Community Health Systems Inc (CYH) 2002 Q2 法說會逐字稿

Please stand by. We are about to begin. Good day everyone and welcome to the Triad Hospital's Incorporated second quarter 2002 earnings report. This call is being recorded. The discussion today may contain so called forward looking statements, which are statements that do not relate solely to historic or current effects.

These forward looking statements are based on the current plans and expectation of the company and are subject to a number of uncertainties and risk, which could significantly affect such current plans and expectations as well as the future financial of the company. Such uncertainties and risks include the competitive nature of the health care business, the efforts of various public and private payers to induce reimbursements to providers, possible changes to the government programs to further limit reimbursement, the enactment of various Federal and State healthcare reformed with legislation and changes in general economic conditions. As a consequence of these and other risk and uncertainties current plans, anticipated actions in future financial conditions and results may differ significantly from those expressed in any forward looking statements made by or on behalf of the company. You're accordingly cautioned not to unduly rely on such forward-looking statements when evaluating the information presented here or in the company's press release.

This call and Webcast are the property of the Triad Hospitals Incorporated. Any redistribution, retransmission, or rebroadcast of this call and Webcast in any form without the express written consent of Triad Hospitals Incorporated is strictly prohibited. At this time, for opening comments and introductions, I would like to turn the call over to the Chief Financial Officer, Mr. Burke Whitman. Please go ahead sir.

Thank you . Good morning and welcome to everyone. This is Burke Whitman, Chief Financial Officer of Triad and sitting with me around the table are our Chairman and CEO, Denny Shelton, and our COO Mike Parsons, our General Counsel Don Fay, Senior Vice President of Operations, Bill Huston and Senior Vice President and Controller, Steve Love and Vice President of Marketing and Public Affairs, Pat Ball. We're going to start this morning with some brief opening comments by me, then I'm going to turn it over to Denny, who will make some opening comments about the company and then we'll turn it over to questions from listeners.

We issued an earnings press release last night and I would just, kind of, summarize our thoughts about it by saying that we continue to be on track with respect to our financial, strategic, and operational plans for the company, and feel good about our current position and our prospects for the future. We reported diluted earnings per share of 40 cents for the quarter before a favorable litigation settlement and this was on revenues of $867 million and earnings before interest tax depreciation amortization were EBITDA of 131.6 million. The 40 cents was before favorable litigation settlement. As I mentioned, we reported 44 cents per share including the favorable settlement.

The favorable settlement did not effect the revenues or . Net 40 cent compares to one year ago, earnings per share of a loss of 36 cent. A year ago the EPS excluding some coordinating adjustments we did at the time of our acquisition quorum was seven cent EPS, and if you exclude further the impact of goodwill a year ago, the number would have been about 18 cent. So, by any measure, we've improved fairly considerably over the past year.

We include into earnings release the same operating date in stats for the quarter and for the six months. I just want to point out those operating statistics for the 2002 periods, the second quarter ; they do represent the total consolidated statistics for the company. We've had no transactions during the first half of 2002, and that either added or subtracted, you know, from the portfolio of hospitals that we have. We do now have 48 hospitals in Triad. The stats 43, because we exclude 5 of them. One of the ones we exclude is one that we purchased just on July 1st, we also have one, which is under construction, but in fact, is going to be opening during the month of August. We have one 50 percent joint venture, whose statistics we exclude because we account for it on an equity basis, rather than incorporating into the revenue and operating statistics.

I know we have two facilities that are leased to a third party. The 2001 numbers on the statistics are presented on the same facility bases as if we had owned and operated everything in our at that time. You may notice that the second quarter 2001, same facility stat, that is the stats we're giving for last year, second quarter, are slightly different from the second quarter, same facility statistics, that we actually gave to you a year ago, and that's due to a change since then in the mix of our portfolio, particularly one hospital that we had excluded from the statistics at that time, because it was held for sale, but then we subsequently decided to keep, and are therefore now in the numbers, and also one facility that was in the portfolio at that time that we subsequently sold, and that's Paradise Valley, which we sold towards the end of this past year.

On the same facility basis we have revenue growth up 10.6 percent year over year. Patient revenues grew 11 percent, and that's on good rate-growth. We had patient revenue for adjusted admission of eight percent, and adjusted admissions growth of 2.7 percent. The inpatient admissions grew one percent year over year, or about 2.1 percent excluding the services that we have closed since, over the past year and a half. These are services we closed, things we got out off, because they were not economically viable. This is admissions growth over, what has been, fairly strong admissions growth over the last three years, in each of the said quarters. Last year we recorded 5.2 percent, same facility admissions growth for the total company. 7.6 percent for the original Triad facilities only. The year before that we had 7.2 percent, same facility admissions growth. We did acquire one hospital, as I've mentioned, right after the close of the quarter on July 1st.

We closed on Willow Creek women's hospital, a 30-bed hospital in North West Arkansas that is a small hospital by comparison to most Triad Hospitals, but it complements very well our growing presence in that market area and that does comprise our 48th hospital. We do expect our stats to reflect that change to the portfolio going forward. The capital expenditure plan that we've talked about for quite a while now, we believe, is still on track, $350 million of capital expenditures for this calendar year, 250 for development and expansion, about 100 for routine and maintenance. We've spent a little under $150 million to date and believe we are still on track. There's always a chance somebody's projects could slip, with, you know, regulatory reasons and other reasons, but at this point, we think we are probably still on track. We continue to make gradual improvement to our balance sheet with a goal. We've talked about before of reducing our leverage over time to, you know, something down below three times debt to EBITDA. We finished the quarter with some cash on hand and a revolving line of credit of $250 million still largely intact.

