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Executives

Steve Filton – SVP, CFO and Secretary

Alan Miller – Chairman and CEO

Analysts

Adam Feinstein – Barclays Capital

Tom Gallucci – Lazard Capital Markets

Justin Lake – UBS

Ralph Giacobbe – Credit Suisse

A. J. Rice – Susquehanna Financial

Darren Lehrich – Deutsche Bank

Christine Arnold – Cowen & Co.

Kevin Fishbeck – Bank of America/Merrill Lynch.

Gary Lieberman – Wells Fargo Securities

Frank Morgan – RBC Capital Markets

John Ransom – Raymond James & Associates

Whit Mayo – Robert W. Baird

Gary Taylor – Citibank

Universal Health Services, Inc. (UHS) Q3 2011 Earnings Conference Call October 28, 2011 9:00 AM ET

Operator

Good morning. My name is Tiktera [ph] and I will be your conference operator today. At this time, I would like to welcome everyone to the Q3 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions)

Thank you. Mr. Filton, you may begin your conference.

Steve Filton

Thank you. Good morning. I am Steve Filton. Alan Miller, our CEO, is also joining us this morning. Welcome to this review of Universal Health Services results for the third quarter ended September 30, 2011. As discussed in our press release last night the company recorded net income per diluted share of $0.86 for the quarter compared to the as adjusted $0.55 per diluted share recorded during the third quarter of 2010 as calculated on the supplemental schedules included with last night’s press release.

During this conference call we will be using words such as expects, believes, anticipates, estimates, and similar words that represent forecast projections and forward-looking statements.

For anyone not familiar with the risks and uncertainties inherent in these forward-looking statements, I recommend a careful reading of the section on risk factors and forward-looking statements in our Form 10-K for the year ended December 31, 2010, and our Form 10-Q for the quarter ended June 30, 2011. We’d like to highlight just a couple of developments and business trends before opening the call up to questions.

On a same-facility basis in our acute care division, revenue increased 3.1% during the third quarter of 2011. Adjusted admissions to our hospitals owned for more than a year were essentially flat for the quarter. On a same-facility basis, revenue per adjusted admission increased 3.5% over last year’s quarter. As expected, the robust acute care revenue growth experienced earlier in the year has moderated, as improvements in payer mix weakened in the third quarter. You also should note that UHS recorded no high-tech revenues in the third quarter.

We define operating margin as operating income or net revenue less salaries, wages, and benefits, other operating expenses, supplies expense and provision for doubtful accounts divided by net revenues. The impact of the prior year items recorded during the 2010 periods and as reflected on the supplemental schedules are not included in our divisional operating margins.

On a same-facility basis, operating margins for our acute care hospitals decreased to 12.3% during the third quarter of 2011 from 13.0% during the third quarter of 2010. As noted previously, the margin decline resulted mainly from a weaker payer mix.

Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates amounting to 246 million and 233 million during the three month periods ended September 30, 2011 and 2010 respectively. As a percentage of gross revenue the combined total of bad debt, charity care and uninsured discount was slightly lower than last year’s third quarter.

On a same-facility basis, revenues in our behavioral health division increased 6.8% during the third quarter of 2011. Adjusted patient days at our behavioral health facilities owned for more than a year increased 3.8% during the third quarter and revenue per adjusted day increased 2.9% compared to the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 26.2% during the quarter ended September 30, 2011 as compared to 26.0% during the comparable prior year period, despite the temporary closure of some capacity at one of our Pennsylvania facilities to repair certain physical plant problems. In addition, the results of the recently acquired PSI facilities largely met our financial expectations for the third quarter.

Our cash flow from operating activities was $207 million during the third quarter of 2011 as compared to $185 million in the third quarter of 2010. Our accounts receivable days outstanding increased to 47 days during the third quarter of 2011 from 42 days in the 2010 third quarter. Favorably impacting our cash flow from operating activities was the postponement of third-quarter federal estimated income tax payments granted by the Internal Revenue Service to certain tax payers located in areas that were impacted by recent flooding.

This postponement deferred an estimated federal income tax payment of approximately $30 million to $35 million from September 2011 to October 2011. Regarding the FTC required divestitures, we have signed an agreement to sell the Puerto Rico assets including San Juan Capestrano hospital and affiliated outpatient centers, and expect to enter into an agreement to sell Montevista and Red Rock hospital located in Las Vegas shortly.

Provided the divestitures are approved by the FTC, we anticipate completing the divestitures in both markets late in the fourth quarter, or early in 2012.

At September 30, 2011, our ratio of debt to total capitalization was 62% and the ratio of debt to EBITDA was 3.4 times. We spent $79 million on capital expenditures during the third quarter. We have opened or expect to open by the end of the year a total of approximately 250 new behavioral health beds at some of our busiest facilities during 2011. During the quarter we spent $38 million to repurchase approximately a million of our own shares. At September 30, we had approximately 700,000 shares remaining under our existing share repurchase authorization, a portion of which has already been exhausted in the fourth quarter.

We are pleased with our third quarter results, which continue to support our unique and proven model of diversification. In a challenging acute care hospital environment, we are fortunate to have the benefit of continued strong demand for behavioral services. When we combine our two business segments, our same facility revenue increased 4.1% and adjusted admissions increased 3.4% over last year’s quarter.

As we approach the one-year anniversary of the acquisition of PSI, our integration efforts are on track, and we are encouraged by the many areas of opportunity including bed expansions in several markets.

Alan and I will be pleased to answer your questions at this time.

