Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Brent Turner - Executive Vice President, Finance and Administration

Jack E. Polson - Executive Vice President, Chief Accounting Officer

Joey A. Jacobs - Chairman of the Board, President, Chief Executive Officer

Analysts

Ryan Daniels - William Blair

Darren Lehrich - Deutsche Bank Securities

Mark Arnold - Piper Jaffray

Adam Feinstein - Barclays Capital

Whit Mayo - Robert W. Baird

Jeff Englander - Standard & Poor's Equity Group

Frank Morgan - RBC Capital Markets

Kevin Campbell - Avondale Partners

A.J. Rice - Soleil Securities

John Ransom - Raymond James & Associates

Andreas Dirnagl - Stephens Inc.

Gary Lieberman - Wells Fargo Securities, Llc

Gary Taylor - Citigroup

Alan Fishman - Thomas Weisel Partners

Kevin Fischbeck - B of A Merrill Lynch

Psychiatric Solutions, Inc. (OTCPK:PSYS) Q3 2009 Earnings Call October 28, 2009 9:00 AM ET

Operator

Good morning ladies and gentlemen. At this time I would like to welcome everyone to the Psychiatric Solutions, Incorporation Third Quarter 2009 Earnings Conference Call.

Brent Turner

Good morning, I am Brent Turner, Executive Vice President, Finance and Administration, for Psychiatric Solutions, and I would like to welcome you to our conference call for the third quarter of 2009.

Today’s call is being recorded and will be available for replay beginning today through November 13 by dialing 719-457-0820. The confirmation number for the replay is 3649045. The replay may also be accessed through November 13 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 news 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 2009. For this purpose, any statement 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 opening remarks, I would now like to turn the conference over to our Chairman, President and Chief Executive Officer, Joey Jacobs.

Joey Jacobs

Thank you, Brent, and good morning. Thanks for being with us today. As you know from our new release yesterday PSI’s financial results for the third quarter did not meet our expectations. Our operations were affected by the Labor Day holiday following seven days later than last year in a quarter that already absorbed the seasonal impact of vacation and school holidays as well as an adverse shift in our payer mix.

One other factor is that had a greater and unexpected impact on our results than ever before was the increase in charity/indigent care. This increase came primarily in two specific markets, one county in California and the state of Colorado whose budget constraints have led to a reduction of adult charity/indigent beds in these markets. As a result the amount of our care for these patients increased by approximately $4 million for the third quarter, more than double the third quarter last year.

While we usually provide some of this uncompensated care every quarter the increase this quarter reduced our same facility revenue per patient day by an estimated 100 basis points compared with the third quarter last year. This had a negative impact on margins and lowered our earnings $0.04 per diluted share.

One other factor that affected our third quarter results was lower than expected earnings from our contract management business which impacted us by $0.02 per diluted share. Part of this shortfall related to higher expenses than planned as the revenue stream from our contract management company softened and part was related to unanticipated expense increases in our health plan business in Puerto Rico which has now been addressed.

During the third quarter we continued our work to add more than 400 beds to existing facilities for 2009 including more than 200 in the second half of the year. The majority of these beds are scheduled for the fourth quarter and this work, plus our maintenance costs, accounted for approximately 50% of our capital expenditures of $65.7 million for the third quarter.

We also completed the purchase of two facilities including one acquired on the last day of the quarter which added a total of 221 beds. As these purchases indicated the market for acquisition has improved from the first half of 2009.

Despite some increase in debt for the third quarter compared with the second we completed the quarter with more than $210 million in availability on our credit facility. We also expect to generate significant cash flow from operations for the fourth quarter. As a result we are well positioned to fund additional facility acquisitions that meet our strategic objectives.

Based on our results for the first nine months and the fourth quarter to date we remain cautious in our outlook for the remainder of the year. We expect our charity/indigent care to remain at similar levels as the third quarter, at least through the end of the year. Despite this increase we continue to expect same facility revenue growth in the mid-single digits for the fourth quarter. We also expect the contract management business to perform to our expectations for the fourth quarter and as a result of this outlook we have adjusted our earnings guidance for 2009 to a near range of $2.11 to $2.14 per diluted share.

From a longer- term perspective we are optimistic about the growth prospects of the behavioral health industry and the opportunities we have as the industry leader. Industry dynamics are favorable with expectations for long-term growth and demand in a capacity constrained industry that remains highly fragmented. With our track record of leveraging these trends and increasing our market share we have proven our ability to expand our capacity through the addition of new beds and strategic acquisitions.

At the same time we have increased our investment not only to provide the highest quality of care, but also to help drive a new level of industry transparency. Over the past 12 months PSI has provided its patients with approximately 2.8 million days of high quality care. Despite the recent industry pressure related to the current economic environment, we are confident that we are positioned to meet growing demand for our services for the long term.

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’s revenue rose to $455.3 million for the third quarter of 2009 from $431.7 million for the third quarter last year. This was an increase of 5.5% for the second consecutive quarter. Income from continuing operations attributable to PSI stockholders was $28.1 million or $0.50 per diluted share for the latest quarter compared with $27.6 million or $0.49 per diluted share for the third quarter of 2008.

Our same facility revenue increased 4.7% for the third quarter on a 3.3% increase in patient days and a 1.6 increase in revenue per patient day.

Same facility EITDA margin was 20.5% for the latest quarter compared with 21% for the third quarter of 2008. Our consolidated adjusted EBITDA increased to $79.9 million for the third quarter, up 2.5% from the third quarter last year. Our adjusted EBITDA margin was 17.5% for the quarter versus 18.1% for the comparable quarter, which also reflected the impact of lower revenue growth, as Joey discussed, and a lower than expected contribution from the contract management business.

PSI’s capital expenditures for the third quarter totaled $65.7 million, which includes $33 million for the addition of new beds and maintenance capital expenditures and $32.7 million for the two facility acquisitions.

Net cash provided by continuing operating activities increased 11.2% for the third quarter to $34.6 million.

With total debt increasing approximately $30 million during the third quarter, our total debt to trailing 12 months adjusted EBITDA was $3.9 x at quarters end, compared with 4.2 x at December 31, 2008 and 3.8 x at June 30th 2009.

Debt to total capitalization improved to 56.2% from 59.6% at the end of 2008 and 56.5% at the end of the second quarter.

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

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Ryan Daniels with William Blair.

Ryan Daniels - William Blair

I wanted to dive into the charity care issue a little bit more if I could. From your comments it seems like in Colorado and California maybe the state budgets have actually forced some of the state run facilities to be shut down or some of the beds to be reduced, is that what you were indicating in your commentary?

Joey Jacobs

Yes, it is. What happened in the third quarter for us in Sacramento County was it is really county/state funds. The Sacramento County has a 100 bed psychiatric hospital for charity/indigent patients for that county and starting at the end of June 1st of July they started diverting patients away and then closed 50 beds of the 100 beds leaving the med-surg emergency rooms and the three free standing psych hospitals in the area as the place for these patients to migrate to. For example in the third quarter of ’08 for our facilities in this market we recorded under $100,000.00 in charity and this time we recorded just about $1.7 million in the third quarter. Now we believe it is going to be moderating in the fourth quarter and we have an action plan. There are some things we can be doing at our two facilities there to mitigate this impact to the Company.

