Steve Filton - Chief Financial Officer.

Justin Lake - JPMorgan Brian Zimmerman - Goldman Sachs Darren Lehrich - Deutsche Bank Kevin Fischbeck – Bank of America Merrill Lynch Frank Morgan - RBC Capital Markets Ralph Giacobbe - Credit Suisse Whit Mayo - Robert Baird Joshua Raskin - Barclays A.J. Rice - UBS Ana Gupte - Leerink Chris Rigg - Susquehanna.

Good morning. My name is Tanya and I will be your conference operator today. At this time, I would like to welcome everyone to the Universal Health Services' Third Quarter 2014 Earnings Call. All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session (Operator Instructions). Thank you. Mr. Filton, you may begin your conference..

Good morning and welcome to Universal Health Services third quarter 2014 earnings call. During this call, 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 those 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, 2013 and our Form 10-Q for the quarter ended June 30, 2014.

I'd like to highlight just a couple of developments and business trends before opening the call up to questions. As discussed in our press release last night, the Company recorded net income attributable to UHS per diluted share of $0.82 for the quarter.

After adjusting each quarters' reported results for the items disclosed on the supplemental schedule included with last night's earnings release, adjusted net income attributable to UHS increased approximately 26% to 137.5 million or $1.36 per diluted share during the third quarter of 2014 as compared to 109.5 million or $1.10 per diluted share during the third quarter of last year.

On a same facility basis in our acute care division, revenues during the third quarter of 2014 increased 7.9% over last year’s third quarter. The increase resulted primarily from a 4.1% increase in adjusted admissions to our hospitals owned for more than a year and a 3.6% increase in revenue per adjusted admission.

On a same facility basis, operating margins for our acute care hospitals increased to 18.3% during the third quarter of 2014 from 14.4% during the third quarter of 2013. On a same facility basis, net revenues in our behavioral health division increased 6.2% during the third quarter of 2014 as compared to the third quarter of 2013.

During this year's third quarter, as compared to last year's, adjusted admissions to our behavioral health facilities owned for more than a year increased 5.4% and adjusted patient days increased 2.1%. Revenue per adjusted patient day rose 2.9% during the third quarter of 2014 over the comparable prior year quarter.

Operating margins for our behavioral health hospitals owned for more than a year increased to 27.6% during the third quarter of 2014 as compared to 27.3% during the third quarter of 2013.

Our cash from operating activities increased approximately 25% to 231 million during the third quarter of 2014, as compared to 185 million in the third quarter of 2013. Our accounts receivable days outstanding decreased to 57 days during the third quarter of 2014 as compared to 59 days during the third quarter of 2013.

At September 30, 2014, our ratio of debt to total capitalization decreased to 48.9% as compared to 52.9% at September 30, 2013. We spent $123 million on capital expenditures during the third quarter of 2014 and $309 million during the first nine months of this year.

In late September 2014, we acquired the stock of Cygnet Health Care Limited for a purchase price of approximately $327 million. Through this acquisition, we have added a total of 18 facilities located throughout the United Kingdom, including 16 inpatient behavioral health hospitals and two nursing homes with a total of 734 beds.

Cygnet has a national footprint and is one of the largest independent providers of behavioral health facilities in the United Kingdom. They are the leading specialist mental health provider in the UK which includes services for children, eating disorders and autism among others.

They have outstanding customer relationships and a well established reputation for excellence. The Cygnet facilities generated aggregate revenues of approximately $161 million during the 12 month period prior to our acquisition. During 2014, we have opened a total of 242 new behavioral health beds at some of our busiest facilities.

We expect to complete construction and open another 258 beds in the fourth quarter, including the opening of the 102 bed Quail Run Behavioral Hospital in North Phoenix. Near the end of the second quarter of this year we acquired a commercial health insurer headquartered in Reno, Nevada.

Included in our operating results for the third quarter of 2014 is approximately $48 million to $50 million of revenues and other operating expenses recorded in connection with its operations.

During the third quarter of 2014, our Board of Directors authorized a stock repurchase program, whereby from time-to-time as conditions allow, we may spend up to $400 million to purchase shares of our Class B common stock on the open market or in negotiated private transactions.

