Community Health Systems Inc (CYH) 2003 Q2 法說會逐字稿

Everyone please stand by. We're about to begin. Good day, and welcome to the Triad Hospitals Incorporated, second quarter 2003 earnings release conference call. This call is being recorded. The discussions today may contain so-called forward looking statements, which are statements that do not relate solely to historical or current facts. These forward looking statements are based on the current plans and expectations of the company and are subject to a number of uncertainties and risks, which could significant affect current plans and expectations, as well as the future financial condition of the company. Such uncertainties and risks include the competitive nature of the healthcare business, the efforts of the various public and private payers to reduce reimbursement to providers, possible changes to government programs to further limit reimbursement, the enactment of various federal and state healthcare reform legislation, and changes in general economic conditions.

As a consequence of these and other risks and uncertainties, current plans, anticipated actions and future financial conditions and results may differ significantly from those expressed in any forward looking statement made by or on behalf of the company. You are accordingly cautioned not unduly rely on such forward looking statements when evaluating the information presented here or in the company's press release. This call and web cast are property of the triad hospitals, incorporated. Any redistribution, retransmission or rebroadcast of this call or web cast in any form without the express written consent of triad hospitals incorporated it [Inaudible] prohibited. At this time for opening remarks and introductions, I would like to turn this call over to Laura Baldwin. Please go ahead, ma'am.

Thank you, Steve Love, good morning, everyone, welcome to Triad Hospitals Incorporated, to discuss second quarter results. With me are Denny Shelton our Chairman and CEO, Burke Whitman our EVP and CFO, Mike Parson, our COO, Don Fay, Dan Moen, Bill Huston, and Pat Ball, Vice President of Marketing and Public Affairs. I would like to turn our call over to our CFO, Burke Whitman.

We issued a press release announcing earnings for the second quarter and for the 6-month period ending June 30th. I'll make some general comments and then turn the discussion to our COO, Mike Parsons, who is going to describe in greater operational detail just how it is that we're managing through a somewhat challenging period in our industry. I think that'll be interesting. We reported earnings per share of 51 cents on revenues of 954 million. EBITDA of 145 million and net income of 38 million. The EPS at 51 cents comprised an increase of 7 cents or last year he is 44 cents, and increase of 11 cents over last year's 40 cents excluding some favorable litigation settlements we had last year. On a pro forma basis, all of our revenue indicators increased revenues were up 9.8%, our patient revenues 11.2%, patient revenues per adjusted admissions 8.8%, admissions 2.4%, adjusted admissions 2.3%, and surgeries, 4.4. Our outpatient visits increase 1.7%, increased even greater 3.7% excluding the home health visits. Excluding our loss crews says New Mexico hospital in third quarter 2000, our admissions increased somewhat less than 1%. We're not providing the precise admissions numbers for Las Cruces because it can be competitive disadvantaged for us locally if we have admission stated for any individual facility. Beginning this quarter, we will begin excluding, or including Las Cruces in our same facility admission stats and I am pleased to report that Las Cruces continues to perform ahead of our original plan in both admission and financial performance.

Our EBITDA margin was 15.2% for the quarter, the same as last year's margin, partly because of the more flattish volumes. But we do continue to believe that we have the opportunity to see increased margin in the third and fourth quarters over a similar period in 2002, and therefore to see modestly increased margins for 2003, over 2002, despite the relatively flattish volumes we've been experiencing this year. That's because we expect to face easier comparables in the third and fourth quarters in three large expense categories, medical malpractice, employee health insurance and employee retirement benefits each of which increased particularly significantly in the third and fourth quarters last year. Salary, wages and benefits costs decreased or improved .4% from last year, despite employing additional doctors in selective doctors in order to give access to insurance and despite increase in employee benefits costs. Mike will address the ways we've been able to do that. Our other operating expense grew from 18.4-18.8% of revenues, largely due to insurance cost increases. And our bad debt expense grew from 7.6% of revenue to 8.2%, resulting from among other things, self-paid pressures resulting from economic conditions and changing health plans and placing greater co-payment deductibles on the participants. I do want to point out that we do confirm our bad debt expense and [Inaudible] on the balance sheet by conducting a hindsight review every quarter, and on every facility.

We conducted this procedure in this way, ever since we lost the company in 99. During the second quarter, we did record some deterioration in bad debt performance. modest deterioration is included in our number and there is some risk that we could experience further deterioration in future quarters. For that reason we're continuing to study and evaluate collection results, but we do not currently see any negative larger trend at this time. In fact, we actually achieved record performance in a number of areas related to receivables, cash, collection, percent of revenue, sales outstanding was an all-time law and up front cash collections from patients improved. For our uninsured patients, topic of national policy interest, we currently provide information about funding sources and we have a loan program in place for those who qualify. We're also currently working on a potential new charity care policy that we helped to implement companywide by the start of 2004 that would use means testing to provide charity discount based on a sliding scale based on individuals income. We're encouraged that some of the other hospital providers are receiving legal and regulatory approval from the corporate regulatory [Inaudible] to implementing similar such policy and we're hoping we will have that in place by the beginning of the year. Cash flow from operations for this quarter was a healthy, $172 million before cash interest and taxes, 117 after taxes including our semi annual payment in May on the bonds.

And our return on invested capital on a GAAP basis increased modestly to its highest number yet. We expect it to continue to go gradually over the next several years as it has since we began, not necessarily in a straight line, since we are spending capital on projects that do not generate immediate return out of the box that's accreted to ROIC. But over time, because we believe we still have the opportunity to improve the operating performance and invest in projects that will generate favorable returns over time. We spent about $63 million in capital expenditures this quarter, less than we had planned due mostly to delays in some of our projects that were beyond our control. We remain committed to all of the projects that we have planned, however, our balance sheet at the end of the quarter, included $100 million of cash and equivalence. We still had $213 million available in our revolving line of credit, so we continue to be in a good position financially to exploit strategic opportunities that may arise. We continue to see many of them. Denny is going to discuss some of the specific opportunities that we have, but let me just summarize for you. We've got one new hospital in construction, in Nevada. Two under development in Texas and Arizona. Four additional letters of intent to acquire or developed additional hospitals in West-Virginia, North Carolina, Oregon, and Alaska.

I believe some of those we expect to become real this year. We've also got five surgery centers on development in markets where we have a hospital, and additional opportunities, particularly for non-profit organizations who see a particularly good fit with triad's differentiated strategy of working in collaboration with communities and providers, continue to come in. And we are in a good position, we think, to be very select about these opportunities. We do still own the two hospitals and surgical centers in Kansas City that we used to lease to [Health West] and now lease to HCA, since HCA acquired Health West. And we currently received around $8 million in lease payments from HCA which really false mostly straight down to the pretax line. HCA has a call option to buy those facilities from us. If it were to exercise that option, we might receive gross proceeds before tax of around $140 million. We would lose the EBITDA but also eliminate the related appreciation expense of about $5.5 million annually. HCA has not informed us of its intents or timing at this point, and we have yet to determine ourselves what the net after-tax proceeds or our use of proceeds would be, both of those will depend on the market and strategic opportunities for us at that time. We updated our earnings guidance for 2003 from our former guidance of $2.08-2.20 per share, up to our new guidance of $2.14-2.20, basically ranging the low rate of the range by 6 cents. We also reiterated earnings guidance for 2004 up 246 to 270.

We continue to expect facility admissions, longer term over time to grow in the 1-2% range, although admissions for 2003 have been flattish so far and might possibly remain somewhat flattish through more -- further into this year, tracking maybe a little bit below the one or two percent here in 2003. Our net effective rate as measured by revenue from admissions we expect to grow in the range of 4-6% of the year, this is a weighted growth rate, based on weighted impact of the different rates of growth for each of our primary care types and we can answer more questions about that in the Q & A if you all would like. The result of that is our expected -- of the expected 1 or 2% volume growth, 4-6% net blended rate growth is the same revenue growth of 5-7% annually in 2004 and beyond. In 2003, we object obviously have had higher faster growth rate than 4-6% in net effective rate, and we do expect that to continue to be the case in 2003, but we expect that stronger rate of growth in 2003 to subside gradually somewhat each quarter over the course of the year. This is just because during 2002, and even late 2001, we achieved through the operational team two structural improvements that added to our net effective rates over and above the rates themselves.