We have also begun dialogue with the county officials about reimbursement and getting reimbursement, so there is an action plan there where we can moderate the level of this charity care. We always took some charity care in those facilities, but all of this occurred in the third quarter for us in Sacramento County and so similar to Colorado it started a little bit earlier, maybe at the beginning of the second quarter there, and we have already taken actions at our facility there. We think the charity level will be going down going forward, trending down.

So, they make up about 75% of the increase in the charity care from third quarter ’09 over third quarter ’08.

Ryan Daniels - William Blair

Okay that is really helpful color. Just to be perfectly clear, when you are talking about charity care they will come to your facility and because you are a freestanding site, unlike an acute care hospital with a psych unit you actually do not get paid anything from the state for those patients?

Joey Jacobs

That is correct and quite frankly some of these patients do not even qualify for Medicaid, they are truly a charity/indigent patient that the county was just taking responsibility for.

Ryan Daniels - William Blair

Okay and maybe you can share with us some of the mitigation plans to help moderate that. It sounds like you have already put some into play in Colorado and you said some of that might be going to the state and you are saying you just can’t shut units and have us take on these patients for free; so maybe there is an argument to be made there. But, what else can you do from maybe a marketing perspective, or trying to fill beds with other patients? Any color there would be helpful.

Joey Jacobs

Our approach is going to be the county obviously realizes what they have done not only to us, but really to the medical/surgical hospitals emergency rooms. For programming for us, as we have evolved the Company we are becoming experts in various clinical programs. Our facilities there do not have a very strong geriatric program, so we may take some of those beds and develop a geriatric program. It is strategies like that that we are working on in Sacramento.

We did something similar at our facility in Colorado. It has expanded its TRICARE programs that are very specific just for the military and the military dependents, so those beds are very unique. There are things like that that we are going to do. We have in the past taken some charity patients and we are not afraid to take our charity patients, but the county just cannot dump all of these charity patients on us, the other freestanding psych hospitals in the med/surg emergency rooms.

Ryan Daniels - William Blair

Are you getting a feel from any other states? It sounds like Colorado you have an earlier fill and it sounds like these two areas are 75%, but are there any other states on the horizon that you are worried about, or think that this could have an impact, or do you have a pretty good handle around kind of what the future looks like at this point?

Joey Jacobs

We do not have, to my knowledge and we just went through our MORs for the month of September, we do not have any of this percolating in any of our other markets and really Sacramento County is very unique. We have other facilities in California and they are doing extremely well. They do not have this charity issue facing them, and they do not have a county hospital that is going to close or close its beds. Sacramento County must be suffering more than the other parts of California.

Ryan Daniels - William Blair

Okay and then my last question is on Puerto Rico. Could you provide a little bit more color on what exactly it was that kind of caused the penny hit and if that should be unique to the quarter do you guys think that could continue to pressure results going forward?

Joey Jacobs

We have one more month of hang over from our actions we have taken with that contract. When we bought this facility through the ABS transaction, we have a great network. We have the largest network in Puerto Rico providing mental health services. With the acquisition came a somewhat small insurance company where it was primarily an ASO arrangement with contracts, we decided to do at risk contracts on a small number of lives that started May 1. By June 30th we knew that we had not made a good decision here and we renegotiated out of that contract as of November 1st and it will revert back to an ASO relationship. So, we have one more month of impact in the fourth quarter for that contract and then it will go ASO type contract. That was a one-x blip that occurred over the summer months.

We encourage our CEO’s that if opportunities present themselves that we will take calculated risks and on this one it didn’t work out for us, but quickly in June we began the discussions to turn it back into an ASO contract and we were successful in doing that.

Operator

Your next question comes from Darren Lehrich with Deutsche Bank Securities.

Darren Lehrich - Deutsche Bank Securities

So I am clear on the charity care issue, can you remind us the $4 million, or the dollars that you will be reflecting in charity/indigent are those on a gross revenue basis? Can you talk about how that trend has been in charity/indigent care say over the last couple of years, what percentage, what dollar amount would you attribute on an annual basis versus what you are seeing on a run rate basis now?

Joey Jacobs

I don’t have the exact full year number for ’08, but I think in ’08 we probably provided somewhere around $16 million of charity. For the first two months of this year we were tracking about $11 million, slightly over $5 million on average for the first two quarters of this year and then it jumped to $8.4. What we have done though is we have modeled, or looked at, what we expect to occur in the fourth quarter of ’09 because we know things are moving our way and we know we are mitigating the issue in Colorado. We know that things are going on in California, so we projected it to increase slightly to between $8.5 to $9 million for the fourth quarter.

I am hopeful that this is the high water mark for us for our quarterly expenditure on this area and that it will start trending back down. That is the best I can give you and those are the numbers I have in front of me right now.

Darren Lehrich - Deutsche Bank Securities

I don’t want to pin you down on this and I know it is hard to predict, but for the investors who are listening to this and hearing about charity care being a dynamic in the behavioral sector maybe for the first time; state budgets, local budgets are under a lot of pressure and it sounds like there may be other local county indigent providers that could lose funding. I want to get your thoughts on why you think it may not be a bigger risk.

Joey Jacobs

First, as I mentioned to Ron I do not know of any other county or market in the Company where we have this risk of a county charity/indigent hospital closing its beds. I am not aware of that going on anywhere else. This is really a Sacramento, California issue that has driven this and we think we have a way to mitigate that. Now, if the county had approached us we probably would have tried to find a way to work through this issue like we did in Raleigh, North Carolina. We had a state hospital that is in the process of closing there, but we worked with Wake County there in Raleigh, North Carolina and we built 44 beds. Wake County stepped up and has inside their budgets. I think it is actually the No.1 priority in Wake County, when you speak to the Wake County officials mental health is the No.1 priority for them and we have been able to work together in a partnership. We don’t get the greatest of rates, but we get an adequate rate there and so we were able to deflect that. Now we don’t have any other discussions going on and I am not aware of any other market where there is a charity/indigent facility that is trying to close or that sort of thing.

So that is the reason for my statements about we have modeled it $8.5 to $9 million for fourth quarter, but we are expecting the Colorado facility to provide less charity care in the fourth quarter, that the California hospitals will still do a little bit more in the fourth quarter. So, that is the best read of the land. I know of no other county facility that is trying to do this and we do have plans that are working in Colorado. We did do this in Raleigh, North Carolina and we are going to work through and work with the Sacramento County officials on finding an answer here for this and so do the med/surg hospitals there.

Darren Lehrich - Deutsche Bank Securities

Sure that is helpful. I wanted to ask about the acquisitions that you closed at the end of the quarter; I know you mentioned there were two of them. I just wanted to flag one thing and that was the $33 million in CapEx you spent on these deals, that is less than 1x revenue which is I think about as low as we have seen for a long time. I wanted to get your thoughts, Joey, on what kind of pricing you are seeing on acquisitions now and how we should think about capital spending on acquisitions and pricing on acquisitions as we look out to next year.