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Adam Feinstein with Barclays Capital.

Adam Feinstein – Barclays Capital

Hi thank you. Good morning. just maybe starting point Steve, if you can just elaborate more on the payer mix comments earlier about a less favorable payer mix and just how best to understand this in terms of the impact from that and just comparing it to the first half of the calendar year, and just and then maybe a couple of follow up questions?

Steve Filton

Sure well. Just to remind folks, earlier in the year and particularly in the first quarter we had highlighted the fact that our acute care revenue growth was stronger than expected, a pleasant surprise, mainly because of a – and to a large degree surprising drop in uninsured volumes, particularly in the Las Vegas market, although we saw the trend throughout the portfolio.

In the Las Vegas market we attributed a large part to a dramatic reduction in unemployment rates there, unemployment earlier in the year dropped from like 15% to 12%, but as the year’s progressed, the unemployment rate has crept back in Las Vegas, back up to 14%, and in that market may have not surprisingly seen our payer mix deteriorate, and again we have seen the trend throughout the portfolio as well.

Just generally, we continue to see less commercial business. This quarter we saw a little less Medicare business, and we continue to see Medicaid and managed Medicaid, and obviously the sum total of all that is we grew payer mix and that is reflected in a slower revenue growth number.

Adam Feinstein – Barclays Capital

Okay, great. And then just a follow-up on Vegas, you know, you mentioned that you saw the payer mix fall off some, but maybe just talk about just the overall trends out there. It seems like you guys have done a good job with cost management. So just as you think about besides just looking at payer mix can you just give us some other highlights from Vegas?

Steve Filton

Sure. I mean you know again, I mean I think that the payer mix issue is just reflective of the fact that the market has suffered economically a little bit disproportionately to the overall national economy. But our overall position in the market remains very good. We are the largest market share provider by a significant amount, and we have finalized as we suggested that we would our contract renewal with Sierra that is now good for another three years beginning in July, this past July.

So contract with our biggest payer is in good stead. And just generally, I think in terms of the market share trends, we feel very comfortable and confident in our market position and we believe that when the market begins to recover economically, we will certainly benefit. From that and again I don’t want to overstate the case, I mean, Vegas was way ahead earlier in the year kind of flat in the third quarter, but overall still ahead for the year, and we are feeling pretty good about that.

Adam Feinstein – Barclays Capital

Okay, great. And then just a final question, maybe just on the psychiatric side, maybe if you can just provide some more color in terms of just you know what is going on there. I mean, obviously it seems like things have gone very well there over the past year with the acquisition of PSI, but maybe if you can just elaborate in terms of what integration you still have left, and then just curious just in terms of you know, some color around resolution. They had a few outstanding issues at a few sites when you guys acquired them. Just curious if any of those issues have been resolved which in effect would help volume [ph]?

Steve Filton

Sure. And I think there is a couple of stories to the behavioral segment Adam. One is just the overall underlying strength of the business, which is reflected in our same-store metrics. Patient days were up 4% in the quarter, and in this sort of an economic environment I think that kind of a volume increase is really pretty impressive. Pricing was up 3%, again in light of the fact that Medicaid cuts in many, many of our states took effect in July or sometime in the third quarter, also a solid number.

And those metrics largely apply at least directionally to both segments, to both our legacy portfolio and the PSI portfolio of assets. We had made some improvements at the PSI facilities from an operating perspective. We have mentioned on a number of occasions that we thought the majority of the improvements still to be affected will be affected in 2012 and 2013, and we still believe that to be the case.

I also alluded in my prepared remarks just opportunities from a bed expansion perspective and from you know a marketing perspective in terms of developing new business. We have talked previously about focusing on the military and behavioral problems in the military as a source of growth, again in both portfolios, and we will continue to focus on that.

And as far as you know some of the problems that PSI had you know I think we have been making progress in most cases and resolving those, and I think your suggestion that there is an upside to that is accurate. But that is a process and it will continue for some time. It is not sort of an on and off switch. But obviously you know we’re just feeling generally positive about the trends in behavioral.

Alan Miller

Adam, let me add that you have always recognized the benefit of the diverse nature of our business, if not the wisdom of having both. And so as Darren, A.J. at times, but I think this quarter shows that where there is a little weakening on one side, in a bad economy if not generally, behavioral health services are more in demand and we know how to provide them efficiently, and even before the Psych Solutions, which had turned out to what we had expected there is wisdom in having a diverse base like this. And I know that you have recognized it early on.

Adam Feinstein – Barclays Capital

Thank you. I appreciate it, and it is really a great, great job of building of the overall business model.

Steve Filton

Thanks.

Operator

The next question comes from the line of Tom Gallucci with Lazard.

Tom Gallucci – Lazard Capital Markets

Good morning guys. Thanks for the color. Maybe two questions, first, late yesterday it seemed that the Federal government had approved some of the Medicaid cuts that were requested out in California. I was wondering if you had a chance to look at that at all, and if you had any color or perspective on how that may or may not impact you all.

Steve Filton

Tom, I believe that those cuts affect providers other than hospitals. We don’t think they have any impact on UHS.

Tom Gallucci – Lazard Capital Markets

Okay, good. That is what we saw too, but wanted to make sure. And then you mentioned Steve in your prepared remarks no high-tech revenue in the quarter, hopefully that makes things a little more straightforward than you have seen with some of the other companies for this quarter. Can you remind us about how you intend to handle high-tech from an accounting standpoint, and sort of what your expectations are going forward?

