美國醫院公司 (HCA) 2002 Q1 法說會逐字稿

Please stand by.Today's call is being recorded. At this time, for opening

remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Victor Campbell. Go ahead, sir.

Good morning, everyone.

Welcome to the call. Thank you for being with us. Here this morning with me, Jack Bovender, our Chairman and Chief Executive Officer, Richard Bracken, our President and Chief Operating Officer, As always, Mark, our Vice President of Investor Relations.

And also, as always, most of the senior management team of hang is here in the room to assist with the question and answer session.

As in prior calls, this morning's conference call will use forward-looking statements based on management's current expectations.

Numerous risk and uncertainties may cause actual results to differ materially from those anticipated in the forward-looking statements.

We've listed on pages 2 and 3 of the press release a number of the risk factors that you should consider. There are also other risk factors detailed from time to time in the SEC filings.

Many of the factors that determine our future results are beyond the ability of the company to control or predict. You shouldn't place undue reliance on any forward-looking statements and we undertake no obligation to revise or update the statement, whether as a result of new information, future events or otherwise.

Let me point out one other new line item on our income statement. Actually we began breaking this out separately on our year-end 2001 financial statements, but this is our 1st quarterly call that will be on your income statement.

As you can see, we recognize the $5 million loss in the 1st quarter of 2002 compared to a $30 million gain in last year's 1st quarter.

Last year, HCA's investment managers realized the gains as they managed the portfolios and this year realized losses as they repositioned funds and this is an ongoing happening that is part of the operations of the insurance subsidiary quarter in and quarter out.

We think this will fund the disclosure will assist you and hopefully make our financial statements more helpful and informative.

Last point I want to make before Jack and Richard talk about the quarter is just to remind all of you, if you have not heard, we are hosting an Investor Day again this year in Nashville.

The investor day is on Tuesday, may 21st, be here at our corporate office, there will be a dinner on Monday night, May 20th at the Frisk Center here in Nashville.

And anyone who hasn't registered or needs information, log onto our website, it's probably the easiest and quickest way to get the information and get registered.

Www.Hcahealthcare.Com. And with that editorial and advertisement, I turn the program over to Jack Bovender.

Thank you, Vic.

Good morning, everyone. We are obviously very pleased with the results we're reporting to you this morning.

We continue to pursue a long-term, low-risk strategy. I'm very happy with where -- where the company is positioned today, both in terms of assets and people.

If we stay focused while always maintaining our ability to be opportunistic, HCA is extremely well-positioned to benefit from the dramatic growth being forecast for U.S. Healthcare over the coming decade.

I'm sure you've all seen the latest projections from the CMS office of the actuary, which calls for U.S. Healthcare spending per person to double between the year 2000 and 2011.

They project healthcare spending as a percent of the Gdp to rise from 13.2% in 2000 to 17% in 2011.

Those of us in this room and on the phone who are baby boomers will ensure that this will happen.

Couple that with the communities where we are locating, which have population growth rates well above the national average, our future should be very sound.

With respect to the 1st quarter, I will let Richard have the honors of sharing the specifics of our results with you as it was he and his operations team that delivered such strong results.

I will point out, however, a couple of key results that I watch closely.

Third, our return on vested capital increased to 12% for the quarter and our return on equity reached 21.8%.

With this, I will stop and

turn to Richard to discuss operations for the quarter.

Thanks, Jack.

Good morning and thanks for joining our conference call.

The fundamental drivers of our performance for the quarter remain unchanged from recent quarters. That is strong, same-facility top-line growth, couple we did effective cost management.

The trends continue to be strong, up 9.3% in the 1st quarter.

On the volume side, our same facility admissions were up approximately 1%, and equivalent admissions, outpatient activity, grew 1.7%.

Emergency visit growth continued on the same trend we've been experiencing, up 34.4% in the quarter.

The average length of stay for our patients actually rose from five days to 5.1 days year-over-year.

This 1.4% increase in length of stay grew our day growth to 2.3%. Although our reported same facility admissions growth was at the lower end of our quarterly trends we've experienced, several factors should be noted.

The most significant of these factors has been our decision to close a number of skilled nursing units in our hospitals.

