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Universal Health Services, Inc. (UHS)

Q3 2007 Earnings Call

October 30, 2007, 9:00 AM ET

Executives

Steve G. Filton - Sr. VP, CFO and Secretary and Controller

Alan B. Miller - President & CEO

Analysts

Darren Lehrich - Deutsche Bank Securities

Christine Arnold - Morgan Stanley

Gary Lieberman - Stanford Group Company

Erik Chiprich - BMO Capital Markets

Shelley Nall - Goldman Sachs

Adam Feinstein - Lehman Brothers

John Ransom - Raymond James

Kemp Dolliver - Cowen and Company

Thomas Gallucci - Merrill Lynch

Gary Taylor - Bank of America

Whit Mayo - Stephens Inc.

Matthew Ripperger - Citigroup

Ken Weakley - Credit Suisse

Frank Morgan - Jefferies & Co

Presentation

Operator

Good morning my name is Bobby Joe and I will be your conference operator today. At this time, I would like to welcome everybody to the third quarter 2007 earnings release conference call.

All lines have been placed on mute. To prevent any back ground noise After the speaker’s remarks there will be a question-and-answer session. If you would like to ask a question during this, time simply press star then number one on your telephone keypad. If you would like to with draw your question press the pound key. Thank you. Mr. Filton you may begin your conference.

Steve G. Filton – Senior Vice President and Chief Financial Officer

Good morning, I’m Steve Filton, Alan Miller, our CEO is also with us and welcome to this review of Universal Health Services results for the third quarter end in September 30 2007. As discussed in our press release last night we recorded net income of $0.54 per diluted share during this year’s third quarter. After adjusting for the various items disclosed and quantified in our press release and related schedules of non-GAAP supplement on consolidated statements of income information, our adjusted income from continuing operations with $0.64 per diluted share for the quarter ended September 30, 2007; as compared to $0.54 per diluted share for the quarter end in September 30, 2006.

During this conference call we will be using words such as beliefs, expects, anticipates, estimates and similar words that represent forecast projections in forward looking statements. For anyone not familiar with the risks and uncertainties inherent in these forward looking statements, we recommend the careful reading of the sections on risk factors and forward looking statements in risk factors in our Form 10K for the year ended December 31, 2006.

I would like to highlight just a couple of developments in business trends before opening the call off to questions. Revenues for the third quarter increased 13% over the prior year. Exclusive of the impact of new facilities most notably Texoma and the revenues related to construction managements contract, where by we are building a new hospital for an unrelated third party. Revenues have increased by 7%. On as same facility bases in our Acute Care Division, revenues increased 7.6% during the third quarter of 2007. The increase resulted from admissions growth, and an increase in revenue per admission. Admission to our hostels owned for more than a year increased 2.5% for the quarter. On a same facility bases, revenue per adjusted admission rose 3% during the third quarter of 2007.

We defined operating margins as operating income on net revenue, less salaries, wages and benefits, other operating expenses, supplies’ expense and provision for doubtful accounts divided by net revenues. On a same facility basis, operating margins where our Acute Care House owned in both the third quarter of 2007 and 2006, increased to 12.6% in the quarter just ended as compared to 11.8% in the prior year’s quarter. Our Acute Care Hospital provided charity care and uninsured discounts based on charges at established rates amounting to a 149 million and 99 million during the 3 months period end of September 30, 2007 and 2006 respectively.

On a same facility bases at our behavioral facilities, admissions increased 3.4% during the third quarter of 2007 over the comparable prior year quarter; and net revenue per adjusted admission increased 5.1%. Operating margins for our Behavioral Hospitals owned from more than a year were 22.4% in the quarter end in September 30, 2007, compared with 22.6% in the quarter ended in September 30, 2006.

Cash flow from the operations for the third quarter of 2007 was approximately a $164 million compared to $61 million during the third quarter of 2006. Our cash flow from operations during the third quarter of 2007 was favorably impacted by a $48 million favorable change in other working capital accounts, primarily due to the timing of certain accrued pay roll and accounts payable disbursements, which were funded in early October.

We also expect to disburse approximately $50 million of cash during the fourth quarter of 2007 for the payment of interest expense on our bonds and income taxes. Our cash flow from operations during the third quarter of 2006, was unfavorably impacted by the payment of 2005 income taxes, that were deferred pursuant to a hurricane Katrina related deferral and by certain Medicare and Medicate receivables that were collected during the fourth quarter of 2006.

At September 30, 2007, our ratio of debt to total capitalization was 37.1% and the ratio of debt to EBITDA was 1.84%. We spent $79 million on capital expenditures during the third quarter of 2007. Included in our capital expenditures were the construction cost related to our new 170 beds Centennial Hills hospital in Las Vegas, that is scheduled to be completed and opened in early 2008 and a new 171 hospital bed in Palmdale, California that is scheduled to be completed and opened in 2009.

In California, we are on the way with a major expansion of our emergency room and women’s services at our Rancho Springs campus. During the third quarter we acquired Foundations Behavioral Health in Dulles Town, Pennsylvania which has 54 acute Behavioral beds and 48 residential beds and cotton wood treatment center in Utah, which has 78 beds.

