Partners

Hey. Good morning. I wanted to ask you, looking at some of these market consolidations, acquisitions you completed over the last year. I guess, six months after the acquisitions have – has the market perform the way you wanted to or thought it would? And has that impacted at all some of the same store volume statistics?

Jay Grinney

Clearly, the consolidations have been Grand slam homeruns. There is no question that they have been excellent transactions. And we have been very, very pleased with the results. Similarly, the acquisition of the hospital in Vineland has been a terrific acquisition, in part because we have a great hospital, great employees, great management team, great physicians. And that too has been a very impressive transaction for us.

So yes, there are some of the – the growth in that 8.1% that’s reflective of the discharges coming off of Midland and Arlington. But again, that’s just – it’s really looking at an existing market, and bringing that market into more focus and allowing us to take more market share.

Derrick Dagnan – Avondale Partners

Okay. I’ll just follow up on labor side. Do you have any (inaudible) evidence on – that this recent economic weakness may have caused nurses or therapists to come back to the workforce? And could that have any positive impact on the absolute wage rate that you may – maybe looking to pay in the future?

Jay Grinney

Yes. We’re seeing that not so much in the therapist side, more on the nursing side. Our therapists tend to be younger. And the nursing staff is a little more experienced. And so we are seeing the ability to attract nurses who are interested in coming back into the marketplace. I think that’s pretty much what we’ve seen in just about any economic downturn in the past, and we’re seeing it again.

By the way, Derrick, Mark just gave me a note. There were about 100 incremental discharges in Q3 from the consolidations in Arlington and Midland.

Derrick Dagnan – Avondale Partners

Okay. That’s helpful. Thank you so much.

Operator

Your next question is from the line of Kemp Dolliver with Cowen & Company.

Jay Grinney

Good morning, Kemp.

Kemp Dolliver – Cowen & Company

Good morning. The question relates, I guess, to your high class volume growth problem. Given the changes in the regulatory environment and also the changes in your prototype hospital, what do you see is your – what’s a reasonable occupancy ceiling to think about? Year-over-year in the third quarter, you’re up about 300 basis points, which is a nice move. And I’m just trying to gear what’s – what are the limits on the sustainability of the volume growth?

Jay Grinney

Well, first of all, we are always looking at adding to that bed capacity. And as I mentioned, that is – that has been a phenomenal use of our capital, to be able to add five or ten beds is always going to be a desirable way of adding new revenues and new earnings. If you keep in mind the overall level – occupancy level that we sort of target towards is about 85%. When you get to 85%, in a typical HealthSouth hospital that has a majority of our rooms are going to be semi private with some number of private, that’s going to be about maximum. And that’s when we start looking to add this. If it’s a certificate of needs state, we have to go through a few more hoops. If it’s a certificate of needs state, we can just make the decision and we have the capacity.

So I guess, one way of looking at that is just say, “Okay. If we added 300 basis points each quarter. When are we going to get 85%?” But you also have to realize that we’re going to continue to add this. And so, we want to stay ahead of that curve. And we think we’ve been able to do that pretty successfully.

Kemp Dolliver – Cowen & Company

Okay. And just to pursue this a little more, but at a different angle, you have a variety of different markets where – there are markets where you’re the only player in town. And then there are markets where you’re part of a larger MSA. And have you seen any difference in the effectiveness of, say – of the TeamWorks initiative by type of market?

Jay Grinney

Not really. We’ve been very pleased in all of our markets with the TeamWorks initiative. Mark, you want to–

Mark Tarr

Yes. I think one thing – the way I’ve seen the benefits in TeamWorks side is pursuing what we call the secondary markets, and not being so dependent upon a small number of referral sources within our main market place, but being able to diversify out and cash in referrals and admissions from a secondary market.

Jay Grinney

And that probably has more of an impact in those smaller markets than the larger ones. But even in the larger markets, it’s going out – beyond the traditional referral sources has been a real positive.

Kemp Dolliver – Cowen & Company

That’s very helpful. Thank you.

Jay Grinney

You bet. Thank you.

Operator

Your next question is from the line of Pito Chickering with Deutsche Bank.

Jay Grinney

Hello, Pito.