First we established stop loss and pass-troughs in the care contracts and secondly, more importantly, [Inaudible] shifted our mix towards higher acute services such as surgery and [Inaudible] services. We had largely accomplished both of those structural objectives by the end of 2002, as a result, we generally expect the rate of growth in our revenue per admissions to gradually decline from the 12.1% we reported in the first quarter this year to the 8.8% we just experienced in the second quarter and continuing gradually downward toward a growth rate of more around mid-single digits. This is the expectation currently incorporated into our earnings guidance for 2003-2004. Most of our managed care contracts are set for 2003, and over two-thirds are set for 2004. We also expect to continue moving our margins upward methodically and deliberately as we have in a manner that sustains important relationships with communities and physicians. We're still comfortable we can carefully drive a current portfolio of hospitals margins and the overall company's margins to something in the 17% plus range, not in 2003, but gradually over time. We also updated our current expectations with regard to capital expenditures in 2003 from an older expectation of $370 million to a newer expectation of $275-300, again largely because some of the projects have been delayed for reasons beyond our control. I do want to emphasize as always, we'll continue to be opportunistic in that we could end up spending more than that if we count the right external growth opportunities.

Of note particularly for those who follow our bonds, we have decided not to launch our previously contemplated refinancing of our $325 million, 11% senior subordinated notes at this time. We had considered launching the refinancing as soon as we could publicly disclose whether we would be conducting the transaction with the Baptist health system of Birmingham and thus could disclose the impact that that transaction would have had on our corporate balance sheet. We now know we're not going to execute that transaction. We'll talk about that to some extent, but that is not longer an obstacle to our free financing. We do now have other strategic opportunities that we're presently evaluating, so we should launch a new deal at this time. We may refinance the old senior subordinated note sometime prior to the first call date in May of '04, because we believe we can replace the current 11% coupon and existing bonds with a significant lower coupon on the new bonds and even after paying requisite premium up front to bond holders and other transaction costs, we believe a refinancing transaction would be net present value positive for the company. The present value, reduced interest costs of the life of the bonds being greater than the up front costs of the transaction costs. We incur some risk, we may miss an opportunity to finance at historically low rates. So we will continue to evaluate very closely on a daily basis the possible refinancing in light of all of the market and strategic opportunities in fronts of us.

I will say I am pleased that we received this quarterly increase in our credit ratings from standard and Poor’s, both Moody’s and maintain a rating on Triad as well as a rating on all three layers of our corporate debt. S&P increased two of its four ratings by two notches each and increased the other two ratings by one notch each. Our corporate rate in S&P is now double B minus, equivalent to Moody’s ratings BA3. We're particularly pleased to receive these ratings increases during a period in which many more hospital organization, especially a number of not for profits have experienced downgrades rather than upgrades over the past three years. S&P gave us credit rating of a positive outlook even after that upgrade. I'll wrap up my comments by saying we do continue to operate Triad in a somewhat challenging environment. We continue to face short-term risks related to volumes, rates, and expenses. Especially bed debt expenses, but all of us continue to feel really very good about our current and future performance prospects. So let me turn it now Mike Parsons, our COO who will discuss how Triad is managing through these somewhat challenges times. While we feel good about the future, after Mike speech, he'll turn it over to our CEO Denny Shelton who will address growth opportunities.

As Burke said, what I do is I'll vote down the income statement low bid and give you some more color on some of the various categories, starting with our patient revenues, patient revenues were up 11.2% through the quarter. That breaks down about 8.5% rates, about 2.5% volume. We did see intensity increase this is quarter, starting with the inpatient side our over all case mix index went up about 8.1%, and our inpatient surgeries were up 4.4%, so, saw that intensity increase on the in-patient side. Saw an increase on the outpatient side as well. As Burke indicate, while our overall outpatient business was up a little over 1%, we have been systematically looking at some of our low revenues, low margin, no margin business, particularly home health over this past year, and have sold a number of those agencies in the process. So when you look at our overall outpatient business excluding home health visits, they were up 3.7%. I think that's why you see our outpatient percentage total revenue actually Ticked up a little bit from second quarter last year. I think we were at 45% last year, out patient percentage total went up to 46% this second quarter. You can see outpatient intensity going up as well. On the managed care front we continue to be on track with what we've told you in these past few quarters. Our increases are right around that 5-7% rate category, and as Burke indicated, we have over 80% of our contracts finalized, negotiation has been finalized for '03 and we feel real good about '04. We have 70% down for '04 as well. On the SW&B front, salary cost, as Burke said, we went down from 41.9-41.5%. A few issues to talk about here, as we told you last quarter, we did make the decision to take on and absorb the greater percentage of our health benefit increases and pension increases this past year, and so our benefit costs as a percent of net revenue did go up, from 7-7.3%. However, I was pleased to see our salaries and wage actually drop from 34.9%, 34.2%, and that's due to a couple of factors. One, we continue to see good improvements in our productivity, our productivity gained about 1% through the quarter, and really, the other major factor was a significant decrease in our contract labor. Our contract labor came down 14% in absolute dollars, quarter over quarter, and so we're now running at less than 3.5% contract labor in terms of our total salaries, wages and benefits.

That's important for a couple of reasons. Not only does it get the premium cost out of the system, but it also is better continuity of care for the patients to have a stable work force. Those were good trends for the quarter. Supply costs at 15.7% was pretty much right on our internal expectation, right on budget, down a tad from last second quarter, 15.8%, and I think it is up a little bit from the first quarter, reflecting some of that increasing in acuity. On the other operating expense side, Burke talked about that going from 18.4% last year to 18.8%, pretty much the same issues the first quarter this year, with the increase being in the malpractice, as Burke said week, adjusted our malpractice accruals about mid-year last year, so we'll start to see some of that normalization in the third and fourth quarter, but we still had a little bit of a comp issue, first and second quarter. Another major issue in this quarter that shows up in that category was we opened a replacement hospital up in Northwest Arkansas, Northwest Benton hospital, real good, good, clean opening, but we did incur some pre-opening costs and some duplication costs as we had to run a hospital while opening another hospital. So, that went well, and we really look forward to good results from that market in the future. Finally, on the bad debt side, as you can see, we went up from 7.6% second quarter last year to 8.2%.

.6% increase is in line or is about the same increase we saw the first quarter, about a .6% increase in the bad debts, which reflects that growing self--pay out-of-pocket for the insured that we've been talking about, and but overall, we had a good AR management quarter, as Burke talked about. Our 63.6 days in ARs is our lowest days ever for the company. So I think the team is focused on accounts receivable management. Bill Huston and his team did a real good job on that this past quarter. So, kind of to sum up, for those of you that made our investor day and Denny talked about some of the slowing revenue growth that we needed to tighten our focus and attention towards some of the operational improvement plans that we have in place, and feel real good and proud of our team's division management teams and hospital management teams think they had good focus and good results this last quarter, so that we can achieve our financial objectives. So, and look forward to the next quarter. So, with that, I'll turn it over to our chairman and CEO, Dennis Shelton.

