美國醫院公司 (HCA) 2003 Q1 法說會逐字稿

Welcome to today's HCA first quarter earnings 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. Vic Campbell.

Please go ahead sir.

Thank you, Steve, and good morning to every one.

Welcome to our call.

With me this morning, Jack Bovender, Chairman & CEO, Richard Bracken, President, Chief Operating Officer, Mark Kimbrough, Vice President of Investor Relations, and most of the senior management team based here in Nashville.

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

Numerous risks and uncertainties may cause actual results to differ materially from those anticipated in our statement.

We have listed on page four of our release this morning, which I hope each of you have, a number of risk factors that you should consider.

We also encourage you to examine other risk factors that may be detailed from time to time in our SEC filings, including our most recently filed Form 10-K.

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

As you heard, the call is being recorded this morning, is available for replay, number is available through the Investor Relations Office here should you need it.

And it will archived on our Web site.

I might also welcome those you that are on the web on this call this morning.

Call is the property of HCA, should not be recorded or rebroadcast without getting our consent.

I might add one thing in today's environment, and that is that we may make reference to the term EBITDA during this call.

And the company uses EBITDA as an analytical indicator for purposes of allocating resources to geographic areas, assessing performance, and other financial needs.

EBITDA is commonly used as an analytical indicator within the healthcare industry and also serves as a measure of leverage capacity and debt serviceability.

EBITDA should not be considered as a measure of financial performance under generally accepted accounting principles, and the items excluded from the EBITDA are significant components in understanding and assessing financial performance.

Because EBITDA is not a measurement determined in accordance with generally accepted accounting principles and is thus susceptible to varying calculations, EBITDAs presented by us may not be comparable to other similarly titled measures of other companies.

One quick point before I turn the call over to Jack, and that is just to point out during the first quarter, the company recognized gains associated with the sale of two hospitals that we had been leasing in west Tennessee, in Jackson and Martin, Tennessee.

During the quarter we recognized the gain on the sales of facilities of $74 million pre-tax, $42 million net of tax, or eight cents per diluted share, which brought the company's reported net income in the quarter to 90 cents per diluted share.

With those comments, I will now turn the call over to Jack Bovender.

Thank you, Vic, and good morning.

I realize that many of you on this morning's call have a long list of questions you hope to get answered today, and I fully understand your concerns.

It has been a long time since one of our quarters has not met or exceeded expectations.

Since our our PRU release last Tuesday, our management team has been working diligently to get answers to your many questions and more importantly, I believe, to assess first what in this quarter was a one-quarter issue.

Second, what might have legs into the balance of this year.

And third, if anything we saw in the quarter might have ramifications to our long-term strategy and growth expectations.

Clearly, we found both one-quarter and short-term issues, but we saw nothing in this quarter that causes us to change either our overall strategy of investing significant capital in our high growth markets or our long-term objective of mid-teens EPS growth.

Bottom line on the quarter, we had a revenue shortfall.

Our revenues came in $188 million below our internal expectations, our budget, due solely to lower-than-expected volumes.

Simply put, if you apply our reported 21 percent EBITDA margin to this revenue shortfall, it explains the entire reason for our 6 cent EPS shortfall in the quarter.

Another way to say it is, due to lower revenue we were unable to lever our fixed costs to the extent we had expected.

Now, I realize some of you had revenue models lower than our expectations and, in turn, higher margins.

There are also questions about what margin one should use in the remaining quarters.

While some would say pulmonary and flu-related admissions are lower margin businesses on average, on a contribution margin basis, the impact is significantly greater than one might think.

In fact, about 45 percent versus our reported margin of 21 percent.

We are not blaming the quarter's shortfall solely on the decline in pulmonary and flu-related volumes.

The table we provided in our pre-release was to help you to reconcile the reported admission decline to more normalized growth rates.

The table was not meant to be an earnings or revenue reconciliation.

Now that we have had a week to analyze the quarter, Richard and I will share our findings with you.

But, one should not lose sight of the individual hospital earning ramifications of such a significant unexpected decline in volume.

Many of our hospitals saw 15, 20, and even 25 percent declines in their pulmonary business during the quarter.

Also, I want to be clear that

and OB admission declines were budgeted and we planned the closures.

These, we believe, were sound business decisions we would make again today.

We have made similar decisions in the past when the strength of our overall base business was able to absorb the short-term earnings impact.

I want to spend a moment on our managed care contracting strategy.

Our 200 hospitals have over 5,500 managed care contracts, most of which are re-negotiated annually with little fanfare at prices and terms reasonable for both us and the payer.

We have had only two contracts of significant size fail to be renewed since the end of 2001.

In 2002, only two of our ten Houston-area hospitals elected to renew their contracts with a particular payer.

Because of their locations and various other factors those eight hospitals retained, in the first quarter of 2003, about 30 percent of the prior year admissions and about 75 percent of prior year ER visits at non-discounted rates.

We would make this decision again.

While decisions like this and the one we just made here in Tennessee provide short-term pressures, they are the right long-term decisions.

More volume at a bad price is not good business, and it's not a good business decision as we saw in 1997.

And the negative impact only compounds in subsequent contract periods.

With respect to the Tennessee contract, we tried to meet the payer halfway and they were unwilling for whatever reason to do that.

Now that we know this contract is behind us, we will re-base and move forward.

As I step back and look at the quarter, I obviously do not share the concerns that seem to be reflected in our stock price.

Yes, we missed our budget and mid-teens growth, but we didn't report a loss or even a decline.

Our EPS rose eight percent.

Our net revenue per adjusted admission was strong and our EBITDA margin was a very respectable 21 percent, within the guidance we have given for the last five years, that is high teens or low 20s.

With respect to the balance of 2003, we plan to do our best to get back on our targeted EPS growth rate.

I am not going to however project our 2003 quarterly earnings today.

Most of you know that's not our style.

We have never projected quarterly or even current-year EPS numbers.

We clearly have some issues this year.

We have disclosed them in our earnings release and our recently filed Form 10-K.

They include a possible Medicare outlier rule change, our pending charity care policy changes and of course the first quarter softness.

But let me restate what I said in the last week's prerelease.

We do not believe the first quarter declines in hospital volumes are indicative of a long-term trend.

While we may experience weaker-than-expected volume trends from time to time, due to seasonal disease patterns and other market specific factors, the overall demographic trends in the country and our market presence in fast growing major metropolitan areas should drive, we believe, continuing growth for HCA.

Today we see no reason to change the company's overall strategy of investing significant capital in our markets and our long-term objective of mid-teen EPS growth.

Now let me add that as a result of the precipitous decline in our stock market price, we are in the process of carefully reviewing our strategic financial alternatives, including share repurchase.

We have repurchased shares of HCA common stock at times over the past 5.5 years when opportunities have presented themselves.

We believe the repurchase of our stock at current price levels represent some excellent investment opportunity for the company.

We currently have 2.1 million shares remaining to be repurchased under our most recent board authorization.

We expect to initiate those authorized share repurchases beginning as early as two days from now, or April 24th, when our blackout period ends.

In addition, management expects next week to make a recommendation to the HCA board of directors, asking them to consider and approve a new significant share repurchase plan.

Since this is still under study, I am not in a position to speculate about the size of such a repurchase plan at this time.

Hopefully, however, we will be in a position to make a definitive announcement at the Investors Conference on April 30th.

With that, let me turn the meeting over to Richard.

Thanks, Jack.

Good morning to everyone.

Let me get right to business.