In conjunction with this program during the third quarter of 2014, we repurchased 227,000 shares at an aggregate cost of $25.2 million. I will be pleased to answer your questions at this time. .

(Operator Instructions) We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Justin Lake with JPMorgan..

Good morning. Steve one question here, can you give us an update on the benefits of reform in the quarter versus the Q2 run-rate and then maybe some comments on how to think about a framework for 2015 ACA benefits for the company? Thanks..

Sure, Justin. So I think, what we had said in our second quarter call and I think we acknowledge that our analysis was limited by a number of factors and so it was not absolutely precise.

But we estimated that of the acute care improvement year-over-year somewhere around 35% - 40% of it was attributable to the Affordable Care Act and the favorable impacts of that.

Another 35% to 40% attributable to an improved economy in many of our local markets and then finally another maybe 15% to 20% attributable to local market factors, market share increases that sort of thing. I think we felt like for the most part those percentages held relatively steady in the third quarter as well.

As far as thinking about the impact of reform on next year, obviously I think we're going to wait as I'm sure most of our peers will to see what the enrollment data looks like.

Obviously, this year open enrollment for exchange products will be completed by the end of the year, so by the time we give our guidance at the end of February we should have a pretty decent picture of new enrollment both from a Medicaid and an exchange perspective.

And we'll base our 2015 estimates in part on that data, much as we did this year although, the data was not available until later in the sort of chronology this year. So, that's how we'll go about framing our 2015 ACA impact..

One clarification, Steve, you said the breakdown of the growth was similar in terms of how much was ACA in the third quarter versus the second quarter. Obviously, third quarter growth was great but not as significant as the second quarter's growth especially in the acute care business.

Should I take that to mean that your ACA benefit in your mind declined in terms of absolute dollar benefit sequentially?.

I think that's right, Justin.

We talked a little bit about the fact that we had a sense in the second quarter because our same store revenue acute care revenue growth in the second quarter which was 11.5% was so significant that there was some aspect of that that was perhaps sort of one-timeish in nature whether that was because of the sort of bolus of enrollment that occurred in the second quarter or some pent-up demand that was exercised in the second quarter.

But, it certainly appears as if the growth rate that we realized in the third quarter of 7.9% was still very strong seems to us to be sort of a more sustainable rate going forward.

So yes, I think we felt like that real strong revenue growth that we saw in Q2 whether it was attributable to ACA or to an improving economy, decelerated just a little bit in Q3.

Your next question comes from the line of Brian Zimmerman with Goldman Sachs..

Hi, thanks and good morning. I was hoping, if you could give us a little bit more detail on what you're seeing in terms of exchange volumes versus Medicaid expansion in states that have done so. Just any more granularity there would be helpful..

Sure, Brian. So I mean I think that we continue to believe that in 2014, the larger portion of the ACA impact is from Medicaid expansion. And we've seen our Medicaid volumes increase by double-digits, certainly in that sort of 12%, 13% range year-to-date.

And exchange or commercial volumes increased definitely increased by a measurable amount but by certainly less than that. Again not difficult to be terribly precise about it but I think we would sort of attribute maybe two-thirds of the ACA benefits to Medicaid expansion in '14 and maybe a third to exchange expansion or exchange enrollment..

Okay and then can you give us a bit more detail on what you're seeing in terms of acuity in payor mix in the quarter?.

Again I think, from a payor mix perspective, the trends are similar to what we've seen all year which is a relatively measurable decline in uninsured volumes, uninsured volumes are down probably 7% to 8% for the year and those are offset by an increase in both Medicaid and commercial volumes as I just noted, and those trends continued into Q3 and I think our expectation is they will continue into Q4 as well..

Alright. Thanks a lot..

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

Okay, thanks. Good morning. So I guess I wanted to ask two things here. The first, you mentioned the acquisition of a managed care plan and I guess, I'd just be curious to get a little bit of flavor for what you're doing with that plan and, I guess, specifically inside this quarter.