Joey Jacobs

The two hospitals that we are mentioning, one is in Fargo, North Dakota and the other one is in Panama City, Florida. The one in Fargo, North Dakota was owned by two psychiatrists that had bought this old med/surg hospital and turned it into one of the only two freestanding psych hospitals in the whole state and it has done a wonderful job there. It had EBITDA margins in the mid to upper teens here. We did buy very good, similar to 2003, 2005 multiples at that time, 5x looking back as we adjust for specific issues.

The one in Florida was owned by a large not for profit hospital that bought it during the collapse of the industry in the 90s and now they need cash for their med/surg facility and we bought it for a little less than 1x revenue, I think, and so these two together are less than 1x revenue and EBITDA earnings are probably in the 5, 5.5 x for and so we expect more acquisitions to occur. I do not see anything else being acquired this year. These two are the only two facilities that we will acquire for 2009, I think. But 2010 the possibility of acquiring two to six facilities is there for us. Our pipeline is busy. Steve is keeping me very busy going on the road looking at facilities and so that is where we are at. The multiples have come back and so that is what is going on.

Darren Lehrich - Deutsche Bank Securities

Okay. I have a question about the bed counts and then a request for Jack. Jack, if you could give us your thoughts on this, will you recast the first and second quarters of the year separately excluding the EAP business or showing that as an asset health for sale, just out of curiosity. It will be easier for us to model that out into 2010.

Brent Turner

I will answer both of those. On the EAP obviously we have restated the first six months inside the nine-month numbers for the EAP going into discontinued operations and assets held for disposition. We had not planned on putting that out separately. We will certainly work with you on the line item adjustments there and if need be we can put something out. But, it is reflected in the nine-month numbers and we can help you bridge that adjustment.

On the bed count, we ended the quarter with 11,192 licensed beds and 10,706 beds in operation.

Operator

Your next question comes from Mark Arnold with Piper Jaffray.

Mark Arnold - Piper Jaffray

On charity care, can you talk through the process of when you make the decision that those patients are going to be charity or indigent patients? The reason I am asking this is that a lot of people were surprised by the results when you guys provided the new guidance excluding the AP at the end of September. So, can you talk through that process of how and when you determine that that care will be considered charity care and reduces your revenues?

Joey Jacobs

On the average the acute patient stays with us nine days, our financial counselors at the facilities make the determination during the admission process. We will go through that process and it has various levels of approval. So it is real time when the patient is in the facility. Our goal is that by the time the patient is discharged we will have made that decision if this was a charity/indigent patient. Even if it is a self-pay account we try to do it real time and see how much the self-pay patient is going to pay us. If they are not going to pay us all off we do that discount at the time and set them up a monthly payment. We try to be as real time as possible about the classifications of the revenue and the appropriate recording of the deductions or expense.

Mark Arnold - Piper Jaffray

Okay and how should we look at the margins in the quarter? What if any impact did the exclusion of the EAP business have on the EBITDA margins versus just the weak revenues?

Joey Jacobs

The EBITDA margins for the EAP company were slightly higher. They had good margins, but it was in the other category there, so you would have seen its impact there, but it would flow through to the Company. The biggest impact to the margins was, in my mind, we were short somewhere $4 to $6 million below my expectations. So, when I look at it when we treated these patients it was probably $4 to $6 million of revenue and I was expecting more than what we got and that would improve all of those margins. There were a couple of expense areas where we could have done a better job and we are working on those areas that would help that.

So, 90% of the margin decline was the fact, to me, that we didn’t get our revenue like we should have. The way to offset that is to continue to grow our patient days. We were disappointed, but we were pleased with our patient day growth at 3.3% it is the highest for the year. The monthly numbers for patient day growth for same store was 1.2 in July, 4.1 in August, and 3.8 in September and so far through 26 days in October we are up 4.5% on same store patient day growth. So, we are optimistic, as we said here today, but it was more of a revenue, but there were a couple of expense areas we could have worked on and done better and we are going to do that.

We are working through the budget process and so we are getting our facilities ready for 2010 and also getting them ready for the holidays. Thanksgiving will be here in four weeks, so we need to be adjusting our expenses and getting ready for the holidays. Like this year we saw that the census really didn’t come back until January the 15th so we are going to have to be managing our expenses better through the first two weeks of January than we did this year. Ron Fincher who is the interim COO for the Company is off to a great start about setting the expectation with our division presidents and CEOs on doing that and that will help the margins.

Mark Arnold - Piper Jaffray

Do you have the break down of to what extent the two markets that you talked about with the charity and indigent care, to what portion the volume growth that we saw was attributable to those markets where the volume growth was obviously on patients that aren’t paying?

Joey Jacobs

The best thing we could do there was to estimate what we thought it did. We thought it cost us 100 basis points on our revenue per day. Because charity/the indigent patient had not been significant to us and hopefully it won’t be, but starting January 1st we will be capturing those revenues, patient days, and admits in a separate category where we had not in the past. So, we are going to work better on getting our IT system so we can answer your question in more detail.

Mark Arnold - Piper Jaffray

There was also a fairly big jump in other operating expenses in the quarter. What caused that and should we expect that dollar value to be similar in Q4?

Joey Jacobs

That is the management contract driving that. We expect revenues and earnings to come back to profitability and the contract in Puerto Rico that is going ASO will impact that line. So, we hope and expect that it will trend down, but once again, we will have to get through the quarter.

Operator

Your next question comes from Adam Feinstein with Barclays Capital.

Adam Feinstein - Barclays Capital

I wanted you to delve into charity care into more detail. I appreciate the fact that you have gone through it a lot, but this is a newer issue for you guys. First, I think in the past the thought of charity care, uninsured, bad debt, really wasn’t as much as an overhang for you guys. I hear comments about some specific state issues that you think will get better, but certainly with respect to things maybe getting worse and at the same time if it doesn’t manifest itself through increased charity care we could see higher bad debt expense. So, I am just throwing that out there and I wanted you to talk about your confidence level and then at the same time do you think we will see bad debt expense move up also?

Joey Jacobs

We know what we did in Colorado is working and we are confident that we will work through the issue in California. Quite frankly, we would not be having this discussion if it wasn’t for Sacramento County. We do not see another Sacramento County out there on the landscape anywhere in our markets, so we are going to work through this issue there. I want to see it plateau, see it trend down.

Bad debts remember 60% of our patients are children and adolescents and they don’t have co-pays and deductibles. If started to see people putting co-pays and deductibles on Medicaid or state agency kids I would get concerned, but so far I haven’t seen that, so all of that population would be fully covered. Bad debts we have historically run 2%; could it go from 2% to 2.2% or something like that? That is possible but I do not see huge increases in the bad debt expense anywhere. I don’t see that coming. No one has told me anything like that.