Pito Chickering – Deutsche Bank

Hi. Good morning, guys. Most have been answered at this point, but a few quick questions on TeamWorks. Specifically, looking at, I guess, your class of facilities in the first quarter that had TeamWorks installed. How much of the growth you’ve changed, from first quarter to third quarter, have you seen it slow down at all? Or is it still continuing to go pretty strong?

Jay Grinney

We’ve seen nice, continued, sustained growth throughout the entire year on those hospitals that went to the installation starting back in the Q4 of last year. And then, each – we had three successive quarters this year where we had installs, and they’ve all continued to sustain growth.

Pito Chickering – Deutsche Bank

Okay. Great. And then looking at the pair mix or the pre big jump on the other third party payers in the third quarter, is that due to the TeamWorks or sales process? Or is that just a seasonal change that (inaudible) the third quarter?

Jay Grinney

No. I think that that’s in part seasonal. But I do believe that the focus that we’ve made has also allowed us to go after those commercial patients that’s in that line item, those small number of patients that still have traditional insurance. And we’re broadening the focus. And it’s really part of the growing effort that we’ve had to look beyond the – the tried and true, and go out and pursue new avenues. And so that has opened us up to being able to serve patients from a broader range than just primarily Medicare.

Pito Chickering – Deutsche Bank

All right. And the last question here, which you may have already answered, but in thinking about your TeamWorks, I guess, in the next four or five quarters, is there any sort of feeling for the number of facilities that you made space capacity constraints from CON states of these nightly facilities?

Jay Grinney

We looked at that – we look at that every other week to keep maintaining the focus on our occupancy. And there maybe one or two where we’re kind of waiting on the CON process, but we’re far enough ahead of the curve that – that’s really not a big issue. And in fact, as you may know, in some states, Florida is an example, if you hit a certain occupancy for 12 consecutive months. And I think it’s 90%.

John Workman

Is that right, or 85% to 90%?

Jay Grinney

85%, 90%, you’re able to expedite the CON process to bring beds on very quickly, the 10% or 10 beds, whichever is greater. So what we’re doing is we’re monitoring that – those hospitals, for example, that might be in Florida running into that kind of capacity constraint. We’re going ahead and we’re taking the risk that we’re going to see that level be maintained. So we’re geared up, ready to go as soon as we’re able to move because of the expedited process, boom. We’re ready to do it, and we’ll move very quickly. So it’s not a big constraint. It’s a much – I mean there is some timeframe because if you have to do some construction, it could be six months or nine months before you get the bed addition completed.

John Workman

Yes. It’s going to be – you punch at a wall, you have to add bricks and some water. There are going to be other times when we can just reassign rooms that has been maybe moved into a pain clinic, or maybe there are some administrative capacity, and we bring those back on line of beds.

Operator

Your next question comes from Miles Highsmith with Credit Suisse.

Miles Highsmith – Credit Suisse

Hey. Good morning, guys.

Jay Grinney

Good morning, Miles.

Miles Highsmith – Credit Suisse

Just a couple of questions on – is the released potential future derivative tax proceeds, et cetera, can you just remind us, are there any requirements to repay bank debt with those proceeds before you can look to buy bonds or do other things with that? And I’m not talking the restricted pay covenant and the credit agreements, just a general repay covenant. And then one follow up.

Jay Grinney

Yes. The answer to your question, the money we receive for federal tax refunds relate to, I believe, it’s ’03 or before, need to be used to reduce the term loan. But it’s only the taxes, Miles. So when you think of a refund, you get taxes and interest. So the interest is available for other purposes. There is no such restriction on the derivative proceeds. There is an excess cash flow sweep that we have to be cognizant of, but there is no specific requirement for those proceeds to be used to reduce the term loan.

Miles Highsmith – Credit Suisse

Great. That’s helpful. And then, I’m just curious of the process, I missed it. But have you – did you give us your company wide compliance rate with respect to the 75% rule for the quarter?