Can you just talk a little bit about maybe the earnings impact? I know you gave us a revenue number, obviously -- that's a lower margin business. Were there any transition costs of any sort? And just help us put that into perspective..

Sure.

So from I think a strategic perspective, Darren, the acquisition of the health plan is really part of sort of the broader preparation and, I think, foundation that we're building for the more integrated or the demands for a more integrated health care delivery system that we anticipate and I think, frankly, most of our peers anticipate is going to be required in the future.

And so, as we continue to form more integrated relationships with our physicians and some of our long-term care providers, et cetera, and other niche providers, we also I think wanted to have the option in at least certain markets of being able to offer an insurance product, in some cases, the Medicare Advantage Insurance product.

And as we thought about how best to create that infrastructure and capability, we looked at potentially building it on our own from scratch or buying it and ultimately decided that buying a small insurance company and the one we chose was in a market that we already operate in Reno, although I don't think there was anything terribly significant about the location itself, because I think for the most part we would like to be able to transform that or transmit that capability to other markets.

So that was the driver behind the decision.

As I indicated in my remarks, maybe approximately $50 million of revenues and expenses in the quarter, slightly dilutive at the EBITDA line and I think we anticipate that it will remain that way for the first, maybe 18 to 24 months of operation at which point we think it would become accretive or positive from an EBITDA perspective.

But again, the real goal here is not to create an insurance business that’s going on its own become terribly profitable but really to help us drive some of the results in our markets and alignments that we're really looking for..

Okay. And then just the EBITDA dilution, should we thinking, a few million or is there something....

Yeah. I would say on an annual basis, in that sort of $5 million to $8 million range..

Okay, that's helpful. And then I guess I wanted to ask also here about the Cygnet transaction.

With regard to the skilled nursing facilities is that, I guess those two facilities, will you continue to operate them or how should we think about that in terms of the enterprise you're buying? And then, what do you think the EBITDA contribution for Cygnet can be on a run rate basis? And then, just I guess specific to guidance, it was not implicitly in the original guidance so how should we put the annual guide into context?.

So trying to work backwards, I think that when we announced the Cygnet transaction, we talked about a margin profile for that business that was fairly similar to our own which I think translates to something like $10 million to $11 million of incremental EBITDA a quarter.

And I think also it translates to something like $0.10 to $0.15 of EPS accretion in the first year of operation. So to your point, Darren, with a quarter of that to be realized in the fourth quarter, we didn't think those numbers were material enough to change our operating guidance given any other moving parts that we might have.

And then as to your first question about the two nursing homes that the company owned, I mean, that's a long standing – those are long standing facilities that the company owned, not necessarily an indication of a business that we're looking to expand, et cetera.

I don't know that we're in any rush to divest any of the Cygnet facilities, but I don't think we also have any desire to expand the nursing home business..

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

Okay. Thanks. So, I guess a couple of questions. I want to go back to your comment about how -- the reform benefit in Q3 might be a little bit less than the reform benefit in Q2. If I remember correctly your adjusted admission number actually was better in Q3 versus Q2 on a more difficult comp.

So, trying to understand, it sounds to me like you're saying that there is demand in Q2 that might have inflated the benefit and that came back to normal, where would we see that if not in the volume number?.

Well, again, Kevin, what I was sort of referring to was the fact that our same store revenue growth in Q3 was some 360 basis points better than it was in Q -- than our revenue growth in Q2 is better, 360 basis points better than in Q3.

And to your point if the volumes are the same then obviously it's in the revenue per unit and that becomes sort of a mix issue. And again, to be absolutely fair about it I'm not sure that we can specifically identify why the mix was so good in Q2, and returned in our minds to a more normal range in Q3.

But I think, the things or the dynamics that we speculated on was potentially the impact of sort of you know utilization occurring as enrollment incurred whether it was Medicaid or commercial, or the fact that you know perhaps, there was some bolus pent-up demand among those newly insured.

Again, whether they were newly insured as a result of an improving economy or of the ACA we also had a little bit of as we have disclosed in Q2, some catch up, Texas reimbursement that drove those numbers a little bit as well.

So I think that -- it's just the issue of trying to offer an explanation of why that same-store revenue growth was somewhat higher in Q2 versus Q3..