Acute care admissions growth, adjusting for skilled nursing admits, which declined 33% year-over-year, would have increased approximately 1.7% in the quarter.

Three other factors influenced volume for the quarter. One, we experienced a very light flu season.

Secondly, we had one less business day in this year's quarter than last year's. And third, the Easter Passover holidays came in March this year rather than in April as last year.

We do expect some volume swings over time, but in the long-term we continue to remain very optimistic concerning patient volumes at our facilities. On the cost side, I was particularly pleased that our hospital operators successfully managed cost around volume fluctuations.

21.5% this year versus 11.9% last year. Positive trends in labor costs were evident in the quarter.

Salary, wages and benefits were 39.66% of revenues. This is flat from the prior year and is the first positive quarterly comparison in almost a year.

Additionally, SW & B was down sequentially 150 basis points from the 4th quarter. We continue to see improvement in wage rates with an increase of only 5% in the quarter.

You might recall this trending down from a high of over 7% in the 2nd quarter last year. Contract labor increased at one of the lowest rates we've seen in some time.

Our employee turnover statistics continue to be very encouraging. As of March 31st, 2002, our nursing turnover was approximately 17%, down 200 basis points from approximately 19% for the same period last year.

Executive turnover at our hospitals has been reduced from 25% three years ago to less than 10% today.

This stability is so important for the long-term success of our hospitals, especially as we push a significant number of operating initiatives.

Supply costs were in line with historical trends and other operating costs improved by 120 basis points, reflecting the six nature of many line items.

Contract services and utilities both showed positive trends in the 1st quarter. Contract services decreased as a result of the company's vision-based procurement initiative, which consolidates various outside contract services which tend to be local, versus national.

Such as linen, lawn care, transcription services and medical advances.

This yielded savings of almost $6 million for the quarter. Utility decreased 13% over prior year, DPU to the GPO contract strategy, enabling us to participate in the drop in natural gas prices.

Provision for doubtful accounts increased as a percent of net revenues by 40 basis points.

Now an update on shared services. Our supply warehouse consolidation is beginning to produce tangible results for the company. We now have 118 hospitals, or 65% of our revenues being billed and collected through patient account service centers and we're realizing encouraged results.

The National PAS, which opened two years ago, now is fully migrated with 16 hospitals.

When they began their net days in AR were up 57. Today they're at 50.

Another example is with our San Antonio operations. They opened with their net days at 74.

Clearly, our model is working. As Jack mentioned earlier, we're significantly investing in our hospitals.I'm extremely pleased with the results we've experienced with projects that have come on-line earlier.

They're clearly outperforming expectations. We will provide much detail on

this at the investor day conference on the 21st. You're all invited to attend. Now back to Vic for questions.

All right, Richard and Sam. Thank you. Rose, if you want to come back on and poll for questions then?

Thank you.

Today's question and answer session will are conducted electronically. Anyone wishing to ask a question may signal by pressing the star key, followed by the digit one on your touch-tone phone.

Please limit yourself to one question. Also, individuals asking questions should not use speaker phones. Please lift the handset if

you're asking a question. And again, that is star 1. We'll pause for a moment to assemble the roster. PAUSE] Our first question today is from Lori Price with J.P. Morgan.

I'm going to turn the question to Bev.

I'm getting chastised here. Before questions I said thank you to Richard and Sam and Sam harasses me a lot here, and

Jack Bovender was a little offended that I called him Sam!

Not true, I'm just glad to be at the table!

Basically the acutely for the organization was relatively flat year-over-year for the 1st quarter.

Our managed care prices as we disclosed to you at the end of last year is approximately 8% for the 1st quarter.

All right. Thank you very much, great quarter.

Thanks, Lori.

Next up is Adam Feinstein with Lehman Brothers.

Yes, first of all, congrats to Vic for getting the AAHA Trustee Award.

So, congrats. And my question is with the shared services, can you talk about how much you spent in the quarter on that?And then you spoke about the number going down throughout the year. If -- if you can just go through the numbers with us?

Give us a sense of the magnitude of the impact from that? And the benefit from going forward from seeing less in investment? Thank you.

Adam, thank you. I appreciate it. I proved the old saying, hang around long enough and something happens, right??

