美國醫院公司 (HCA) 2002 Q3 法說會逐字稿

This is premier conferencing and today you're holding for the HCA conference call. At this time, we are admitting additional participants and will be under way shortly. We thank you for your patience and please continue to stand by. This is premier conferenceling. Please stand by. We are about to begin. Welcome to the HCA third quarter earning release conference call. 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. Vick Campbell. Please go ahead, sir.

Thank you very much. Good morning, everyone. Welcome to the third quarter earnings call. As always, with me this morning, Jack Bovender, our chairman and CEO, Richard Bracken president and chief operating officer, Mark Kimbrough, vice president of investor relations and here in the room with us, most of the senior management team that are based here in Nashville of HCA. As in prior calls, this morning's call will contain some forward-looking statements, those will be 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. As we always do, we've listed on pages 3 and 4 of our earnings release this morning a number of risk factors which you should consider. We encourage you to look at these as well as other risk factors that we may detail from time to time in our SEC filings. You should not place undue reliance on the forward-looking statements and the company undertakes no obligation to update or revise any of the statements whether it is result of future events or new information or otherwise.

We are making this call available for replay, and it will be archived on our website. Those numbers are available by checking with our office. The call today is the property of HCA, should not be recorded or rebroadcast without the written consent of HCA. I do hope everyone on the call has received the earnings release statement, nine pages. It was put out early this morning. I'm going to take a couple of minutes to clarify a couple of items in the release before I turn the morning's program over to Jack and Richard.

For the third quarter, our net income excluding goodwill amortization and excluding gains on sales of facilities in prior years, impairments, in both years and investigation-related cost, totaled $319 million or 60 cents per diluted share. A year ago, on the same basis, net income was $226 million or 43 cents per diluted share. Net income after all of those non-operating gains and losses are taken and adjusted for goodwill amortization would be 38 cents share compared to 51 cents last year. The fourth paragraph of the release discusses an impairment charge and in the third quarter we did record an impairment charge on investment securities. This was $107 million net of tax or after tax, 20 cents per diluted share. The impairment charge was recorded on equity securities which are held by our insurance subsidiary which we talked about with you many times before. The insurance subsidiary has total investments of approximately $1.6 billion, so you can see that $107 million is relatively immaterial to the total holdings. Historically, they were routinely marked to market on the balance sheet with the offsetting entry the recorded to other comprehensive income or loss. In the equity section of the balance sheet.

But this quarter, due to the continued overall market decline and our management's review and evaluation of the individual investment securities, we deemed that the market decline for certain investment securities, predominantly those in technology and communications industries were other than temporary. And that's a defined term which clearly some of our folks can talk to you about later if you'd like. And the related adjustment to fair value for these securities was recognized in the income statement rather than just through the equity portion of the balance sheet. The effect of recognizing this impairment charge has no impact on cash flows, and we do have David Anderson and Milton Johnson here for all of you who would like to address this more specifically in the accounting side of it.

Our balance sheet at September 30th finished the quarter very strong. Ratio of debt to debt plus stock holder's equity was 53.7%. This year, that is down from 56.2% at year end 2001. Also, our ratio of debt to EBITDA improved to 1.95 times, that's September 30th at year end. You may recall it was at 2.15 times. And finally, during the quarter, we did repurchase some stock, 6.2 million common share was repurchased average share of about 45 and a half , $282 million of cash outflow. At the end of September we had 513 million shares outstanding compared to 5 15 million shares a year ago so almost exactly the same number as a year ago. With those preliminary comments, I'll turn the morning's program over to Jack Bovender.

Thank you, Vick, and good morning to all of you. As you have seen and heard, this was a particularly outstanding quarter for HCA. Our 40% EPS growth this quarter was driven by our sixth consecutive quarter of double digit, same facility revenue growth along with 120 bases point margin improvement. This is our strongest quarterly EPS increase since our return to HCA in 1997. I should add this quarter significantly exceeded our own budget and expectations as you might expect.

What I would like to do this morning is to ask Richard Bracken to talk to you about the results of the quarter. I will then come back after Richard's comments and talk about our Health Midwest announcement we made last Wednesday morning. Richard?

Thank you, Jack. Good morning to all, and thanks for joining our call. I am most pleased to report another excellent quarter for our company's operations. A very satisfying aspect of these results, which I'll describe in more detail in a moment, is that our performance was achieved in a very balanced way across our portfolio of hospitals and corporate operations. Our eastern operations as well as western operations recorded strong results. Virtually all of our operating divisions significantly exceeded their growth targets and our corporate administration spending was below anticipated levels. While we don't usually comment specifically on our ambulatory surgical operations because their results are integrated into the overall market numbers, this operating division is also having a particularly good year and quarter and warrant some mention. Our ambulatory surgery division which operates 78 surgery centers had EBITDA growth for the quarter and year of approximately 25%. Driving this earnings growth was strong case volume of 5.7% and 5.2% for the quarter and year respectively. Our ambulatory and surgery operations clearly are adding value to our overall marketing operations.

We remain steadfast in our opinion that our strategy of aggressively reinvesting in our existing hospitals to add both capacity and state of the art technology when combined with a dedicated focus by all levels of management towards improving patient service levels and internal processes will continue to yield superior results. The location size, clinical station and service orientation of the hospitals continue to drive increases in market share in many of the communities in which we operate. As Jack and Vick mentioned, operating earnings increased by 40% to 60 cents per diluted share. Year to date EPA is $2.07, up 30% from the prior year.