None of our operation or division CFOs or Ron Fincher has given me a heads up that that is coming, so I just don’t see that, though it is always a possibility. We have been out on the road the last 90 days and talking to folks. Obviously everybody needs the economy to get better and the state budgets to get better and we want that to occur to help us too.

That is the best I can do on that Adam.

Adam Feinstein - Barclays Capital

I understand. You guys called out Sacramento County as well as Colorado, but if you x those markets out does charity care go up and the other markets? You gave out those numbers earlier, but I am just trying to…

Joey Jacobs

Do you mean as compared to the third quarter of ’08?

Adam Feinstein - Barclays Capital

Yes.

Joey Jacobs

It actually went down. You have to remember in the third quarter of ’08 there was only $100,000.00 in there for Sacramento County and now it is nearly $2 million. Once again it is only $8 million and $3 of the $4 million increase was Colorado Springs and California.

Adam Feinstein - Barclays Capital

Riveredge it sounds like you guys have been making progress there, so you would have annualized the impact midway through the quarter. How much of a pick up did you get on that this year relative to last year and just any updates?

Joey Jacobs

I will give updates on the demand side. The hold was put in, I think, the third week of July of last year, so for the third quarter Riveredge averaged 91 patients, and last year it averaged 94. This year Riveredge is averaging 110 patients for October versus 94, 97 for last year. So it is up about 10% over last year for the month of October to date. If we can keep those trends continuing through the fourth quarter patient days are going to be positive growth over the quarter last year and that is what we are working on.

Adam Feinstein - Barclays Capital

Your patient mix, could you give us some ballpark numbers in terms of payer mix for the quarter and how that changed relative to last year? Maybe it didn’t change much, but I just want to better understand the mix of patients you are seeing.

Joey Jacobs

I do not have that detail with me. What I can tell you is obviously charity was also dumped in self-pay and other for us in our financial system classification. I think that did increase a little bit, so it took away from the other payer mixes there. There wasn’t a lot of movement in the Medicaid. There might have been some decline in state agencies, but it was minor movements once again. It is hard to move our payer mix very much anyway.

Adam Feinstein - Barclays Capital

The only reason I was asking was because of the charity care issue you brought up, so I was just wondering if you were seeing more patients move from the commercial population to self-pay.

Joey Jacobs

Until we get our financial system up January 1st when we will start categorizing charity care as a very separate account we won’t have those numbers.

Operator

Your next question comes from Whit Mayo with Robert W. Baird.

Whit Mayo - Robert W. Baird

Just given the pressure on budget and waiver funding right now, Joey, has this impacted at all any of your out of state RTC referrals? I understand a lot of those are very specific in unique cases either at the Deaf Academy or Texas Neuro more often than not, but how has that trended over the past maybe 6 to 12 months?

Joey Jacobs

I don’t have those numbers, but I have a lot of anecdotal information. So far this month we have had a new state refer to our Deaf Academy two new patients. This year we have put together a corporate call center for referral placements for placements for RTC patients and we are hitting record levels as far as admissions being sent to our facilities and referral packets being reviewed. I don’t have the details on that, but I do stay close to how many admissions they are having weekly and sometimes daily. I do know we have broken into some new states that normally would not have been giving us referrals.

Whit Mayo - Robert W. Baird

Do you have any idea for just the number of patient days that you’re getting from out of state? Then if you could comment on the negotiated rates, whether or not those rates are changing at all?

Joey Jacobs

The vast majority of our RTC patients are out of state. I don’t have the rate information here in front of me.

Whit Mayo - Robert W. Baird

If we compare maybe kind of renewal rates right now with some of those states, has that gotten better or worse then a year ago?

Joey Jacobs

I think it stayed status quo. I think actually one large referral area has actually given us an increase.

Whit Mayo - Robert W. Baird

Jack, did you guys reverse any bonus accruals in the quarter and if so what was that number?

Jack Polson

We did that as we did any quarter where we don’t have the expectations. I don’t have the exact number because it is done at each individual facility level, but that is done with RA. We don’t meet expectations; we don’t expect to pay out bonuses.

Whit Mayo - Robert W. Baird

Was the number really an expense or was it a benefit for you in the quarter as you reversed it?

Joey Jacobs

It would be a benefit. Obviously with the results for the third quarter, there was some pick up in the reversal of bonus accruals, because they might have been in the bonus accrual at a certain level and due to the performance they had to reduce it, or if they were barely over it had to be reversed out. But, that is a real time, every quarter accounting issue. I just don’t have the numbers.

Jack Polson

But the expense wasn’t a negative expense in the quarter. There are still facilities that earn bonuses.

Whit Mayo - Robert W. Baird

That makes sense; maybe we can talk offline about that. Just maybe on the management contract business, just to be clearer it sounds like you lost some plans, some of the old Horizon plans. Were any of those, those big high priced cadillac plans that Horizon managed and can you minus how many rehab contracts you still have?

Joey Jacobs

First, there was none of the large contribution contracts. This year we have seen more of a decline in the rehab contracts. Unfortunately for us we have several new contracts that are full staff models that began in the second quarter and as they ramp up their staff and their census they had negative earnings, they lost money. We lost $360,000.00 in the quarter for the start-up contracts, but we also lost several rehab contracts during the year. Our folks are optimistic and we do think their performance will be better in the fourth quarter as compared to the third quarter and so it still generates cash and earnings for us.

Another key point here is of the contracts nearly half of the contracts were up for renewal this year and I think we had something over an 80% renewal rate. Next year we only have 35 contracts up for renewal, so we will not have as much pressure about getting contracts renewed.

Whit Mayo - Robert W. Baird

So we could frame up the risk around those 35 contracts could you isolate for us how much annual revenue that would contribute, obviously assuming that you would probably still have an 80%?

Joey Jacobs

I don’t have that detail in front of me.

Operator

Your next question comes from Jeff Englander with Standard & Poor's Equity Group.

Jeff Englander - Standard & Poor's Equity Group

Given the charity care question I am wondering if you can give us some color that you are seeing from any other states and/or anything you are doing in anticipation of any kind of pressure or any kind of cutbacks?

Joey Jacobs

During our monthly operating review for September it was not highlighted to me that any other counties were having an issue similar to what’s happening in Sacramento County and that is a very unique arrangement there. We project, and we have lowered this over time, rate increases for Medicaid we think are zero at best going forward for the next 12 months, but, as I mentioned earlier, we have had one large referral source to our residential facilities give us an increase. So, we do provide a very unique service that is very much in demand and so we do have some pricing leverage there, but no one has brought it to my attention that there is another Sacramento County out there that would cause this. Due to our sensitivity now I think they would be quickly coming to see me and telling me that we might have an issue or we need to work on this. So, I am not doing that and no one has come to me.

Jeff Englander - Standard & Poor's Equity Group

You mentioned what had happened in Raleigh. Have any other states approached you with similar circumstances at all?

Joey Jacobs

We have been presented with opportunities to run state facilities and we have passed on those. We would do more Raleigh’s, but right now we do not have any of those discussions under way. No one has approached us to do that model. That model is working very, very well both for the county and for us, and most importantly the patients. It is a good, safe facility and they are getting good care. But, no one else has approached us, but we have over time been approached about running state psych hospitals.