Our Behavioral Facilities have operated at a very efficient 76% available occupancy rate for the quarter. These high occupancy rates are suppressing our admissions growth in certain markets, though we have multiple projects that add capacity to our busiest Behavioral facility.

We opened to a total of 50 new Behavioral beds and existing facilities during the quarter. As indicated in our press release last evening, the government’s investigations of our South Texas health system affiliates remain active and on going. At this time we are unable to evaluate the existence of extent of any potential financial exposure, in connection with this matter and we are unable to provide any additional information beyond that, which was disclosed in our third quarter earnings release.

We are pleased to answer questions at this time.

Question and Answer

Operator

[Operator’s instructions] We’ll pause for just a moment to compile the Q&A roster.

Sir you have a question from the line of Darren Lehrich.

Darren Lehrich – Deutsche Bank Securities

Thanks. Good morning everyone. Few things here I guess, challenges, wanted to ask you about the M&A environment, we have asked you this before but it looks like you were relatively quiet and from the buyback front, so just want to gauge, where you are, where you see the M&A opportunities now versus say, 3 to 6 months ago and whether there’s reason to believe you will deploy more capital in 2008 to grow with Acute care acquisitions?

Unidentified Company Representative

We have capital, as you can see and we are just being careful and opportunistic. We made a couple of good acquisitions, in the psyche field and we are looking and waiting and talking to people but we don’t really have anything on the horizon at this moment.

There’s been a lot of un-score turmoil at what is happening in the industry and we expect that opportunities will present themselves there.

Darren Lehrich – Deutsche Bank Securities

Okay and Steve just as it relates to the uninsured trend, obviously the charity care number was up significantly. Can you help us understand, what the actual self-paid volume growth was on the acute side and can you just talk about that trend if it was concentrated in any particular regions?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Sure Darren, as you know we had pretty favorable uninsured experience in the first quarter, we saw it spike up in the second quarter and we saw those trends continue again in the third quarter. In terms of where we saw it, I think it was largely throughout the portfolio as it has been these last few years but we certainly did see specific pressures in some of the markets that others have noted, in Florida , in California and Las Vegas. Markets I think that have been particularly hard hit by the housing and the real estate crises. We seem to be feeling that perhaps a little bit more pressure. But for the most part we just continued to see the uninsured trends and pressures that we saw in the second quarter continue on to the third.

Darren Lehrich – Deutsche Bank Securities

And just the overall economic condition in your market as you look into 2008, how should we think about that debt and the uninsured and how are you guys thinking about it at this point?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

One of the challenges I think that everybody, both providers in the industry and those who follow it have had over the last few years has been and have been to find sort of leading indicators that will allow us to predict when we would see spikes or we would see stabilization in the uninsured volumes. And frankly I think no one has really done a great job of identifying what would be the best leading indicators. So we certainly are watching some of these trends like the, reduction in housing starts and the number of fore closures in some of our markets. But honesty Darren, I’m not sure we know, exactly how that data relates to what we are going to see in terms of people coming to our hospitals and particularly to our emergency rooms, and the level of health insurance or no health insurance that they might have. So we are watching all that carefully but its difficult for us to predict what those relationships are.

Darren Lehrich – Deutsche Bank Securities

Okay and then just one last thing and I’ll jump back in the queue here, but as far as 2008 goes, I know you typically provide your guides in, I think February. Looks like FY07 has progressed more or less in line with what you laid down in the beginning of the year. But just speaking about FY08 conceptually I guess you have some start up losses that gets pushed out in Vegas into 2008 and you may have, I don't know, we’ll have to hear your view about the UPL situation in Texas that might be a pressure point for you. But just looking into 2008, do you think you can grow earnings? And I don't know if you could put a frame work around it, but that would be helpful just to get your thoughts on weather you think you can grow in a way.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Well I think Darren, that the metrics in the both of our businesses have been fairly apparent and relatively stable for some time now. I think we think about sustainable, behavioral same store admission growth in sort of the 3% to 4% range going forward, sustainable pricing growth 3% to 4%. So I certainly see growth and as I indicated in my prepared remarks we continue to expand capacity in that division.

On the Acute side, the same thing I mean 2% to 3% same store admission growth, is what we have been reporting. 4% or so pricing growth I think looks sustainable. And so again the wild card remains on the Acute side, the levels of uninsured and as it always does, any reimbursement challenges that we may face and you mentioned Texas UPL., we did reverse in the third quarter some prior year Texas UPL. just because we anticipate that there may be some challenges to the specific ways that, that UPL was funded. But we continue to recognize UPL for 2007. CMS has announced they are going to review some of the programs in Texas. We think some of the programs that we are part of have already been reviewed and probably won’t be part of this CMS review. And we think other programs even if they are reviewed are likely to pass the CMS muster or criteria although there’s certainly no guarantee of that so we’ll have to wait and see. But we remain having all of our 2007 Texas UPL. recorded in the financial statements and continue to believe that that money is safe for now. So, yes that’s the way we are thinking about the future and we continue to obviously watch it carefully.

Darren Lehrich – Deutsche Bank Securities

Okay. Even may be this one more here, the Behavioral margins anything to say about that, and if/whether on a consolidate basis, I think they were down a little bit but any pressure points there? Thanks.