While we're pleased with the quality of our reported results, they're even more meaningful since they have been achieved while investing heavily from both the financial and management resources perspective in our infrastructure. I believe you're all aware of the significant efforts in our shared services, information technology and patient safety initiatives, so I won't elaborate further on them at this time. Suffice to say that these initiatives remain an important and productive part of our operating strategy, will favorably position us in future years and distinguish us from many in the healthcare industry.

Now, some further comments on the quarter. For quarter, total net revenues increased 11.1% to $4.9 billion, while same facilities net revenues increased 12.2%. This is the sixth consecutive quarter where same facilities net revenues have increased in excess of 10%.

Continuing to fuel this revenue growth are solid increases in patient volume. Same facility admissions increased 3.4% in the quarter, the best quarterly result this year. Additionally, if the impact of the closing of skilled nursing beds is excluded, same facility admissions would have increased 3.7%. Recall that in some instances we convert skilled nursing beds to medical surgical beds as a way of quickly and efficiently adding medical surgical capacity. Same facility adjusted admissions increased 3.6% for the quarter, the best growth rate since the quarter of 1999. Additionally, other volume indicators showed the same strong trend, same facility, E.R. visits increased 5.4% and same facilities surgeries increased 5.5%. Revenue per unit trends remain consistent through the third quarter. As we have stated before, we expect in the future that the composition of our net revenue growth will be driven increasingly from the volume growth and less from pricing. This effect is beginning to be noticed in the third quarter, and is consistent with our expectations. Same facility revenue per adjusted admission. Year to date this factor has increased by 8.7%.

Our managed care contracting results for 2003 have remained on course and consistent with prior comments that I have made. As of the third quarter, we have approximately 55% of our managed care contracts in place for 2003 and have verbal agreements on pricing terms with several other contracts. We are still comfortable forecasting pricing increases on our managed care book in the 7% range next year.

We're pleased to report that EBITDA margins improved 120 basis points over the prior year. Furthermore, EBITDA margin improved 150 basis points. Normalized for last year's gains. These operating gains were primarily due to improvements in salary, wages and benefits which the declined ten basis points and other operating expenses which declined 150 basis points. Other operating expenses improved significantly in the quarter, reflecting the fixed nature of many of these expenses being spread over a larger base of revenue.

Supply expense and bad debt is is a percentage of revenue were flat from the prior year's third quarter. While the cost of hospital care remains expensive, our costs were generally in line with expectations and our pricing models. We have been able to cover cost increases through a combination of pricing, volume, and operational efficiencies. Labor rate, or the average hourly rate we pay each FTE increased by 5.4% in the quarter, slightly higher than the second quarter of this year. We still project this indicate tore increase in the 6% range next year which is lower than our rate of increase last year.

All About Staffing, the company's own temporary nursing staffing agency, continues to provide value to our operations. All About Staffing now operates in ten markets with satellite offices in another 17. This initiative continues to prove extremely helpful in our effort to control contract labor costs while improving the quality and efficiency of the temporary personnel used at our hospitals. Year to date, the rate of growth in contract labor costs has decreased. By our calculations, we have generated in excess of 20 million in saveings or cost avoidance this year due to this important initiative. Additionally related to labor, efforts to reduce employee turnover continues to be a high priority.

Overall turnover rate for the company calculated on 12-month basis through August improved slightly, while nurse turnover improved by 60 basis points. Cash management remains strong in the quarter. Net days in receivables declined to 64 days, compared to 65 days last year. Cash collections were 99.2% trailing the 60 day revenue less bad debts. Also, as of the end of the third quarter, we now have approximately 80% of our revenue consolidated in our patient account service centers. This effort continues to progress in its employment end results. The results of hospitals that have transitioned to our service centers consistently outperform those that have yet to transition in collection results. We look forward to having almost all our hospitals transitioned by the end of 2003.

Capital spending continues to be a major aspect of our strategy and repositioning of our company. As we previously commented, a significant number of capital projects are coming on line in the second part of 2002 and during 2003. In 2002, we will put in service approximately 600 million of major construction projects and in 2003 this number increases to 1.3 billion. Early results suggest that these facilities are outperforming better than we had modeled. For example, if we reviewed the operating results in the 125 million worth of projects brought on line in first quarter of this year, the results are most encouraging. EBITDA for the facilities increased almost 30% in third quarter over the prior year's third quarter and admission volumes are up over the same time period. All signals indicate that our capital spending strategy is on the mark and resulting in improved performance for the company.

In a moment, Jack will provide you with details concerning our recent announcement concerning Health Midwest. Any capital commitment made as a part of this acquisition will not alter our capital spending strategy or spending levels in our existing hospitals. One final point on capital spending before I turn this back to Jack concerns overall returns. For the 12-month period ending September, return on equity is up 380 basis points to 24.1% from 20.3%. Similarly, return on investment capital from the same period of time is up 90 basis points, or 12.7% from 11.8%. Clearly, our capital investment decisions are proving sound and significantly adding to the value of our company. With that, back to you, Jack.