We did enter into a second interest rate swap during this period, a $100 million 3-year interest rate swap to fix some of our floating debt at 6.99 percent for three years. That should not affect our interest rate expectations and we had already, sort of, built in allowance for some of this in the guide that we've given before. We now have two $100 million interest rate swaps, a total of $200 million of plain vanilla interest rate swaps fixing floating to fix in place to earlier, when we did prior quarter for two years at 6.22 percent. We also during this period completed an bank credit facility, really just to give us more flexibility to exploit future strategic opportunities. Nothing about our plans is changed specifically, so we didn't do this to put ourselves in position to do any particular acquisition or development.

It really was just an effort to position ourselves better for any future opportunities that arise and Denny is going to talk some about the status of some of our development projects and, you know, some of the things we're excited about doing. I want to finish with just a couple of topics that have been topics of, I think, interest and concern just in American history in general. The first is the issue of potentially expensing options, just to let you know where we stand on that issue, we do not currently expense stock options. We do disclose the relevant information in our annual 10-K filing with the SEC and for those of you interested in the details, it's back in the debt pages, pages F28 through F30.

We don't have any current plans to change our policy, but we are definitely closely monitoring the developments and I can tell you that we would be prepared, without any hesitation, to adopt a new policy and start expensing stock options. If we were to determine to doing so, you know, on balance would be in the best interest of the public and of our company and, just, you know, if we, if our view of all the debts really just the right thing to do, so we're monitoring and we'll continue to do so, make a decision if one needs to be made. The final topic is that we are one of the 900 plus public companies United States, that will have to have the CEO, Denny Shelton, and the CFO, I, sign an oath and file it with the SEC, an oath with the FCC, an oath that our current, and prior financial filings are accurate and solid, and just that, reassure anyone who might be worrying, that is not an issue for us at all. Both Denny and I will sign on August 14th, just so, you know, one of the reasons this is not an issue for us at all, because we have had, since the year 2000, a pretty robust program here internally in Triad.

What we do is require all of our facility leaders, that is for each of our facilities, the CEO, CFO, COO, and CNO, the Chief Nursing Officer, to sign at the stations, each quarter, testing to, the integrity of the numbers, testing the fact that they have followed policy to procedures, including general accepted accounting principles, that they have reconciled bank statements with the financials, and a number of other things. We've done that since the year 2000, those added stations have been rolled up to our divisions. Our Division leaders, the Division , the Division in added stations themselves, and then six of us on the corporate management team, and it's the CEO, COO, CFO, Senior Vice President of Operations, Senior Vice President and Controller, and Vice President of Financial , all six of us sign a representation letter which we present to our external auditors, representing to them that our financial statements and other information are sound. So again the oath to the SEC, not a big deal for us, and we will be signed that on August 14th. I will stop there and turn over to Denny Shelton, our Chairman and CEO.

Thank you Burke and good morning. Just a couple of brief comments. Burke spoke about the Willow Creek acquisition, I think it is important strategically, we have, I think as many of you know we have a relatively large facility for our company, the Northwest facility, there in that market, and we are in the process of building a replacement hospital for what was a whole city facility in Bentonville, Arkansas that we are replacing, that was a quorum obligation. We upsized the project back last year with input from local management physicians and the local board there, and that project is under construction, in fact, steels up, and should be completed sometime in Spring, late Spring or early Summer of next year. So adding this Women's facility to these already two hospitals in the immerging new facility that has been built is going to give us a strong presence in northwest Arkansas, so we're excited about the growing opportunities in what is a real growth area of that part of the country. We also have been working with the city of Mesquite, Nevada on building a hospital in Mesquite, Nevada, that project looks like it could be in the ground, the latter part of this year, at the latest first of, early next year. This is an interesting project. This kind of goes with the strategy that we have been developing with QHR, which is the manage side of our business, but it deals with a lot of rural hospitals. This is a market today that is kind of borderline.

It's about 25 thousand people in the immediate service area, but growing rather rapidly, I think, it's counted as the fastest growing community under 50 thousand in the US. It will be 50 to 60 thousand people there over the next few years, and as it grows, being the only hospital on that market, gives us a chance to grow with this community. It is right on the border of Nevada, bordering the states of Utah and Arizona but it is a very high growth area and has the potential to grow into be a very prototypical type market for us in the future. It'll start out probably as a part of the QHR managed kind of facilities it will kind of an owned piece of that managed group that will be the smaller facilities but if they grow and emerge we will roll those facilities into Triad and treat them just like we do all other owned facilities.

We also are continuing discussions with the community of , West Virginia, again this was a that we responded to along with several other for profit and not for profit organizations and we have been working with the community to build a replacement hospital for a 50 some odd old facility that needs to be replaced and we continue to work with the community to try to reach an agreement to build a replacement hospital for that community. That should come to a head here in the third quarter and in terms of either going forward or not but we've really enjoyed working with the people there are excited about at least pursuing this opportunity through the third quarter.

We are working with as they have begun construction on a new hospital that we are partners with them in the Las Vegas market and that project started in this past quarter we expect to open in the third quarter of next year and we're working with them on our continued involvement extending our involvement in that partnership. We're also as Burke mentioned briefly we are nearing the opening of our Mountainview Medical Center in Las Cruces, New Mexico which will open in about three weeks and this is a project that we started construction for toward the end of May last year, actually build the hospital in about 13 months it's 220 30 thousand some odd square feet. It's an all private room facility and we've got approvals from the state I think just in the past week on occupancy and we have kind of formal ceremonies to dedicate the facility coming up in the next week to ten days and then hopefully by the middle of August we'll have that facility open. And we're really excited about it this is a service area of 200 and something thousand people who really about almost half the people in the area the primary, secondary service area out migrate for health care. And so we're excited about the opportunity.

