美國醫院公司 (HCA) 2002 Q2 法說會逐字稿

Good day and welcome to the HCA 2nd quarter earnings release conference call.

Today's call is being recorded.

At this time, for opening remarks and introductions, I would like the turn the call over to the Senior Vice President, Mr. Vic Campbell.

Please go ahead sir.

Melinda, thank you and good morning, everyone.

Welcome to our second quarter 2002 earnings call.

With me this morning as usual, Jack Bovender, our Chairman and CEO, Richard Bracken, President and Chief Operating Officer, Mark Kimbrough, Vice President Investor Relations.

And most of the senior management team of HCA based here in Nashville.

As in prior calls, this morning's call may contain some forward-looking statements based on management's currents expectations.

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

Listed on page three of the release this morning, are a number of the risk factors that I hope you all will review and consider.

We encourage you to examine them as well as other risk factors that are detailed from time to time in our SEC filings.

You should not place undue reliance upon forward-looking statements and the Company takes no obligation to update or revise any of these statements, whether as a result of new information, future events, or otherwise.

Our call is going to be available for replay later in the day and will also be archived on our web site.

And I might also welcome those of you who are listening to this call on our web site, we appreciate you joining us as well.

Today's call is the property of HCA and should not be recorded or rebroadcast without our written consent.

I do hope every one received a copy of the 9-page earnings statement.

It was released early this morning on all the various wire services.

I just want to take a minute to quickly clarify a couple of items from the release before we proceed with the discussion of the quarter.

In the quarter the earnings per share increased 32%.

71 cents per diluted share, compared to 54 cents per diluted share last year.

And these EPS results exclude goodwill amortization, any settlement, comparement or investigation related costs.

Also investment gains from our insurance subsidiary which we began showing on the face of our income statement at the end of last year, totalled $1 million in this year's 2nd quarter as you'll see on the income statement, that is actually less than last year.

It was $9 million gain in last year's 2nd quarter.

That's about a 1 cent swing year-over-year.

The Company also recorded a charge this quarter of $18 million net of tax related to the decision to delay certain components of our planned replacement of certain portions of our financial systems.

And Milt Johnson whom I think most of you know, our Chief Accounting Officer, is here.

He will be happy to address this in more detail during the Q & A, if anyone would like.

Next, our balance sheet which was on page 8 of today's release. as you can see remains very sound.

The Company's ratio of debt to debt for our stockholders equity was 53% as of June 30th, that's down 3 points from 56% at year end.

And our debt to EBITDA coverage improved to 1.99 times of June 30 versus 2.15 at December 31st.

Also during the second quarter, the Company paid off its stars contracts totaling $400 million which was included on the balance sheet at year end, and it was described as company obligated manditory redeemable security.

This represents the final cash out lay related to our forward share repurchase program that we initiated a couple of years ago.

Finally, our return on equity rose to 23% for the latest 12 months ended June 30, that compares to 20% for the 12 month ended last June.

And our return on invested capital rose from 11.7% for the 12 months ended last June, to 12.3% for the latest 12 months.

Again reflecting continued solid investments and returns from our capital programs.

I believe everything else in the release should be relatively straightforward so Jack, with that, I will turn the call over to you.

Thank you, Vic and good morning everyone.

As you have seen and heard, there was a particularly outstanding quarter for HCA.

Our 32% EPS growth this quarter was driven by our 5th consecutive quarter of double digit same facility revenue growth along with a 120 base point margin improvement.

This is our strongest quarterly EPS increase since 1999, over two and a half years ago.

I should add that this quarter significantly exceeded our own budget and our expectations.

So I won't be so tempted to steal Richard Bracken's thunder, and start talking about the many successes of the quarter.

I'm going to let Richard go first on this morning's call.

But I do want to come back after his comments with some thoughts about how well HCA is positioned amongst public companies in today's uncertain times.

Richard.

Thanks, Jack and good morning.

I'm assuming by now that you've seen our release so at the risk of sounding perhaps overly confident, let me say that we were extremely pleased with our performance this quarter.

Not only have we exceeded expectations, including our own, but we've seen the continuation of many of the positive trends that we've established over recent quarters, and I'll comment more on these in a moment.

Our performance thesis remains unchanged.

A dedicated focus on providing quality, patient care service has produced a strong growth in our top line revenues.

This revenues have been generated by a healty combination of both volume and pricing.

This revenue growth has been assisted by effective cost management, particularly in labor expenses, which has produced an exceptional quarter for HCA.

As both Vic and Jack mentioned earlier, earnings per share for the second quarter were up 32% from the prior year to 71 cents per share.

Year to date through June, earnings per share, totaled $1.47 compared to $1.15 last year, an increase of 28%.

We were pleased that many of you were able to attend our investor conference in May.

At that conference, we spent a great deal of time detailing our strategic vision.

The advantageous competitive locations of our hospitals.

The details of our operating strategy and provided you a comprehensive review of our trend and results.

So today I'll repeat this information.

I would however, restate that we remain optimistic about the dynamics impacting our industry from both a volume and a pricing standpoint.

We remain bullish about the ability of our hospitals to successfully compete in their markets.

We remain steadfast in our decision to appropriately and thoroughly invest capital in our hospitals, which will enable us to condinue to fund low risk, high return projects and we continue to make significant investments in our operating infrastructure which will assist us in producing a consistent growth pattern in future years.

In short, the strategy which we have been articulating remains intact, on course, well funded and producing our desired results.

Our management team as well as our clinical partners, I feel, are also very engaged in this strategy.

Now for some comments on the quarter.

For the quarter, total net revenues increased 9.7% on a reported basis, while same facility revenues increased 11.7%.

As Jack mentioned, this is the 5th consecutive quarter where same facility revenues have increased at a double digit rate.

Driving this growth, same facility revenue per adjusted admission increased 8.4% during the quarter.

