美國醫院公司 (HCA) 2003 Q2 法說會逐字稿

Good day and welcome to the HCA second 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. Victor Campbell.

Please go ahead, sir.

Thank you very much and good morning to everyone.

Welcome to our call.

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 most of the senior management team from here in Nashville joins us as well to help with the question-and-answer session.

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

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

We've listed on page 4 of the release, which hopefully all of you have received this morning, a number of the risk factors that you should consider and we encourage you to examine these and other risk factors that we detail from time to time in our SEC filings.

You should not place undue reliance upon our 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, today's call is being recorded.

It is the property of HCA and should not be rebroadcast without our written consent.

The call will be available for replay and archived on our website.

I also welcome those of you that are on the website listening to today's call.

We've had an increasing number of individuals participate through the web and we hope you find that useful.

During today's call, we may make some references to the term "EBITDA."

The company uses EBITDA as an analytical indicator for purposes of allocates resource are for geographic areas and assessing their performance.

EBITDA's commonly used as an analytic indicator within the healthcare industry and served as a measure of leveraged capacity.

It should not be considered as a measure of financial performance under generally accepted accounting principles.

The items excluded from EBITDA are significant components in understanding and assesses financial performance.

Because EBITDA is not a measurement determined in accordance with GAAP as thus susceptible to varying calculations, EBITDA as we present may not be comparable to other similarly titled measures of other companies.

Now, one quick point before I turn the call over to Jack, as we announced last Tuesday, today's reported results include a $106 million increase in our second quarter doubtful account as a result of our recently completed hindsight analysis.

Also, as we discussed last week and even prior to that, we recorded a charge in the quarter of $130 million related to our decision to discontinue development of our Millennium Accounts Receivable System, or MARS, and that charge is reflected as an impairment to long live assets.

With that introduction, I'll turn the call over to Jack Bovender.

Thank you, Vic and good morning to everyone, we appreciate you joining us on this conference call this morning.

We told you during our conference call last week that we would devote the time this morning to operational issues, since we discussed the bad debt issue in depth last week, and what I would like to do this morning is turn the call over to Richard Bracken first to give you a complete run-through of our operations for this quarter, and then following his remarks, I'll make some summary comments about what we believe this means as far as the second quarter and going into future quarters.

Richard?

Thanks, Jack.

And good morning to all.

I realize that most of you are on a tight schedule with three conference calls back-to-back.

With this in mind, my plan this morning will be to focus my comments on what we believe to be are the key issues that you are concerned with relative to our company's operations.

As always, we will attempt to answer any questions that you might have about any aspect of our operations.

During the Q&A session to follow.

Generally speaking, the second quarter proved to be an interesting one.

While our inpatient volumes continued to be soft compared to a year ago, there were some good indicators for growth in some of our markets throughout the quarter, and overall, for the month of June.

Let me caution you, it's too early to draw any conclusions about volume trends.

Outpatient volumes continued to be under pressure, although our AST division had a solid quarter and for the most part, despite a significant increase in our bad-debt allowance, which we discussed at great length last week, we were pleased with the management of our operating expenses.

More on all of these issues in a moment.

Key operating results for the second quarter 2003 are as follows: Consolidated net revenues increased 11 1/2% for the quarter.

This performance reflects continued stability in our pricing agenda, a small increase in the charity care rendered to our patients, some inpatient volume growth as well as the revenue generated by our new Kansas City hospital.

The 11 hospitals we acquired in the Kansas City market on April 1st of this year contributed approximately $230 million to the second quarter revenues, representing about 400 basis points of the revenue growth.

Adjusting our results to a same facility basis, net revenues for the second quarter grew 7.1%.

Same facility net revenue for adjusted admission increased 7 1/2% for the quarter.

This is slightly less than our recent trend, but it reflects a growing recognition of charity care discounts.

Remember, this is an important dynamic to watch, because when any given account is considered a charity account, it is recorded as a contractual adjustment or discount to gross revenue.

It does not flow through the collection cycle; that is, accrue as revenue and eventually become a write-off to bad debt.

There are some events occurring which are increasing our charity levels.

As we previously announced, over the last two quarter, we have made a concerted effort to have all of our hospitals report its charity those accounts of individuals who qualify as being within 200% of the federal poverty guidelines.

We are now consistently applying this standard across all of our hospitals, and it is increasing recognition of charity care.

Furthermore, we anticipate an acceleration to this effect when our new charity-care policy is fully implemented.

Please recall that we intend to charge those patients that fall within 200 to 400% of the federal poverty guidelines a discounted amount on each of their claims determined on a sliding scale basis.