Okay. I guess, in the past when you talked about why you think it's 35% to 40% reform and 35% -- or 35%, 40% economy you talked a little bit about performance in the expansion versus non-expansion states.

Can you talk a little bit about what happened maybe in Texas versus Nevada?.

Yes. I mean I think, I'm not sure that, I mean I do think another dynamic that is affecting that slight deceleration in revenue growth is the fact that the Las Vegas market and I think the economic improvement in the Las Vegas market that drove higher revenues was something that we began to experience in the middle of 2013.

So, by the third quarter of 2014 we were clearly starting to lap or anniversary that improvement, and that comparison consequently has become a little bit more difficult.

I think we're still clearly ahead in the third quarter of '14 versus '13 in Las Vegas but probably further ahead in some of the other markets like Texas and California whose improvements started later and really didn't start in 2014..

Okay.

And I may have missed this from the question before, but did you comment on transaction costs around Cygnet in the quarter?.

I'm sorry no, I did not. But there were no significant transaction costs in the quarter for Cygnet. .

But will you have any in Q4, or they're just not [indiscernible]. .

No I mean, we had basically legal fees and some related transaction fees but no fees for an advisor or anything like that..

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

Yes. I guess, just a follow up on that last question. You were starting to talk a little bit about Texas given that the recovery in Vegas area lapped.

But, I was hoping you could go around some of the other markets and maybe comment on those, where they are and maybe give us some color on how long you think the runway is in the recovery, is there anything different about how long we should expect the recovery in Texas and some other states? How long should that be sustained compared to what we saw in Vegas, and then secondly likelihood of a California provider tax hitting in the fourth quarter? I know it's not in your guidance but, do you still think that's a likelihood and is that still like a $9 million or $10 million kind of number?.

Sure. So, again, trying to take it backwards and at the risk of forgetting something as I work my way back. The California provider tax we did quantify as having the value to us of about $9 million or $10 million annually.

As we said in -- when we offered our original guidance early in the year we did not include it in our original guidance, we did not include it in our revised guidance and specifically because it was pending CMS approval and while we ultimately expected that CMS approval will be granted, it was difficult for us to project or predict when that would happen and et cetera.

And I think that's still the case. So, we continue to hope that we get CMS approval and that we get those moneys but, I have not projected that in our revised guidance and I think we'll continue to take that position.

As far as your other question Frank about the individual markets again, I mean, I think that what we've seen and I think we commented on this after the end of our Q2 reporting was we've seen strength in all of our markets. And I think, that strength can be attributable to both Medicaid expansion in places like California and Nevada and D.C.

It can attributed to an improving economy in a number of states including -- and I think notably Texas as well as exchange enrollment in a number of states including Texas and California.

I think our sense is that those benefits that is the people who have enrolled in insurance plans whether, they be Medicaid or exchanges as a result of the ACA or people who have gotten or maybe even reentered the insured market because they've returned to the job force, et cetera.

I think, we think, those benefits definitely continue for the most part into 2015. I think what we are not necessarily sure of is to what degree there will be new enrollment, ACA enrollment in 2015. I think that was sort of the context of my answer to Justin's question earlier.

And I think the other piece that is sort of obvious is there is a sort of initial benefit as these un-insureds reenter the insured marketplace. And while that benefit is sustained, it doesn't continue to incrementally increase.

So, while we’re starting to lap the Las Vegas benefit in Q3, maybe and I think from here on out, we won't lap the other the benefits that we started to enjoy in the beginning of '14 until next year. But there will be some element of that occurring next year..

Okay. One final and then I'll hop off. Just looking at the implied range for the fourth quarter given that you're reaffirming guidance, a pretty wide range there, I think it's something like 127 to157.

Anything we should be mindful of in considering as we look at that wide range and try to hone in a final number, just anything we should be aware of? And I'll hop. Thank you..

I don't think so. I mean, obviously, it was an intentional decision on our part not to narrow the range.

I still we still continue to believe that there are -- there's a decent amount of volatility in the markets, et cetera, but generally are comfortable that we will meet our original range and I'm not sure that any further commentary was intended or required..

