Universal Health Services, Inc.
Q3 2013 Earnings Call Transcript

Published: 30 Oct 2013

[Operator:]

Good morning. My name is Brandi, and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services Third Quarter Earnings Conference Call. [Operator Instructions] Thank you. Mr. Steve Filton, you may begin your conference.

[Steve G. Filton:]

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, 2013. During this conference call, Alan and I will be using words such as believes, expects, anticipates, estimates and similar words that represent forecasts, 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 and Risk Factors in our Form 10-K for the year ended December 31, 2012, and our Form 10-Q for the quarter ended June 30, 2013. We'd like to highlight a few developments and business trends before opening the call up to questions. As discussed in our press release last night, during the third quarter of 2013, the company recorded net income attributable to UHS of $1.15 per diluted share. After adjusting each quarter's reported results for the items disclosed on the supplemental schedule included with last night's earnings release, adjusted net income attributable to UHS increased to $1.10 per diluted share during the third quarter of 2013, as compared to $0.91 per diluted share during the third quarter of last year. As discussed in last night's release, included in the adjusted net income attributable to UHS during the third quarter of 2013 is $0.10 per diluted share, resulting from additional revenues recorded in the quarter that are applicable to the period of October 1, 2012 through June 30, 2013, earned in connection with the Texas Medicaid disproportionate share and uncompensated care programs. On a same-facility basis, net revenues in our behavioral health division increased 3.4% during the third quarter of 2013. Adjusted admissions to our behavioral health facilities owned for more than a year increased 5.8%, and adjusted patient days increased 1.5% during the third quarter of 2013 as compared to last year's comparable quarter. Revenue per adjusted patient day rose 1.9% during the third quarter of 2013 over the comparable prior year quarter. Operating margins for our behavioral health hospitals owned for more than a year were 27.5% during the third quarter of 2013 as compared to 27.9% during the third quarter of 2012. On a same-facility basis in our acute care division, excluding the impact of approximately $16 million of the additional revenues earned in connection with the Texas Medicaid disproportionate share and uncompensated care programs covering the period of October 2012 through June of 2013, revenues increased 6.6% during the third quarter of 2013 as compared to the third quarter of 2012. The increase resulted primarily from a 3.6% increase in adjusted admissions to our hospitals owned for more than a year and a 2.9% increase in revenue per adjusted admission. On a same-facility basis, operating margins for our acute care hospitals decreased to 12.8% during the third quarter of 2013 from 13.4% during the third quarter of 2012. Our acute care hospitals provided charity care and uninsured discounts based on charges at established rates, amounting to approximately $276 million and $259 million during the 3-month periods ended September 30, 2013, and 2012, respectively, and approximately $766 million and $840 million during the 9-month period ended September 30, 2013, and 2012, respectively. In addition to provision for doubtful accounts at our acute care hospitals increased to approximately $291 million during the third quarter of 2013 as compared to approximately $167 million during the third quarter of 2012, and increased to approximately $725 million during the first 9 months of 2013, as compared to approximately $456 million during the comparable period of 2012. As a percentage of acute care net revenues, the provision for doubtful accounts, charity care and the uninsured discount in this year's third quarter we're at levels higher than those experienced during the third quarter of 2012. Our cash from operating activities increased by approximately 15% to $186 million during the third quarter of 2013, as compared to $162 million in the third quarter of 2012. For the 9 months ended September 30, 2013, our cash provided by operating activities increased by approximately 11% to $592 million over the $535 million generated during the comparable 9-month period of 2012. Our accounts receivable days outstanding increased to 59 days during the third quarter of 2013 as compared to 57 days during the third quarter of 2012. At September 30, 2013, our ratio of debt-to-total capitalization was 52.9%. We spent approximately $104 million on capital expenditures during the third quarter of 2013. Included in our capital expenditures were the construction costs related to the recently opened 140-bed Temecula Valley Hospital, a newly constructed acute care facility located in Temecula, California. Late last week, we completed an amendment to our $275 million accounts receivable securitization program, which extended the maturity date of this program for 3 years to October of 2016. This year, 48 UHS hospitals, that's 43 behavioral health and 5 acute care, were recognized by the Joint Commission as Top Quality Performers. This acknowledgment publicly demonstrates the long-standing commitment of UHS to provide care to our patients that is based upon evidence-based practice to ensure positive outcomes. Several sets of quality indicators are measured and compared across the entire population of accredited hospitals. In 2012, 32 UHS hospitals were recognized. This year's achievement recognizes that these facilities have sustained excellent quality performance for the past several years. Alan and I will be pleased to answer your questions at this time.