Anyhow, I appreciate that. Milton Johnson, our Senior VP Controller will talk about shared services.

We're very excited about that. That's somewhat ahead of schedule for us.

We're also, other initiatives around our ERP implementation, when you factor that in to the equation, I think for the year we expect that to come around flat for the company for the year.

This is Jack again.

Let me -- I'm going to tease you a little bit about the investor conference. We're going to do advertising all through this conference call for it.

But we're going to do a fairly in-depth presentation on shared services at the investor conference and show you some more in-depth results than we can cover on the conference call here today.

Great!

Okay, and then just one other question, you guys mentioned on the call last time, just about benefit costs, really taking up a lot.

So, it looks like this quarter that wasn't the case, but can you give us some update there?

Sure. Milton?

Sure, benefit costs are increasing.

However, this year, based on the -- the claims for the first month, January/February, our projections, we look fine and in line with where we expected to come in for the year, unlike last year.

Hopefully, we've obviously

have a lot to go this year with respect to the cost, but feel good about the first two months.

Great. All right. Thank you.

Next is from Darren Lehrich with SunTrust Robinson Humphrey.

Thanks, good morning, everyone.

Can you slice and dice a little bit more with regard to the volume? Maybe just talk a little bit about how it broke out in some of your regions?

And then just -- just out of curiosity, is there any sense that all the construction in the -- and expansion that you're doing in some of your

markets, I guess most of which comes on-line the second half of the year, was that disruptive to you in the quarter and have anything to do with -- with the softness your volumes?

This is Richard.

You know, actually the quarter started off good in January and February and we had a slower-than-anticipated March and for the reasons I stated in my comments.

Dallas/Ft.Worth, Houston, San Antonio and Austin are all -- all experiencing very, very strong volume growth.

We have seen, you know, as mentioned, a very light flu season and some slowdown in the winter visitors.

The construction -- it always interferes somewhat. We're always glad when construction activity is over and as we mentioned, we have a lot of construction activity going on at the hospitals.

I think it might get in the way of some of our elective, but clearly not in our emergency volumes. So, I do think that it has an effect, but I wouldn't say a

major effect.

You know, if I could just follow up, on the unit closures and sub acute and sniff side, can you give us order of magnitude, how many units you've closed and the timing of the closures and maybe talk a little bit more about th e process you undertake, you know, to get them operational, you know, as med surge beds?

The -- the -- over the last few years, '98, '99, 2000 and 2001, we have closed approximately 10 to 15 skilled units per year.

Earlier, '98, we would have closed the units that had lower volume levels.

As we, you know, think about our volume demands going forward, you know, we're obviously looking at the highest and best use of our hospital plants and that's converting these skilled units to med surge beds.

So, in the more recent years, 2000 and 2001, these were units that had serious volume in them.

Obviously, the changes in reimbursement affected the decisions as well. Really, as I go around the country and I look at -- at demand, patient demand, one of the first places we go to create quick demand is by converting these skilled units to med surge units.

We -- you know, it's -- it depends, the process for conversion depends upon the facilities at any given hospital.

In some cases, the skilled units were med surge units when the hospital was originally constructed, it had been converted in years past.

So, the conversion back to med surge is a very easy thing to do. Other times it requires substantial renovation and investment in medical gases and technology and that sort of thing.

So, there is no singular answer.

It varies, but -- but compared to building a new unit or a new wing -- it is still much more efficient.

Darren, thank you.

Next up is AJ Rice with Merrill Lynch.

Yes, thanks.

Maybe I will follow-up with the last one a little bit. Maybe, Richard, one question on the sniff conversions to you. INAUDIBLE] lag there in terms of when you converge -- are the beds immediately available in the same quarter?

Or does a retooling have to happen?

Obviously there are vagaries from quarter-to-quarter because of what's happening industry overall.And how do you volume for that, I guess?

There is a lag time in the conversion.

It can vary. I think probably the quickest a unit could convert would be maybe in a quarter, you know, 60 to 90 days. If there's more construction involved, obviously it could extend from there.

But -- but the bigger question is, you know, that you asked is how -- how do you keep the management teams focused on -- on backfilling, on the volume agenda's, et cetera?

We just spent, Sam and Jay and I, the last three weeks, visiting with probably 40 hospital management [INAUDIBLE] about that exact issue.