I'll be real brief and get to questions here in just a second. Dan Moen is here today too. We can answer questions about the development front. We'll tell you, as it's been for the last probably 6 months or so, we probably have more projects than we can do or could do. There are people that think we'll do 1500 deals a day if we could do them, which is kind of ludicrous, but we do have, you know, we continue to have almost weekly conversations with new groups of -- and new individuals from non-profit organizations around the country, talking about relationships or ways to work together. As I mentioned several times before, they usually take on one of two kind of broad categories. They are either strategic or they really are focused around need for capital, and you know, we kind of gave the strategic example as being the new project up in Denton, Texas where we're partnering with Texas Health Resources to build an expanded new facility in that marketplace which is really strategic for them and us. You know, it's a mutually beneficial partnership. We continue to work and should get closure in the next 60-90 days on a number of the not-for-profit joint ventures, the one in Alaska, the [Paler/Wicella]project up in the [Matsu-burra] in Alaska. We got attorney general approval and we're moving forward in Eugene, Oregon.

We need good hope and soon to be Willington, North Carolina. We started and are under construction now which is not a JV, which is the mesquite, Nevada project. We continue to have and it's something we will continue to look at, we will continue to work with many of these nonprofits. One thing I will tell you that's interesting because we've got a little probably publicity here in the last few weeks, and I want to mention it briefly. In almost all of these cases, the nonprofits, especially on the capital partner side, they get out there in front of us on announcing these things, and they announce them sometimes when we wish they wouldn't, just simply until we get a deal completed, and while that happened, it happened in Eugene, and it happened in Alaska, you know, they are excited and they've got a lot of issues in their local community, and we just kind of roll with the punches. That's kind of what happened, really, in the Baptist situation down in Birmingham during this last quarter. We had gone through a fairly arduous and significant process with a number of other for-profits and not-for-profits as they looked at alternatives, what they could do going forward, and in that particular case, they went through this process, and had called and thought that they had consensus among their board, and called a press conference on a day in which their board was meeting, and then had the press conference and the media release waiting as their board, you know, really went through longer discussion than what they had anticipated. When they were kind of pushed against the wall, they basically called a vote, and the vote was -- I think it was 18-1 that they wanted to do a transaction not with another non-profit and not with another for-profit, but with triad, and at that time, and the only comment that we've made publicly until today was that we were proud to be chosen. They had made site visits to our corporate office and to several of our hospitals, and we made friends with a number of people there. It's a very good organization with a long history of servicing communities in Birmingham and other communities in the state of Alabama.

They were struggling with, and we knew this at the time. They were struggling with -- triad can come in here and help us do these things, why can't we do it ourselves, but from the day that they announced that they wanted to spend the next 30 days trying to reach an agreement with Triad, we never met with them, never met with the board, ever. So, we just -- we asked on many occasions, Dan and I did, to meet with the committee or meet directly with the board and to talk about the issues that they had and the struggles that they were going through, but we never met with them. We near negotiated a transaction. Some of the publicity and end result of the last couple of weeks kind of implied that the deal had broken down. I can tell you no deal broke down, because no deal was ever entered into. I don't know how you can enter into a deal if you never meet with them. So, I want to give that clarification, because let me tell you, the pipeline of being able and to have cultural compatibility with the non-profit organizations and being able to work with them is very important to us. We continue to have very good relationships with the people at the Baptist healthcare system in Birmingham, including with members of that board who resigned as well as members of that board who are still there. They are a great group of people. Like I said, they do a great job. We wish them well. We wish we had gotten to the table to negotiate a deal. We didn't, but we also understand that there is a lot of, you know, local politics and a lot of history there, and we're going to help them and be supportive of them any way they can as they try to manage through a fairly difficult process for them.

I want to give some color to that because there has been a lot written and said -- a couple of things said by a couple of consultants who really, one, don't know the industry, and two, really, truly, don't understand the relationships that we were talking about and I want to give some clarification and some color to that. But Dan and his team continue to almost every week, continue to look at opportunities. What we're looking for is we're looking for the best opportunity for Triad and our shareholders and we're also looking for that compatibility knowing that we can work with the local community, the local communities leadership as well as the positions and it's a good fit strategically for us going forward. So, again, contrary to a couple of people out there, you know, we're not doing every deal we can get our hands on. In fact, we're passing on the vast majority of the deals. It's kind of isolated selective process, and we're going to continue to be disciplined in terms of doing that. So, I know Dan can add some color as we go through the questions here and hope if you have others, we can address those. But, Steve Love, if we can, let's open at some point to questions for the team here and we'll try to do the best we can to get to all of your questions or comments.

Thank you, sir. The question-and-answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key, followed by the digit 1 on your touchtone telephones. If you are on a speaker phone, please make sure your mute function is turned off to allow your signal to reach our treatment. Once again, everyone, that's star 1 to ask a question, and we will go first to Darren Lehrich (ph) with SunTrust.

Good morning, everyone. I want to clarify with your CAPEX guidance. If I heard you correctly that there is no projects that came off the table, but I just want to understand, did you have acquisitions bogged in at all in auto 03 number, and then I have a cup other follow-ups on cash flow.

Okay. The -- what he what we tried to do, Darrin in that, we have in our guidance for those projects, because these things are phased in over a period of time. So the capital guidance that we have been giving, includes being able to fund the capital for those projects going forward. So the so the new guidance to get these projects that we've announced off the ground, and for example, in this year, what you would have is as Mike mentioned the hospital up in Bentonville, Arkansas, the bulk of that capital, each though it was a new hospital that, capital was in -- I mean, that was in the capital to expend it for this year and the guidance going forward . So we're trying to be inclusive of those projects, in that guidance going forward. Now, we had thought originally that we would do somewhere around $370 million in capital this year, and what we're telling you, it's not because we've backed off, it's just really the timing on many of these projects have slipped, because either regulatory, you know, like certificate of need process or just -- a good example is like up in Eugene. We would like to be starting that Eugene project just as quickly as we can, but we had to go through the AG. We still will have to go through a certificate of need process, so we've tried to blend, you know, timing on these projects out and put them in the appropriate years or appropriate quarters and sometimes, you know, we know more as we go, and we just don't hit they will. I it doesn't mean we're not going to spend the money, it's just our timing is not exactly right because of the process that we're going through. New guidance is that $275-300 million for this year, and that is reflective of, you know, again, Bentonville, using that as an example, those new construction dollars are in those numbers.

Okay.

So we try to be inclusive.

And just to clarify, there are no acquisitions baked into the numbers or the prior numbers so --

No, that's right, Darren, no acquisitions.

Okay, and there is a question about your cash flow, third quarter cash flow from operations comparison looks pretty tough over last year. Do you expect cash flow in the third quarter to be down year to year? Are there any cash tax payments that come in the third quarter that we should be aware of? There bay may be general commentary with regard though to your new CAPEX guidance on free cash flow for this year, '04 and for '05?

Yeah, Darren, really no further guidance on free cash flow through '04 and '05, beyond the implication of reduced capital expenditures this year. We will continue to evaluate what we think next year's What probably is going to happen is some of this capital expenditures will be. Some of them will slide into next year, but we may also slide for what was planned for next year into the following year. So, we'll stand by for that. I think the third quarter, we'll just see how we operate, and you know, how well our operating performance goes. We have not really try to give operating cash flow guidance on a quarter to quarter basis. It obviously does fluctuate quarter to quarter based on the number of working capital factors, even where the quarter ends sometimes, I think the biggest swing factor for everybody to keep in mind for us, is that in our second and fourth quarters, we always have our big interest payment on our two outstanding bond issues. So, include that piece, the second and fourth down. No particular reason to expect anything other than a continuation of the trend that we've been on generally.

Okay. This is one quick thing on the Las Cruces. It looks like it was pretty strong growth in the quarter there. Can you update us on when you expect to contribute to consolidated earnings if it isn't already, and can you update us on the situation down there with memorial and where you stand vis-à-vis getting involved in that biding process?

Darren, I'll answer the second part of that. We don't plan on getting involved in the bidding process. We've told the community and we have a good relationship there with the mayor, the city council, the county commissioners and we've told them --

So I hear.

I'm sorry?

So I hear.

