Community Health Systems Inc (CYH) 2006 Q3 法說會逐字稿

Good day everyone, and welcome to the Triad Hospitals, Incorporated third quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I'd like to turn the call over to Ms. Laura Baldwin, Vice President of Finance and Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, everybody.

With me this morning are Denny Shelton, Chairman and CEO; Mike Parsons, COO; Dan Moen, Executive Vice President of Development; Steve Love, CFO; Bill Huston, Senior Vice President of Operation Finance; Rebecca Hurley, General Counsel; and Pat Ball, Vice President of Marketing and Public Affairs.

Before we start, please bear we me while I read the Safe Harbor 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 condition 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 web cast are the property of Triad Hospitals, Inc. Any redistribution, retransmission, or rebroadcast of this call and web cast in any form without the expressed written consent of Triad Hospitals, Inc. is strictly prohibited.

Okay. This morning we reported our results for the third quarter of 2006. For the third quarter, we reported revenues of 1.4 billion, adjusted EBITDA of 156 million, diluted EPS of $0.46 and diluted EPS from continuing operations of $0.47. These results include stock compensation expense at 7.1 million pretax or $0.05 per diluted share. We began reporting stock compensation expense effective January 1, 2006, in accordance with SFAS 123R. Results for the 3 months include approximately 25 million of additional allowance for doubtful accounts which reduced diluted EPS from continuing operations by approximately $0.18.

We previously announced this on October 16th, and Steve Love will have additional details about this in his opening remarks. The results also included several items that result in a net positive impact of $0.01 on diluted EPS from continuing operations. These items were a $0.03 per diluted share positive impact from a gain on the sale of assets, a $0.02 per diluted share positive impact from the reversal of annual incentive compensation accrual, a $0.02 per diluted share negative impact from a reserve for a lawsuit settlement, $0.01 per diluted share negative impact from severance payments, and $0.01 per diluted share negative impact from net deferred tax adjustments. Excluding the net positive impact of $0.01 of these items, diluted EPS from continuing operations would have been $0.46, which is what we were taking credit for this quarter.

On a same facility basis for the quarter, admissions increased a strong 3.7% and adjusted admissions increased 4.0%. Same facility surgery growth remained strong, with inpatient surgeries increasing 4.1% and outpatient surgeries increasing 1.3% in the quarter. Same facility patient revenue per adjusted admission increased 6.0% and same facility revenue increased 9.6% in the quarter. Mike will discuss volumes and revenues in more detail in his opening comments. Adjusted EBITDA margin was 11.4% for the quarter, a decrease of 330 basis points over 14.7% in the third quarter of last year, primarily because of the increase in bad debt expense.

Excluding stock compensation expense, adjusted EBITDA margin would have been 11.9% and SW&B expense would have been 39.9% of revenue verses 40.4% as reported. The provision for doubtful accounts, or bad debt expense, was 11.1% of revenue, which included the additional 25 million of allowance. We reported cash flow from operations of 78.2 million. If you exclude cash interest and taxes, cash flow from operations was 122.8 million. Cash flow was negatively impacted by a delay in receipt of approximately 36 million in Medicare payments, and this delay was mandated by the Deficit Reduction Act of 2005. If you add back these payments, which were received in the fourth quarter, cash flow from operations would have been approximately 158.8 million.

We have slightly reduced our guidance for CapEx and acquisitions for this year to 570 to 630 million from 630 to 780 million. This Thursday at the regularly scheduled quarterly meeting, we will be recommending to our Board of Directors approval of a program to repurchase up to $250 million of our common stock in the open market, and Denny will address both of these issues later in his comments. We have updated our guidance for same facility admissions growth for 2006 to 1 to 2% from 0 to 1%, reflecting the strong growth we saw in the third quarter. And for the fourth quarter of 2006, we expect diluted EPS from continuing operations of approximately $0.54 to $0.59 and diluted EPS from continuing operations, excluding stock compensation expense, of approximately $0.59 to $0.64.

We expect the provision for doubtful accounts for the fourth quarter to be approximately 10.3 to 10.8% of revenues. And for the full-year 2006, we expect diluted EPS from continued operations of approximately $2.48 to $2.53 and diluted EPS from continuing operations, excluding stock compensation expense of approximately $2.69 to $2.74. And please note that this guidance for the year incorporates Q3 EPS of $0.46. As we did in the third quarter, we will update our average cash collection percentages in the fourth quarter. If these percentages are consistent with trends observed during the fourth quarter, an additional allowance for doubtful accounts of 18 to 22 million may be required. And please note that this additional 18 to 22 million is not incorporated into our guidance.

Now I'll turn the call over to Steve Love for additional opening remarks.

Thank you, Laura. Good morning, everyone.

I wanted to discuss a little bit about the bad debt. And before I get into the current quarter's discussion, I wanted to just briefly remind everyone of some of the methodologies that we have used over the past. First, as you know, we used an AR look-back each quarter, did a vigorous look-back and have done that since the inception of the Company. In the fourth quarter of '05, we made a determination because of the discount policies that we put in place that the answer, if you would, that we were getting or the range that we were getting when running the AR look-back was so positive, which we would expect based on the writeoffs that we were doing through the discounts, that we would utilize other metrics to look at AR and rely more heavily on collections that we've gotten on our self-pay. And as you know, we've booked approximately a 62% reserve up until this quarter on our self-pay receivables.

Now, there are many ways you can evaluate bad debt. You can use a cliff method, where you take a point in time and reserve everything over some days like 150 days. You can do an AR look-back method, you can do some in between methodology, and what's important is when you do it. Do you do it quarterly? Do you do it annually? Et cetera. Because as you refine those estimates, it's going to have an impact. We feel that the provision that we do and the analysis that we do is very rigorous. It always has been.

We look at AR days, we look at self-pay, we look at self-pay revenue, we look at collections, and all of the other types of analytical reviews that one would expect. And we feel currently, especially in this current environment, updating and looking at cash collections as a percent of self-pay is the best way to do it. And it would help capture any shifts, subtle shifts in your self-pay probably would capture it more quickly than some of the other methodologies.

Now let's look at what we did in the third quarter. In the third quarter, we did update the collection percentages on our self-pay. Now, we've waited through June 30 for a couple of reasons. As you know, obviously we had updated it at 12/31/05 when we essentially started relying more heavily on this metric. And we wanted to wait 6 months to have that time period elapse to see how things played out, especially in the changing environment related to bad debt and self-pay.

But more importantly, as you remember in the second quarter of '05 is when we implemented the second part of our self-pay discount policy. And we wanted to get through that period of time so for comparable comparison, especially of collection rates in '06, we would have more of an apples-to-apples comparison. It is our intent on a go forward basis to continue to update these collection percentages every quarter. Once those percentages are updated from a sampling of hospitals, we apply that overall average to the entire self-pay receivable for the Company. And we feel in the current environment this is the best gauge of how to record the appropriate estimate related to the self-pay receivables.

We felt when we did our review in the third quarter that we had to obviously analyze where we were going. We thought as soon as we had indications for the quarter related to bad debt that we were compelled -- since we had essentially noted these trends, we felt compelled to prerelease and to talk about the bad debt. And then we did this when we had an acceptable range within the controls we have in place to analyze accounts receivable.

We did this before we had completed all of the internal reconciliations and the reconciliations between the different buckets of the self-pay, but in total, we felt compelled based on the trends to make our estimates and to prerelease. Now that we have completed the final work related to the third quarter, we have found that the actual shift in the pure self-pay was closer to 30 million and basically some of the increase, at least in the time period from June until September, basically was in the pure self-pay.

We still had increases in the self-pay after insurance, but at least in the quarter and time period from June to September, it was more of a shift in the pure self-pay. Based on that, we updated our collection percentages and recorded what we thought was appropriate. Based on that discussion, the sensitivity is approximately $5 million for every percent change in collections with approximately $500 million in pure self-pay times 3% is why we felt compelled to book and record an additional $15 million.