Operator

Your next question comes from Frank Morgan with RBC Capital Markets.

Frank Morgan - RBC Capital Markets

I have a question on the update on med now reserves, there was no mention of that in the quarter. I am just curious if you have an update there. Then once again I just want to be perfectly clear on the separate and apart on the indigent care issues, your expectations for rate growth overall for 2010.

Joey Jacobs

Let me take the rate increases first. We want to be in the 2% to 3% overall revenue per day increases for the Company and to do that we think Medicare will give us 2% next year; we are expecting 6% to 85 from the commercial payers. There are some states giving us rate increases, but some are cutting. Overall we would like our revenue per day to go up 2% to 3% every quarter and for the whole year next year.

As far as the malpractice the accruals occurred as they normally do each month. We are into the fourth quarter and we will be doing the full blown actuarial study once we get past 12/31 and we will have it some time at the end of January, but so far everything has been normal on that line.

Frank Morgan - RBC Capital Markets

Okay and just to be clear on the rate growth 2% Medicare, 6% to 8% commercial and then 0% for Medicaid and that still gets you 2% to 3%?

Joey Jacobs

We hope. Now, I said revenue per day Frank. Make sure you write that down, revenue per day, because we are building a lot of acute beds and it is according to what kind of programs the payer makes us go into those beds. If we are successful in doing some very specific clinical beds that will help drive that revenue per day number.

Frank Morgan - RBC Capital Markets

Is there any way to get reimbursed for psych care for these adult indigents if it is an outpatient visit? I mean is there any way you can treat these patients on an outpatient basis and don’t you get an exemption from the A&D exclusion if it is an outpatient visit?

Joey Jacobs

We have very little outpatient volume inside the Company. I would have to check with our business office people, billing people about that. One thing that is in the healthcare reform bill, well there are a couple of things: Some of these people would qualify for the uninsured that President Obama is going to cover; the other thing is that inside the healthcare reform bill is our demonstration project about adult Medicaid patients going to freestanding psych facilities and getting paid. So there are a couple of things in the healthcare reform bill that would absolutely benefit us. One, similar to med/surg is taking care of the charity patients and uninsured and on Medicaid adult there is a demonstration project and obviously we would be asking for that demonstration project to be put in markets where we have an issue of treating more Medicaid adult patients because the med/surg hospitals have closed their psych beds.

Operator

Your next question comes from Kevin Campbell with Avondale Partners.

Kevin Campbell - Avondale Partners

First on the commercial rate increases, do you still feel comfortable that 6% to 8% is achievable despite the pressures that perhaps the managed care companies are seeing themselves elsewhere? Do you still think that 6% to 8% is a good number?

Joey Jacobs

We hope so. That is what we have been getting. That is what we have been seeing and so.

Kevin Campbell - Avondale Partners

Have you negotiated some this past quarter to get recent rate negotiations where you are still seeing those types of increases?

Joey Jacobs

Yes we have.

Kevin Campbell - Avondale Partners

I also wanted to step back to the charity care question and the time when you recognize it as charity care. If you are recognizing it throughout the quarter and you had the chance, obviously when you revised guidance on September 30th that wasn’t an issue that you thought of then; so I am just trying to better understand what happened between now and then that resulted in the reduction.

Joey Jacobs

If you follow the Company our third quarter is made on how we do in September and during the third week of September was when we were doing all of the work on getting the press release ready for the EAP sale. As I look back at that, probably what we should have done was to have that press release out earlier. We did not know the full impact of the charity and the results for September and for the quarter until somewhere around probably around October the 8th, give or take a couple of days there, so that was the timing. Probably what we should have done was to get the EAP announcement out sooner. It was done the third week of September and then released on the 30th I think, by the time it got through all the approvals and reviews here at the Company.

Once again, our third quarter is made on how September does and we didn’t know that until the second week of October.

Kevin Campbell - Avondale Partners

On 2010 guidance typically you issue that with the third quarter release, at least I have seen you do that in the past. Is there a reason why you didn’t do that this year?

Joey Jacobs

Absolutely, it was the first quarter of this year. So, I think we have told most everybody that we will be giving 2010’s guidance sometime after the first of the year. We are going to let the books get closed. We are going to have our budgets finalized and adjusted and then we will be giving the guidance sometime after the first of the year.

Kevin Campbell - Avondale Partners

Okay and then on the contract management as well, so clearly there were some of the issues in Puerto Rico, but what were the other issues in the contract management business? I didn’t quite gather all of that from some of the earlier comments.

Joey Jacobs

Some of it was start up losses for new contracts that we have signed. They have lost, I think, $350,000.00 during the quarter. Also, the reduction in contracts were greater to us in the third quarter and Puerto Rico; when you put all of those things together that caused the miss in the contract division for PSI.

Kevin Campbell - Avondale Partners

The start up costs you feel like over time would go away as you ramp up there and turn those profitable. Puerto Rico clearly will change. Of those two what percent does that represent of the relative shortfall there versus the decline in contract? Clearly the decline in contract is sort of a continuing, on going issue.

Joey Jacobs

It is probably a penny each way. It is probably a penny on this ramp up of the start up losses in Puerto Rico and there is probably a penny on the lost contracts. That is my best estimate on the limited information I have in front of me.

Kevin Campbell - Avondale Partners

On the RTC side one of the things that we have seen from talking to some other private providers is utilization pressures just on the front end, not necessarily when the children and adolescents have been placed, but just getting those referrals. Have you noticed that yourselves in the RTC business and if so is it in select markets over others or?

Joey Jacobs

We have done really well with our national call center on placements and the number of placements continues to grow each month, as we started that department at the beginning of the year. Then we are building 20 RTC beds in Arkansas right now and we sped up construction because there are patients that need to be in those beds. We have some very good RTC facilities and some very good RTC programs that states need to send their patients to.

Operator

Your next question comes from A.J. Rice with Soleil Securities.

A.J. Rice - Soleil Securities

Not to belabor a point, but on the Sacramento situation you have a million seven impact in the quarter. Adults you said have a nine-day average length of stay. You have about $500 to $600 average reimbursement per case. That seems like a huge number for one facility. Am I missing something there or how can you explain that?

Joey Jacobs

There are two facilities there and I haven’t worked through the math like you have there. The only think I know is I have one [interposing].

A.J. Rice - Soleil Securities

Is there some other dynamic there? Is it a catch up of previously treated patients from other periods?

Joey Jacobs

No, it is not a catch up. Probably some of the difference is that when the County hospital had been full they would send overflow to us and the County of Sacramento would pay for those patients. So, there would be some of those patients that we were actually treating previously that got paid and they stopped that as of July 1st too, paying our facilities for treating charity/indigent patients, so that would also be in that number.

A.J. Rice - Soleil Securities

Maybe slice it a different way, if you look at patient days year-to-year up 3.3% how much was charity up if you just look at the charity days? Do you have that number by any chance?