And you've had a little visit there, so you know. We've had -- we have told them that, you know, if they run into a situation, you know, we're prepared to be a backstop for them and work with them in regards to that facility, but that we did not plan on being out front as a bidder in the process, because, quite Frankly , I think that that community, is growing, and it's growing significantly will support two and eventually three hospitals in that market, and it doesn't make sense for us to be an acquirer because all that means is that there is very short time frame, somebody else is going to be into that market. So, we made a decision, really through our local board, because it was really a local board decision. We basically pushed that decision process down to them, and we kind of reached -- went out and sat down with them, Mike and myself and Marsha Powers, one of our division presidents and had a great discussion with the board, and I think the decision then was made not to be out front in terms an acquirer, but to try to help them in any way we can, because the community does need and will support two hospitals. Mike, do you want to --

Yeah, in terms of the financial performance, we're at least six months ahead of our projections on Las Cruces, and we've -- we were cash flow positive for the quarter in Las Cruces, and would expect to be, you know, EPS accretive sometime -- six months quicker than what our normal startup would be, hopefully by the end of the year, we would see that being, you know, positive accretive on an EPS basis.

Steve Love, next?

We'll take our next question from Gary Lieberman (ph) with Morgan Stanley.

Hi, Gary.

Thanks. You guys have talked a lot about the volumes in the past, it seemed like in the quarter that maybe the volumes were a little bit better than some of your competitors. Can you talk about if your outlook for the rest of the year is still for continued weakness in volumes or what you're seeing there? Thanks.

Gary, I've said that I thought this was the trend for the next several quarters, and I still think that. I think I've been up front on this. I think that's where it's at. I think it's -- Burke said flat flattish. Kind of plus, 1.5, minus half, minus 1, something like that. That's the industry, my take. Again, depending upon what organization, either not-for-profit or for profit, depending on what your hospitals are, what your growth is in that area, you may overcome some of that, but I think it's plus or minus 1, the way I see it, at least for the next couple of quarters. Does that mean that, you know week, may do better than that? We might. I mean, I'm not -- I don't have a crystal ball and can tell you, but my gut is just from trending this thing, that it's going to stay relatively soft for the next quarter or two.

Can you just briefly comment on what you're seeing incrementally on competition on the outpatient side?

We're seeing the same pressures. We've been fortunate. I mean, I will say this, but I do understand that the most significant areas are, you know, urban. I mean, the -- there is a lot of pressure in the urban markets, especially on surgery centers. And I will tell you, I mean, again, because there is so much choice or selection in those urban markets, and there is not the loyalty -- I mean, there is not the perceived loyalty -- and again, not as a -- you know, not as a general rule, but as more of a general rule, not specific to any one market, when you are in a big urban areas, physicians tend to have, you know, a presence at multiple facilities, and they don't have the kind of brand loyalty that you tend to find in smaller cities or even, especially, in rural markets. So one of the things I think -- we're seeing is lots of pressure in the urban areas where physicians are being courted by a lot venture capital money and startup money, trying to get them to come out and, you know, move their old allegiances and alliances to a product that they own. That's really -- the pressure is great in the urban areas. In the smaller city markets, we've got great pressure there. The advantage that we have, and it's not always the case, is that the physicians in those markets have more of a loyalty to the brand, one, and two, they also understand that the hospital has more than just a quality of life value to the community. It's invaluable in terms of the economics because most of the hospitals in these markets are either the largest or one of the two largest employers and their economic viability and vitality are important to the general economics of the market,. The physicians have a greater sense of we don't want to tear this hospital down, we don't want to lose this facility in the marketplace, so we tend to find that the doctors, even if they are pursuing something in the small city markets, they tend to, if they are going to do something, come to the hospital and say, hey, would you guys -- do you want to participate. So we're not excluded. We may be included, may not be exactly what we want, but that's kind of what the thing looks like. It's -- so are we still seeing pressure? Yeah, in multiple markets, we're seeing pressures where we've got physicians who are at least looking at what their alternatives are, what their options are in terms of potential projects. But it is greater in the urban markets than it is anywhere else.

Thanks a lot.

Okay.

And we'll go next to Ken Weakly (ph) with UBS.

Thank you and good morning everyone. I was wondering if you could qualify relative difference for pricing and intensity games in the inpatient and outpatient setting?

On the inpatient side, once again, with the case mix being 1.8% --

Yeah.

Overall, probably half of that makes its way into the pricing given the structure of the contracts, being per diem, stop losses, pass troughs, those kind of things. On the outpatient side, I think it's really more a reflection of really dropping off that lower acuity, and I have to calculate that, Ken. That probably is in that 1% to 2% as well, but I haven't calculated it on the outpatient side.

Okay. In terms -- could you maybe give some historical context for the changes in case mix overtime the [Inaudible]? How does that stack up for the last couple of years. I'm trying to get a sense of where you've been historically.

Yeah, just looking over the -- that's been trending up over the last six months. Lord, we have it --

We can get the historical over the last several quarters, Ken. We've got it.

It's a relatively good quarter, of increase.

Where that's basically coming from is in those markets where we've been adding cardiology and surgery in some of those markets where we are one or two hospitals where we said we're increasing the acuity there by bringing new services in. So that's in our markets where -- like Hobbs, New Mexico where we added cardiology last year, and now we're starting to see those programs, get some traction and get some volume to them.

Last question. One statistic I tracked for the industry is inpatient surgeries divided by inpatient hospital admissions to get a sense of what's going on in that regard. Your status are actually very, very strong, 38% or so, almost 40% and the national average is about 29%. So does that imply that you've done an awful lot with these assets, is there less or more to do in terms of adding surgical capabilities to drive up case mix and drive-up revenue per admission?

That's an interesting statistic. I think it does kind of support our general feeling about bringing some of those specialty services into some of these hospitals. Orthopedics in particular. , but, yeah, that is a focus of ours, is to look at some of those high specialty services whether it be orthopedics or cardiology to once again provide, you know, not only specialty, but in some cases subspecialty care. That's one of our, you know -- it's one of the niches we have and operational strategies is to increase our capabilities and that drives up case mix and that carries with it a higher net revenue.

Ken, you may recall, this was part of a very much deliberate strategy, operating objective, particularly over the year and a half or late '01 through '02. We exited a number of businesses that were lower acuity, lower or negative profitability, and generally, lower revenue, you know, rates, revenue per admission, and specifically to increase the presence we had in surgery, some of the capital investments we made, were directed at that. You wouldn't necessarily expect it to continue the surgery growth relative to in patient to continue to increase as it has been, but we certainly feel we ought to keep that level of business that we have gotten. We do think we got a lot of that out of the existing facilities over the last year and a half, and that is part of what has affected, as Mike said, the net effective rate increases that we've had. It's one of the two reasons that is we've seen our reported per adjusted admission increasing year over year the last three quarters, well above the underlying actual rate increase that is we've been negotiating. Let me ask you your side.

Okay, thank you.

And we'll go next to Lori Price (ph) with JP Morgan.

Hi, a couple of things. One is you had all talked about the self-pay pressures that you're seeing contribute to the rise in bad debt expense. I was wondering if you could give us the percentage of revenues or percentage of admits that are comprise by self-pay patients this June quarter versus last?

Well, right now in terms of just -- on a pure self-pay basis, our pure self-pay runs about between 4-5% of total gross revenue. That probably hasn't changed all that significantly from period to period on the self-pay. The thing we've seen, a little bit of increase has been on the self-pay after insurance for pure insurance patience where the deductible co-insurance has increased. But that's between 4-5% of gross revenue.

It's not a change in the self-pay population as much as it is a change in co-pays and deductibles.

Yeah, we're still seeing pressures, especially when you look in Texas where we have a lot of facilities and a lot of high uninsured in the state, but the pressure has been more so on the co-insurance and deductibles.

