Community Health Systems Inc (CYH) 2006 Q2 法說會逐字稿

Good day, everyone, and welcome to the Triad Hospitals Incorporated second quarter release earnings conference call. [OPERATOR INSTRUCTIONS]

At this time for opening comments and introductions I would like the turn the call over to Ms. Laura Baldwin, Vice President of Finance and Investor Relations. Please go ahead, ma‘am.

Thank you, Stacy. Good morning and thank you for joining us today. With me this morning are Denny Shelton, Chairman and CEO, Mike Parsons, COO, Steve Love, CFO, Daniel Moen, Executive Vice President of Development, and Pat Ball, Vice President of Marketing and Public Affairs. Please bear with me while I read the forward-looking statement. 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 significantly affect such current plans and expectations, as well as the future financial condition of the Company. Such uncertainties and risks are described in our most recently filed annual report on Form 10-K. As a consequence of these and other risks and uncertainties, current plans, anticipated actions and future financial conditions and results may differ materially from those expressed in any forward-looking statement made by or on behalf of the Company. You are accordingly cautioned not to unduly rely on such forward-looking statements when evaluating the information presented here or in the Company's press release. This call and webcast are the property of Triad Hospitals Inc. Any redistribution, retransmission or rebroadcast of this call and webcast in any form without the expressed written consent of Triad Hospitals Inc. is strictly prohibited.

This morning we reported results for the second quarter of 2006. For the second quarter we reported revenues of $1.4 billion, adjusted EBITDA of $187 million, diluted EPS of $0.69 and diluted EPS from continuing operations of $0.69. Excluding stock-compensation expense of $6.9 million pretax or $0.05 per diluted share, diluted EPS from continuing operations would have been $0.74. We began recording stock-compensation expense effective January 1, 2006, in accordance with SFAS 123(R). For the quarter on a same facility basis, admissions increased 0.2% and adjusted admissions increased 1.5%. Same facility surgery growth remained strong, with inpatient surgeries increasing 3.8% and outpatient surgeries increasing 2.5% in the quarter. Same facility patient revenue per adjusted admission remained strong, increasing 8.1% or 8.6% excluding self-pay discounts of $50 million. And same facility revenue increased 9.6% in the quarter or 10.1%, excluding the self-pay discounts. Mike will discuss volumes and revenues in more detail later.

Adjusted EBITDA margin was 13.5% for the quarter, a decrease of 180-basis points over 15.3% in the second quarter of last year. SW&B expense improved 120_basis points year-over-year, but this improvement was offset by increases in other operating expenses and bad debt expense. SW&B expense and other expenses include adjustments related to the true-up of estimates during the quarter. which Steve will address in his opening remarks. Excluding the stock-compensation expense, adjusted EBITDA margin would have been 14.0% versus 13.5%, and SW&B expense would have been 39.7% of revenue versus 40.2%. The provisional -- provision for doubtful accounts or bad debt expense was 9.3% of revenues. Excluding the impact of self-pay discount policy, bad debt expense would have been 12.5% of revenue. Both Steve and Mike will address bad debt expense further in their opening remarks.

We reported cash flow from operations of $36.7 million. Excluding cash interest and taxes, cash flow from operations was $185.3 million. During the quarter we acquired an additional 21% interest in Massillon Community Health System, LLC, bringing our total interest to 80% from 59%. We acquired the 59% interest earlier this year, and during the quarter our partner exercised a put option for the additional 21% interest, for which we paid $12.2 million. We have reiterated our guidance for 2006 diluted EPS from continuing operations of $2.81 to $2.93, as well as our guidance for diluted EPS from continuing operations, excluding stock-compensation expense, of approximately $2.99 to $3.11.

Now I will turn the call over to Steve Love for further opening remarks.

Thank you, Laura. Good morning, everyone. I wanted to address first a little more discussion on the bad debt. On our bad debt provision, it was consistent with how we handled it in the first quarter and also at 12/31/05. As you know, we booked approximately 63% of our self-pay, and we also looked at other metrics; and those other metrics included cash collections, up-front collections, AR days, the agings, and some of the other types of accounts receivable metrics that we use to evaluate not only the accounts receivable, but the adequate allowance each quarter.

As you know, the discounts, as Laura indicated were approximately $50 million. Prior to this, it's been running about $45 million a quarter, so we did have a few more discounts this quarter than in the past, which was something that we took into account as we evaluated the adequacy of our allowance on our bad debt.

We did perform the AR lookback. The AR lookback as you know, is a tool we're using but we're not relying onto book the allowance. It did show an improvement. It did show that we would book less allowance than we actually recorded this quarter and it did reflect an improvement our day metric. And we will continue to monitor this, but we are currently using, as I indicated, a consistent method as a percent of self-pay to record our bad debt provision.

On our profit and loss statement, Laura mentioned a couple of estimate true-up's, and I wanted to elaborate on that. As you know, every quarter in any industry you're going to have accounting estimate true-up's. That happens each and every quarter. However, if you have estimate true-up's that would impact specific line items, which Mike's going to address as he goes through the operations analysis of our profit and loss statement, there's something that we're going to talk about in our Form 10-Q, and we felt it appropriate that we mention this on the call.

First, we did record approximately $10.3 million negative impact in our medical malpractice insurance. The reason is primarily two fold. First, we made a decision to lower our discount rate used in that calculation with the actuary from 6% to 5.5%, and we've always disclosed we use 6%, but we always have recorded to a very high confidence level to the very high-end of the range. We continue to record to the high confidence level the high-end of the range, but based on looking at the moving average of historical treasury rates, we felt it appropriate to adjust this. And we're adjusting it this quarter because we got our actuarial study this quarter, and this is done twice a year, as you know, with our independent outside actuary.

The second reason that we had additional malpractice expense, on a positive note there is an accelerated pattern related to our claim payments, some of this because of tort reform, some of this because of internal work working with getting these claims settled quicker. But some of the underlying -- and that's going to be positive in the long run -- but this particular quarter, based on that trend and in discussions with our independent actuary, some of the underlying assumptions related to those payment patterns had to be adjusted back candidly, from the year 2000 forward, because there is a shorter period of time that we could claim investment income, for example. So as a result, $10.3 million negative is reflected in the other operating expense line.

Two other estimate true-up's that we're going to talk about relate also to specific trends on specific line items. The first one is on our workers' compensation. We have actuarial true-up twice a year, also, in our workers compensation expense and this is reflected in the salary, wages and benefits line. We had a positive indication and approximately $4.5 million positive is recorded this quarter related to the workers compensation that would basically be for periods prior to this quarter, based on the actuarial true-up.

The third item relates to a disproportion share of approximately a positive impact of $4.8 million, and this related to a true-up on some disproportionate share that is done basically once a year, based on the finalization of the cost report to look at the underlying data for the specific state qualifications within that state. This is consistent with practices that we would do, based on that cost report. So essentially, if you look at the $10.3 negative impact from the malpractice --and I might add, on a go-forward basis, you're going to see an improvement we anticipate in malpractice. This is basically because of the two reasons I gave you that's going to be specifically in this quarter, and that's why on the Q, you're going to see our overall insurance expense this quarter run approximately 2% of net revenue versus, say, 1.5%.

On a go-forward basis, we would anticipate insurance expense to be in the 1.5% to 1.6% range. But the $10.3 negative and then the $4.5 positive on the workers comp and the $4.8 positive on the disproportion share renders basically an overall zero impact -- maybe about a little bit negative -- but this is something we felt important to point out, because it will be discussed in our form 10-Q.