While the first quarter's results missed expectations and were problematic on several fronts, most notably hospital volumes and the associated earnings shortfall, let me state that the outset that we are confident, we understand the reason for the volume decline and are genuinely comfortable with the strategies we have in place to deal with the related issues.

It is my intention this morning to concentrate my prepared remarks on volume and net revenue per unit matters.

Rather than spending time providing prepared commentary on all expense categories, we will be pleased to do so during the question and answer period to follow.

Since the major reason for our miss is volume related, that's where I will spend my time.

First and most apparent in our operating result is the reported decline and in same-store hospital volumes.

For purposes of our discussion this morning, I want to discuss volume performance for our inpatient and outpatient lines of business separately.

Let me start with some comments on inpatient admissions.

We are reporting a four-tenths percent decline is same-facility admissions for the first quarter compared to the same quarter in the prior year.

The factors which we believe caused this shortfall are as follows.

As stated in our pre-release, we noticed a significant and material decline in inpatient admissions associated with the pulmonary and respiratory diagnosis.

For the first quarter, we recorded a nine percent decline in this diagnostic category compared with the same quarter last year.

This reduction in patients with pulmonary diagnosis accounted for approximately 4,300 admissions or about a 110 basis points of admission decline compared to the prior year.

While obviously there are pulmonary problems that are unrelated to flu, we do believe that the flu creates the major demand within this diagnostic classification and that it is a surrogate measure for the flu-related effect.

The drop in flu-related admissions occurred among both the company's Medicare and managed care patient populations.

Pulmonary admissions decline 12 percent in the Medicare population and nine percent in the Managed Care population, indicating that the decline occurred across peer categories.

Although most of our markets experienced a decline in pulmonary diagnostic-related admissions, some as high as 15 to 20 percent, some of our markets did not see this trend.

Our hospitals in the Dade, in the Jacksonville, north central Florida, central Louisiana, Oklahoma, El Paso and Southern California markets did not experience a material decline in admissions with the pulmonary diagnosis.

We have tried to compare these markets where there were no significant pulmonary admission declines with data supplied by the Centers for Disease Control to determine if our experience was consistent with their data.

Unfortunately, CDC data is not sufficiently detailed to allow for market-by-market comparison.

Other than -- this is a guess -- that the flu virus appears randomly in various locales and explains why hospitals in different markets may or may not be affected by the same public health issue.

The second recent cause in decline in inpatient admission volume is related to the closure of skilled nursing units.

As we have noted in prior calls, we have been systematically closing skilled nursing units based on a hospital's projected need for additional space to accommodate future medical surgical demand, ancillary services or medical office space.

Since the beginning of 2001, we have closed 57 percent of our skilled nursing units, or about 979 beds.

Since the first quarter of 2002, we have 17 units, which resulted in over 2000 fewer skilled nursing admissions in this year's first quarter.

This represents about 60 basis points of admission decline.

As Jack said, our overall volume growth usually allows us to manage through these conversions.

We remain convinced that this is a sound and cost efficient way to create medical surgical capacity in our hospitals, even if the volume ramp up includes some uncertainty.

The third reason contributing to the inpatient admission decline were the reduction of 1200 obstetric admissions at seven of our hospitals where we elected to close these units because they were not economically viable.

This represents about 40 basis points for the admission decline.

Now, normalizing for these three factors alone, that is, eliminating the admissions due to the reasons from both prior year and current quarter, we would calculate that same-facility inpatient admissions would have increased approximately 1.7 percent for the quarter ending March 31, 2003.

While this is slightly slower than our average growth rate for the entire year of 2002, which was 2.5 percent, it is in excess of the growth rate we experienced in the first quarter of 2002 of one percent.

At this time, we believe that most of the drivers that contributed to inpatient volume declines were a result of the typical nature of flu and pneumonia and our decision to close nonproductive skilled nursing facility and obstetric units and that they are not indicative of any other major trends.

Also contributing to the volume shortfall were contract disputes with third-party payers in two markets, Houston and Tennessee.

While these disputes are unfortunate, they are a byproduct of our contracting strategy.

These decisions did, and will, negatively affect us in both terms of volume and profitability in the short-term.

However, over the long-term we feel they reflect a strategy that is necessary.

As Jack mentioned, it is imperative that our contracted rate reflect the rising cost of providing healthcare services.

During the first quarter of 2003, due to these contracts not being renewed, admissions were reduced by approximately 1100 in the each of the Houston and Tennessee markets.

Each represents about 30 basis points of the admission decline.

I might add that the Houston contract terminated in the latter part of April 2002, so our comparative statistics in the Houston market should be easier from this point forward.

As Jack noted, we have over 5500 managed care contracts in HCA.

Each year, we successfully renew virtually all of these contracts during the normal course of business.

In excess of 85 percent of our 2003 contracts have been renewed and approximately 55 percent of our '04 contracts have been renewed.

Pricing on these contracts remains stable and the increase of them are in our target range of seven to eight percent.

One question that might be asked is if we were able forecast any of the first quarter inpatient admission decline.

If one examines the volume growth rates for each of the quarters of 2002 over the prior year, there would be increases of nine-tenths of a percent, 2.3 percent, 3.4 percent and three percent for the first, second, third and fourth quarters, respectively.

Additionally, if we look within the first quarter of 2003, the largest admission decline occurred in the month of January, which was almost two percent.

Each subsequent month improved, with February's decline only 0.5 percent.

And in March, volumes increased 1.1 percent.

The short of it is that the precipitous drop in the month of January was not foreseen and while February and March admissions were improving, they were unable to overcome the significant effect of January's performance.

For those of you who are wondering about our April volumes, as you know, we don't comment on monthly volumes during the quarter, and it's really too early to speculate on April at this point.

Obviously we will continue to closely monitor hospital volume trends.

Relative to outpatient volumes, we also experienced declines in the first quarter.

When we define outpatient volumes, we generally group these services into three major categories --- outpatient surgeries, which include those surgeries performs in our freestanding surgery centers and those outpatient procedures performed in our hospital surgical units, emergency room visits, and three, all other outpatient services such as laboratory, x-ray, physical therapy, wound care, healthcare clinic visits, et cetera.

From an earnings perspective, the two categories that are most relevant would be outpatient surgery volumes and emergency room visits.

So, let me comment on those more specifically.

For the first quarter of 2003, our same-store outpatient surgery volume declined 2.9 percent.

It is important to note that there was growth in our freestanding surgery center volumes of 3.5 percent, but a declined in the outpatient surgical volume performed in our hospitals.

Some of this is by design and some of this is due to market forces.

Where feasible, we are moving procedures from our inpatient unit to our outpatient centers to free up inpatient surgical time, as well as to respond to partnership opportunities in our markets.

Some of the decline is due to competition.

As we have discussed previously, there is a significant amount of niche competition in the outpatient surgery service sector.

Clearly, physician-owned niche competitors did not just show up in the first quarter.

In fact, as we have mentioned previously, we have been dealing with this competitive issue for some time.

However, with the general overall softness in volumes this quarter, this issue was magnified.

Specifically, our Eastern Group operation team believes that approximately one-third of their outpatient surgery shortfall was due to competition from physician-owned niche competitors.

In our Western Group operations, they believe that three-fourths of their outpatient surgery shortfall is a result of niche competition.

We are answering this competition on several fronts.

First, from a service perspective, we feel we are taking extraordinary efforts to be sure that our surgeons are pleased with the level of technology and responsiveness of our centers.

And secondly, we are more proactive in considering ambulatory surgery developments in our markets and we historically have been.

Presently, we operate 78 ambulatory surgery centers in our various markets.

We have an additional 16 centers currently under development.