Joey Jacobs

As I mentioned earlier on the call our system does not capture charity patient days and admissions specifically for charity. We have a catchall that says self-pay and other where these types of patients would be categorized. Starting January 1st we are going to be capturing them in a specific charity/indigent so we will know better. We know the dollar amounts, but we really don’t know how many patient days and admissions were involved there.

Brent Turner

On the California there was a million nine increase for Sacramento. Rates out there are much higher than the 500 average for the company. Using 800 and 92 days in the month it is an increase of about 25 patients across two facilities. That is still the total dollars we referenced. The length of stay, even though that company’s average is nine, in California it would be one to two days lower.

A.J. Rice - Soleil Securities

So on the self-pay if you were to look at that number year-to-year what kind of increase would you get on self-pay?

Brent Turner

I don’t have that number.

A.J. Rice - Soleil Securities

On the contract management, EAP came out of that right? So you are running $45 million in the second quarter and your EAP would have taken about what $13 million out of that going into the third quarter?

Joey Jacobs

How much revenue was taken out in the third quarter for the EAP or how much would have normally been there?

A.J. Rice - Soleil Securities

Yes, obviously it was down and less than it had been in the [interposing].

Joey Jacobs

We are looking for that number for you. The revenue for the EAP company was slightly over $40 million I thought. So, if you divided that by four it is going to be somewhere around $10 to $11 million that would have normally been there.

Jack Polson

In ’08 it was $43 million, about $11 million.

A.J. Rice - Soleil Securities

So that puts you sort of flat sequentially in the contract management x EAP am I thinking about that the right way?

Joey Jacobs

It was flat to slightly down, yes.

Jack Polson

But it also increased because the gross revenue increased because of the at risk contract in Puerto Rico which we have adjusted for.

Joey Jacobs

That is right. I don’t know if you were on earlier, but in May of this year we entered into an at risk contract, so we put more gross revenue there and that will go away November 1st.

Operator

Your next question comes from John Ransom with Raymond James & Associates.

John Ransom - Raymond James & Associates

The adult business, are you seeing any impact yet from the Company hiring unemployment numbers? Is the demand side on the adult side still holding up and do you think it will continue to? Is that still stable? I know you were talking about your price increases but what about the demand and the volume?

Joey Jacobs

It is very stable on the RTC business, which is all children. On the acute side the demand for the adult business, for the month we are up 4.5% total and acute will be up more than the 4.5%, RDC will be bringing that down. So, the demand for the acute children and adult I think is doing very well. I don’t have those specific numbers, but I would expect that it is doing well.

John Ransom - Raymond James & Associates

Okay and if you were to look out, let’s just assume conservatively which I don’t think is going to be right, but no acquisitions. If you were to look at your bed count additions and the conversion in Chicago, if we were to look at the end of 2010 what do you think our approximate revenue mix is between the two businesses if you will? I mean how much is going to skew to adult and child acute versus RTC by the end of 2010 versus where it is now?

Joey Jacobs

You would have to call back. We would have to do a little study on that. We will give you the number, but we would have to do more homework on that.

John Ransom - Raymond James & Associates

The issue is wouldn’t we expect, not a gigantic, but a material up tick in the acute mix given where you are trending your new bed count?

Joey Jacobs

Absolutely. We expect to have more acute patients next year than we did this year. When you talk about the adult, I don’t have the adult and the child broken out. I have acute and RTC, but I don’t have acute broken out between adult and child with me.

Operator

Your next question comes from Andreas Dirnagl with Stephens Inc.

Andreas Dirnagl - Stephens Inc.

Joey, I know it is obviously going to be the No.1 topic today, but when it comes to Sacramento and Colorado Spring, I guess you made some comments in your prepared remarks and then answering questions. I guess in Colorado you seem to get a sense that something was going on by the beginning of the second quarter. In Sacramento I think you mentioned that at the end of June, early July they began to divert and then they closed 50 beds. Was there something missed there? In other words when was the first monthly operating review that you heard about this happening? Were there forewarning signs that you maybe could have seen that you are now on the look out in other states for? It seemed to come on rather suddenly and what is to give us comfort that it is not going to come on rather suddenly despite the fact that right now you are not aware of anything happening in other states?

Joey Jacobs

I think just the level of sensitivity that has been raised over this issue by the ones on the call and by our CEOs in the field. We’ve sent a clear message to the CEOs in the field that any inkling of information about something like this they need to get it to us immediately.

Andreas Dirnagl - Stephens Inc.

In Sacramento specifically were there signs, or was there any inkling that maybe you should have been picking up on a couple of weeks or months earlier?

Joey Jacobs

Absolutely, there were signs in California about budget issues. Fortunately for us it only impacted these two facilities. Our facility in Freemont and our two facilities in the L.A. area are not impacted by this. This was specifically a Sacramento area issue and I have a feeling our folks were hopeful that there was a way it was going to be fixed by the Governor. I don’t think they still have their budget done. I don’t think anyone, in the beginning, thought they were going to close 50 of their 100 beds.

Obviously in the second quarter of ’09 somebody had to be talking about this and telling us about this that these issues were going on, but as far as the magnitude of what they did it surprised us all.

Andreas Dirnagl - Stephens Inc.

So in other words the actual action of closing the 50 beds was very quickly decided and caught everyone by surprise?

Joey Jacobs

To my knowledge it was all decided in the third quarter.

Andreas Dirnagl - Stephens Inc.

To be blunt, there has been a risk in future quarters that that could happen in a number of other locales. If the decision is to be made and then the impact of the Company can happen within a couple of weeks…

Joey Jacobs

The unexpected can happen, but this is what you need to find, how many markets have 100-bed charity freestanding psych hospital funded by the county? That instantly reduces the pull instantly, absolutely instantly.

Andreas Dirnagl - Stephens Inc.

And of your markets how many do?

Joey Jacobs

To my knowledge I know of no other that is set up like this. Maybe after this call we will poll our CEOs again about that specific question, who has a 100-bed charity hospital bed hospital funded by the county in your market that could close? We may survey our CEOs and do that, but once again, when you put that criterion out there who has a 100-bed charity hospital funded by a county, they are few and far between.

Andreas Dirnagl - Stephens Inc.

Okay, so Colorado was a slightly different circumstance then?

Joey Jacobs

Colorado was, well first population density matters here and that several med/surg hospitals over the past 12 months had closed their psych beds due to budget constraints. I think Colorado may have one of the largest unemployment rates in the whole country and the largest uninsured rates in the whole country. But, we are working around that and we expect the charity issue in Colorado to trend down.

Andreas Dirnagl - Stephens Inc.

Okay and then in general clearly there is a potential moral or charitable obligation to take these patients. What is the legal obligation to take these patients?

Joey Jacobs

The legal obligation is for us and med/surg hospitals in its entirety. If a patient shows up to you and they are in an emergency condition you have to treat that patient. Every hospital in this country has that obligation whether you are a psych hospital or a med/surg hospital; you have to treat that patient.

Andreas Dirnagl - Stephens Inc.