As expected this was somewhat down from previous quarters due to timing of when medicare increases took effect in the prior year.

Recall that the full market basket plus 1% increase became effective in April of last year.

Which had the affect of somewhat dampening the quarter to quarter comparison.

Inpation revenues per admission increased 9.5%.

This reflects continuation of a favorable pricing environment on the private components of our business, along with modest increases on our medicare business.

We also continue to see some modest benefit from the mix shift from lower paying HMO products to PPO and to traditional Medicare fee for service.

Volume growth remains consistent and reliable.

Growth for same facility adjusted admissions, which account for both hospital inpatient and outpatient volumes, increased 3% in the quarter.

Same facility inpatient admits increased a solid 2.3% for the quarter, 2.6% if we exclude the effect of our closing of SNF units, Skilled Nursing Facility units, in the hospitals.

Remember, we're closing some of these SNF units so that capacity can be increased by converting these beds to medical surgical use.

EBITDA margin increased to 20.8%, up 120 basis points from the prior year.

Contributing to this margin expansion was significant improvement in labor cost.

Salary, wages and benefits expressed at a percent of net revenue, decreased 70 basis points from the prior year, to 40%.

Assisting in this improvement was continued moderation in the rate of increase of the average hourly rate, to 4.6%.

You'll recall when we first identified this trend three quarters ago, when average hourly rate was growing in excess of 7%, this reflects the fourth quarter where rates of increase have declined.

Additional new contract labor costs increased only 6% in the quarter.

The most modest increase we've experienced in some time.

Contract labor expressed as a percent of total salaries, wages and benefits, was unchanged year over year, and down sequentially from the 1st quarter.

We continue to have great success with All About Staffing, our own nurse agency service.

We now operate All About Staffing in 26 regional or satellite locations across the country.

Year to date, we estimate we've saved approximately $17.5 million on contract labor cost due to this initiative, not to mention the improvement in efficiencies and patient care, which can be more easily delivered by a consistent group of trained personnel.

Additionally on the labor front, employee satisfaction based on our current year to date Gallop survey results, is at an all-time high.

We continue to see improvement in employee turn over rates.

Both nursing and total employee turn over rate, measured on a 12 month rolling basis, are 100 basis points improved from prior year, to 17 and 24.5% respectively.

Other operating costs improved by 130 basis points in the quarter.

This improvement reflects the fixed nature of many of these expense items being spread out over a larger volume of revenue base.

We also note improvement in contract services and utility costs.

As I mentioned last quarter, contract services improvement is due to the consolidation of certain services such as linens, medical transcription, clinical gasses, from a hospital to a division level procurement basis.

This allows us to standardize contract terms, aggregate volume and improve unit cost.

In the quarter, this effort generated $6.5 million in savings.

Supply expense for the quarter was 15.9% of net revenues, consistent with prior years performance and in line with our expectations.

No major developments to note this quarter with this line item.

Cash management remained strong through the quarter.

Net days in receivables declined once again, to 63 days, in the quarter, down one day from last year's second quarter.

These numbers are derived from a patient receivable methodology and not the balance sheet method used by some organizations.

If we were to compute our days in AR, using this method, they'd be 49.

Cash collections remained exceptionally strong at 103% of the trailing 60 day average net revenue less bad debt.

Our provision for bad of debt increased in the quarter to 7.6% of net revenue, compared to 6.7 in last year's second quarter.

However, bad debt reflected as a percent of gross revenue, was esentially unchanged from prior year.

We feel bad debt expressed as a percentage of gross revenue is a better metric, because it normalizes for pricing increases.

Before I turn this back Jack, let me briefly comment on the performance of our shared service program.

Currently we have 10 patient accounts service centers in operation, serving 125 of our hospitals.

74% of our facilities now have fully transitioned to the PAS format.

This represents 69% of the Company's net revenue.

Our net days in AR for PAS migrated facilities, out performed those facilities which have yet to transition.

In June, PAS days in receivable were at 62, while non PAS hospitals were at 64.

Let me conclude by restating our belief that this was a strong quarter for earnings to date.

By most measures our performance from operation was in line or above our expectations and significantly exceeded prior year's performance.

As discussed during our May conferenct, our management teams remain engaged in addressing four key operating initiatives.

Patient safety, being the employer of choice in their respective marekt, shared services transition and implementation and volume building.

We continue to be most pleased with results of our capital spending projects, and look forward to an increased number of facility projects coming on-line later this year and next year.

So with that, I'll return the call back to Jack for some final comments.

Thanks, Richard.

I want the take a few minutes before the Q & A to share some of my thoughts with you regarding where HCA is with respect to some of the financial reporting, public accountability and corporate governance issues that are on everyone's minds these days.

First, I want to remind you when Tommy Frist and I returned to HCA almost five years ago now, we focused an incredible amount of our personal time on as well as a significant amount of the Company's human and financial resources on many of the issues confronting public companies today.

Our Company's public accountability, financial reporting and corporate governance were all under fire in the summer of 1997.

Regaining the public's confidence and integrity of our company, was our first priority.

I'm not going to go through the full litany of what we've accomplished since then, but I would dare to say there are very few public companies, if any, that have been through as much internal and external scrutiny as this company has over the past five years.

Working with an outstanding group of high profile, outside independent directors, we have addressed corporate governance, financial reporting and public accountability issues.

Also in November of 1997, we hired Alan Yuspeh, a Senior Vice President and Chief Ethics Officer.

We have installed ethics and compliance officers at every one of our hospitals.

We require annual ethics training for all HCA employees.

We developed a code of conduct that makes very clear the values and principles we expect from all HCA employees.

This code of conduct is publicly available on our web site.

We stress an employee's personal obligation to report suspected wrongdoing and provide an ethics line to facilitate this process, should the need arise.