We are in discussions and analysis with another 35 centers that may materialize in the relatively near term.

I am not suggesting that all of these centers will come to reality, but we clearly have an offensive effort in place to develop freestanding surgical centers throughout our various markets.

As you would expect, this is a business we know well, and understand the market dynamics.

Our net revenues in our existing ASC operations are growing about nine percent and case growth is about 6.5 percent.

We enjoy healthy margin in this line of business.

Another factor affecting outpatient surgery volumes were the two non-renewed managed care contracts I discussed earlier.

We estimate that about 25 percent of our decline in outpatient surgery volume was due to this issue.

And lastly, our Eastern Group operators have identified 20 to 25 percent of their outpatient surgery weakness in the quarter in areas they would define as "physician issues."

These include physicians who have retired or left states, generally West Virginia and Florida, because of the high cost of physician malpractice insurance.

The second component of outpatients volume I would like to comment on this morning is emergency visits.

During the first quarter of 2003, the emergency room visits increased 1.4 percent on a same-facility basis.

While we were pleased to see this growth in this category, this growth is somewhat moderated from past quarters.

In 2002, our ER visits grew 4.9 percent, with a quarterly growth ranging from a high of 5.4 percent in the third quarter to a low of 3.2 percent in the fourth quarter.

Once again, we believe a significant portion of the first quarter 2003 slowdown was due to the flu patterns.

As we had done for inpatient volumes, we examined the diagnostic composition of emergency room visits for the first quarter and we estimate the number of patients being seen for pulmonary and flu-related illness in the emergency department was down 4,600 cases in the first quarter, about 3 percent.

Many of you know approximately 15 percent of the emergency visits convert to admissions.

So a slowdown in the emergency room volume does affect inpatient levels in our facilities.

We know there are other issues that have affected our patient volumes, but it is, quite frankly, difficult to quantify the effect.

The weather conditions in the first quarter were problematic in many of our markets, most notably Virginia, West Virginia, Denver, Tennessee, and even Dallas.

This weather clearly disrupted normal traffic patterns.

General concerns with economy, the effects of new employee plan year, with higher co-pays and deductibles, have all been advanced to some of us, and to some of you, as possible reasons.

While we don't dispute that these factors might well be impacting volume in some markets, it is difficult if not impossible to accurately quantify their impact.

Accordingly, we will not be attempting to do so this morning.

In summary, outpatient net revenues increased 7.6 percent in the first quarter, somewhat below last year's growth rate of 10 percent.

From a volume perspective, we were not pleased with the first quarter.

While some of the factors affecting the quarter were beyond our control and not predictible, we are either implementing or developing strategies to deal with each identified issue on a market- and hospital-specific level.

Our goal is to get revenues back on target where possible and to re-base our cost where we know revenue shortfalls may continue.

As Jack indicated, we are positioned well for the long-term and our overall operating strategy is sound.

Having said that, we will use what we have learned from this quarter to adjust some local operating plans.

For the sake of allowing enough time for us to address your questions, I will not go through my normal comments on line item cost analysis.

Before I close, let me briefly comment on operating margins, however.

While the reported number showed a 40 basis point decline for the quarter, we still achieved a 21 percent operating margin, healthy by any measure.

Our operators did adjust their operating levels to respond to the lower volume to the extent they could.

Cash performance was strong at 102 percent of adjusted net revenue, and we are pleased with that performance.

And with that let me turn the call back to Vic.

All right.

Richard, thank you very much.

Steve, if you want to come on, we will begin the questioning.

And if you will remind everyone, as always we would like to hold it to one question.

I am sure there are a lot of you on the line with questions, and let's show, if we can, that respect, so we can try to get everybody's questions answered.

Thank you Mr. Campbell.

As mentioned, today's question and answer session will be conducted electronically.

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

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

If you have a follow-up question or additional question, we ask that you re-queue by pressing star, one.

We also ask individuals asking questions using speakerphones to please lift the handset if you are asking a question, and to not use your speakerphone.

We will proceed in the order that you signal and we will take as many questions as time permits.

Once again, that is star, one on your touchtone telephone.

If you find that your question has been answered, you may remove yourself from the question queue by pressing the pound key.

We will take our first question from Darren Lehrich with SunTrust.

Thanks.

Good morning everyone.

I am just wanting to get a little bit to the managed care renewal question as relates to your volume loss in the quarter.

Are there any negotiations of the year currently in where you are concerned near term about volume loss.

Looking out I realize you have a number of contracts to renew this year, but any of similar size to Blue Cross, and I guess

Houston where we should be aware of that you may be in a tough negotiating stance.

Thanks.

This is Beverly Wallace.

We are in the process of negotiating several of our major contracts, and, at this point in time, we believe that those negotiations are going successfully and don't anticipate anything like this cause.

And Darren, thank you.

Anything else, either Sam or Jay, you would like to add.

No I concur with that.

Our next question will come from Lori Price with J.P. Morgan.

OK, can you tell us relative to the volume softness that you saw in Tennessee and Houston, with the loss of those two contracts, what happened to your margins in those two markets?

And how much of the margin softness overall was related to those two markets?

In terms -- of course we gave you the basis point decline.

It was about 30 basis points around

That's on volume.

It was about 1100 admissions.

Jay, do you want to -- again, it was -- Blue Cross was part of the quarter.

Here in the Nashville market, we lost probably 200 basis points on margin.

And in Chattanooga it was more dramatic.

It was closer to 600 basis point decline in our margin quarter over quarter.

And in Houston?

Yeah, this is Sam Hazen, Lorie.

We were down on a year-over-year basis in Houston about 360 basis points.

Some of that is due to Aetna.

We had other issues in Houston that aren't necessarily attributable to Aetna that complicated the performance there, but Aetna was a piece of that.

But it is important to know, on Aetna we did achieve a reasonable level of capture on the business that we lost, as Jack indicated in his comments.

But that were the factors that contributed to the decline.

And how much do the business in Houston does Aetna control relative to the 35 percent or so that Tennessee Blue controls in Tennessee?

You know, their market share has moved down and I really don't have a good feel for what their market share is at this particular point, but it is our impression that have lost businesses as part of their restructuring.

So I am sure of the exact numbers on that.

We can find that out.

OK, but if you exclude the soft margin performance in Nashville, Chattanooga and Houston, what would your overall margin performance have been?

I don't know.

Vic.

We haven't cut the numbers that way, Lori.

We've cut them a lot of ways, but we haven't cut them that way.

OK.

Thanks.

Richard.

You want to add something.

Yeah.

This is Richard.

I just might add that if you reconcile our earnings for that six cents a share miss, generally it shakes out something like this.

Aand perhaps this will short-cut a lot of questions that that others might have as well.

About a penny and a half of the miss, we would attribute to the flu.

About a penny and a half to the managed care contract nonrenewals, about 2 cents to the outpatient surgery volume declines and about one cent to the general miscellaneous malefactors, weather, what have you.

So, if you shake it out that way, we think that will makes up the six cent miss.

And next, from Salomon Smith Barney, Deborah Lawson.

Hi.

I was just wondering, you started talking about on the outpatient side with regard to volumes and what not and the increase in competition.

Can you give us some more color there in terms of who this competition is?

I mean, the environment there -- outpatient surgery centers are kind of an old story, if you will, that have been around for a long time and imaging centers and all the freestanding types of centers and what not.

In your markets, are you seeing for some reason a big resurgence in this activity?

Give us some more color there in terms of what you're suddenly seeing is different from what you've seen in the last several years.

All right, who wants to go?

East?

Sam, in the west?

Deborah, this is Sam Hazen.

