Community Health Systems Inc (CYH) 2004 Q2 法說會逐字稿

Good day, everyone. And welcome to the Triad Hospitals, Inc. 2nd quarter 2004 earnings release. Today's call is being recorded. The discussion today may contain so-called forward-looking statements which are statements that do not relate solely to historical and current facts. These forward-looking statements are based on current plans and expectations of the company and are subject to a number of uncertainties and risks that could significantly affect such current plans and expectations as well as the future financial conditions of the company. Certain uncertainties and risks include the competitive nature of the health care business. The effect of the various public and private payers to reduce reimbursements to providers. The positive changes to government programs that further limit reimbursement. The interactment of various federal and state healthcare reform legislations, the changes in general economic conditions. As a consequence to these uncertainties and risks, certain plans, anticipated actions and 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 are not -- you are cautioned not to rely on such forward-looking statements when evaluating the information presented here or in the company's press release. This call and webcast is property of Triad Hospitals, Inc. Any redistribution, retransmission or rebroadcast of this call and webcast in any form without express written consent of Triad Hospitals, Inc., is strictly prohibited. At this time for opening comments and introductions I would like to turn the call over to Miss Lauren Baldwin, Director of Finance and Investor Relations. Please go ahead, ma'am.

Thank you. Good morning and thank you for joining us. With me this morning are Denny Shelton, our Chairman and CEO, Burke Whitman our CFO, Mike Parsons, COO, Don Fay, our General Counsel, Dan Moen, Executive Vice President of Development, Bill Huston, Senior Vice President of Operations, Steve Love, Senior Vice President and Controller and Pat Ball, Vice President of Marketing. Before we start, I want to mention briefly that we will be holding another investor day this year. It will be on September 9th here in Plano during first half of the day and we will also have a cocktail reception the evening before on September 8th. You can find the details on our website and you can also contact me. And now I will turn the call over to Burke.

Thanks, Lauren. We issued a press release last night with our financial results for the 2nd quarter. We do intend to wrap up this quarter's call in a relatively brief one hour because another hospital company is scheduled to conduct its own earnings call at that time. So we will limit our opening comments in order to leave time for your questions. We reported revenues of $1.09 billion adjusted EBITDA of $150 million. Diluted loss per share of 7 cents and diluted earnings per share from continuing operations excluding refinancing costs about 56 cents. Now our earnings per share 56 cents and included two positive items and two negative items that together resulted in those significant back to EPS. The positive items were reductions in our practice in preacquisition liability. The negative items were litigation expense and a small loss on a sale. I will point out some of the key performance indicators and how it's changed from the prior year. Same facility admissions increased 2.6% and that's on top of the 2.4% increase in the prior year. Now patient revenue per adjusted admission increased to healthy 6.5% due in large part to some favorable managed care pricing increases in selected markets. Same facility revenues increased about 10.1%. And total revenues increased 21.7% based on prior year results being reclassified to reflect the discontinues operations. In operationing expenses as a percent of net revenue, we achieved improvement in salary and benefit expense and also in our other operating expenses.

However, as expected, we experienced higher supply expense and higher provision for doubtful accounts relative to the prior year. Our provision for doubtful accounts or bad debt expense was 10.6% of revenue for the quarter, up from 8.2% last year. The adjusted EBITDA of $150 million, that represented a 7.5 increase -- 7.5% increase over the prior year and EBITDA margin was 13.7% lower than in the past, primarily due to that increase in bad debt expense that we experienced over the past year. In fact, EBITDA margin if not for the increase in bad debt expense as a percent of revenue would actually have improved by half a percentage point over the prior year. Diluted earnings per share of 56 cents from continuing operations excluding the refinancing costs represented a 9.8% increase over the prior year. Cash flow from operations excluding cash interest and cash tax payments was a strong $207 million, up 20% over the prior year due largely to good cash flow actions especially of receivables related to hospitals that we acquired toward the end of 2003 as we had expected and discussed in the last quarter. You ought to note that we made an unusually high cash tax payment in this quarter, but we expect that number to be lower in the 3rd and 4th quarters and we expect for the whole year that our cash tax payments will be roughly similar to the income tax provision on our income statement for the whole year. We did reiterate our guidance for 2004 diluted EPS from continuing operations excluding refinancing costs of $2.33 to $2.41. This incorporates the 56 cent from this quarter and 64 cents from the 1st quarter with the 1st quarter adjusted to reflect assets reclassified now as discontinued operations. We continue to expect bad debt expense to be less predictable than some of the other items.