Another area that I would like to talk about is on cash flow. If you will note, as you look through the cash taxes that Triad is currently paying is certainly increased and continues to increase over what it has been in previously years. We feel we had a good cash collections quarter, we feel positive about the up-front collections, and we feel very positive of the work that our business offices are doing. But let me walk you through some of the reconciliation that we do internally related to cash flow.

If we start with the cash flow from operations of $36.7 million, add back the cash interest and cash taxes, then we have a total of approximately $185.3 million, and I know if we look at EBITDA it was $186.7 million. That's roughly 99.3% as far as the reconciliation of the cash flow to the EBITDA. Now last year the same period it was approximately 114.7%. There a couple of items that I need to point out. Included in our cash flow related in the other receivables is approximately $13 million at Gateway that was funds collected on behalf of Triad that needed to be remitted to Triad from Gateway. We've now collected that $13 million. It all came in basically by July 31, so that was a timing difference, but frankly, that was our cash. It is just at June 30 we had to show it as a receivable.

Steve, let me interject there. Gateway for those of you who don't know is the hospital that we closed on in partnership in community of Clarksville, Tennessee, in the fourth quarter -- February of this year, first quarter, so just so that people know what we're talking about in terms of the facility.

Right. That's not unusual to have timing differences like that, as you have kind of a cut-off from the payments coming in from managed care companies and intermediaries, and basically a change to the new bank account. There were some other items, for example -- and this is just to give you an anecdotal remark -- we actually had to pay a payroll on June 30 this year, so we actually had one more cash payroll paid than what we had in the previous years. So our cash flow was pretty strong this quarter. We feel good about it, especially when you look at the taxes we had to pay, when you look at the $13 million that we just referred to at Clarksville, and then some of these other items like another payroll. We feel that as far as comparing it to EBITDA, we're approximately in the same range of approximately 115%. We hope that the efforts that our business office is doing, the up-front collections, as we move forward into the future quarters, hopefully our cash flow will continue to improve.

With that I will turn the call now over to Mr. Mike Parsons, as you know, our Chief Operating Officer.

Okay. Thank you, Steve. Once again, I will take you down the income statement and give you some color and some highlights to some of the areas. Starting with patient revenues, as Laura said, patient revenues were up for the quarter 9.6%. That breaks down, our volume was up 1.5% on an adjusted admission basis. Our rates in intensity then made up the 8.1% difference, bringing us back to 9.6% as reported increase.

Breaking the volume down starting with in-patient, our same-store admissions were up 0.2%. In-patient surgeries were once again strong at 3.8% growth for the quarter. Rehab admissions, which we identified last quarter, the same thing this quarter. Rehab admissions were down 316 admissions from last year, primarily due to three closures that we had in our rehab units, and in our -- throughout the Company. In fact, our rehab admissions were down 25% when you look at what that 316 represents. Excluding the rehabs drop, our acute admissions were up 0.6% same store.

Going to outpatient , outpatient -- same store outpatient surgeries were up 2.5%, outpatient visits were up pretty strong at 2.8%, so that led to an overall increase in our adjusted admissions of 1.5% for the quarter. Bringing it down to rates and intensity, another good strong month on our rate standpoint, revenue per adjusted admission, adjusted for self-pay discounts was 8.6% for the quarter. Case mix once again was strong, up 2.6%. Our rates averaged about a 6% gain once again. That's been consistent over these last four quarters. I know that you all track this pretty close. You'll notice second quarter of last year is where we kind of popped up, and we sustained that level for the last four quarters. And then Steve mentioned the $4.8 million disproportion share that was included in the net revenue, as well, based on the true-up.

Salaries, wages and benefits, as reported was 40.2% compared to 41.4% from last year. Adjusted for self-pay discounts, it was 38.8% compared to last year's 40%. Have three items that we need to look at to really normalize the salaries, wages and benefits, some things going both ways. I think Laura and Steve mentioned -- or Laura mentioned the stock-compensation expense in this year's quarter that wasn't in last year's quarter, which was $6.9 million. That was about a 50-basis point increase.

That was offset, though, by a couple of adjustments on a positive note. The first is a reclass of our IS employees. I think we talked to you about our agreement with Perot to basically outsource our information systems, so April 1 of this year our employees transferred over to Perot, So you did see a movement in our salary costs which is basically a reclass from SW&B to contract services which shows up in the all-other category. The impact of that was about $6 million for the quarter, so it was a 40-basis point reduction in SW&B, but there's a corresponding 40-basis point increase in all other, and you will see that to be consistent going forward, because that's the new way that that expense category's going to be classified. The other positive adjustment that Steve talked about was the workers' compensation true-up, which was about $4.5 million, had a 30-basis point impact. So when you normalize all that out, our SW&B was really 39% of net revenue compared to 40% second quarter last year, which is a 100-basis point improvement, so still good SW&B performance for the quarter.

Supply costs came out pretty much as we would expect. As reported it was 16.8% compared to last year's 17%. Adjusting for the self-pay discounts, it was 16.4% compared to 16.2% for last year. However, it was down sequentially from the first quarter of this year, which was around 16.8%, so overall the supply costs were pretty much in line with what we would expect with our higher case mix and acuity that we've been seeing over this last year.

Other controllable expense category, that's where a lot of the adjustments that we talked about showed up. On a as -- adjusted for the self-pay discounts, it was 19.1% compared to 17.9%, which is a 120-basis point increase. So to reconcile that down for you to show you what some of the main components are, talked about that reclass from Perot, which was a 40-basis point impact to the all-other catagory. Steve talked about the malpractice true-up of the $10 million, which is about a 70-basis point impact just on the malpractice piece. And then the other three items that we -- when we first talked about it last year in giving our guidance, we expected higher-than-normal utilities increase, professional fees because of the some of the hospital-based subsidies, and the IT conversion costs. Those three items represented a 40-basis point increase over last year's second quarter, so when you add those up, that's about a 150-basis point impact from those three items. And so we were able to find improvements in other areas of 30-basis points, which reconciles down to the 120-basis points increase.

On bad debts, normally this is where I would turn it over to Bill Huston. You may have noticed in the introductions that Bill is not with us today. He and his family had a scheduled family vacation, so Bill, if you're on this call, hope you're having a good time. Wish you were here. [LAUGHTER[ But with that, I will go through the bad debt numbers with you.

Adjusted for the self-pay discounts, the bad debts were 12.5% for the quarter compared to 10.7% last year. Sequentially that's up from the first quarter. First quarter we were at 11.7%, so moved up to 12.5%. For the year that puts our bad debt expense as a percent of net revenue at 12.1%. Some further details and key components along the bad debt line, overall our self-pay -- payer mix for the second quarter was 5.9%. That's up both from the second quarter of last year and up sequentially. Second quarter of last year the self-pay mix was 5.3%, and the first quarter of this year the self-pay mix was 5.2%, so the 5.9% is what really drove the increase in the bad debts.

However, when you look at the cash collections, cash collections were good for the quarter. We were 101% of our goal, both for the second quarter and year-to-date. Our goal is based on the 60-day lag of net revenue and minus bad debts, and we look at the collections compared to those time periods, and both for the quarter and year-to-date we're at 101% of goal. Looking at our up-front cash collections, same-store our up-front cash collections were up 22% compared to second quarter of last year, so I think a lot of initiatives that we're doing is bringing in some good cash.