You know, obviously, in the western part of the country, there is no certificate of need.

So, there is no impediment in front of anyone who wants to invest in either a surgical hospital or a surgery center, and so we have seen a pretty significant proliferation of both in a number of our markets.

And just as an example, when you look at the first quarter '03 against the first quarter of '02 in our markets, we had six new surgical hospitals that opened who are direct competitors of existing facilities that we have in our group.

And that had a dramatic impact in some markets on both admissions as well as outpatient surgeries.

As it relates to outpatient surgery centers in particular, obviously there are a lot of companies out there that are trying to develop the surgery centers.

They're looking at the same factors that we look at in these fast-growing markets, and they see opportunities with physicians who are under pressure with their own revenue strains and feel a desire to participate in the facility fee.

So, the issues vary by market, but I think there has been an unusual proliferation over the past two years in the number of both hospitals and surgery centers that have opened inside of our markets.

I can say that over the three years previous to the last two, we didn't see the same kind of growth that we've seen inside of our markets over the past two.

OK, and so those referrals that those doctors are taking with them to these new facilities are -- I mean, it is being more driven by where the doctor decides the referral is going to go to or is it more driven by a managed care decision about where that referral goes to?

So, how much of this is doctor driven versus a pricings ...

OK, I think clearly the physician investment drives the admission patterns significantly, on outpatient surgery and also, even more significantly, I think, in the hospital situation, managed care is the secondary factor and in some instances a non-factor as it relates to where the business goes in these centers.

It just depends on the market dynamics somewhat I think, but it is not as material of an issue as the physician ownership.

And last thing on that, HCA doesn't want to do deals with these docs yourself.

Is that correct?

In hospital, no, we have a policy of no sending patients.

We think it is a bad public policy and it creates issues for community hospitals that are difficult to manage through.

Obviously, on the surgery centers, as Richard alluded to, we do have a number of our surgery centers.

Most of them are partnered with our physicians in some kind of shared equity situation, and we are continuing with that strategy.

Jay, do you want to add something to that?

Yeah.

Just want to -- Deb, about third of our outpatient surgery shortfall in the quarter was attributable to two new centers.

And you're right -- I mean this ASC has been around a long time.

But just going down the schedule, I mean, a lot of these are centers that have opened -- here is one that have opened in December of '02, October of '02, October of '02.

So most of these are new centers, and our physician-owned versus owned by publicly traded companies.

OK.

So, that is a kind of the phenomenon we are seeing in the Eastern Group.

We don't have the same issue that Sam has in the West with -- because of our certificate of need with the lot of specialty hospitals popping up.

Deb, thank you.

Probably better move to next question.

Our next question will come from

with Merrill Lynch.

Oh yes, good morning.

Can you just explain why some of these costs were rising so quickly given that some of these losses of admissions were actually planned closures, but you still got 8.6 percent increases in supplies and salaries and, in fact, you could also comment on why you got this 16 percent rise in the doubtful debt provisions and where you think that's going in future?

OK, Paul, thank you very much.

Milton Johnson, Chief Accounting Officer, you want to address those?

Sure, I think our expense management overall was very good during the quarter considering the shortfall in volume.

Bad debts is up and in terms of dollars but it is within our expectations.

In terms of the amount, actually we feel pretty good about the bad debts in the quarter, but we did lose 50 basis points of margin that is directly attributable to -- the major piece of it is attributable to the shortfall in budgeted revenue that we spoke about earlier.

, again, I think looks pretty good relative to the volume.

Where we did not get our margin expansion is on the other operating expenses and again we were not able to leverage the fixed nature of those expenses as we have been doing in prior quarters with the additional volumes.

So, again, 21 percent margin versus 21.4, but if we had hit our revenue numbers, I think our margin would have been in line with expectations.

Mike, this is Vic.

And let me just remind folks, on the other operating expense line that is where we have been seeing our margin improvement if you really look back the last couple of years.

Last year in particular, just to remind you what the numbers in the first quarter 2002, we improved our other operating expense margin by 120 basis points, second quarter 130, third quarter 150, and fourth quarter 90 basis points.

So, again, the key improvement in overall EBITDA margin has been coming through leveraging primarily the fixed cost in other operating expenses.

Just a little bit more color on our labor causes -- this is Richard speaking.

When we think of labor, we think about it in a couple of categories.

One of course is rate, and one is productivity.

Our overall rate was very reasonable at 4.9 percent.

As we shared with you over our prior calls, that number has been anywhere from 4.5 to 5.5 percent, so we had a pretty good showing on our average hourly rate increase.

We also had a nice reduction in our contract labor usage.

Of course, management of premium labor cost is a key part of our facility management's strategy going forward and we saw a nice improvement there as well.

Productivity, of course, is something that -- that is, improvements in productivity are more difficult to attain when volume levels are decreasing.

You can pull out labor, as our management did, pretty aggressively, but it is difficult to do it sort of dollar for dollar and because of the fixed nature of some of the staffing.

So on balance, and as I mentioned in my comments, we think the operating costs were managed reasonably well given the volume decline, there is always the opportunity for improvement, but with overall labor costs under 40, we were reasonably pleased in a down-volume cycle.

Milton, do you want to add one more think on bad debts?

Sure.

Keep in mind that our bad debt expenses driven by our policy of reserving for counts that are 150 days old -- so 150 day policy.

And so we are reserving in the first quarter related to the revenue from the fourth quarter and so we now have a pretty good idea what to expect on our bad debts.

And, again, they did come in slightly under our expectations for the quarter.

Just one other comment on labor productivity.

It is obviously something we have spend a lot of time thinking about and analyzing.

And throughout the quarter, we did get some mixed signals.

As I mentioned, the volume was most problematic in January and then slowly started to improve over February and March.

And so we were getting some mixed signals about what was happening to volume, and our operators are loathe, appropriately so, to send nursing staff home if the volume is going to spike back up.

So there is a little bit of delay.

That also occurs in the contract disputes.

You know, these -- specifically in Tennessee, as the negotiations and mediation were going forward, we were not inclined to be removing labor.

Now that the contract is over and we know our new base labor, we will manage and get back to equilibrium as time progresses.

But these conversions, these transitions, do erode the productivity number somewhat in the quarter.

Can I just -- just on these labor costs.

I mean, I suppose, what I am having difficulty reconciling is that if your rates are up 4.9 percent and you close some units, presumably shedding labor, how you actually ended up with an 8.6 percent increase in labor costs?

It was just

for adjusted admission.

Are you doing on a per adjusted admission basis?

Well I was just looking at the fact that overall, yes, you had fewer admissions, you actually closed some units, and yet your salaries and benefits cost is rising faster than the 4.9 percent increase that you said in labor rates.

Yeah.

A big piece is in the benefit costs.

Benefits are going up -- employee medical and other related benefits are going up around 20 percent, this quarter versus first quarter last year and that is driving up the

cost.

OK.

And this bad debt situation is going to continue to grow quite a fast rate, is it?

Well.

I think what you are going to see is our bad debt expense.

It is going to be difficult to predict out at this point what is going to be the rest of the year, but I see it is probably running somewhere for the year around that eight percent.

We usually run in the high sevens to the mid-eight range.

And I would expect something similar to that for this year issue.

Alright.

Paul, thank you.

And as a remainder.

If your question has the answer you may remove yourself from the queue by pressing the pound key.

Moving on, we will take our next question from John Hindelong with CS First Boston.

Thanks good morning.

First off, a comment Jack, in your presentation, my port just cut out for a bit, then it came back and said "This is a decision that we would make again."