We recruited close to 20 physicians with a commitment that we would recruit 50 doctors over a five-year period of time and we are well on a pace to expand clinical services to this community and allow people to stay home, near to families and support systems for their healthcare. We think that's good for them and it's good for their community so we're excited about that project being open.

We're also working very diligently on building our third hospital in Tucson. We are on track to get started on the facility area of Tucson which many of you may remember several years ago about three, four years ago we put in a kind of diagnostic center a kind of full range diagnostic center, physician offices, urgent care facility out in this really fast growing area of Tucson and the project was very successful.

We did that as a prelude to building a new facility, which we're in the process of now getting started. We hope to be in the ground there first quarter of next year and we're real excited about that project mainly because we continue to see such good growth in the market I think may of you know that our northwest facility northwest Toucan facility we will be on-line finally with all of our beds in operation by the sometime toward the end of the third quarter this year maybe early fourth quarter, and within probably just a matter of weeks we'll put all those beds into use, so I think I've mentioned before I was out there just a few weeks ago, and we have 46 emergency room beds, or bays at that hospital, and almost on a continuous daily basis all 46 bays are full, and we're holding beds because we don't have beds available, so we're excited about getting the facility up to more capacity but we know in very short order we're be pulled there, so getting going on this other project which would be to the further north and northwest of our existing facility where the growth continues to spiral upwards is gonna be great opportunity for us, and good for those communities, so we're working on both that and getting the mountain view hospital opened this quarter as well.

We also have a number of discussions going on with several non profit groups, and I hope that this quarter will be the quarter that will bring a couple of those to , and we're excited about that, and all we can tell you at this time is that we've got some really significant opportunities here to grow stronger relationships with several profit systems, and in terms of either building a new hospital together, or building a replacement hospital, or a joint venture in the existing facility with a strong non profit organization, and we're gonna continue to pursue those opportunities as we go forward, and hopefully as I mentioned in this quarter we'll see some of that come to fruition some of the discussions that we've been having.

I want to just echo what Burke said. You know we've always, and I think most of you who follow us know that we have always been pretty conservative in the way that we report we've had a very strong out of station program in place for the last couple of years, and very comfortable with the integrity of our numbers, and integrity of the way that we report. Not only to the street in a very formal way but hopefully the way that we deal with you in getting you information about the company, and our performance, and we try to give you as much information as possible, and to tell you that we feel comfortable with that information is correct.

Also we just tell you for the record that you know our Board of Directors is a very active functioning group of people that currently includes 11 members, and those individuals are they're non-outside directors, and two inside directors. The inside directors are Michael Parsons who is the Chief Operating Officer, and myself, and so we have a very strong outside influence on our board made up of you know some individuals who readily available through our web page but also for information that we put out are very strong in various areas of business, and education, and industry in this country so we've had a strong outside presence, and our audit committee for example has always approved our outside auditors, and the chairman of that is obviously not an insider it's an outsider, and so I think we can sit here and tell you comfortably that we're very comfortable not only with the financial information that we report, and are confident in signing this attestation for the SEC on August 14th but we have a strong influence from a board made up of not only a majority, most of the members are outside directors, so confident in the numbers and information that we provide to you. I'm going to stop there and lets just open for questions unless you have one other comment you want to make.

one thing I just meant to say, you might let me comment, people passes this as good time for us to just give an answer, we do not have any plans currently to raise cap a little lower to do any kind of capital market transaction at this time, so that's a plain and simple answer to that. and that's it so open up now, so if you want to see if we have any questions.

Thank you sir, if you would like to ask a question on today's call you may do so by pressing star one on your touch tone telephone, again that is star one to ask a question. we'll pause a moment to assemble our roster.

we'll take our first question from with JP Morgan.

OK, I was wondering if you could tell us how QHR performed in the quarter, at least directionally in terms of whether you're seeing a ramp up or down there in revenues and , also I was wondering given the difficultly that a lot of doctors are having in finding affordable mal-practice coverage is that having any impact on this business in terms of taking the risks on mal-practice costs and is that changing?

Yeah. Laurie, good morning. I would say at this point in time we are, you know we're kind of holding our own with QHR. Kind of what we expected, we anticipated that we would have some potential cost exposure here especially on the malpractice side and that's obviously something that we're working on for next year because malpractice issues, not just for the managed business but for all of our businesses and I said this at several conferences over the last two or three months. Its something maybe because other things were going on did get a lot of attention or focus. Or maybe in terms of absolute dollars it didn't appear to be that much but it's a significant issue and we said that and we're experiencing now as we're beginning to have discussions with, as we're beginning to have discussions with some of our carriers that there are cost issues related to this business. But that being said, we're not overly concerned that it's going to be a big problem for us in this business long term but it is a short term problem and we still have good opportunities here.

We're still seeing lots of, you know, a lot more opportunities than problems and we've also seen that QHR is on the plan that we had agreed to with them but the management there, especially when we got Dan Moen on board, this past year. They're on track. They're doing pretty much exactly what we thought that they would do and we have not lost any significant business, in fact if we lost less business then we'd anticipate. When I say losing business what I'm referring to the fact that we are doing as, as some of these contracts coming up for renewal we're taking a position that we can't take that liability for these not cooperative organizations we just can't do it. And so we've taken a position that there are certain things that have to be in the contract and if they're not, it's not that we don't want to continue to provide the services we just can't. Because the management fee does not cover the risk associated with malpractice claims that may or may not come from these institutions that we don't own. So right now we're holding our own and they are on plan.