As you know, we entered an 8-year corporate integrity agreement with the Department of Justice in the first quarter of last year.

Requirements of our CIA should give investors added comfort.

HCA has the appropriate infrastructure and safeguards in place, in the are of federal and state regulatory compliance.

With respect to corporate governance, two years ago, our board of directors adopted most of the government's principals recently recommended by the New York Stock Exchange.

Some examples, independent directors should comprise the majority of the board.

12 of HCA's 14 directors are independent, outside directors.

Audit compensation and nominating committees should be comprised solely of independent directors.

Ours are.

Both the audit committee and the board hold executive sessions without management present, as part of every meeting.

Every other year, we a reassess our corporate governance guidelines and conduct a self-evaluation of board effectiveness.

We are in the midst of that process now and expect to complete this reassessment and make appropriate changes by the end of the year.

Well continue to strive to be a company of best practices in the area of corporate governance.

From an accounting perspective let me share just a few thoughts.

In 1998 we held 12 regional CEO balance sheet training seminars for all hospital CEOs and CFOs.

Tommy Frist and I attended each of these mandatory two-day training seminars to review our accounting policy guides and emphasize the Company's focus on financial integrity.

We continue this training and it is mandatory for all new hospital CEOs and CFOs.

To date, we have provided a total of 30 seminars for all hopsital CEOs, CFOs, controllers, and business office managers.

We have a highly trained internal audit staff of 150 professionals.

A substantially greater number of auditors than present in most other companies.

Also our Senior Vice President of internal audit, reports directly to the audit committee and the CEO.

Over the past three to four years, the Company has focused significant resources and evaluated and refining its revenue recognition process' including, standardizing our month-end managed care accrual processors, over 2 years ago, conducting additional training and education classes for our CFO's as we are transitioned to our patient accounting service centers, and incorporating key control systems around our insurance reserves and around our governmental receivables.

Most importantly we have an active and very highly qualified audit committee on the board led by Carl Reichardt, retired Chairman and CEO of Wells Fargo, John McArthur, former Dean of the Harvard Business School, Martin Feldstein, world renouned economist, Fred Gluck, retired managing director McKenzie, and Harold Shapiro, the past President of Princeton University.

A very strong and highly qualified group of individuals.

By the way, our audit committee met seven times last year.

They have also adopted restrictions on non audit services from our external auditors, Ernst and Young, and on employment of former E&Y employees.

The tone at the top is most critical and I can assure you that the tone set by our board has been one of stressing the importance of honesty, consistency and transparency in financial reporting.

While on the topic of financial reporting, let me address two questions that I'm certain someone would otherwise ask during our question and answer session.

First of all, stock option accounting.

Our immediate response is not to make a quick and uninformed decision in this area.

Therefore, I've asked an internal task force, with the help of outside consulting, to study this issue and provide me and the board with a reccomendation in this area, before the end of the year.

However, as many of you know, additional detail concerning stock options is already included in our annual financial documents filed with the SEC and in our annual report.

Using the Black Shoals valuation methodology currently disclosed in our footnotes, our 2001 EPS would have been reduced by 9 cents a share, due to stock option.

That represents 4.3% of 2001 reported EPS of $2.07.

Second, SEC reviews.

As you are aware, the SEC earlier this year committed to review the financial reports of all fortune 500 companies.

We, like many other companies received a comment letter from the SEC staff in June, based on their review of our 2001 form 10-K. and first quarter 2002 10-Q.

In response to the comment letter, we provided suplemental information to the SEC that we believe adequately addressed the staff's comments.

We believe none of the SEC comments received would result in a change in our reported results of operations or our statement of financial position for 2001, or the 1st quarter of 2002.

Finally, let me offer one very simple way for you to audit us.

Look at our cash collected as a percentage of revenues less bad debts and you will find that we continue to collect over 100% of our revenues in cash.

As Richard told you, we collected 103% in the 2nd quarter, and that really is the bottom line.

Now we would be glad to answer any questions and we'll a call for the operator for our questions.

Linda, if you would please.

And if you would remind those asking questions that they limit their quiestions to one at a time, and if they want to get back in the queue fine.

But since we have such a large number on the call, let's be fair to everyone and hold to one question.

Thank you, gentlemen.

Today's question and answer section will be conducted electronically.

Anyone wishing to ask a question, may signal by pressing the star key followed by the digit one on your touch-tone telephone.

We would like to ask that you limit yourself to one question.

Individuals asking questions should not use speaker phones.

Please lift the hand set if you are asking a question.

Again, that's star one if you would like to ask a question.

We'll pause for just a moment to assemble the roster.

And our first question will come from Adam Feinstein of Lehman Brothers.

Great.

Thank you.

Good morning everyone.

I have a couple of questions about labor costs.

And just in general it seems like you guys really are making some progress there.

Just wanted to get your sense.

You were talking on a conference call earlier in the year about benefit costs really being a drag.

And just sort of was curious whether, you know, that is going to still to be a case.

And then secondly just wanted to ask about, would the improvement in the labor cost, how much of that would you say is very skilled labor versus non skilled labor, and just help us, I guess, understand the trends there some more.

Thank you.

Alright, thank you, Adam.

Milton, you want to address the benefit question?

Sure.

Last year we did discuss the employee medical cost being above our expectations.

The cost is still up substantially.

It's up in the high teens, 20% range, but that's what we budgeted for this year and expected.

So, we're actually running slightly under our budget in that area through the first six months of this year.

But it's still up substantially over the prior year.

Alright Milton, thank you.

Adam, on your skill and non skill, we actually don't have specific numbers on that.

I think clearly our feeling has been that early on, we saw the loosening up in the labor market in some of the non skilled areas first.

Clearly there is still a nursing shortage in this country and it varies from market to market.