As require we have asked CMS and our five fiscal intermediaries or FI's for their approvl of this plan.

CMS has given us its approval as has our largest FI.

We expect approval from the remaining FI's will be forthcoming.

We are preparing to implement this policy as we speak, probably sometime during the third quarter.

Additionally, contributing to the increased charity charges for the quarter was a change in policy interpretation instituted by the state of Florida that reduced a number of covered days for patients admitted through the emergency room for any given Medicaid enrollee.

This decision was made in July of last year and we're now beginning to see the impact of this decision.

We reclassed $19 million as charity in the second quarter.

Because of this issue.

Considering the effect of all those factors, charity care increased $60 million for the quarter.

Furthermore, normalizing for the incremental growth in charity care, our net revenue per equivalent admission for the quarter would have been 8.1%, more in line with recent trends.

Same facility inpatient admissions for the quarter increased six-tenths of a percent.

As we shared with you in our press release last week, monthly volume within the quarter was down .9%, down .5%, and up 3.5% for the months of April, May and June respectively.

Let me reemphasize the comment I made a moment ago that while volume growth in June was a strong 3 1/2% it's too early to draw any conclusions that this is a reversal of the overall slowdown we've seen in the first and second quarters.

You might also recall that we have been systematically closing skilled nursing and underutilized OB units in certain of our facilities, and reconfiguring those units for general medical/surgical capacity.

Much of this was done in 2002, and the first part of 2003.

If you adjust for these closures, same-store admission volume for quarter increased approximately 1.5%.

This is an important specific to consider since it provides a better perspective on the growth of our base business.

While we continue to see some impact from the tail of these closures over the balance of the year, year-over-year impact of these closures should lessen in each of the next two quarters.

We believe that the general softness in admission trends is a result of the sluggishness of the economy and the increasing unemployment levels in several of our large urban markets.

Additionally in certain specific markets position issues related to malpractice concerns, managed care contract disputes, and new competition both in inpatient and outpatient sector are contributing to slow growth.

As you might expect, inpatient admission performance across our market varies widely.

Admission growth has been particularly strong in our Salt Lake City, Dallas, North central Florida, and Fort Myers markets with growth rates in these markets ranging between 5 and as much as 10%.

Patient admission volumes were soft in our Tennessee, Florida panhandle, Las Vegas, Dade County and international markets.

We'd be glad to detail the reasons in any given market during the Q&A session if you desire.

But in summary, Tennessee relates to a managed care contract issue, the Florida panhandle has a new hospital competitor, and Las Vegas, it's economy-related along with the repositioning of our Sun Rise Medical Center which we discussed before, and in Dade County, our volume has been reduced following our decision to suspend privileges of certain physicians at our (indiscernible) facility.

It should be noted also that patient volumes in our international division, that is our eight hospitals in England and Switzerland, have been significantly affected by the conflict in the Middle East.

While their volumes are typically a fairly small percentage of the company's total volume, about 2% of total, their incremental drop has been significant.

If we exclude international operation from our same facility admission growth calculation, admission growth for the second quarter would be 20 basis points better than on an as-reported basis.

Same-facility adjusted admission volume for the quarter decreased four-tenths of a percent, obviously this reflects the volume decreases we've experienced in our outpatient service line.

For discussion purposes, please recall that when we define outpatient services we group the services into three major categories.

First, emergency room visits; second outpatient surgeries which include those surgeries performed in our freestanding surgery centers or the ASC's and the out patient procedures performed in hospital surgical unit; and three, all other outpatient services such as lab, x-ray, physical therapy, room care, healthcare clinic visits, et cetera.

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

Let me comment on these more specifically.

For the second quarter of 2003, same facility emergency room visits increased 2%, while we've experienced emergency visit growth rates higher than this in the past, this 2% growth rate is in line with recent trends.

Same-facility outpatient surgery volume declined 3.6% for the quarter, important to note here that there was growth in our freestanding surgery center volumes of 1.7%.

One aspect of outpatient surgery volumes that you might not be aware of is that our current method of counting outpatient surgeries does not include noninvasive procedures such as indoscopies, (indiscernible) and pain management treatment.

That are performed in our centers.

When both invasive and noninvasive cases are included, which we believe is more in line with industry practices, ASC volumes increased 5.6% in the quarter.

You should also be aware that a reported same-facility outpatient surgery decline requires additional explanation because as we open a new ASC on a hospital campus, our same facility statistics are reduced for the surgeries that shift from the hospital to the new ASC.

