Forward-Looking Statements
This Quarterly Report on Form 10-Q and other materials we have filed or may file with the Securities and Exchange Commission (the "SEC"), as well as information included in oral statements or other written statements made, or to be made, by our senior management, contain, or will contain, disclosures that are forward-looking statements. Forward-looking statements include all statements that do not relate solely to historical or current facts and can be identified by the use of words such as "may," "will," "expect," "believe," "intend," "plan," "estimate," "project," "continue," "should" and other comparable terms. These forward-looking statements are based on the current plans and expectations of management and are subject to a number of risks and uncertainties, including those set forth below, which could significantly affect our current plans and expectations and future financial condition and results of operations.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Stockholders and investors are cautioned not to unduly rely on such forward-looking statements when evaluating the information presented in our filings and reports.
While it is not possible to identify all these factors, we continue to face many risks and uncertainties that could cause actual results to differ from those forward-looking statements, including:
• risks inherent to the health care industry, including the impact of unforeseen changes in regulation and the potential adverse impact of government investigations, liabilities and other claims asserted against us;

• uncertainty as to changes in U.S. general economic activity and the impact of these changes on our business;

• health care reform proposals that, if adopted, could adversely impact reimbursement rates for our services;

• economic downturn resulting in efforts by federal and state health care programs and managed care companies to reduce reimbursement rates for our services;

• potential competition that alters or impedes our acquisition strategy by decreasing our ability to acquire additional inpatient facilities on favorable terms;

• our ability to comply with applicable licensure and accreditation requirements;

• our ability to comply with extensive laws and government regulations related to billing, physician relationships, adequacy of medical care and licensure;

• our ability to retain key employees who are instrumental to our operations;

• our ability to successfully integrate and improve the operations of acquired inpatient facilities;

• our ability to maintain effective internal controls in accordance with
Section 404 of the Sarbanes-Oxley Act;

• our substantial indebtedness and adverse changes in credit markets impacting our ability to receive timely additional financing on terms acceptable to us to fund our acquisition strategy and capital expenditure needs;

• our ability to maintain favorable and continuing relationships with physicians and other health care professionals who use our inpatient facilities;

• our ability to ensure confidential information is not inappropriately disclosed and that we are in compliance with federal and state health information privacy standards;

• our ability to comply with federal and state governmental regulation covering health care-related products and services on-line, including the regulation of medical devices and the practice of medicine and pharmacology;

• our ability to obtain adequate levels of general and professional liability insurance;

• future trends for pricing, margins, revenue and profitability that remain difficult to predict in the industries that we serve;

• fluctuations in the market value of our common stock;

• negative press coverage of us or our industry that may affect public opinion; and

• those risks and uncertainties described from time to time in our filings with the SEC.

We caution you that the factors listed above, as well as the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2008, and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2009, may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict such new risk factors nor can we assess the impact, if any, of such new risk factors on our businesses or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statements.
Overview
Our business strategy is to acquire inpatient behavioral health care facilities and improve operating results within our inpatient facilities and our other behavioral health care operations. From 2001 to 2004, we acquired 34 inpatient behavioral health care facilities. During 2005, we acquired 20 inpatient behavioral health care facilities in the acquisition of Ardent Health Services, Inc. and one other inpatient facility. During 2006, we acquired 19 inpatient behavioral health care facilities, including nine inpatient facilities with the acquisition of the capital stock of Alternative Behavioral Services, Inc. on December 1, 2006. During 2007, we acquired 16 inpatient behavioral health care facilities, including 15 inpatient facilities in the acquisition of Horizon Health Corporation. During 2008, we acquired five inpatient behavioral health care facilities from UMC and opened Lincoln Prairie Behavioral Health Center, a 120-bed inpatient facility in Springfield, Illinois. In January 2009, we opened Rolling Hills Hospital, an 80-bed inpatient facility in Franklin, Tennessee. In September 2009, we acquired two inpatient behavioral health care facilities.
On July 31, 2009, we signed a definitive agreement to sell our EAP business for approximately $70 million in cash. Accordingly, the results of operations of our EAP business have been classified as discontinued operations and its assets and liabilities have been classified as held for sale. The transaction was completed in the fourth quarter of 2009.
We strive to improve the operating results of our inpatient behavioral health care operations by providing the highest quality service, expanding referral networks and marketing initiatives and meeting increased demand for behavioral health care services by expanding our services and developing new services. We also attempt to improve operating results by maintaining appropriate staffing ratios, controlling contract labor costs and reducing supply costs through group purchasing. Our same-facility revenue from owned and leased inpatient facilities increased 4.7% and 5.0% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. Our same-facility revenue growth was primarily the result of increases in same-facility patient days and same-facility revenue per patient day. Same-facility patient days increased 3.3% and 2.7% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. Same-facility revenue per patient day increased 1.6% and 2.3% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008. Same-facility growth refers to the comparison of each inpatient facility owned during 2008 with the comparable period in 2009, adjusted for closures and combinations for comparability purposes.
Income from continuing operations before income taxes was $45.5 million and $145.8 million, or 10.0% and 10.8% of revenue, for the three and nine months ended September 30, 2009, respectively, compared to $44.9 million and $129.9 million, or 10.4% and 10.2% of revenue, during the same periods of 2008, respectively. The $0.6 million and $15.9 million increase in income from continuing operations before income taxes for the three and nine months ended September 30, 2009, respectively, compared to the same period of 2008 was primarily the result of the following:
• same-facility revenue growth at our behavioral health care facilities of 4.7% and 5.0% for the three and nine months ended September 30, 2009, respectively, compared to the same periods in 2008;