But we currently estimate it will remain roughly in the low to mid tens as a percent of revenue. In a separate press release last night we announced our plan to implement a new comprehensive self-pay discount program in the 4th quarter. Under that, our hospitals will offer every uninsured self-pay patient a discount and those who have limited ability to pay may then apply for further discount. We currently expect the self-pay discount to result in no significant net impact on earnings per share but obviously we will monitor and report on that as we implement it. The company now has 51 hospitals owned or operated. That's reduced from 54 in the prior quarter and reduced from 57 at the end of 2003. As tat asset count demonstrates we have continued to rationalize our portfolio of hospitals even while growing the company at a manageable and sustainable rate. In closing, since spinning off as an independent company five years ago this quarter, Triad has led the industry in physician satisfaction improvement, admissions growth, earnings growth and return on capital growth but we continue to have much more growth ahead of us especially in earnings in returns. Looking beyond 2004, we continue to project sustainable earnings growth at least mid teens percent for several years through a combination of continued, methodical delivered improvements to internal operations augmented by disciplined incremental external growth of 3 to 5 additional hospitals per year that we can acquire or joint venture at favorable valuations at markets where we have a competitive advantage. At this interim point in our history, we believe more than ever that our strategy of collaboration with physicians, communities and other private hospitals positions us particularly well for sustainable performance and growth for a long time to come. Let me turn the call over to our COO, Mike Parsons for some further opening remarks.

Thanks, Burke. I will once again just take you through the income statements and go through some of the highlights starting with our revenues. Patient revenues were up 10.1%. That breaks down between volume and rates 3.4% volumes, 6.5% rates. The volume adjusted admissions were up 3.4%. On the inpatient side, inpatient admissions were up 2.6%. Inpatient services track that pretty closely at 2.7% increase in our inpatient surgeries. Outpatient, we continue to have a high outpatient mix. Outpatient surgeries in particular were up 5.4% for the quarter. Overall outpatient visits increased just .7% and as we mentioned in the past, that's kind of the average of a lot of moving parts on some of our outpatient visits. Particularly this quarter looking year-over-year the main thing is we closed a couple of and sold one outpatient lab last year and closed a couple of our outpatient centers. Once again, those are the lower acuity, lower revenue visits and so the overall outpatient revenue and outpatient mix continues to be pretty strong. On the rate front, on the managed care side, same as we what have been saying, still looking at our managed care rate increases in that 5 to 7%. I'm sure you will note that our net revenue for adjusted admission for the quarter 6.5% which is a little higher than our previous 2 quarters year-over-year. As Burke mentioned in his opening comments, some of that was due to some of our markets having some unusually good negotiations go through and some of the markets that had the high admission increase also had some strong rates. But the other way to look at it, if you look at our 1st quarter and net revenue per admission, our 2nd quarter was 1.2% higher than our 1st quarter. So it's pretty much tracking on the run rate we expect this year.

Salaries, wages and benefits, we dropped as a percent in that from 41.2% last year to 40.3% this quarter. Breaking that down, salaries and wages dropped from 33.3% last year to 32.6%. A 70 basis drop there. Benefits pretty much stabilized. We were glad to see that these last couple of quarters. Last quarter, 2nd quarter, 7.8% of net revenue this quarter came in at 7.7%. So about a 10 basis point drop there. Looking in some of the key areas in salaries, wages and benefits, as I said, benefit costs have stabilized and in fact ticked down a bit. We did continue to see a slight reduction in our contract labor as a percent of our total salaries wages and benefits year-over-year. Last year contract labor represented 3.3% of salary, wages and benefits this year 2.1%. As we said last quarter, that is starting to normalize around the 3% of salaries wage and benefits as you will always have some contract labor and in fact that's healthy. That was about a 10 basis point help in our year-over-year comparison. And another thing that helped our -- led to our reduction in our salaries and wages was now that we had a lot of those physician practices in the queue for 6 to 9 months, we were seeing some improvements and are managing those practices so that actually had a basis point improvement in our overall salaries, wages and benefits looking year-over-year and the remaining 40 basis points improvement came from really just managing our acuity and our salary costs against the increase in net revenue to where we picked up some economies there. Supply cost increased year-over-year from 15.6% to 16.1% this quarter. But you well know that I think that 16% is around where we've been running and that's our more of our current run rate. Last quarter it was 16.3%.

I think that the higher acuity and some of the surgeries and some of the technology costs that we we've experienced these last 6 to 9 months is what is reflected in that number. All other, as Burke mentioned, we had a drop from 40 basis points in the all other, I know you saw and probably read in the earnings release we had some moving parts in there that pretty much canceled out in terms of extraordinary items. So really the 40 basis points improvement came from the higher fixed base nature of a lot of those all other cost categories were able to see improvement in margin with the revenue increase, particularly contract services, utility, property taxes, saw 10 basis improvement in all of those just because of the fixed nature of those expenses. As Burke mentioned, bad debts were up for the quarter. Overall, though, I think we felt pretty good in terms of the cash collections. The overall self-pay was very consistent with our overall payer mix. We saw no deterioration in our self-pay utilization. So really just kind of, you know, imagine that on a day to day, month-to-month basis. But overall, I think it was in a manageable level. That's about it for me. With that I will turn it over to our Chairman and CEO, Den Shelton.