Unidentified Company Representative

No, I think, I think we mentioned this last quarter, I mean we may be sort of past the period when people can expect those margins to go up 50 basis points a quarter. But as long as we can sustain the kind of volume growth that I just talked about and pricing growth, I think we should overtime continue to see increasing margins. One of the pressure points we do have is, we are opening new capacity and we can’t fill that facility immediately upon opening. So there’s little bit of a drag but obviously as you know those margins remains very strong and I think our outlook for fundamentals that business remain very good.

Darren Lehrich – Deutsche Bank Securities

Thank you.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Thanks.

Operator

The next question comes from line of Christine Arnold

Christine Arnold – Morgan Stanley

Good morning. Continuing on kind of the same line of questioning on FY08, how do we think about the incremental serial volume that you got this year and what is likely to happen when United mergers with Sierra which is targeted by U. N.? Do we think that some of that volume could be lost, some of the volume trends could temporarily turn south?

Unidentified Company Representative

It’s hard to say Christine obviously a United will have a big say, what happens to that volume so that we are certainly not the only opinion accounts in all this. I mean I think we have said all along that we thought that overtime, the Sierra-United network or the Sierra-United volume would probably gravitate back to a situation where all providers were in network in some form or fashion. So I think some of that Sierra business may be a risk, but those who follow us know, having that Sierra volume has not been a wholly positive issue, it has squeezed out some higher paying business and it has challenged our operators to manage their mix of business very carefully and in an environment of very strange capacities. So we have a contract that’s come up, coming up for renewal with Sierra in the middle of next year, we will negotiate those rates carefully as I am sure they will. And I am sure market may undergo some changes but I think it’s a little too early to predict exactly how that‘s all going to sort out.

Christine Arnold – Morgan Stanley

And then, could you talk a little a bit about McAllen, and kind of what you’re seeing there and when you expect Renaissance to what impact you think that might happen in terms of the extra capacity?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Renaissance has opened its OB service and OB capacity, I think sometime in October and we clearly have seen some impact of that. It’s again too early to tell at the end of the day what sort of bottom line financial impact that will have on us. As we have said before we think that probably that, there will be a greater proportional impact on our competitor HCA Hospital, just because they have a better mix of business, historically than we have in OB business.

But our expectations will have some impact where, used to that competitive environment now in the McAllen market and we are working hard to do a number of things on our end to regain some of the [BLANK] better paying commercial in Medicare business and we will continue to do that. But Renaissance continues to build and expand and open new services and as best as I can tell, they are going to continue to do that as well.

Christine Arnold – Morgan Stanley

Okay then final question. As we think about the volumes in the pricing here, looks like you got back some of that lost higher priced good business in Vegas this quarter. Is that true without overseeing in the better pricing and the better volume and is that sustainable, you think you can hang on to that?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

I think so, when we had fairly depressed pricing in the second quarter and we really attributed that to two factors, one was a higher level of uninsured and two, was to a less favorable mix of business in Las Vegas. I think in the third quarter we were able to correct the mix of business that were modified in Las Vegas so that we had better experience than we had in the second quarter; though probably not as good as we had in the first. Unfortunately our insured volumes continued to remain high. But I think that the better mix of business in Vegas is sustainable certainly for the next couple of quarters, until we get as we said you know the point where we renegotiate our contract, where the United-Sierra merger is completed, and there may be some, reconfiguration in the market and we will have to see how that all sorts out.

Christine Arnold – Morgan Stanley

Okay, thank you.

Operator

Your next question comes from the line of Gary Lieberman.

Gary Lieberman – Stanford Research

Thanks, good morning. Just wanted to go back to, I guess one of the questions that was asked earlier in terms of usage capital and pay down of debt quarter. Sounds that you still fairly optimistic that there might be a, a deal out there that you would be interested in. So given that, should we expect that in the fourth quarter, I guess for the near term future that the use of cash would be similar in terms of paying down debt in favor of repurchasing stock?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

You know we had a similar conversation in the second quarter conference call. We clearly, I think entered 2007 with the notion that there would be more properties for sale at more reasonable prices, particularly on the Acute side than we have seen for a number of years. The reality is we haven’t seen much of that and at the same time we continue to look at our own shares as an attractive buy. We did buy some $11 million or so of our own shares in the second quarter. And we are going to continue to sort go through this evaluation on a continuous basis and look at the opportunity to buy earnings streams externally as well as buy our own earnings stream, which we find very attractive right now, and I don’t think we can sit here right now, Gary and say we are going to go one direction or another. It’s going to be something that we continue to reevaluate literally, if not on a daily basis, certainly on our weekly or fairly frequent basis.

Gary Lieberman – Stanford Group Company

Okay and then one house keeping item. Do you have the bad debt, it’s the Acute care hospitals, I didn’t see that in the release.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

We do. We will find it and I will provide that information as we continue to answer questions, Gary.

Gary Lieberman – Stanford Group Company

Okay. Thanks a lot.

Operator

Your next question comes from the line of Erik Chiprich.