• a reduction in interest expense as a percentage of revenue to 4.0% for the nine months ended September 30, 2009 compared to 4.5% in the same period of 2008 due primarily to a decrease in interest rates on our variable rate debt; and

• a decrease in share-based compensation expense of $0.7 million and $1.5 million for the three and nine months ended September 30, 2009, respectively, compared to the same periods of 2008.

Our operating results for 2009 were adversely affected by the following items:

• charity care provided by our inpatient behavioral health care facilities increased $4.2 million for the three months ended September 30, 2009 compared to the same period of 2008, which was concentrated in two markets that we serve;

• the non-renewal of several contracts and start up losses on new contracts within our contract management business negatively affected our operating results. We expect the contract management business to stabilize in future quarters;

• a new at-risk contract within our managed care plan in Puerto Rico contributed higher other operating expenses and lower profitability for our other operations. This contract was renegotiated to an administration services only contract in the fourth quarter of 2009; and

• an increase in salaries, wages and employee benefits expense as a percentage of revenue for our same-facility owned and leased inpatient facilities to 54.7% for the three months ended September 30, 2009 compared to 53.4% in the same period of 2008, due primarily to an increase in health insurance claims for health insurance coverage of our employees and their dependents.

Sources of Revenue
Patient Service Revenue
Patient service revenue is generated by our inpatient facilities for services provided to patients on an inpatient and outpatient basis within the inpatient behavioral health care facility setting. Patient service revenue is recorded at our established billing rates less contractual adjustments. Contractual adjustments are recorded to state our patient service revenue at the amount we expect to collect for the services provided based on amounts reimbursable by Medicare or Medicaid under provisions of cost or prospective reimbursement formulas or amounts due from other third-party payors at contractually determined rates. Patient service revenue comprised approximately 93.0% and 92.7% of our total revenue for the nine months ended September 30, 2009 and 2008, respectively.
Other Revenue
Other behavioral health care services accounted for 7.0% and 7.3% of our revenue for the nine months ended September 30, 2009 and 2008, respectively. This portion of our business primarily consists of our contract management business and a managed care plan in Puerto Rico. Our contract management business involves the development, organization and management of behavioral health care programs within medical/surgical hospitals. Services provided are recorded as revenue at contractually determined rates in the period the services are rendered, provided that collectability of such amounts is reasonably assured.
Results of Operations
The following table illustrates our consolidated results of operations from continuing operations for the three and nine months ended September 30, 2009 and 2008 (dollars in thousands):