But we did see, once again, the self-pay mix go up this quarter. So from a bad debt standpoint, I think the first quarter, if you recall was -- the mix was a little lower than what we would expect. I would say this quarter was up a little higher than what we would expect, so I think we're still cautious about the bad debt number, and still working hard on various initiatives to get our cash collections up accordingly. In summary, we had a overall good net revenue in SW&B performance, which offset the higher bad debts and all other expenses to, I think, give us a good solid quarter.

With that, I will turn it over to Dan to give us -- Daniel Moen, our Executive Vice President in charge of Development to talk to us about the development update.

Great. First of all, bring you up to speed on what we're doing on Beacon Hospital in Dublin, Ireland. We're going to open this project in the fourth quarter of '06, and as many of you know, it's our first international project. This is the first private hospital built in Dublin in 30 years. It is de novo 122-bed hospital in south Dublin, have a 30-bed shell there. It is a pretty unique arrangement that we've got. We've got three Irish business men who own the land, building and equipment of this brand new hospital, and Triad's going to lease and manage the fully-equipped $188 million facility. It is a short-term lease with options to make it long term, and our rent payment is a portion of the hospital profits. They've pretty much invested all of the long -- in the long-term assets. Our investment is only in the cash required for the start-up costs and to finance the working capital. We think it's pretty good opportunity here. The economy in Ireland has done very well, and it's an interesting opportunity, the kind of deal we wouldn't be able to negotiate over here, anyway.

The other project that's coming online is St. Joseph's Hospital, a 231-bed hospital in Augusta, Georgia. We signed a letter of intent to acquire this facility from Ascension, and we're in the process of completing due diligence and getting the definitive agreements negotiated. We will close this transaction in the fourth quarter of '06, but it's subject to approval from the attorney general in Georgia.

The next project that we're working on is the Baptist Health System of East Tennessee. This is in Knoxville. We won a very competitive bidding process, and we signed a letter of intent to buy this 514-bed system. It includes four hospitals, big hospitals, a tertiary hospice, Baptist Medical Center of East Tennessee, then the two new hospitals out we -- in west Knoxville, Baptist West Memorial Center and Baptist Women's Hospital and then a hospital in Cocke County, which is about 40 miles east of Knoxville, Baptist Hospital of Cocke County.

This is a 80/20 joint venture with Baptist Health System of East Tennessee is our 20% partner. In the process we won the bid with evaluation of their assets at $225 million. Triad is acquiring an 80% interest in that system, so we're putting up $180 million, and Baptist will take its existing cash plus our $180 million investment and will pay off all of their debts and their liabilities. We will, in this partnership as all the partnerships that we're involved with, manage the day-to-day operations. This project will close -- we expect to close on this in the fourth quarter of '06 and currently the attorney general is reviewing the deal.

The other project that we got going this past quarter is Cedar Park Medical Center. You heard about that 75-bed hospital in north Austin, a booming part of a growth area in central Texas. This, too, is an 80/20 joint venture with Seaton, which is an affiliate of Ascension, and we actually began construction on this in June of 2006, and we expect to open this in the first quarter of 2008. It turns out that 2006 is going to be a very good year for the Company in terms of addition of new hospitals. If you look back on the Cedar Park project, the Gate -- that we closed on in January of this year, the Gateway project in Clarksville, Tennessee, in February of this year, Massillon in Massillon, Ohio, in February of this year, Beacon, which will open in the fourth quarter of this year, those are all done deals, and then the four Baptist hospitals in St. Joseph's that we think will close in the fourth quarter, we should add nine new facilities.

In addition to that, I will tell you that our pipeline is as full as its ever been. In addition to these nine projects that we think we'll complete this year, and primarily we've gotten most of our pipeline is filled with unsolicited potential partnerships with the non-profits.

So with that I'm going to turn it over to Denny Shelman -- Denny Shelton [LAUGHTER]

Let me just reiterate just a couple things. One, too, on the Gateway, we actually broke ground on the new hospital in Clarksville, Tennessee, the first week of July, so we're also under construction there, as well. Just an update, we have been working for two years on trying to get the project off the ground in Eugene, Oregon. We really haven't spent hardly any monies there, and the partnership we did with the non-profit group in that community, the Eugene-Springfield market, but we have finally identified and are working with the city of Eugene on a piece of property. And we hope that we will now begin to break ground on that project sometime in early 2007 which we're very excited about, and we have a lot of momentum in that market with the medical community.

Our problem is that we don't have the facilities and services to make available for the physicians who want to work with us in that market, and we're very optimistic now that that project should start sometime early 2007.

As Dan mentioned, I would tell you today, we've talked a lot -- as many of you, we've talked a lot about the choppy waters in this industry [arounding] and surrounding the bad debt, and we spent a lot of time on this call talking about bad debt issues. One thing I am proud of is that we've been able -- through moving market share and increasing our market positions, we've been able to sustain significant strength in our net revenues which, quite frankly, has been able to offset some of the choppiness that we've seen from the higher bad debts and the ability to collect monies for the patients that we're seeing.

One of the things that we see, though, is that there is so many hospitals in trouble in this country that I can tell you I have not, in my career ,seen as many opportunities today that we see. And the bad part of that is because there are a lot of hospitals in this country that are in trouble, that have not been able to sustain the kind of market share growth and leverage on pricing, and have ratcheted down expenses to the point where they're not comfortable going further, and they're looking for other alternatives. Looking for partners, looking at ways to network, and I think we are uniquely positioned in this industry to work with hospitals in the non-profit sector to meet the needs of their communities. And I think if we're smart, and we are selective in the communities that we work in, that our opportunities have never been better, because we've continued to receive unsolicited calls from systems and hospital, organizations around the country who are looking for help, looking for assistance and looking for partners,

And as Dan mentioned the project down in Austin, Texas, the Cedar Park project that broke ground last week in June, Ascension is one of the finest healthcare systems in the country, the largest healthcare provider in the country. They're building two other new hospitals in the Austin market today. The partnership with us is the third market. They're the largest provider in the market, and it came down to a cultural fit, and just the number -- the dollars that they were willing or could expend in that marketplace given the other priorities that they have on a nationwide basis.

So being able to partner up with a group like Ascension, who has huge market share position and also a tremendous reputation, that project is going to be hugely, I think, successful for us as we go forward. So I am highly encouraged by -- the opportunities out there, because in times of turmoil, there are opportunities, and I think we're uniquely positioned to take advantage of those opportunities, if we're smart. And I think we're being very diligent in our efforts to make sure that we're selecting partners and projects that make sense and in the best interest to the growth of the Company and the best interest in terms of growing value for our shareholders.

At the same time I am also equally pleased with the performance of our operating teams because, in spite of the choppiness and the great variability, and you can see if you track sequentially or year-over-year, tremendous variability in this bad debt. And we have said for the last year or two that we don't see stability there, and we haven't. But at the same time we've been able to manage through, and we've been able to remain consistent in terms of our financial performance, by good management in terms of labor and supply expense and being able to grow our case mix and to position ourselves for leveraging appropriate pricing in the markets, so our operating teams are doing well also.

Now, the other thing we want to do, we want to continue to improve in terms of cash collections at point of service, and we want to continue to be selective in terms of building networks and building relationships with the right partners on a national basis, and again, I think we're uniquely positioned to do that.

What started out, and I can tell you, we really -- what we've seen over the last 60, 90 days, we have seen some strengthening on the volume front, because coming out of the first quarter and into April, April was a very difficult month in the quarter, and if you talked to me after April, I was certainly concerned about the precipitous drop that we were seeing on the volume front. But we've seen some significant improvements over the last two or three months, coming off of April. And so, given where we are, given the performance from the operating team, given the position that Dan's team has put us in in terms of opportunities, you know, we feel pretty fortunate on a go-forward basis.