Steve Filton

Sure. Well, two things, first of all just substantively and I think we have been through this before, but just to remind people, where we’re at in terms of implementing an EHR electronic health record is we implemented our first hospital this past July. We have subsequently implemented another couple, but then we have the remaining 20 some odd hospitals to go over the next couple of years.

And obviously as we implement, we would hope that shortly thereafter, we will meet the meaningful use standards, and will begin to qualify for high-tech revenues. Now we also said in our second quarter 10-Q that we did expect something in the neighborhood of $10 million or $15 million of Medicaid high-tech revenues, which don’t in many cases require you to meet the meaningful use hurdles that Medicare requires.

We would expect to get them by the end of the year or early next year. But we also I think discussed in our second quarter call that our intent, which seems to be somewhat different than our peers is to do our best to match our revenues and expenses so that as we get those revenues, as we receive them, our intent would be to essentially defer them and amortize them over a comparable period to how we are amortization the expenses associated with implementing the EHR.

So in the third quarter of 2011, we had some very minor amortization expenses as we just implemented the system and began to amortize in a few hospitals. That number will grow a little bit in Q4, and obviously will grow more in 2012. When we give our 2012 guidance, we intend to be very transparent about the amount of revenues we have included in our guidance and the amount of related expenses.

Tom Gallucci – Lazard Capital Markets

Okay, great. Thank you very much.

Operator

The next question comes from the line of Justin Lake with Universal Health [ph].

Justin Lake - UBS

Thanks, good morning. I know you are not going to give guidance for ’12 until the fourth quarter, but I was curious if you have any initial thoughts on how we should think about any kind of headwinds or tailwinds here for next year that should be considered maybe such as an update on PSYS synergies, and Steve, maybe even if you want to opine on on your current comfort level with the 2012 consensus estimate of 450?

Steve Filton

I will choose not to do that Justin. We will give our guidance in February as we normally do, where we are going through the budget process in great detail now, and I think we have always felt more comfortable completing that process before being real specific. But I think that to a large degree the third-quarter results are fairly emblematic of what things should look like going forward. I think that an acute care revenue growth rate in the sort of 3%, 3.5% range seems reasonable in this sort of an environment.

The behavioral growth rate of 6.5%, 7% that we saw in the quarter I think is actually very impressive. And we will be hard pressed to keep that up, but we should do something close to that as we move forward just again because we continue to find opportunities to expand capacity et cetera. So that is my general sense of it, I don’t see any great pressure on expenses. our operators have done generally a good job in controlling expenses and managing, and I don’t see that changing dramatically in 2012.

Justin Lake - UBS

Any update on PSYS synergies, I think you had talked about the potential there for maybe 100 basis points, 150 basis points of improvement over 2012 and 2013, any change in your thought process or timing there?

Steve Filton

As always Justin, you are more confident about our performance which is I think is why the operator said that you work for Universal Health.

Justin Lake - UBS

I only wish I could.

Steve Filton

It is an opportunity for 50 basis points or 100 basis points of improvement, and again I think what I was saying in some of my comments to Adam is we have actually achieved a little bit of that in 2011, you know, what I will sort of call the low hanging fruit. I think that they will remain opportunities both from an operating efficiency and a business development standpoint in ’12 and ’13. And I think what you are getting at and I appreciate is that those – if we are able to achieve those opportunities they are sort of above and beyond the underlying metrics that I just mentioned.

Justin Lake - UBS

Okay, Steve.

Steve Filton

We will obviously be far more specific I think about that when we give our 2012 guidance.

Justin Lake - UBS

Okay, great. Thanks for all the color.

Steve Filton

Sure.

Operator

Your next question comes from the line of Ralph Giacobbe with Credit Suisse.

Ralph Giacobbe – Credit Suisse

Thanks. Good morning. do you have how was acuity mix in the quarter Steve?

Steve Filton

We talked in the first half of the year Ralph about the fact that our acuity is measured by our Medicare CMI was at the highest levels in our history. we saw sequentially a very slight drop off in Q3, but are still ahead of last year and I think there is generally not seeing any real softening of acuity to the degree that some of our peers have alluded to.

Ralph Giacobbe – Credit Suisse

Okay, and then just as it relates to the payer mix number, do you actually have the payer mix numbers maybe for this year versus last?

Steve Filton

I mean, first I am not exactly sure how I would describe it. But you know again, I think in my comments I outlined we have been seeing pretty consistently a 5% or 6% decline in commercial admissions that certainly continued into Q3. The trends up to now have been very slight growth in Medicare. Q3 we actually saw a slight decline in Medicare volumes. I am not sure that I would read a whole lot into that, since I don’t tend to believe that Medicare volumes are all that economically sensitive.

Probably the one element that maybe stood out a little bit in the quarter was that Medicaid and managed Medicaid admissions picked up, and I think that contributed along with some continued uninsured pressure to the step down in our acute revenue growth.

Ralph Giacobbe – Credit Suisse

Okay and just on that point, on the managed Medicaid side, have you guys – what is the percentage, remind us may be what the percentage of total revenue that is because that is in the managed care bucket. Is that right?

Steve Filton

It is I am not sure that I have that.

Ralph Giacobbe – Credit Suisse

Okay, we could follow up I guess.

Steve Filton

Yes, we can.

Ralph Giacobbe – Credit Suisse

Well, my question was basically can you help us understand sort of the profitability as more of that fee for service Medicaid goes into managed Medicaid, is there a differential on sort of the top line in how we should think about profitability?