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

Thanks, good morning. Just want to go to same facility side of things, you had sizable improvement in the acute care and a bump up on the behavioral side, but when I look at in aggregate we didn't see the same level of sort of margin pull through or improvement. So what outsiders for the organic is preventing the better margin performance.

I know you mentioned the Reno health plan, but is there anything else in terms of corporate overhead or other costs that's sort of impacting the margins?.

Thanks, good morning. Just want to go to same facility side of things, you had sizable improvement in the acute care and a bump up on the behavioral side, but when I look at in aggregate we didn't see the same level of sort of margin pull through or improvement. So what outsiders for the organic is preventing the better margin performance.

I know you mentioned the Reno health plan, but is there anything else in terms of corporate overhead or other costs that's sort of impacting the margins?.

Yes, Ralph. So, I mean, we had 7.9% same store revenue growth in our acute care business and almost 400 basis point improvement in margins. I realized that the audience can be sometimes pretty tough, but I think we consider that to be pretty strong performance on the behavioral side where we already have very robust margins.

We had a 30 basis point improvement in margins, again, I think we felt like both of those results were kind of well within our expectations.

I think when you compare perhaps the acute business sequentially to last quarter, again, I'll just go back and highlight the fact that the results that we posted in Q2 with an 11.5% increase in same store revenue were a little bit better than what we posted with a 7.9% increase in revenue that's just the nature of the model.

But again, I think the third quarter results were well within our expectations and honestly I don't know that we could do a whole lot better than that. .

No, that's fair, Steve. I guess what I was asking more was sort of on an aggregate or consolidated basis as opposed -- I mean, the same store numbers were clearly strong from the acute and the behavioral standpoint.

The pull through wasn't there from a total margin perspective, so I'm just trying to reconcile and I know the Reno piece, the Reno health plan probably, to your point earlier, dragged it down.

I guess I was just wondering, are there other corporate overhead or other costs that sort of didn't allow you to show through better on the sort of consolidated margin line, not on the same store?.

No, that's fair, Steve. I guess what I was asking more was sort of on an aggregate or consolidated basis as opposed -- I mean, the same store numbers were clearly strong from the acute and the behavioral standpoint.

The pull through wasn't there from a total margin perspective, so I'm just trying to reconcile and I know the Reno piece, the Reno health plan probably, to your point earlier, dragged it down.

I guess I was just wondering, are there other corporate overhead or other costs that sort of didn't allow you to show through better on the sort of consolidated margin line, not on the same store?.

No. And I don't think there are Ralph, I mean, nothing of any material amount..

And then I guess on the behavioral side, you showed sort of continued momentum and strength in the revenue there, driven by the volume side.

Any thoughts on sort of drivers of that? Are we starting to see -- do you think we're starting to see some parity benefits take hold or you think it's still too early on that front and then maybe how you expect that to play out in 2015?.

Yeah. I mean, the pace of revenue growth has picked up in behavioral as the year has gone on. I think we were in the sort of 3.5% range of revenue growth in Q1 and then a little under 6 in Q2 and a little over 6 in Q3.

And again, in much the same way and maybe even a little bit more so, it's difficult I think for us to precisely identify either in ACA or a mental health parity impact in the behavioral space.

But I think the sense in Q3 was that maybe we started to get a little bit of benefit, not terribly material, but a little bit of benefit from one or both of those dynamics.

Certainly, I think we had entered the year with a notion that our behavioral business would grow by about 4.5% - 5% same store revenue, so we've done a little bit better than that in the last two quarters. And I think there's a general inclination to believe that a little bit of that is coming from reform/parity..

Okay. All right. Great. And then just my last one.

Did you have any headwind from Texas Medicaid waiver cuts or I guess the deferral around that?.

So, I mean, I think that question is prompted by the HCA announcement that they had sort of two, I'll call it non-recurring revenue items or will have in the quarter, one is they recognized their RAC settlement in the third quarter. We did not do that.

We will recognize it in the fourth quarter when we receive the settlement or sign the settlement, that number is not terribly material. I think it's probably in the $5 million or maybe a little bit lower range. And then HCA announced that it was reversing either some or all of its Texas uncompensated care revenue.