Looking at -- very carefully, their plans for service development for construction, if they had big projects that had been improved.

What were they based on and how were the plans coming together? There is, you know, a lot of recruitment effort going on.

Okay, thanks a lot.

Next is John Hindelong with First Boston.

Thanks, good morning.

The company's stated goal is still mid-teens. So, what is it that you think will get you off the 20% track down to something less than

that, if anything?

Somehow, John, I knew it was going to be you who was going to bring that question up.

Obviously given how we performed over the last couple of years we have certainly outperformed our goal.

I still think that basically long-term, this company can sustain a model in the mid to high teens growth into the foreseeable future.

Does that mean that sometimes we will have much better than that?

Yes, but our goal is to be dependable, not to promise more than we can produce and

that's the way we will continue to operate into the future.

I guess another way to ask the question, Jack, what concerns you most now, other than the company is on a roll and the industry is and so forth.

What are the one, two and

three issues you're most concerned about?

The biggest issue and you're talking about volume just a few minutes ago, my biggest issue is not that the volume is going to be there, it's capacity, are we going to be able to get enough capacity on the ground, the right kind of capacity in time to take care of the patients that we're seeing.

That's the biggest problem I think this company is facing looking out, next year, three years from now and five years from now.

It is a great problem to have. Other than that, it's the same issues that we've dealt with for 30 years in my career.

Labor costs, what is government going to do with reimbursement?The basic blocking and tackling that we need to do, but that hasn't changed over 30 years.

What has changed and what I have not seen in my career is

this drive in demand that I really believe is going to dominate issues in this industry over the next 5 to 10 years.

Thank you.

Our next question is from Debra Lawson with Salomon Smith Barney.

I have, I have two things, one is what you are seeing or able to do in terms of enhancing the ability to collect from patients on the self-pay side?

And just as a follow-up to the -- to the utilization issue, is, you know, with -- with equivalent occupancy at 83.5% in the quarter, which I believe is high for the company looking back, where can that number go?

I know you're looking to bring on new capacity, but what's a reasonable level that that number can actually go to without it becoming a very problematic issue? Thanks.

All right, Bev, you want to talk about self-pay collections?

Sure, hi, Deborah.

What we've instituted in the last several months is self-pay committees. That focus is very similar to what we do with the managed care committees. We understand where the patients are coming, why they're coming to our facilities, what their deductibles and co-insurance are and have a better estimate of what to collect up front through systems that we're adding to our hospitals.

So, it's an issue, it continues to grow as payers move the portion due from the patient to a higher level.

We're staying very focused on it and working with our

patients to collect those monies up front.

Okay.

On the utilization aspect of that question...Hospitals, for short periods of time, can go over 100%.

We -- we experienced -- we are experiencing that right now in many markets.

The question is, you really can't do that for extended periods of time with -- with much efficiency and effectiveness. So, as Jack mentioned, the bottom line has to be to add capacity.

That's why we're -- we're converting these sniff units, in some cases rehab units, in some cases service programs that are underutilized in a market and turning them back into med search space.

As a -- as a operating average,

it is a little tough to button down because that's dependant upon the mix of private versus semi-private rooms in a hospital.

Uh-huh.

If you have a hospital that has all private rooms, you're able to get a much higher effective occupancy than one with semi-private, for the obvious reasons.

Age compatibility, disease compatibility, gender compatibility and all those things decrease that efficiency, but averaging it all out, if -- if we're running on an inpatient admission basis in that, you know, 75 to 85%, we're pretty full.

You add the outpatient factor on top of that, it gets to 90% and we're pretty -- we're pretty maxed out.

Okay, great, thanks.

Deb, thanks.

Good morning.

Two questions, one on the conversion of the skilled nursing, has that been something that's been under way since 19 illustrate or has there been something in the interim that's accelerated that?

And if so, how do you reach a comfort level that they will

continue to be capacity in the given market to discharge the patients?

I guess if you look at the numbers, Gary, Richard said we've been closing about roughly 10 a year or so.

If I go back to '98, I will give you specific numbers. We closed 10 sniffs in '98, some 14 in '99, 14 in 2000 and 14 in 2001.