Erik Chiprich – BMO Capital Markets

Hi, good morning. A Question on the other expense that continues to creep up. Are you seeing any pressure there, is that professional fee, they are doctor recruiting or is it the seasonality that is going on in that line item?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Well I would just caution, there are a couple of things Erik and one is that we did in the quarter as we disclosed in the press release have a couple of non-recurring items that affect that line. The legal issue, as well as the write down of the joint venture asset, both on a combined basis provided about $6.2 million or $6.3 million of other operating expense, additional other operating expense in the quarter. I think the other item to keep in mind which we talked it about last quarter as well is that as part of this construction contract, construction management contract that we have. In the third quarter there is about $20 million of revenues and a similar amount of expenses which again, get recorded in other operating expenses that are inflating that line. So I don’t know people why the people have that modeled in there but that’s something to keep in mind. Other than that, the one other thing I will comment about other operating expenses is, we did see a big savings over the last year when we converted from our outside, an outsourced pharmacy to an in-house pharmacy and we are anniversaring that impact so I think that’s somewhat muted as well. Other than that Erik I am not sure that we see any particular pressure on the other operating expense line.

Let me just add in response to Gary’s question, we had about a $103 million of Acute care bad debt expense in the third quarter 2007 and running about 11.9% of revenues.

Erik Chiprich – BMO Capital Markets

And one additional question I think you mentioned you opened 50 additional side beds during the quarter, what is the potential to accelerate that pace going forward?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Well you know we’ve talked about being able to open some where in the neighborhood of between 400 and 500 beds a year for the next couple of years and that being our plan, unfortunately it doesn’t necessarily come on radically. So I think we will continue at that pace there will be quarters when we have more opening and quarters when we have less. But last quarter I think we opened 115 beds, the quarter before that we opened 88 beds, so 50 is kind of on the low side but again I think we’re shooting for that kind of 400 as a target.

Erik Chiprich – BMO Capital Markets

Okay, thank you.

Operator

Your next question comes for the line of Matthew Borsch.

Shelley Nall – Goldman Sachs

Hi, thanks for taking our question, this is Shelley Nall for Matt Borsch. I have a follow up question on the Acute care bad debt, Steve I was wondering if you have available on the break out, into the co-pays and deductibles versus the uncompensated care buckets for this quarter? And then maybe as compared to last quarter and a year ago? And if you don't have those actual numbers, wonder if you could speak it directionally on what you are seeing and what the key drivers are in each of those buckets?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Shelly I think historically our sense has been that probably about two thirds of our uninsured expense comes from folks who have no insurance what so ever, and about a third of it comes from the portions that are due after insurance. We have seen both of those amounts rise obviously over the last few years, but that relationship has remained largely constant of about two thirds and one third, and I don't think we see that changing dramatically in the future.

Shelley Nall – Goldman Sachs

Okay, great thanks and then a quick question on the labor costs, is this driven by a contract costs in the Las Vegas market? And is there any thing you can do to sort of rein in the contract labor costs, perhaps bring the staff inclusion in-house?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

I mean I’m not sure sort of what the premise of your questions is, I mean I think our labor costs were, from at least our prospective kind of in line of what we expected. I mean we have certainly said before that probably our use of temporary nurses are higher in Las Vegas, than they are anywhere else in the country. We do have our own in house nursing, nurse registry pools in Las Vegas, as we do in many markets. I think frankly we use a lot less temporary nursing today than we did several years ago. And I think for the most part in today’s environment we use it for the right reasons, which is, temporary spikes in volume etc. that it’s not productive to staff up permanently for us.

We continue to look at that in every market ring, we continue to look for ways where we can to reduce temporary nursing, but we certainly don’t view it to be the problem that we viewed it to be 5 years ago and there was a real drain on our earnings.

Shelley Nall – Goldman Sachs

Okay, great. Thanks.

Operator

Your next question comes from line of Adam Feinstein, Lehman Brothers.

Adam Feinstein – Lehman Brothers

Close enough, thank you good morning everyone.

Alan B. Miller – President & Chief Executive Officer

Feinstein is that you?

Adam Feinstein – Lehman Brothers

Yes, yes it is me. Good morning. I guess its several questions here Allan and Steve; I guess maybe starting with Vegas, you still can’t talk about the Sierra contract and what was going on there. One if you can talk a little bit about the competitive landscape in Vegas, outside of this year contract. And then at same time Centennial Hills opening up in early 2008, maybe just talk about what the expectations are there in terms of, I know you talked about this field initial impacts Steve, but may be just talk little bit more about what you are openly expecting from that hospital and I have a couple of follow up questions.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Sure I mean in the competitive environment in Las Vegas is, it is competitive. I mean there are some pretty aggressive entities that we compete with in Las Vegas including HCA and Capital Healthcare West, both have expanded and built new hospitals in last few years, both continue to have some capacity expansion plans on the boards; although there are other than Centennial, no other brand new hospitals being built at the moment in Las Vegas.

I think in terms of what the expectations for Centennial, I think it’s worthwhile to go back and look at our experience when Spring Valley opened in fall of 2003. We had a couple of quarters where we cannibalized some business from our other hospitals when we first opened. So it caused a little bit of disruption in the market as physicians change, there practice patterns and patients changed there, patterns for seeking health care.