Thanks, Mike. Good morning, everyone. Just a couple of brief comments. Burke alluded to in his opening remarks that reduction in number of facilities from 57 really at the beginning of the year down to currently 51. And that's pretty consistent what we've told people over the last two or three quarters that we were going to continue to rationalize our portfolio as we added facilities especially at the latter part of last year that we would begin to look at strategically facilities that didn't make sense relative to long term future within the organization. And we're going to continue to do that. I don't think at the pace that we have seen over the last couple of quarters but probably consistent with as we continue to say that 3 to 5 additional hospitals per year that we will, you know, look at divestitures of maybe, you know, 1 or 2 hospitals each year and that's kind of what you can expect I think for the next 3 to 4 years. Real pleased with the operational performance. I think the operational team has done a good job of managing cost and improving productivity and working with our physicians and local boards to make sure we are balancing that with sustained good quality care in the hospitals that we serve and in the communities we serve. We are at a point now where I think we hit some pretty good strides in that regard. The bad debt situation, I think we've said is going to have some fluctuation in it. We think that we are, you know, very conservatively reserved for, you know, our bad debt and handling of our bad debt. And one of the things we want to do is we want to get through this next quarter and have a year under our belt that when we begin to see some of this bad debt problem really manifest itself in the industry and particularly in our hospitals. And I think it will give us a chance by the end of this next quarter to take a real, you know, good solid look at what's transpired and then, you know, reassess at that time our reserves and how we were treating bad debts but feel like that, you know, you're going to see some slight fluctuations in that as we have seen in this quarter. But very likely could, you know, could go down as it's gone up.

But we think we are in the ballpark there and don't anticipate that it will be, you know, a significant driver of anything negative on a go-forward basis. But something that we're going to continue to monitor. On the development front, we continue to have a significant pipeline of nonprofit relationships throughout the country. Working with nonprofit organizations both strategically and on specific capital projects in markets where, you know, having a strong partner, having a strong nonprofit partner, you know, makes sense for us on a go-forward basis. We are real pleased with that. We continue to get calls almost weekly and we are working with a number of organizations. They take a lot of time in terms of building those relationships and understanding each other. We feel good that we are on the pace to kind of grow the company in a very reasonable, slow, methodical way and not jeopardize, you know, the culture that we established in the relationships we've established in the communities that we are serving. So we feel pretty good about where we are operationally and continue to -- continue to watch the bad debt. And that's kind of the story for the quarter where we are year-to-date. With that, let me ask Wanda if you would queue it up and let's get the questions and see if we can respond to comments or questions that you may have.

Thank you. The question and answer session will be held electronically today. If you would like to ask a question, you can signal us by pressing the star key, followed by the digit 1 on your touchtone telephone. If you are using a speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. Once again, that is star, 1 on your touchtone telephone to ask a question. And we will pause for a moment to assemble the roster. Our first question will come from Lori Price of J.P. Morgan.

Okay, great. Thank you. We were hoping you could reconcile something for us. In your release you say that your allowance for doubtfuls includes an amount beyond what the company's historical experience would require to reflect potential growth in uninsured receivables. And also further deterioration in the collectibility of those receivables and that seems to imply there is a cushion in your bad debt reserves and if that's true, I'm wondering what caused your bad debt ratio to rise sequentially.

Well, there is -- we got the same sort of $14+ million amount that we put in that's over and above what all the analytical tools that we use would suggest we need. That's with a we put in place a year ago and we left that there. And we initially thought we probably would feel most comfortable leaving that in place for one full year, Lori, just to get through four full seasons. You know, our hope and expectation will be at some point that we will determine that's no longer needed. There is not a risk of further deterioration. As to some of the specifics this quarter, Bill, do you want to address?

As far as this quarter goes, you know, we had a couple of things that kind of caused the uptick from where I think we had expected. One, as you know, we had a number of acquisitions that we did back in the latter part of 2003. And in those acquisitions, you know, we are having to develop our working capital. We didn't bring our working capital across. At this point we are still going ahead and booking at what their experience had been prior to our acquisition. We aren't showing any improvement in that. I think we will -- it will take us probably a year to go through the complete cycle to really understand kind of what we call our AR lookback will tell us what their experience is. Right now that's the only thing we know to do. And their experience has been much above what our company average is. So as a result of that, that's causing the slight uptick in terms of where we would expect to be. Also we had some physician practices and we did see a slight uptick there as well in the bad debt. So some of this is -- and we had, we started to mould them into our collection series process. So I do expect to see improvement in those acquisitions before. But right now until we know what that is, that's the way we're going to continue to keep booking this, and again, that's above our average. What the company average is, so that's what's causing the issues in this quarter.

Lori, I think if you across the board, Denny mentioned we do feel we are appropriately conservative with our estimated bad debt expense based on the piece Bill is talking about and allowing for some potential further deterioration and, you know, we hope we will feel by the end of the year this is finally gotten to a new level and we won't feel there is additional risk of further deterioration.

Okay. Can I guess then, what was your same store bad debt ratio changed sequentially? Was there a change up or down on a same store basis? And also, what did happen to your self-pay collection rate in the quarter along with, you know, any changes in bad debt expense related to uninsured versus, you know, managed care, co-pays and deductibles and residual amounts. Is there any material change up or down in those things?