So, I assume at the time you were talking about the Blue Cross/Blue Shield contract.

I do not that, but I am hoping may be you could repeat what you said there and update us on whether or not you'll go back to the negotiating table because, again, it cut out on mine, probably on others, too.

But that doesn't get at my question, though.

The question has to do with your share repurchase.

I believe you've got an investment credit rating with one and just below, another.

So I'm wondering if your ratings will let's say preclude the share repurchase from being significant in size, where you restricted to just free cash flow?

And if you would have repurchased shares at this levels, give us sense of how accretive or not it would be.

Well, John, again, I can't really elaborate beyond what I've already said, that it will be a -- we're going to recommend a significant share repurchase to our board and we will make a definitive announcement about that, hopefully at the investors conference on April 30th.

And I'm just not in a position to go beyond that statement at this point in time.

Obviously, all the issues that you talk about will be taken into account, but one of the things that I think always gets lost in the analysis of this company, at least has for the time that I've been here, since 1975 is -- it seems like people always underestimate the cash flow generation ability of this company.

So there are a lot of things to be considered and taken into account when deciding on where, if you will, the sweet spot is in a stock repurchase plan, and we're in the midst of analyzing that right now, and all again I can say is it will be a significant recommendation that we will make to our board.

David Anderson of Treasury, do you want to add anything on that, David?

Well, John, I'll add one thing to what Jack said, which is that we always tell the rating agencies what our plans are in terms of any share repurchase or any major acquisition or something like that.

It's not our goal to certainly have -- to surprise them with anything, and we'll certainly do that at this point.

With regard to your question about Blue Cross, John, those negotiations are over.

We don't expect them to occur again, or negotiations to be reopened at any point in time.

Therefore, this year, as far as Blue Cross of Tennessee is concerned, will be a re-basing year.

And next year obviously we won't have the effects, the negative effects, of that contract being gone in our numbers.

It's always a tough thing to go through when you go through this, but once the pain is over and it's re-based, I think we end up being in a stronger position.

As many manufacturers who have done business with retailers such as Sears and others over the years have found out, once a company gets to be a purchaser of your services to a certain degree, it will have such a market share, they control the process from their own, and we just needed to move through that, re-base our numbers and move on.

And that's what we think we've done here.

And I think we'll be in a much better situation in Tennessee next year because of doing it.

Thanks a lot.

Thanks, John.

Next, we'll move to Rob Hanassee with Blackert Financial.

Thank you.

Good morning.

I was just wondering if you had a sense as to how much the revenue per adjusted admission might have been skewed up by the lower flu volumes with the lower revenue, I would assume?

OK.

Rob, we reported revenue per admission increase of about 9.6 percent year over year.

If you were to take the flu out both years, the increase would have been about 100 basis points lower, around 8.6.

Great, thank you very much, Vic.

And with Morgan Stanley, we have Gary Lieberman.

Thanks.

If you go back to the outpatient for a second, can you talk about incrementally what the company may be doing specifically to better compete with some of the outpatient facilities, and I guess if you could talk specifically in terms of -- is there any ability to put pressure on manage care companies in terms of their contracting with some of those competitors in those markets.

Dick -- thank you Gary.

Richard do you want to address that?

Gary, let me start and maybe Sam and Jay can add some color to it.

When we think about our outpatient surgery line of business, I think the first thing we do to be sure that were good competitors just to be sure that the level of service and technology that we're providing to our physicians is certainly the best in the market, and I think it's important to note that because of lot of these freestanding centers don't compete at the same level as ours.

And we think its important to have a both service and technology edge.

Having said that, from our tactical standpoint, the thrust of our strategy is built around a couple of things.

One is that we want to anticipate where surgery center development might occur and off our own syndications as an alternative.

In many cases we can do that more effectively than perhaps a competitive center.

Our own centers would be perhaps closer to the hospital.

It would clearly take care of our managed care network positioning and we certainly play that hand as often as we can.

We do think that there is also benefit to these centers in terms of the overall expense levels by tapping in to the shared support services that HCA provides.

Historically, I think it is fair to say that from an AFD development perspective, we have been perhaps more defensive.

And actually over a year ago, we sort of changed our strategy to be more offensive and really began developing that list that I articulated earlier of centers that are in various stages of development.

So it's really a multi-pronged attack.

We think about it in terms of the service, of the technology, of being more offensive, of tying them into our local networks, our purchasing programs et cetera, so that we can provide a better P&L.

The competition is difficult out there.

A lot of competitors will offer equity structures that we won't replicate, we don't think make good long-term sense.

But for the most part, if we can get out in front of that development, we have a reasonable chance of providing an alternative development.

Thanks.

Yes, thank you, Gary.

Yes, moving on, we will hear from A. J. Rice with Merrill Lynch.

Hello everybody, just may be a conceptual question for Jack or Richard.

You know, I guess, you guys are commenting that most of the volume shortfall occurred in January, and you've certainly had a number of quarters where there has been fluctuation in price and volume, but you have always certainly able to deliver our expectations.

And I guess, with the pricing environment up 9.6 percent, still one of the strongest, I guess I would just be interested if you give us some sense about the flexibility of the operating model, how the information flows in and was there anything about this quarter in terms of not being able to adjust to sort of the early indications of where the volumes was coming out versus other quarters where you had price and volume fluctuation and then been able to make the quarter.

maybe I can start it off or Jack, you want to take it?

No.

Go ahead.

A.J., I think we did adjust in terms of the expense side, obviously, and as I mentioned earlier, it is really hard to pull cost out dollar for dollar in a very short time period.

The transition cost associated with the managed care contract, et cetera, there is a delay in that that we think makes sense and is just good business.

But in general, the operations did flex.

Now, there is room for continued flexing as we get a better handle on what the volume might be going forward, and certaily in the managed care non-renewals.

Relative to the overall inpatient volumes, it was a little difficult to predict.

As I mentioned, we had come off a really strong year with some very good volume numbers.

January was very problematic at a two percent decline, and actually February, although better, was still in the negative territory.

It really didn't start turning around until March.

And the flow of data is realtime;

I mean, it is not like we didn't know it was occurring.

We have weekly forecast, we have daily census, we obviously know the data and what's occurring.

The trick is not necessarily knowing it, but trying to forecast if it's going to move within a week or two weeks or a month.

And given the difficulty in finding labor and given the difficulty in making sure we stay off contract labor, we are appropriately hesistant to just when we see an immediate change in a day to let that labor go.

When we reset, when volume is down, if these trends continue, we will reset it.

But actually on balance, I know Jay feels this way and Sam as well, the operators did a reasonable job.

Still left a little on the table, of course, but we did a reasonable job in adjusting our expense level.

Some of the expense levels, like bad debt, I mean, they are preprogrammed.

They're in from prior year, I mean, they're in from prior quarter net revenue, and they are going to flow through, independent of the current volume.

But on balance, I mean, it's a judgement call that our execs make in the field.

We want them to have that judgment, and if it's ticking down or if it is staying down, they will fairly readjust the cost level.

Let me add to that A.J. a couple of things if you are in the middle of the quarter.

As Richard was talking about, there is some moving parts going on.

He gave you a quick reconciliation of the six cents, 1.5 cents related to the flu, 1.5 cents essentially related to the contract situation.

One of those contracts, the major one, was under negotiation through two-and-a-half months of that quarter.

And that obviously affected our thought process about those volumes and what was going to happen with those volumes.

And then, quite frankly, we have not in the last at least five-and-a-half years and in my recollection going back to when I was a hospital CEO, have really never seen a time when we didn't have a flu season.