So my gut says that more of the improvements come in the non skilled area, but we don't have specific numbers but we will try to get that for you in the future.

O.K., and what about shared services in the labor cost, I guess, with less of a drag in the current quarter relative to the prior year?

Okay.

Adam and you're stringing this question out.

But, we'll finish that.

Milton will you address shared services as it relates to labor in particular or anything else about it.

Well, shared services over all contributed about a penny to earnings this quarter so our benefits are again exceeding our costs in that area.

As we talked about in May, we do expect it to be somewhat accretive this year, slightly accretive to the Company this year, and we continue to see that in the 2nd quarter.

Thanks.

Thanks, Adam.

Gary Lieberman of Morgan Stanley has our next question.

Good morning.

Can you discuss your interest expense came down significantly in the quarter, just some detail on that.

David Anderson, Senior V.P. Treasury will talk about interest expense .

Interest expense is down basically because our percentage of flowing rate debt I believe is up slightly and obviously short-term interest rates are down substantially from the prior year and I believe our average balance period versus period is also down.

And if I could just follow up, you also talked about your provision for bad debt expense, you discussed it a little bit on the call, but it just seems somewhat inconsistent with your DSO's coming down by a day and you have the provision going up significantly.

Is it that --

Milton, you want to address that?

Sure.

Some of the allowance for bad debt, we have 150-day policy that we reserve for accounts that age to that level.

And so you see the 1st quarter revenue -- higher revenue rolling in this quarter and that would account for the increase in allowance for bad debts in the 2nd quarter.

Thanks a lot.

Next is John Hendalong from First Boston.

Hi guys, good morning.

Would you discuss your thoughts on share buy back given what's going on in the marketplace, given the strength of your balance sheet, cash flow, et cetera, and are there any constraints regarding what you might buy back [INAUDIBLE] the investigation at [INAUDIBLE]?

John, thank you.

Jack?

Obviously at these market prices that's an attractive alternative to us.

And we are looking at that now.

We have no authorization currently for a share buy back, but we're looking at that quite intensely now and I guess that's all I should say, Vic.

I think the question in terms of any restrictions, as it relates to the government investigation, there are none.

No other restrictions that we have.

Thanks.

David, you want to add something to that?

The only sort of restriction is we do have stated financial policy rights in this company which we intend to try to maintain those policies.

In looking at any investment alternative including buying back stock.

Thank you, John.

And once again, we do ask that you please limit yourself to one question.

Moving on to Darren Rurch of Suntrust.

Thanks, good morning everyone.

Wonder if you can just break out for us the margin performance between western group and the eastern group and maybe just have the operators talk about anything unusual or noteworthy on the cost side if you can contrast the two divisions.

Thanks.

Alright, both Sam and Jay are here.

Jay, you wanted to take the eastern route?

Yeah.

Looking at the eastern group, our volumes for the quarter were up about 2.5%.

And we had very strong net revenue for adjusted inition growth that really helped drive that performance throughout the group.

You know, relaly nothing on the cost side that really jumped out.

Contract labor continues to be an issue.

I mean that's something that we're trying to get on top of and I think we're seeing some success.

One thing that we are doing that is a little bit different in the first and 2nd quarter this year, is we're seeing our skill mix adjusted throughout many of our hospitals.

We're going -- many of the facilities are going back to, kind of team nursing concept.

I think that that's helping us control our labor costs a little bit better.

I guess that's it -- margin.

Margin has gone -- is right now at 22.1%.

And that's down slightly from last year.

But I think that's attributable to some additional overhead cost that we're taking on as a result of shared initiative service.

We got 85% of our hospitals fully migrated into the PAS's so we're taking a little bit more of cost than we have in the past.

Sam, you want the talk about the west?

Yes.

For the western group for the quarter, we had a really strong volume.

Our volumes were up about 3.2%.

Revenue growth for the group was about 12.5%.

We saw very consistent volume growth across most of our major markets.

Especially in Texas.

And also in southern California.

We had very good revenue growth in each of those markets as well.

Our margins for the quarter were 22.9%.

We were up a healthy percentage over last year.

185 basis points actually.

A lot of that's driven by a really strong management on the labor and bad debt.

As Jay indicated and that helped to drive to pretty good margins.

But, very good performance in Texas, Denver continues to perform well for us as a market and as I said southern California, is a market that's really surprised us and it has done exceedingly well this year.

The only other comment, that I would like to make from the East is that we did in the last nine to 12 months, we've closed a considerable number of low margin services, I think Richard was talking about that earlier, we closed probably 12-15 sniff units.

We closed a couple of low volume obstetrical units and some new patient psych units, where we were not confident that we were going to be able to maintain the quality standards that we wanted and because of the low volumes, they were not producing the kind of revenues and EBITDA that we would expect.

Alright Jay, thank you Sam.

Thank you Darren.

Thanks.

Next we'll hear from AJ Rice with Merrill Lynch.

Hi everyone.

I would just ask you, Jack maybe conceptually, when do some of the rural companies come in here and say that sort of forsee, looking ahead, outpatient ramping up relative to inpatient and growth and you're showing sort of above trend line growth on both inpatient and outpatient.

Do you foresee that continuing in terms of the mix and maybe while we -- is there any way to explain the difference in sort of outlook and experience?

Morning, A. J.

No, I don't know exactly what the rural companies are focusing on when they talk about that.

You know our investment strategy.

And that investment strategy is focused on high intensity, high acuity level care.

We're investing significantly in intensive care units and operating rooms and radiology facilities, ramping up our cardiology and orthopedics, cancer care, and that obviously implies generally, more inpatient utilization.

Having said that you also know that we're investing significantly in emergency rooms and other outpatient capabilities.

So I have nothing to suggest that our trend of mix and growth from outpatient and inpatient is going to change in our case.

How about on the pricing side on that too, is that -- anything favor one versus the other, or is that in balance now?