We continue to look at all of our options, weighing our cash position and use of cash in terms of lots of other opportunities out there, whether that would be looking at LBO opportunities, looking at stock repurchase, looking at paying dividends, we're going to continue to weigh all of those options of how we use our money with what's in the long-term best interests of our shareholders and -- which is really weighing that with the potential growth of the Company.

One thing I don't feel good about is standing still, is that if we don't have as a commitment to grow the business, to grow the business and to continue to strengthen our position in the markets that we're in by extending and growing networks, our abilities to leverage pricing will deteriorate rapidly. And so, we've got to weigh kind of what do we do, how do we address all of these issues that many of you call about -- and I have been inundated with both from investors, but also from private equity groups, looking at all the various options out there and our board -- we had a board meeting yesterday in South Carolina, and we're committed as a board to keep all of our options open and considering how do we best use our cash for the long-term best interests of our shareholders. And I think what's in the long-term best interests of our shareholders is to how do we grow this Company, continue to grow it, for the long-term, and that's that we're focused on.

So I feel pretty fortunate in terms of where we are after the second quarter and see some things that give me encouragement, but by the same token, there's still tremendous variability on the bad debt, and I’d like to sit here and tell you as I told most of you many of you over a period of time, there is no stability there. It's moving, and it's moving in a lot of different directions. We saw a significant improvement in the first quarter, sequentially, and then you come to the second quarter, and you see it kind of go the other way. So I just -- don't have an answer for you on the bad debt other than to tell you we're going to have to manage through it, and I think we're positioned to do that. That's what we're continuing -- committed to see, improvements regardless of where we are with the bad debt.

With that, Stacey. what we'll do is key it up for questions and answers, and if you help us do that.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Sheryl Skolnick, CRT Capital.

Boy, that's a surprise. I didn't expect to be first. Congratulations on working very hard to build the business as much as you have through a difficult time, because it's not so easy. A couple of questions, though.

As you look at the expenses -- in particular this is in net, as I look at the other operating expense, you explained the delta. Of that, the IT expense continues going forward. Is there any other comfort that we could -- or guidance that you can give us about the level of the other operating or controllable expenses being higher than anticipated -- as far as I was concerned -- will it be staying at that level or are there things you can do, ex the unusual items, to kind of mitigate any of, and get better leverage?

Okay. Thanks, Sheryl. Go ahead, Mike.

Yes, I think, Sheryl, from kind of the long-term and what you'd expect going forward, I think the Perot reclass, the 40-basis points I talked about there, the 40-basis points from the utilities, professional fees, IT's there. The 70-basis points that we talked about malpractice won't stay there. If you wanted to just look at normalizing this and say is that a pretty reflective number, I would say the 80-basis points up and then the 30-basis points improvement that we did see that brought it down, so about that 50-basis points.

Okay. And then relating your EBITDA to cash flow is helpful when you add back the cash taxes and such, but can you give me a feel for when the actual EBITDA -- excuse me, the actual cash flow from operations might begin to reflect a bigger percentage of EBITDA, or will it never?

I won't say it would never, Sheryl. We certainly think it will. And again, I think you really have to consider the $13 million that was our cash that really should be factored in. They wired the money to us, and we had it by July 31, so I mean, that was just a timing difference, as Denny said, and those kind of things happen. I will tell you, as Mike indicated, you've seen up-front cash collection improvement. Overall cash collections were strong, especially in May and June. It is hard to predict the future as we look at bad debt, but let me just say this. I think cash flow, if the trend continues in the third and fourth quarter that we've seen in the second quarter, it is going to closely approximate EBITDA trended as it's been in previous years.

Okay. Finally, you gave us a percentage of revenue coming from self-pay, but can you give us a sense in terms of the number of units of admissions or adjusted admissions that are uninsured in the quarter.

The self-pay admissions increased about 10%.

Okay. Great. Thank you.

Thank you. We'll go next to Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everyone. Denny, I guess based on your commentary on volumes, I wanted to dive a little bit deeper into what you're seeing. Throughout most of the first half of the year I think you've been particularly cautious about volumes and just want to make sure I am understanding what you're saying. Did you see an acceleration or a strengthening of volumes in the last couple of months and can you just comment a little bit further there? And does that change your annual outlook for volumes, which I think was zero to 1%?

Probably too early to say that, Darren, but have seen some strengthening on the volume front over the last two months, and encouraged by that. I will tell you one thing I am encouraged by, it goes to the projects that we're talking about. Some of the strength that we see is in Alaska on the new hospital that opened there in January, Presbyterian of Denton here in the Dallas-Fort Worth area that opened last year, our partnership with Texas Health Resources, Oro Valley new hospital that opened last year out in Tucson. So one thing that's really encouraging is some of the strength that we're seeing is in the projects where we invested the money and where we expect to see the returns, we're getting strong indications that our view or opinion on those projects was well vested, and expect that we're going to see the kind of returns or better on those projects that we expected.

Okay. And then as far as the guidance goes, I understand you're confirming the earnings per share guidance. There are just a couple of other components that you have referred to previously. Obviously with bad debt on an adjusted basis, it's a touch higher than what you talked about at the 12% level, but on a reported basis it is running quite a bit more than the 8.7% that I think you had guided to. So maybe just a little bit of clarity on what the bad debt outlook is for the rest of the year and if pricing is the offset, maybe can you update us on what the pricing outlook is?

Well, I think, Darren, I guess what I'm saying is that I don't know that I can give you with any clarity, you know, what the bad de -- I mean, if you look at it, it's really kind of all over the place. We've had -- you know we've had -- like first quarter was significantly better than we thought it was going to be, and the second quarter was significantly worse than we thought it would be on the bad debt front. So with that being said, I just don't see any trending. I don't have a feel, and I don't think our team has a feel for how this thing is trending because every quarter it seems to be different, and it is so highly variable that I guess I wouldn't change anything -- in terms of my view at this time -- in terms of how we kind of look at bad debt, but I would caution to say that -- caution that I don't have any further clarity I can give you on that ,other than I feel comfortable that, barring any unforeseen real dramatic spike up or down, that we've got at least a fighting chance to manage our way through whatever that variability might be.

Darren, I do have -- and this will partially answer the question that Cheryl asked earlier that I gave an estimate, but just our self-pay mix, inpatient self-pay went from 3.9 the second quarter last year to 4.3. Our outpatient was pretty flat at around 7.6% going to 7.7, so just to give you some more indicators of the bad debt.

I guess what we're saying Darren and that kind of sums it up, I mean, we're reiterating the guidance saying that I think we can manage through this. Again, there obviously could be surprises plus positive and negatives, but given all of the moving parts, feel like we can do it, but we're just going to have to follow with bad debt. I wish I can give you a better answer. I don't have a strong enough feel for it yet.

That's fair. I guess one last clarification of the guidance and I will jump off here. Your CapEx plan, Steve, can you just confirm to us that the projects we've talked about today would get you into that $600 to $700 million in total CapEx that you guided to? Thanks.

I think, Darren, given a couple of projects that are there, it is possible that our actual cash could be slightly higher for this year if these projects finish out, and could be more kind of 630 to maybe 7 -- mid-7 range if all the projects went through. That's a little bit of a moving piece, too. We need to see how some of the projects are going to finish out and the negotiations for definitive agreements. But it could be slightly higher because -- than what we had projected simply because a couple projects are bigger. For example, the Knoxville project is bigger than what we had kind of guesstimated the average project cost would be on doing three to five projects a year. It could be slightly higher for this year, depending upon how these final due diligence and negotiations go.