This will continue for a year until the new ASC is considered part of our same facility database.

In the second quarter, this resulted in a 120 basis point of the 3.6% decline.

Competition in the outpatient surgery business is intense as it has been historically.

Our competitive response which is determined market-by-market, evolves around service, development, physician recruitment, and managed care agendas.

While I will not disclose all of our competitive thinking to date, it's fair to say that we operate a large book of outpatient business across our markets.

We understand this business quite well, we believe we have reasonable leverage within our managed care strategy to promote our centers, and we have the extraordinary ability to recruit additional physicians to our campuses to make up for defection.

We believe we offer investigation state of the art and comprehensive healthcare delivery networks in our market which are attractive to the physician community.

Unfortunately, while we do feel we have many competitive strategies to execute, it will take some time and we don't expect the situation to turn around overnight.

Also, the sluggish economy exacerbates the situation.

We remain comfortable with the managed care pricing environment.

Currently, 85% of our 2003 contracts and 55% of our 2004 contract negotiations have been completed.

Our 2004 book of businesses being renewed at approximately 7 1/2%, consistent with current year trends.

Now, on the cost side.

We spent a great deal of time last week detailing issues surrounding bad debt so I won't take time to repeat that.

Other aspects our operating expenses, most notably labor and supplies fared quite well during the quarter.

Salaries, wages and benefits expressed as a percentage of net revenue for the quarter were 39.8%, compared to 40% in the second quarter of the prior year, representing an improvement of 20 basis points.

Adjusting for our Kansas City operations, salaries, wages and benefits as a percent of net revenue for the quarter were 39.5%.

Needless to say we are pleased with the performance of our hospital executives in managing labor.

One area of labor management where we noted significant improvement was in our contract labor levels, both utilization of contract labor and absolute dollar spent significantly improved in the second quarter, contract labor put adjusted patient day decreased 15% from the first quarter, on a dollars per adjusted patient day basis, contract labors now at the lowest level we'd experienced in recent memory .

Additionally, the average hourly rate increased 4.7% on a same-facility basis, in line with the decreasing trend that we've been experiencing.

Small movements in this number when applied to our employee base of over 180,000 FTE's are meaningful.

Now, as a final note, total employee turnover calculated on rolling 12 month basis decreased 250 basis points to 22%, these are all very favorable results in the company's single largest area of operating cost.

Supply costs expressed as a percent of net revenue was 15.9%, unchanged from the second quarter of the prior year, given the significant increases in costs that we are absorbing in this area, we remain pleased with our overall performance.

Cash collections remain strong in the quarter at 104.8% of trailing 60 day net revenue less bad debt, net days in accounts receivable decreased by one day to 62, virtually all of our hospitals and 85% of our net revenue is now being processed through our 10 regional patient collection centers.

Some of you have asked about our capital spending plans and whether the company will continue spending at its current pace.

Please keep in mind that much of the capital that is being spent today was capital committed one and even two years prior.

As part of our capital planning process, we continually evaluate future demands.

We do see a slowing in spending in the one to three-year time frame.

Based upon our most recent analysis, we anticipate that capital spending for 2004 including Health Midwest will approximate $1.8 to $1.9 billion compared to the original projection of $2.1 billion.

This reduction is more a result of how projects are being staged in the out years rather than due to a rollback of viable projects.

And before I close, let me provide some comments concerning our Kansas City operation.

It's now been one full quarter since we completed the acquisition of the Health Midwest system.

We are still finding our way around, so to speak, but our management team is in place, fully engaged.

The initial stages of the integration have gone reasonably well, considering the strategic and operation challenges presented by past practices and the deteriorating run rates that we inherited.

Fortunately, there have been no major surprises.

We continue to execute our turnaround plan and are determining the best methods to reposition the system.

We believe this is a long-term investment in look to improving results over time as we implement our recapitalization and investment strategy in this market.

During the second quarter, the Kansas City acquisition reduced reported EBITDA margin by 50 basis points, and earnings per share by about a penny.

And with that, I'll turn the call back to you, Vic.

Jack, do you want to make a couple comments before we go to Q&A.

Yes, thank you Richard and let me give you my general impressions of the second quarter as compared to the first quarter and indeed the last year.

First, the economy, I believe, is the most over arching, but hardest to quantify factor affecting our results year to date.

The other strong influence as discussed by Richard comes from niche competition, particularly on the outpatient side.

Second, volumes were better in the second quarter, but still not where we expect them long-term.

Third, pricing continues to be solid and predictable.