And just in terms of the overall percentage of those facilities you manage, where your taking the risk, is it more than half or less than half?

I'm not following the question.

I'm just trying to figure out...

I'm just trying to figure out you know, you're saying that you are refusing to take the liability risk if you renew these contracts so where you have exposure. Do you have exposure on most of those facilities that you manage?

Yeah, I would say that it's not on most but there are some you know depending on how far back the contracts go. There is a different time when those contracts were written and some of these issues weren't pertinent at that time but I would say that you know we're most of the, we got a meeting of the of most of the most of the facilities that we managed that have come up for renewal. I can't remember of the top of my head. We probably had three or four that have actually, we haven't been able to reach agreement and we no longer have a contract with them. I don't know the number exactly. We'll have to check on it.

Ok.

But it is not, it's just a handful, and we have not been able to have a meeting of the and of course, these contracts are usually kind of, three to five year agreements. So some of them are coming up you know, trying to get a third to a fourth to a third of the agreements come up this past year another third or fourth will come up again this year. And so we're trying to deal with them if those contracts come up and we have been pretty successful. And one thing that we found this past year, is that the three or four , I don't know the exact numbers so we will find that out, but it is a handful that were not able to reach agreement. We kind of offset that by some new agreements with new management agreements that have come online. So we are kind of holding our own. Part of the biggest the biggest in this business has been in . That is the group that does it's crisis intervention in and his group have done a great job of providing kind of, crisis intervention, crisis management support to a number of non-profits and that has that is going appreciably. So, the business as a whole is doing pretty much what we thought so that's kind of where we are on the malpractice contract risk issues that we are dealing with.

Great. Thank you.

We'll take our next question from with

Thanks. Good Morning everyone.

Hi .

Can you comment a little bit more on what you are seeing on the manage, care and commercial pricing front and you know, just wondering if that eight percent rate growth number is a function of any one time catch ups or maybe just expand a little bit on the pricing trend. And then secondly, can you give us your view on multi-year contracts and whether that is an important part of you pricing strategy going forward. Maybe just give us a feel for the form of those multi-year deals and what level of increase you are seeing as you negotiate those?

Parsons is going ...

Yeah, I think they are in the contracting is really still pretty much where we been saying in the last couple of quarters. We've been faced with the progress. Most of the agreements have been in that for the six, seven percent increases with making sure we have the for past through on the high cost items. So that has been pretty consistent. We had a pretty strong, we had good pricing this quarter as well. We had a couple of markets that really did well too that are kind of on a high interview scale as Denny mentioned is doing very well, and we're seeing good growth in totals and for we continue to see a good, strong performance there so some of the pricing is coming from those as well as kind of a mixed increase as well as a pricing increase, in terms of multi year, we are doing some multi year where it makes sense for both sides but that is no the standard in all of out agreements, it's really on a case by case basis, but I think the biggest thing on our managed care pricing has been a pretty standard approach to it that we have put into place about 18 months ago and then kind of flowed them trough on the plan and I think the results have being pretty consistent. and her team have done a real good job of organizing that activity.

If I could just follow up maybe could you review for us some of the natives that your are dealing around the charge master and whether or not that had any impact on the revenue number and how many hospitals have you completed that exercise in what is left in terms of the balance of the portfolio and doing some of those coding and charge master ?

we thought our process about two months ago we signed a agreement with who stand rise all of our charge masters we have only just begun that process so we did seamy benefit of that in the second quarter. We really expected to see benefit of that probably more into the early part of the fourth quarter and then really in the first quarter of 2003 in those type of things that we are looking at.

Thank a lot.

We will take our next question from with Lehman Brothers.

Great thank you high everyone just a couple of questions from the Burke can you just comment a little bit more under the guidance I know you guys made a brief mention on it but I was just curious to get more details later and in particular on the 2003 guidance. And then secondly I know you guys are no longer breaking with the DO now with over a year old but just wanted to get your comments since maybe from Burke as well as Denny in terms of how we can gage the integration efforts and just maybe some thing that you can point us to just so we can get a since of how things are going there. Thanks?

Yeah to answer your first question first, we did as you saw I am sure. We have revised our earnings per share for this year to arrange a dollar 74 to a dollar 78 and that reflects the 40 cents that we have reported. This time we are in fact not claiming effect for the extra four cents that came from the settlement so we had 55 cents the first quarter and 40 cents in the second quarter 95 cents year to date and we are leaving unchanged our former third quarter and fourth quarter guidance.

Third quarter guidance was 34 to 36 cents and fourth quarter was 45 to 47 cents also leaving unchanged the guidance for 2003 and 2004. And so really no change to those and we continue to feel obviously some major event you know that we don't anticipate this time could make a change to that you know a year before we bought we didn't know we where going to do that. But we don't know anything on the horizon this morning. We continue to feel comfortable that we are going to continue to gradually, carefully improve operating performance of our current facilities and markets through day to day operating performance also through the impact of the capital that we are spending internally on these projects.

So that is really it no change at all except just to reflect the actual third quarter second performance on the Denny do you want to.