Then just to be clear in terms of the mitigation factors that you are taking, by in effect putting in a specialized program and designating those beds to the specialized program, if you don’t have an appropriate bed for a patient you can’t take them?

Joey Jacobs

Absolutely, you could not put a 40-year-old adult acute patient in a geriatric-based program where all of the patients there are 79+ years old. That would not be safe to the patient that needs care and it definitely would not be safe to the geriatric patients on that unit.

Andreas Dirnagl - Stephens Inc.

Your comments were that the Puerto Rico issue by June 30th it was clear that this was a problem. The end of June, early July the divert and then the closing of the beds in July, obviously California, Sacramento had an impact in part of July and most of August. By the third week of September you would have theoretically closed the first two months of the quarter and seen that there were already a couple of things going against you. I know that the quarter is made in September, but was it basically the hope that okay despite the fact that Labor Day is a week late this year and we knew September was maybe going to be problematic that we would still be able to make up this shortfall, in terms of not adjusting your guidance?

Joey Jacobs

Coming into the month of September we just came up August and the patient day growth was up 4.1%.

Andreas Dirnagl - Stephens Inc.

And pricing at that point?

Joey Jacobs

I don’t have the pricing numbers in front of me. Then September ended up 3.8%. The real issue is this $4 million of charity care and that as we have explained $3 of the $4 million is in two markets.

Andreas Dirnagl - Stephens Inc.

Labor Day was a week late this year; do you have any estimate as to what impact that had on the business in terms of maybe volumes?

Joey Jacobs

I can always give you estimates. We are now averaging 4.5 for the month of October. We averaged 4.1 in August. Could I easily have reached a conclusion that Septembers 3.8 would have been above 4%? Sure I can, but the Labor Day week took it down. So, if I was to go back and look at September and say what would we normally think we would have gotten out of this, it probably would have been above 4% patient day growth because we had that in August and we have it so far in October. So, the trending of patient day growth was 4.1, 3.8 and now 4.5, so obviously when looking back at it I would have expected September would have had a chance to be above 4%.

Operator

Your next question comes from Gary Lieberman with Wells Fargo Securities, Llc.

Gary Lieberman - Wells Fargo Securities, Llc

In terms of the mitigation that you have discussed in Colorado, you talked about adding some TRICARE business, so can you just maybe talk about the dynamic that that helps you avoid some of the charity care? Is that just because you fill beds with other business and so you don’t have beds for charity care, how does that work?

Joey Jacobs

Let’s think through this. If you have an 80-bed hospital and you have five very distinct programs, distinct meaning a child and adolescent, or a child and an adolescent program, or a TRICARE program, or a geriatric program. If you have a defined clinical program for these distinct units for the safety of the patient and the safety of the patients in those units, the patients have to have similar diagnoses. Once again, if you have a geriatric unit that is taking care of patients that are 65 and older you are not going to put a 40-year-old adult on that ward. It is designed totally differently, the equipment, the bed, everything there is different for that patient. So, if your facility has these unique programs and a patient presents that doesn’t qualify for the clinical programs you obviously cannot treat that patient. We have an obligation to try and find you a place to send that patient to, but more importantly, when the referral source calls we will legitimately say we have two geriatric beds open. So, if the patient is not a geriatric patient then that person needs to go somewhere else. That is how very specific clinical programs can develop very specific niches. This is one way you diversity payer mix.

Gary Lieberman - Wells Fargo Securities, Llc

That is helpful color and then just to clarify one of the numbers that you gave out, I believe you said that Colorado was 75% of the issue in the quarter and then you also said you mostly mitigated that.

Joey Jacobs

No, Gary it is California and Colorado are 75% of the issue. Of the $4 million $3 million is for those two states.

Operator

Your next question comes from Gary Taylor with Citigroup.

Gary Taylor - Citigroup

Your two facilities in Sacramento I think are about 148 beds, am I right?

Joey Jacobs

That is close.

Gary Taylor - Citigroup

Okay and then I want to go back to your comment on 2010 guidance. You would anticipate releasing that after the New Year but before the release of the Q4 which is probably in February, or with the Q4?

Joey Jacobs

I didn’t make that commitment. I just said it would be after January. We would have to talk to the board and we would have to huddle, the board would approve the budgets and things like that. There are some logistics we would have to go through and then the timing we would have to decide. I don’t know what most companies do. Historically we have done it in November, but we do think it is prudent for us not to do it the first week of November when you still have 60 days of the year to go.

Gary Taylor - Citigroup

Right, no, I think most companies give it in conjunction with their Q4 earnings report, but there are a couple that actually give it earlier in January, so I just wanted to see if that was firm or it sounds like it is not firm.

Joey Jacobs

Somewhere in the New Year is the answer.

Gary Taylor - Citigroup

You mentioned on the Medicaid side some states giving increases and some states cutting. What state gave you the biggest rate cut and what was the magnitude of that?

Joey Jacobs

Probably what is going on in North Carolina, they are doing somewhere between a 3% to 7% rate cut in North Carolina based upon the services, I think. To my recollection that is probably the biggest cuts that have occurred.

Gary Taylor - Citigroup

Is that an ongoing process or is that pretty finalized?

Joey Jacobs

I think it is either finalized or will be finalized shortly.

Gary Taylor - Citigroup

In your contract management business, the contracts that you failed to renew, is there a competitor that is willing to do it cheaper, has there been dissatisfaction? What do you attribute some of that contract loss to?

Joey Jacobs

What we have seen is facilities try to do it in-house. They think they are going to make money by eliminating the management fee that we were charging, or someone buys the med/surg hospital, or the CEO terminates and the new CEO doesn’t believe in outsourcing. Those are really the three reasons why a contract turns. Very rarely will you get a contract terminated for performance.

Gary Taylor - Citigroup

The Puerto Rico health plan was the assumption of risk there you were taking there purely a behavioral risk or was there some medical risk that you have been parceling out?

Joey Jacobs

It was behavioral and drugs.

Gary Taylor - Citigroup

Okay and then I thought the commentary around Sacramento was very helpful to understanding this, but I am not as clear on what happened in Colorado. You are describing more of just a macro issue of seeing more charity as opposed to any sort of definitive unilateral action by a city, county, or state facility, is that correct?

Joey Jacobs

That is correct. I do not know of any unilateral decision made there. What I do know is that over 12 months quite a few psych beds closed inside med/surg hospitals and then one day we woke up and we are the primary provider for Southern Colorado and with that came more referrals for the charity/indigent patient than we had seen previously.

Gary Taylor - Citigroup

How does Texas look and feel on the charity issue?

Joey Jacobs

It is not an issue at all and no one is saying it is an issue.

Gary Taylor - Citigroup

Going back to the concept of, these were obviously isolated incidents, but of course the markets worry that at some point this could be broader, or even if you are not seeing issues now more issues could pop up and you have allowed for that. I think in most of your markets wouldn’t there be some safety net, city, county, state facility that is taking these Medicaid adults? Wouldn’t that be true in most of your markets? Maybe not a single large provider, as large as 100 beds, but wouldn’t that sort of safety net exist in most markets, or not?