But in relatively short order within about three or four quarters as Spring Valley began to earn healthy positive margins, approach the margins of our, the average margins of our hospitals in the market, I would think Centennial would have as good, if not a better experience, its probably and even a better demographically situated part of the city than Spring Valley was. And so our sense is much the same, we will have a couple of quarters that disruptions perhaps but in the long run Vegas remains an under-bedded market, one in which the hospitals operated very high levels of capacity. And I think that’s going to continue the market even despite the references I made before to some, housing market, etc. The market continues to grow, people continue to move in, gaming projects continue to be built and capacity expands in that industry, which is obviously the heart of Vegas’ economic health. So we just think it remains a very, very robust market for us.

Adam Feinstein – Lehman Brothers

Okay and just a follow up question. I guess the minority interest Steve, is all the lower than what I was thinking for the quarter. I know a lot of that is impacted by Vegas , was any sort of show up there associated with expenditures related to the new hospital, just trying to get any color there.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

No, I don’t think, there is no P&L, a little bit of start up cost running through for Centennial Hills. But I don’t think it’s material and other than that I think it’s just the idea that, the minority interest in the first quarter was extremely high because we had a very robust quarter. When we first got to see our volume drop dramatically in the second quarter and in the third quarter we are kind of in between. And it’s like we were saying to Christine before, I think that’s sort of where we’ll settle and it seems to me.

Adam Feinstein – Lehman Brothers

Okay and then just, you spoke a little before about the Texas upper payment limit. But just wanted, does the Texas Dish Program any updates there in terms of just what you are anticipating and then I guess I want one more follow up after that.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

No, I mean actually the taxes dish payment have remained fairly stable over the last few years and our expectation we do not have our funding numbers yet for their fiscal year, which actually begins in September or began in September. But our expectation is that our just before sincere funding will remain pretty constant in the state’s next physical year.

Adam Feinstein – Lehman Brothers

And then just final question in the investigation I appreciate the details you provided upfront, just wanted to talk about a little bit more detail, I just, I know that you’re limited in terms of what you can say. But obviously you guys have always avoided these things over the years and have done a good job in terms of managing through, while the regulatory issues, compliance issues in this industry. I just, any comments, for starters anything you can say Alan in terms of just, your thoughts on this matter and just in terms of just, I guess just merging through this certainly hits all of the companies from time to time but just since you guys have never really had any sort of investigation. Just curious this in terms of how you guys are responding to this?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

I’ll answer but I just want to make one quick comment. I am partly, we were saying relatively little from a detail perspective because there’s not a great deal that we know. I think as we indicated in the press release and in the prepared remarks, I mean the message that we want to deliver is that the investigation is active and it is ongoing. We certainly don’t view that as a good thing but we want to acknowledge that and keep people aware of that. But we remain largely in the dark about the substance of the issues that the Governor-Mayor may not be concerned about. At some point we assume we will know more and we will be able to comment at that point. But it’s difficult for us to comment at this point on the substance of what the Governor really might have issues with, that option certainly Alan can add to that.

Alan B. Miller – Chairman, Chief Executive Officer and President

No, Adam. The only thing I would say is that you said something to the effect that we are limited in what we can say. I think we have said everything we know.

Adam Feinstein – Lehman Brothers

Okay.

Alan B. Miller – Chairman, Chief Executive Officer and President

There isn’t anything that we know.

Adam Feinstein – Lehman Brothers

Okay.

Alan B. Miller – Chairman, Chief Executive Officer and President

But it is ongoing and as Steve said, actually you have all the information we have.

Adam Feinstein – Lehman Brothers

Okay, alright. Okay, well very good. So I appreciate the details there as always. Thank you.

Operator

Your next question comes from the line of John Ransom.

John Ransom – Raymond James

Hey, good morning. Couple of things. I was looking for an update in the Manatee [ph] market. If you see any, I mean any daylight in Florida or if it continues to get worse from a bad debt standpoint. And also just how the two hospitals performing now that the one down in the Ranch [ph] there has been over for a couple of years. Thanks.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Sure, John. Manatee [ph] had a major renovation, which was completed at the end of June. Unfortunately for the Florida market that’s not the greatest timing so having the renovation for the summer is not really a good indicator of how, what sort of an impact it will have. Probably in our next call when we have gone through a busy season we will have a better sense of what that really has meant to us. Lakewood Ranch opened late in FY04, been opened for a few years. We continued to really wipe the Lakewood Ranch market. I know John that you are familiar with it, it’s just a very demographically positive market, just a lot of good economics surround the market. The challenge that we have there is we are really obligated in order to succeed to take market share from some very large and successful hospitals in Sarasota. I think that’s taking us longer to accomplish than we thought and so Lakewood remains, just a slightly profitable hospital for us.

But I think our long term view of the market and that hospital remains quite positive. I know you have been down there and if anyone has been down there I think they would understand why we continue to have a very good feeling about the long term prospects of that market. It reminds us in many ways of the Summerland market in Las Vegas and other markets we’re had experience in.