[Operator:]

[Operator Instructions] Our first question comes from the line of Chris Rigg with Susquehanna International.

[Christian Rigg:]

Was just hoping you can provide some additional color on the bad debts? And what, if anything -- or what additional color you might be able to provide with regard to the increase, both sequentially and year-to-year?

[Steve G. Filton:]

Sure, Chris. So as we, I think, talked about in the middle of last year, we changed our charity care policy across the division, frankly, to make it a little more difficult to qualify for charity care. And we suggested at that time that the cosmetic result of that on our income statement would be the shift on compensated dollars from charity care to bad debt. And in fact, I think that's what you're seeing occur in the significant increase in bad debt and the reduction in charity care in 2013. As noted in my prepared remarks, I mean, the total amount of the items that we consider to be uncompensated care has remained relatively stable. And, again, I think it's largely, in our minds, a cosmetic change.

[Christian Rigg:]

Okay. But, I guess, that makes sense year-over-year. But relative to the second quarter, it does look like it crept up a little bit. There's nothing notable to isolate there?

[Steve G. Filton:]

I don't think so. I mean, obviously, if you look at -- after you adjust for charity care or uncompensated care, our net revenue metrics were quite strong in the quarter in the acute division. So it doesn't seem to be having -- doesn't seem to be any underlying or substantive change in our payor mix.

[Christian Rigg:]

Okay. And then just change gears quickly here. In Temecula, can you give us a sense for the operating expenses, how much expenses in there were related to Temecula without any corresponding revenue in the quarter? And I'll leave it at that.

[Steve G. Filton:]

Sure. So just provide a little bit of context and to remind people, in our original guidance for 2013, we included $15 million or $16 million, both preopening start-up costs as well as opening start-up losses for the Temecula facility. And we indicated that those would occur in quarter 3 and quarter 4. We incurred something like $6 million or $7 million of start-up costs in quarter 3 across all of our operating costs. And we think we're on track, generally, to incur the sorts of losses that we included in our original guidance with the fourth quarter opening of the hospital.

[Operator:]

Our next question comes from the line of A.J. Rice with UBS.

[Albert J. Rice:]

Just maybe -- mentioned, obviously, with the nice pickup in volume on the acute care side you had. Did you end up running -- having to make any short-term adjustments that would have maybe mitigated some of that flowing through to the bottom line, the way you dealt with the nurses, et cetera?

[Steve G. Filton:]

Yes, I think that's correct, A.J. And the fact is, because volumes picked up as quickly as they did in Q3, I think as we went through the detailed results, we found that there is probably $4 million or $5 million of what I would sort of describe as inefficient salary expense. In this case, meaning, higher uses of registry and over time, as we responded quickly to the increase in volumes. And I think the good news from our perspective is that those increases should be fixed in relatively short order and return to much -- kind of a more normalized salary and staffing pattern. And so we would expect that issue to largely be resolved in Q4 and going forward.

[Albert J. Rice:]

And I might switch gears and ask you about this behavioral business. Obviously, there's been some discussion about bumping up against capacity constraints in various markets. Are we at a point now where you would actually look at even a de novo facility, and do you have any of those on the drawing board that are worth highlighting?

[Steve G. Filton:]

The easy answer to the question is yes. I mean, we have opened de novo facilities in the last few years. We opened de novo facilities in Arkansas and in Illinois and in Texas, all in the last few years. We have a couple -- another 1 or 2 that are absolutely on the drawing board. So I think our view of capacity expansion as we move forward is that it includes both expanded beds at existing facilities, as well as de novo projects.

[Albert J. Rice:]

Okay, and maybe last question. On the pressure on the length of stay in the RTC segment, which continued this quarter. I mean, we don't have a lot of competitors any more to look at, to benchmark you against, but it does seem like the other public company doesn't -- isn't seeing exactly the same, at least they're saying they're not. And is there anything about particular programs you have or particular geographies that would make the facilities a little more susceptible to that length-of-stay pressure? And then I know it's a hard call, but do we see any signs of that starting to ease up a little bit?