Great. Okay, thank you.

Thank you. We'll go next to Adam Feinstein with Lehman Brothers.

Thank you. Good morning, everyone. A few questions here. Denny, just a big picture question to start. I appreciate your candid comments. as always. You mentioned earlier that you're exploring all options to create shareholder value, including stock buy backs as well as looking at LBO's. Could you provide more commentary there and I just don't know how exactly to interpret that. Are you doing any sort of strategic review here? Did you hire some sort of outside advisor on this? Could you provide more clarity, and I have a follow-up question. Thank you.

Well, let me say this. I have spent an inordinate amount of time with -- talking to some of the bankers, as well as some of the private equity groups. You know we try to keep all of our options open, we try to be as educated as we can. We're trying to weigh all of that, all the various options with the projects that are coming available to us, and what should we expect in terms of return on the kind of projects that we're seeing, vis-a-vis other options that we might have in terms of balance sheet plays, and that's what we're doing. We're kind of -- it is a top-of-mind awareness and it's just what's the best use of the money.

And I have to tell you, and I have told people this, is that I am encouraged by -- I'm encouraged by what we're seeing in Alaska. I am encouraged by what we're seeing at Presbyterian. I am encouraged by what we're seeing at Oro Valley. The projects that we invested the money in that always are called into question over the last two years, we're starting to see some fruit -- bearing some fruit there, and then we take that in terms of what we're experiencing and how we're doing with those projects? With new projects that we're seeing, can we expect what kind of returns using internal -- a relatively high internal rate of return hurdle and kind of measuring that, and we've not hired anybody specifically, but I can tell you, I am spending a lot of time talking with the various advisors about how to look at this, what should we be looking at, and our board has spent a lot of time looking at it, and that's kind of where we are. I obviously know our leverage is relatively low, could we leverage up, and I think that's the big question.

If you're looking at, for example, stock buyback, could we lever up and -- yes, we could, and how do we do that in relationship to the opportunities that are evolving out there, potential hospitals that may come on the market, the non-profit facilities that are coming to us, looking for assistance, how do we value the opportunity costs there versus the opportunity to lever up now in terms of share repurchase. So we're talking to a lot of people, and we're trying to be as -- get as educated as we can, and we have a couple of plans in our pocket that, if we decide, you know, that some of the projects don't look as good or we don't feel as comfortable about them or they don't give the kind of returns that we would expect, we could move quickly in a different direction, so that's what we're doing.

As you would expect, I have had just about every private equity group in the country been here, and over the last 90 to 120 days I have talked with -- at length and multiple times with many of them, and I have tried to keep our board apprised as to what those options might be. And I would tell you at this point in time that we feel good about the returns that we're going to get on the project that we have invested in and the projects that we're currently investing in, and it would have to be, you know, something pretty special and a commitment to stay the course with the growth strategy of the Company -- and I would tell you there are a number of private equity groups that have voiced interest in at least staying partially the course with this. And that's important to our board, and I think quite frankly it is important to our communities and our existing community that is we continue to get stronger in regions and selective markets that we continue to grow. So that's a long-winded answer, but it is just -- there is just so much going on, and we're trying to be as diligent as we can and as open minded in terms of how we use our money.

That's very helpful. Let me ask a follow-up question if I may. With the volume numbers, would just be curious to get more insight there in terms of how much variability you're seeing between your various major markets, just wanted to know. You mentioned some of the newer projects, but certainly as we think about some of your key markets, could you provide a little bit more detail, most interested in the Fort Wayne market, since that is your largest market. Thank you.

I'll answer it this way, Adam. I think we mentioned last time and we saw the same trend this time. We are seeing faster growth in our multi-hospital markets versus the sole community providers. I think we saw that the first quarter and we're seeing that this quarter that those areas where we do have the market potential to move market share I think we're seeing that. The sole community providers are the ones that are not growing as fast.

That's kind of interesting, Adam, if you look at it that way. About a third -- maybe slightly less than that, maybe 20%, 25% of our hospitals now are sole community providers and It is kind of interesting. That's where we're not seeing the growth. In fact, we've seen negative numbers in those markets which means that is we're not losing the business. It's just we're not seeing as much presented, and I think that is the influence of the pressures on the kind of consumerism movement. We're seeing less presented there. I think it is also what we see in some of the competitive markets, but we've been able to move market share in those markets to offset the impact of that consumerism and the numbers are actually pretty strong in the competitive markets drug down by the lessening numbers in the sole community markets. And that's why it gives us encouragement. And then kind of compounding it positively is the markets where we've seen investment and the new projects that are coming on board and some that are beginning to mature, we're seeing good growth, and significant growth, and that is highly encouraging as well.

The one thing just to close the loop on the sole community hospital providers, they're still doing well. They still have good market position with good net revenues, more of a cash cow kind of approach with them because of their opportunity, but not to say just because that metric is down that their performance is correspondingly down. They're doing fine from an operational standpoint.

Thank you. We'll go next to Oksanna Butler with Citigroup.

Thank you. I am not going to ask anything about bad debt. -I wanted to just touch on the inpatient reimbursement changes, the final rules that were just announced, and just wanted to hear your perspective. I know we talked the last quarter a little bit about how you're working with physicians in anticipation of some of the cuts that had been originally proposed, and just wanted to see if the final rules have changed your perspective in that regard and what sort of impact you see and what the strategy might be at this point?

Thanks. This is Steve. That's a good question. Let me give you the short answer, and I will elaborate a little bit.

We don't anticipate, even though the final rules have come out, any significant changes from what we've said earlier. To quickly recap, and I know you have seen these, obviously it is going to be looking at the transition for the cost weights. It's going to be phased in over a three-year period. The specific severity of illness, which is going to be categorized in 20 specific DRG's and then some more public comments and more of a finalization of that in '08, and then, obviously, no DRG weight is going to decrease more than 5.4%. They're kind of the highlights that we focused on since these rules came out about three days ago.

We don't anticipate, based on what we've seen and doing a quick overview -- In fact, I met with our Vice President of reimbursement early this morning. We don't anticipate anything coming out of this that we see that's going to be adverse or adversely affect us from what the proposed rules came out. However, we are running through in our reimbursement department us specifically taking all of the different DRG's and recalculating and regoing through these. But we don't anticipate anything that would be negative. To give you kind of a recap, we think our overall Medicare reimbursement in '07 is certainly going to be comparable to '06.

All right. Thank you.

Thank you. We'll go next to Chris McFadden with Goldman Sachs.

Good morning. As ever, Denny, thanks for the detailed comments. I am interested in a comment you made in your prepared remarks. You talked about seeing a hospital environment in which you felt as if there were a lot of hospitals who were financially in compromised positions and that had the opportunity to create real opportunities for you to partner with them in a number of different forms.

Contrast that against a couple other data points. Subsequent there was a discussion of some of the sole market providers and some of the economics of those markets, and if we look at the consolidated industry data that comes out of people like the trade associations and some of the credit rating agencies, they tend to paint a picture in which margins, at least at one metric, are near sort of as a higher end of historical ranges. So I am wondering in your mind you seem to see a picture here of they're have and have not's, and as you see the landscape, where do you think sort of the demarcation lines are and the factors driving some of that polarization performance and how do you expect to be able to most take advantage of that, assuming you have the capital, to be partners with some of these facilities? Thanks.