The more relevant note he made is the ones we've closed more recently are the more active ones.

It was easy decisions early on with a small sniff and not a lot of patients is you close it. Clearly some of the decision-making now is we've got these units, the reimbursement is not appropriate for them and secondly, we need this capacity.

So, we really stepped it up. If you go back [INAUDIBLE] the utilization, clearly we had an oil-basis point decline as a result of those shifts in this quarter.

We went back and looked at the last several quarters and really it was not a material amount, but we saw in the 3rd and 4th quarters last year, 40, 50 basis point declines.

Prior to that, it was clearly immaterial. Those are the relevant statistics.

And there is no concern in your existing markets in there's going to be capacity to discharge these patients into subacute?

I'm looking at the operators and everyone is shaking their heads, Jay? Nothing. No, at this point, no.

And one last question related to the CAP-X spending.

Any significant projects come on-line this quarter? Or the next couple of quarters

that you see?

All right, Sam, Jay, you want to talk about projects that may have opened here recently?

Yeah, this is -- this is Sam Hazen from the Western group.We added about out beds at that particular hospital.

I think the total project cost was around $90 million.So, we really exceeded our expectations on that particular project.

And this is Jay Grinney from the Eastman group.

We have about 29 projects that are going to be opening up this year, in the 1st quarter we opened seven new projects, about $48 million worth of -- worth of work.

And it's really scattered throughout all of our markets. No single big project that came out.

Thanks, guys.

Thanks, Gary.

Our next question is from Kenneth Weakley with UBS Warburg.

Thanks, good morning, everyone.

When deciding how much you're going to spend in a particular market, you're obviously looking at expected future demand. I was just wondering, does your CAP-X forecast hope to capture 100% of that expected incremental demand?

Or do you assume you're basically going to keep some fixed percentage of the market?

Ken, this is Jack.

Okay.

But we are very, very conservative in any kind of market share estimates.

Okay.I know it's hard to do, but of local competition.

Over the last years you spent a lot of money internally and what was the response -- especially in the markets where you poured a lot of money in -- what was the response, if any?

We do, in fact, watch what's going on from our non -- not-for-profit brethren in the markets.

We pretty much contract what their plans are, particularly if it's major expenditures, new satellites, major outpatient facilities built in different parts of the markets and so forth.

That's not true everywhere.

We're up against some very well-heeled not-for-profits in some of our markets, but essentially I think we're in a better position to get our

capacity on the ground faster than most of our not-for-profits. I don't know if Sam or Jay have additions to that? Sam, I think.

I don't have anything else, Jack.

I think we're outpacing our competitors in our spending and part of that is because we're in suburban locations and we have a territory that's somewhat ours.

It is ours to protect and to grow. Whereas a lot of our competitors are still stuck in more urban areas and haven't been able to encroach on the suburban market, which gives us an opportunity to spend and really grow our capacity in those markets as far as just general demand needs as well as new services and so forth.

Ok, thank you.

Here in Nashville we had a large competitor, Baptist that, had been for some time talking about some capital improvements.

They eventually were not able to do that and that result

made a merger with -- with another competitor here, but we're not really seeing a huge slowdown, but there is -- it seems, a -- excuse me, not a delay, but it seems like there is kind a slowdown in the commencement of the projects.

We also have, in the East, most of the markets, you have certificate of need and you know what your competition is doing well in advance.

It makes a big difference.

So, it's a little easier to track. The West is a little bit more free-spirited.

Sure, thank you.

Our next question is from Gary Lieberman with Morgan Stanley.

Good morning.

Good morning.

Can you give a little bit of color in terms of maybe how your negotiations with managed care providers are -- are different if they are this year versus a year ago?

Are the pairs more -- do they move more quickly on price?

There's been a fair amount of price on your negotiations with Etna in Houston, is that an anomaly?

Any color would be helpful.

Beverly, you want to start that color?

Sure.

I guess the thing that I would say about managed care negotiations is that we are out in front of terminations now more than we have been in the past.And we did go to term last week with that contract and that's where it stands right now.

Richard, you want to add to that?

Well, just that negotiations with managed care companies are always colorful.

And, you know, we don't want to be in a situation to terminate contracts.