In terms of the same store, we did see a little bit of an uptick, we did have one particular state where last year changed Medicaid eligibility issue. As a result of that, we have seen a little more self-pay in that particular state and we had a lot of presence. But it did have a little bit of an issue there. In terms of our self-pay, I mean I think the thing that we have been pleased with is when you look at our admission growth overall, it's actually not been as significant in the self--pay arena as the overall increase has been. Then I think we continue to see from our overall collections of self-pay is that we seem to have stabilized that. The other thing on bad debts that I think we were pleased with is that, as you know, Texas is where we had our biggest challenge. I mean Texas bad debts run, you know, quite significantly higher than what our company average is. We had almost -- we had 2 quarters now, that stabilized. So gives us a lot of comfort there, at least going forward, if we can work these new positions, new acquisitions into our process is that we feel pretty good that we think hopefully we can stabilize and be able to predict more consistently going forward what bad debts will be.

That's perfect. Thanks.

Thanks Lori.

Up next we will hear from Darren Lehrich with Piper Jaffray.

Thanks. Just a couple things here. Good morning, everyone. Are you guys seeing anything out there at the state level with Medicaid and I think you mentioned eligibility changes in one of your states. If you could comment a little more on that. And then with regard to Arkansas, I guess just some commentary would be helpful with Blue Cross/Blue Shield and whether you are seeing progress there in gaining broader access to that pair and could you just help us understand where the holes are at this point in your Arkansas network from a contracting standpoint. Thanks.

Yeah, Darren, you know, I don't want to say too much but we have and continue to have more discussions with Blue Cross/Blue Shield with Arkansas. We have half our facilities and half our facilities not participating in the main PPO product in Arkansas. And those discussions continue. And I would say this, it's not all one sided. It's not all can we get into the plans? We had some areas of the state, for example, northwest Arkansas where the major employer in the market which happens to be Wal-Mart, you know, has adjusted their plans to include our hospitals in that market. And this was the end of last year going into this fiscal year and calendar year. So we have been making progress there in several areas in Arkansas. Of course, that's a significant area for us because we have three facilities up in northwest Arkansas. And so we continue to make progress regardless. But we also want to continue to try to work with Blue Cross. We have a good relationship with them and we are a major provider in several markets with them. We were continuing to have those discussions and continue to find ways that we can work together. I'm optimistic about it. These things obviously don't happen overnight. Because there is a lot of relationships and a lot of history especially in some of these new facilities that we are getting to know. So I would say I am cautiously optimistic that we will continue to improve our relationship with Blue Cross and continue to find ways to work together in the state but I want to make clear that we do work with them and in markets where we don't work with them, we are making progress regardless. So that's kind of where we are in Arkansas. Bill, you want to comment on the other?

Well, I think we've seen a couple states that have made changes over the last couple of years. I have not heard any others that we consider to be too much at risk concerning eligibility changes, I mean that's subject to change. But at this time in time, I think the ones that we had in the last few years that's been pretty much all that we all think is experience.

We are less than 5% of our net revenue right now is Medicaid. We do expect that portion over the rest of this year to be looking at slightly lower overall reimbursement. Probably down 2 to 3% compared to the prior year and Texas is one in particular that Bill is talking about where the eligibility was made more challenging and still is. Doesn't appear to be getting worse, though, and there are some economic reports as you know are suggesting we may be seeing stabilization to a number of the states' budgets which could bode well for Medicaid, kind of stabilizing over the next year or two.

Thanks a lot.

Okay, Darren. We will try to limit folks to one question since we do have just the one full hour today. So appreciate if you all could try to squeeze it into one question that would be great.

Thank you. Up next we'll hear from CS First Boston, Kevin Berg.

Yea, do you have ten in the hospitals are operating so far now that you had them for a little bit of time and in terms of improvements that you are seeing and the where the opportunity is to get greater improvements toward the company levels.

I think overall, Kevin, we are pleased. We think we made real good progress up in northeast Arkansas and Jonesboro in terms of relationships, especially in the medical community there and we work in very well in that market with the northeast Arkansas clinic there and some of the independent physicians in the marketplace. I think we were making progress in Jonesboro. Too early to tell. I think the relationships there are good and getting better and we feel good about that market long-term. We have been really pleased with relationships in Russellville, Saint Mary's, just a great group of physicians. And I think there was real uncertainty there because they had a number of physicians under employment agreements and those agreements were in question. There is a lot of turmoil with the doctors when we first went in there. I think we stabilized that. We have a good management team on the ground there with I think now good relationships with the medical community. And we've stabilized some of those contractual concerns with new contracts and so we are feeling good about that. Got new management team in Searcie, and think we did just approved a new emergency room project there to try to improve some of the outpatient services and access for people in the community. That hospital is actually doing better than what we expected. Probably the area that we continue to struggle a little bit is in Hot Springs. We've got some real challenges there. It's a really nice hospital. Got a great medical community. We stepped into some community and physician relationships that had deteriorated. And we think we were making progress there, too. I don't want to make it sound negative because it's not. We have a really good group there. A good management team. It's going to take longer there. Overall pretty pleased with the four hospitals we picked up with Arkansas. Making real strong progress in two markets. Stabilized one and one we're not where we want to be but we are making progress.