As we evaluate our accounts receivable and our allowance for doubtful accounts, we feel good about where we're at. We had about $45 million in discounts this quarter. They run 50 million a quarter, 45 million a quarter. It looks like that's what the run rate's going to be. These have to be taken into consideration when looking at the proper stating of the net realizable value of the receivable. And if you look at our overall coverage and add back the discounts, our allowance coverage as a percent of gross revenue has consistently increased. And it's increased quarter-to-quarter and it also with the recording of the allowance for doubtful accounts this quarter has also increased to almost 40%.

So we feel that we are appropriately estimating and booking in conjunction with the discounts that we're giving an appropriate allowance for doubtful accounts. One final thing. The actual amounts that are recorded are approximately 65% as far as the allowance. When you read our 10-Q, you're going to see it's 65.9%, just as when you look at the second quarter it was closer to 63% because we have rounding as we go through our facilities and especially with some of our joint ventures. So you'll see the actual allowance coverage 65.9% of the self-pay.

Laura touched on the cash, but I wanted to reiterate a couple of points. As you know when you look at our balance sheet, you're going to see about $262 million of cash on hand. There was approximately $36 million related to Medicare because of the last 9 days of the month, as you all know, that was reduced. We received that $36 million in the very early part of October. So our cash on hand really on a go-forward basis is 300 million-plus. If you look at the cash flow from operations, add back the interest intact, and add back in the $36 million, as Laura indicated, then our cash flow from operations actually was a little stronger than the adjusted EBITDA which is a proxy that we use to kind of compare the cash flow versus the EBITDA.

I'm going to now turn the call and comments to over to Mike Parsons, our Chief Operating Officer. Mike?

Okay. Thank you, Steve.

As in the past, what I'll do is go through the income statement and give you some -- some more color on each of the main areas. As Laura said in the opening, our patient revenues were up about 10%. That breaks down roughly 4% volume and 6% rates. Breaking down the volume on the in patient side, same store admissions grew 3.7% for the quarter, and basically what we experienced this quarter was a return of our medical admissions. For the first 6 months, I think all of you have noted that we had strong surgical admissions.

Our surgical admissions for the first 6 months were up 6% with our medical admissions being down the first 6 months 3.3%, resulting in an overall flat year-over-year admission volume increase. This quarter, however, we saw the surgical admissions continue to grow, 4.1%; but we also saw our medical admissions come back and grow 3.5%. So the net result was overall increase in our admissions of 3.7%. On an outpatient basis, same store outpatient surgeries grew 1.3% and our same store outpatient visits grew 2.6%. Our adjusted admissions grew 4% for the quarter.

Looking at rates and intensity, our revenue per adjusted admissions same store for the quarter grew 6%. This 6% is due almost exclusively to rates this quarter. The intensity was flat due to a couple of reasons. First, the proportionate increase this quarter of medical to surgical admissions was a main reason for kind of the flat intensity. And as [further how item] when you look at our case mix for the quarter, our overall case mix was down 1.4%. That was offset somewhat by our Medicare case mix being up 2.3%. Net effect being that our intensity for the quarter was basically flat.

Going to salaries, wages, and benefits, as reported, our SW&B as a percent of net revenue for the quarter was 40.4% as compared to 42.6% third quarter last year. We did have several reconciling items or extraordinary items in our SW&B this quarter. The net effect was pretty much that they offset each other, but I thought I'd break them down for you to give you some more -- some more visibility on what was going on with SW&B. On the negative adjustment side, we had, as Laura said, the 7.1 million in stock option expense that we recorded this quarter that wasn't in last year's third quarter. And we also had approximately 800,000 in severance cost this quarter related to reduction in forces at several hospitals in this quarter.

On the negative -- these negative adjustments were offset in part by a couple of positive adjustments to SW&B when comparing the prior year. First, as we said last quarter, we began outsourcing our IT services to Perot in the second quarter of this year. So you will see that reclass of SW&B costs to contract services, which shows up in our all other category for this quarter as well as next quarter. That had about a 40 basis point impact, a $6 million shift. And also, as Laura noted in her opening comments, we reversed our management bonuses that were recorded earlier in this year that had a net impact of 3.5 million.

Overall, when you add the pluses and minuses together, our SW&B as a percent of net was 40.6% compared to 42.6% last year's third quarter. Basically at 200 basis point improvement. So I think you can see the divisions in the hospitals really did a great job this last quarter in managing our SW&B to -- as tightly as we could to help offset where we could some of our bad debt pressures.

Supply expense -- as reported increase in supply expense from 17.1% to 17.3%, a 20 basis point increase. This increase is due really to the addition this past year of 2 hospitals that are generally larger and more complex than our average hospitals, particularly Trinity Hospital in Birmingham where we have a strong cardiology and neurosurgery programs at that hospital. When you look at our same store supply costs, we actually showed a decrease from 17.1% to 16.8%. So as I said, a lot of -- all of that increase year-over-year was pretty much due to the addition of these highly complex hospitals.

In the all other category, there's a lot going on in the all other category. We've talked about most of these in the past two quarters. But to recap some of the main issues for you. First, is that reclass of Perot agreement out of SW&B into contract services. That was about a 40 basis point movement from SW&B into the all other category. We've been discussing these three areas that would have a big impact this year on our all other category. Utility cost increases this year, professional fee subsidies we've been experiencing this year as we have to subsidize some of our hospital-based services to be able to provide those services at our hospital, as well as our conversion costs as we're moving into converting our hospitals.

The three -- those three areas together represented a 50 basis point increase in our other controllable expenses for the quarter. We also noted last quarter our change in our discount rate and our malpractice, and when you look at that year-over-year with some of the good improvements we'd made last year and just kind of normal increases this year, it had about a 15 basis point impact quarter-over-quarter. And the finally in the all other category, Laura mentioned that prior year QHR -- a lawsuit settlement for 2.5 million and that showed up in the all other category.

With that, Steve went over the bad debt reserve breakdown a little bit. And I'm going to turn it over to Bill Huston to talk -- give a little bit more color on our bad debt. So, Bill?

Thanks, Mike.

One of the things that Steve had mentioned is in our self-pay in terms of change in our AR from Q2 to Q3, that we did see a $24 million increase in our self-pay AR. A lot of this is still related to our self-pay mix. Our self-pay mix from Q2 to Q3 went from 5.6% in Q2 to 5.8% in Q3. And really, most of this is still in the -- was in the outpatient. Inpatient did go up slightly, it was at 4.3% self-pay mix in Q2 and that went to 4.4% in Q3.

We did see about a 2% increase in self-pay admissions in looking at Q2 compared to Q3. So self-pay admits weren't quite as high as the overall admits were for the quarter. It was really in the outpatient arena, where we ran a 7.7% outpatient mix in the second quarter of '06 and that increased to 8.1% in the third quarter of this year. So that kind of gives you a little bit of flavor in terms of why we saw the increase. When you look at self-pay after insurance compared to the second quarter, it only went up 5 million.

The actual mix actually declined just slightly when you look at how our self-pay after insurance AR compared to total AR. So that was a little bit of a change. We had tried to extrapolate when we gave you numbers previous to that, we didn't have -- it usually takes us until about the 20th of the month to be able to reconcile all AR. We have 10 different AR systems out there that we have to reconcile.

So the number we gave you previously, we had -- we were trying to extrapolate based on what our experience had been, and we got the reconciliation done, and we now see that self-pay went up 24 million, self after insurance up 5 million. When you look at that, again, it's kind of still the self-pay mix where we saw it in this past quarter was really in Texas, Mississippi, Oregon, New Mexico, Alabama's where we saw the majority of the increase relative to the self-pay mix.

One thing I thought I'd share with you a little bit is some of the things that we're doing to try to counteract, obviously, this issue with our self-pay mix. I think we've mentioned to you in the past some of the things we've been doing is -- really been a big part has been the education at our hospitals relative to -- in terms of teaching our -- or educating our medical staffs and also our boards on just some of the trends that we are seeing, especially when you talk about in outpatient arena.