Well, as you might expect, we have more flexibility, I think, on the inpatient side in our pricing, we are not niched as much on the inpatient side as we are on the outpatient side.

You know, there are a lot of outpatient imaging centers.

Outpatient surgery centers being developed across the country and obviously we're at more risk on the outpatient side for niching than we are the inpatient side.

So that does have implications for pricing.

O.K.

Alright, thanks a lot.

Thanks A.J.

And once again, we would like to remind today's telephone audience, that if you would like to ask a question, it is star one.

Also please utilize your hand set when asking a question.

Next we'll hear from Kip Hewitt of Lite Naysan.

You mentioned that you're seeing a shift from more managed care and PPO to more fee for service.

Can you first of all just maybe sort of give us some sort of indication of the amount of that shift.

And then secondly, what effect you think that will have on your pricing over all, your commercial pricing particularly as more of the payments are directed directly to consumers with higher co-pays and deductibles?

Kip, let me first just give eveyone the data we normally give you in terms of our initial mix and maybe we'll let some people talk about the mix shift between HMO, PPO.

But if you look at our over all admissions for the quarter, we had in medicare, 38.1% of admissions were medicare, and that compares to 37.6 a year ago, so 50 basis points up.

Medicaid was relatively stable, 10.6 this year, 10.4 last year..

You really look at the combined discounted business managed care business, it was 41.6 this year, 41.5 last year, so it didn't decline, it really was more of a mix shift there.

Commercial was 5.5 this year versus 6.4 a year ago.

Self-pay, 4.2 this year, 4.1 last year.

In terms of the movement between the products.

Does anyone wanted to offer this?

Beverly, do you have any thoughts.

Sam or Jay?

I don't have specific numbers as far as the mix of PPO and HMO.

I can probably get that number for you and give it to Mark.

But on the deductibles and co-insurance, we are seeing an increase in those numbers and we have enhanced our collection activity on the front end.

As I mentioned in the investor conference, year over year we're up about 30% getting up front collections in our PAS hospitals.

And we anticipate that focus to stay there.

And we're staying very close to the change in the plans that the payers are offering in our markets and identifying what employers are buying so that we can stay attached to that shift.

Okay.

Thank you.

Thanks, Kip.

Next we'll hear from Debra Lawson of Salomon Smith Barney.

Good morning.

I was wondering if you could just -- the $1.7 billion and $1.8 billion of Cap-X that you've got ear marked for this year and next, can you just review for us how much of that is going to be maintenance oriented, how much of it's growth, and how much of it's going towards shared services, and then any other detail as well.

Thanks..

Alright Deb, thank you very much.

Ros Elton oversees our capital program.

When you look at that as a growth percentage, we're probably looking at about -- a little bit over 50%.

If you're looking at kind of the operating infrastructure that Richard talked about, that is around about 12% and then the routine is pretty much the remainder of that.

That has some growth percentage in that routine, but we just kind of look at that right now now as [INAUDIBLE] maintenance.

O.K.

Great

Thank you.

Total dollars on the routine is running around -- right around 600.

$600 million a year.

Great.

Thanks.

Thanks, Debb.

Ken Weekly of UBS Warburg.

Thanks, good morning.

I was wondering if you could maybe quantify to some extent at least the geographic variation in pricing power.

Of course your -- say top two or three markets in both the west and the east.

And then maybe spend time on how your capital spending projects over time have perhaps affected that pricing power.

All right.

Sam, Jay, you want to talk a little bit about that?

I think in between the East and West --

This is Sam.

-- the net revenues for adjusted inition were generally comparable for the quarter.

Our group was up about 8.5%.

We do have certain markets, however, that are up much more than that and those are markets that are typically in a different leg of this cycle if you will.

For example, in the Dallas-Fort Worth market, we've experienced better than average pricing there.

We do have, I think, well, well positioned hospitals in that particular market.

We had been able to capitalize on that and it's a market that's significantly under bedded in relationship to maybe national norms.

And that has created some opportunities for us to move our pricing.

Obviously in Dallas-Fort Worth as I indicated in our investor conference, we do have significant amounts of capital going into that particular market and that over the long run, we think will continue to sustain our ability to gain market share and hopefully get price as we have in the past.

In other markets, in the west, they are generally comparable to Dallas-Fort Worth.

With the exception of northern California where we have had difficulties in moving our pricing in that particular market because of some continuation of capitation by our physician groups, that's created some challenges for us in those markets.

But generally across Texas, we have been able to move a pricing consistent with the average as well as in Denver and other markets of that size.

And then within the East, a similar story.

We have -- of course our top markets are Richmond, Nashville, Tampa and then in south Florida.

And in Richmond because of our very strong presence there, -- not -- including the acquisitions of the new hospital at the [INAUDIBLE] campus in Richmond, strengthend our, I think, negotiating position there.

We continue to see good rate increases in that market.

Same in Nashville because of the geographic coverage that we have here coupled with the very significant capital investment.

I think everybody knows since 1995 we've basically rebuilt Centennial.

Put in a new hospital out on the east side of town, Summit.

Brand-new facility up at Skyline.

Significant capital investment in this market has allowed us to -- to get some very good pricing.

Probably a little bit above the group average.

Then in south Florida, that's probably where we have seen the most dramatic positive growth on our pricing agenda.

Again, I think very much related to the significant capital investment that we made down there particularly in Broward county where we've invested close to $60 million at Westside.

Putting in a brand-new open heart program and expanding that facility and then over at our Northwest hospital, the hospital that five, six years ago was really sort of on the bubble, and now is experiencing 8, 9% growth volumes and significant EBITDA and margin expansion.

Richard.

Historically, we've been able to move the pricing agenda more aggressively in those markets where they perhaps were farther behind the area averages.