We did not do that in part because, we are not in the same counties that CMS targeted with their deferrals. So, we are not in any of those same counties and so we continue to record our Texas uncompensated care revenue at the same rates that we have then..

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

Hey thanks, good morning. Just first question is really just on Cygnet just meaningful impact on your tax rate looking out over the next year and how do you think -- or how should we think about the growth opportunities in the UK and what's similar and dissimilar versus the U.S.

market?.

Sure. So, from a tax rate perspective Whit, the UK effective tax rate is much closer to 20% than the high 30s that we incur here in U.S., and we should continue to enjoy that lower tax rate as long as we don't repatriate those moneys or effectively bring them back to the U.S.

So, I think in the short and intermediate term, the expectation is that on those Cygnet earnings we will enjoy a lower effective tax rate.

As far as the growth opportunities, I think when we announced the deal we articulated the notion that I think one of the things that drove us to enter the UK was the opportunity to grow in ways that may be coming a little more difficult in the U.S.

We've got a bunch of facilities now in the UK, 18 facilities that are mostly operating at very high occupancy rate so, we have the same sort of organic capacity expansion opportunities that we have here in the U.S.

I think, we also have the opportunity to acquire other facilities in the UK and while we have those same opportunities here in the U.S., the opportunity to do that in a big way in the U.S. is certainly becoming more limited, and also we're restrained because we have such a significant footprint with our behavioral facilities here in the U.S.

that in many markets and with many acquisition opportunities we are limited by some FTC and similar restrictions that obviously we don't have in the UK.

So, we're very excited about the opportunity not only as I articulated in my comments to have acquired this very well run behavioral business in the UK but, to have also acquired a platform that I think, will allow us some of the robust growth in the UK that we've enjoyed here in the U.S. over the last few years..

Is there a range for kind of organic revenue growth and maybe inorganic revenue growth that you think is reasonably achievable out over the next two to three years?.

I mean again I think, in terms of the inorganic or the M&A activity, we've always been of the mind that we never really try and frame that or guide to it because, I think we always had the view that we're going to be opportunistic about those opportunities.

If there are compelling opportunities to earn an above market return then we're going to pursue those aggressively. And frankly if there are not, then you know we'll be judicious about it. As far as the organic growth I mean I think, that our activities here in the U.S.

where we were adding something like 3% to 5% on the incremental bid base here in the U.S. that we've been doing for seven years or eight years, I think that's probably not an unrealistic way to think about what we might be able to do in the UK..

Okay and my math might be off a little bit but Temecula looks like it's probably off to pretty good start, looks like the third quarter revenues may have in fact, doubled over the second quarter and it does appear to be EBITDA positive.

So, just any update on that hospital, how it's trended with your expectations?.

Yes. So, I don't have those numbers right in front of me Whit so I'm unable to confirm what you're speculating, but I will say that in general, which I have said on our previous calls, our California results have really been very positive this year.

And we tend to look at the overall what I'll call the overall Riverside County market that Temecula is part of. And certainly that has exceeded our expectations.

Temecula itself as we expected, kind of ramping up and again, not -- I don't have it right in front of me but, I think it may be a little bit short of our internal expectations although, as I said, I think the overall market is clearly ahead of our expectations. .

Got it and one last one just on buybacks and I know it's less than a formality to extend or increase your authorization but, how do you think we should be thinking about the pace of buybacks over the next 6 to 12 months? Thanks. .

Sure well I mean, I want to put it in the context when we announced the buyback in late July, we did so with the notion that we really felt our leverage levels were as really as low as we wanted or needed them to be and certainly didn't intend for them to get much lower than they were at that time.

Now at that time, we were not at all certain that we were going to do the Cygnet deal. Obviously, two months after the announcement of the share buyback, we deployed $327 million of capital to acquire Cygnet. So, in that sense I think we had some capital deployment that we were not anticipating.

And so I think our basic approach to share repurchase will be much like we articulated at the time and that is we view share repurchase as another opportunity for us to deploy capital. And we will compare that to the attractiveness of both organic and inorganic opportunities we have, and we'll continue to make that judgment as we move along..