As you know, when someone presents themselves in emergent situation, we have an obligation, and obviously, we will treat those. It's really in the outpatient non-emergency arena is where we are making -- continuing to educate our hospitals and medical staff on these issues and continue to do that. One of the things we will be establishing and some hospitals have is minimum payment requirements to continue to provide service for those non-emergency situations. And those are some of the things that we're sharing and teaching our teams on.

In addition to that, we continue to train our staff, continue to upgrade our staff in terms of individuals and their ability to ask for funds at time of service. We've made upgrades to our registration staff. Continue to add financial counselors in our ER, which is a major issue in terms of, again, being able to have people there who have those critical thinking skill and be able to ensure that we are -- attain the kinds of funds that we need to provide those services. Also, we are looking at some patient scoring in some selected markets as a way of us kind of knowing who has the ability to pay a little more effectively in terms of the way we do it currently.

These, along with many other things that we are initiating -- have been initiated, but we continue to see some progress or expect to see some progress in these areas. But you can well imagine a lot of this is just some cultural change that we're going through. And I think -- it's not only us, but it's really an industry issue that we have to address. So those are just a little bit of things to give you some flavor, some color relative to the bad debt experience that we had for this particular quarter.

And with that I'm going to turn it over to Dan Moen.

Thank you, Bill.

Just briefly, I'd like to go over a couple of projects that we're working on. You've heard about the Cedar Park Medical Center, which is a suburb of Austin, Texas, in the north Williamson County, we're building a 75-bed hospital with a shell for another 75 beds. That's an 80/20 joint venture with Seton, which is an affiliated company of Ascension out of St. Louis. This is a de novo hospital, and construction began on this project in June of '06.

The next hospital is Beacon Hospital in Dublin, Ireland. This is 122-bed full service de novo hospital, which we expect to open in mid November, next month. And this is approximately $180 million full-service hospital. And we will try to lease and manage this facility when it opens next month. And as I think we've told you before, we have very minimal capital investment here. Our investment is the working capital. We have a short-term lease on the facility, which we can convert to a long-term lease at our option and the lease payment to the landlord is based on a percent of the profit. It's a pretty -- pretty unique type of transaction in terms of the type of agreement we have. It's not the kind we'll find over here, but it was very attractive from our point of view and very effective use of our capital. And this is the first new hospital built in Dublin in over 20 some years, so we expect that it will do well.

The other project that we're working on is St. Joseph's Hospital in Augusta, Georgia. This is a 231-bed hospital. We will purchase that effective November 1st. And that's pretty much -- pretty much a done deal. I should say that we're probably -- we're purchasing it in a partnership with a very large group of physicians that basically is our medical staff. And we've been working with these physicians over the last 90 days to put this partnership together. So, actually, the physicians will put up about a third of the capital required to purchase this hospital. And we think that it'll be a very good acquisition/joint venture for us as this hospital has a good [inaudible] a very good reputation in the Augusta market.

Another project that you may have heard about in the last couple of weeks is our merge -- it's in San Angelo, Texas, with the Shannon Health System. This is a merger of Triad's San Angelo Community Hospital, 168-bed hospital, with Shannon Health System, a 411-bed acute care hospital. A much larger hospital than ours. Our plan is to consolidate the services between both of these hospitals, but to continue to operate both facilities. And we think we can improve the services and the quality in this community while controlling costs by doing this joint venture/merger. Triad'll own 55% of this joint venture, and we will manage the day-to-day operation of the combined facilities. These are the only two acute hospitals in this community, so it is subject to regulatory approval. And that'll -- that kind of gives you a flavor of what we're working on as of the moment.

And with that, I'll turn it to Denny Shelton.

Okay. Thanks, Dan.

Well, let me kind of cover a few points that have been raised and maybe add some color to them. The -- one of the things, obviously, that -- when you look at the quarter, there's obviously the one big negative is the bad debt. And that's not a Triad issue. I mean, I know there are a lot of people out there thinking why can't you collect this money? What's happening? Why does this thing continue to -- I mean, this is an issue that's facing every hospital in this country. This is a U.S. health care issue. And we've got a lot of hospitals in this country in trouble because of it. So you have 75 to 80% of the hospitals are in some type of financial distress because of this growing problem and it impacts us, as well.

I mean, I'd like to tell you guys that we got this thing under control or this thing's going to continue to improve dramatically over the near term and the long-term, but I can't do that. And so it's somewhat shoot the messenger. And I wish we could be more specific in terms of exactly what's going to happen over the next quarter and into next year. We hope to -- and we've tried to give you some guidance for the fourth quarter based on trendings that we've seen on our collection rates up through the third quarter. If those trendings were to continue, what the impact would be for the fourth quarter, and Steve gave you some specific information relative to every percentage increase in the collection rate or decrease in the collection rate what the impact of that is in terms of dollars, and, obviously, in terms of what the EPS impact would be.

You know, that's the big issue. It's being able to get a handle on it. For the last three years, I think we've been in a leader in trying to tell you when there's a problem. And sometimes we've got a bunch of people who don't want to hear it. But the reality of it is is that there's no real science to this thing. It's a moving target. We're going to continue to work on it, we'll continue to be upfront and honest with you and let you know what we see. And -- but this is an issue, especially as we get into midterm elections.

A lot of communities in this country dealing with and concerned about the -- what's going to happen to their community hospitals. Lack of coverage of people in this country and the impact is bad debt. We have to balance that with morally and ethically what's right in terms of taking care of people in our communities. You heard us say on a number of different occasions that we have a lot of hospitals where we're the sole community provider.

We're the only player in town or the only player within a region. If we're not there to provide that care, people don't get it. So it's not just simple to say, well, if you don't have the money or resources, we're not going to provide you the care or service. And so it goes even beyond the [impoly] issues. Impoly issues are legal issues, but there are moral and ethical issues here about doing the right thing. And we don't make widgets. We provide care to patients, and that's what we're committed to doing.

Now, what does all that mean? Well, if you look at the operations, I'm real proud of the operational team. I'm real proud of our facilities. Our hospitals and our surgery centers. About 6 or 7 years ago, many of you on this call asked, what would be a good range in terms of operating margins of this company. And we said if we can get to the mid teens, maybe 16 or 17%, we could be -- that's probably a good goal for us, and we've been pretty consistent in that message. If you took the impact from the last year or two for the bad debt, we'd be running at 17 to 18% operating margins. The 400 to 500% hits that we're taking on this bad debt has negated and I think we lose sight of how efficiently the hospitals have become and how much better operated they are today than they were three years ago, five years ago, seven years ago. So the operating teams are doing a good job.

The other thing that I think that's interesting to note is that we're still buoyed growth. And we've had a lot of good indicators -- Mike talked about surgery volumes that we've seen grow. We've seen good net revenue growth over the last two years, three years, which has really kind of been industry-leading, which really came from 4 or 5 years of commitment to growing the business. And I think we -- I said this over the last couple of quarters. I've been kind of encouraged beginning to see signs that we're strongly moving market share again. Not just in terms of growth in individual markets, but just absolute growth in admissions and volumes across the board in our facilities.

Let me tell you, what gets us excited is not just the growth for growth's sake, but the impact it has on market share and ultimately the ability to be treated fairly in terms of getting good pricing from the commercial payors. And that's really ultimately where it's driven. I think I said this repeatedly, but when you take and you break down the segments of our business, it all comes down to commercial pricing. And the stronger we can get commercial pricing, the better we're going to be, as long as we're efficient providers and some of the good positive signs of the quarter in spite of the bad debt is that we're seeing good volume growth and we're highly encouraged by that. So a lot of good things going on.

We see and we're still having lots of organizations, lots of people talking to us from those -- 4700 hospitals in the United States out there. Those -- those hospitals that are feeling the financial distress can't recapitalize themselves. Losing money, what do they do? How do they continue to provide care and services? They're coming. We've got a lot of people talking to us. We've got lots of opportunity on that front. I'm going to come back to that. We're seeing significant volume growth, abilities to move market share, we're seeing pretty good efficiencies in the operations of our hospitals and surgery centers. So a lot of encouraging things.