Thank you, Richard. I would like to commend Richard, Sam Hayes and our division presidents and their entire operation teams for this great quarter. We had very strong operational and financial results across all markets throughout the quarter. Our September comparisons, however, stood out as exceptional. We had extremely strong volume comparisons, and earnings growth. Part of the strong September comparisons is, of course, attributable to the softness we experienced last year following September the 11th, while some can also be attributed to an extra business day in this year's September. However, these take absolutely nothing away from the superb job all or CEOs and local management teams did during the quarter.

While we don't forecast earnings and I don't plan to start that today, if one analyzes HCA's EPS growth over the past 11 quarters one would see we have ranged from mid teen's growth to this quarter's high of 40%. In this period, we have averaged approximately 25% growth. Therefore I don't want any of you leaving this call today thinking this company can achieve 40% growth every quarter.

Specifically looking into this year's fourth quarter, we believe the company's EPS growth will most likely fall in the 20 to 25% growth range. Obviously, many factors which we can't predict today will ultimately impact our financial results, but at this point we believe this to be an appropriate range of growth for the fourth quarter. I guess I did slip a little there and do some forecasting by saying 20 to 25%, but that's as far as I'm going to go. Now, let's talk about Kansas City. Last Tuesday night, I received one of the most rewarding telephone calls of my professional career. We learned the board of directors of Health Midwest had just voted unanimously to enter into an agreement of principal and exclusive negotiations with HCA for Health Midwest. Let me tell you a little about the Health Midwest system, and the Kansas City market. Health Midwest is a not for profit system compromising 14 hospitals, about 2,500 beds and 12,000 employees. Its net revenues in 2001 were approximately $970 million and it was marginally profitable. The chairman, Bernie Erdman, and CEO Dick Brown have done an outstanding job putting together this well positioned group of hospitals. They have good geographic coverage in the central, southwest, southeast and east regions of Kansas City. Three of their hospitals are in Kansas, two in Overland Park. Their hospitals range in from size 553 beds at Research Medical Center to three small more rural facilities.

We offered $1.25 billion in cash to acquire Health Midwest, a little over 1.1 times revenue. We are also committing to invest a minimum of $450 million in capital in this market over the next five years. I know many of you on this call are interested in whether this acquisition will be neutral or dilutive from an EPS perspective. While EPS impact was clearly one of the measures we used to determine the fair price for Health Midwest, it was not the single driving force in our equation as you might expect. We look at this acquisition as an opportunity that doesn't often occur, to enter a new community of approximately 1.7 million people with a market's leading group of hospitals. This is a long-term investment opportunity for HCA. Having said all of that, we have modeled this acquisition to be mildly dilutive and by that I mean to two to three cents for he first couple of years. Obviously, we would hope to do better than that. We believe this is the largest not for profit system acquisition ever done.

From comments we received from Health Midwest board members, management staff and their investment adviser ponder, we believe the following were critical in their choice. First, the mission and values of this company, particularly our patient first philosophy. Second, the quality and commitment of our management teams as witnessed by Health Midwest board members and medical staff in their site visits to Denver, Dallas and Nashville. Third, an unyielding commitment to quality which they were able to see on their site visits, particularly as seen in our patient safety initiatives which we have talked to all of you about before. Fourth, our demonstrated ability to maintain the religious, cultural and charitable traditions of our hospitals and therefore by projection their hospitals going into the future. And lastly, demonstrated investment of capital into our hospitals which again project into what we will do and are willing to do for their hospitals.

To give you some flavor of this, we showed them that our cap ex expenditures as a percent of revenue in 2001 companywide was 7.6% compared to all other investor owned hospital systems of 6.5%, and all not for profits of 3.8%. Said another way, our cap ex expenditure per license bed in 2001 was $34,000 compared to all other investor owned hospital systems of $23,000 and all not for profit systems or hospitals of $19,000. Obviously, we think this was paramount importance to the Health Midwest board and their management team. Finally, I'm very happy to say that Health Midwest CEO Dick Brown, who I respect greatly, said that HCA had demonstrated uncommon dedication to the highest quality of care to the community. We are obviously pleased to have this wonderful opportunity to serve the citizens of Kansas city and we plan to make those who chose us very proud of their decision for many years to come. With that, Vick, I turn it back to you for our questions.

Vick Campbell All right, Jack, Richard, thank you. Stephen, you want to come back on and poll for questions. And I will reiterate what Stephen will probably say to you please hold your questions to one so that we don't run out of time. We always get a little tight on these calls.

Thank you, Mr. Campbell. Today's question and answer session will be conduct electronically. Anyone who wishes task a question may signal by pressing the star key followed by the digit one on your touch tone phone. Do limit yourself to just one question today. Individuals asking questions should not use speakerphones. Please lift the handset if you're asking a question. Once again that's star one to signal. And we will take our first question today from Laurie Price with J.P. Morgan.

This is Kathleen Baxley for Laurie Price. Can you give us an update on what's happening with respect to malpractice in your market? Are you seeing any moves out of the market, or are you extending loans to any of the physicians? qemz

All right. The question on malpractice, Milton, you want to lead off on that. And if anyone else wants to add to that.