[Steve G. Filton:]

No. I mean, as you know, we've been discussing this pressure on length of stay for some time. And I think in response to previous questions, we've always talked about the fact that, although it was relatively isolated to our residential business, that within the residential business, it was fairly widespread, that this was not just a phenomena at a small handful of facilities. And so, again, it's been a pervasive kind of phenomena for several years. Why another company or other hospitals might not be experiencing it is really a question that's difficult for me to answer. And as far as sort of indications of a turn, while I know lots of people have heard me say for a long time, and I certainly can see that I'm the main proponent of this, that there seems to be a natural trough to this length-of-stay issue. To be fair about it, we have not yet seen it yet -- we haven't seen it yet. And I don't know that we've really seen any leading indicators of it.

[Operator:]

Our next question comes from the line of Joshua Raskin of Barclays.

[Joshua R. Raskin:]

Just first question. Just simply on the admits number, not adjusted admissions, but actual admits in the quarter, same-store basis on the acute care side were, obviously, very strong. And I'm just curious any color on that, and whether that's geographically focused, or any other sort of things that you could point out there?

[Steve G. Filton:]

Well, I think from an admissions perspective, by far, the greatest strength in admissions in the quarter was in Las Vegas, which is kind of an interesting turn from the second quarter. In Q2, much of the strength in Vegas was from a payor mix perspective, as opposed to volumes. And now in Q3, volumes were stronger. But I will make the point that I think the overall revenue strength in the acute portfolio was fairly widespread, which I think means that while volumes were strongest in the Vegas market, the payor mix and therefore, the pricing metrics, were stronger throughout the rest of the portfolio as well.

[Joshua R. Raskin:]

Okay. But, no specific types of admits or delays or anything that you can -- it sounds like it's generally picking up in Vegas was the big driver, is that fair?

[Steve G. Filton:]

I think that's a fair characterization, Josh.

[Joshua R. Raskin:]

And then Temecula, just a quick follow-up on that. I think I got the answer in the last question. It sounds like you're on pace for sort of a $9-million EBITDA hit in 4Q. I'm just curious, expectations for EBITDA breakeven at Temecula. When do you think that happens?

[Steve G. Filton:]

I think we've said before that our general expectation is that Temecula itself would likely get to breakeven for the full year of 2014. And progressively, I think what that implies is that we'll have some losses in the beginning of '14. And then that should turn around by the end of the year. The more difficult call for us, quite frankly, is how Temecula affects the other hospitals in its Riverside County market. It's been a while since we had an opening like this, that is an opening in a market where we had existing hospitals. But when we opened Centennial Hills in Las Vegas, it, clearly, in the early, I would say, first 12, 18 months, cannibalized our own hospitals a lot more than it took market share away from other hospitals in the market. And I think, to some degree, we're expecting some of that same dynamic in Temecula. But after that, Centennial really started to take market share from its competitors and really came into its own. And again, I think, we'd expect that same sort of phenomena in Temecula. So a little bit of an unknown as to when we say we expect Temecula to break even, what the impact on the rest of the market is, but we're certainly very upbeat about the long-term prospects of the hospital.

[Joshua R. Raskin:]

So it's possible that Riverside, overall, in '14 may not be breakeven in light of the impact on -- the cannibalization on other facilities, but Temecula itself would be breakeven, if that's...

[Steve G. Filton:]

Well, incrementally breakeven. Certainly, the other hospitals are already profitable, and we wouldn't expect them to decline in that sort of material way to make them breakeven. But, yes, incrementally breakeven for the market, maybe a bit more of a hurdle.

[Joshua R. Raskin:]

And then just last question, Steve, on the guidance coming up. Midpoint's about $0.12 or $0.13. I'm curious how much -- was that mostly Texas? Was any of the Texas DSH -- I think, the whole amount was $0.13. Was any of that expected? I know only $0.10 was out of period, but was any of the $0.13 expected, or is that the boost in guidance? And, I guess, just a little surprise based on the strength of the actual quarter and the final IPPS rule came in a little bit better, et cetera?