Okay. Thank you very much.

Up next we will hear from Ken Weakley with UBS.

Thank you. Good morning, everyone. Burke, I want to ask you about your -- you had mentioned about rising returns about investment going forward. As I look at it, that can either be driven by improving margins or improving say invested capital returns. So on the one hand improving margins, given me some sense of whether the two or three attributes of getting the margins in the, say, mid to high teens at 15 to 18% and how likely is that in the next couple of years and then I guess more importantly, you've got invested capital returns because that seems to be the bigger driver to returns on investment sector. What do you think your capital spending outlook is going to be and how much do you really need to keep spending to get that productivity out of your asset base? Thanks.

On the market front I think the last couple quarters have kind of shown what we have been saying in terms of improvement in margins. Once again, the bad debts was a little bit of a wild card in the margin -- in the march toward where we wanted to be with the margins. When you kind of neutralize the bad debts I think you will see pretty good improvement and most of that improvement is coming from managing our growth. Particularly the salary and wages line and the other controllable expense line where you are able to achieve some of those economies and as we get program growth, see margin improvement as you recall, some of the programs we put in whether it be cardiac program at a hospital or orthopedic program, you tend to have some high fix costs to start those programs and when they start to get volume, you get to see that economy. That's where our margin improvement has been coming from and we expect to continue to see that.

Do you think margin -- will we be able to see margin improvement if bad debt stays in the 10% range, or will it be more difficult without a major improvement?

Bad debt is the wild card to that margin improvement. Outside of bad debt we expect to see that and bad debt should stabilize, too, around that 10 to 10 1/2 that we talked about earlier. So with that stabilization, I think you go back and you see the other metrics have improved along the lines of what we expected.

If bad debt stays somewhere in the, you know, low to mid tens, we do expect to have gradual, methodical improvement to the margins. As we always thought. But you won't see us do that dramatically. We could do that, but our belief is that we are setting ourselves up to more sustainable long term improvement in growth by doing it methodically, deliberately in collaboration with the physicians in the communities. But there is room and Denny was going to address the other piece.

The capital piece, Ken, is that one thing we have done, I think that we are recognizing that we have from the fiscal plan from the equipment needs and just patient flow areas that we were getting the hospitals where they need to be. And our back early on, those first 3 or 4 years we had a appetite for the capital basically to get the hospitals to the service levels that would sustain the quality of care and attract the kind of quality physicians and staff we needed to sustain long term growth. And I think we have accomplished that. We are getting to where we need to be. And so a lot of the kind of internal capital needs are going to moderate. And especially over the next couple of years. So we -- what we expect to see is kind of this spending on capital for the internal, the existing facilities that we operate to begin to decline. And so one of the things that makes us optimistic is that really the bulk of the capital that we got identified, we can pull back on if we choose to do so. We could either go to the high end of what we kind of said 3 to 5. We could go to maybe 5 more aggressive projects if we wanted to if we feel like we need to, we can pull back on that to 3 or even less. And so I think we probably for the first time in the 5+ years of the company we are at a position where we can either, you know, we can choose to take our cash and invest it in the future of the company based upon good projects and, you know, pick our spots because the capital needs of the existing facilities is moderating.

The other good thing that affects returns on projects is we continue to find ourselves increasingly in a position to be selective about what we are doing externally. Dan Moen and his team are seeing far more project opportunities that appear to be value added, that is that we believe would and should generate return well in excess of weight average cost to capital than we feel comfortable doing. We are finding ourselves being able to continue to be selective and even with some of the stronger pricing on acquisitions like that really is not effective a number of things that we are looking at because we tend to be doing projects which we are particularly well positioned, more often than not uniquely well positioned to have those opportunities.

If we were going to just run 51, 52, 53, hospitals in that range, we're probably -- our capital needs for basically routine capital and capital to sustain community needs, meaning -- meeting community needs on development projects, you know, putting in a new women's pavilion or adding a cancer treatment program or whatever, those kind of things but all internal capital is probably in that kind of 200 to 2 1/4, 225 million range, that's kind of where we are. Any capital in excess of that as we go forward is really geared more towards outside development expansion. And that's what we have to weigh in balance as we go forward.

Thank you.

From Morgan Stanley we will hear from Gary Lieberman.

Hi, Gary.

Hi guys. Good morning. This thing with the bad debt theme for a moment. Your bad debts increase sequentially about 40 basis points. There was some mention made of the acquisitions. I don't believe you did any acquisitions in the quarter. So perhaps it's just me, but I'm a little confused about how the acquisitions are impacting that trend sequentially.