Sure. From the hospital standpoint, we are seeing some improvement in the malpractice market, but still though it is an increasing cost for us. We've been increasing our premiums through our hospitals in the 20% range. We project it will continue in the high teens next year. With respect to the physician market, however, still a very, very difficult market for physicians, both access and cost. We are not loaning money to physicians, however. To my knowledge, in any of our facilities to help cure that problem.

Thank you.

Thanks, Kathleen.

Our next question from Lehman brothers is Adam Feinstein.

Good morning, everyone. Just a couple -- well, I guess one question, Vick. Just with the charge here in the quarter for the insurance, could you give us a sense of how big your surplus is now after the charge, and then also what percentage of the investment portfolio is allocated in tech and telecom. Thank you.

Adam, thank you for holding it to one question. Milton, and then David, you both want to tag team that one?

Sure. First of all, on the surplus question, at the end of September, our surplus was $414 million. The market has improved a little bit, obvious obviously since then and it's up probably closer to $450 million I believe today if we were to calculate that today, based on the current market. David, you have --

Adam, I don't frankly have a percentage in terms of what was in telecom or in communications which were the the industrial classifications of equity securities most impaired in the writeoff. We can provide that information for you, but I don't have it today.

Very good. Moving to our next questioner. This is Gary Lieberman with Morgan Stanley.

Thank you. A question about your salaries and benefits. The percent of revenue is late higher than it has been in the first half of the year. Can you talk about that and your use of the nurse registries and if at all, if it was a function of your volumes can be perhaps a little stronger than expected.

Well, generally, salaries and wages as a percent of benefits over the course of a year range anywhere from 38 to 41%. It varies by quarter. It varies with the amount of volume we have. But I think your question hits on an important note, and that is as nurses are increasingly difficult to find in the marketplace, our CEO's are reluctant to send them home early if there's a momentary or a short down turn in volume. So they tend to hang on with that labor a little longer because they know it's going to come back. But on balance, our SDB was within our range. The productivity at the hospital levels is improving as you might expect. As we look at this kind of volume increase, and we look at the number of FTEs that we employ, we're becoming more productive, about 1.5% to 2% over prior year at the hospital level.

And our next question today from Darren Lyric with Sun Trust.

Thanks, good morning, everyone. I was hoping Jay and Sam could give us a little more detail on the group results in terms of net revenue growth. Adjusted emission growth and unit pricing and perhaps highlight some standout markets. I'm wondering, if Jay can also comment on the situation in [Macon and what assets you keep.]

Darren, we lost the last part of that question.

Sorry. I was questioning about Macon, Georgia, and if you could just comment on what assets you're keeping in that market. Thank you.

Okay. Jay, you want to go first?

Yep. If you look at the eastern group for the quarter, volumes were very strong on a same store basis. We are about 3.5% up on admits. Surgeries were very strong. A little over 4%, and E.R. visits almost 6%. On a unit pricing basis, net revenue remained very strong at 9% and we had some really standout markets throughout the entire group. Probably the one that stands out the most is our east Florida division, which compromises the markets of Dade County, Broward County, Palm Beach and then the Treasury Coast. They had really strong indicators across the board.

Central Atlantic which is all of our Richmond, northern Virginia markets are also very strong as well. As we look at the Macon market which is part of our southeast division, we made the decision to sell a non-performing asset in that market. It was immediately adjacent to a large not for profit hospital. We sold that hospital to the competitor and we were in the dispute with an open heart program that we wanted to put in at our Coliseum Medical Center. As a result of this sale, the not for profit dropped its appeal to our certificate of needs, so we now have a certificate of need for an open heart program in that market. And with that, we will keep Coliseum and we'll also keep our north side facility as well as our Fairview Park facilities. So we have seen great trends throughout the quarter, and we're really pleased with everything that we've seen.

Thanks, Jay. For the western group, we had a very good quarter. Our volume levels for the quarter were actually stronger than the previous two on a year over year basis. Our admissions grew on a same store basis at 3.8% and in total 4.4%. Part of that was due to the flood we had in Houston when we had to take a hospital out of service. Our surgeries, deliveries, emergency room visits, all were up at a faster pace than the previous two quarters. So very strong activity levels across the group. Revenue in total was up over 12.5%. And that equates to 8% per adjusted admission. Our earnings for EBITDA for quarter was up 20% and that was primarily driven by strong profitability where our margin had grown by 125 basis points over a year to year basis.

As far as markets, we have a number of markets that did very well. We did well once again in Texas, pretty much across all of Texas, Dallas continues to perform well. San Antonio does well. Austin had a great quarter. We had a solid quarter in Houston. Denver continues to perform at a very high levels for us, as well as markets in the far west division in southern California and so forth. So generally speaking across most of our major markets, we had very, very solid performance and really difficult to single out one or two markets because all of them did very, very well.

All right, Sam and Jay, thank you. Darren, appreciate the question.

We'll move on. This is A.J. Rice from Merrill lynch.

Yes. Hello, everyone. I wanted to ask a follow-up question on the volume trends. Obviously the 3.4% is an acceleration. Can you guys give us a little color, does that show the impact from the increased capital spending, or are you starting to see that or is that still in the future a maybe just comment on the underlying growth in the markets on volume if you have a sense of what that was versus the 3.4%.