At least, a fairly substantial one if not and -- I shouldn't put it this way -- if not a great one, at least a substantial one.

And we didn't see it this year.

And when it didn't occur in January, we expected in February.

We saw some signs in some markets that it was starting to happen, and we expected it in March.

Also -- and it just did not occur.

So that accounts for a kind of a thought process and at least the thinking that went on revolving around four of those six cents that we are talking about.

Just one final thought maybe to state the obvious is that we really don't want our CEOs knee jerking on a such a short-term basis, because not only is it bad for business, but it actually could create another downtrend spiral that the hospitals would have to contend with.

But what I'm saying is that if volume is down and it is not known whether this is really a new level or just a temporary blip, it can create a lot of dislocation.

It can create problems in the physician ranks, it can create problems elsewhere and actually end up costing yourself more than if you just sort of take a cautious wait and see attitude for a defined period of time to see if we're really at a new level.

So our operators are all over that every day, judgment call when it occurs but we don't want anyone knee-jerking in the field.

Thanks, just a quick one for our model.

There is one item that you had the last few quarters, insurance subsidiary gains and losses.

Do you have those numbers for this quarter and last year's quarter?

A.J., so far, zero this quarter and last year I believe we actually had $5 million loss.

OK, alright thanks a lot for the answer on the other question.

Thanks, A.J..

Our next question comes from Kent

with SG Cowen Securities.

Thanks and good morning.

I think the one comment that was most interesting I mean if you can elaborate is your assertion that the managed care contract situations, their impact would be temporary since -- maybe it's just a difference in terms of temporary being -- some would view that as a few months rest, whereas some of us may -- you may be thinking of it as a year.

But could you just elaborate on what you expect to happen next, thank you?

In terms of Blue Cross?

You know, certainly since that seems to be the most recent one.

In terms of Blue Cross, as Jack mentioned -- this is Jay Grinney.

The contract mediation process that we were in for several weeks drew to a close and we went into that mediation process hopeful that we could split the difference between where we were and where Blue Cross was.

Unfortunately, for whatever reason, Blue Cross decided not to take that same approach, and we were unable to come to a resolution.

So we're re-basing as we speak our operations.

We think that it's probably going to be at least one, maybe two year, process to try to get that business redirected to payers that we do have a contract with.

I think we'll be successful, I think we have got a strong network here in Nashville and we have got a strong network down in Chattanooga.

And so we think that there is going to be that kind of time period to see that volume in that business, get out of the Blue Cross contract and into payers with whom we do have contracts.

One of the thing just to elaborate talking about Blue Cross of Tennessee that elaborate on what Jay was saying, is that these contracts and the renewals and re-enrollment among employees and different businesses in the state who had a choice between Blue Cross and other plans, when they went through the re-enrollment and the re-contracting period in the fall, these products that Blue Cross sold were sold with HCA hospitals in the network.

And there is significant discontent out in the market over the fact that they are not in there anymore.

So, obviously part of our strategy with that is not just to re-base, that is, get the Blue Cross, if you will, out of our blood system, but part of our strategy is to help other competitors as we go into the re-enrollment periods, which will begin in the summer and fall.

The Uniteds and the Cignas and other companies that are also competitors in this market to help them in their situations as they go through re-enrollment.

We do think, as Jay alluded to, the fact that HCA is in some providers' networks or so in some insurers' networks and not in others, is a strong selling point and we intend to help them with that.

If you want to cast this into the bigger, broader market managed care, I don't think you can make some kind of estimation that the world has changed.

We have been in these battles since 1997.

Some of you will remember the bitter battle we went through with Humana in Florida in 1998 over these same issues.

So it is negotiations are tough, we try to strengthen ourselves in the market so that we have got some leverage.

But again, all we are trying to do is to get the fair rates that reflect the increase in costs that we are seeing and when some insurers try to use their market clout and their pervasiveness in certain markets to beat down the providers, we are just not going to play that game.

But there is no change in that from what we have seen in the last five years.

And what percentage the Blue Cross Blue Shield Business or on a percentage basis are your capturing.

And that is my last question.

You mean here in Nashville and Chattanooga, how much is being redirected?

Yeah, or how much are you maintaining?

How much is still coming in the door in the absence of a contract?

Not much to be very honest.

We are not seeing a lot of the volume from Blue Cross right now.

We just finished the mediation, probably, what, two, three weeks ago.

So it is really kind of too early to see any kind of redirection.

As Jack mentioned, open enrollment comes in September, October, November time period.

That is when we do expect to see some redirection, but right now we were not picking up a lot of that Blue Cross business.

Thank you.

Thank you.

Not to prolong this but, and it is not exactly the same, but clearly we experienced this in Houston with the contract a year ago, and as I was looking at the numbers year over year, we'd lost about 75 to 80 percent of the volumes in that.

But we did retain quite a bit coming through our ERs and showing up in admissions, because of location and other factors, clearly at non-discounted rates.

So, we weren't equal at the end of the day, but Sam I don't know if you could add any color to that, but we did retain a fair amount of volume and a much better amount of revenue.

Yes and just as an example and I don't know if the Blue Cross situation will be the same, as Vic alluded to, in Houston we have captured about 20 percent of the inpatient business that we had.

We've lost a lot of the outpatient but when you look at the revenue stream that was provided by Aetna, it is about 75 percent of the revenue stream that we had historically under the contract.

So, obviously the per unit revenues per patient are significant when you are providing services in and out a network situation and so that's generated the closeness on the revenue side albeit on very little volume.

with Variance is next.

Good morning.

Some people have suggested that lowered cardiology procedures due to people delaying for drug coded stents might have had an impact in some hospitals.

Did you see that at all, and if so to what extent?

Alright, Frank Houser our Chief Medical Director, you want to address that Frank?

Yeah, we really didn't.

Our cardiology volumes really are pretty good.

The CABGs we did in the first quarter, just about the same number maybe 1 percent less CABGs than we did the year before, but our total number of CADs was actually up a little bit.

Thank you, Frank.

Let me remind people, let's do really stay on the one question.

I know there is you have got a lot on your minds but there are also a lot of people on this call and we got about 20 minutes at best left here, so, next question.

Next question comes from Lee Cooperman with Omega Advisors.

Thank you.

I try to stay to one.

The terms of the repurchase, I followed this thing for a while -- I may be off with some numbers.

I should say good morning to everybody first, excuse me.

Good morning Lee.

Good morning, Rick.

From 1997 to year end 2002, I think we have spent $5.5 billion on stock repurchase.

I am wondering if you have the average price we paid over that period.

That is not the question.

In the same period, we paid $40 million a year over five years in dividends of $200 million.

We have gross cash flow about 1.8 billion, and clearly, just looking at the record, there is a much greater interest in stock repurchase versus paying cash dividends.

It seems to me that to make that judgment in the extreme way that you are making it since the vast bulk of your shareholders base are taxable, tax-free individuals, tax-free institutions, you have got to have a very firm view about the value of your business.

So far the $5.5 billion that we spent, if I am guessing that we probably spent on average of something around current price levels, maybe less, and you got a kind of present value of those numbers, has not been a winning strategy.

And, you know, short-sellers can short out stock now with impunity because there is no cost associated with it.

Dividend yield is, I think, negligible.

I think we're paying eight cent dividend.

So I guess the question is, how well-thought out is the stock repurchase program and why is the cash flow so skewed to repurchase versus the consideration of an ordinary cash dividend and wondering whether there are any other compensation plans push you in this direction where your compensation plans apply to the EPS or return of equity, which would create a disincentive maybe to pay dividends in some way.

I really have a second question, which is very critical, but I'll abuse you and throw it out.