Steve Filton

Yes, I don’t think that in general we view a shift to managed Medicaid as again that is a general comment that may vary in specific situations, but as being terribly impactful. I think I should note that in behavioral most of our Medicaid business or a lot of the large chunks of it have been managed for years. As I think about it Medicaid has been managed program in states like Massachusetts and Pennsylvania for many, many years. And they are among our largest Medicaid States for behavioral.

On the acute side, there will be a change as Texas in particular moves to a managed Medicaid model because that is our biggest state from (inaudible) perspective. But I think in general what we find to be the dynamic is that you know payment rates generally start off around the same, and the way that the managed companies make their profit is by doing a better job of controlling utilization.

I think there may be some sort of temporary disruption in the beginning, but at the end of the day I think we appreciate the fact that commercial companies sort of set the rules in advance, and you know what they are, and you are able to run your business that way as opposed to the government, which tends to manage utilization by doing retrospective audits 2, and 3 and 4 years down the road, which is a much more difficult way quite frankly to manage your business.

I don’t think we’re terribly concerned with the shift to either managed Medicare or Medicaid. We have been dealing with it on both sides of the business for a long time and again once we have an opportunity to adjust to it; I think we will do just fine.

Ralph Giacobbe – Credit Suisse

Okay, thanks. And just the last one, DSO seemed to pick up a little bit in the quarter, maybe help us understand what is going on there?

Steve Filton

Yes, no one single explanation. I think we had probably a handful of situations where receivables ticked up in the quarter. the state of Illinois, which for us is a behavioral state slowed considerably in making Medicaid payments in Q3, and quite frankly we expect that to continue into Q4. we have had that experience in Illinois before. We have a much bigger presence in Illinois after the PSI acquisition, however, so it is more apparent but we expect that those payments will resume and will be caught up sometime in 2012. There has been kind of similar slowdowns with California Medicaid or Medical. We have had some slowdown in VA payments, the Veterans Administration payments of South Texas, where we are an exclusive VA provider.

In every one of those cases, we expect that the government will make good on its payments although, it may be a bit of a process. I should also note that I don’t think in every case it is a function of simply government budgetary pressures, I think there are some processing issues et cetera that the government is working through.

And then in Las Vegas, I mean I alluded I think in my responses to Adam that we signed our Sierra contract, but during the quarter while we were still negotiating the final terms we weren’t getting paid. So you know that pushed our AR days up, and that has frankly has already largely been resolved as we signed the new contract and Sierra has caught up on their payments.

Ralph Giacobbe – Credit Suisse

Okay, that is helpful. Thank you.

Operator

Your next question comes from the line of A. J. Rice with Susquehanna Financial.

A. J. Rice – Susquehanna Financial

Hi Alan and Steve. A couple of things if I could ask just as when we head to 2012, I just was going to actually make sure we are up to date on 2011. You didn’t say anything about the guidance, I am assuming you are reaffirming sort of your full-year guidance essentially at that point. And is there any early read on sometimes I know you comment on what you are sort of seeing by and large, or otherwise in the early part of the quarter, or any thoughts on that at this point?

Steve Filton

So, two things A.J. yes, you know, I think generally our practice has been we don’t comment our guidance. We’re just reaffirming what is out there. as far as trends in Q3, again they seem to be reflective more of the same from a volume perspective. You know it is obviously still early in the quarter. Look I think that the critical piece as this year has demonstrated in our acute care performance is payer mix, and unfortunately, fortunately or unfortunately, but this early in the quarter we are not going to have a real read on that. So to me that is the open-ended variable in terms of acute performance.

A. J. Rice – Susquehanna Financial

And then maybe just one other question, broadly on capital requirement, you obviously stepped up this quarter to the advantage to pull back into stock, is that something that maybe has moved up as a priority a little bit, and then I guess you guys have also then mentioned in some of the local press reporting as looking at a couple of these big nonprofit DOs that are out there, what you are seeing really on both sides, but I guess your admin is active on the acute side. Are you seeing some things that maybe are interesting at this point.

Steve Filton

A couple of things A.J. You know we have said since the PSI acquisition was completed that our major focus of free cash flow was going to be the repayment of debt, and that has been the case. We have done a nice job I believe of generating cash in the last year, and repaying that debt. and that has created significant amount of financial benefit and leverage.

Alan Miller

On the other hand we have also said we will explore opportunities as they arise as we have historically done. So we will be judicious in doing that. You know, as you commented we took advantage during the quarter of what we thought was a historic decline in our stock price below valuations or at valuations that we thought made share repurchase a pretty compelling sort of move in the quarter. and we will continue to look at that.

There are, we commented on this before, there are lots of opportunities out there. I think that the environment, the uncertain environment has created a number of sellers out there, who might not have previously been sellers or potential sellers. And we look at a lot of opportunities, but again I think we will be judicious in doing that. The one thing I would say about local press is it is often unreliable. So I don’t think you can read a lot into sometimes what the local press reports. But I think UHS’ history sort of speaks for itself. We will respond to opportunities if we think they are compelling.

A. J. Rice – Susquehanna Financial

Okay, thanks a lot.

Operator

Your next question comes from the line of Darren Lehrich with Deutsche.

Darren Lehrich – Deutsche Bank

Banks, good morning everybody. I guess just a couple of things left on my list here, first can you just comment a little bitjust a couple of on residential in the context of what is going on at the state level, any new trends there to talk about, the length of stay has been I guess tracking down about 4% you know basically all year. But if there is anything more to say there you know I would be interested?