It really boils down to it, how do you get a handle around this bad debt and then how do you appease short-term thinking in terms of certain shareholder groups who want to see increases in EPS next week? Or next month? And we're cognizant of that. We know -- and we try to tell people historically is that you have to grow or you will die. And we -- and I will tell you we cannot grow EPS into upper single digits, low double digits, even back into the mid teens off the backs of these existing hospitals.

They, in essence, are running 17, 18% operating margins when you take out the effect of bad debt. There is not a lot of room there that we're going continue to be able to squeeze a dollar out of those hospitals without adversely affecting patient care. And that is a line I will not cross. We are going to continue to ere on the side of providing outstanding care because that's what we do. And ultimately that representation of providing good care is what will drive and sustain the business long-term.

Now, given all of that, what do we do in terms of trying to find some balance return? Well, one of the things that we're doing is that we've got 3 or 4 projects that we've been looking at. And we're probably not going to get all those projects done. We're sitting on some significant cash. Now that I know that we're not going to get some of those projects done, we're going to go ahead and move to do some share repurchase. We've talked about it in June at our Board, we talked about it again in the August at our Board.

I will take it to the Board again this week. Anticipate strong support there to use some cash that we have available. I'm not a big proponent of highly leveraging the Company on share repurchase or other financial engineering, but that being said, I think when we have the opportunity to create some value with fast availability, or even if we were to leverage up slightly would I be willing to go back up into the mid to upper twos in terms of leverage? The answer is yes. We want to keep ourselves in the position to advantage of lots of opportunities out there, but I think that hopefully what you see is there's a pretty good discipline.

We're not doing 10, 20 projects a year. We're doing 2 or 3 or 4 projects. And that's what we're committed to doing. And this is really a strategy that's evolved over the last couple of years. And we still strongly believe, and we're getting good indications that the projects that we have done over the last couple of years that are just in their infancy stage and some of them not even yet completed, we feel very strongly about, just like we did a quarter ago. And so nothing's changed over the last quarter is that there's going to be good returns on those projects.

And there's going to be good volume growth. And there's going to improving market share position and ultimately there's going to be good pricing that comes for our system that will hopefully get us back into mid teen EPS growth because that's our objective to do that. We're trying to outrun the bad debt. That's what we're trying to do.

And I wish I could tell you that it's easy or I wish I could tell you that we can -- we can define it clearly on any given day. And the honest truth is, we can't. It's a moving target. But I think we are positioned exceedingly well as a company to grow, to grow earnings, and we've got to stay the course. I think we have to find some balance and some discipline, increase our discipline in terms of how we use our cash. I've told people I'm not opposed to doing share repurchase.

And quite frankly, I'm not capitulating simply because there are a few out there that would rather us do this and not do anything on the development front. But because we're not going to get a couple of projects done and we've got some cash available. And we're going to put that cash to work which hopefully is advantage to our shareholders on a more short-term basis. So that's where we're focussed on.

I also want to say thank you to Tom Frist III, who has been a long-term member of our Board, started with us, almost 8 years ago. And who stepped down from our Board this past week. Tommy was a great Board member. I think given the situation of his family's involvement with the HCA buyout that he didn't believe, I didn't believe that there was a conflict, but I think he didn't want to give any impressions that there might be and felt like that it would be clearer. There were a couple of articles that were written that he felt like that -- and we felt like didn't necessarily represent his true position, but I think it made him realize that there was possibilities for people to perceive a conflict that wasn't there. So I think in credit to him, he went ahead and tendered his resignation to our Board, and I want to thank him for the time and effort and the energy that he brought to the Board over the last 8 years.

That's kind of where we are. We are really focussed on tightening our belts, we're going through a budget process. We're looking at making -- trying to -- where we can to reduce costs, especially here at the corporate office. I think the facilities, again, are doing a good job. I want to take as much pressure off of them. And we want to continue to position ourselves for selective growth. That will bode well for us. And I think we're well-positioned to do that. I wish the answer for bad debt was more clear, not just for you, but for me. I mean, it's tough. And -- but we're going to continue to fight that fight and we're going to continue to work to overcome it. And the best way we can over come it is to continue to grow the Company in a reasonable way and take as much pressure off the existing facilities as we possibly can. And to balance that where we can with some short-term financial engineering that will hopefully help the Company on the short-term.

So that's kind of where we are. That's what we're doing. Strategy hasn't changed, but hopefully -- I think here, I think we recognize a need for more discipline and to tighten our belts as much as we can and to stay the course with growing the Company.

So with that, let me ask the operator to come back on and we will open it up to questions that you guys want to talk about.

[OPERATOR INSTRUCTIONS]. Christopher McFadden, Goldman Sachs.

Hi, Chris.

Thank you. Good morning, and as always, Denny, thanks for the detail and thoughtful comments. Couple of follow-ons. On this call 90 days ago, you were pretty open with the investment community in terms of the inquiries you'd received from the private equity community. You didn't talk about that at all today. I was wondering if you'd be prepared to just comment generally on if anything's changed or developed since you provided that posting? And then secondly, you talked about managed care pricing, and I was struck by your comment here, quote, all -- I think you said it all comes down to commercial pricing in terms of our businesses.

Having said that, the market is continuing to focus very closely on the results of the managed care organizations. Do you see any shift or change in tone in terms of what you think are realizable pricing adjustments from those contracts, whether it's specifically on the kind of the headline rate or whether it's other elements in terms of how it is you contract for those organizations that might have some affect on what the industry has -- should expect in terms of commercial price increases on a year-over-year basis? Thanks.

Thanks for the questions, Chris. Let me -- on the LBO front. No, I mean -- listen, we -- again, let me -- I have continued to have meetings with different groups and have had some good discussions. And I have several people out there that I have been positively, I guess -- been positive about what I've heard. And we continue to have some conversations. There's nothing imminent. I think it's a dialogue that we're going to continue and something that management -- I'll continue to keep our Board informed. So -- and at some point in time, I -- again, nothing's imminent, but at some point in time, we might want to consider something. But I believe and I met two or three groups that I've been real impressed with. I've met two or three groups that I think recognized that this isn't a hunker down strategy.

You cannot succeed in this business by making it off the backs of just your existing hospitals and that you can't just lever an organization up and then hope to ride it out for 3 to 5 years by, in essence, putting your facilities in terms of routine and routine capital needs at the facilities in jeopardy if in fact you can't meet the cash objectives that you have. And so -- because that's really the only flexibility that you have if that's your strategy. And ours is one, I think, is that we need and I think we are well-positioned to grow and I found two or three groups that recognize that. That this wouldn't be your typical, let's leverage this thing to the max and to ride it out on the cash flows by short changing the facilities for a 3 to 5 year period of time. And so I'm encouraged by that.

So we're having some good conversations and we're going to continue those. I mean, they know this and realistically I would tell you that I would prefer to stay a public company, but -- simply I think we can be well -- we can do well in this environment and we will do well intermediate and long-term. We're not going to outrun this bad debt problem over the next 12 to 18 months. I just don't think we're going to.

I think we can hopefully fend it off, but I don't think we're going to outrun it to any great extent. But hopefully, we can prove that and show that that it's better to stay the course as a public company. If not, or if we feel like that there's somebody who really gets it and is willing to put their money where their mouth is and wants to do something in line with strategically where we think we need to go, we would consider it.

Mike, do you want to answer or comment about the --

Managed care. On the managed care pricing, in fact, Bill Huston and I just this last week were spending a lot of time on the operating budgets for this next year looking through what the hospitals and divisions had done, and I would say it looks like managed care is about what it's been the last couple years. It's -- still feel -- most of our increases are kind of on track in that same 4 to 7%. We're not really seeing many trends changing on what the pattern that we've started over the last 2 to 3 years. Seeing some areas where we're actually doing a little better than what I just said, some areas where we have more pressure than what I just said, but in the main, that's what -- that's what we're seeing.

Probably the biggest thing that -- some of the things like Champus/Tricare are where some of our bigger challenges are, and that's kind of a government -- government-led initiatives. But on the private managed care side, it's -- I think our relationships that our team has built over the last couple three years, when the contracts come up for renewal, I think both sides are trying to be fair.