That's a great question. I guess I have a lot of thought about this, and when I talked to a lot of different groups -- again in greater detail but try to be as brief as I can -- about this. This is an industry that's extremely bifurcated in have or have not's, and about 60% of the hospitals in this country are have not's. They don't have a strong position to leverage pricing. They either are what I call bottom feeders, they get whatever rates they can, and -- because they don't have enough market position to leverage rates.

By the same token, you have about 40% of the hospitals in this country that are able at least to be treated fairly or are in a position of strength, and they can leverage pricing accordingly. One of the things that we're trying to do -- and a great example of that is the partnerships with Texas Health Resources of Dallas, the partnership with Ascension, the largest Catholic provider in the country, down at Seaton in Austin. I mean, a lot of partnerships that we're doing now is partnering up with organizations that have strong market position, and are have's in the markets they're in. And by connecting with those organizations, where we're culturally compatible, they bring strength in terms of making sure that we can get reimbursed because when it really comes down to it, this is very simplistic.

When you look at it, most of us we lose money on Medicaid patients or we eek out as low a negative margin as we can on Medicare. If we're highly efficient we can eek out some profitability, and when it comes down to it, it all come down to commercial pricing. And on the commercial side, if you can get the rates, that's really the differentiator between the have and have not's.

So what we're trying to do in the partnerships is to find partners in which -- in markets where we believe that through those relationships or the opportunity that presents itself that we get a market position where we can leverage rates appropriately and responsibly. So that's what we're trying to do. We talk about picking the spots and being making the right decision, but it is looking at what's the opportunity here. If we hook up or partner with a particular group, what do they bring to the table, what do we bring to the table. Is it mutually beneficial if we are going with a local group that doesn't have that kind of leverage, what's the opportunity there to build market share and leverage pricing through what means and so we're constantly looking at that.

That is really -- that's why I think it’s a great question. It's really the gist of what we do. It is how can we make sure in that bifurcation that we're on the have's side? And that's -- listen, if people ask me, well how have you been able -- and remember a year ago I got asked these questions repeatedly. Well, your net revenue is strong. How can you continue to sustain net revenue? It was strong a year ago. How can we expect that a year from now your net revenue continues to be strong?

Well, your net revenue is strong if, in fact, you’re strengthening your market position and appropriately leveraging pricing. And so I think that is probably a good an indicator as to, I think, the relative strength of the Company is that our ability to have been able to sustain strong revenue growth in the face of the environment that we're in.

So that's kind of what we're -- that's why we're at is trying to pick our partners. Dan and I were up in St. Louis with Ascension just maybe three or four weeks ago, and one of Ascension's long-term strategic plans was they see, over the next five, ten years, is that they will have multiple partners across the country and those partners will be people that will help them strengthen their networks. They have a very similar philosophy. They're a large non-profit system, but they have the same philosophy we have is that pick your partners and pick them well. That's kind of -- I think that's why I think we're so comfortable with our strategy, and I think we are uniquely positioned because we have good in-roads and good relationships with many of the non-profit players in the country.

One quick follow-up. Thank you for that. Do you think we will reach a point in the future in which quality or some other metric of sort of care outcomes becomes equally or more important to pricing power, which I think is really what you're referring to here, than market position which we tend to think about today as really being market share and network design and that sort -- those sorts of provider characteristics?

I think you could. I think it is more likely to be viewed kind of from the other side. If you can't show -- if you're a market player, market leader, and you can't demonstrate that you have equal or better quality in a market, it can hurt you. I don't know -- in other words, if you're in a major metropolitan market, and you've got 4% market share, the fact that you have outstanding quality, I don't know if I would see in the near term that you're going to move a lot of business because of the perception of that quality.

I think if you have significant market share and you demonstrate that you have quality, I think you're going to sustain and potentially grow your business. It is going to be difficult for a one-off hospital or a minor player to increase leverage in a market just based on quality.

Thank you. Next to Erik Chiprich with BMO Capital Markets.

Thanks for taking the call. A couple questions on your acquisition integration pipeline. In the Massillon market can you talk a little bit on what your strategy is there. I know you have two hospitals. Will that be consolidated into one and what are the potentials there? Is that a cost saving improvement or market share gain? And then also in Dublin markets in the St. Joseph's and Baptist potential acquisitions, what are the potential for EBITDA margins there? Thank you.

Let me just say on Massillon is that what we're doing, we're working with our partners there and our physicians and lay community board members to look at consolidation. We're -- what is the consolidation plan. What's appropriate? And it is kind of a deal, because we know you're going to have to spend capital to consolidate because you have to make -- you have to outfit a facility that can take the patients from both facilities and where do you do that, and what's the best location, and then you got to look at is it better to spend that capital in an existing facility or do it with a new facility. Is it more efficient and is there a better return on that capital. And we don't have an answer for that, but that's something that the partnership is looking at now. Mike is leading that effort, and we're in that evaluation process as to is it a renovation consolidation strategy, or is it a new-build strategy we're looking at.

In any case, Erik, the answer to your question is it a cost consolidation savings or is it kind of getting stronger for kind of a growth. The answer is yes to both. We'll get consolidation savings, as well as have a stronger network with instead of two heart programs, have one strong heart program, et cetera, et cetera. On the second question, turn that over to Dan.

With regard to margins, the way I would describe it is that we would get up to the Company average -- as a general response here, try to get up to the average -- the Company average in that 13% to 15% range in the three to five years type of time frame. Generally speaking like the Baptist system in Knoxville, the reason it is for sale was because it hasn't done particularly well and we think with our strategy we can get it to at least a Company average, but it is not going to happen over night.

Thank you. Is margin at Baptist, is that low single-digits or can you give a little more clarity there?

It is below our average.

Thank you.

Thank you. We'll go next to Glen Santangelo with Credit Suisse.

Hi, thanks. Denny, just a couple of quick questions. I know gave us a lot of comments around the bad debt and I appreciate that, but you're saying you don't have any idea which kind of direction this is going, and could you kind of give us a sense for maybe what you have embedded in your 2007 10% to 13% EPS guidance?

Yes, we had -- I think what we had said was that 12% was what we had, was it not?

Yes, that's it. That's kind of where we were. That's why you look after the first two quarters, Glen, and it's right around there. So, and again, we had a good first quarter, not good second quarter on the bad debt front, but if you look back over quar -- last six to eight quarters, we've had such variability up and down that we haven't seen any trends. In other words, we haven't seen it sequentially trending up and we haven't seen it sequentially trending down. We'll see one quarter up, one quarter down, and that's why, you know, at this point in time, we're not ready to say anything differently but just continue to caution people that it's highly variable.

I wanted to make sure I understood your question. Did you say for '06, the remainder of the year or did you say for '07?

I meant for '07.

'07 basically what we've said is you know that we gave guidance, but we just basically said that there would be increase or decreases in the allowance for doubtful accounts, and that we would have a percentage of EPS growth at that point. And then basically, beyond that, we would expect the EPS growth to go the mid-teens. So, I just wanted to make sure we clarified the years.

Can I just follow up on revenue per adjusted admission? I think you had commented in the past you were expecting it to trend in that 5% to 6% range. Now we've had -- the first half of the year's kind of averaged about 8.5%, and I think last quarter you commented yourself on the sustainability of that. Could you kind of maybe give us a sense for what you're seeing and what you're looking at for the back half of the year?