A.J. this is Richard. There's no doubt in our minds that the capital spending is beginning to come into play. Those comments I made in my opening remarks were just an example of that. We clearly see projects when we bring them on line that they perform at a superior level than our averages. So capital spending is clearly having the desired effect. As you know, our hospitals are located in markets that have robust population growth. And we're in the suburban parts of the markets which even amplifies that. So we have two factors going on that are really I think beginning to start to kick in. You know, when the baby boom effect fully takes hold, I think is somewhat speculative. But we can clearly see it when we add capital, we add capacity in our hospitals, it has a dramatic and immediate effect.

Do you have any data on that baby boomer category by any chance for this quarter and how they contributed?

We do. A.J., this is Mark. If you look at the admissions growth in the quarter, if you look at the age group of 40 to 50 and 50 to 60 they increased at 7.5% as a group.

That's same admissions?

No. That's total.

Okay.

Moving on next to Deborah Lawson with Salomon Smith Barney.

Hi. I have seen a couple of local press reports on agency hospitals in both Florida and Texas discontinuing labor and delivery services and I guess you're going to reallocate the beds to other uses. I was wondering if you can elaborate on the financial impact and also how we might think about that in same facility admissions going forward. Thanks.

Let me just start with that and then maybe Jay can add a few comments. We're very careful about where we discontinue any service. We have discontinued as you know some skilled nursing units, and in some cases some O. B. services. And typically these are OB services that had very, very low volumes. If you think about it, most of our hospitals operate three shifts a day, and if you look at the level of volume that these facilities were having in terms of OB, you know, there would be a couple of shifts a day that probably wouldn't have any activity. So the OB units that we have closed are really underperforming, low volume units, and it is a way to take those beds and reallocate them back to the med surge capacity. Jay, anything specific in your markets?

No. Just a -- just to give you a little color commentary on this. We have closed eight obstetric units so far within the eastern group. The most recent one that we announced was over in Aventura. We had never had a claim in the history of that unit, and our average reimbursement on a blended basis was about $2,500 per delivery. The cost to provide malpractice per delivery was $1,000 and that's on a program that had never been hit with a claim. So you can see just we're losing money on those programs. Fortunately, there are other community alternatives and for us we can really as Richard said move those beds into a med surge kind of environment where the demand is and the volumes are, and I think we'll do very well.

All right. .

We'll proceed next to Andrew Bach with Goldman Sachs.

Congratulations on the third quarter. I was wondering if we can revisit a few aspects of the Health Midwest transaction and your expectation for near term dilution and rolling out what you expect in terms of rampup. Not in terms specifically of in terms on a penny by penny basis, but directionally what you expect in terms of operational improvement and dilution, which is to say that it would moderate going forward. But I may incorrectly infer from Jack's comments that you expect two to three cents dilution for several years. Thanks.

Andrew, this is Jack. No, my comments specifically said two to three cents mildly diluted for a couple of years. Obviously, we would like to do better than that, but we think that doing conservative modeling is about what we could expect with that. And then obviously in that model three years out and longer, it becomes increasingly acretive to us. Again, we estimate and project that the reason it becomes acretive to us in the future is the significant capital investment that we're going to make there. These are exceptionally good, solid hospitals with significant market shares and a large urban market. What they need is capital infusion. And a plan to do that in responsible way. In addition to that, the platform that we have talked with you about for three years now, shared services will bring that to bear, which will take costs out of the system and improve performance in the area of cash management. As well as reduction in supply costs. It will obviously bring our group purchasing organization too bear there which will help on the supply-side, as well as using the supply chain and shared services to take cost out of that system. So we've got a lot of work to do. This is not something that will turn around overnight. But it's a good, solid platform, great hospitals, high quality hospitals with exceptionally good medical staffs, and this is obviously the kind of situation we want to be in. And we had said all along that we would be opportunistic with the right acquisitions and I can't think of any other system in this country that fits any more perfectly our strategy than this acquisition does.

Okay. Thanks very much.

And we would like to remind our participants that if you do have a question or comment, you may signal by pressing star one on your touch tone phone. We'd like to remind you to please keep your questions or comments to one statement, please. We'll proceed next to Joel Gray with Wachovia Securities.

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Thank you very much. I was wondering, Vick, if you can talk to us about where you see pricing trends with your negotiations with the insurance sector. You have indicated about 55% of your revenues or contracts in the next year have already been renegotiated. Of course, we all have a sense that insurance premiums are rising pretty quickly again. Do you still have what you feel is a good symbiotic relationship with the insurers at this time?

All right, Joel, thank you. I'm looking at Bev Wallace and the east and west if they want to make comments. But Bev, you want to lead off here?

Sure, Joel. We are averaging the same price increases that we've seen in 2002 for our managed care agreements going forward that's in the 7% to 8% rate range. Obviously, volumes is important to us in that portfolio. And our relationships with our payers are good. It's not to say we don't struggle through this process, but they're good and we've brought our major negotiations to completion so far this year.

Okay.

Any other add-ons to that? I think everybody is fine with that. Thanks, Joel.

We'll move next to a representative of UBS Warburg. This is Ken Wheatley.

Thanks. Good morning, everyone. I was wondering if you could walk through how the return on investment profile changes from year to year on a given year of investments? Like if you went back to 2000, give us a sense of what you invested in then what the growth projects were, how much you spent. And then what year one return was and how that improved in the year two. I'm trying to get a sense of the scale of the ramp up through time as the projects come on line.