That is disruptive in the market, disruptive to our hospitals, disruptive to our patients. We will terminate as we've clearly demonstrated when we think we're not getting fair rates that reflect the increasing cost of doing business.

Or if a payer is out of line with other area payers.

Gary, thank you.

Thanks a lot.

Our next question comes from Andrew Bhak with Goldman Sachs.

Hi, good morning.

One quick follow-on question on the shared services initiative, if I correct in understanding that what you're saying is that was less of a drag this year over last year, but still posing a drag on the income statement?

And secondly, can you walk us through maybe if -- maybe if Jim is on the call, as well as

Beverly, how you guys are thinking about the coated stent issue?

All right. Milton, you want to do shared services and Jim can talk about coated stents.

Sure.

For this quarter, shared services would be the patient account service strategy and certain supply chain strategies around centralized warehousing and so forth. For the first time, those two strategies, the benefits identified with the strategies have offset the cost in this quarter, just slightly.

Then the ERP initiative really had no effect on the quarter.

We are in the phase of the project where most of the costs related to the ERP implementation is being capitalized. That will change later in 2002 we move into other phases of the project.

And overall for the year, I think the trend that shared services is now accretive will continue, but again, moving

into the ERP project into different phases, that the cost there will most likely offset the net benefit coming from shared services for 2002.

All right, Milton, thanks. Jim, you want to talk about coated stents? Jim Fitzgerald.

Good morning.

First of all, I want to say that the drug coated stent won't be on the marketplace until sometime 2003. It won't impact our results this year.

Secondly, overall we do not see this particular technology changing the overall outlook for the company in 2003.

Having said that, the cost of the stent will be significantly higher than the coronary stents we purchased today. But if you look at it overall and factor in the reimbursement impacted by this, being able to collect the costs from the companies it could be $25 to $30 million million of impact to the company in 2003.

Beverly, you may want to comment on the managed care side of that?

We're out in front of the coated stents on our contracting strategy.

As I mentioned to you before, we do have contracts that allow for additional reimbursement for high-cost technology implants and drugs.

So, we feel pretty comfortable that we can stay at the pace that these items come out to the market.

The only area of reimbursement that we don't get immediate impact on is the medicare reimbursement. Very to wait for that to flow through the system.

All right, Dr. Frank Howser?

One comment on the drug-eluded extent.

There's been a comment on our open heart surgery in 2003, we looked at that fairly extensively and looked at what the stent could potentially reduce the need for.

And our bottom line is, our belief, is if it has any impact at all on the rate of

open heart surgery it will be minimal.

Thanks.

Up next is Kemp Dolliver with SG Cowen.

Anything in particular driving that number? Thank you.

Jim?

Yeah, if you -- if you look at that trend, what's driving it and you mentioned acutely being relatively flat, the issue is that you've got new technologies and new pharmaceuticals that are being used to treat the procedures -- the existing procedures.

That's why there's not an increase in the acutely itself.

But if you look at our supply cost, it's really the same old story, it comes from two areas and that is technologies which is predominantly in the coronary area of pacemakers and stent costs.

The other one that is rising is spinal cage technologies and the related procedures there.

On the pharmaceutical side, again, it's our Kath-lab

related drugs and several other areas, not any one drug in particular, but the growth is coming from those two areas.

That's great, thank you.

Hi, good morning, thank you.

I have three questions for you. Getting back to the contract in Houston with Etna, now that you're about a week past the termination date, wondering if you could kind of characterize your outlook relative to prior to the termination date and how things are kind of progressing there?

And then maybe in general, kind of how we should think about that, too?

And secondly, last week we've got what I thought was positive commentary from another hospital company on medical malpractice rates for 2003.

I'm just wondering, I know you're self-insure aid, but what have your actuaries been telling you about 2003 and changes in 2002, as well?

And lastly, on the three remaining issues for the gob investigation, if anything's

going on that you would consider material? Thanks.

Okay. Malpractice, Milton Johnson, we're go around the table. You want to hit malpractice?

Sure.

We actually will be getting our projections from Actuae in the middle of this year and will have a better look, in about probably four months, 2003. Really quickly, what you're hearing about are some of the trends, in the year 2000, the healthcare industry, hospital industry, faced a number of very large claims and we define large claims as claims where judgments or settlements are in excess of $1 million.