And lastly, cost management in the second quarter was very good, in particular, labor and that is a tribute to all of our managers, both at the hospital level as well as division and group level.

For the balance of the year, we expect somewhat similar operating results.

We'd like to point out that prior year comparisons will remain challenging, especially in the third quarter of 2002 where admissions grew 3.4% and earnings per share grew 40%.

The key to a return to stronger EPS growth is a return to historical volume growth.

And of course, predicting that turn around is difficult.

Also, as you know from our previous comments and disclosures, the fourth quarter of 2003 will be impacted negatively by the still to be finalized outlier rule and threshold.

This issue will carry into 2004 at least through the first three-quarters.

We are in the process of updating our environmental assessment strategic plan and long-term outlook.

Those of you who follow us know that we do this typically during the third quarter of each year.

We will be reviewing this with our board of directors at a planning session in September, and our goal will be to share updates to our strategic plan and outlook with you along with our third quarter results in October.

I don't, however, want you to go away today thinking you will hear some earth-shattering strategy changes from us in October.

I think that is highly unlikely.

But I expect that there will be some tweaks here and there there.

Frankly, we like our current assets and the high growth market in which we're located.

As I've said to many of you, you can't look at two quarters or even a year as an overall long-term trend, and we believe our strategy is still very viable.

I believe that continued investment in these markets is the key to our long-term future.

However, our updated environmental assessment should help us to refine the best use of our free cash flow between capital investments, acquisitions, share repurchase, debt reduction, and dividends.

And while we won't take further time to discuss the issues of free cash flow right now, if there are questions concerning this, and policies going forward as we reassess our strategic plan, I'll be glad to discuss those during the question-and-answer session.

All right.

Jack and Richard, thank you very much.

If I could get you to come on and monitor the Q&A, we would especially today, like to keep calls to one question only.

We plan to be off here in 30-minutes so that you can get to the next conference call.

Thank you, sir.

If you would like to ask a question on today's call, you may do so by pressing "star 1" on your touch-tone telephone.

Again, that is "star 1" to ask a question.

If you are on the speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment.

We do ask that you do not use the speakerphone but please lift up your hand set if you would like to ask a question.

Again, that is "star 1" to ask a question.

We'll take our first question from Lori Price with J.P. Morgan.

I was wondering if you can give us some disability color on the deceleration that you saw in same-store revenue for equivalent admission from March to June?

And I know you talked about the partial implementation of your new charity care policy and what's going on in Florida but that only explains about half of that deceleration.

Can you tell us what else might have contributed to it?

If you look at the quarter, if you look at what we have been running in recent times, we've been running somewhere in the 8 to 9% increase in net revenue per adjusted admission.

If you look at our first quarter, we reported 9 1/2%, which is actually at one of our high levels of.

We think that was impacted partially by the acuity of the business that was soft in the first quarter tended to be somewhat lower acuity so that was lowered a bit and it moved to 7.5. 60 basis points of the 7.5 change was due to charity care so we would have reported 8.1 without that change.

And to be perfectly honest, that would be the same seasonal trend that we saw last year.

If we go back to '02, there is some seasonality movement in this number, first quarter last year our growth was 9.3, second quarter was 8.4.

There are a number of other moving parts, Richard, I don't know if you want to touch on any of them.

But that would really kind of put us back in the range of where it has been in the past.

Wouldn't you be expecting, though, to see a higher average acuity given the soft volumes that you expect would be more concentrated on the discretionary kinds of care?

And shouldn't that have created an upward skew to this metric?

Two things, Lori, this is Richard.

Obviously the outlier payment reduction also occurred, we had some dollars relative to that.

But I think from a business perspective, what's contributing to the somewhat softening in this number is really the slowdown in surgical volumes.

Our overall surgery volumes both inpatient and outpatient was down about 2 1/2%, that's skewed more, as I mentioned in the outpatient sector typically and as you know, our surgical volumes drive a higher net revenue per unit than our medical volumes.

With those numbers being down, I think it's kicking in and hurting that number as well.

Okay.

Great.

Thank you.

Thanks, Lori.

We'll take our next question from Gary Taylor from Banc of America Securities.

Hi, good morning.

I didn't see a cash flow from OPs for the quarter, I did miss that?

Milton?

$320 million.

$320 million.

And as I go, if Richard could just, he mentioned both inpatient and outpatient competition being a factor and I think we talked about outpatient with ASCs and I'm just interested in any color you have on some of the inpatient competition that you're seeing.