I don't know, but as we talked about last quarter I mean I can basically cover the integration issues or passes. I won't tell you or set up that there's any excuses that would comment in the year term for not meeting our objectives because of immigration issues, I feel fairly confident that we're through that. I mean we do have the information systems issues that we're going to have to deal with over the next couple of years. Just simply the fact that half our hospitals now are owned HPOC and half of our hospitals are through the HCA information systems contract that we had the current spin off and so we're well in the up information, and actuary without I think long term. We need to have some kind of consistency, especially from a clinical prospective as we start looking at more and more outcomes and outcomes managements that we've had. Lucky to have systems, we need to be as consolidated as we can be. So we're going to have to make some decisions long term, I mean not in the next quarter or two, we're going to have to make some decisions about information systems, but the issues are basically been addressed.

As we talked about on systems that. The financial systems are all fully integrated. We finished that toward the end of this past year. The came out of the patient accounting and clinical systems were all essentially two different lines and just continued to feel we didn't want to go through the deliberations of converting the old systems, patient accounting systems to try it until we're going to make a decision about what we're going to do for the overall company following you know three years after, it all works very well, very seamlessly.

The other thing I mentioned with respect to Adam. A few fair questions sort of asking about performance, maybe relative performance and this is the thing there is much more overlap than there is dissimilarly among the you know what used to be facilities and used tried facilities in any given period. We'd have relative, some that are performing relatively well, and some that are a little bit behind and most performing on track with what we would have hoped. And we really don't make decision in any way that reflect on sort of old versus new tried facilities. You know everyone of our five divisions has hospitals from both of the former companies and you know all of the polities have been conformed and we've had you know several sort of events that I think really bought what were two good teams together in the one team. And so I feel really good about the immigrations point, as we mange to company the immigration issues or really behind us.

OK, great thank you.

We'll take our next quest ion from AJ Rice, with Merrill Lynch & Co.,

Hello everybody. Just a couple of things, first of maybe just to follow up on the previous discussion real quick, I know when you guys first closed the one of the opportunities was described as that if you took warm you'd been axed out for in the management business even the "A" margin on the rest of the portfolio was about 11 percent. I'm assuming you don't have the number for where the rest of that portfolio is today but can you give us a flavor for the other of magnitude on how close you've maybe moved to the historical trial average on those facilities. Do you have any sense on how far along you've come?

That's a real good question, I don't know if we've done that over the last few months, we always go back and look at. I mean anecdotal, we know that we are making some improvements, you know, in several markets and I, we don't have that, just be honest with you. I don't have that off the top of my head, but we need, we'd need to look at that. We'll follow up on it, but I don't have that.

OK. I guess if the manage care rate increases around in the four to seven percent range, put your revenue per adjusted admissions up eight percent, you must therefore be getting some good contribution from the acuity side based on Mike's earlier comments. Is, can you expand a little bit more on that? And then also, is that a one time thing that happened this quarter? So have you made some adjustments that gave you reason to think that maybe some of your earlier pricing assumptions look pretty conservative?

Yeah. I think , in terms of, it's not so much a one-time thing in the quarter. Some of the areas, our growth areas where we've being really putting some of our capital expenditures for growth, happen to be in some of those kind of high revenue, high growth areas as Denny said, with the South crash, you know the campaigns we've been having in the South crashed over the last couple of years. Expanding that services in Tucson, you know we've been spending a lot of capital at Tucson, expanding those services, you know. I think what you're saying is some of those strong markets continue to be strong, and some of the pricing too, depending on, you know, there's another layer, and I've said this on my manage care pricing, that it's showing up in a lot of the, as some of the security does come on board, with some of the specialties that we've being bringing on.

Some of those high cost past show up in some of that revenue too. As you can see, some of that shows up in our supply expense too, which has been going on for a little bit, but those two are kind of going hand in hand, and one other thing, that just reminded in, we had another nice, kind of a nice recovery in Florence, South Carolina. We finally got into the , where we've being trying, pretty much forever, to get into that contract. So now we're in the contract with Florence too, so that's kind of helped our stable of manage care contracting as well.

I'd just like to add a couple of things, that, sort of that, your right, however it is higher acuity, as Mike is saying, some of our development has been towards higher acuity also, some of the things that we've exited, the services that we've closed or some of the lower acuity things like , and site services, it's a lot of the things that tend to be lower revenue, and definitely lower margin of a negative margin kind of businesses. We have, certainly had rate increases, fundamental rate increases, but we've also had contract improvements themselves, with, we've talked about this a couple of, in the last couple of quarters too, but more in the way of past than we had in prior years in just the structure of the contracts that we've negotiated, it would have been better to reinforce, and actually get the rate increases that are built into those.

OK. One last thing, real quick. Burke, you mentioned that, you asked a lot about capital market type of activity, and there isn't any immediate plans. I guess one of the reasons you got asked, is you got. You have some high cost data out there. I guess if you were tired it would be added if you know, some of the others in the industry have acted to bring that in early. Can you give us some; your flavor and your thoughts on about some of those items, and what you might do down the road?

Yeah. A really good question. Absolutely we still have 325 million dollars of senior subordinated notes with an 11 percent coupon, and certainly would like to be, you know, paying less at some point. We're a little less than two years away from the first point at which we could call those at 105.5 and we do monitor that on ongoing basis. Our assessment is that if we were to, if we were to buy those in the market, in the open market now, in doing so would actually have a negative net present value, or you know, say it another way, it would not actually be helpful to shareholders for the value of the company for us to do that.