[Steve G. Filton:]

So I think that, basically, the raise in guidance was largely, in our own minds, a mechanical exercise to reflect the Texas DSH and UPL amounts or uncompensated care amounts that were, in fact, not expected and not included in the original guidance, as well as the adjustment for -- we had originally included in our original guidance the Medicare DSH cuts that were embedded in the ACA that have since largely been eliminated. The reason why the guidance raise is a little bit less than those 2 items together is that I think that through the 9 months, our results for the 9 months are probably a few pennies shy of our own internal expectations, so that we're reflecting that in the guidance change as well.

[Joshua R. Raskin:]

Okay, got you. So there were some modest headwinds that offset those 2 positives?

[Steve G. Filton:]

Correct.

[Operator:]

Our next question comes from the line of Tom Gallucci with FBR.

[Thomas Gallucci:]

Maybe just following up on that last point that you made, Steve. In terms of maybe a few pennies weaker than you were looking for, are there any particular areas that you can point to that have been a little bit different than what you were initially expecting?

[Steve G. Filton:]

Well, I think probably, in the broadest sense, we've already touched on those. I think that our behavioral revenues have grown by -- pretty steadily at around this 3.5% mark for the year. And I think our own expectations were for slightly stronger behavioral growth. And as it get largely -- really gets down to this length-of-stay issue that we've discussed quite a bit before. And on the acute side, struggling a little bit -- I mean, we're very pleased with the way revenues have rebounded, but struggled a little bit with getting those margins up as quickly as we might have hoped to get them up, given the revenue increase. So I think those are the 2 phenomena. Obviously, on the acute side, as we mentioned, I think, we feel like those are fixable sorts of items that turn around pretty quickly. And on the behavioral side, while we think there's a natural trough in this length of stay, we're still finding it difficult to predict when we hit it.

[Thomas Gallucci:]

Right. Two cost items, I think, that you called out in the past, just want to make sure we've got the right numbers for this quarter. On the acute care side, sort of physician costs, I think, have been a drag. Just curious where are those this quarter. And on the behavioral side, you've had continued legal costs, so just want to make sure we call those out, too.

[Steve G. Filton:]

Sure. So on the on the behavioral side, the legal costs associated with the investigation were about $2 million for the quarter, which is compared to, I think, about $4 million for last quarter. And then on the acute side, the drag from the incremental increase in our physician-owned, physician-acquired, physician subsidies is probably $3 million or $4 million in the quarter, which again, I think, is a sequential step-down from the last quarter, but still a little bit of a drag.

[Thomas Gallucci:]

Okay. Last question, just a big picture, sort of on the M&A front. See a fair amount of activity out there, just curious what your perspective is at this stage of the game, particularly on the acute care side.

[Steve G. Filton:]

I think we -- as we we've said, I think, pretty consistently, we remain very interested in any strong and attractive, compelling acquisition opportunities and investigating those. I think our sense is, at the moment, the market's taking a bit of a pause as we sort of make our way to the other side of health reform, and it seems like that is consuming most hospitals' attention. But our expectation is that at some point next year, the pace of activity is likely to pick up again.

[Operator:]

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

[Darren P. Lehrich:]

A few things left here in my questions. The length-of-stay topic, obviously, has been prominent with you guys over the last several quarters. I guess, one thing I just wanted to ask is I think a lot of the focus has been on the residential side, Steve, in terms of how you've described this issue. But on the acute side, is there anything that we might see in the final parity regs that might help you out a little bit with managed care payors in terms of how length of stay is managed. I'm just wondering if that's part of the issue as you see it here.

[Steve G. Filton:]

I mean, I think in many respects, Darren, that the parity -- the preliminary parity regulations kind of already addressed the issue and basically say that insurance plans can't really manage utilization in the behavioral space differently than they measure in the Med/Surg space. We certainly try and reinforce that point with payors. It can be kind of a nuanced issue at times, but I think we think that sort of protection is already there. Certainly, I think we've seen small pockets of pressure on length of stay on the acute behavioral side of the business, where a particular state has, let's say, moved to -- from a traditional Medicaid program to a managed Medicaid program. But I think those -- again, those instances are fairly isolated. And the really broad impact on length-of-stay pressure has continued to be in the residential business, and by definition, in the Medicaid side of the business.