And so you if look at our performance in some of these markets over the last several years, where the markets were farther behind over all averages, we were able to move them more aggressively.

Going forward, you know, capital expenditures, et cetera, are important but what continues to be extremely important is the position and concentration in these facilities in the growth corridors of the cities.

And as Jay was mentioning and Sam had mentioned before, we can continue to invest money where the population is in the suburban markets whether it's in south Denver or south part of Nashville, we continue to put dollars in access points of our hospitals, whether they be in emergency rooms or the intensive care units and all of these things allow us to continue to work that pricing agenda.

So it's -- going forward, we think we have put our money -- our capital dollars where it's going to do the most good in terms of pricing.

Thank you.

Jack.

Did you have something you wanted to add?

Yeah, Ken, I think you've heard me say before, but I'd like to reiterate, that as you look at our capital investment, over time you will see more and more of our net revenue growth coming from volume.

I think the pricing will continue to be good.

But you will see that segment that is generated by volume continue to increase as a percentage over time.

And that's where the real punch comes from these capital investments that we're making now and into the future.

Ken, thank you very much.

Thank you.

Charles Woods with CIBC World Markets has our next question.

Thanks, good morning.

Kind of related to that last comment.

We've heard a lot of discussion about the difficulty physicians have been having in retaining or simply paying for their malpractice coverage.

And given your fairly intense focus on adding higher acuity services and procedures in your hospitals, can you talk a little bit about your ability to recruit and retain the specialists to provide those services and maybe some anecdotal pictures of any problems or successes you've had in different markets and projects.

Charlie, thanks.

Jay and Sam.

Yeah, throughout the eastern group we really have not seen any difficulties in recruiting and retaining high quality physicians, even the specialist that are hard hit with the malpractice increases.

With one exception and that's in West Virginia.

Quite frankly, that state environment is considerably different than virtually all the other markets within the eastern group.

We have lost some specialists, primarily orthopods, some cardiologists and then some primary care physicians.

Mainly obstetritians from that market.

As you know, we do -- we have rolled out a new program to help provide some malpractice coverage for those physicians.

We have got about between 30 and 40 doctors that are signed up right now.

We anticipate more will sign up as their renewals come due.

Hopefully that's just a short terl solution.

We're looking for the state to come in and create a physician mutual.

But, West Virginia is really the only state -- the only market where we've had some problems recruiting physicians.

All other markets, it's really not been an issue.

This is Sam Hazen, in the west, the hot bed market for us obviosly is Las Vegas.

Where Nevada has had significant malpractice issues.

Most of our physician were insured by St. Paul and as most of their policy's expire with St. Paul this summer, we've seen a departure from the state by a number of physicians, most significantly in the obstetrics area and then secondarily in some of the surgical specialists.

As far as recruitment in that state, we have seen a little bit of of a slowdown in migration of new physicians into the Las Vegas market.

We still have increases but we're seeing a slowdown in the increases as the new programs that the Governor is sponsoring are taking hold, and hopefully will alleviate some of that.

But that's where our biggest issue is.

In Texas, we have pockets of issues.

Primarily along the border of Mexico in McAllen and Brownsville.

In particular Austin, not so much, but we have not seen a dramatic slow down in recruiting.

However, we have seen some issues with physicians that have been reluctant to take coverage for emergency call and those kind of things, as they try to sort out their malpractice issues.

But by in large, it hasn't had an impact on our volumes in any of these markets in a big way, but it is an issue that we're trying to deal with and hopefully we'll see some moderation in the near term.

All right.

Thank you, Charlie.

Thanks a lot.

Moving on to Michael Wiseburg of ING Asset Management.

Yeah, could you go through the bad debts and the reason it's higher.

I know you explained it once, I didn't quite get it.

You mentioned you have 150 day reserve policy.

I didn't quite understand why that ratio is going up as your volumes increase.

Michael thank you.

Milton, you want to touch on that?

Sure, again, the main factor is we have high revenue in the 1st quarter compared -- higher than we had in the 2nd quarter.

And as a result under our policy when an account ages to 150 days we reserve for it.

We do not write it off but we do reserve for it as a bad debt.

And so when that high revenue arose in the 2nd quarter, we typically will see our allowance for bad debts increase.

Also effecting that is the pricing strategy and then the pricing growth that's impacting that as well, as well as volume.

So there's really three different factors contributing to the increase in the allowance for bad debt this quarter.

So that -- if I understand, a quarter where you get sequential increases in revenues, that would cause the bad debt expense as a percentage to decline.

Yes.

O.K.

And then could you maybe -- what would your pricing do?

Explain how your pricing strategies would cause the bad debt reserve to go up.

Well, basically, your revenue is going up and therefore your -- say your account that's bad also that amount you're writing off reserving for is going up in line with your revenue growth.

Okay.

Can I just ask, what would you expect the bad debt reserve to be second half on the year to year basis, in terms of percentage of revenues?

Well, on a percent of net revenue, you know, our bad debt is running, you know, 7.5 to 8%.

And, you know, in the second half, I would expect it to continue to run in that 7.5 to 8% range.

Great.

Thanks a lot.

Thanks, Mike.

Ken Soliver of SC Cowen Securities.

Thanks and good morning.

Just quickly, could you talk a little bit about acquisitions in divestitures.

It seemed from the analyst stay, that probably even the even the smaller divestiture program is likely done and obviously based on the northern Virginia acquisition that you're still very selective in terms of what you're looking at externally.

Thank you.

Jack, do you want that?

Yes, we continue as we have said in the past to have an acquisition policy that's usual term is selective.

I like to use the term opportunistic.

We concentrate again where we already have market presence.

Those facilities such as the acquisition in Richmond and now the new acquisition in northern Virginia, is meant to give us added presence in markets where we already have some significant presence.

So that will continue to be the focus of our acquisition strategy.