I was also, Chris -- I'll give you just a little color, I was up a week before last up in Arkansas with Blue Cross/Blue Shield which is one of the larger plans in any state in the country. And had a great meeting with them and really feel like we have some shared interests and some shared values. And what I'm finding is with a lot of the insurers, they're recognizing that there are a lot of problems. There are a lot of hospitals in trouble. And how do we -- how can we find ways to work together?

What can we do to bring better value to consumers and at the same time shore up this -- the financial positions that we face? And so I felt the dialogue has been good. And that was a great example. I was buoyed after I came back from Little Rock. Just the willingness to talk about how we can work together, how can we work on new products together? And so highly encouraging.

Very good. Thank you for the detail.

Darren Lehrich, Deutsche Bank.

Hey, Darren.

Thanks. Good morning, everyone. Couple things here. Just in light of the bad debt comments, it would appear you don't have a whole lot of control. But given your history of having pretty strong physician relations, I'm wondering if you can use that to leverage better collection rates on the self-pay after insurance piece. And can your physicians help you here at all? Or is this just, again, totally of your control?

Darren, I think there is some help that can be there. We have our National Physician Leadership Group meeting this week. Friday, Saturday, and I plan on talking with the group. And I -- by the way, as soon as this call's over, I plan on having a call with the field. And Bill Huston is working on a -- basically kind of a summit meeting where we're going to bring all of our business office, CEO, CFOs -- and I say CEOs, I really want to emphasize that in here in the next 30 days.

I mean, we're really trying to get kind of a team effort and part of that team includes the doctors, and what we're going to try to encourage them is that, guys we're going to need some help. I mean -- and it's not just Triad, but that's what we're worried about is Triad, is that if we want to be able to continue to do the things that we're doing and have done and continue those, is that we've got to get paid. And so we -- again, we got to balance it with being responsible, but you guys can help us. And part helping us is to be understanding is that we're going to start to have to ask people before they get non-emergency care to pay for that services.

And I have to tell you, that is a cultural chasm from what we as a industry have done in the 30-plus years now I've been in this business. We just don't do that. And haven't historically done it, and people in this country don't expect it. And so it's not as easy as it sounds. And I can tell you, that there's a lot of people on this call that think, oh, why can't you do this? That's easy. Why don't you just ask people to pay you? And I can tell you, I'll give you a great example. This is a true story. I mean, you get a lady who has a kid who falls and cuts their head and they're three years old and she panics and grabs the kid and runs to the hospital and they found out it's really not a real emergency. They clean him up. He's got to have a couple of stitches in his head.

How would you like to pay for this? Well, didn't bring their purse, didn't bring their pocketbook. All they were worried about was that kid. And so do we not stitch the kid up because they don't have a checkbook or they don't have a credit card on them? And so there's some things that we've got to balance but there are other things like elective surgeries or some minor procedures that we need the doctors to help us. And I think that's a great question and a great point. And we're going to start asking more for the physicians to support us.

The other thing that I think will help us, Darren, is that we are having really, really good traction with these syndications -- these whole hospital syndications. And I think, getting the physicians to see the big picture in terms of quality of care, the reasons you've got to focus on quality, looking at the whole issue about appropriate collections. I mean, the whole gamut of the business, I think they're getting more understanding of because they're at the table. And I think these whole hospital syndications where we are now just not because we like each other and we try to work together but because we have a shared interest in the business going forward, I think it has some value for us, too. And what we're seeing, we're highly, highly encouraged by the participation that we're seeing in the hospital syndications.

Great. And just one last thing here, just want to get your kind of summary comments on -- as it relates to the development pipeline and how bad debt may change that in terms of your view of the opportunities that are out there. Does this increase or decrease the number of targets? Just wondering how you're viewing that in terms of the consolidation strategy?

Well, I'll tell you what we're seeing, we're seeing more than ever so that's increasing. And I think a lot of that's reputational. I think we're getting a lot of -- the kind of opportunities we're seeing and the opportunities that we'd like to see we're seeing more of because of -- because simply hospitals are in trouble and they're trying to figure out if we've got to do something, who would we more likely want to do it with? And I'll give you the example. Darren, we don't announce deals until we do them, but some of the people that want to work with us get out ahead of us and that's okay because I understand the reasons. But we had, for example, out in San Angelo, Texas, the deal that Dan mentioned is basically -- that's an incredible opportunity on a significant consolidation play in that market. And we have in the last 30, 45 days, we've had two or three other local communities where there are two hospitals or three hospitals in the community wanting to consolidate or wanting to look because they're saying, together, we can maybe make this work.

Apart, we're probably going to kill each other and given the problems we all had, can we make it work? That's highly encouraging because I can tell you in my career, historically, those guys you kind of thought, well, that would never happen. And so I've been pleasantly surprised by some of the -- kind of the new wave here of what I'd call consolidation opportunities that are starting to present themselves. And, of course, as Dan mentioned, those also have regulatory issues and we have to get through that process. But I think for the benefit of the community they'd make a lot of sense and hopefully two hospitals as one are a lot stronger, not only in terms of the long-term benefit to the community, but also in terms of being just financially viable.

Thanks a lot.

Tom Gallucci, Merrill Lynch.

Hey, Tom.

Hey, Denny. How you doing? Thanks for all of the comments here. I guess just one housekeeping question first. Do you have offhand what the allowance for doubtful accounts as a percent of self-pay receivables is as of this point?

As a percent of self-pay receivables?

Yes.

Yes. It's going to be 65.9%.

Okay. Great. And then, Denny, maybe to follow-up on your comments there on the pipeline. Are you seeing any kind of adjustment in pricing that's being -- that's being looked at out there? Obviously, with bad debt and everyone struggling with it, hospitals more desperate. We've seen some deals outside of Triad where multiple of revenue doesn't seem to be changing verses what it's been in the past, but, clearly, there's been some hit to profit. So can you talk about what the expectations are on the sell side?

Yes. Dan, do you want to comment on that, and then I'll make some commentary.

Yes, I don't see any significantly different pricing as a result to all of this. But I will tell you, I don't know that we've won a deal that we were the high priced bidder on any one of these.

Yes. And that's been one of the good things, too. Yes. So, I mean we -- what we've found is that with our partnering strategy is that it's really comes down to -- there's so few hospitals left. I mean, again, I talk about it, but I mean we've gone from 8,000 hospitals to 4700 here in the last 30 years and it continues to decline. And a lot of these organizations today, they don't want to sell. And given an alternative, they'd rather stay involved if they can. So we haven't experienced some of those numbers, but the general feeling I think is we haven't seen kind of the -- at least at the auctions, we haven't seen much reduction in the pricing.

Okay. And then just from a management perspective. I guess, Denny, how many activities in terms of the pipeline do you think you can handle at once, if you were to capitalize on whatever you thought were, quote, unquote, kind of good deals?

Well, I -- at any one time I think with the size of the group and what we're doing -- I mean, we kind of said 3 to 5 projects a year. That may be in a time of tightening our belt a little bit might be 2 to 4. And putting -- reigning in some capital and doing some things just what we're talking about doing. Putting some of that money to some share repurchase, but not foregoing the strategy. So I would tell you 2 to 4, historically I might have said 3 to 5. I mean, the number of actual things that we're looking out there are larger. Let me give you an example, too, about -- and this is something Dan's team will be working on is in Ireland.

Ireland is deciding to go to what they call a co-location agreements where the government is going to allow an organization to develop hospitals on the campuses of large public facilities and take the private business out into a -- what they call a co-located hospital on the same property. Well, our partners in Ireland have decided that they want to be players in that game. They would like to build 3 or 4 new hospitals in Ireland. And again, as Dan mentioned to you, we don't have -- we're not providing the capital for that. We're basically providing the operational support to us. And while it's a -- kind of it looks like a lease, it looks like a management for a percentage of the profits.

And so there's some things that would be maybe additional that doesn't -- that has a very, very low risk threshold that we might be willing to do. But I think what we're saying is back up on capital a little bit. Try to get some cash working to continue our growth strategy, but also to do some things that maybe have some short-term benefits given the impact of the bad debt.