Steve Filton

No Darren, I mean, you know, our behavioral segment itself breaks down into two broad segments itself, which is the acute behavioral segment and then the residential segment. The residential segment as you know is the segment that has the vast majority of our Medicaid revenue, and so it has been the portion of our behavioral that has been under the most pressure both from a rate perspective and a length of stay perspective as to alluded to. And quite frankly I don’t really see an end to that as long as you know the state budgets remind under pressure.

But it should be noted that the behavioral – excuse me the residential business is definitely the smaller component of our behavioral business, probably in the 30%, maybe 35% range. and you know we have talked before about to the best of our ability actually trying to shift residential capacity to acute capacity where that is possible. We have done it in a couple of places with some notable success. I think we have mentioned Winston-Salem North Carolina before. it is a good example where we have converted beds, and we will continue to do so. But the residential business is a tough business in this environment. But we continue to do well in it.

Darren Lehrich – Deutsche Bank

Okay that is helpful. And then I guess just back to the payer mix the questions were more on the acute side, but on behavioral we heard (inaudible) talk a little bit about their pressure, that there are seeing an MLR in their behavioral business. I am just wondering if you have seen any notable trends with regard to commercial managed care growth inside your behavioral business, and whether that might perhaps be an offset to some of the Medicaid pricing, because I think 3% was probably a little bit better than what I would have expected on the pricing side there.

Steve Filton

Yes, I think that (inaudible) comments were sort of very specific to the notion that health care reform in 2011 made – extended the age of dependents up to 26 years old and I didn’t follow very carefully, but I think they quantified that that had some impact on their MLR. We don’t sort of cut our utilization that fine or in that same way. But I think in general, your question is a good one in the sense that and I think we have said this before I believe that our behavioral business has benefited from a payer mix. It is favorable payer mix that is a result of benefit plan design.

We tend to focus on the fact that it is mostly a result of mental health parity legislation that passed late in 2009, but obviously I think we get some benefit from the fact that there are, I think the estimates are 1 million more eligibles, who are currently eligible because of that age 26 change et cetera. So I think in general, we have seen a more favorable shift in our commercial business on the behavioral side that again is a favorable change that we have not seen on the acute side.

Darren Lehrich – Deutsche Bank

Well, I think that is it. I will just make one comment, Alan I certainly wouldn’t have expected you to be buying stock back inside of the year from the PSI deal. So, good job getting your leverage down and being able to do that too.

Alan Miller

Thank you Darren.

Operator

The next question comes from the line of Christine Arnold with Cowen & Co.

Christine Arnold – Cowen & Co.

Hi there. A couple of follow ups, you reopen Pennsylvania, can you speak to what impact that might have going forward. I think that was supposed to be open third quarter, but was delayed and that might have impacted the metrics, and then could you expand on the military opportunities you see in the behavioral health business that you alluded to?

Steve Filton

Sure Christine. So you know, we discussed in our second quarter that we had a facility here in Pennsylvania that had some physical plan problems. It required us to close some capacity because it was relatively short-term closure. We didn’t really have an opportunity to reduce our cost by much. So we had about a couple of million dollars of operating losses. I think you are correct. We thought we might be able to get it reopened sometime in Q3. it turned out we really didn’t get a chance to reopen the capacity until early in Q4.

So that couple of million dollars of operating loss replicated itself in Q3. We’re sort of ramping back up. So there may be a small piece of it that continues into Q4. but in effect I think it should be a tailwind and a positive for us in 2012 as the capacity is fully open and remains open for all of ’12.

And your second question was about?

Christine Arnold – Cowen & Co.

Military opportunity that you alluded to.

Steve Filton

Okay, I am sorry. Yes, we have a number of behavioral hospitals that are located very approximate to military bases. There are a lot of returning veterans who have issues as a result of their service. We have designed programs that are responsive to those needs. We have got sort of a whole complement of people focused on that, and focused because it tends to be a base by base sort of an issue on responding to local needs. And I think that has been an upside.

You know it is you know I want to be fair, I mean it is a niche program. it is still not a huge as a percentage element of our overall behavioral revenue, but in terms of growth opportunities I think it is a significant growth opportunity.

Christine Arnold – Cowen & Co.

Could you go the TRICARE contractors, could you go to DoD, could this be expanded to something kind of more macro for you, or is it going to be base by base revenue?

Steve Filton

To the best of my knowledge it remains a locally run kind of a program. As best as we can tell that is the way the military prefers it, and I think we have been responsive to that and we have aligned ourselves in that way. So we’re comfortable obviously responding and offering the service, and however the military wants to do it and that is what we are doing right now.

Christine Arnold – Cowen & Co.

Okay, thank you.

Operator

Your next question comes from the line of Kevin Fishbeck with Bank of America/Merrill Lynch.

Kevin Fishbeck – Bank of America/Merrill Lynch

Just wanted to confirm, you mentioned before that you expect to get $10 million to $15 million of high-tech payments in Q4 or Q1, but that is the cash payment and then you would take that or you would amortize that benefit as revenue over time?

Steve Filton

That is correct Kevin.

Kevin Fishbeck – Bank of America/Merrill Lynch

Okay and then just looking at the margins in the business, I’m actually a bit surprised about the size of the margin compression in the acute care business and the lack of more margin expansion in the pysch business. I think historically you have talked about hitting 3% and maybe 4% of revenue growth to be able to show some margin expansion. And it is not like you historically did whether you care how that revenue came through where it was volume or price. And since you are doing a lot better than that on the psych and there is potentially psych solutions cost-cutting, I am surprised that we are going to see flow through there and then again if you are in that ballpark and you saw acute care margins down 70 basis points. Just give a little bit of color there?