That's our current assessment and even though absolutely it would after a big one-time charge, it would, you know, it would probably boost our earnings per share next year. Our feeling is that the net present value is still negative. We do continue to watch it and as we get closer to that first call date, and if rates continue to remain low generally. If interest rates continue to remain in the range where they are now it could become increasingly and, you know, as with the case with our portfolio management, we're, you can expect us to, you know, be opportunistic about, you know, our capital structure, cap markets, the test versus your stowaways, you know, what is going to best enhance the value of the company and shareholder value. That sounds like a glib comment, but it really is not meant to be. That is the test that we use and at this point it is not felt to us as though it makes sense to do anything.

OK Great.

We certainly could at some point.

Thanks a lot.

We'll take our next question from with Credit Suisse First Boston.

Yeah, thanks, good morning.

.

So your admissions were up by one percent and then you go on to say it would have been 2.1 percent excluding unprofitable services. So I wonder if you could tell us what kinds of services they are that you've eliminated and if this is kind of an ongoing pruning and should we crank this into our expectations for the rest of the year and into next year? In other words, just if you would please expand on that and again I know you don't want to separate the quorum from the legacy Triad, but is there a great difference between the quorum admissions and Triad?

Well, turning just to services, I mean we look at, as you well know with the advent of PPS and the skilled nursing units, and the rehab units and also we have limits on our site units, those are the primary ones that we look at more from a profitability standpoint, service standpoint in the markets and this past quarter, or the quarters of the last year and this year we've closed one skilled nursing unit and we've closed the Unit and we'll continue to . We've got some rehab units that we continue to look at, so each one of those we look at on a periodic basis to make sure that, first of all we have the services as need the community and also to providing the financial returns we need as well.

So that must be in quad explanation as to why your revenue growth is so much higher than your pricing growth.

That's part of the reason. I think we mentioned that before.

Yeah.

That's not the biggest part of the reason, that's part of the reason and some lower revenue services have been taken out of the business.

But, how long, or, you know, how much more do you have to go this, I guess, is the question?

Well, we've still got a number of units out there that we'll continue . Right now we don't foresee any of those happening, but where just now the process is moving to the rehab PPS and it does, from what we think, that looks very positive. We don't see any reason why we will need to close any of those but we'll continue throughout the year looking at all of these services.

John, on your other question about differential between admission, growth in the form of admissions growth and former Triad , we do have that information. We'll think about it, Denny sort of suggested this as well, we made a deliberate decision, which we said a year ago that we were going to provide separate numbers through the unit this past year, but stopped doing that for this year and not disclose it. We do track it internally. I can tell you it doesn't have any you know sort of there's no big strategic difference. The difference is the hospital are more significant than the differences by you know categorizing in those two ways but we'll think about that and maybe provide some additional information about that .

which you'd expect I think it's the Triad admission growth has been declining and the what were the facilities have been increasing so it's pretty much what we thought you know maybe faster or slower in some areas than we'd expected but going in the direction we anticipated.

That's really the essence of the question is obviously you know they're coming from different histories and we'd obviously like to see an improvement in the performance which is what I think you're suggesting.

Yes they're sort of convergence because all of what were very strong pre-acquisition numbers for Triad in '99, 2000 and 2001.

OK thank you.

We'll take our next question from with Morgan Stanley.

Thanks.

Morning .

Hi how are you. Will somebody give more detail on some of your new facilities in particular in that Las Cruces facility will you be able to bring the occupancy rate up in line with the rest of the company and on your in Las Vegas what's the potential that, that project could be slowed down due to the poor malpractice environment specifically in Las Vegas?

Well I think on the Las Vegas one we've got a board meeting coming up with here in the next few weeks and we'll get more of an update on that I mean they're already in construction so I don't think they're slowing up so I think that it's that thing is moving ahead at this time. The as far as the new facility you talked specifically in Las Cruces the usually on a project we're looking at nine months to the EBITDA break even and about a year and a half to kind of EPS break even and again that's a kind of general rule of thumb but we'll be tracking MountainView you know closely obviously how they do you know some have done better than that and others have trailed. Interestingly those that trail sometimes long-term end up being stronger so I mean there's no rhyme or reason but I would say this we done a lot of homework on Las Cruces. We feel real strongly that the hospital is going to do real well and there's a real need for it in the community but that usually kind of the rule of thumb that we use.

Thanks a lot.

We'll tale our next question from with UBS Warburg.

Thanks good morning everyone.

Good morning .

I was wondering if anyone - this is a kind of weird question - but does anyone track like unemployment in your markets where you have your hospitals with the thought being that the benefit buy down process that people are anticipating in the slowing economy will be probably directly related to the tightness of the labor market. So I'm just trying to get sense of how the slowing economy has effected your markets and hence what you might be thinking like beyond the horizon as that process continues? And then also maybe how that's effected the labor situation and turnover, and wage rates and all that kind of stuff?

Yeah I can tell that we're, we've always had I mean I think before we did the transaction we were really tilted toward a very high uninsured market because of the strong south less presence, and in especially Texas, New Mexico, Arizona because I think all three of those states rank in the top or the bottom five in the United States in terms of uninsured, and under insured, so we know obviously are very concerned about that. You know almost for a month in the beginning of our history when we spun away from HCA but I would tell you that's I don't know do we have any particular market you know we try to tell most market by market obviously we are concerned for example when you start getting into you know automobile sales, and parts, and just whole the automobile industry a big impact on the Fort Lane market when there is downturn, and people get laid off out of the automobile industry it has an adverse affect on that market so it's almost market by market.