Okay. Great. Maybe if you -- could you just give us color on the -- on the nature of the two or three projects you mentioned that are going to free up some of that CapEx? And I'll drop off. Thanks a lot.

Next 90 -- next 60, 90 days. I mean, I think we're in pretty good shape on the cash side. And if we -- if we were to kind of stay the course, we might reach a point where we would get to that kind of lever a little bit, sometime maybe second or third quarter of next year, but I'm not -- I'm not real worried about that. I mean, if we -- hopefully as we can give you in the next 90 days, give you -- 60 days, give you 2007 guidance. Hopefully, the earnings growth can -- can just take us just as back down quickly on the leverage, if we -- even if we happen to leverage up slightly because of this share repurchase.

In the interest of time, I'm going to ask everybody if you could limit yourself to one question so we can get as many people as we can before we have to end.

Christine Arnold, Morgan Stanley.

Hi, Christine.

Hi, there. How are you?

Good.

So I'm just trying to -- to put it all together as kind of the new girl here. You're saying that it's hard to get more margin out of the existing hospitals because they're at 17 to 18, which is pretty optimized, and we're only doing 2 to 4 projects. So if we're in the status quo environment, what kind of an EPS growth rate are we looking at kind of generally speaking if nothing changes?

Well, I mean, I think things will change because we're going to stay the course with some, I guess, modest to -- I don't want to say aggressive because it's not -- growth strategy. If we can kind of do the 2 to 4 projects that we've talked about, I mean, our objective is over the next 12 to 18 months is to try to get us back into a position of moving towards mid-teens EPS growth. That's what we want to do. And I think we can do it. I mean, I believe that you look at the project that Dan mentioned in Austin, the new project that's under construction in Clarksville, Tennessee.

We are committed to a new project in a high growth interstate corridor in Birmingham for replacement for Trinity. We finally have worked out at least a scenario that'll allow us to build the new hospital in Eugene, Oregon. I mean, we've just got a lot of good projects out there that we're excited about and we're seeing the maturation of, which there's some things we've talked about -- alluded to in terms of some positive -- real positive signs.

We see real growing opportunities in Tucson with our Oro Valley facility. We see the new hospital open this past year in -- up in Alaska really starting to take root. And we're really highly encouraged by the partnership hospital -- Presbyterian Hospital of Denton we've seen huge growth in that hospital over the last 90 to 120 days. So just the new projects that we -- that are now open we're seeing encouragement and the projects that are online to either -- or in the process or getting near the process are highly encouraging. So that's where I think we will stimulate the kind of growth that'll get us back to mid-teens or maybe even better longer term.

Now, I say all that is that -- my only point in telling you this is that we're never going to get there long-term -- I mean, look, I can stop capital spending today and not do any of it and I can goose the -- goose EPS significantly. It's just what are we going to do two years from now, and how do we sustain that long-term? And the other encouraging thing -- I don't want to forget this is that we are getting stronger in terms of our position, in terms of negotiating with commercial carriers, we're getting stronger, and gaining more respect. And when we do that, that'll sustain, hopefully, a stronger net revenue position on a longer term basis.

So for all those reasons, Christine, I -- I mean, I'm highly encouraged to -- and I still -- and done this a long enough time. I think we know what we're doing. And I wish, -- I mean, if wouldn't -- we wouldn't have any frustrations out here at all if we were -- if we didn't have this bad debt problem.

Adam Feinstein, Lehman Brothers.

Great. Thank you, and thank you for all of the details.

Hey, Adam.

Hey, Denny. My question is this: it was helpful you talked about the policy, and maybe this question is best directed to Steve or Bill. But just -- if you're -- you sound pretty confident that you're likely going to have to recognize another 18 to 22 million next quarter. Why not just do it now? And then at the same time, you talked about the 65.9% of self-pay receivables. There's some companies that reserve as high as 80%. I'm not saying their methodology is better, but I'm just trying to understand with everything we know right now why not just be as conservative as possible and just try to get this cleaned up as much as possible now? So any thoughts there? Thank you.

Yes. Steve, do you want to make some comments on that?

Yes. Adam, good morning. Very good comments. Let me first address the latter, and then I'll come back to Triad. You're right. And I kind of alluded to this in my opening comments. Some companies may have 75 to 80% coverage, but once again, you've got to look at how discounts factor into this. When you give the amount of discounts we give, 50 -- 45 to 50 million a quarter, then the allowance coverage is going to come down somewhat. So you've got to kind of look at the toggle, if you will, including self-pay, discounts, et cetera. Because within that, say, 80 or 90% coverage they may have, normally they would have had discounts, their bad debt coverage may actually in theory be below the 65%. So just take that into consideration, but that's what we look at.

I want to -- I want to clarify one thing. We absolutely feel comfortable with the estimate that we've recorded at September 30th for our allowance for doubtful accounts. We feel it's appropriate and we feel based on all the information we have now, that is certainly appropriate and within the acceptable range that we would deem appropriate for our net realizable value by receivables. All we're saying in the guidance is if those trends continue into the fourth quarter, just status quo, then we've given you kind of the guidance that we've expected, the 10.3 to 10.8% on the provision for doubtful accounts.

However, if the trends that occurred in the third quarter where we had a big growth in the pure self-pay -- had a total increase in the pure self-pay receivables. If those trends manifest themselves in the fourth quarter, coupled with the collection percentage review that we're going to do and by this it doesn't mean that cash is deteriorating, it means the percent of total available collections deteriorates. That gap of increasing pure self-pay or self-pay after insurance has an impact on lowering that actual percent that we then take the average and apply it to the total.

All we're saying is if that trend in the fourth quarter occurred, we potentially would have to book plus or minus, depending on what happens to that collection rate. But as of September 30th, we have absolutely recorded what we deem appropriate. And we can't record a cookie-jar reserve type by saying, we're going to record some more just in case. We feel comfortable with what we've recorded.

Even if we believed the trends were headed in that direction, we couldn't -- we wouldn't -- couldn't and wouldn't do that, Adam. But we -- because we see the trending evolving, we felt it was best to at least be upfront that that's -- that's an expectation that you should be aware of.

Chuck Ruff, Insight Investments.

Good morning.

Hi, Chuck.

I look back to the transcript on the conference call 3 years ago when the Company reported disappointing earnings due to bad debt. And at that time, you expressed confidence that you could work through it in the long-term, that you felt your good local market shares would allow you to rebound, the industry would adjust, et cetera. It sounds like your thoughts are similar today. I guess the question is, you've been wrong on this so far, but that obviously can change. How many years do we wait before we make a final judgment on that?

Yes, I mean, I wish I could -- I wish I could tell you I was right. The -- but I don't know anybody that has a crystal ball that -- about how this bad debt's evolved over the last three years. I mean, this is a societal issue. This is a U.S. health care issue, it's not a Triad issue. And things have changed. I mean -- look, why does -- why do -- why do we increase from -- to -- I think I read a number that 59% of the people who have employment who have employers who cover health insurance have elected to use health insurance provided by their employer, but that's down from 64 or 65% just a few years ago. So why do people do that?

Well, I mean, I couldn't have predicted that for you. I mean, I think I understand it, but I couldn't have told you that those people would opt to go bare. But I'll also tell you over the last three years, too, there's been a lot of publicity, a lot of publicity about hospitals and how they collect and are they even right to collect? There was a series of articles in the New York Times, Wall Street Journal, which were highly publicized about hospitals going after collections and -- of people who owed them money and got such negative publicity. And there's been a big push back about what's appropriate in terms of collection.

I'll give you an anecdotal story. We have a hospital -- I won't tell you the hospital, but I had a story the guy was telling me. Lady who was making 60-something thousand dollars a year, single mother and had a $5,000 bill and -- from the hospital, and when was contacted by one of the management team members about their bill said I'm not paying it. And what do you mean? We'd be happy to work with you.