John Ransom – Raymond James

Yes I think they have a nicer hotel there than we do in whole huge metropolis of Tampa. So I’m probably jealous if anything. The other question I had was, the states have been in a pretty good medicate cycle and a good revenue cycle. The, obviously that’s starting to turn, what are you hearing about any pressures from, I know we have just gotten through the gene budget cycle, but are there any states we need to be aware of that may be going in reverse from a medicate stand point?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

No I mean actually you are right I think we have gone through a few years of pressure in many of our states from the medicate program, I think actually most of the data that's out there shows that state budgets are actually looking better etc. So if any thing, I think we are expecting maybe a little bit of a loosening of purse strings across the country. Now having side that, our expectations in our modeling for the next few years, our medicate price increase is in 0% to 2%. I mean certainly nothing extra ordinary, but even that is probably a little better than we have actually experience over the last few years.

John Ransom – Raymond James

Okay thanks a lot.

Operator

Your next question comes from the line of Kemp Dolliver.

Kemp Dolliver – Cowen and Company

Yes thanks. Couple of questions, first is the construction project for the third party still likely to rap up around the end of this year?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

It will probably slip over into the first quarter of next year Kemp. I think its about three quarters done from a construction prospective and is said to open in the first quarter. So I am assuming that sort of from the bill paying and bill collecting prospective, we’ll have some first quarter activity next year and it should then marginally wrap up.

Kemp Dolliver – Cowen and Company

Okay good and Steve, could you quantify the self pay volumes for the quarter

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

I realized as I was looking through the material when Gary asked his question for am not sure I have that with me Kemp, although my recollection is that as I sort of said before, I mean our self paid volumes trends in the third quarter pretty much mirrored what we had experienced in the second quarter. And we frankly I think had hoped for little bit of an improvement and just for the most parts saw the trend continue.

Kemp Dolliver – Cowen and Company

Okay that's great thanks.

Operator

The next question comes from the line of Thomas Gallucci.

Thomas Gallucci – Merrill Lynch

Thank you good morning. Just a couple of follow ups to some of the questions that have been asked. Just on the south Texas investigation I know that, we know what you know, did they give you any sense for timing at all in terms of next events or anything like that? That we might be able to find out more?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

One of the challenges that we have is that government, I think has said a few times that, they were intending to try and bring us to a conclusion perhaps by the end of this year etc. But I mean, there is no sort of guarantee there and we can’t necessarily account on that. So we sort of continue along, according to there schedule and when they are ready to present their findings to us, presuming they will do so and there is little weak in due to influence [inaudible] to cooperate and that will essentially move along according to there schedule.

Thomas Gallucci – Merrill Lynch

Okay and then just on the leverage again in the balance sheet and uses of cash, if I am not mistaken you are probably somewhere around three times debt to EBITDA. Can you remind us sort of, of your comfort level where you, what would you move up to? Then I think you’ve could talked a little bit about being opportunistic on acquisitions side. You did do some share repurchases in the quarter, but I might have thought it may have been a little more aggressive so may be just remind us there, where would you be comfortable going? And may be if you see any more significant uses of cash between now and let’s say, year end as opposed to what we’ve seen in last few months.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Sure I mean I think as the conversation went before, you didn’t see the level of share repurchase that perhaps you expected; not because we were necessarily concerned about our debt levels, in fact I think Allen said, we have plenty of capacity. But we, as we said we have been waiting for perhaps the acquisitions opportunities that we haven’t see for a few years and there is no guarantee we will see them but although our expectation was that we might have an opportunity to see some more of those.

We certainly have remained one of the more conservatively leverage companies in the spaces you know, we probably don’t intend to take on the LBO or LBO like levels of debt of our, some of our peers, but we certainly can take on more debts and for the right transaction and for the compiling opportunity we are certainly willing to do so. I think we have announced that before we are going to continue to evaluate, we are continue to watch we have been cautious, that’s sort of been our history. But we are also going to respond our opportunities as they arise both in terms of buyback our own shares as well as any external opportunity represents themselves to us.

Thomas Gallucci – Merrill Lynch

Okay and then may be just the final one, the Behavioral health business pricing was up nicely, sequentially. Is that more a function of mix or can you expand on what the dynamics are there? Thanks.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Sure, we talked a little bit about in first six months, I think pricing under Behavioral side was little bit lower than we expected and I think we said that, that there were things that we could do in terms of mix and contractual negotiations and things to push that number up a little bit and I think to our operators credit we managed to accomplish a number of those things in the third quarter.

We, I think we have said before, we ought to be able to sustain in 4% to 5% pricing creases on increases on the behavioral side. We were kind of at the high-end of that in the third quarter, which we were grateful for but we think we can kind of stay in that range at least.

Thomas Gallucci – Merrill Lynch

Okay thank you.

Operator

Your next question comes from the line of Gary Taylor.