Ian, that that's a good question. What I think you did was you gave Mark a good assignment, along with Rozelle tonight. Richard, you may want to make general comments to the group? In terms of general specifics, I'm glad to deliver that.

I think the only thing I can add short of specific numbers on the specific projects would be there is a ramp/-up period when we bring the these projects on line. In some cases the ramp up period is very short. We can bring your attention to Vegas where there was huge pent-up demand and they hit their full stride right out of the chute. But I would on balance and over time, these projects need a year or two to kind of start kicking into gear. That's how we tend to model them. I would say generally by the third year they're hitting our parameters.

Okay. Thank you.

And we'll proceed next to Kip Dullliver with [inaudible] securities.

Can you give us more detail with regard to the shared services initiatives and their impact in terms of say DSO supply cost savings and then also the extent that they contributed to earnings this quarter. Thank you.

Kip, on a total basis shared services was basically neutral. Probably it was slightly positive, but overall, so ahead of expect takes for the full years you may want to make a comment or two. Again, we talked about the DSOs. I know they run a little better in the shared service unit, Bev.

Yeah. The days in the shared services units where we have approximately 80% of our hospitals are running 63 versus those that have not yet migrated are running 66. So we are continuing to see a positive spread between those two.

And Jim, you want to address the supply-side?

Yes. First the year. The east and the western group put in place the new supply management action team program, and in this year to date we have saved in excess of $60 million related to the efforts there at the facilities. I guess needless to say, that savings has been offset by the increases in technology and pharmaceutical costs that we continue to experience, but the program has been very successful in helping to mitigate these increases.

All right, Kip, thank you.

And our next question will be come from Michael Weisberg from ING Asset Management.

Good morning. You mentioned I think a 7% increase in total admissions for people I guess in the 40 or 50 and 50 to 60 age group is that right?

That is correct.

All right. Do you try to track surgeries and what kind of increase you have had in surgeries in the two groups?

Michael this is Mark. We track the surgeries. We don't necessarily track them by age group. We may have that data somewhere but I don't have it to be quite honest.

What was the overall trend in surgeries?

Total surgeries were up 3.8%.

Great. Because I'm just wondering whether that age group growth would have any impact on your positive impact on your revenues per admit. And that they would presumably be a little sicker.

You know, I think that assumption is probably correct. What we saw though if you really break it down, we saw tremendous growth not only in the surgical volume, but cardiology. That was up 7.6% in the quarter. Orthopedics was up 3.8. Neurology was up almost 3%, so all of the components, I mean if you really look at kind of your higher end acuity per level of service, we saw a good growth in all those areas.

Thank you.

Just one final thought on the surgery volumes. This quarter was the highest growth quarter in surgery at just over 3.3%. Second quarter below 3 and the first quarter was below 2. Those are significantly better than they were last year. So as I mentioned in the ASC division, they're seeing strong surgery growth as well. We're seeing a strong upsurge in surgery cases over time.

All right, Michael, thank you.

And our next question will come from John Hendelohn with CS First Boston.

Thanks, good morning. I was going to ask Richard to follow up on a comment that I thought he made, just make sure I understand the comment. I think you said that in the future growth will be more dependent upon admissions growth and less so on revenue per admission growth. Does that means you're looking for the admissions to grow 3% and change and does that imply that revenue per admission growth might slow IE? Would that mean you don't look for pricing to remain as strong or acuity growth to remain as strong going into the future? If you'd please expand on the comment.

John, you're directionally accurate on all the comments. I do think and we do think that as we think about our net revenue growth over time and into the future, a greater percentage of it is going to come from volume increases rather than from price increases. No doubt over the last years we have had a very strong increase in our top line due to pricing. As you heard this morning, we've had strong performance this year and we expect our pricing certainly from our managed care book to be strong next year. We knew Medicare was going to be do down somewhat and we think as a matter of planning an forecasting, that the huge prising increases that we have had over the last several years might moderate some. We also believe that with the level of capital expenditures that we're making that we're going to continue to see proportionally larger growth in volume. So we do anticipate our volume increases to step up. We are planning that as we go through our budgets this year. And I think that you'll see that mix -- that blend change slightly next year as well.

)) Caller: But you're not buying up market share?

No.

Let me interject one question. Somebody couldn't get their question in. They came off the web so they shot it to us. And it goes back to Jack's earlier comment about the fourth quarter expectations being something in the 20 to 25% growth and the question came back as what base were you going off of, and I think first call may still carry the 44 cent number last year before amortization goodwill adjustment. The base that we're coming off, the number comparable number for the last year's now 48 cents. So that's the baseline number that we were coming off of in jack's earlier comments. If anybody was confused by that.

If I might, let me go back to John's comment one more time. You know, we clearly are not buying market share. I mean, that was a historical strategy in the industry. I think we have learned our lesson from that. And that we are very careful about our pricing. We understand our pricing and our requirements now better than we ever have, and given the pressure on capacity in many of our hospitals, we're very careful about the rate structures that we we'll take.

Thank you, Richard. Thanks, John.

And our next question come will come from Ashok Kumar with J.P. Morgan.