Steve Filton

Sure. I think on the acute side Kevin, you have to and certainly the way we look at it is that we include bad debt expense in our net revenue growth picture. And when you include bad debt expense in net revenue for the quarter our net revenue growth is sort of more in the 2.3%, 2.4% range. And again I think your comments are fairly accurate. I think we believe if we get to 3%, 3.5% that we have the opportunity for at a minimum keeping our margins stable if not growing them. But 2.5% starts to really push the envelope, and you clearly saw that in the quarter.

The hope would be that we can improve that payer mix as the economy improves and we get some rate increases et cetera. On the behavioral side, again, I think it is a little more difficult when you get up to those 26% margins that we showed in the quarter for the same store of the legacy facilities. I think this notion that some people are accustomed to going back several years that we’re going to have 40 basis points, or 50 basis points, or 60 basis points of margin expansion a quarter is a little unrealistic.

I think over time though I would agree with the notion that with 6.5% to 7% revenue growth we should be able to expand our margins. I think if you look at the overall margins that include the PSI facilities, again we had a couple of kind of smaller drags on the portfolio. We seem to have a dark cloud over us here in Pennsylvania where we had a PSI facility that was flooded as a result of the couple of floods that we had in September and had to close. And you know again there is probably a couple of million dollars of losses there.

Again I wouldn’t necessarily call that out. Generally it is dragging the margins down a little bit, but yes, I mean we would share the hope that with that sort of margin – excuse me with that sort of revenue growth that in the future we might be able to squeeze out a few more basis points of margin expansion.

Kevin Fishbeck – Bank of America/Merrill Lynch

Okay that is helpful. So like the 3%, 3.5% is a cash revenue number when you think about margin expansion opportunity and I guess next year we are going to change the accounting on bad debts. So when you talk about 3%, 3.5% growth in revenue, I guess it is kind of the baseline assumption heading into 2012. Is that under the current accounting and so the GAAP will be a little bit less?

Steve Filton

That is a cash accounting number in fairness, and I realize it can be confusing because obviously the GAAP accounting doesn’t follow, but we have always looked at it that way because at the end of the day, we can only do what we can with the cash that comes in the door. So you ask, when I talked before about 3% or 3.5% revenue growth in acute that was a cash number that beginning in 2012 will be consistent with the reported number.

Kevin Fishbeck – Bank of America/Merrill Lynch

Okay that is helpful, and then as far as the proceeds from the asset sales that you expect to get in the next three of four months, you know is there a thought process on where that capital should go, is that viewed as usual in some way and maybe more deployable?

Steve Filton

No, again I think my comments from before what sort of still be relevant and that is you know our first priority is debt repayment to the extent that we have exceeded our sort of scheduled debt repayment schedule. Like I said we took advantage of a share repurchase opportunity in the quarter, and will continue to explore those sorts of opportunities what I will kind of describe as excess cash, but again in this environment

we think we have done pretty well by kind of sticking to our knitting and paying down our debt rather rapidly.

Kevin Fishbeck – Bank of America/Merrill Lynch

Okay, thanks for the clarity.

Operator

Your next question comes from the line of Gary Lieberman with Wells Fargo Securities.

Gary Lieberman - Wells Fargo Securities

Hi, thanks for taking the questions. There has been some discussion that Medicare might consider rebasing the behavioral PPS, could you just share your thoughts there, and you know any thoughts or analysis you have done in terms of the amount you think it could be rebased by?

Steve Filton

Well, hi Gary, I think as you know there was a MedPAC meeting in the past month or so to talk about the issue. From our perspective the meeting went largely as we expected that it would. I think MedPAC made some important observations. One that from an overall program perspective, the behavioral PPS methodology that was introduced in 2005, or was implemented in 2005, has largely played out the way that it was expected to. That is the overall program spend, the amount of capacity, the amounts of beds available, the amount of utilization in admissions et cetera, all have tended to play out as MedPAC and CMS expected.

And that is generally I think a good thing. What MedPAC commented on or observed, again nothing new to this was that there was a difference in margins between the free standing facilities and the units within acute care hospitals, and what they suggested was that that differential merited further study. And I think the whole thrust of the meeting for the most part was how do you gather that data, you know and how do you do that meaningfully.

The industry, not just UHS, but the industry I think is a full participant in that. We have engaged a consultant to help do that. We think that there are perfectly reasonable, rational explanations for the margin difference, most of which I think center of the size of hospitals or the freestanding facilities tend to be larger and therefore more efficient, which we think is intellectually intuitive. And we are prepared to share that information with both MedPAC and CMS. Our sense of it is that the process of studying this issue is not an immediate one. It will take some time.

Like I said we will participate in it, but we’re not of the mind that there are any sort of imminent or immediate changes to the Medicare reimbursement system, and I will also remind you that Medicare is less than 20% of our behavioral revenues.

Gary Lieberman - Wells Fargo Securities

Good. Thanks a lot for the color.

Operator

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

Frank Morgan – RBC Capital Markets

Good morning. just a couple of quick ones here, Steve you mentioned you had bought stock since the end of the quarter, I was wondering if you comment on how much you bought and what is that updated number on remaining shares available. And then secondly, just more of a mechanical question with PSI leading close to lab [ph], those behavioral results, will you put that in same-store in the fourth quarter, or just wait until you get the full quarter and the first quarter of next year?