[Darren P. Lehrich:]

Okay. That's helpful. And then just as it relates to your share count. You've been a little bit more quiet on the buyback front. I think your share count has crept up about 2% year-over-year, I guess, from options. But can you help us think about how you're looking at buyback versus other options that you have with capital deployment, particularly as it relates to just managing share count at a minimum.

[Steve G. Filton:]

I think that -- sort of like what I alluded to before as kind of a broader industry kind of trend, I mean, I think we're very much focused on operating our business as efficiently as we can and preparing for kind of a post-reform landscape. And I think when we get to sometime well into next year, the middle -- the second or third quarter of next year, I think at that point, it would be more prudent of us to sort of sit back and see what the M&A landscape -- it looks like, what other uses for our cash flow there might be, and whether at that point we want to become more serious about returning capital to shareholders. I think between now and then, we're mostly sort of keeping our head down sort of literally and figuratively, trying to run the business as efficiently as we can, happy to generate a lot of cash, which we've been doing, and pay down debt in the interim.

[Darren P. Lehrich:]

Makes sense. Last thing here is just wanted to maybe get a little bit more visibility, if we could, on HITECH, and how you're thinking about how that comes through in Q4 and then for 2014. Any broadbrush comments on what you think your net benefit might look like? I know it's not in your guidance, but it's certainly a source of cash flow for you, as we've seen this quarter.

[Steve G. Filton:]

Yes. So from a 2013 perspective, while you're correct we don't include it in our guidance per se, we did estimate that the impact of EHR would be a positive $0.13 or so in 2013. And I think we are -- feel like we're largely on track to get within shouting distance of that number, one direction or another, which means that the fourth quarter should be a fairly significant positive, mostly because a lot of the revenue recognition occurs in Q4. As we move beyond that, and again, I think we've set the stage for this previously, we have said that the ultimate impact of our EHR process is a net investment in the neighborhood of $50 million or $60 million. So ultimately, it would be a net cost to us. Again, the way our accounting works and require that it works is that we're recognizing the revenues and the cash tending to be upfront, but we will recognize the expenses more ratably as we depreciate those costs over a 5- or 6-year period, as we bring these hospitals live. So beginning in 2014 the EHR impact will turn negative. When we give our 2014 guidance, we'll be more specific about the magnitude of that number. But from here on out, it becomes negative. I will make the point that from a cash flow perspective, I think it's only positive from here on out, because we've spent virtually all of our -- or made all of our EHR investment already, so that the expenses that are being recognized from here on out is just depreciation of already expended amounts.

[Operator:]

Our next question comes from the line of Jason Gurda with KeyBanc.

[Jason Gurda:]

With some of the details out now on the exchanges and the health plans, how do you feel with UHS' contracting strategy?

[Steve G. Filton:]

I think that we're fairly confident that we have exchange contracts with most of the payors in our market. In some markets, there's a little bit of alignment with certain payors with certain hospitals, et cetera. But I think we feel reasonably well positioned from a contracting perspective in our markets. I think this is going to be a more meaningful question, both asked and answered, months from now, when we have a better sense of how -- what enrollment looks like in those markets, and who's got the bulk of enrollment, et cetera. But I think, right now, we're very comfortable with our positioning in the vast majority of our markets.

[Jason Gurda:]

Okay. And have you guys done any more quantitative work on what the potential benefits from the expansion of coverage might be on the behavioral health side of the business?

[Steve G. Filton:]

Not really. I mean, honestly, it's difficult to do. We've certainly done what I would sort of call scenario work, in which we go through the exercise of saying, "If enrollment increases by this, and if there's x amount of admissions per thousand as a result of that, these would be the impacts." But I think it's still very early and really too premature for us to say with any level of confidence what the actual beneficial impact of these newly insureds are going to be, and how much more behavioral admissions will result from that increase in insurance.

[Operator:]

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

[Ralph Giacobbe:]

Steve, can you just give us the payor mix percentages, actually, in the quarter and maybe versus last year? And then do you have the uninsured volume growth and what percentage of admissions that represents?

[Steve G. Filton:]

Well, what I would say, Ralph, is I think the most significant change this quarter is, really, for the first time in a number of years, we saw an increase, and albeit a slight one, in both managed care and Medicare volumes. And, really, those have been on the decline for several years. So I think that gets -- winds up getting reflected in the strong pricing and the strong revenue growth in the quarter. Uninsured admissions were relatively flattish as well. So I mean, it was a quarter in which most of our payor classes were sort of flattish in terms of utilization. But quite, frankly, that's the best utilization we've had in a long time. And it obviously got reflected in our revenue growth numbers.