                              For the Three Months Ended September 30,                      For the Nine Months Ended September 30,
                                  2009                           2008                         2009                           2008
                          Amount             %           Amount           %            Amount            %           Amount            %
Revenue                $    455,310          100.0 %    $ 431,713        100.0 %    $  1,348,534        100.0 %    $ 1,273,408        100.0 %
Salaries, wages,
and employee
benefits (including
share- based
compensation of
$4,249, $4,935,
$13,525, and $
15,013 for the
respective three
and nine month
periods in 2009 and
2008)                       254,333           55.8 %      238,479         55.2 %         751,878         55.7 %        705,778         55.4 %
Professional fees            42,258            9.3 %       41,117          9.5 %         125,017          9.3 %        121,964          9.6 %
Supplies                     23,358            5.1 %       23,784          5.6 %          70,063          5.2 %         70,228          5.5 %
Provision for
doubtful accounts             9,798            2.2 %       10,129          2.3 %          26,542          2.0 %         25,830          2.0 %
Other operating
expenses                     49,954           11.0 %       44,815         10.4 %         142,712         10.6 %        133,351         10.5 %
Depreciation and
amortization                 11,498            2.5 %        9,792          2.3 %          33,084          2.4 %         28,687          2.3 %
Interest expense,
net                          18,607            4.1 %       18,648          4.3 %          53,432          4.0 %         57,688          4.5 %

Income from
continuing
operations before
income taxes                 45,504           10.0 %       44,949         10.4 %         145,806         10.8 %        129,882         10.2 %
Provision for
income taxes                 17,431            3.8 %       16,958          3.9 %          55,714          4.1 %         49,188          3.9 %

Income from
continuing
operations                   28,073            6.2 %       27,991          6.5 %          90,092          6.7 %         80,694          6.3 %
Less: Net income
attributable to
noncontrolling
interest                          7            0.0 %         (390 )       -0.1 %            (338 )        0.0 %           (642 )        0.0 %

Income from
continuing
operations
attributable to PSI
stockholders           $     28,080            6.2 %    $  27,601          6.4 %    $     89,754          6.7 %    $    80,052          6.3 %

Three Months Ended September 30, 2009 Compared To Three Months Ended September 30, 2008
The following table compares key total facility statistics and same-facility statistics for the three months ended September 30, 2009 and 2008 for our owned and leased inpatient facilities:

                                         Three Months Ended September 30,          %
                                             2009                 2008           Change
   Same-facility results:
   Revenue (in thousands)              $      420,292        $      401,321        4.7 %
   Admissions                                  44,694                41,631        7.4 %
   Patient days                               719,024               696,317        3.3 %
   Average length of stay (in days)              16.1                  16.7       -3.6 %
   Revenue per patient day             $          585        $          576        1.6 %

   Total facility results:
   Revenue (in thousands)              $      422,544        $      401,321        5.3 %
   Admissions                                  44,914                41,631        7.9 %
   Patient days                               721,465               696,317        3.6 %
   Average length of stay (in days)              16.1                  16.7       -3.6 %
   Revenue per patient day             $          586        $          576        1.7 %