I think we've had -- the last four quarters have been pretty consistent, so what we see is that the difference in the six and the eight is pretty much the case mix increase. And a lot of that is driven -- what we talked before about the shift in some of our stronger markets getting stronger, and where they have a higher case mix and a higher net revenue, and about this time last year was the first time it really popped up, and we said we'll see if it sustains. I think I said last quarter we'll feel more comfortable that this is or run rate, and I think this quarter bears that out.

Thank you. We'll go next to Ken Weakley with UBS.

Thank you and good morning, everyone.

Hey, Ken.

I was wondering, given your comments about how volatile bad debt has been, I was wondering if you've been able to determine which local market variables, in terms of patient mix, uninsured admissions, benefit design changes,, local label, which variables may be explain the volatility. Have you gotten to a point where you feel you have a grasp on what's actually causing the volatility?

A lot of it, Ken, is certain states, you know, continue to be the drivers of a lot of the volatility. It is happening in Arkansas, Texas, Oklahoma and Alabama. That's kind of following how our volumes are trending in those states.

Let me state something, too. That goes hand-in-hand with some of the other questions that have been asked. Some of the things that we're looking at from a development standpoint, some of the projects that Dan and his team are working on, we're beginning to, you know, when you start looking at priorities, opportunities, looking at states where the business around bad debt and collections are better. It is a -- that's something I think Bill Huston had mentioned in a couple of previous calls. That's a pretty good -- that's a pretty good point is that learning from your experiences in certain markets or certain areas, and I kept saying, there's going to have to be a dog gone good case of why we go into or expand in a particular market if, in fact, the bad debts there, as an example, are difficult to overcome.

Okay. So within certain states it seems to be more common, but even within that context, are there certain elements of those geographies that help explain this or is it just unknown at this point?

I think it is really which ones are kind of increasing and which ones are decreasing. It is kind of the case mix within those markets, Ken, more than anything else. All of those states that I mentioned, the bad debts are in excess of 10%, and all of our other states it is less than 10%. They're driving based on which market and which state has a particular quarter. Once again, you can track the numbers. Even though we said 10% admission growth in self-pay, it is still 10% of a low number, so it kind of -- but it does affect the percentages that we track pretty acutely.

Okay. Denny, I have one I guess follow-up question. As you look at the business, your CapEx has always been very much committed to developing the business as you have always said, and I guess over the last couple years you've spent about $1 billion, yet same store admissions this quarter, even if you ex out the rehab was up 0.6, and I believe last year's June quarter was up about 1%. You could argue over the last two years same store admissions are up less than 2% despite some heavy spending. How do you look at what is the optimal level of capital spending, given the macro environment such as it is, and what kind of return on investment you need to generate in order to justify a CapEx level as high as it is today?

Well -- and it's a good question and I have to tell you -- and I've said this repeatedly -- is that the driver of capital is not volume. It is not in itself what kind of volume growth you're seeing. It is what kind of market share are you seeing. What kind of market share growth are you seeing.

And as we've said, I think with the exception of one or two markets, we're continuing to see market share growth pretty much across the board, and that's encouraging. As I said on this call and I think I repeated it on several individual calls here in the last few months, we're very encouraged by where we're putting our capital is that the projects, for example, Alaska, Presbyterian in Denton, to name two, but I think -- we did our board yesterday and looking at our board report, Mike had gone through kind of our facility performance, and I think three of our five highest, fastest growing volume and fastest growing earnings growth were coming from the new projects, which is where it should be.

So that's highly encouraging, and at a pace faster than what we expected, and so I am looking at -- I am looking at market share, because it is market share that decides pricing. And you can be in high growth market and have a 3% growth rate, but if the growth rate in the market is 5%, you're losing position. And -- but we've got some markets where our growth rate is negative one, but the market share position is actually increased because the number of admissions in the market are minus four. So what we're trying to do is look at market position and how much market growth do we have and that's a better indicator of our abilities to determine the financial viability of a project. And as we said previously, you have -- where we're seeing negative numbers are in the sole community operations. Where we're seeing significantly higher than 1% to 2% growth rate is in those markets where we have competitors and especially in those markets where we have put new capital dollars.

Thank you. We'll go next to Rob Mains with Ryan Beck.

Yes. Just one question on physicians. Hearing, I think they're kind of anecdotal stories about shortages. Just wondering if you're running into any issues with recruiting and on the similar vein where you stand with physician employment? Thanks.

Thanks, Rob. We're seeing -- [inaudible] talked to the board yesterday, one of the biggest, significant kind of operating factors we see is physician employment. We went through in the industry in the mid -- mid '80's to mid '90's, we went through a relatively sharp and difficult understanding of employment issues with doctors, and a lot of that was built around income guarantees and people lost their shirts on it, and we all kind of got burned and backed away.

We probably see today a bigger and faster growth rate on the employment -- physician employment side than any time in the last 30 years, but one thing that's better about it is that we kind of learned from our experiences in the industry, and we know now we don't do guarantees. Things or contracts are based on productivity, and what we bring to the table is the ability to get economies and efficiencies from everything from purchasing power to malpractice insurance rates on a global basis, and so we bring some benefits to the doctors, but we keep them on a productivity basis.

We're seeing significant, significant growth rate on a rapid scale on the doctor's side. If you go back to seven years ago when we started, we had about 40 employed doctors. Today we have 855, and it is growing significantly. It is on a -- again, on a productivity basis, and so we've learned something from our experiences, but that is a big part of it. And as far as shortages go, yes, we are seeing some shortages and some difficulties in some areas. Mike, you may want to comment. I know anesthesia, interventional radiology, what, Dan?

Hospital list.

Hospital lists. We're seeing some shortages in some areas. Dan says hospital lists because we see a lot of markets wanting to move to that because the primary care physicians don't want to come into the hospital in mini-markets and treat the patients but finding the hospital to do the job is hard to find. We are seeing some shortages.

Thanks.

We'll go next to Miles Highsmith with Wachovia.

Morning, guys. Just one quick numbers question first, then a follow-up. Was the charity care running roughly 20 in this quarter?

The charity care ran -- you talking about the -- the overall discounts, if you look at the total the $50 million.

The self-pay discounts.

Self-pay discounts.

And then, Miles, the charity discounts were about $23.5 million, over and above the self-pay discounts.

23.5. Okay. Thanks. Then just secondly, kind of a broader question. Looking at internal of return for your projects, I always thought about you in a 15% to 20% range, unlever -- and had my memory might be bad there -- but levered, potentially a little bit better. Is that the case and is anything changing there in terms of what you're seeing in recent projects or opportunities, given some of your comments before that some of the targets may be continued to be challenged? Just any commentary you might be able it give us in terms of the IRR picture on projects and acquisitions?

Well, we don't give out that number, but what I would tell you is that I mentioned just Ken's question or comment the -- what we're seeing is the returns kind of looking out on the projects that we've invested capital in. We're seeing highly encouraging signs of returns equal to or better than what we would have expected on those projects, and the hurdle rate for those are such that any prudent investor would say, boy, if you can get those kind of returns, I would like to see you spend your money that way, which encourages us that over the next two years, as these projects come online and they mature is we're going to get returns that will justify the decisions that we made, and will strengthen the Company for the long-term. So everything that we see today tells us encouraging signs that we're going to have internal rate of return, hurdle rate that on these projects that's going to be met or exceeded. Now, you're not going to do it on every project. We're going to have projects that we don't, but the -- as a general rule, what we're seeing is very encouraging signs in anticipation that as -- and aggregately that we'll do equal to or better what we expected on those projects.