I would say again, just because of the fact when we look at how we will book bad debts on those facilities from period to period, we got to the point where we went ahead and booked more what our experience had been last year versus kind of where we were a little bit in the 1st quarter. We were trying to make sure that we were at the reserve.

These are acquisitions that we executed in the 4th quarter, Gary that you may remember. We acquired and added seven facilities toward the end of the year. This the first year in which we are managing those. What bill is saying is our expectation is we will do better over time. But we were making conservative assumptions about the collectability of those receivables at this time based on their historical experience.

To get a run rate, we were 120 to 180 days into the experience factor and we don't feel like we have enough information on a look back because we're usually looking back over a one year period of time and we only have 4 to 6 months of data. They have been looking at a kind of historical performance and we believe that historical performance is going to be better than what it was. But we were trying to get the history to prove that until we get that year rolled up underneath us, we've taken an more conservative approach and book to their historical data or historical approach rather than under our new procedure. At each quarter, each month really that goes by, we were getting a better handle on it and that's where we are.

And again, from the 1st and 2nd quarter again as we mentioned also, we had physician practices that we had. We had additional bad debt there. And then also again we spoke to particular states that we had some eligibility issues back in the little part of 2003. So we did see some deterioration there. I don't want to say it's all those it's a combination of two or three areas that had the impact of that 40 basis points.

All of this goes to why we are not expecting -- there is risk around bad debt but we aren't expecting it to go up 40 basis points every quarter, quarter to quarter to quarter. Our best estimates is that it's somewhere in this low to mid -- tens.

That's very helpful. If you can give a little more detail around what I guess what the issue might have been on the physician practices.

We added some. Not that it's our business model to do so, but largely driven by the malpractice crisis really that some physicians have had. We actually added some physician practices in the last --

And bringing them on, you bring on their receivables as well. And so then we have to start managing those. Those tend to come in without as much of the rigor that you would you would expect on the normal receivables. So it takes us a while, once we take those on to get them back and get those receivables in line. When we just look at the actual increase in accounts receivable attributed to the physicians, it's at a higher percentage than our overall company. So that's just something that's part of the businesses acquiring the practices and getting them in line. That's really just a function -- those being higher than our company on a percent of revenue.

Great, thanks a lot.

Don't want to give specific numbers. It's couple million dollars worth of increases is straight from the increase in physician practices.

Thank you.

From Lehman Brothers we will hear from Adam Feinstein.

Great, thank you. Good morning, everyone. A couple questions here. When I look at the reserves on the balance sheet, they are up about 300 basis points relative to the March quarter. So just wanted to see if there was anything in there that would have I guess skewed that number. I know some companies have changed some of their accounting policies and I want to see if there is anything there. And then also just the length of stay was down in the quarter and I want to see what was driving that. Thank you.

Let's say, you know, I think some of that is and some of the long-term care stuff that has been moving out of the facilities, we have been seeing a shorter length of stay here. Over the last couple of quarters, but nothing dramatic, Adam, in terms of stopping service and those things. It's really more just ratcheting down some of the utilization. Yeah, we had quarter-over-quarter we had actually closed or sold a skilled nursing facility where some of that length of stay was higher than our average.

Nothing really put your finger on.

Nothing really dramatic pops out.

And I don't know that the issue about the reserve.

What was the first question? We aren't sure --

As I look at your allowance or doubtful accounts as a percentage of your receivable balance in the quarter, it looks like it was up about 300 basis points relative to the March quarter. So just trying to reconcile that because it would appear you boosted reserves here another quarter which would help explain the increase in other bad debt. But I know sometimes the reserves on the balance sheet can be skewed by the day policy for when AR --

I that I lot of that, Adam, is related to the collection that we did of some of the Medicare, Medicaid receivable, government receivables from those acquisitions. The tenant facilities that we bought in particular, we didn't acquire those receivables so we actually kind of built up our own book of receivables. While -- and collected some of that. But those and those obviously didn't have very high reserves associated with them back in the last quarter. Because we had a high degree of confidence we would be collecting those receivables.

Okay, thank you.

Make sense?

Okay.

From Avondale Partners, we will hear from David Dempsey.

Good morning, guys. Question for you on the outpatient surgery, obviously that volume is strong. Do you segregate it at all between the growth from outpatient facilities in the hospitals versus ASCs and the regarding ASCs, you talked about six ASCs on the boards for the rest of this year, what's the status of the development so far in that regard?

Okay, Dan. The -- we do kind of separate our banner ASCs separately and I can tell you, I think we have been saying those have been relatively flat because of the competition in Phoenix. Our hospital base outpatient surgeries are actually up higher than the number reported. So we are seeing good, strong hospital base surgery centers. I mean outpatient surgery growth. And one of the reasons why that net revenue is pretty high associated with the outpatient factor now as well because of that. In terms of the new development, we are kind of in the middle of that now. Lauren's going to give you the details so I don't misspeak here. We have opened -- we opened the one in Hattiesburg this past year. We have Carolina -- yeah, we have several that are coming on board. I see about five of them will be coming on board here in the next 2 quarters. We opened 1 in Las Cruces that we talked about. Those are kind of being incorporated into our numbers as we speak. Once again, back to the rather than the kids stay at home kind of approach, we were doing the surgery centers with our physician groups instead of losing them to some of the competitors.