You were talking about the effects of the 1st quarter and a bunch of them are transitory, but one is not transitory, that could be secular, is outpatient surgery activity.

We understand a lot of the private equity people have put money into that business, and to an extent that money is there is to stay, it could be a quasi-permanent effect on business.

I'm just wondering what our cost structure is and our ability to compete with these outpatient surgery centers.

I apologize profusely the second question but ...

We'll let -- Richard can step back.

Jack, do you want to start this off here?

Yeah, Lee, good morning.

Let me address the stock repurchase.

I think the average price of the $5.5 billions is about $27.

We believe, given any models that we run about the growth of this company over the next two or three years, even if you discount the growth rate back from mid teens, that the stock is significantly undervalued where it's trading now.

And that the best investment that we can make in the short term of our free cash flows is to buy back our stock.

There are obviously always issues about dividend policy, and we are constantly looking at that.

Obviously, if the tax laws change, it becomes a more attractive alternative.

But right now, I think it is clear from every analysis that we are doing, and we are not just doing this internally, we have got some outside people whose advice we listen to, believe the same thing.

And let me also say that there is nothing in the executive compensation plans that drive us to that decision versus a dividend decision.

It's not -- that's just not a part of the equation.

The issue that is driving our serious look at a significant stock repurchase plan right now is that we believe that that is the best investment that we can make for the shareholder right now because we think there has been an overreaction to one quarter number and I guess that's part of the price you pay for having about 13 out of 14 quarters of 20 percent growth and then have one where it is just eight percent.

David I don't know if you got any?

Well, just let me add that obviously we do considerable work to try to make sure that prices where we buy stock, in our judgment with the information we have, is at a reasonable price.

But we use share repurchases A)As an investment, B)to try to manage the shareholder count.

And if you go back to the period subsequent to 1997, we bought back a substantial amount of stock as a result of, in effectdoing the spin-offs and also significant sales of assets.

So what we did was take the balance sheet and shrink it in size, both in terms of the amount of debt and equity employed in the balance sheet.

Last, Richard you want to draft outpatient competitive factor one more time?

Lee, I think your general thought is on track, and when you look at our outpatient volumes, the declines from prior year, about half of the decline was due to this competition, maybe 25% or so was due to the contracting issues.

And I think your sense is right, it's not nearly as transitory, this competitive environment.

But I think another side of the equation is, we do have the ability to compete, we had them competing in this sector for some time, we are stepping up our development, we think we can compete well on service, on technology, on location, and I mean location next to hospital campuses, that is an important part of freestanding surgery development.

We have the staying power in difficult market times to stay the course.

We also think our overall managed care pricing strategy is important when we could include the ASDs.

So yeah, it is a sector where there is competition.

We're used to it, we're just going to need to step up our competitive activity as well.

So it is what it is at the end of the day.

Thank you.

Next, John Ransom with Raymond James.

Good morning.

Just want to beat this horse of labor costs a little bit more.

You have in the past talked about 4 to 5.5 percent rate increases.

Could we think about then perhaps two-thirds of your labor cost being that which is subject to rate increases and perhaps one-third the benefit side, which is subject to the 20 percent increase that you mentioned earlier?

If I blend those two, we get something like a 10 percent unadjusted increase for volumes.

Is that how we should be thinking about labor?

So in other words, your labor costs are presently growing -- total compensation in labor costs are currently growing something like 8 to 10 percent a year.

Anybody want to take a swing at that?

Good question John.

John, this is Milton Johnson.

Just listening to it, I think the logic -- I haven't run the numbers you've described but the logic doesn't sound wrong to me.

I am looking at some numbers here, and if you blend those that is probably causing a total labor cost increase of around 8.5 to 9 percent.

And just to follow on to that, so if you were to get back to your range of, kind of two to three percent volume, your compensation costs are going to be growing darn near 12, 13 percent again.

So, I guess, our conclusion is, are you at the point where there is just little to no -- need these...

John, this is Milton here.

We don't agree with that, that second conclusion.

Again, we think if we get the additional volume that we can leverage our existing labor costs and hopefully maintain if not reduce it, so, I don't see a two percent volume in the future resulting in anything like that present labor cost increase.

OK, that's helpful.

And finally ...

Yeah, we better move to the next one.

OK.

Thanks.

Next is

with American Express.

Hello.

Hi, can you give us the revenue and admission numbers by a payer?

Thanks ...

All right, hold on one minute here.

We look at the changes in mix and we look at the admission mix every quarter, year over year.

Our Medicare mix was, we had about 20 basis points increase, 40.1 percent of admissions, compared to a year ago of 39.9.

Medicaid was up 40 basis points.

Our discounted business down 20, commercial, self-pay combined was a net down 40.

I don't actually have the revenue breaks here in front of me, but we are happy to get back to you with those.

Next, we will hear from Kip Hewitt with Legg Mason.

Yes.

Just a question on the outlier issue, which you have referred to of course in your 10-K.

My question has to do with what is it about the formulas that were proposed that could conceivably cause it to go down as much as -- I believe you said 12 million a month when your total in 2002 I think you had said was about 148 was it -- no it was 200 -- I don't have the number in front of me, but it was a substantial reduction.

It was almost cutting in half your outlier payments, when in fact your overall percentage was about 5 percent of your

revenues.

So a surprise on this formula that had been proposed, it could be that much.

OK, let me back into the numbers, give you numbers as far as to mean what the proposal is, which is still pending.

Last year, our total outlier payments as reported during the 10-K were $284 million.

Our total Medicare revenues last year were $5,514,000,000 so outliers represented roughly 4.9 percent of our total Medicare payment.

That is in the range that is historically Medicare has targeted, roughly 5 percent of their operating dollars to go to outliers.

So we really fit within sort of a normal number.

What the proposal is, is to change the cost report and use as the most recent filed cost report and the ratio of cost-to-charges that you will get out of that cost report, as compared to the existing practice that we have had for years in this industry.

And that is the most recent settled cost report.

So in essence, what is the change that is being proposed that impacts us and creates that estimated $12 million a month shortfall, were it to be implemented as proposed, is this moving cost report periods earlier.

Our cost reports, final settled ones, most of those would be 1997s, maybe '96s.

And jumping from a 96-97 cost report to a 2002 cost report creates that $12 million a month difference.

We think in fact we are not only one impacted by this.

Any of you that have followed the industry comments coming from the American Hospital Association, among others.

There has been quite an outcry.

There are many, many hospitals in this country that are having a significant -- would have a significant negative impact were that change to take place.

And in fact most of the comments that I have really not said "don't do it, but at least if you are going to do it, phase it in over some period of time."

Just for example, data shows that 71 percent of the hospitals in the United States are dealing with cost of charge ratios on cost reports 1999 and prior, and in fact 25 percent of the hospitals in the country are '98 and prior.

And just to magnify it once more, the state of New York has been very outspoken on this and it's probably because 84 percent of the hospitals in the state of New York are dealing with cost reports and cost to charge ratios 98 and prior.

Sso again comment period is out.

That's where the number comes from, and in essence what happened, it appears, as an attempt to fix one piece of the outlier world, that being the statewide averages.

Which did not impact us and didn't impact most hospitals in this country that in the process, there are some unintended consequences taken place here that are effecting all outliers.

And you are exactly right, it would take our number dramatically below the sort of five percent number that you would expect.

So, again, we will see you over the coming month or so, once the final rule proposal comes out and I can't speak about it at this point.

OK, thank you.

Next, we will hear from Sheryl Skolnick with Fulcrum Global Partners.

Good morning, thank you.