Joey Jacobs

No, not really. This hospital in Sacramento County, these weren’t all Medicaid patients. These were truly charity that they were taking care of. These people didn’t have coverage. These people were uninsured.

Gary Taylor - Citigroup

Regardless of whether they are Medicaid adults or just people that either didn’t sign up or didn’t qualify for Medicaid, isn’t there a sort of safety net city, county, state capacity in most of these markets or they just end up at the city med/surg hospital, or county med/surg facility?

Joey Jacobs

I will take Tennessee for example. I think in Tennessee there are three large freestanding psych state hospitals scattered through out the state geographically. Then inside med/surg hospitals there are psych beds that should be taking care of the Medicaid adult patients. So that is what is going on. Then there is more for an out patient basis there are community mental health centers that would be treating the adult schizophrenic population and they would be residing there.

Gary Taylor - Citigroup

I guess there are a lot more out patient safety net resources than in-patient at this point?

Joey Jacobs

Absolutely, there are a lot of mental health centers through out the country.

Operator

Your next question comes from Alan Fishman with Thomas Weisel Partners.

Alan Fishman - Thomas Weisel Partners

My question is around the portion of revenue that is related to state agencies. How are those rates generally set?

Joey Jacobs

Some state agencies may use Medicaid costs; some of them may be set by individual negotiations, probably a majority of them.

Alan Fishman - Thomas Weisel Partners

Are based on negotiations?

Joey Jacobs

Yes.

Alan Fishman - Thomas Weisel Partners

Okay and so you talked about a 0% at best in 2010 Medicaid reimbursement rate, should that also include the state agencies at 0% as well, or what do you think about that as you look forward to 2010 and still targeting this 2% to 3% revenue per day?

Joey Jacobs

This is primarily for RTC patients that are being referred out of state. I would think that we would get a 2% to 4% price increase there. For example I mentioned earlier that one of our large referral sources gave us a good increase. So, I think the more specialized the RTC patient is that is being referred to us from out of state the better our chances are of getting adequate reimbursement.

Alan Fishman - Thomas Weisel Partners

Switching over to Medicaid reimbursement, you mentioned North Carolina, but what other states might you be looking at that are considering Medicaid reductions and how does that factor into your Q4 and 2010 expectation for this 2% to 3% revenue per day growth?

Joey Jacobs

Right now the worry will restart next year getting ready for July 1st and October 1st. The only really straggling budget out there is California: they have made a lot of their cuts, but once again in California the economy is not very good at all. Right now the only one I am really worried about right now is California’s budget because basically we have gotten through all of the other state budgets.

Alan Fishman - Thomas Weisel Partners

How quickly can you transition beds in the acute setting from a general purpose, or another program, into a geriatric to mitigate this potential charity care issue?

Joey Jacobs

I think it would probably take us 60 days, maybe even a little less. We have a lot of expertise in doing geriatric-based units. One thing is you have to go back and re-look at the environment. In the geriatric population instantly falls become an issue, so we would go back and re-look about the flooring and beds and those sorts of things we would have to do. We would have to do some of that and then the staff would have to be trained for that geriatric patient and their special needs for that patient. By the time you got through the in-service and additional training probably 30 to 60 days maybe.

Alan Fishman - Thomas Weisel Partners

Okay and that would be relatively similar for TRICARE as well?

Joey Jacobs

Yes. It takes about 60 days to bring up any clinical program.

Alan Fishman - Thomas Weisel Partners

Okay and I guess you were aware of the self-pay volume increase, how did that contribute to the overall volume growth in the quarter? Did you break that out?

Joey Jacobs

I don’t have that number.

Operator

Your last question comes from Kevin Fischbeck with Banc of America Merrill Lynch

Kevin Fischbeck - B of A Merrill Lynch

I want to follow up on a comment you made earlier. The comment you made on the two deals you closed so far was helpful, but you also mentioned the ability to maybe do two to six deals next year, which I think is up from the two to three that you have recently been talking about. I just want to get a better sense of that visibility in the pipeline. What is driving it? Are the types of sellers changing? Can you give us any color there?

Joey Jacobs

More activity and actually there is activity with multi-facilities in one transaction. So, we could do one transaction and fill the six, or two transactions and get to the six. We have more of those opportunities now that the credit markets and PSI’s balance sheet has been strengthened, so the ability now to continue to consolidate the market is there for us, so the activity has picked up and there can be transactions that would get us there through one transaction.

Kevin Fischbeck - B of A Merrill Lynch

Okay so it is not as much a situation of, I guess you mentioned one of the hospitals being a non-profit hospital looking to focus on its core business is not necessarily an issue of the economy weighing on those types of sellers as it has as much to do with the financial flexibility that you have now opening you up to doing larger transactions?

Joey Jacobs

Correct.

Kevin Fischbeck - B of A Merrill Lynch

When we look at the cost structure that you have now, when we look at your margins and you look at each line item, the comments that you made earlier about other operating expense being a little bit high and how that is going to start to improve in Q4 was helpful. Is there anything else that you would look at, any line items where you say here is an area where either there is going to be a lot of leverage when we drive volumes or even at current volumes there is room to move? Any comments on that would be helpful.

Joey Jacobs

Sure, I can think of three areas: We have rolled out a formulary drug formulary for the whole company and we have established a corporate pharmacy and therapeutics committee. That just got kicked off, so we do think we will be getting more rebates and better use of lower cost drugs. The second is that on the benefit side of the business normally we are in April 1 reenrollment; we pushed that up to January 1st, so that will also assist the Company. Then last if we will just fine-tune our productivity standards and expectations on the salary and wage line we will get some benefits there, so right now those three areas. We might get some more expense out of the system in the professional fee line, so we have a project going on there too. So, we have several projects going on to take expenses out of probably the five or six largest expense categories for the Company.

Kevin Fischbeck - B of A Merrill Lynch

Do you have any thoughts about margin expansion opportunity or target margins?

Joey Jacobs

We expect our margins to improve, so once again, we have not given up on the goal of having an EBITDA margin before overhead of 22%.

Operator

This concludes today’s question-and-answer session. At this time I would like to turn the call back over to Mr. Jacobs for closing remarks.

Joey Jacobs

Thanks everyone for your attendance today and all of your questions. I hope I didn’t sound frustrated about answering the charity question. It is very important to all of you and it is very important to us and it has our undivided attention.

We do want to welcome the two new facilities, Prairie-St. John's and Emerald Coast to the Company, Fargo, North Dakota, and Panama City, Florida. To the CEOs, many of our CEOs did listen on in this call and I just want to thank them and their employees for the great job they are doing in keeping our patients safe and growing the business. We recently had a CEO meeting back in Nashville, probably six weeks ago, and I want everybody to keep in mind what Mike Ham reminded us of, we are PSI. So, thanks for all of your hard work.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Psychiatric Solutions, Inc. Q3 2009 Earnings Call Transcript
This Transcript
All Transcripts