David, probably one way to look at it is either in construction, just opened or under development will -- we will be adding eight new ambulatory surgery centers in this -- in some stage of development or at the point of opening.

Okay. Thank you very much.

Our next question will come from Jim Link with August Partners.

Hi, good morning. My question is just generally on pricing. Renewal of contracts. I think what we are seeing across the three companies that reported last night was that pricing seems to be quite strong relative to expectations. I was just wondering if you could flush that. What's driving that? Are you preparing for a market basket minus scenario coming in '06? Are you factoring more in for higher deductible plans where cash collections are tougher? What's driving the better than expected pricing?

Well, I will take the managed care piece. I think the pricing is pretty much what we have been expecting. I think we have been saying for the last 18 months that 5 to 7% range and I think that has -- we were pretty much on track with that. And as we said before, that, you know, you go up and down based on not only acuity but some of the add-ons that the contracts have like high cost factors and those things are specific to the kind of utilization that you have. So we then -- we have been comfortable with our price increases on the managed care side. It's still a fight just to get increases. But we have been successful getting those. In terms of the market basket, Denny, I think you had some thoughts on the market basket on Medicare?

I think it's too early to make a call on that for 2006. I gotta tell you, I'm feeling better today than I was probably 2 to 3 months ago about it. And I -- and as you guys know over the past couple of years, we have been out front and we thought whether it's volumes or bad debts, we have been out front telling you when we thought something was on the horizon and when something we thought might be negative or even positive, that I am pretty neutral right now. I'm not convinced there is a BBA-2 coming. There has been a lot of work done in the congressional front in terms of education. There is a few people out there pounding the drums about we have to take it out of provider's hides and other people out there saying, no we are not. And there are a lot more people in last few weeks standing up and saying no, we're not than before. I'm kind of cautiously optimistic that with the state of America's Community Hospitals, that I'm not convinced that we are going to get plunked in terms of any significant reductions in the market basket. So too early to tell, Jim. We will follow closely. We are actively involved. Mike and Burke are both on the board. Mike is the Chairman of the Federation of American Hospitals this year. I'm on the board of the American Hospital Association. And just went on to the executive committee. So we are staying, all of us are trying to stay pretty active in terms of what's going on that front. And we will keep trying to get a better feel for it. We get a feel one way or the other we will certainly pass that on. But right now I'm not convinced of that.

Thank you.

From Merrill Lynch, we will hear from A.J. Rice.

Thanks, everybody. Two just quick clarifications and a question. You made a comment about being adequately reserved and reassessing after you get one more quarter under your belts on the bad debt situation and your reserve policy. What would you expect if you stay in the current trends are you thinking you will actually be able to reverse some of the reserves you took last fall? Second, there has been several times you comment about the Medicaid change and how it impacted your results when they cut out eligibility. Does that happen immediately so that once you annualize that you will start to see some benefit there at least on the comps? Or is that a gradual thing that just continues to perpetuate? After those two clarifications. My big question was on the charity care policy. When you start to do that in the 4th quarter, what shall we expect? How much of an impact on revenues will it have? How quick will that flow through the numbers? Is it going to be a gradual ramp up or will it be something that's fully effective in the 1st quarter that goes into effect.

The last part first. Our expectation is that we will implement this across the company in the 4th quarter. We have one state that still presents regulatory obstacles. We hope to get over that. We don't know that we will. It's an issue that may even require legislative action. Other than that state, we expect to implement it across the board and to hold your hand through the impact it could end up being a net slight positive. It could be a net slight negative. Our best estimate all right now so far suggests it will still be roughly neutral. On your first question, Steve, you want to share a percent?

As you know, we go through the methodical look back that we do that we talked about before. And we wanted to go through one full year so we can look at one full year of what were the questions related to the uninsured? Where were we going to be? To answer specifically your question, as we move through one year and we do the look back analysis, assuming the bad debt is stabilized like we hope it will in that 10 to 10.5% range, it will be appropriate to change our estimate accordingly. So, yes, if there was a calculation to support it after we have done a detailed review we wouldn't need the entire amount of the reserve. It will be reduced according to match the estimate.

On the Medicare, that typically happens with each state's fiscal year which is typical most states in July 1. It's immediate. As soon as they change the eligibility amount and that happens immediately and of course for us that will kind of flow through and may take you 6 to 9 months for it to kind of flow through and is finally going to impact your financials.

Or just on your comment, Den, I asked, I guess the others are implementing their charity care, it's sort of somewhat dependent on the patient's filling out the forms and so forth. Will yours be similar to that, somewhat dependent response of the patients?