OK if we can go back to your very convenient breakdown for a second of the six cent difference between Street and what you reported.

You said 1.5 cents was from the flu, so it seems like there is a lot of fury over not a lot of EPS.

But, again, the two cents from the outpatient surgery volumes declining, the fact that you had a lot of openings in what sounds like third and fourth quarter, that doesn't seem like it's going to go away anytime soon.

In fact that it seems like, if anything, it works its way out over the year and then you face some of these issues again next year.

But of the one cent that came from all the other items and the penny-and-a-half that came from the managed care nonrenewals, I guess what I am trying to get is a sense of is sort of what part of that that goes forward.

He said that we anniversary the Aetna situation in Houston, was that roughly half of the one-and-a-half cents?

It was part of it.

I don't know the exact amount of it but those were the two contracts, the Aetna and the Blue Cross so that some of that does go away.

Some of that goes away, so it looks like we are somewhere around three-and-a-half cents that goes forward.

And I guess the part of the question that I don't get is implicit in that is also this increase in the provision for bad debt because the revenues are all little bit light.

If these things continue and the revenues are still a little bit less than you thought they were going to be, how do we account for the impact of those provision being higher on the bottom line?

Or another way to look at it is, what is the impact that it has on cash flow?

I am not sure, Milton do you want to.

Well, I just have a couple comments about the analysis, the breakdown, of our six cent shortfall.

I'm not going to predict the future here in terms of how those things will play out the rest of the year, but I would point out that that usually the volumes are higher in the the first quarter than in any other quarter so the impact may be somewhat more magnified in the first quarter than other quarters.

And I think I probably would not want to address anymore than that.

The bad debt issue typically lower revenue should result -- it depends on obviously the mix of that revenue.

Self pay, if it is higher in self-pay, it should probably result in higher bad debts down the road.

But generally lower revenue is going to have a favorable impact on the dollar amount of bad debts in the future period, but there are a lot of other factors that go into projecting bad debts other than just the amount of revenues.

So, I wouldn't want to use that as just the sole predictor.

But again, we're not at this point, think bad debts increase being a major issue for a cash flow for the year at all.

OK.

So, it is not as a result of managed care holding up bills for additional scrutiny or anything else that has a measurable impact on contribution of cash flow from collection.

Our days in the ER are as much as 62 from 63 down one day.

Cash is, as Richard mentioned, a 100.2 percent of adjusted net revenue.

Ccash flow is strong and none of those problems are present.

Thank you.

We got time for two questions.

Whoever the lucky two are in the queue.

Next from Bank of America, Gary Taylor.

Hi.

Good morning.

I had a question, a part of the six cents, also you had mentioned 2 cents a miscellaneous including medical malpractice, and the last time I had checked, you were reserving about 108 million a quarter, so does that suggest that you've tweaked that accrual up slightly, or were there any implications from the annual actuarial review?

Let me.

Gary, the first of the miscellaneous reference was one cent and the reference to malpractice there has noting to do with our malpractice expense.

Milton can give you the numbers, but what we were referring to there is in a few markets, in particular, West Virginia and some in Florida, there were physicians that had malpractice issues, either chose not to buy the insurance or couldn't get it and accordingly we factored that in in terms of lost volume inpatient and outpatient.

So, that is where that it is.

Again, it wasn't working out one cent, but if you put that, the weather, the economy and a number of factors together that all came in that miscellaneous that's where that one penny came from, but Milton you want to put to bed the malpractice cost side of it?

Yeah, as you can see in our recently filed 10-K, we have finished the year in a very strong revered position near the top of the high-end of the reserved range.

We have been increasing our malpractice expense for the last three years.

Fairly significantly, as a result of seeing increases as far as the settlements in the malpractice arena.

We were not seeing increase in the frequency of the claims, but just in the size of those claims to get them settled; for example 2001 over 2000 was about 18 and 19 percent increase in the mid 20s, 2002 over 2001 and 2003 we are expecting again high teens type of increase in our malpractice expense and that has been in our models for the past two years.

So, am I -- am I correct that that is still about 2 percent of revenues are somewhere between like $400 and $450 million a year.

You're a little high on the cost, it is about 1.8 to two percent of net revenue is what we expect something in that range and malpractice expense for the year is probably going to be somewhere around 400 million to 415 million would be my estimate.

Thank you..

Thank you, the last question.

Our last question comes from Ken Weakley with UBS Warburg.

Thanks, good Morning everyone.

The effectiveness that your capital spending strategy going forwards I guess would really depend on how accurately you forecast both demand and supply for inpatient services.

What we have seen here in the quarter is it's not so easy necessarily to forecast either demand or supply, at least to some extent.

So, can you walk us through how much new capacity you foresee coming onboard in your markets over the next five years, both because of bed conversions and construction.

And on the demand side, maybe if you could discuss what usage rate per thousand you are assuming for inpatient usage and perhaps discuss how new technology in managed care may be will alter that.

All right.

Had to end it with a bang.

I think we probably need to address that at the investors conference where we can actually lay you out some graphs and some tables that I give you our estimates on that.

Maybe then, may be if I could just answer those supply question?

How much new bed capacity has come onboard in the last couple of years, because of conversion and construction, and how much do you think will come up in the next couple of years, because obviously if the increase in supply on just the ambulatory side is causing some distortion, may be we should worry a little bit especially out west, and maybe where there's no CONs how much new capacity you might be seeing?

There is a lot of detailed numbers and Mark can may be come back and give you some bed numbers.

Any general comments from east or west in terms of just the capital spend.

I mean obviously we will have a major pitch next week to talk about this.

I am sure.

That is because we must keep all of our strategy.

I guess don't, but we haven't sort of collected the numbers like you have asked for, not that any of your requests are out of the ordinary but we will be happy to try to put them together.

OK

Ken, just a couple of quick numbers by the way.

Looks like we got about 2000 beds that are scheduled to come online over the next three, four, five years.

OK.

Those are the kind of numbers that we got out there, the other components...

Those are HCA beds, right?

Those are HCA beds, that's right.

I'm more curious about what you think is coming on board in the markets that are non-HCA beds.

I just quickly, either Sam or Jay are you seeing any big uptakes in inpatient capacity being built in your market?

This is the Sam Hazen.

There are certain markets where there appears to be an unusual proliferation of beds and that could potentially create some challenges for us down the road.

But these market happened to be some of the fastest-growing markets across the Western Group as well, and its difficult to say today whether or not supply is going to be needed or not.

The demand trends, if you look at the past two to three years and couple that with the population growth, would suggest that it probably is needed, but obviously it is difficult to say with what level of confidence as to whether or not that is appropriate.

So you know what we will try to do is give you a little bit more color on that Ken next week and show you a few markets as to what's going on, but there are a couple of markets where there appears to be more bed capacity than others that are experiencing similar growth rates.

OK.

Ken, in the Eastern, as you mentioned, you know all our states are seal in regulated so we are just not in that same kind of situation.

Clearly there are markets where because of population growth and so on there are opportunities to expand beds through the CON process.

Wwe are always there with those CONs.

There are couple of markets in Florida where we are looking actually on a preliminary basis, but we are looking at satellite hospitals or new facilities to enter new markets.

But all of that gets into a certificate of need process, it's very regulated, other providers can get in there and compete and so the dynamics are quite a bit different than what Sam was describing in the west.

Thank you very much, and with that I would like to conclude the call, again.

Thank you for participating.

We look forward to seeing many of you at noon next Wednesday here in Nashville.

Have a good day.

That does concludes today's conference call.

We thank you very much for your participation and have a good day.