Your next question comes from the line of Josh Raskin with Barclays. .

Hi. Thanks. Good morning. First question just on the behavioral side. The revenue per adjusted admission trends to have obviously been sort of zero-ish numbers for a pretty long time.

I guess are we getting to a point where length of stay and some of the other impacts there are going to start turning at some point? I mean, obviously, the revenue growth has been very strong on the behavioral, but just curious on the revenue per adjusted admission..

Yeah, Josh. I mean, I think that we've been facing this length of stay challenge for some time. And while I think it is reasonable and rationale to expect that at some point it will level off, we quite frankly and, I'll say, I, personally haven't been very good at predicting when that will be.

So I think it while we took the approach that we took this year is we're going to assume that length of stay continues to decline at sort of this 3% to 4% rate that it has been, until we really see some evidence over the course of a couple of quarters at least that that's not the case and it really has leveled off.

To be fair, I just don't think we're there yet, although certainly at some point we think we will see that. I think you sort of described of behavioral dynamic pretty well in the sense that we're seeing a very steady reliable revenue growth and volume growth and we've seen that for a while.

I think the real upside as you suggest at least to some degree in the behavioral business occurs when either that length of stay levels off which we assume will happen at some point, and, or we start to get the benefit from reform and/or parity. And as I suggested in some my earlier comments, maybe we started to get a little bit of that in Q3.

But I think we feel like and have always felt more like we would start to see a more measurable benefit in 2015and beyond..

That makes sense. And then just last question on the fourth quarter, I know you guys are confirming the guidance which obviously is a wide range.

But anything, we should think of as unusual from either of seasonality or a sequential change in the fourth quarter that would be atypical relative to what we've seen in the past for the fourth quarter?.

No. I mean, obviously, the normal seasonality should be present but other than that no, I don't think there's anything that we know of that people should be thinking about in terms of their expectations for the fourth quarter. .

Okay, unless California provider or something like that happens..

Right, right. That would be obviously something we're not anticipating at the moment..

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

Hi, everyone. Maybe just a couple of quick ones here. When you think about looking ahead to 2015 and ongoing reform benefit, obviously there's some discussion about potential states expanding. I don't know if you have any particular view on states that if they expand, that would be particularly helpful to you that are likely to expand.

I guess also, though, there's clearly the exchange population, and there'll be some natural growth there. But I'm also curious. So we've got some new some of the managed care guys are going to be more aggressive next year.

Is there anything you're doing in terms of new contracting, recontracting, approaching that business that's worth noting in terms of 2015 and its potential benefit to you?.

Sure, A.J. So, as far as the expansion – further Medicaid expansion goes, I mean, the two states that are significant to us that have not yet expanded are Florida and Texas. I'm not sure that my commentary on those states is any more valuable than anyone else's. I think they're big states and people are following the developments there.

I don't think either of those states is about to imminently expand Medicaid. So, we will follow that along with everybody else. But those are clearly the two states that continue to or would make a difference for us if they did expand. As far as next year goes on exchange enrollment, I don't know that we're seeing a whole lot of new developments.

I think we anticipated that maybe we would see a greater move to narrower networks next year. I don't know that we are seeing that.

I think like all other providers, we are having sort of developing conversations with our managed care providers about changes in contracts to move to, to move away from fee for service reimbursement and to some sort of fee for value proposition, but I think those developments continue to be relatively slow developing and I don't think our anticipation is that in 2015, we will have a significant amount of our reimbursement that will be sort of new or different from our traditional fee for service..

Okay. And I know we've talked around some of the growth opportunities in the UK with Cygnet deal. I think one of the things that’s been thrown out is that there are other properties held by the private equity, held by different private equity groups and that there might be opportunities down the road for bigger transactions as well.

In your thinking about that, would you say, hey we've got to run Cygnet for a while, get comfortable with market or if one of those bigger transactions came along fairly quickly would you guys be comfortable feel like you have enough of understanding of the market to go for that?.