And we certainly saw that in our insurance company.

But in 2001, we saw those large claims fall to about Half the run rate that they were in 2000 and the trend so far in early 2002 is we're on the 2001 run rate.

So, 2000 was a -- was a tough

year and I think the actuaries reacted to that quickly and you saw that in the rates of malpractice insurance. But again, the 2000 trend is not continuing. 2001 and 2002 look like they will be very similar.

Sam Hazen, you want to talk about the Etna?

Yes, on the Etna deal in Houston, we have 10 hospitals in Houston.

Two of which are not affected by the termination. The eight other facility that's are affected or typically facilities where we have a limited capacity already and it's really difficult to assess the immaterial effect, if any, of the Etna business in the market.

In most instances we're able to back fill whenever we walk away from a contract like that because of the demand that we have and the hospitals that are most impacted are the ones in the southeast part of harris county, which is where we have a greater portion of our market share, anyway.

So, we feel pretty good about our position on this contract.

The bottom line of it was this, we wanted an increase, they wanted a decrease. We weren't going to come to terms that.

So, we're still sorting it out with them, but at this point in time, it is too early to say whether there is a material issue on volume.

And Jack, you want to talk about the investigation question?

Yes.

I can make this very short and say there is no movement to -- on the remaining two issues, really, cost reports at the Justice Department and Physician Relations.

The -- the agreement that we reached with cms and previously announced, we're still waiting for Justice Department approval on that.

So, there is no new news on that front. I think the process has been slowed down somewhat by the ruling that you all know about reversing the conviction of the two individuals, Robert Whiteside and Jay Jaryl in Tampa.

That, I think it slowed the Justice Department down somewhat having to rethink the whole issue.

But we're ready to resume

negotiations and hopefully bring all these issues to an end in the near future.

Okay, great.

Thanks, Charlie.

Just a follow-up to that, on the -- on the medical malpractice, is there a [INAUDIBLE] maybe your '02 original assumptions that your actuaries might turn out better than originally expected?

We will be quick on this. Charlie, you're sneaking five questions in.

I'm sorry.

Milton and Sam?

Very quickly, my experience is they react to bad news quickly and good news slowly.

I don't know if we will see it in 2002, but obviously if these trends continue we will

see it eventually sometime in the next couple of years.

And Sam?

If we sign the agreement with Etna, that should be a good thing, yes.

Good answer! Next question.

Next is from Kip Hewitt with Legg Mason.

Yes, just quickly on the shared services again.

My reading of your severe weather to the previous question on that, you're

looking to break even on it in 2002 and then be accretive. Can you give us a sense of how much accretive in 2003? And then I had a second question on the capacity am I reading that correctly? Is that what you said?

Yes, what we've always said on shared service, we've been talking broadly, we've had the shared services, the two specific projects, some internet initiatives and in the past talked broadly.

We want to refine that further. We will refine it better in may and make you wait a little minute.

I thought you going to complete the advertisement with a preview, maybe!

I gotcha!

We thought this year was the turning year and thought this was the year we'd start out negative to start the year, turn a little positive toward the end of the year, be neutral and going forward it's part of our base operations and will have a positive benefit.

We will have nice returns. Clearly we -- we are slightly ahead of that in the 1st quarter.

So, we're clearly more comfortable than we were even before that this is the turning point year. We will see how it nets out at

the end of the year. We like where we are and the [INAUDIBLE] moving well.

And Vic, just on the capacity issue, I think earlier you said you're looking to spend $1.8 billion in CAP-X in '03?

That's correct.

And in the past you talked generally about new capacity and adding new services, adding new services.

How much are you adding new capacity in effect, with that $1.8 billion?

And then, therefore, should we start to see this 83.5% effective capacity start to decline?

Or do you see in the next two years that number edging up somewhat?

Okay, Rosalyn Elton, who oversees the capital projects?

In 2002 we will bring about $575 million on-line, which is about 218 beds. And in 2003 we will bring in about 1.2 billion on-line, about 745 beds.

At existing facilities primarily?

Yes. A new facility and some replacements.

Will it take the 83% effective capacity down or will it rise for a while until this really kicks in? Over the next two years, really?