[Ralph Giacobbe:]

Okay. And then can you talk about initiatives or strategies you have in place or will put in place to get more people enrolled in the exchanges or Medicaid heading into 2014? And, also, if you can give us a sense of what percentage of success you currently have in getting Medicaid eligibles signed up.

[Steve G. Filton:]

Well, I think it's worth noting that the process of enrolling eligible patients as they present themselves in our hospitals and Medicaid is nothing new for us, or I would think for most hospitals, and something we've been doing for a long time. And, quite frankly, in some markets we have a whole sort of infrastructure created to do that. And in large part, the Medicaid expansion just allows us to continue a process that we're very capable of doing and are very accustomed to doing, and we'll continue to do that. Obviously, the introduction of the exchanges is certainly a new nuance that we haven't dealt with before in this very specific way. And we've trained people for that, we've educated people, we've got people certified as counselors, et cetera. Right now, like everybody else in the world, we're sort of subject to the government ironing out the kinks in their systems before what we're prepared to do, I think, will have a real measurable impact. So even some of the things that we've thought about doing more proactively, reaching out to patients through mailers and other means, I think we're, for the most part -- and I think, most of our peers are -- have suggested the same thing. I mean, we're really delaying and deferring those sorts of activities until it seems like the system is prepared for those people in a more efficient way than it currently seems to be.

[Ralph Giacobbe:]

Fair enough. And then just my last one. Can you talk about the 2-Midnight Rule? Any concerns there? Do you think it will impact you in any way? And just maybe general thoughts on the rule itself.

[Steve G. Filton:]

I think as -- again, as I understand, at least some of our peers have commented on it. We have some concerns to the degree that what the 2-Midnight Rule suggests is that if that a patient is in for 2 midnights, then that's likely to be a legitimate admission. But by the converse being that if they're there for less than 2 midnights, then that's not a legitimate admission. Now I don't know that CMS has really confirmed that that's their view. So I think, like other providers, we're anxious to get as much clarification and as much specificity from CMS as we can. And until then, we're going to follow this issue very closely. I think until there is more specificity forthcoming from CMS, it's difficult for us to say what the impact is likely to be. I think we'll have a better sense of that early in 2014.

[Operator:]

Our next question comes from the line of Brian Zimmerman, Goldman Sachs.

[Brian Zimmerman:]

Looking at your acute side of the business, can you make some general comments on what you're seeing in terms of trends on specific business lines, like surgeries, emergency department visits, any trends you saw this quarter?,

[Steve G. Filton:]

Yes, I think surgeries, clearly, also along with payor mix, took a bit of an uptick this quarter. Again, everything is relative. So I think our surgical volumes, both in and outpatient, were up this quarter, albeit slightly. But I think that's the first time they've both been up in a number of quarters. And again, I think that the strength in surgical activity is another dynamic that's reflected in that overall strong revenue growth. ER admissions -- or ER visits tend to track admissions pretty closely. And, obviously, ER visits, I think, ticked up with the increase in admissions. Or I would almost sort of suggest it goes the other way, that admissions tick up as ER activity ticks up.

[Brian Zimmerman:]

Okay. And then I appreciate your comments on Vegas and the admission trends you're seeing there. What about Texas? And any update you can provide on trends you're seeing in the Texas market?

[Steve G. Filton:]

Well, it's worth noting, first of all, that we're in a number of significant markets in Texas.

[Brian Zimmerman:]

Right, McAllen is the one I'm thinking.

[Steve G. Filton:]

The McAllen has been a market that I think was sort of slow to be impacted by the economic downturn, and conversely, has been slow to recover, and I think remains that way. So we're seeing strength in the acute care portfolio. I don't think McAllen is really driving that much.

[Brian Zimmerman:]

Okay. And then my final question is just a follow-up. How many of your hospitals are now meaningful-use compliant that you've attested for?

[Steve G. Filton:]

All of them are compliant from a Phase I perspective.

[Operator:]

Our next question comes from the line of Kevin Fischbeck with Bank of America.