We do look at it, and Mike, as his team goes through their strategic business planning process, are looking at you know those kinds of things. And were the risks you know critical factors were the risks are you know going forward but I would tell you now the biggest risk that we have in kind of that general area is, is in the whole area of kind of malpractice insurance, and why the insurance cost associated with you know the insurance side of our business, and those are pretty well documented. You know that's Nevada, and Mississippi, and West Virginia, and Pennsylvania you go down the list of states Texas were there are big insurance risk issues. Probably your kind of the higher that's on our top profile right now.

We're really in tune to that. I've been on vacation this past week and I only got back last night, and was reading through, reading through e-mails, and I probably had a couple hundred e-mails, and I bet you half of them were on insurance issues. And so that's really kind of high on our list but I think we've been saying that. Burke and I have been saying that now for six months that this was one of the big issues in this industry is all this insurance problems, and it had a significant impact on our business. Again we've told people that's part of why we've taken a fairly conservative approach financially in terms of expectations, and so we're sitting here telling you we're prepared to meet our numbers in spite of these issues but they are issues, add that's probably the highest profile we have.

I should just mention just to make sure it's clear our insurance calls our risk management calls are relatively stable for this counter year. We've got a few little things that were new over the course this year but our big; the vast majority of our insurance is already covered through the end of this counter year. The question that Denny's raising is what happens in 2003, 2004, and obviously we don't really know I don't think we'd even be able to get someone to give us a quote right now for a you know January one start date to medical . You know we're have to see what the market does over the next few months but we simply note that with increases in the you know mid 30 percent range for us from '01 to '02, and the facing the potential of that same kind of magnitude increase in overall insurance costs from this year to next year, and no one really knows the answers that's why it's very high on our list of sort of the things that we're concerned about.

So on commercial health insurance though your not anticipating any major changes on the benefit design packages such as or predictable could increase materially, and alter demand for care or is that just not a likely scenario in the short-term?

We're evaluate thing like that in the way you would probably expect as absolute. The question is what is the right thing to do what is the right balance, I should aspect that most companies and certainly we here are examining those kinds of things we have made no plans to make any changes to our current benefit structure this time. But at some point that certainly could make since cause here are significant pressures there.

OK and lastly I asked about turn over, what has happened to turn over in your local markets over time?

I don't think we have had that we pretty much with th e numbers anticipated I said that we did the spin off we turned about 60 percent of the managements teams turned over a 12, 18 month period of time. That was you know a fairly tough process and we tough with the core mach acquisition that you know there might be 30 percent , 25, 30 percent turn over. And it has actually being less than that so I think we have kind of reached a establishing point. You know right now I would say most of the turn over that we seen is just real crack down really focus down to either people can't do things that we needed to do or they don't want to do them and it's pretty stable.

Thank you.

We will take our next question from with Salomon Smith Barney.

Hi. I just was wondering back on that pricing question. That has been through the call you had patient revenue for adjusted admission in the quarter of $6,728. I guess I am just wondering what kind of should we expect over the coming quarters on that number? You know is that a good base to work from or you know might it show some both on a down side or up side or what ever can you give us a just some since of that?

And then just quickly on the settlement that you mentioned. Can you remind us what that was, I mean was it the organ I can't remember what that might have been? Thanks.

In terms of the pricing increase is not, is a pretty stable part of that increase and I think that probably the change in the mix. And terms of taking out some of those lower services is stable and kind of go forward it is kind. Of one and a half to two and a half percent is based on the mix of which hospitals are come in stronger and various quarter verses the another might be the piece of that.

OK so we shouldn't expect that number on a absolute basis to back track from that level.

No easy to expect that you know one never knows

I understand that .

but there is no reason we should expect that.

OK great and then just on that ?

Yeah Steve Love is going to answer your settlement question.

The settlement was a payment we received from Hospital Corporation of America in relation to the key of the case.

And that case was the largest of the cases that handled that it settled right before we required yet and it was related to hospitals that HCA owed in way back earlier year before so this was under managed that is right. So this was HCA essential paying it's share of that overall settlement we had sampled reserved what we thought appropriate, conservative reserves for that number. Turns out we where in more conservative than we needed to be with respect to what we would ultimate collect there.

OK, and was that a cash in payment?

Yes, that was a cash payment.

OK, thanks a lot.

Thanks dear.

we'll take our next question from with Bank of America.

Morning guys!

Morning Gary.

Two questions. One, I wanted to go back to information systems, I know that you had said for a while you where waiting to see what HCA was going to do on the ERP side given that you purchase information services from them and last week they told us that they we're going to delay by 18 months or so. four or five of the modules on the ERP side, and I just wondered if perhaps that in the future it will make you possibly look to an outside vendor if the changes are sinking at all.

Yeah Gary. You know our agreement with them is seven years, so at the time that we spun of we had a seven-year agreement with them and I guess where we are is that we're kind of . I mean what Burke had mentioned earlier, things where running smoothly. It's not a problem issue, it's not something that there's a problem on either side of the major vendor's, the HCR BFC so it's not, nothing that really can't amount to having to make any quick decisions. So we're waiting to see what HCA comes up with and how they're going to handle and how we're going to be treated in this process and, you know to do that you really want to continue to provide services to us and if so under what conditions, or what programs are going to be available so we got to go through that evaluation process with them. So it's kind of pretty clear other than we tell people that we've got two separate systems and in some point of time we'd not like to do that but we're not in a real hurry to push the issue.