Steve Filton

No, we will put it in – we will have them in same-store in the fourth quarter. I don’t have the share repurchase numbers in front of me. Obviously it is not a huge number that is left on the authorization, but like I said in my remarks I know we have exhausted some of it already in the first month.

Frank Morgan – RBC Capital Markets

Okay, just one last one, I will hop off. In terms of were the third quarter kind of run rate of growth in behavioral reimbursement, is that a good kind of way to think about the way it will look say over the say the next 4 quarter, or would you have all the rate cuts that went into effect, are they kind of loaded into the numbers now, and would we expect to see that same type of year-over-year rate growth over the next three quarters?

Steve Filton

You know, I think when I was responding to Justin’s question about sort of the guidance for next year, I commented on the fact that 6.8% of behavioral revenue growth in the quarter was surprisingly strong, and maybe a bit optimistic as you thought about next year for a couple of reasons. One is, I think as you have alluded to some of the Medicaid cuts, they were not implemented in Q3. Most states implemented on July 1, but there are some states like Texas that did not implement till September 1 consistent with their fiscal years.

So there is – there may be a bit of a further drop off in Q4 as we get the full implementation of the Medicaid cuts. The other issue I think Darren kind of alluded to and I think Christine may have alluded to is that I mean we have had some favorable offset. We have a favorable kind of commercial offset in our payer mix in the behavioral segment to these Medicaid cuts that we don’t quite frankly have available in our acute segment. It is a little hard to predict to what degree that can be sustained et cetera.

Again I think we’re you know, perfectly comfortable that behavioral growth will continue in kind of a 5.5%-6.5% range and we’ll certainly you know, hope to push it to close to what we've been running but you know, I wouldn't you know, sit here today and guarantee that we can do that.

Frank Morgan – RBC Capital Markets

Thanks.

Operator

Your next question comes from the line of John Ransom with Raymond James. John, your line is open.

John Ransom - Raymond James & Associates

Hi, good morning. Just a couple of things, Steve, you mentioned you know, the acute-care opportunity you know, your stock is stretching at a single-digit multiple on EPS. I mean, what kind of opportunity would you have to see to do a standalone acute-care acquisition relative to buying back your own stock. What kind of discount are you looking for?

Steve Filton

John, I don't know that you can answer that question sort of an entirely kind of you know, multiple or discount basis. I think most likely, and I think frankly again this has always been true in terms of the way we explore opportunities or try and take advantage of opportunities again both behavioral and acute. We have been particularly interested in opportunities that allow us to enhance an existing franchise that have an unusual growth opportunity or improvement opportunity, but again you know, I'm going to just repeat I think for UHS you know, the history sort of speaks for itself. I think we've been more judicious than you know, maybe I would say most or maybe even all of our peers in selecting those opportunities and you know, I just you know, I think it's going to be the same as we move into the future.

John Ransom - Raymond James & Associates

Have you seen anything out there that look more interesting than what you might have seen over the past five years given what we're hearing about the supply of opportunities in the marketplace?

Steve Filton

Again you know, I think there are interesting opportunities out there. You know, the challenge which I think is how you are framing it is you know, at what valuations and at what price do they become compelling. And look you know, you raised an important point, I mean we have an opportunity to buy back shares as another opportunity for our free cash flow that is pretty compelling at the moment as well, and you know, that certainly enters into our thinking. But again I don't know that's any different than how we think about this process or how we've always thought about it.

John Ransom - Raymond James & Associates

Okay, and then secondly just a minute on the high-tech revenues, it looks like you know, relative to some of your peers you're qualifying a little more slowly. Was that a strategic decision or is your IT consultant may be struggling a little bit to find all the meaning [ph] for these criteria.

Steve Filton

No, I think you know, substantively we're in a little bit different position than some of our peers. We're just implementing an EHR system that we think will qualify. We had you know, essentially or effectively a homegrown clinical system that we were most likely going to replace anyway, but certainly with the availability of the high-tech reimbursement that became a much easier decision to make.

So you know, that's, we're just at that point where I think some of our peers already have hospitals that, and again I obviously have no direct knowledge of this that they believe qualify or having an indication that they qualify. We know that we are just beginning to implement hospitals. So you know, there are revenue recognition, our expectations are going to be based on that.

John Ransom - Raymond James & Associates

Okay, and then thirdly this is for Alan. Alan what does your crystal ball say on the super committee and also going from super committee to doc fix, what do you think is a realistic scenario in terms of what hospitals are going to have to contribute to the pay for for both of those efforts.

Alan Miller

Well, first of all nobody knows and we don't think, well I'm just going to take it back, I was in Washington the other day and they said it's unlikely – they thought it was unlikely that they would get to $1.2 trillion that it would be something short of that and so it's a question of what it actually gets to depending on how much and what hospitals might have to contribute. The really isn’t anything to say beyond that other than this week is really the week although they had to have it done by November 23rd in order to process it and do the calculations and get the regulation out. It really has to be finished by this week.

John Ransom - Raymond James & Associates

Right.

Alan Miller

So look at the papers over the weekend and by Monday probably we'll see something.

John Ransom - Raymond James & Associates

Okay, thanks so much.

Operator

Your next question comes from the line of Whit Mayo with Robert Baird.

Whit Mayo - Robert W. Baird

Hey, thanks. Steve, do you have any feel for how your UPL is going to change with the new waiver program in Texas. I know it has done a lot but I'm just curious if you heard anything new?

Steve Filton

No, Whit I think that you kind of accurately described it, our general sense is that the changes that have been announced in Texas are unlikely to have much of an impact on the specific UPL programs that we participate in. I know that for some of our peers, you know, there has been a more material effect but our sense and our understanding is that our UPL programs will not have much of an impact.