It's ours -- you know, each company probably is unique. Ours will be -- we were actually calling it a self-paid discount program and what it will have is we will offer on a blanket basis a discount that is unique to each market, each market situation is different. But a discount that will be offered to every uninsured self-payer regardless of means. So everyone will get offered that. And then in addition to that, if someone wants to do so, they can apply for further discounts on a based on means testing. I think probably relating it to others, you know, as we understand it looking from the outside, one of the other companies in our industry has mostly the first part what we are doing which is blanket discounts. There is another company in our industry that's using mostly just the 2nd part of our piece, which is means tested discounting based on means to pay. We are actually doing both in ours and calling it a overall program itself in self-pay discount program. And I will apologize. Laura tells me we have a few other callers on and we probably just have time for one or two more of these and we may not get to all of you and we all know you all want to get to the next company's call here.

Let's take two more.

We will be here to answer your questions later this afternoon if any of you want to call. We can go ahead and take a couple more.

Up next we will hear from Cheryl Skolnick from Fulcrum Global.

Thank you very much. I was beginning to think that hospital management teams didn't want to hear my questions. But actually this was a fairly gentle one. I noticed that your DSOs were 51 days in the quarter which at the low end of the industry and does suggest that you are very reasonable in your combination of bad debt charity care, AR balances and reserves and allowances. But then you mentioned that you think you got probably $14 million in excess reserves that's been there since last year and this time more or less. That's about a day in change of AR at current revenue run rate, if my calculations are correct. Assuming that bad debt stabilized your self-pay ratios of percent of revenues and dollars of self-pay receivables actually do stabilize, presumably at some point you reverse that, does that mean your DSOs will actually go up or are you just going to put that back on the income statement and leave the AR balance the way it is?

It would -- this is Steve, to answer your question, once we change the estimate, it would have a P&L impact but also an impact on the AR data calculation. You're correct.

All right. So if it goes up by day we shouldn't be particularly worried if it's a result of the fact that you were just, you know, reasonably conservative historically.

That's a good assumption.

And probably needless to say, if we do get to that point, we will be breaking that out and making that clear when we do it as we did when we put that in place.

Okay. Terrific. Thank you very much.

Up next --

We'll take one more.

Thank you. And that final question will come from Kemp Dolliver with S.G. Cowen and Company.

Thanks. Could you run through an update of the construction projects of new hospitals and also joint venture discussions in Arkansas and Ohio?

Yeah. Dan, you want to give a brief kind of what's going on the development front?

With regard to the De Novo projects as we mentioned we opened the new hospital in Mesquite, Nevada, this month. And we are going to open a De Novo project in Denton, Texas, really an expansion. And it's an expansion of existing hospital in the spring of '05. And then Oro Valley, that's a De Novo project in Tucson, we will open up in January of '05. We do have another project in Arkansas we haven't announced yet but we think it will happen in fall this year. That's a big project. One of our -- it is probably our largest single project that we have done and feel very confident we will get a deal done there. With regard to Ohio, we also feel that this discussion has gone on for a year or so. And we think we will get it done, but it hasn't been announced yet either. So with regard to the pipeline, we have five to six other projects we feel comfortable. I know that we will get the three to five projects that Denny and Burke keep talking about done this year. So I think we will be right there at the end of the year with the addition that we projected.

That's great. Thank you.

And just to add to that, too, we making great progress on the hospital up in Alaska. That's actually moving ahead of schedule. The real good news about that, and this is something we will keep an eye on, is that we were originally saying if that thing would be opened by sometime summer of 2006, and now we believe that we might get that thing up, and I say "might" by the end of 2005 which would be really exciting because we are doing real well up in Alaska and the expansion development there is going great. So I can tell you as soon as we get that hospital open and additional beds, we will fill them. We are feeling good about that project. Just to add color to it. And the hospital you talked about in Arkansas, they announced it. We haven't announced it. That what he is referring to is the hospital in Ft. Smith, Arkansas, Sparks Medical Center. We have been working with them. We had a team on the ground out there for about six or seven months and we have been working a year with their board and the management team there. Hopefully we are reaching a conclusion here this fall as Dan said. So things are going well on the staff front but I wanted to add that about the Alaska because we're excited about it. The other project that we talked a lot about is Eugene, Oregon. That one into place in the 4th quarters as well. And it looks like we have identified at least a couple of sites. We have a preferred site and it's a site that's currently occupied by a electrical concern and the co-op and they are having to try to find -- do they want to sell and find another place to move to. And we were excited about that but we also have a backup property there if that doesn't happen. That's not going as fast as we expected and hoped. Just simply because there is not a lot of property available. We are hopefully in the next during this 3rd quarter we are going to get that worked out and we'll be able to give you some direction about timing on the development at Eugene. With that, we will just thank you guys for participating in the call. Feel good about where we are and where we are going. And look forward to talking with you. I know Laura and Burke will be around today. And many didn't get your questions answered and if you want to do follow ups you can do so by getting in touch with Laura and we will be happy to get some questions answered that didn't get answered on the call. Thank you for joining us. We appreciate it.

Thank you.

That does conclude our teleconference for today. We would like to thank you you all for your participation. You may all now disconnect.