We've seen a split, Lori. What we've done, we've had great success in collecting more cash and more cash up front from people who can't pay, but the deterioration has been on some of those, you know, some of those fewer older receivables, but they are lower quality now than they had been before for those who can't pay, don't pay up front.

Okay. And then the other question I had, I don't think you mentioned QHR in your prepared comments. I was wondering if you could talk about that subsidiary what did it contribute to revenue in EBITDA in the quarter and I notice in the release that non-patient revenues were down 9%. Is that a reflection on a decline of hospitals under contract or is that a more reflection on conflict of the risk of malpractice onto the hospitals that you contract with?

On QHR, we don't really break out the profitability. I will say that we had in QHR some, you know, ongoing malpractice expense. Litigation settlements.

We've settled -- we're on plan except for the fact that we settled prior litigation expense in the quarter.

That was taken into expense in this quarter?

Yes.

Is that another operating?

Where is it at?

I believe -- yeah, I believe it is in other operating.

Lori, we're actually seeing -- we've actually picked up, haven't we, Dan, some contracts. In the last week we've signed three new management agreements.

We've got our best sales effort we've had in years. We've done about 12 new sales in the first six months, and this litigation, back to this litigation experience, these are two claims that we settled for -- that we picked up when we acquired QHR two years ago and we basically settled them this year. These are not malpractice expenses.

Okay. I know you have been trying to off-lay the malpractice risk onto the hospitals themselves. What percentage of the hospitals under contract now do you still have that financial risk for?

Well, we are putting them under new contracts as they renew, and on the average, these contracts last three to four years. So we're well into the renewal on what we call our new form. So we have 60 plus percent on the new forms.

Great, thank you.

Lori, you'll see a little bit more broken out on to HR in the 10-Q when we file that in a few weeks.

Okay, that's great. Thank you.

And that litigation settlement was operating expense, other operating expense.

That's where it was, Lori.

Okay, great.

And we'll go next to A.J. Rice (ph) with Merrill Lynch.

Thanks. I had two lines of questioning, if I could ask. First of all, in Texas, you obviously mentioned that Texas is a big state for you. Can you comment on two things that are developing there? First the Medicaid, update on some of those developments related to Medicaid there, and there is malpractice reform in that state that's passed since the last quarter. Does that move the needle at all for you?

Well, that's malpractice is going to a vote in September, Pat?

Yes.

So there is a vote coming up, A.J. on the malpractice piece. That's part two, so stay tuned. So we'll see. That goes to a vote of the general population --

Proposition 12.

It's called Proposition 12 here in Texas. We'll have to wait on that. On the Medicaid, Steve Love?

Yeah, A.J., as you know, we expect the Medicaid rates to be reduce beside 5% beginning September 1st in Texas, and in Texas, that'll have an impact on us, but, again, the Medicaid impact will be low or single digit impact as we expect. So we're continuing to monitor that and we're working with folks on that, but we do expect a 5% reduction.

Okay. So basically, that's in the guidance that you are reiterating and improving upon today, I assume?

It is, A.J., we have built in our guidance overall nationwide, companywide, Medicaid rate growth of a little bit below 0%. We've got a few states that are still going up. We've got, you know, if you want to call it a risk adjusted assumption that Texas also be one of the states that's down a little bit and obviously the one most in capital on us. I would also say, you know, of the four broad categories of reimbursement, of payer category Medicaid, Medicare, managed care and other, for us Medicaid is the one that has the broadest bell curve around it is the one that has the greatest risk with the most uncertainty. It could end up being worse than 0% or it could be a little bit better. The good news from that standpoint is Medicaid still only represents about 5% of our overall revenue. It's a relatively for Triad, compared to other organizations, it's a relatively small component of our revenue base. It is pretty tough to predict, given some of these in Texas are on the decision-making process.

Given Denny's comments, it sound like you haven't assumed any change from the malpractice insurance change until the final vote from the population is done. Would it be enough to move the needle either way, looking out into '04, if it were to pass?

It -- A.J., it's tough to say. In some respects, it would. But you have to remember, there is a tale associated with malpractice claims. It depend ongoing how he is implemented, after that specific date. You have to have the runoff of the older claims. But hopefully it would, but actuarial, it would be interesting to see how that's factored in as we go forward. Obviously an impact in the future just how soon is the question.

A.J., we do anticipate -- we hope this is right, a little bit of a reduction in the unbelievably dramatic rate of growth in the medical malpractice expenses. We've been having in the last couple of years, in the 30s, even 40% range increases. We're hopeful that that is going to start tapering down now in '04, but it's still going to be, you know, well north inflation and probably moves us from what is currently, you know, mid-2% of net revenue, to something north of 3%, particularly when you include the, you know, the QHR piece in there, looking out into '04 and '05. one other question if I could real quick. In your prepared comments, you put the capital structure refinancing on hold because of some strategic opportunities in front of you. I guess I wanted to flesh that out a little more. Is it that the rates have backed up a little bit, so you don't have the sense of urgency? Or are the deals that you are looking at so significant that they either significantly move the needle on what you might need or what the outlook of the company would be if they were to come through?

Rates -- the treasury rates are back up, but the market indications we've gotten for our own debt have really not backed up significantly. We could still do a really favorable transaction. It would still be favorable, the company, even if our own rate indication did back up some. I think -- what we're seeing is we just have got to -- we're looking at strategic and market opportunities at the same time, capital market opportunities at the same time, and we're going to continue to watch those closely. We still could end up doing a transaction sooner rather than later. We'd originally that we might go ahead and launch something right upon the point that we were able to clarify the stats of the relatively large Baptist transaction. We're not doing it right now, but we still could really just about any time between now and May of next year, as we continue to evaluate these opportunities, something could change. We could get clarification on one or two of these, you know, almost any week now.

Okay. Okay. Thanks.

And we'll go next to John Hindelong, (ph) of CSFB.

Thanks, good morning. Since you guys were spun out a few years ago, you've been consistently reevaluating the portfolio. I'm wondering if you are comfortable with all of the assets in the portfolio, and then drilling down a little bit more, you have a cluster of surgery centers in Phoenix. Could surgery centers be a business line item for you and then, I also think a while ago you talked about forming a rural hospital division, so I'm wondering what's going on there. Maybe if you could flesh out for us what you think the portfolio look likes now versus what it might look like in the next couple of years.

Yeah, we've -- we have -- because we manage, you know, the QHR makeup, even though it ranges from big hospitals like the University of Mississippi Medical Center to small hospitals, it is over-waited on more small rural hospitals, which is not really indicative of the majority or almost all of the facilities that we own are joint venture. So, we have set up the sixth division. We've done that in last 30 days. We are looking now at aligning some of the more smaller facilities, and we do have a couple of projects which we can now -- cannot announce, but a couple we have, like, for example, the hospital in Littleton, North Carolina, the new mesquite project, will fall into that category. So we are moving some hospitals and projects into that sixth division that will be run as more of a rural operation than the rest of the facilities within the existing Triad portfolio. So, yeah, we're moving on that. That's been done. It's been organized and it's moving forward at this time. The ASCs, John, I would tell you that we, you know, we are looking at all of the ambulatory surgery issues because of the pressures in the market. I will tell you this, we are not going to be getting into the ambulatory surgery business only to the extent that it is an extension of our hospital business in markets where either we have facilities or where we are developing facilities. So don't look for it to be a developing line of business for us separate from the hospitals, because that's not going to happen. And, we -- what was the other question? I can't remember now.

Well, I mean, I'm wondering if therefore you might sell the surgery centers and redeploy assets that way?