Thank you.

And we'll go next to Chuck Ruff with Insight Investments.

Hello, good morning.

Good morning.

I think it was about three years ago you talked about getting to free cash flow in '05 then somewhere along the line that got moved to '06. I think in last year you talked about generating free cash flow in '07. Given now that you're very excited about all the projects out there, is '07 off the table or would you like it put a new year out there?

Well, I don't think -- I don't ever remember saying three years ago that it's be '05, but not to argue that point, because we really actually didn't start expending dollars on these outside projects until two years ago. And we anticipated that it would be '06, I think, end of '06, early '07, is what we had said. And I think we've said that some of the projects we're seeing, one, are bigger than what we had anticipated, and, two, the projects -- some of the projects like Eugene, for example, and Birmingham are sliding. We haven't spent the money there, but those projects are sliding. We thought that we would be under construction in Eugene. This was two years ago, within a year, and we're two years out and we haven't started construction. So as a result, some of the projects are pushing back because we haven't spent the money yet and we're not going to get a return on it until we spend the money. So do I think that -- are we pushing it back? No, I think what we said over the last year is we said by the end of '07, '08, that's what we expected, and that is a pushback for about a year from what we were saying two years ago, and some of that is inside the project, and some of it is a delay in the projects we've done.

Obviously CapEx is very heavy this year. Can you give us any kind of direction for next year? Do you expect it to stay somewhere around that level? And I know it is highly uncertain the timing of these things, but just to give us some feel for whether you expect it to stay at that level, go up, go down?

Probably a little less this year, but more in the 600 to 700 range for next year, with a combination of internal and external cap, but within that range of 600 to 700.

Thank you. And we'll go next to [Whey Dial] with [inaudible].

Just a quick one, is there any drawing on the revolver? It looks like your debt is up a little bit.

No, we've done no draw on the revolvers. As we indicate when we file our 10-Q, there's no draw on the revolver, although we do have letters of credit that count against it, but that's not a big number. But we've had no draws on the revolver.

So the debt increase, where is that come from?

I am sorry I didn't hear the question?

On your total debt increase?

I don't think there was a debt increase, I think there was -- I will go back and double check. I think there may have been a slight decrease from last quarter. We'll have to go back and check and we can get back to you.

There is no real debt increase in this quarter.

Alright. Did you talk about -- last quarter I think you talked about you might think about or revisit stock buy backs -- I had to jump off the call for a few minutes. Did you talk about that?

Yes, we've already talked about that. I think we said before that we hoping to share repurchase vis-a-vis, use of money, in terms of what's the best use of money, what's the best long-term return for our shareholders and in the best interest of our community. It's something we'll continue to look at and it's possible we could do something but we're not willing to make that commitment today.

Okay, alright. Thank you.

And we'll go next to Mike Scarangella with Merrill Lynch.

Hi. Good morning, guys.

Hey Mike.

Hey, Denny, I'm just still chewing on your comments about possible uses of cash and I guess I have two questions around that. I think as recently as your last quarterly call you said you didn't have much appetite to lever up much past where you were, and you might do a modest share buy back if some of the developing projects didn't hit.. I guess the fact that you're saying LBO out loud here and you're talking about, sure, we might lever up. Sounds like your appetite for more leverage has evolved. Can you talk about what's driving that? I mean, have some of your advisors kind of thought about ways to do it that wouldn't necessarily compromise your development plan or is it changes in you pipeline? Maybe you could comment, and then I have a follow up.

Probably, Mike, not -- just we've dug deeper into it. I don't know that it's really changed that much. I think what it was is that we weren't very -- we weren't very forthcoming about -- I think there was some people that thought under no circumstances would we do a share repurchase, and I think probably only until the last couple of months have we kind of said, you know, that's just not true. I mean, if -- what I don't want to do, Mike, is that I don't want to lever up significantly. Could we lever up some, yes. I mean -- but again, I don't want to lever up dramatically. I mean, if we stay in the twos, would I feel comfortable? Yes, I would, so we could lever up. But again, I want to measure that against other opportunities that are out there and I just -- you know, that's what we're trying to work our way through. Dan said in his comments -- I mean, our pipeline has never been more robust and it's -- again, this is unsolicited. We've got -- [inaudible] go into those discussions. We're under a number of confidentiality agreements, but we've got a number of markets where we've got the ability to span regional presence. We've got markets where we've got competitors wanting to consolidate.

We've got just some unique opportunities that have huge value for the Company and, ultimately, the shareholders, and we just want to kind of work our ways through that. And that's never really changed. It's just -- I think we were -- there were a lot of people out there thought that under now circumstances would we do share repurchase. And the reality is is that if we don't feel good about some of these projects, we will -- and the leverage is -- I would feel comfortable staying kind of in the twos if -- and I would feel comfortable. I don't want to go into the three handle. I don't feel comfortable about that. And part of that is I think some of the prudent investors can see it, is that there's a lot of things hanging out there in terms of what's going to happen over the next year or two. Just there's so much uncertainty, I wouldn't want to leverage myself up and then there'd be some really significant opportunities that are kind of at that moment, and we're levered up to a point where we can't do anything. And so, just trying find that balance, that's what we're looking at.

Okay, that's helpful and actually dovetails into my second question. I mean, in terms of LVO's, stock repurchase, dividend. I would love to have you handicap those three for us, but I'm sure that's something that you probably need to do for us right now. But if you're objective is preserve your opportunities to do development, I would assume that LBO is got to be the least likely out of those three and maybe share buy back and dividend are more likely. Is that accurate in terms of order of magnitude?

Yes, but you know what, it's kind of interesting, Mike. Some of the private equity groups here are saying, you know what, we see it. We see what you're doing and we get it and we like it. And you know what, you're going to get a return. And you know what, if the shareholders don't want to wait for that return, the return's going to better. You know, we'll take that position. And so, it's been kind of interesting. You know, some of the private equity groups that have been here have been, we see it, we see the projects you've done. We see the returns that are coming, and if there's this frenzy out there to take a buck today, we'll take two bucks for tomorrow. So I've been pleasantly surprised by that, but I'm also -- I think our board is cautiously cautious about looking -- jumping off on that too quickly, and I think what we'll do is continue to keep our options open, and to have the discussions and weight that against the course that we're on.

And I have to tell you, I mean I've said this and I've kind of invested my money and my future in this, is that I feel good about the course that we're on. I feel like we're going to get the returns on these projects and I just -- I don't want to just give it away and I also don't want to be beholding to individuals who don't really understand the industry and their only objective is cut cost and hunker down and pay down -- leverage up and pay down debt and get away from what I think you have to do in this business. I think if you don't grow, you die. And I don't think hunkering down's a good strategy. And I have to be honest, if it's a hunker down strategy, it's not for me. I mean, it's be -- I mean if somebody wanted to do that with this Company, they could find somebody else to do it, because I just don't think that's the right thing to do.

And ladies and gentlemen, that does conclude our question and answer session for today. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

I just want to go back to the last question we had about our debt. We did have a slight increase in our other debt in the past quarter. It's about $4.5 million related to a note at Mal which the transaction we closed back in February , so just wanted to clarify that about a $4.5 million increase in our other debt.

Thanks, Laura. We appreciate it. Laura I know is going to -- she'll be here to help any of you and let us know what we can do to help you or answer any questions that you might have or any comments that you want to make. We appreciate getting those as well. And appreciate you being on the call.

Thank you. Ladies and gentlemen, that does conclude today's call. We thank you for your participation and you may disconnect at this time.