However, that doesn't mean in this environment that if a good markets -- good new markets that we can enter in a strong position become available to us that we won't take advantage of that.

In terms divestitures, Ken at this point I think we really don't have a significant divestiture program.

Overall, our total number of hospitals are down from June a year ago.

But, very selective as we, in the past have to look at capital investment decisions and individual facilities that might not be in the very strong disposition, we then determine whether or not it makes sense to retain the facility and make the capital investment or take that capital and proceeds from a sale and reinvest it in a Denver or a Richmond or Nashville.

Again, the important thing to remember about us going forward is that our operating model does not depend on acquisitions to drive our goal of mid teens to high teens or better earnings growth year over year.

And just quickly on the divestitures, do you think you're at a pace where you would do less than say the typical 3-5 you've done the last few years?

Yeah.

We really don't have a plan 3-5 hospital a year divestiture program.

Again, we're opportunistic on the divestitures just as we are on acquisitions and we are constantly assessing our portfolio, seeing if all of our assets continue to make sense and pruning the tree when it makes sense to prune the tree.

Great, thank you.

Thanks Ken.

Frank Morgan of Jeffries and Company has our next question.

Good morning.

Wanted to follow up to an earlier question on the medical liability and how you're helping doctors in this program.

Was that specific just to West Virginia or is that a program you're doing in other areas as well?

And exactly what are you doing?

Are you actually taking the risk and becoming the insurer for the physician?

And then my little question is if you could elaborate or maybe refresh our memory as it related to the small charge you took $18 million on the decision to delay the implementation the financial systems.

Kind of explain what that was and does it have any other ramifications, by the fact that you've delayed the implementation?

Thanks.

Alright thanks for your question.

Milton, you want both of those?

Sure.

On the malpractice front, we are -- we have put together a program that Jay mentioned in West Virginia, in that market, we are insuring the risks of the physicians that are on our medical staff.

Again, we have got about 30 to 40 at this point.

We probably will grow that throughout the year to possibly as many as 100.

There we have to take the risk.

There is no one else in that market willing to take the risk.

Again, we are receiving a premium for that and we are receiving benefits from the physicians as well, such as participating in our patient safety program that we implemented.

And it is a transition strategy, it's not a long-term strategy, a short-term strategy.

Over time we expect to see a physician mutual be created in West Virginia, and we would transfer that risk to the physicians mutual company at that point in time.

And we do not expect it to have a material impact on the financial operations of the Company.

And we are charging market rates for that coverage.

And then we also put together a program in the west in the Las Vegas market.

But, we are not taking risk there.

We are simply putting together a plan to help the physician possibly with some deductibles, but not taking the risk there.

With respect to the ERP and the write off there.

Basically we baught a license to implement the entire software financial suite, including HR, Payroll, Accounts Payable, General Ledger, Budjet, Fixed Assets and Procurement.

We were on a path -- again with our mars development as well -- on a parallel implementation strategy.

Our risk management process identified that as being a high risk to the Company going forward and decided to reduce our risk profile and to delay the implementation of the financial systems, with the exception of HR and payroll.

Where we believe we have the the greatest need in the short-term.

Our -- you know we don't have to have these systems today.

We have the flexibility to delay them so we made that decision.

But as a result of delaying it probably 18 to 24 months, we wrote off our design cost that we had capitalized in 2001 and early 2002, so that we would not over state the value on or books of these systems as we continue to bill those out.

Milton thank you.

Frank, appreciate it.

Ellen Wilson of Sanford Bernstein.

Thanks.

Was wondering if I could get you to kind of provide some more color on where you are in terms of shared services right now?

Specifically if you can give me an update as to where you are for the rest of year in terms of rolling the hospitals onto the patient account service centers?

And then also in terms of sort of financials.

We've obviously seen the benefits come out of this sooner than what you had originally expected.

Which my understanding was latter half of the year.

Could you kind of help me quantify what to look for in terms of financial benefit the second half of the year.

Ellen, thank you.

I'm going to have Beverly Wallace talk about the rollout on the patient account service centers over the balance of the year.

And then Milton you may want to swing back and talk about the financials going forward.

Ellen, we have a total 164 hospitals that will be in one our locations at the end of the year.

As of June, we're sitting at 125.

So, we have about 29 more facilities to roll on the last half of this year.

We're on target with that.

As far as our premigration activities, so we anticipate being there by the end of December.

Then we'll have a few hospitals, mainly in the far west, that will migrate at the -- over the course of '03.

Because we're not opening the largest center in Las Vegas until August, September of this year.

Thanks Bev.

Milton.

Sure, benefits, financial benefits, shared services, again, that would include the PAS revenue service in our strategy and certain consolidation efforts in our procurement area.

And again that was accretive by about a penny this quarter.

I would expect for the rest of the year that you will see a penny to a penny and a half in the next six months.

Again, we're turning the corner.

Our benefits are now exceeding the costs -- additional costs of these programs.

Also keep in mind, we mentioned the ERT program that we have slowed down.

But, we will probably incur a penny to two pennies of cost in the last half of the year, as we roll into different phases and start implementing some of the payroll and HR systems.

So there will be some benefits from shared services but also some ERP costs will be coming in over the next six months as well.

Just so i understand -- so you're saying it kind of washes out though in the end, it sounds like.

You know, for this year, you know, we don't really include the financial system upgrade in shared services because it's more -- it is a system implementation.

So again, shared services if you isolate that I think we'll have another penny to penny and a half type of financial improvement.

But I just want to make sure -- remind you that the ERT program, we've been in a capitalization phase in the first half of this year and we will see some expense pick up in that in the next half of the year.

O.K., thanks.

Ellen, thank you.

Joel Ray of Wachovia Securites.

Good morning and congratulations, folks.

Was wondering if you could go and discuss for us a little bit about what your efforts will be with the leap frog group and how you think this will help to differentiate HCA.