[Kevin M. Fischbeck:]

Just wanted to follow up on Las Vegas, because just looking at the minority interest line, it looks like the overall results of Vegas maybe weren't as strong. You mentioned that the volumes were good. Was there a cost offset that was flowing through there? Is there something skewing the minority interest line? How do we think about the profitability of Vegas during the quarter?

[Steve G. Filton:]

Well, what I did say before, Kevin, was that in Q2, what really drove the bottom line Vegas performance was an improvement in payor mix. And what I suggested before was that even though volumes improved in Q3 in Vegas, payor mix actually deteriorated from the second quarter. And I think probably more than anything else, that drives what I think is kind of an overarching sort of dynamic in the acute division in Q3, which was stronger revenue performance, which didn't necessarily translate dollar-for-dollar to the EBITDA line. And I think in Vegas, the main explanation for that is payor mix, whereas, I think for the rest of the portfolio, there were more -- tended to be more operating cost explanations.

[Kevin M. Fischbeck:]

Okay. Because, I guess, I'm having a little bit of difficulty reconciling the comment you made earlier. I think it was Chris's question about the bad debt and the charity care. Because looking at the numbers, it looks to me like your charity care and discounts were up about 7%, and that bad debt was up 74%, which is due to the classification issue you mentioned before. If you add them together, they're up 33% in the quarter. So that to me feels like a big number, but you kind of characterized it as more flattish. Is there something -- am I missing something in that analysis?

[Steve G. Filton:]

No. I mean, I think, the issue, obviously, is though -- and to me the ultimate test is what's happening to our overall paying revenues, which are clearly up in the quarter and the strongest performance that we've had in some time. And that's reinforced, or in my mind, validated by our cash performance. So no, I mean, I think, and I've made this point a lot before, we don't do a lot of analysis of bad debt and charity care in the sense of what we're not collecting. We're far more focused on what we are collecting. And I thought in Q3, those numbers were actually pretty strong.

[Kevin M. Fischbeck:]

Okay. I think that makes sense. And when you think about the payor mix issues that you're talking about, that is just Medicare growing as a percentage? Or what's causing the payor mix issue?

[Steve G. Filton:]

In Vegas?

[Kevin M. Fischbeck:]

Yes, I guess, specifically.

[Steve G. Filton:]

Because Vegas, I think, is really where we had the payor mix issue, yes. I mean, I think what we saw in Vegas was an uptick in emergency room business, and that led to an increase in volumes, but unfortunately, the mix of those patients was more uninsureds and more Medicaid, specific in that market.

[Kevin M. Fischbeck:]

Okay. And then how do we think about the Texas DSH program, because in some ways, it's very helpful for you to spike out what happened in the quarter versus out of quarter. But is this something you would expect to continue next year? Or is this something that we're going to have to wait until this time next year before it finalizes again, and then we'll find another onetime -- or not, maybe not onetime but out-of-period item that we have account for? How do you think about that number going forward?

[Steve G. Filton:]

So our expectation at the moment is that these couple of programs that we spiked out will continue into 2014, and will have a favorable impact in 2014 of about $15 million. And so at this point, we would expect that we would include those numbers in our guidance for next year.

[Kevin M. Fischbeck:]

Okay. Do you think you will be able to accrue for them? Or will it have to be a wait and see?

[Steve G. Filton:]

No, I think at this point, we would accrue for them.

[Kevin M. Fischbeck:]

Okay. And then maybe last question. On the psych, I think the margins were down there year-over-year, even though the revenue growth did improve. Any comments there, I guess, maybe besides litigation costs that might have brought down the margins?

[Steve G. Filton:]

No, as you said, I mentioned a couple of million dollars of legal fees before. I think other than that, we saw a tiny bit of pressure on things like supplies and some professional fees for our psychiatrists, but -- and our doctors, but nothing terribly specific. I mean, honestly, at a 3.5% revenue growth rate, it can be a little challenging to really be able to post margin expansion every quarter at those rates of growth.

[Operator:]

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

[Frank G. Morgan:]

Steve, I hate to go back to this, but one more time. So the volumes and the mix improved across the entire portfolio except in Las Vegas, where mix deteriorated -- volume continued to improve there, but the mix deteriorated, is that correct?

[Steve G. Filton:]

So, I guess, what I would say, Frank, is that in Vegas, volumes were very strong, and payor mix deteriorated pretty measurably, whereas in the rest of the portfolio, volumes were less robust, but payor mix clearly improved.