No, I'm not paying it. I've read -- I mean hospitals -- what are you going to do to me? You going to bankrupt me? You going to take me to court? So there's a lot of things that have changed over the last several years, and I wish I -- I wish I had an answer for you. I don't. I mean, I'm trying to learn it and understand it, but it's changing daily. And that's kind of interesting. There's a lot of people, I think, believe that this is our problem and this isn't -- this isn't a U.S. problem. And we ought to have an answer for it. And I sure as heck wish we did.

Sheryl Skolnick, CRT Capital Group.

Good morning.

Hi, Sheryl.

And, Denny, I'm -- hi there. I'm sure there's a lot of us who wish we had it. I just have one minor detail on the reserve historically and then a broader question. Remember back when you had that sort of kind of extra $15 million put away in accounts receivable reserves? I think it was third quarter -- second quarter of 2003 there was an incremental 15 million.

Did that ever get used? And if not, why not? Or did it ever get reversed? And if not, why not? And then my bigger question is, if I'm hearing you right, Denny, this is a really big change on the share repurchase versus the acquisition opportunity versus the investment in the growth of the business opportunity at this time. Because if I remember correctly, last quarter, especially viewing the likelihood that there will be additional hospitals for profit in strategic locations for sale given the HCA transaction, I got the strong sense that you wanted to keep that powder very dry. And now I'm getting the sense that, well, gee, maybe we don't have to rush to do those things next year, so we can spend the money on a share repurchase.

Let me answer that one first, and Steve can answer the other one.

Sure.

Sheryl, what I've said all along is that we're not -- we're not giving up on the strategy, we just -- at any one time, we might have 5 or 10 things in the hopper. And those things move along a continuum in terms of are we going to get them done or not, or do we want to get them done or not. We find ourselves -- and we kind of knew this over the last 90 to 120 days. That's why I kept telling people, we're not opposed to doing share repurchase if we have available cash, and we don't have anything imminent that would use that cash in terms of one of the transactions that would be part our growth strategy. And what's happened is is that a couple of things that were imminent that we thought we'd get done are not likely to get done now.

So it might be -- it may be 4 months, 6 months, I just don't know when, as we've got the room. I mean, in other words, if we use the cash we have now that we were saving for a couple of those projects, our actual -- while we might -- the lever might have some impact when you look at kind of our debt position less -- or plus cash, the -- our -- we'll actually, if we come down 4 months from now, 6 months from now, and we need cash, we'll have regenerated a position to be able to do some of those things. And if we have to lever a little bit on the revolver, we can do it.

So we're not giving up -- if it came down do we had projects that were imminent that we could do that would give intermediate to long-term value to the Company, I would do it. But as I told people is that we're not opposed to share repurchase if we have the cash available and we're not using it. And that's kind of where we find ourselves.

And on the question, Sheryl. Let me go back. You're correct that the third quarter of '03 when we recorded the additional bad debt charge and announced it, we also talked about $15 million that we recorded more than what the AR look-back process showed for potential further deterioration related to accounts receivable. And we recorded that within our allowance for doubtful accounts, and we basically commented and updated that language on a go-forward basis.

However, we always had it in the allowance for further deterioration. And we commented on this in the fourth quarter of '05 when we no longer did the AR look-back process. That 15 million was totally included in the allowance for doubtful accounts, [full for] the deterioration, and we haven't commented on it since because it became part and parcel of the allowance in '03 and has continued to be there and is basically used in all evaluation that we do related to it.

So it's not like it was sitting there and went away last quarter. It's always been there and basically when we discontinued the AR look-back process, there was no longer a calculation to show that. If and when we ever go back to the AR look-back process when we get through all of this, we'll determine then where we're at in conjunction with that, but it's certainly in the allowance for doubtful accounts at this point.

Elie Radinsky, Citigroup.

Yes. Most of my questions have been answered, thank you. But I do have one operational question. Seeing a lot of not-for-profit hospitals going back and hiring physicians to be on their staff. This was a disastrous issue about 5 years ago. What are you thoughts on that? And are you also hiring additional physicians for your staffs as well? Thank you.

Yes, Elie, I mean -- let me say this, is it goes back, really -- I mean, there was a -- I kind of I call it two waves. The first wave of physician ownership or physician employment when hospitals really evolved in a big way starting in the late 80s to the mid 90s, and it was a disaster. I mean, there's no doubt about it, mainly because hospitals that were getting into the business were doing what I call guaranteed contracts. They were, in essence, employing physicians and guaranteeing that they would continue to make what they were making. And a couple of things happened.

One, there was a time of significant managed care push. In certain parts of the country, a lot of HMO and risk contracting. And two, probably as important as anything, once they got guaranteed contracts, people quit working. And as a result -- not everybody, but in a lot of cases, and as a result hospitals and anybody who employed doctors were saddled with huge losses. What's happening today is mostly around aligning interest for contract networks, the abilities to get on the same side of the table from a strategic standpoint. And what we're seeing on the employment side is really what I would call employment lite.

It's a model where we employ physicians, and those physicians are on productivity standards. They -- in essence, they are able to work and they make what they earn. And they get the advantage of malpractice group rates, benefit cost group rates, so they get some efficiencies. But the hospitals do not take the risk for guaranteeing income.

So you're going to see a lot more of it. I have told people -- and I do believe this -- I think that over the next 5 years, we'll -- probably 50, 60, 70% of physicians in the markets we're in will be employed. There'll be a few bastions of private practice out there, but for the most part, today, especially with younger physicians coming out of training, if you don't offer an employment contract, you're not going to get them because they don't want to -- for a lot of reasons, but a lot of them are lifestyle issues. They don't want to go in and start -- have to build a practice where they get up and make rounds at 5:00 to 7:00, 8:00 in the morning, see patients til 5:00 or 6:00 and then round again in the evening. That's just not appealing to them.

They want to be a part of a group. And a part of that is one of the reasons that we see a drive towards more intensivist hospitalist because the way medicine's being practiced is changing, again, around -- significantly around lifestyle issues. So I think you're going to see a lot more of it, but it's different than it was -- than what I call that first wave. And the risk pieces of it are much better managed today than they were back in those times.

Kemp Dolliver, Cowen and Company.

Hi, Kemp.

Hi, thanks. Now that you've been doing this process for a while, I wonder what phenomena your additional reserving at corporate captures that the hospital level reserving does not. And I'm thinking in terms of what slips through -- what type of events slip through the cracks that you are trying to catch in your overall reserving policy?

Okay. Steve you want comment on that?

Yes, basically, when we -- especially back in the fourth quarter, when we went to the percent collections and came up with an average percent collections, we worked closely, obviously, with Bill Huston and the operations team. And this reserve is booked at the hospital level. Now we do consolidate, look at the agings, look at what's happening in the self-paid buckets on the agings. We look at AR days. But we don't keep a, quote, unquote, corporate topside reserve per se for allowance for doubtful accounts.

We do push that down and have it recorded at the hospitals. We do consolidate it when we evaluate it. And this particular quarter, we did record the additional 15 million that we put here. But I mean, that'll be allocated down to the hospitals. But there is no corporate topside reserve other than we look at it in total, analyze it in total, and know that the real exposure, obviously, comes out of the self-pay receivables and the mix within those receivables related to self-pay after insurance or pure self-pay.

Bill, do you have anything you want to add to that?

No. That's the way it is, Steve. I mean, that's the way we do it. Every hospital does book their own. The only difference being on some of the JVs and some of the physician indications, instead of booking at a corporate average, they will book more specific to their facilities.

Okay.

Rob Mains, Ryan Beck.

Morning, Rob.

Good morning. Actually, I've got a layup for you here. Just in the assets sales that you completed in the quarter, there are a couple medical office buildings. Are those outright sales or sales lease backs? I just want to get a sense as to whether there's going to be a recurring rent expense?

Yes, the main thing in the -- hey, Rob, just so you know, on the gain on the sales, the main driving force of that was a building we had up in Palmer, Alaska. You know how we built a replacement building? We've sold the old building, and that was the lion's share of that related to that gain on the sale.

Yes, Ron, those are just sales. I don't think we have any sales lease backs, so those were just outright asset sales.