Allright, Frank Houser, physician and Chief Medical Director.

Frank, you want to talking about that?

We made the decision to join Leap Frog several months ago after some fairly extensive conversations with their leadership.

Our decision was really based on two factors, one, the objectives of Leap Ffrog's, the employers supporting Leap Frog itself, lined up very consistently with ours.

As you know, we've got a patient safety initiative underway now for a couple of years.

It's beginning to look at ways to reduce medication safety.

One major piece of that, being electronic order entry, that we're looking at implement across our company, and that is the first priority of Leap Frog.

On the other issues, on the other leaps if you will, our objectives and clinical objectives again were pretty much in line when we had some issues around some of the volume dictated referral requirements that Leap Frog had and wanted very much to be in a position to have -- have discussions with them about those concerns.

And we had the good fortune of having a huge data set from all of our hospitals to support some of our -- some of our positions.

And they were very responsive to that.

So, from our perspective, from a clinical perspective, we saw a great advantage to us affiliating with Leap Frog.

And as a differentiator, yes, we think that the objectives that they are trying to achieve for their large employer base are very consistent with our goals.

Frank, thanks..

Joe?

Maybe just one or two more questions.

Next we'll hear from Andrew Bach of Goldman Sachs.

Good morning and congratulations on the quarter.

In thinking about your capital spending and free cash flow.

I'm curious, what persentage of your hospital portfolio today do you think is at capacity, or will be at capacity say within the next three years?

And what does that imply about your current capital spending over next 3-5 years, as we think about those plans?

And then finally, and not have a three part question but I am anyway --.

Join the crowd Andrew.

Yeah, sorry.

As we think about that, clearly you're sort of addressing pent up demand in those markets.

But I'm thinking -- in terms of sort of a rate limiting step, to staff those units as you open them up with those [INAUDIBLE], how should we think about trying to source labor, particularly skilled labor and any challenges that might pose?

Thanks.

Andrew, thank you.

Richard?

That is a serious single question.

I'll do my best on it.

It is a key question for us.

And as you recall during our investor conference, we showed statistics that the effective utilization of our hospital facilities is indeed increasing on any measure that you look at.

Whether it be on admissions or adjusted admissions.

And we also explained at that time that the definition of a facility being at capacity is sort of a moving target.

It can be at capacity some time during the week and not at other times during the week, et cetera, given how the admission patterns play out.

But when you think about our capital spending and what we have done.

We have -- a grown portion of it on adding capacity.

We have been in the process of doing this for three years.

The amount of time it takes for these projects to come on line is long.

This capacity is coming on-line the latter parts of this year and into next year.

Whether it be in our emergency rooms for the outpatient, whether it be in medical/surgical bed capacity, whether it be in taking under performing units, as you heard Jay talk about earlier, obstetrics or skilled nursing facilities, converting them to mid-surge capacity.

So there's a lot things that have been going on to increase the capacity of our facilities.

Our viewpoint at this point in time is that we are on track to appropriately meet the capacities in our market.

We evaluate this, our management teams are evaluating this everyday.

And if we get done with a project and we sense that we have under sized it, it immediately gets back in the hopper, and we'll a develop additional capacities.

So, I do think that we're ahead of this issue to the extent we can be.

If I was an organization just started thinking about this, had three or four years to wait to get it on line, I would be much more worried.

But as I said, we started this effort at least three years ago and I think we are doing what we can.

Relative to the labor question, clearly a key issue in being able to process the volume.

We have a lot of things going on and we're very pleased with the labor numbers that we presented this morning.

But I think when I think about our labor agenda, I'm more pleased that for the first time we really have a comprehensive labor program in place and being deployed at all facilities.

And this just isn't about paying a competitive wage rate in our market.

It's about being sure we're hiring the right people to reduce turnovers.

Changing how nurses can work in our hospitals being more flexible and the kinds of things that -- the kinds of shifts they can work.

Supervisor training, to be sure that our supervisors treat our employees with the appropriate levels of professionalism that they require.

Standardizing exit interviews, knowing why people are leaving our facilities.

I mean, it's a whole host of things that we have in place and we're consistently deploying across all of our hospitals.

We think that this will continue to better position our facilities.

We as an organization can't singularly solve the supply of nurses in America, but we certainly think we can be -- improve our position in be the employer of choice in our market.

We have all the right kind of things moving on, and it should coinside well with our capacity increases.

Great.

Thanks very much.

Andrew, thank you.

About one last question Melinda.

Yes, sir.

Our final question will come from Gary Taylor, Banc of America.

I can't believe it.

I just got in.

Oh, if I knew it was you, Gary.

You wouldn't have taken it.

Most of what I wanted to ask has been answered.

I guess I just wanted to come back and touch on medical malpractice from the hospital perspective, given that, you know, some of the nursing home operators have continued to see accelerating growth there.

And just wondered if, you know, very briefly, you could just touch on how often you look at your reserve levels, where those are running and what you've seen in terms of past year's claims experience, either accelerating or coming in line?

Allright Gary, good question.

Milton?

Sure.

Actually, you know, what we saw, we saw negative trends developing in 2000.

We increased our professional malpractice premiums by about 15%.

Again, we're a little bit ahead of the curve, I think in what the general marketplace was doing in that area.

And that was after years of pretty flat rates.

This year, again we upped it 20%.

We get two actual [INAUDIBLE] reports annually.

Those reports are in process of being finalized for 2002.

But we're far enough along to know that we're not going to have a problem in that area this year.

As a matter of fact, we expect that our reserve strength will be greater exiting the year than where we ended the year.

All right Gary.

Thank you Milton.

Thank everyone.

Mark and will be here for the balance of the week to take your calls or questions.

Thanks again and look forward to talking to you.

That does conclude today's teleconference.

We thank you for your participation.