[Frank G. Morgan:]

Okay. But some improvement in volume across the rest of the portfolio?

[Steve G. Filton:]

I don't have it exactly in front of me, but I think most of the volume improvement was in the Vegas market.

[Frank G. Morgan:]

Okay. Unrelated. I think you mentioned surgical volumes being up, but just general Med/Surg acuity, was it also up? Like, what was your case mix on the hospital side in the quarter? How much -- did it increase?

[Steve G. Filton:]

Our case mix has been -- had risen, and I think it still is above where we were in the third quarter of last year. But over the last few quarters, it has largely leveled out and has been pretty consistent this year.

[Frank G. Morgan:]

And then with regard to the drag from the owned -- the physician clinics, any plans for further acquisition of those type of clinics in the near term?

[Steve G. Filton:]

I think, obviously, in sort of a -- in a micro way, yes. I mean, we're certainly going to continue to acquire and employ physicians where it makes strategic and business sense to us. But I think that the real significant push that we experienced kind of late last year and early this year, which you're really kind of seeing flowing through our numbers now, is not likely to be repeated.

[Frank G. Morgan:]

Okay. So the drag could very well have maxed out and might even decline over time, is that a fair way to say it?

[Steve G. Filton:]

Yes, what we suggested last quarter was that we expected that the drag would decline sequentially, and it did. And I think that continues to be our expectation.

[Frank G. Morgan:]

Okay, great. One last question, and I'll hop. Just on behavioral pricing and your outlook there, and I'll hop.

[Steve G. Filton:]

I think behavioral pricing has been, on a per-day basis, in that kind of 2%, 2.5%. And I think our general sense is that it should remain around that level.

[Operator:]

Our next question comes from the line of Justin Lake with JPMorgan.

[Justin Lake:]

Just a couple of quick numbers questions here for me. First, Steve, your interest expense looked a little lower in the quarter than I would have expected. Can you give us an idea what drove that, and whether it was a contributor to the quarter? And how to think about that run rate going forward?

[Steve G. Filton:]

So, Justin, we did receive from the state of Illinois about $4 million or $5 million in interest payments. As you know, we've been talking about for the last couple of years that Illinois had fallen significantly behind in its Medicaid payments because of budgetary issues. And they did issue some interest payments this quarter. Obviously, I think in the grand scheme that just offsets the higher interest expense we incurred in these previous periods, as we financed that increase in working capital. In the quarter itself, we didn't really call that item out because there were some offsets, some of which we already discussed like the legal fees and a couple of million dollars in sort of cost report-type adjustments, which in our minds, largely offset that interest expense benefit.

[Justin Lake:]

Okay, great. And then just lastly, obviously, you're a bit of an outlier here among the hospitals that reported so far in terms of volumes. I know a lot of it's based in Vegas. Can you give us an idea, have you seen that volume improve and continue into October?

[Steve G. Filton:]

I think the trends have largely continued in October, meaning strength in Vegas and mostly sort of flattish numbers elsewhere.

[Operator:]

Our next question comes from the line of Robert Raiff with Centurion. The question is withdrawn. We'll proceed to the next question. Our next question comes from the line of Gary Lieberman with Wells Fargo.

[Gary Lieberman:]

Maybe one housekeeping item. Do you have an allowance for doubtful account number available?

[Steve G. Filton:]

Yes, that will be in the Q.

[Gary Lieberman:]

Okay. And then I guess just going back to the patient mix. Were there any service lines that were particularly strong or weak, or that you entered or exited in the markets?

[Steve G. Filton:]

No, other than sort of what I alluded to before, that I think the surgical service lines were stronger this quarter.

[Gary Lieberman:]

Okay. And then do you have any data or statistics for us in terms of the numbers of certified application counselors that you have available at the hospitals, either sort of on an average per hospital or on an overall number for all of the acute hospitals?

[Steve G. Filton:]

We don't really have any detailed numbers, Gary, other than I believe that we have certified counselors in most of, and certainly all of our larger facilities.

[Operator:]

[Operator Instructions] There appear to be no further questions at this time.

[Steve G. Filton:]

Okay. Thanks, everybody for your time, and we look forward to speaking with you next quarter.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.