Miles Highsmith, Wachovia Securities.

Hey, guys. Probably me getting off to a slow start here on a Monday, but there's a number that was thrown out earlier that I didn't quite understand. Denny, you were kind of giving us some color on the reserving, and I thought I heard you throw a $30 million number out there. Was that meant to say that that was kind of the right way to think about that versus the 25, or was that part of a calculation that got us to the incremental 25? Thanks.

Okay. Steve?

Yes, and that's a good question. Thank you for bringing it up, just so we clarify. We have -- as I said, when we saw the trend and we basically saw that we knew because of the collection rates that there was going to be increased reserve needed in allowance for bad debts, we felt compelled to be appropriate and let you know as soon as possible we did the prerelease.

After further reconciliation, it was a closer number to a $30 million increase in self-pay receivables. And as Bill Huston mentioned, the lion's share of that was in the pure self-pay increase as opposed to the self-pay after insurance. But that was an increase in the pure self-pay, not an increase in the allowance. So that's what that 30 million was.

Gary Taylor, Banc of America.

Hi, good morning. I was wondering if you could give us your third quarter payor mix on net revenue, but also the payor mix of the gross AR. And while the one other thought I have is, why -- why don't you just book self-pay on a cash basis instead of an accrual basis?

Because as we've seen this issue recurring, to me, it's primarily a revenue recognition issue as opposed to a cost of care issue. So it seems like if you just booked on a cash basis, we wouldn't have this true up and the look-back and all the estimates that are involved. Thanks.

Steve?

Hey, Gary. I'll answer the latter part of that and I'll let Bill Huston talk a little bit on the patient receivable and payor mix, et cetera. But, obviously -- and I'm not giving you a flippant answer, but we're on accrual base accounting. And, yes, I guess on self-pay, we could 100% reserve it when it came in the door, and then as we collect on it or make recoveries on it, then we recognize the revenue, that's probably not the way to go, that's really being ultraconservative.

And even though it is self-pay, we're talking in terms of a pretty significant chunk of revenue, so it's appropriate to book it on an accrual basis, but then we have the responsibility to do -- as best we can to book an appropriate reserve on that, as you know, to properly state the net realizable value of the receivables. And while I know it's frustrating, and believe me, it's frustrating to us, we still feel the robust techniques that we use we're staying on top of it.

The unfortunate thing is, this quarter, especially, we had to take the additional reserve because of the big shift in the pure self-pay and also the trend we noted early in the year, while we didn't see it manifest itself as much this quarter, increase in self-pay after insurance. I understand -- I understand what you're saying, but we really couldn't just book 100% reserve knowing we're going to get some collections on it.

And on the -- on the payor mix for the quarter, Medicare was 29%, Medicaid was 5%, managed care was 47, commercial other was 8%, and self-pay was a little over 10% for the quarter. And then as far as, again, the mix on the AR, Gary, I mean, our self-pay and self after insurance and other self-pay runs about 46% of our total AR is kind of the payor mix. I don't have the break down of Medicare and all the others, but in terms of the self-pay mix, it runs about 46%.

Yes. You're going to see in our Q on the billed self-pay that we talk about, as you know, that was roughly 43% last quarter. It's going to show a little bit of change if you add back the Medicare impact on the receivables it's going to be about 46.2% of the billed, if memory serves me correctly, that's going to be in our 10-Q.

Rob Eich, Cleveland Research.

Good morning, and thank you.

Morning.

Question for you, Denny, here on the strategy. As bad debt continues to be a problem industry-wide, has that caused you, I guess, to reevaluate your portfolio and maybe get out of some of the markets or states where bad debt seems to be most problematic? And if not, I guess, going forward as you look for additional joint venture projects or acquisitions, are you going to focus more in the states or the areas where bad debt is lower than corporate average today?

Well, in terms of the latter, clearly, we're a lot more diligent today about new projects, where they are, what kind of the market considerations are. So absolutely in regards to where we grow or how we develop going forward. And even in certain states where the stakes necessarily are not good, or have high uninsured rates, there's still pockets. For example, the project in Austin is in a north suburbs of Austin, which is a high-growth, high income areas, so I think the risks there are relatively low. Kind of like the -- there are other examples like that, but absolutely, that's the case. We want to be able to do that.

Ken Weakley, UBS.

Thank you, and good morning, everyone.

Hey, Ken.

Denny, the one question I had, two weeks ago, Modern Healthcare had a story which showed that total hospital profits are at an all-time high. Medium profit margin was at was a seven-year high, so I'm just curious about why the for-profits obviously are experiencing a huge profit squeeze because of bad debt. But it doesn't seem to be homogeneous across the hospital industry. I'm just wondering if you could maybe flesh out some of your thoughts on why that may be the case, [inaudible] patients might be?

Ken, I think -- if I remember that article, it's -- it was an article about public hospitals that were doing -- doing well. And there are some of the public hospitals. And a lot of it has been a number of the states have changed their -- the way they handle disproportionate share and -- and allocated disproportionate share and I think some of those hospitals have done -- have done really well. And -- because of it. And I don't have any qualms about that because of the disproportionate share that the -- of patients that those facilities do.

They're really true public hospitals in that regard. I would tell you, and I'm pretty active nationally with a number of groups, is that I think when the data comes out, back -- going back into 2005, which we still don't have 2005 data for the industry as a whole -- but I think you're going to start seeing that the trends among non-profit hospitals -- and the majority of the non-profit are not public hospitals, they're 501(c)3s -- are really, really struggling. And I've got a pretty good pulse on it. I mean, I talk to a lot of the groups, a lot of the organizations and have friends in a lot of the big non-profit systems. A number of the catholic organizations. I mean, we're all struggling with the same issues.

I think some of them are really hurting in that they've gone through and depleted a lot of the foundation monies that they've had or that would support the hospitals. So I think you're going to see a pretty remarkable change in the health of America's community hospitals. That being said, I think the public hospitals at least through 2004, early 2005 were having pretty good results because of -- I think in large part because of some of the reallocation of disproportionate share monies that the states did to, in essence, shore up those hospitals at the expense of others, including 501(c)3 and for-profits.

And, Mr. Shelton, that does conclude our question-and-answer session. At this time, I'd like to turn the call back to you for any closing comments, sir.

Thank you. Let me go back to just one thing that Sheryl Skolnick said. I just want to be really clear about is that we aren't changing, and this isn't a departure. We have said -- and I have said repeatedly -- and again, it's like being a politician. We've got people all along the continuum that have an idea of what they want in terms of being a shareholder. And we can't be all things to all people, but we want to be -- we want to be as fair to our shareholders as we can be. And we -- we're not going to change our strategy in terms of growth.

We are going to try to reign in some of our capital spending and be more selective in our projects, just simply because I think we've got so much choice we need to be selective. But when we do have cash available, we just want to make that and put that cash available for the benefit of our balance sheet and our shareholders, and that's what we're trying to do is to find that balance. But we are -- and nothing's changed in the last 90 days. I mean, we're still battling the bad debt, but a lot of the indicators in terms of where the Company is and where the Company's going are stronger than they've been. We've got great operational results, we've had significant growth, I think industry-leading growth across the board. And and we feel good about that. And the projects that we have evolving are good projects, and we're going to continue to do projects.

We're going to try to balance that as we've always said. And there's some people that wouldn't believe that we would do that. And, again, this happens maybe at this time, and it looks like, oh, well, they're changing courses. We're not changing courses at all. We said if we had cash available and we didn't have projects that were imminent, we didn't worry about doing some things, especially at this time to do some things from a financial engineering standpoint. And that's what we're doing. So we're going to stay the course. And hopefully, we're going to fight through this bad debt issue, and we're going to get back into a positive cycle, and I think the Company's well-positioned to do that.

So appreciate you guys being on the call. Laura will be available today and through the week to hopefully get most of your questions answered and some of you, I'll try to hop on if I can to support her. So appreciate you guys being on the call. Thanks.

Thank you. That does conclude our call. We do appreciate your participation. At this time you may disconnect. Thank you.