Whit Mayo - Robert W. Baird

Okay, and looking at your free cash flow you’re kind of on a run rate from almost $500 million now at this point and you’ve consistently said you know, you're going to look at some more psych beds as an opportunity, you’ve got high tech coming up over the next you know, couple of years. Maybe just directionally can you help us think about you know, CapEx and what's going to be required going forward?

Steve Filton

You know, Whit I think that that's another sort of a dynamic where I think that our, you know, current performance is reflective. You know, we said I think in Q2 that we expect it to spend somewhere in the neighborhood of $275 million to $300 million on CapEx in 2011. You know, I could see that number moving up or down a little bit in the future but it seems to me to be a reasonable run rate as we think about the future and you know, at the moment I don't anticipate you know, material changes to that trajectory.

Whit Mayo - Robert W. Baird

Okay, so thinking into ’12 $300 million could be a decent number to think about?

Steve Filton

I think so. I mean again you know, we are not giving guidance at this moment and you know, I reserve the right as we finish our budget process, to think about differently but you know, again you know, in terms of a placeholder at this moment I think it's a good one.

Whit Mayo - Robert W. Baird

Yes, okay. No, that's helpful and maybe just one last thing and I may have missed this. Did you comment at all on the EMTALA demo project for adult Medicaid, I think Debbie said that it started in October, just didn't know if you are participating in that just curious if you have any thoughts.

Steve Filton

I did not comment on it. Thanks for asking because we think it's a positive development, just for those who don't know for the most part Medicaid does not pay or reimburse for adult behavioral treatment. So you know, for folks who are between the ages of 21 and 65 and who don't qualify for anything other than Medicaid we are generally not getting paid for those folks.

As part of healthcare reform there is again in the grand scheme of healthcare reform a relatively small program demonstration project to allow states to apply for federal funds to start to pay for and reimburse for those that age folks. We know a number, I think it's at least a dozen states in which we operate, have applied for to participate in the demo project.

We know that a number of those states have specifically named certain of our hospitals as providers and so you know, we are working with those states. We view that again the demo project itself is probably not enough to materially, I'm sure it's not enough to materially affect our results, but if in fact it is the precursor to change in that regulation that would be we believe a significant positive for the behavioral business.

Whit Mayo - Robert W. Baird

Perfect. Thanks a lot Steve.

Steve Filton

Thanks.

Operator

Your next question is a follow up from the line of Justin Lake.

Justin Lake – UBS

Thanks. I just had one quick follow-up on the Medicare psych side, Steve, with the MedPAC analysis, the work you are going to doing going forward, I just wanted to check that are there any Medicare or I should say are there any psych rates that in the commercial or Medicaid world that are tied to that are directly tied to Medicare so that if Medicare were to be cut you would see some corresponding decrease in some of the other rates?

Steve Filton

Now, I mean look they maybe you know, some sort of isolated contract out there but you know, generally neither our commercial nor Medicaid rates are tied to Medicare reimbursement.

Justin Lake – UBS

Great, thanks.

Operator

Your next question comes from the line of Gary Taylor with Citibank.

Steve Filton

Okay, I just want to say operator, we've got to make this our last question but Gary go ahead.

Gary Taylor - Citibank

Okay, the question is does the affiliate [ph] loss get any easier to swallow if Cardinal actually win the world series?

Steve Filton

There is a couple of hardened [ph] fans sitting with me in the room Gary and I would tell you they think not. You know, when we set the date of the call we actually were looking at the world series schedule, and thinking this is going to be a real challenge for us. So there is a lot of disappointment in this room.

Alan Miller

We bought a bid for Chris Lee [ph]. I'm ready to let him go.

Gary Taylor - Citibank

Well, probably just jinx to my folks that you can tease me on Monday. My only real question I think that's left unanswered is when you look at, can you tell us on the dollar basis sequentially the Medicaid rate hit that you took. So you know, $x million of sequential EBIDTA hits from you know, the rate actions in the states on July 1.

Steve Filton

You know, in our –

Gary Taylor - Citibank

Or ball park even.

Steve Filton

Yes, I mean in our second quarter 10-Q I think we attempted to quantify the dollar impact of you know, what we've been talking about is 3% or 4% Medicaid rate cut, and I think that number as I recall was approximately $45 million or $50 million and I think you know, we still feel like we're on that trajectory. Obviously that's an annual impact number.

Gary Taylor - Citibank

Right. So okay, so you're still on that trajectory. So end of the day that didn't change a lot. So over the inpatient acute, inpatient behavioral in RTC, where was the greatest you know, rate impact would you say of those three?

Steve Filton

I think from a rate perspective Gary the impact has been pretty similar across the segments, most of the Medicaid cuts within a state have been kind of what I called you know, broad-based or you know, they haven't been terribly new ones. So I don't know that from a rate perspective we find that there any different. Obviously, you know, they vary by state and I think as you know, in responding to Darren’s question from before, we find that in the behavioral residential segment it's a little bit of a double whammy, because we been impacted not just by rate reductions but by length of stay compression that we don't really see on the Med-Surg or even in the acute behavioral side of the business.

Gary Taylor - Citibank

Okay, perfect. Thank you.

Steve Filton

Okay, well we’d like to thank everybody for joining us this morning and look forward to speaking with you again in the fourth quarter when we’ll be prepared to give our 2012 guidance as well. Thanks very much.

Operator

This concludes today's conference call. You may now disconnect.

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