I think we're always looking -- the only places that we have -- the only place that we have surgery centers where we don't have hospitals is Phoenix. And, of course, you know, John, that's changed over the last year, because we sold out, you know, we sold the Paradise Valley hospital to vanguard, and so now we don't have any presence in Maricopa County other than the surgery centers. I will tell you this, if it weren't for our partner, which is our partner out there is Banner, with the 5149 partnership, and Banner is by far the number one provider in Maricopa County. If it wasn't for that partnership with Banner, you know, it probably -- we would have been out of there. So Banner is one of the larger not-for-profit systems in the country, and they've been a good partner, so we've stayed in, but, you know, I would, you know, it is a market where we don't have hospitals. It's something that we inherited, and it's just something that we will have to continue to look at, but it's not -- that concept is not going to grow. As far as the rest of the portfolio goes, you know, we've got -- you know, we've got a couple of facilities. We're like anything else. It's kind of like a bell curve, it's like I told you a couple years back before we did the quorum deal, just being able to spread across a bigger base was important for us from a management standpoint, and we have two or three markets where we're not doing as well as we would have expected or, you know, something has transpired in the marketplace that, you know, changed it dramatically, and I don't want to get into really any specifics there, but to answer your question, yes, there are two or three markets that we're looking at, that are on the potential divestiture list or we have to question whether we're the right ones to stay in that market, because there's some markets we're just not going to be able to fix. So we're looking at that, and I would tell you over the next several months, you know, we hope to rationalize the portfolio based upon that assessment.

Thank you.

Okay.

And we'll now go to John Ransom (ph) with Raymond James.

Good morning, in the first quarter you provided a breakout of salaries versus benefits as a percent of revenue. I was wondering if you could do that again. And more broadly, are you seeing any diminution in the pressure margin from the benefit line? Have you taken steps to alleviate that? Thanks.

Yeah, John, on the benefit side, we were 7% benefits, 7.3%, which was up from 7%, and our salaries and wages went from 34.9% second quarter last year to 34.2%, and I think you'll see that that benefit change was less dramatic the second quarter than it was the first. So I think it was -- we've seen some of that -- come back in the control benefit costs, closer to what we've been experiencing, but that's about it. We did consciously -- we knew our benefit cost was going to go up because we did absorb a greater percentage of the increase in our health benefit costs. We did that consciously to help stabilize our work force, due to the competitive nature of healthcare workers, but, those were the numbers for the quarter.

So in other words, you did see an improvement relative to the -- I think in the first quarter benefits cost you almost 200 basis points of margin?

Yeah, that's right.

So was it --

So it lessened the second quarter.

Okay. And why was there such a large improvement? -- or less pressure on margin this quarter this quarter than the first quarter?

On the benefit side?

Yes.

We started seeing the benefit costs going up, you know, second quarter last year, not to the rate that it reached in the third and fourth quarter but, we started to see some of that developing in the second quarter as we started adjusting our kind of our IB&R on our benefit costs.

This is last year.

Meaning last year

In '02.

We're seeing some of that. We anticipate third and fourth quarter will be pretty normal.

In other words, just an easier comparison, not that the expense went down.

That's exactly it.

That's a better way to say it, John.

Okay, easier comparison. You may have said this, and I'm sorry if I missed it, but can you give me the malpractice as a percentage of revenues quarter over quarter?

Oh, quarter over quarter. It's 2% over our net revenues. Give us just a second, we'll get that -- why don't we go to the next question, we'll get back to you, John, with that. We just need to get that at our fingertips here.

All right, thank you.

And we'll take our next question from Gary Taylor (ph) with Bank of America.

Hi, Gary.

Good morning, everybody. It's actually George Arzente filling in for Gary.

Giving a shift in self-pay in the last couple of months, can you give us a look at your guarantee patient loan program and what's your current reserves there? Thanks.

We started again with the old Triad a couple years ago and had the last facility up in Indiana is implementing that program, so everybody is completely in the program by the end of august, and there is maturity on that is probably going through the rest of this year and end of next year. We currently got about 17 million in balances of about 3.7 million in reserve on the balance sheet right now on that loan program, but, again, we've seen the records, again, this -- not only record AR days but record up-front cash collection again this month, as a result -- or this quarter, as a result, I think, of implementing this loan program.

All right, great, thanks.

And we'll go next to Kemp Dolliver (ph) with S.G.Cowen.

Thanks. A couple of questions. First, minority interest was down year over year. Could you give a quick update on what's happening there?

Yeah, Kemp. The a couple of things, minority interest for us includes what we give back to our partners for where we have the majority stake and our partners have minority stake. One of the ones that is down a bit, the surgery centers in Phoenix that Denny was talking about. That is an urban market where we are feeling some outside pressures from competitors, so we've got a little less performance above and a little less giveback to the minority interest. Also, our Vicksburg hospital has not kicked in as much as we would have expected, but we still feel very good about it, you know, long-term performance.

Okay. And on the taxes, you are still not much of a cash taxpayer, which I think you were expecting this year. Do you expect the cash tax payments to pick up in the second half? Or do you expect you'll continue to run pretty high deferrals?

We're right around the switchover point, Kemp. You're right, we've continued to -- certainly by next year, you should be expecting us to be, you know, essentially fully cash taxpayer. The question is whether we will be in this year or not. Probably will be by the end of the year, but we're literally at that point, just related for others of you listening, the fact that we started out really financially looking like the leverage buyout and had loss carry forwards for a while. We really are just about at the end of that period. So just about any quarter now I'll say you can expect that to transition.

Great. Thank you.

We've got -- I've got just -- there was a question related to the insurance in the quarter of 2003, this quarter, the insurance that was in other operating expense was 2.4%, and in the same time period last year, it was 2.1%. Burke, that does include total insurance. It excludes health benefits.

This is what John had asked?

Yeah.

Yeah, that's it.

Let's go to the next question.

And our next question is with Andrew Bhak (ph).

Two questions. Both related to the operating cost structure. Over the next four to six quarters, can you talk about your expectations for underlying wage rate increases and then your expectations for benefits, the rate of growth and benefits for next year? Secondly, on -- in terms of other operating expense, what your general expectation is for medical malpractice costs and the rate of increase there, thanks.

Okay. Starting on the first question, on the rate of increase, we're starting to see that moderate, the wage increases. So we're looking more in the 3-5% range now in our wage increases, and our benefits for next year, once again, while we have been seeing 20% increases in our benefit costs, we're seeing that into more -- more in the 10-11% for, you know, next year going forward. That's starting to moderate as well. Still higher than general inflation, but starting to moderate in terms of the overall percent increase.

Let me add some color to that, Mike. Just so -- because I think this is a big issue. I mean, I'll tell you, we take off our healthcare hat and put on our employer hat, and you know, where we're seeing the rate increases are just, you know, off the charts is in the HMO side. The -- quite frankly, one of the things that we're going to have to do is we're going to have to really consider, you know, how much cost are we going to absorb on the HMO side with our employers for our employees for -- for them and their families. We're having a heck of a lot better results on the PPO side of the business where we are networking using our own hospitals as the network, and pushing the business, you know, back through our facilities. The costs are just much better, and the -- we're seeing that as Mike said, we're seeing that as those kind of increases coming down fairly dramatically as compared to the HMO side of the business. So, you know, we're like a lot of other employers is that, you know, self-insured PPO business, you know, we we're seeing rates dramatically dropping. The only place we're seeing increasing it kind of off the chart increases are on the HMO side. So as an employer, not as a healthcare provider, those are the things that we're having to take a close look at. On the malpractice front, where -- what were you going to say, Steve Love?

On the malpractice, we looked at the malpractice and a couple of components. One obviously we looked at on the facility side on the QHR side. We evaluate the amount of risk that we'll take on the thought that we will have a self-insurance retention. Given all of that, and looking at the future and talking to the actuary and working with the insurance brokers, we still don't have a total grasp on where it's going to be next year, but probably hopefully it won't be as pronounced as this year, but it could be 30-35%, hopefully closer to the 30% range. We hope to have better feel for this in the next 4-6 weeks as we get more feedback from some of the under writers.