Revenue. Revenue from continuing operations increased $23.6 million, or 5.5%, to $455.3 million for the three months ended September 30, 2009 compared to the three months ended September 30, 2008. Revenue from owned and leased inpatient facilities increased $21.2 million, or 5.3%, to $422.5 million in 2009 compared to 2008. The increase in revenue from owned and leased inpatient facilities relates primarily to same-facility growth in patient days of 3.3% and revenue per patient day of 1.6%, offset by a $4.2 million increase in charity care provided. Other revenue was $32.8 million in 2009 compared to $30.4 million in 2008.
Salaries, wages, and employee benefits. Salaries, wages and employee benefits ("SWB") expense was $254.3 million for the three months ended September 30, 2009 compared to $238.5 million for the three months ended September 30, 2008, an increase of $15.8 million, or 6.6%. SWB expense includes $4.2 million and $4.9 million of share-based compensation expense for the quarters ended September 30, 2009 and 2008, respectively. Based on our stock option and restricted stock grants outstanding at September 30, 2009, we estimate remaining unrecognized share-based compensation expense to be approximately $35.7 million with a weighted-average remaining vesting period of 2.2 years. Excluding share-based compensation expense, SWB expense was $250.1 million, or 54.9% of total revenue, for the three months ended September 30, 2009 compared to $233.5 million, or 54.1% of total revenue, for the three months ended September 30, 2008. SWB expense for owned and leased inpatient facilities was $231.3 million in 2009, or 54.7% of revenue. Same-facility SWB expense for owned and leased inpatient facilities was $229.9 million in 2009, or 54.7% of revenue, compared to $214.3 million in 2008, or 53.4% of revenue. This increase in same-facility SWB expense for owned and leased inpatient facilities is primarily the result of an increase in health insurance claims for health insurance coverage of our employees and their dependents and shift from utilization of contract labor that is a component of professional fees to the utilization of employees. SWB expense for other operations was $12.3 million in 2009 and 2008. SWB expense for our corporate office was $10.7 million, including $4.2 million in share-based compensation, for 2009 compared to $11.9 million, including $4.9 million in share-based compensation, for 2008.
Professional fees. Professional fees were $42.3 million for the three months ended September 30, 2009, or 9.3% of total revenue, compared to $41.1 million for the three months ended September 30, 2008, or 9.5% of total revenue. Professional fees for owned and leased inpatient facilities were $38.0 million in 2009, or 9.0% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $37.9 million in 2009, or 9.0% of revenue, compared to $36.2 million in 2008, or 9.0% of revenue. Professional fees for other operations and our corporate office decreased to $4.3 million in 2009 compared to $4.9 million in 2008.
Supplies. Supplies expense was $23.4 million for the three months ended September 30, 2009, or 5.1% of total revenue, compared to $23.8 million for the three months ended September 30, 2008, or 5.6% of total revenue. Supplies expense for owned and leased inpatient facilities was $23.2 million in 2009, or 5.5% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $23.1 million in 2009, or 5.6% of revenue, compared to $23.6 million in 2008, or 5.9% of revenue. Supplies expense for other operations as well as our corporate office is negligible to our supplies expense overall.
Provision for doubtful accounts. The provision for doubtful accounts was $9.8 million for the three months ended September 30, 2009, or 2.2% of total revenue, compared to $10.1 million for the three months ended September 30, 2008, or 2.3% of total revenue. The provision for doubtful accounts at owned and leased inpatient facilities comprised substantially all of our provision for doubtful accounts.
Other operating expenses. Other operating expenses consist primarily of rent, utilities, insurance, travel and repairs and maintenance expenses. Other operating expenses were $50.0 million for the three months ended September 30, 2009, or 11.0% of total revenue, compared to $44.8 million for the three months ended September 30, 2008, or 10.4% of total revenue. Other operating expenses for owned and leased inpatient facilities were $33.5 million in 2009, or 7.9% of revenue. Same-facility other operating expenses for owned and leased inpatient facilities were $33.4 million in 2009, or 7.9% of revenue, compared to $32.9 million in 2008,

or 8.2% of revenue. Other operating expenses for other operations and our corporate office increased to $16.4 million in 2009 compared to $11.9 million in 2008. This increase in other operating expenses for other operations and our corporate office was primarily the result of claims expense from a new at-risk contract within our managed care plan in Puerto Rico. Depreciation and amortization. Depreciation and amortization expense increased to $11.5 million for the three months ended September 30, 2009 compared to $9.8 million for the three months ended September 30, 2008, primarily as a result of expansion projects at existing inpatient facilities and development of new inpatient facilities during 2008 and 2009.
Interest expense, net. Interest expense, net of interest income, was $18.6 million for the three months ended September 30, 2009 and 2008.
Income attributable to noncontrolling interest. We own a controlling interest in two joint ventures that own two of our inpatient behavioral health care facilities. Income attributable to noncontrolling interest represents the pro rata portion of each joint venture's net profit belonging to the noncontrolling partner.
Income (loss) from discontinued operations, net of taxes. The income from discontinued operations, net of income tax effect, was $0.1 million for the three months ended September 30, 2009 compared to a loss from discontinued operations, net of income tax effect of $1.2 million for the three months ended September 30, 2008. During the third quarter of 2009, we entered a definitive agreement to sell our EAP business, elected to make The Oaks Treatment Center available for sale, and terminated one contract with a South Carolina juvenile justice agency. During the second quarter of 2009, we elected to make Nashville Rehabilitation Hospital available for sale. This facility's behavioral health services were transferred to Rolling Hills Hospital in the first quarter of 2009. During the year ended December 31, 2008, we elected to dispose of a leased inpatient facility. Additionally, two contracts with a Puerto Rican juvenile justice agency to manage inpatient facilities were terminated in 2008. Accordingly, these operations are included in discontinued operations. Nine Months Ended September 30, 2009 Compared To Nine Months Ended September 30, 2008
The following table compares key total facility statistics and same-facility statistics for the nine months ended September 30, 2009 and 2008 for our owned and leased inpatient facilities:

                                          Nine Months Ended September 30,         %
                                              2009                 2008         Change
    Same-facility results:
    Revenue (in thousands)              $     1,239,720        $ 1,180,209        5.0 %
    Admissions                                  131,303            124,263        5.7 %
    Patient days                              2,133,338          2,076,905        2.7 %
    Average length of stay (in days)               16.2               16.7       -3.0 %
    Revenue per patient day             $           581        $       568        2.3 %

    Total facility results:
    Revenue (in thousands)              $     1,254,444        $ 1,180,209        6.3 %
    Admissions                                  133,232            124,263        7.2 %
    Patient days                              2,157,856          2,076,905        3.9 %
    Average length of stay (in days)               16.2               16.7       -3.0 %
    Revenue per patient day             $           581        $       568        2.3 %

Revenue. Revenue from continuing operations increased $75.1 million, or 5.9%, to $1,348.5 million for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. Revenue from owned and leased inpatient facilities increased $74.2 million, or 6.3%, to $1,254.4 million in 2009 compared to 2008. The increase in revenue from owned and leased inpatient facilities relates primarily to the acquisition of five inpatient facilities from UMC in 2008 and to same-facility growth in patient days of 2.7% and revenue per patient day of 2.3%. Other revenue was $94.1 million in 2009 compared to $93.2 million in 2008, an increase of $0.9 million.
Salaries, wages, and employee benefits. Salaries, wages and employee benefits ("SWB") expense was $751.9 million for the nine months ended September 30, 2009 compared to $705.8 million for the nine months ended September 30, 2008, an increase of $46.1 million, or 6.5%. SWB expense includes $13.5 million and $15.0 million of share-based compensation expense for the nine months ended September 30, 2009 and 2008, respectively. Excluding share-based compensation expense, SWB expense was $738.4 million, or 54.8% of total revenue, for the nine months ended September 30, 2009 compared to $690.8 million, or 54.2% of total revenue, for the nine months ended September 30, 2008. SWB expense for owned and leased inpatient facilities was $678.2 million in 2009, or 54.1% of revenue. Same-facility SWB expense for owned and leased inpatient facilities was $670.3 million in 2009, or 54.1% of revenue, compared to $631.2 million in 2008, or 53.5% of revenue. This increase in same-facility SWB expense for owned and leased

inpatient facilities was primarily the result of a shift from utilization of contract labor that is a component of professional fees to the utilization of employees. SWB expense for other operations was $35.9 million in 2009 compared to $36.7 million in 2008. SWB expense for our corporate office was $37.7 million, including $13.5 million in share-based compensation, for 2009 compared to $37.3 million, including $15.0 million in share-based compensation, for 2008.
Professional fees. Professional fees were $125.0 million for the nine months ended September 30, 2009, or 9.3% of total revenue, compared to $122.0 million for the nine months ended September 30, 2008, or 9.6% of total revenue. Professional fees for owned and leased inpatient facilities were $113.3 million in 2009, or 9.0% of revenue. Same-facility professional fees for owned and leased inpatient facilities were $111.9 million in 2009, or 9.0% of revenue, compared to $108.4 million in 2008, or 9.2% of revenue. Professional fees for other operations and our corporate office decreased to $11.7 million in 2009 compared to $13.5 million in 2008.
Supplies. Supplies expense was $70.1 million for the nine months ended September 30, 2009, or 5.2% of total revenue, compared to $70.2 million for the nine months ended September 30, 2008, or 5.5% of total revenue. Supplies expense for owned and leased inpatient facilities was $69.6 million in 2009, or 5.5% of revenue. Same-facility supplies expense for owned and leased inpatient facilities was $68.6 million in 2009, or 5.5% of revenue, compared to $69.6 million in 2008, or 5.9% of revenue. Supplies expense for other operations as well as our corporate office is negligible to our supplies expense overall.
Provision for doubtful accounts. The provision for doubtful accounts was . . .