You know A.J., I think our experience is opportunities present themselves when they present themselves so, I think ideally I would, sort of echo the position that you just articulated. We'd certainly like to be able to run Cygnet for a while, get used to the new market.

But on the other hand we're very comfortable with the experienced management team that we have in place there, and so I will tell you that we're evaluating opportunities as they're arising in the UK. And we'll continue to do so. So, I don't think we will be limited by sort of an absolute prescription that we have to wait.

I think, we're going to try and do what we think is right for that investment there in the UK. .

Okay, all right, thanks a lot..

Your next question comes from the line of Ana Gupte with Leerink..

Yeah thanks, good morning. Just wanted to follow up Steve on the comments or the attribution on payor mix.

I think, you said two-thirds is Medicaid, one-third is exchanges is that -- and have you been able to see any difference between the exchange membership that came onboard in April and May which was more late enrollment probably lower acuity any observations there?.

So, I think I would say two things, Ana. I mean my two-thirds one-third comment I think, it was a year-to-date comment.

I think that earlier in the year in the first quarter, it was really more heavily weighted to Medicaid and then in the second and third quarters it began to swing with a little bit less weight towards Medicaid and more to commercial as the commercial enrollment increased. And again, I suspect that dynamic continues into Q4.

As far as acuity and I know others have commented a little bit differently but, I think for the most part we feel like the acuity of our newly enrolled ACA patients whether they be Medicaid or commercial patients has been largely reflective of our existing insured population and not terribly different..

And have you been able to distinguish you know -- with your systems can you tell us if it's a commercial life or if it's an exchange life at this point?.

Ana, I think from the beginning we've said that, I think in some cases we feel we can do that very precisely and in others it is not so clear, and which is I think why whenever we've given ACA impact estimates, we've given a fairly broad range because it is not always absolutely identifiable and easily and objectively identifiable. .

Okay one last question. It sounds like the exchange rates are looking still pretty good and the contracts are fairly long-term.

Have you had any data so far to see whether collectability of deductibles now might be an issue and put some pressure on the margin?.

I think that our accounting has anticipated the idea that the collectability of coachers and deductibles on those exchange plans might be less than what we have experienced historically, I don't know so, I think our accounting has been appropriately conservative in that regard.

I don't know that we have enough actual experience to really make that statement definitively however..

(Operator Instructions) Your next question comes from the line of Chris Rigg with Susquehanna..

Hi good morning. I got in here a little bit late so, I apologize if this was asked. But, I know you talked about Reno in a little more detail relative to what was in the second quarter 10-Q.

It looks like the capital being allocated there is coming in a little bit more significant than what I would've expected and so, would just love some sort of qualitative -- a better qualitative understanding as to the strategic rational there.

Is it entirely due to market dynamics, capitation or something like that or is this sort of a beta test for something that could become more significant in the future?.

Yes so and we did [indiscernible] about a little bit, Chris so I'll be brief but, I think that it is really more of the latter. First of all, it is not really at all specific to the Reno market, that just happens to be where the plan is located.

I think it's really to give us the capability as we think about this sort of integrated healthcare delivery system of the future with closer relationships with physicians and other long term care niche providers and I think the ability in some markets to be able to offer an insurance product maybe a Medicare Advantage insurance product.

We think it's just a worthwhile capability to have, that's what really drove the desire to have this what I'll call insurance infrastructure or platform. .

Okay and then just on the comments on leverage I mean, what is sort of the internal target these days or what's sort of the level you'd like to be at going forward?.

[Indiscernible] we have a very specific target. I think if you sort of look at our history here, we were comfortable levering up to do the PSI deal to a little bit over 4 times debt to EBITDA, that was obviously an extremely attractive and perhaps a fairly unique deal.

On the other hand then, when we levered back-down to into close to the low-2s, I think we clearly felt that was about as low as we wanted or needed to go. So, certainly, within that range and I appreciate the fact that it's a fairly broad range, but we're certainly comfortable operating within that range.

And again, we'll operate within that range and be responsive to compelling opportunities as they arise..

There are no further questions at this time.

Do you have any closing remarks?.

No. I just want to thank everybody for their time, and I look forward to speaking again next quarter..

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