And here we have initiated just internally, here we've initiated a strategic review, broad base strategic review of what the ideal outcome would be for us looking out about three years, whether we continue with initiated systems completely across the board or maybe continue what we have now which is a split on the patient accounting piece of or systems or can't you do something different, on our, we really don't have any bias with one another. in the mean time we still have very good, very detailed, very thorough information available to us at across the board for all of the operations, I think just, there's, we're going to get through a strategic, almost a revision related review over the next few months. we've actually got some, we're going to advance from outside assistance to helping us with that and coming out of that we might have a little bit more to say that will probably be a least a quarter away before we'd have a little bit more vision on what approach we think we'll take over the next few years as if we've planned for potential change or not.

OK, good and if I could just get one more, one that kind of you didn't maybe touch. I know we go through this quarterly but on the acquisition environment, obviously you're not shy about the big acquisition next year. But I think we've had some conversations that on a forward basis there's a lot of activity, there's a lot of development and on the non-profit side perhaps a bias towards doing some as opposed to outright acquisitions. I just wanted to see if that continues to be the case and any comments you may have on the acquisition environment.

Gary I would tell you that not that we're opposed to the acquisition because like you said I don't think that we obviously haven't shown we're not afraid to take on some of those opportunities if they manifested themselves in the form of an acquisition but what we're saying we've not seen a lot of acquisition opportunities out there just quite frankly the I mean probably again out side of rural markets which you know we haven't played in and or we've only played sparingly in through a kind of QHR strategy.

Most of the mid-sized markets and the urban markets there haven't been a lot of activity now that doesn't mean that there won't be in the future, I mean I've said you know 85 percent of the healthcare in this country is provided by non-profit healthcare systems. And it just my opinion there's probably half of those have many of those are very you know outstanding organizations they have financial troubles and it may be the fact that they just don't have access to capital. And in a very capital intensive business it's hard to compete without having access to money. And so they're becoming disadvantaged network-wise or they're becoming disadvantaged because of their abilities to compete with other for profit entities and other not for profit entities because they can't build a hospital or replace a hospital that needs to be done and give it area of their market.

So what we're seeing is opportunities that you know come as what I call one off opportunities. We're seeing and having discussions with a number of people about doing you know a single venture whether that's a joint venture of a facility or building of a new hospital and we're seeing those kind opportunities which really kind of what I call grade 'A' you know really first class organizations they're going to be there for the next 100 years but there's an opportunity for us to work with them in some way because we culturally I think can kind of come together and make it work.

On the other hand while we haven't seen a lot of acquisitions it wouldn't surprise me if there were not more acquisition opportunities in some of the larger markets over the next year or two but right now other than Albuquerque where you had a kind of you had the system and then selling off their system, there's really been very few markets where we've seen a lot of acquisition opportunities.

Thanks.

We'll take our next question from with SG Cowen Securities.

Thanks I'll just hit these two things quickly, one, could you talk about what you're seeing in terms of labor inflation I assume you're seeing some moderation and then number two could you talk a little bit about how you're doing in Vicksburg with the new facility thank you.

Yeah in terms of the labor inflation I think you're right it's moderated I mean we still have the same pressures that we've had but at least we're kind of holding our own there. Contract labor usage was down slightly year over year but not significantly so but good news on that front at least it wasn't up and Vicksburg continues to be right on plan.

Is Vicksburg profitable?

Yes.

Great thank you.

We'll take our final question from with .

I just want to make sure on this pricing issue you've got the rate increases. You've got some mixed things that I guess serve your driving by the services you're offering but do I also, am I also hearing you that there's some kind of shifts occurring at your hospitals where because of some of the investments that you're doing you're attracting more high acuity services that would tend to move your revenues per admission pricing kind of above where your -- just the rate increases are over a fairly prolonged period?

Yes. That's really what it is. It's really some of those areas that -- you know, if you take a look at the portfolio, you have some on the lower acuity end, some on the higher acuity end, so depending on which ones are growing faster on that scale will kind of push the overall acuity numbers of the company. And what we're saying is, where a lot of our growth and where a lot of our capital has been spent here in the last couple of years have been in some of those high growth, high acuity areas in some of our metropolitan markets, quite frankly, like Tulsa and Northwest Tucson, and Lutheran to some degree, where that's pushing the overall average, just as kind of the relation of that mix. And those hospitals tend to have the higher acuity services with them and therefore having the higher revenue per admission and per adjusted patient .

Right, so if we assume sort of like the same rate of growth across your whole portfolio, which obviously isn't the realistic assumption. But if we were to assume that, we would see above rate increase growth in pricing because of that?

Because of the mix?

Yes.

Yes.

OK, thanks.

Thank you.

Thanks, .

, I guess that's it?

Yes sir.

OK. Well, we'll just wrap it up. Appreciate everybody tuning in and kind of -- I hate to think that a boring -- but we want to try to get back kind of doing what we told you guys that we were going to do, and that's continuing to see performance improvement and do it in a methodical way and I think we're on line to do that. Again, I want to reiterate that there is, you know, real stability in our business and we're confident and comfortable with where we are. We're also confident and comfortable with our reporting, with the involvement of our board, and I think can give you a high degree of confidence that, you know, that we have, you know, have that in your best interest and our best interest going forward. And we think our best days are ahead of us.

So still very bullish on the company and think -- you know, we've got a lot of things that we're working on. A lot of development opportunities, and we're going to try to do that with balance, and not bite off more than we can chew, but do it in a way to continue seeing good growth of the company for -- not only for the short term, but for the long term as well. So, look forward to working with you in the future. If there's anything we could do, please let us know and we'll try to help you as we always have. And thanks for tuning in.

Thanks you all.

This does conclude today's conference. At this time, you may disconnect.