We don't -- we are about 50% self-insured now and 50% premium paid. That is that 2.5% of net revenues, half of that we pay in premiums. We don't renew the premium portion until the end of the year with a couple of modest minor exceptions. Steve Love said there is an element to this, we won't know for a while, but it looks like it's beginning to taper a little bit. And if it stays in the lower part of that range, as Steve Love described, we'll fit that comfortably within our guidance for over the next year. I would also point out, we have increasingly moved towards being self-insured on medical malpractice. We started out in '99 really with first dollar coverage. We've gradually increased the share that is self-insured, up until this current year when we are about 50% self-insured and as Steve Love is suggesting, that could continue to go higher as we do -- just our own risk analysis and get -- figure out what level of comfort we have of being increasingly self-insured which reduces the cost and increases the risk.

Quick follow-up. In terms of the salaries and wages and the dynamic in that line item, do you expect any more improvement in the use of contract labor and then secondly, with the moderation in the rate of increase in wage rates, is that a function of the service worker category versus the nursing or the embedded in that blended wage rate of that also a contract nursing moderation?

Yeah, in terms of the moderation, we still have some room to improve on the contract labor, but there is a point where the use of contract labor is actually, you know, a good and useful tool in terms of managing our business, to handle spikes in the business and some of those things. What we're seeing is less reliance on just staffing basic shifts on contract labor that we saw in the previous year. So while it may continue to go down, it’s not going to be ever eliminated because of those periodic spikes that you contract labor is really good for. That wage increase that I talked about really excluded any contract labor. That was really our own employees that I was talking about, and I think that does reflect a combination of some of the nursing issues coming more in line year over year increases and the general work force that you alluded to, the other Allied professionals in that -- they are more in that 3-3.5%.

Great. So for every major category of cost driver that you've experienced over the last four quarters, it would appear that those trends will be moderating over the next 4-6 quarters. Is there anything else we should be thinking about in terms of extraordinary rates of increase going forward? Or is it looking like just the operating cost pressure sort of naturally, the cost pressure there is sort of naturally moderating?

I think it's naturally moderating. The only kind of issue I would put there in terms of it moves numbers around a little bit, is and Burke alluded to it in his opening comments, the employment of physicians that we've had to do this past year, because of some of the malpractice issues, you know, they tend to come in with a higher SWB as a percent of net revenue by the nature of that type of business, and we had to employ a little over 80 physicians this year compared to last year because if we hadn't done that, they would have had to leave the market, because they couldn't afford the malpractice increases. That's about the only other thing. It tends to not have much of a -- you know, it tends to, you know, move the indicators more than just normal business.

Okay, thanks. Thanks for taking so many questions for me.

No problem.

We'll go next to Adam Feinstein (ph) with Lehman Brothers.

Great, thank you. Just -- two things here. First, can you just comment on, you know, the '04 guidance is such a wide range, it's a pretty big difference in the high end and the low end, the revenue guidance you've given is a pretty narrow range of 5% on the low end, 10% on the high end. So, Burke, can you just comment on what is driving the big range there and you know, the best case what -- you know, what has to, I guess, take place for you guys to hit the high ends, and exactly, maybe, Denny, you can follow up with the house, looking at hospital billing practices with those letters that recently went out, I wanted to get your point of view there. Thank you.

On the guidance, I could just say we're being wimpy and would not tighten you up for '04. You can expect us to tighten up the range for '04 guidance by next quarter, by the time we report our third quarter. We could do it sooner than that. You can probably tell for this year and next year, we've deliberately been a little slower to tighten up reins simply because of slightly grater grieve of uncertainty associated with the flash volumes. It does make it a little bit more challenging to feel comfortable with the tighter reins. We considered tightening it up for '04, and we do anticipate at this time continuing to provide guidance for the '04 year and probably by the third quarter you'll see a tighter number.

On the request for information from Billy Tozan, representative Tozan's committee -- I'm sorry? Well, Represent Tozan's committee, we've had -- we've been working with, obviously, with members of the different associations about complying and with that request, some of that information is not even, you know, we don't even have, so I mean, some of the questions that they have asked for, I think, is probably more reflection of they don't understand and don't understand what they've asked for. I mean, literally, I thought it would be interesting if we requested -- they took all of the information they requested and some of them that we couldn't give, we filled up Washington D.C., probably no government building is empty, so, the -- I think what's happening now is the federation of American healthcare systems and also the AHA we're working with to, you know, to try to get down to the -- cull through and get the specific information they need and what they are trying to accomplish. So it's been a cooperative effort, and they are going through those discussions now, Adam, and hopefully, you know, the amount of information and the specificity of that information is going to be reduced to a workable number of documents. I think as all of you know, we're one of the, you know, 20 or so systems out there that have been asked to participate, not as targets of any investigation, I'll be real clear about that, but more of a reflection of the balance of for profit and not-for-profit and balance of some of the larger systems of the country. So, you know, we're trying to cooperate with them. Again, right now, it's more of a reflection of trying to get it down to -- really, exactly what are you trying to get to, and let us help you in terms of making sure that you're getting the right information and you're not going to end up with the capitol full of paper that you'll never get to the answer or find what you are looking for. So that's where it is right now.

Okay, thank you.

And we'll go next to Charles Lynch (ph) with CIBC World Markets.

Thanks, good morning.

Charlie?

Denny, in the past, through the first half of this year, you've made comments about your discussions with your physicians and their, I guess, disposition as well as comments on office visits as a corollary to what you are seeing in the hospitals. I was wondering if you could give some color if there has been any changes in the tone of those conversations or if you've noticed anything new or if you're seeing support for soft volume trends.

Probably continued, I think. That's what I sigh, least, for the next, two, three quarters and, you know, nothing really that changes that. I mean, they are working hard. It's not a reflection of -- that's one thing that's easier for us than, you know, again, if we were -- if we were overweighed mainly in urban markets, it's hard to see physician loyalty and pick up those trends because there is so much competitive threats in the urban markets. But when you get out into -- you get out into the Huntsville Alabama, or you get into long view, Texas, it's easy to find out where the business is going, are you losing business, are you losing market share, and so we follow that pretty carefully, and one, we see things kind of continue the way they are, two, is that we are not losing market share. So it's not a reflection of -- I think these guys are working hard. It's just -- it's soft. I think it will continue that way, at least for another couple of quarters. As we start to see some trending changes, you know, we'll try to be out on the front end in terms of giving you some good information, the thing to start to cycle back.

That's great. Just one quick numbers question follow-up. Do you have a stat on cash collections as a percent of net revenue?

Yes, we were at 104% for the quarter.

Great. Thanks a lot.

Thanks, Charlie.

And we'll go next to Robert Mains (ph) with Advest.

Good morning.

One question left. When you talked about Las Cruces and what volumes looked like as a range, could you give us a similar number in the first quarter? I don't recall it?

I don't think we did, Rob. We did give the 6-month number to you now in this current release, when you exclude last Las Cruces from the 6-month period, the volume was a decline of less than 1%. We didn't break it out specifically in the first quarter. I hope everybody understands, the reason for that is just if we give out the information on one specific facility, it can be competitively disadvantageous to us with regard to payers, competitors and others in any given community.

Burke, just a clarification, I didn't understand what you said, decline of 1% what?

In the 6th month period. Without Las Cruces an increase of less than 1% in the quarter, a decline of less than 1% in the 6-month period.

Next quarter, that'll go to the same facility so we won't have this issue any more.

Right for at least part of the quarter. So again, talking like sort of ranges, this quarter, ex-Las Cruces was 0 #- to 1%, last year, minus 1 to -2, something like that.

I don't know about that, Rob.

Because mine is .9.

We were minus .8% in inpatient admissions in the first quarter, including Las Cruces.

Right.

It didn't have as big an impact in the first quarter as it did the second quarter.

That's right.

All right. Good enough partnership just wanted a ballpark there.

Next up is Denise Warren with Avondale (ph) Partners.