Gary Taylor – Bank of America

Hi good morning, just going back to Las Vegas briefly, actually from a seasonal prospective it looks like Las Vegas about the typical seasonal trend, and the margin in the profitability were actually. Is there anything you kind of characterized first quarters best of all worlds and the second quarter as specific sort of headwinds and I thought the third would kind of be in the middle, which looks like we are at sell out. Is there anything sequentially different in Vegas outside of just payer mix?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Well I would say just two things Gary, I mean one is I think that the reference that you made to season out in Vegas. I mean there is some seasonality but just from a personal prospective I can tell you that, someone who is now been going to Vegas for some twenty years, used to go to Vegas in the summer time and it would be dead and that’s just not the case anymore. The hotels are lot more busy and more occupied than they used to be in the summer time and so I think there is less seasonality in Vegas, than there was historically. But the other issue I think the whole Sierra issue really is not going to do with seasonality as much as it does with this. Major contractual change that was made at the end of the year.

What happened there at the beginning of the year, in the first quarter is we got this incremental Sierra business and we were able to keep all of the, our other business at the same time and then as the year went on and certainly the second quarter went on, some of that business began to grab a take. So naturally I think in some cases to the less busy facilities, which I think handed to be the HCA facilities, which have lost their Sierra volume. And certainly HCA was proactively trying to attract non-Sierra business and I think they were successful in dealing it in the second quarter. In the third quarter our own operators responded a little bit more balanced, attracted back some of that business, just managed their business a little bit better and as I said to a couple of people in the call, I think that, that’s kind of a sustainable level where we are in the third quarter.

Alan B. Miller – President & Chief Executive Officer

Have you been spending a lot of time in Las Vegas ?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Not recently.

Gary Taylor – Bank of America

Okay so its pretty, I mean you had, that was your expectation anyway you had laid out. First you thought third quarter would be some sort of balance between the trends you had seen in the first and the second.

On the Texas dish, in particularly some of the upper payment limit counties in question. Have you changed anything with respect to revenue recognition or accounting treatment on any dish moneys or, I guess essentially in a few counties the state’s not paying this money. Is that right?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

I think what has happened is, I think we can confuse the two programs. I don’t think there’s been any interruption to dish moneys or disproportion share moneys. About 3 weeks ago or so, Texas issued a press release saying that CMS was going to look at some of the specific county UPL programs; which is different than the disproportion share program. And what Texas said was, they were going to defer any new request for money until CMS sort of cleared those programs.

I think the last payments made for UPL were in August. They tend to make those payments quarterly in this state and kind of state fiscal year, so the next payments will be, were scheduled to be in November. We don’t know if they’ll be made on a timely basis or not. CMS has started the process of gathering information to look at certain county programs. We think that our programs in South Texas are likely to be looked at because they haven’t been looked at before. But, our program in Amarillo where we get two-thirds of our UPL reimbursement is probably not likely to be looked at in this round because its been reviewed before by CMS in this past muster previously so that’s our expectation. We don’t know if payments will be made in November on the same, like I said on a timely basis. But from an accounting prospective as I mentioned before we've not done anything to change our recording of UPL moneys in the September time frame which is really the only time frame that’s an issue at the moment because we were paid through August.

Gary Taylor - Banc Of America Securities

And have you? Maybe I missed it then, ex Amarillo have you talked about what the revenue run rate is from UPL is?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Yes can we disclose in, I think our, definitely our 10-K and I think our 10-Q as well that, we expected to receive in 2007 about $19 million of UPL moneys in Texas. About two-thirds of that in the Amarillo market and then the remaining one-third or so from the South Texas markets, McAllen, Loredo and Maverick county.

Gary Taylor - Banc Of America Securities

Great. And my last question just going back to the construction contract, $20 million of revenue in the quarter winding down by the first, does the revenue amount wind down 4Q to 1Q or does it look stable sequentially?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

It’s a little hard to predict Gary I would think its, it probably remains about the same in 4Q and then I think probably winds down some in the first quarter of next year before ceasing altogether.

Gary Taylor – Bank of America

Great thanks.

Operator

Your next question comes from the line of Whit Mayo.

Whit Mayo – Stephens Inc.

Thanks, good morning. Behavioral looked to be up a little bit in the quarter. Just any color you can provide on that just whether or not that was a mix between RTC. and the QPEDS, and just any outlook on your opinion of where you see that trending over the next year?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

White, I have to be honest with you, I don't recall sort of seeing that trends other than if you suggest it's there, it's there. We have obviously waited portfolio a little bit more to the residential side over the last few years so it really doesn't come as a big surprise. But just generally I will tell you on a same store basis we've seen very few changes to our length of stay. So if there was a little bit of an increase I would suspect it was probably a little bit of a shift mix to the residential side.

Whit Mayo – Stephens Inc.

Great. And similar to many of your peers it looks like you're likely to come in a little the lighter on your CapEx relative to your guidance. Just how should we think about your spending for the fourth quarter and just any thoughts at this point on FY08?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

I think that we will wind up spending in 2007 just somewhere in the 365 to 375 range and probably for FY08 as we finish the Centennial project but start up our Texoma project I think that 375 range is probably as good a guess as atypical. Texoma.

Whit Mayo – Stephens Inc.

Great and just finally, just I made a point on that the call but I didn’t hear any mention of guidance at this point just I don't know if you guys are confirming the range of 3 to 305 at this point or any changes there?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

We haven’t commented on that Whit because as so has been the case all year we were being comfortable with that originally guidance that we issued and so we are leaving it to speak for itself and sit out there.