Jay Grinney

No, we didn’t. But that is right at 62%, which is right in the range of what we have said we’re comfortable with. We don’t want to get it all the way right smack down at 60%. We wanted to have a little cushion because as we said before, the process of reviewing the compliance level is not a pure science. There’s a lot of discretion involved on the part of the fiscal intermediary, a lot of subjective elements that come in. And so we don’t want it to get all the way down to 60%, and be subject to an interpretation by a position that we then have to appeal. And during that appeal process, the hospital is being paid an acute care rate.

So we feel very good at that 62%. And I think you’ll find that that’s been pretty consistent at where we’ve been managing all through the last three quarters.

Miles Highsmith – Credit Suisse

Great. Thanks a lot.

Jay Grinney

You bet.

Operator

And your next question is from the line of John Ransom with Raymond James.

John Ransom – Raymond James

Hey.

Jay Grinney

Good morning, John.

John Ransom – Raymond James

Good morning. John, I’ll just you to defer this if you’re going to do this Monday. But are you going to update the company’s 382 calculation on your NOL?

John Workman

I’m not sure we’ll be happy to do that. I mean, at this point in time, we don’t have exposure for that as I remind everybody that we did the block trade transaction, and there’s something called a small issuance exception that was available to us. But Kemp was under that. And we do have that validated every year. And we’re not going to risk – we’ll remind everybody that March of ’09, the convertible purchased stock, which was a significant change in ownership drops off because of we’ve been there for three years, which will – can give us further relief from the 50%.

John Ransom – Raymond James

Okay. Great. And my other – just looking at your EBITDA, there was an unexpected, at least in our model, drop off minority interest. Is that a sustainable event? Or was just something that happened with those particular assets this quarter that might bounce back?

John Workman

I mean, I don’t have a specific answer to that other than if you look at the – those are with joint venture partners, which means they probably did a little worse, I’m not sure, than some of our non-joint venture partners. And that can vary. Some quarters, we see those a little bit stronger. But those typically are tied to acute care hospitals. And you’re probably, like everybody else, seeing some – well I would say, maybe softening in acute care hospital discharges. So it’s not illogical that those two might be linked a little bit.

John Ransom – Raymond James

And finally, I do agree with the – that the wheels have certainly turned with the knot for profits in terms of the market conditions. Is your scope of opportunity there going to change materially in terms of accelerated shutdowns? Or maybe people approaching you to be saying to them – in certain markets where they might be looking to monetize an underperforming rehab unit? Or is it too early to see that?

Jay Grinney

John, I think it maybe too early to see that. But we certainly are putting our resources into market-by-market assessment, gathering as much information as we can, reaching out where we think it’s appropriate. Because clearly, the – you have to have a willing seller and a willing buyer. And we’re certainly a willing buyer. But we’ve got to make sure that there are – that the (inaudible) profit is willing to see the benefit. We think that that’s going to happen. And as I’ve mentioned, we think that that’s something that may present an opportunity for us. But I think you’re right. It’s probably a little bit too early to tell. But we should start to see – get better indication of that as we move into ’09.

John Ransom – Raymond James

Right. I mean, I guess the paradox is the credit crunch is creating an opportunity, which is also inhibiting the opportunity to take advantage of it, which is kind of a paradox.

Jay Grinney

It’s not really inhibiting us. I mean we have the ability to execute on those kinds of transactions. I mean we’ve got the cash flow. We’ve got the ability to do that. They’re not huge transactions. We’re not talking about $30 million, $40 million. These are $5 million, $10 million, maybe $12 million transaction–

John Workman

And you get immediate lift in earnings.

John Ransom – Raymond James

Sure.

John Workman

Actually, when you look at them on a post acquisition multiple, you’re in pretty good shoes.

Jay Grinney

Yes.

John Ransom – Raymond James

Okay. Thanks a lot.

Jay Grinney

All right. Thank you.

Operator

There are no further questions at this time. I will now turn the call back over to Ms. Arico for any closing remarks.

Mary Ann Arico

If you have additional questions, we’ll be available later today. You can contact me at 205-969-6175. Otherwise, we look forward to seeing you on November 10th in New York City. Thank you.

Jay Grinney

Great. Thanks, everyone. Thank you.

Operator

Thank you for participating in today’s HealthSouth’s third quarter 2008 earnings conference call. You may now disconnect.

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Source: HealthSouth Corporation Q3 2008 Earnings Call Transcript
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