Good morning, guys. On -- the equity and affiliates went up which I assume relates to strong performance in Las-Vegas. Given where universal has gone with the new facility there, does your partnership extended the new facility there-- how is the partnership with UHS progressing is likely to stay the way it is?

It does include the new facility. In fact, what we've been doing, instead of taking cash draws, we've been plowing that money back into our percentage interest in the new facility. So that -- David, that's what's been happening. Really, we have two major partnerships, that one with universal and they have done really well, and you know, obviously Clark County is a high growth area, and they are doing well in that market, and as a result, we're doing well. The other was with HCA in make con, that has not done well, and we're just kind of track that, follow that, you know, as we go, but -- any way, that's kind of the story.

We get a little bit of contribution in that line item from our 50-50 hospital joint venture with the not for profit in South Arkansas as well.

Okay. Couple other quickies if I might. You mentioned 5ASCs in development. Timing of when those might come on?

Very vary.

Yeah, they vary starting next year. The earliest, I'm thinking is second quarter next year, and then they stagger through the rest of the year, but all of those should be in place by the end of '04.

Okay. And one final things, in terms of the capital partnerships, you didn't mention West Virginia specifically. Is that still moving ahead or has something occurred with that one?

Well, it's in the regulatory process, David. I mean, there is a certificate of need review going on. It really -- really kind of what's happened there is that there is a fairly significant movement there politically to have a regional medical center. That is, and that's the proposal being offered by the -- by West Virginia, university, and so, there is -- we're working with the people in Fairmont who are wanting to replace their hospital. One of the things that we said is that, you know week,' gone down this road -- you know one of the things that we've said is we've gone down the road with these people and we really like the community, but one thing that we can't do, and it's really going to come down to a regulatory decision, we're not going to build a replacement hospital in that community, if the state is bent on developing, really a 200-plus million dollar regional medical facility that would be within 10 miles of the existing hospital. So, I guess the answer is, well, kind of long-winded here, is we're playing out the hand to see what the state wants to do.

Sure.

That's one of four letters of intent that Dan and his team have at this point in hand and, you know, just the way things are, you might expect maybe one of those four to just hit an insurmountable obstacle, kind of the way the averages would work.

We're still looking to be committed on what we've said all along, we want to get on a 3 to 5 a year run rate, and that's really staggered over the next 12-24 months to get on that run rate. So, for next year, for example, the only new hospital that will get opened will be the mesquite hospital out in Nevada. But then, we will break ground in the third quarter, really, in the next 30-60 days, we will break ground on the new hospital in Denton, and we will break ground on our third hospital in Tucson out in the Ore valley. These projects will start staggering on, and then we hope by 2005, to get on that 3-5 a year beginning to come on line, and that's still our plan.

All right, guys. Thank you very much.

Thank you Dave.

Thanks.

And we will take our next question from Frank Morgan (ph) with Jeffries and Company.

Good morning, Frank.

Good morning. You may have answered this. I didn't hear it. Could you comment specifically on volume trends within the quarter? Last time you commented how the trend was over three months of the quarter. Could you comment on the trend on the in and out patients in the months of April, May and June, if not specific numbers, kind of give worse, better, kind of the trend as that relates. And then secondly, your comment as an employer in seeing much more modest increases on the PPO side of your healthcare inflation benefit costs, are there any implications, is there any extension you can make in terms of how you position the company as a hospital provider there? That's it. Thanks.

Okay On the second part of that question, Frank, I mean, the, you know, we are, you know, obviously -- I mean, it's advantageous and frankly, it is advantageous for us as a company, and good for our employees, ultimately, because you know, there is out-of-pocket expense to our employees. It's advantageous to us as a hospital company, though, on the PPO side of the business, because we have a kind of channeled plan to provide most of the services in Triad hospitals, and so, you know, the PPO business is a better business for ultimately for us and for our employees, from a cost standpoint, and from utilizing our facilities. The HMO piece of it is, you know, two, three years ago, it was fine, but with the kind of increases that we've been seeing, it's just astronomical. The rate increases that people have been, you know, forcing upon us in terms of those rates, and it's important because a lot of our -- as you would expect, it's not a big percentage of the total, but a lot of our younger healthier people want to go into that HMO product because, you know, they figure it's kind of an all-inclusive plan, and so we're working through that, but from a pure health provider, it's also better for us to use the PPO. We're going to continue to offer an HMO option to many of our employees, but it's going to be at a higher cost to the employees and their families because the increases being passed on by the HMO companies are literally way beyond medical inflation, way beyond medical inflation. And we just can't -- we can't continue to foot that bill. On the issue about guidance relative to month, you know, Frank, we don't do that. I think we were the first ones -- I mean, we've been, you know, talking about this wasn't a fluke trend and we said that back in January, and you know, we kind of reiterated that -- we see the same thing in the second quarter. I think what we'll do is we'll always be up front and out there relative to appropriate trends, but I don't want to give months and then weeks in terms of, you know, how the volumes look. We just -- it just kind of -- it's distracting and it's -- and I think we're out there far enough to give you good advice in terms of what's going on with us, without giving months and weeks.

Actually, maybe I didn't make it clear. I'm not interesting in monthly guidance going forward, just in terms of the second quarter, how did the months progress there, if you can.

Frank, just don't feel good about doing that, starting that habit of getting out monthly guidance, because next quarter people will want the same thing. We just, you know, what we'll do is we'll try to -- I think I've given you -- told you what I think he is going to happen third and fourth quarter, and we'll just -- if that trend looks like it's changing, if it's material, then we'll get something out on it, but ride now, I'd tell you, things are tracking just about like we thought they would.

Okay. Thank you.

Okay.

and we'll take our last question, a follow-up from Gary Lieberman (ph) with Morgan Stanley.

Thanks. Just real quickly. I'm not sure, do you have QHR revenue and also other revenue?

We'll be giving the QHR information out in the 10-K, which will include the QHR revenue and the QHR EBITDA, including that litigation settlement, and the medical malpractice cost as well. You'll see it there. It's -- in overall EBITDA down from the year before because of those unusual expenses. Other than that, it's tracking where we have expected that it would. Other than that one unusual set of expenses.

Gary, the total other revenue number for the quarter was 56.6 million, and that's actually broken out in the operating data table between the patient and the non-patient. And QHR is included in that 56.6.

Okay, thanks.

I think that was the last question, so, I think what we'll do is just wrap up and -- and it goes back -- let me just say what Frank's question was because I know there has been a lot of discussion about that even on some of the other companies is that, I know people are trying to get a handle on this kind of trending on this volume, and we will try to give you some guidance on that thing, if something changes from kind of what we think is going to happen over the next quarter or two. So just bear with us on that. I mean, we're not -- if we see things moving in a certain direction, we'll certainly follow up with you guys and let you know if things are, you know, moving back one way or the other. Just tell you that, you know, kind of in conclusion, I am proud of the effort that our operational teams did, and this is, you know, it's been a tough couple quarters in terms of managing through some of the softness and keeping focused and I think the majority of the cases our teams in the field have done a really good job and we're appreciative of that. So I mean, I think if it shows anything, it shows that sometimes you've got to hunker down and manage through. This business has always been fairly cyclical and moves in different directions and just being able to manage through the process. I think the guy has done a pretty good job. So, you know, on the development front, you know, we're still committed to kind of that 3-5 and that's what we're working on and we've got probably more opportunities than we've got available space to do some of these things. So you know, we're going to be disciplined and focused and making sure that we grow in the right way. So, that's kind of the story from this end, and we feel real good about the direction of the company, and feel good that, you know, we're accomplishing some of the objectives that we set out for this year to accomplish. And we appreciate your being on the call. We appreciate your interest in our company, and we look forward to talking with you soon. Thanks for joining us.

Thank you. Once again, that does conclude today's teleconference. We do appreciate your participation. You may disconnect at this time.