Good morning. A couple quick questions. On the Health Midwest transaction could you give some guidance when the transaction closed. Secondly, could you comment on your concern for completing the transaction for acquisition price?

All right. In terms of closing date, Karl, you want to comment on that? Karl George is overseeing that project.

We're working towards a December 31 close date. That is what Health Midwest wants and that's what we're trying to accommodate.

We're obviously subject to various filings and regulatory approvals. So we can't say hard and fast that's the date. And -- but all our targets will be trying to get it done by year end but could obviously slide into the first quarter. David, did you pick up the second part of the question?

I think the question was how will we finance the transaction? We had a $1.5 billion revolver in place today, but I anticipate that we'll probably put together another bank facility to enable us to close the transaction which would then be taken out in the public market. We might go to the public market prior to the close and issue some bonds because we will have an opportunity to issue for cash flow needs next year and we may prefund a bit.

Great. Thank you.

We'll proceed next to Frank Morgan with Jefferies.

Good morning. I was hoping you could give a little more color on -- is this composition of revenue change changes. On the pricing side I'm real curious about where you are today in terms of the components of the 8.3% revenue equivalent in growth, how much is pure inflationary, versus change in acuity. Do you have a flavor on a case mix?. Has acuity really changed and could increasing the acuity really offset some of your concerns about what happens to pricing down the road so that perhaps pricing does hold up a little better?

All right. As it may look to the operators to make some comments here, but if you're looking at 8.3% revenue per admission growth, clearly, as Bev has told you, we have been getting price increases out of managed care. Somewhere in the 7% occasionally a little higher. Obviously, Medicare has been a good bit less than that. The true price on Medicare has been more in the 1.5 to 2% range so if you factor the two together you can clearly see price overall is substantially below that. So we are definitely picking up acuity. And I don't know, Sam or Jay, any of you folks have any thoughts on that?

Well, as far as case mix, I can give you case mix for the quarter in the group. And overall, our case mix grew almost 2% on a year over year basis. And if you look at Medicare alone, Medicare grew a little less than 1% so we're seeing more acuity inside of a non-Medicare portion of the equation, and I think that would go to the fact that we have seen a lot of admissions in sort of the early baby boomer category if you will. And compared to year to date, that is up over where we were on a year to date basis which case mix has only grown by 1% on the year to date basis. So a little bit of intensity increase for the quarter.

And we've seen some intensity increase, but not to the same extent as the western group. Our total case mix index is up just under 1%, and Medicare case mix is up a little bit less than that.

All right. Sam and Jay, thanks. Frank, thanks.

We will proceed next to Stewart Hoffensky with Vanguard.

Hi. My question has been asked and answered. Thank you.

Thank you, Stewart.

I'll remind all participants that if your question has been answered you may press the pound sign on the touch tone phone and that will remove you from the queue. We'll proceed next to Ellen Wilson with Sanford Burnstein.

I want to follow up on Health Midwest. Can you walk through operationally what your plan of action will be from the time that the deal would close on through the first year in terms of what you'll be targeting first and doing and related to that I was wondering if you can touch on the $450 million capital investment requirement. Will that be front loaded, because it sounds like it will, given Jack's comments that it needs a lot of capital infusion.

Thank you, Helen. Sam Hazen who will be operating in Kansas City.

Yes. Just to give you perspective, up to this point, we haven't had a chance to do our 100% of the due diligence. We are in the portion of the phase at this point in time. But first thing we'll do is establish an HCA division office in Kansas City because of the magnitude of this transaction. We have in the process of doing that as we speak. I think in any transition of this magnitude, one of the most important ingredients is really sort of working on the cultural transition, and integrating the two organizations. Culturally, that requires an enormous amount of effort, a huge amount of communication and that's going to require a lot of our time so that we can get our systems, policies and procedures in place so we can execute operationally.

As you think of the operation, obviously there are some duplication of overhead with the free standing system as compared to a multimarket system like ourselves. We think we can extract some synergies in those areas. We also believe that there are opportunities on the revenue cycle, as Jack mentioned with our shared service strategy where we can execute on the managed care front we think a little more effectively more than a free standing system can with the investments we have made in our technology and people and so forth. So that's an area where we see some opportunities. As we implement our IT systems, there are some things that should drive better performance. Then you as you think of the capital expenditures to answer your question some of the commitments are front loaded. By front loaded, we're talking two to three years. Where we'll talk about get most of the investment made that's really good news for us, because we think with this system and the fact that it has not invested significantly in the past that we have an opportunity if we astutely apply the capital that we're going to commit to drive some market share gains in this particular market. How much of that we don't know. When will that happen? We don't know. But near the process of sorting that out as we speak.

There are some deferred maintenance within that capital commitment that won't necessarily yield market share gains. We factor that into the equation as well. And I think there's one other issue that's on the table. There is some union activity in this market that we'll have to address on the front end. And we think we've appropriately factored that into the equation and that's something that obviously we'd like to sort out sooner rather than late so that we can go about transitioning this system effectively.

Okay. Thanks.

We'll go next to Gary Taylor from Bank of America Securities.

Good morning. I just had a question, noticing that for a couple of years now typically just seasonably this is a weaker quarter, yet this quarter admissions were up on a sequential basis without a lot of change in the bed count. And just wondered what you would attribute that to? Is that really market share? Would that be some of the cap ex that's perhaps not showing up in the actual bed count numbers, or what do you think about that?