Whit Mayo – Stephens Inc.

Right thanks guys I appreciate it.

Operator

Your next question comes form the line of Matthew Ripperger,

Matthew Ripperger – Citigroup

Hi, thanks very much, just a couple of questions could you comment on how much CapEx you are going to need to finish the Texoma and Palmdale hospitals and how is that going to be staged out over the next couple of years in FY08 and FY09.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Palmdale is some where in the neighborhood of $175 million, $185 million project probably there is a decent amount to spend on that in FY07 but prior to the bulk of it will be in FY08 and we will finish in FY09. Texoma is a less costly project as it is in Texas. Its probably in the $130 million, $135 million range that sort of price gets split between 2008 and 2009.

Matthew Ripperger – Citigroup

As you said here today are there any other replacement hospitals or new hospital developments initiatives that you got sort of in the plans for the next couple of years.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

None that are begun, we have looked at some new properties in California potentially et cetera, but certainly none there are in that in that committed stage?

Matthew Ripperger – Citigroup

Okay. And then second question is just on mental health parity, it seems like there is growing momentum for that I wanted to see if you could do two things; one is handicap, what you think the likelihood of parity going through and the two is if you can update us on how you and your Behavioral operators think that could actually impact utilization on the commercial side going forward?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

As far as the handicapping piece goes, I think most observers had commented that the better chance than ever that mental health parity legislation gets passed but I still think, it’s a 50-50 shot in terms of whether it can pass both halves of the Congress, its passed the senate but is always historically stalled in the house. In terms of what the impact could be, hard to know, we are do operate in some states where it has, the states have passed health parity legislation and our experience with that is that we’ve had some incremental benefit in those states but its not terribly dramatic, other observers have indicated they think there could be a 10% or 15% increase in utilization, I think we take the efforts that we will wait and see where there A as you indicate whether the legislation passes it all and B whether that kind of really measurable impact would materialize. We certainly be thrilled to see it happened, but we are not predicting it just yet.

Matthew Ripperger – Citigroup

Last question. In the past you have provided margins for the McAllen market, could you update those margins today, or is that something we should look forward in the queue?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

We generally do it in our filings, I have right in front of me, but I mean I don’t think our McAllen margins have changed dramatically, they probably in the mid single-digits and was kind of what our expectations was for the year and I think we have been running in that range.

Matthew Ripperger – Citigroup

Okay. Thanks very much.

Operator

And your next question comes from the line of Ken Weakley.

Ken Weakley - Credit Suisse

Thanks and good morning every one. I was just curious if we can talk about maybe operating margins by payer category, do you or you want me to disclose either specifically or maybe just directionally revenue per adjusted mission across your payer categories, I am just trying to get a sense especially given some of the Medicare changes were coming, where profitability might go on your different payer classes?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

I mean I don’t have that information in front of me, Ken, I mean I do think that the payer classes in most markets have sort of gravitated closer to each other. I still think in most markets, commercial payers are better margin payers but they are lot closer to Medicare today than they were just a few years ago and I think Medicaid in most markets and in most service lines, lags a little behind those two but I don’t have those consolidated numbers in front of me.

Ken Weakley - Credit Suisse

If you had to I guess given some of the changes with the expansion of the DRG system as well as to continue roll out of recalibration, do you think Medicare patients become more or less profitable given your asset mix?

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

I think we’ve felt as we looked at the expansion of Medicare DRGs that will benefit slightly from the expansion, obviously, its incumbent upon us to make sure we are coding properly and doing everything we can, sort of administratively do to handle the expansion properly but our general senses that will do a little bit better.

Ken Weakley - Credit Suisse

Okay. Thanks so much.

Unidentified Company Representative

Sure.

Operator

Your next question comes from the line of Frank Morgan.

Frank Morgan - Jefferies & Co

Good morning Steve, I wanted to follow-up on some comments you made earlier about the trends in uninsured volumes, could you tell me, you said the trends are similar, is it the trend, the gross rate and the number of uninsured or is the trend the percentage of uninsured is the percentage of total admits, is that staying the same or growing at about the same rates, I guess, if you kind of help me on exactly what you mean by the trend? And then the second question relates to the accounting treatment for this UPL payments like how do you accrue for that based on what you are expected or do you how does that work? Thanks.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Sure. I think as to your first question, all I was saying before was kind of recapping the year, we saw a much lower number of uninsured in the first quarter than we sort of expected and anticipated for the year, it’s spiked up quite a bit in the second quarter and again the number of uninsureds I think continued at that high level in the third quarter. Its sort of all I was trying to say when I talked about the continuing trend in the third quarter. As far as UPL revenue recognition goes, when these programs are established, you know how much money we are receiving from Medicaid like sources, county programs or health district programs and we also know what is the better match level is in that particular state. So we have a pretty good sense of how much UPL money we should be receiving every quarter and every month and that’s the amount of money that we do record.

Operator

[Operator Instructions] At this time sir, you have no further questions.

Steve G. Filton – Senior Vice President, Chief Financial Officer and Secretary and Controller

Okay, we thank everybody for their time and we will speak to everybody next quarter.

Operator

This does conclude today’s conference call, all you may now disconnect.

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