I'm not sure if anyone is willing to project that number.

This is Sam again.We're adding a lot to surgery departments, we're adding a lot to emergency departments.

We're adding a lot to outpatient imaging departments and so forth. You don't see that necessarily in the -- in the licensed beds. As far as the occupancy levels on the inpatient side, I don't think the numbers will change materially across either group as the projects come on, within an individual hospital there, may be a period of time when the occupancy goes down.

But the way our projects are staggered across the different markets and the different groups, it's not going to materially impact the occupancy levels.

And if you convert Vic's office to beds, how many beds can you get in there?

Vic's office is an intensive care bed with the most square footage.

Okay.

Someone said this is the build it they will come strategy.

I said, no, this is build it, they're already there. And I think that speaks to the issue, I think in some of the

markets, particularly, our bigger urban markets in the West, we're already behind the curve and I think that you're not going to see a growth or drop in our utilization rates as we go forward.

Okay. Thank you.

Kip, thank you.

Just to let you know, Kip, I only sleep two out of the eight hours I'm in the fist. So, it's still not -- not a bedroom yet!

All right, a couple more questions.

Next is from Frank Morgan with Jeffries and Company.

And what you've done specifically to reduce the turnover at particularly the

nursing level? Thank you.

All right, thanks, Frank.And someone want to talk about productivity?

Productivity for the quarter was -- was generally flat.

Improved sequentially from the 4th quarter, but generally flat from the prior year quarter.

On the issue of turnover, there's really no one single thing to point to that really aes the turnover number.

It is a host of initiatives and attitudes and activities at the hospital. We -- we have looked at everything from competitiveness of our compensation structures to how we are recruiting, who we are recruiting and retention.

Some of the things that -- that we're doing include comprehensive manager training.

We know for a fact that -- that if we can improve the skills, the management skills of our supervisors that, will have a dramatic impact on lowering turnover rates.

We have standardized our exit interview processes, so, what we can aggregate data across hospitals and -- and areas and regions and -- and we're even moving hopefully to shifts and that sort of thing to understand better why people are leaving.

There is a fair amount of turnover that occurs for -- for reasons that are within our control and we want to know that and sculpt flames address those specifically.

We've done a lot on the recruiting side to -- to bring a lot more nurses in.

Web-based recruiting, all about staffing that allows for some flexibility in working arrangements for nurses.

And there is just a host of things that we're working on and we -- we think we will reach that number. As I mentioned in my comments, it's been -- it's been exciting to see some dramatic improvement, down 200 basis points year-over-year.

And if we continue to make those kinds of gains, it's really going to add value to our operations.

Thank you, Frank.

And a follow-up question from Kenneth Weakley with UBS Warburg.

Thanks, last question here.

In terms of length of stay, a number of providers are seen creeping up a bit. I know over the years the contraction on Medicare lengths of stays has been one element on the hospital industry.

Can you spend time on length of stay trends in the Medicare versus commercial business and

how it affects overall productivity.

Our length of stay actually went up both on our Medicare business and on our private business.

They're both up a little bit in the quarter. I don't know, Richard, you want to make any comments about length of stay in general?

Or any of the operators? I'm not -- it hasn't been a big change, so, not a big factor. Sam?

Part of the length of stay at least in the West was our delivers, as a percent of our total admission mix, was down.It has an increased impact on our length of stay.

So, those factors played in. Also with the skilled nursing facility admission decline which is a longer length of stay than an acute admission. That also would affect some of the mix.

So, there is a lot of moving parts. There is nothing dramatic taking place in the marketplace that's affecting it one way or the other. And it is difficult to assess intensity within the existing patient mix.

Obviously the case mix may be flat as Beverly indicated a year ago, but within the case

mix, you may have more acute patients who need more intense services and it's really difficult assess that, that may have an impact on length of stay.

And I would add that length of stay increases tend to favor the managed care book because a vast majority of our contracts are -- are structured around some sort of a per diem arrangement.

Conversely, you know, it can

hurt us in the medicare book being paid on a DRG basis.

All right.

Richard, thank you very much. Jack, I want to thank you all of you for joining the call.Mark and I will be here to

respond to any further questions. We thank you very much and look forward to speaking to each of you soon.