I'm look around the room. Sam, you want to take a --

It was obviously good.

Let me throw a couple of comments --

They all want to say management, I think. But I'm not going to let them go there.

I think last year's third quarter and September was an odd month last year. We had another business day so we have some statistical issues that are working in our favor as well. As I mentioned and I really feel our capital spending is starting to produce some results for us. As these projects come on line, they are outperforming our models. We tend to be conservative in our forecast, and what's happening more frequently than not when these projects come on line, they are significantly surpassing our expectations. This capital infusion ramps up in 2002, you know, it's back loaded in the second half of the year. It will be even more significant in 2003. While we have been at our capital spending plan for a number of years now, it takes time to design these projects and to build them and to get them up and we're just now sort of on the cusp of really starting to bear the fruits of those investments. So I think from a volume perspective that the capital is playing a very big role and just in the overall positioning in the markets that we're in. We have large market share, in many of the markets we operate in. And we have population growth. So we have a number of factors that are working in our advantage and I think all these are playing out.

Just a little additional color commentary. Within the eastern group, just looking at the projects that have come on this year, the first three quarters, we really haven't added a whole lot of new beds. We have added some in a few markets, but we spent a lot of money on renovating and upgrading our intensive care unit, renovating or expanding the operating rooms, emergency departments and some of the high-end imaging services. So that's a factor. And the other thing is that within a lot of our markets, we've got license capacity that's actually greater than operational capacity so we may be bringing on some additional beds and making more of the license capacity operational without any corresponding change in the total bed count. So that's going to play into that as well.

Gary this is Jack. A further comment on this. We started talking to you and your colleagues over two years ago about this baby boom phenomenon. As this group started to age into its late 50s, and talked about that our biggest issue and biggest problem we felt we had to deal with as a company was to get enough capacity on the ground in all of these fast-growing markets to be able to take care of this. And I think this is just some of the early proof of that strategy that we were talking about two or three years ago. That doesn't mean we won't see fluctuations in the growth of utilization from quarter to quarter over the next two, three years and on out. But certainly the prevailing trend is there are going to be more and more people older and older needing more and more of our services, and the key to this is making the investment in these facilities to be able to take care of this population. And does that lead to market share gain? We think so.

Great. Thanks.

)) Operator: Our next question will be from Michael Shomenshein with CS First Boston.

Good afternoon here from London. First of all, I'm just wondering how you're planning to finance this acquisition in terms of mix of debt and equity. Can you also give us a little bit of color on the capacity utilization or in the markets that you're operating in?

You want to address that, David?

Sure. This is an all-cash transaction which will be financed primarily through the public debt markets. We will not be issuing any equity to help fund this transaction.

So the earning solution is going to come from primarily what? From the additional leverage that you'll put on or is there some margin differential as well?

Well, there certainly will be interest expense associated with $1.125 billion transaction that has been factored into the models when we've kind of played at what the dilution and increase will be would be on a go forward basis on this property.

Michael, quickly on occupancy our schedule shows for the quarter we were running our hospitals on a license bed, and we talk about license beds. A lot aren't being utilized for overnight patients, but we were 52.2. That was up almost 200 basis points a year ago. Year to date, 54.2, again, up a couple hundred basis points. If you just adjusted for beds in service, you'd move it up ten points. If you were adjusted for true utilization of a hospital the outpatient activity as well, you'd find yourself well into the mid 70s in a lot of our facilities.

Maybe I don't know where we are, but one or two more questions before we conclude.

Thank you.

And we will proceed then to Denise Warren within Avondale Partners.

I think I got the last question last time.

Well, it's a good one.

It's on Health Midwest, it's following up on what Mike was talking. The facililities themselves posted a profit last year and then the positive comments he gave earlier in the Q&A regarding the good medical stats, the shared services and I would anticipate there being a lot of low hanging fruit. Is it fair to assume the dilution would come from the interest expense, increased DNA and redundancy costs? And then a follow-up to that is are there any of the Health Midwest properties that you would seek to rationalize out of the portfolio?

This is Jack. And I'll ask Sam to jump in here on this one, too. Let me deal with the last part of your question first. We are -- in the early parts of the due diligence, and there are no plans at this point in time to use your term rationalize any hospitals out of the system that is sell or close any. There may be the opportunities for some consolidations in the future as we get in and look at that market. By that meaning that there may be hospitals close together where we can consolidate some services. The possibility of building some new replacement facilities that might involve consolidation is always there, but it's just too early in this acquisition to be talking about those kinds of things because we don't know.

Our models going forward don't assume those kinds of things. Now, the issue about dilution that we mentioned before, the two to three cents for first couple of three years, and I'm going ask Sam to jump in on this we have obviously modeled the improvement in operations there on a conservative basis, and don't expect the margins to come up to companywide margins in first two or three years. So obviously that creates a dilutive situation as well as the additional interest expenses associated with it. Sam?

Well, you know what? We started with a lady and we'll end with a lady. We want to thank all of you who participated on the call. We look forward to hearing from all of you. Thank you once again.

And this does conclude today's presentation. We thank you for your participation and I hope that everyone has a wonderful day.