Before we go to Richard, let me explain something in the number, $320 million cash flow from operations, note that the $250 million CMS settlement was deducted in this quarter, and also there are some differences, on income taxes that are material, primarily last year's number benefited from a $70 million decrease in tax payments in stock option exercises that we didn't have this year.

So those were two material differences that you want to be aware of for that number.

The 320 has the 250 settlement taken out of it?

That's correct.

Okay.

And Gary, relative to inpatient competition, what we're mainly referring to is the opening of new physician syndicated hospitals in any number of our markets.

This is an issue more predominantly in our western market, but if you look across any number of our markets we have fine hospitals, new heart hospitals, we have new [MEDCAP] facility in New Orleans, we have freestanding smaller ventures that are doing syndications in Louisiana.

And in Oklahoma.

So there's just a lot of physicians syndicated hospitals opening up in our western market.

That's really what we're referring to.

Jay, you also had a new hospital open in the panhandle of Florida.

We did.

We have seen a slowdown in our volumes particularly at our Twin Cities and (indiscernible) facilities.

Thank you.

Thank you.

We'll take our next question from Gary Lieberman with Morgan Stanley.

You talked on the outpatient side of things that it may take some time to correct the competitive issues.

Can you talk about some of the the strategies, if you would, that you have started to implement other that you plan to implement going against some of the competition on the outpatient side?

Have you considered purchasing some of your competitors?

What are some of the tasks that you'll set out to compete?

Thanks.

Sure.

In my comments I said we think about our competitive response in four major buckets.

And first, and I always say this first because despite some of the dynamics of these ventures we think it's important that our facilities operate at least equal to or better on a service, patient satisfaction, on a technology basis, so where we have any weaknesses in service levels or capacity within our existing centers, we take those issues up first and make sure that those are currently market competitive.

But from a development agenda perspective, I mean, it breaks down into a couple different categories.

One, developing brand-new ones.

We've told you that we have gone through a process, we've looked at our existing markets and we see the opportunity to create about five a year within the existing markets.

And this will either be new centers or reconfigurations and rebuild of existing centers.

We think that some of our existing facilities are at stretched capacity and so we have a plan in place to increase the capacity at a number of our existing ASC's.

Another thing that we're doing in certain cases on our existing ASC's is to restructure them to allow additional partners to enter the syndication.

Along with the development agenda, you know, not as much in the ASC market but in our outpatient areas we are looking at purchasing other centers in the marketplace, specifically in the diagnostic radiology area.

We also layer over that a pretty aggressive physician recruitment agenda for those physicians that may chose campuses and go elsewhere rebuilding in those areas.

And then, of course, the most important one to us is the managed care agenda.

As we position our pricing and our networks with our payers, we are obviously looking to promote our ASC's and we think we have some possibilities there as well.

But one thing I would say about all these strategies is that they're all developed market-by-market.

And because the dynamics in each of the markets change and which one is more important, and one thing you won't see is a sweeping index from Nashville about how we're going to do this across all our markets.

We believe that business is best structured locally and sensitive to local market dynamics.

This is how we're progressing.

Can you follow up on the point you made about promoting your ASC's with managed care companies; what does that entail?

I mean, I haven't heard you guys talk about this but some of your competitors have talked about the concept of leveraging inpatient relationship to essentially exclude other ASC's from some of the managed care plans.

You just answered the question, and you know, when we position our business with the managed care organization, we're positioning our whole network of service delivery; inpatient, outpatient, in a marketplace.

And so we'll use that to our best advantage when we enter these negotiations.

You're not afraid of any potential --

Gary, I tell you, we need to move, we're holding up, we'll come back to that, but we really need to keep moving.

Thanks.

Okay.

We'll take our next question from Adam Feinstein with Lehman Brothers.

Great, thank you.

Just two very quick questions.

Can you just tell us what the EBITDA in terms of absolute dollars from the Health Midwest assets were in the quarter?

And secondly, you gave the volumes on a monthly basis but if we're going to look at the outpatient volumes for the month of June, how would that stack up?

Thank you.

Health Midwest was approximately 13 million in EBITDA.

13 million in EBITDA.

Okay.

And then the outpatient volumes by quarter, Mark, do you have those right there handy?

Outpatient volumes were down, I don't have the exact number, for April and May.

Adam, they were down slightly slightly --

They were actually down around 2%, outpatient surgery in April.

May was actually softer than that.

They were seven or eight.

And then there was -- they were up about 1% in.

In June.

Adam, the numbers were April minus 2.4, May minus 8.5, June up .8.

Thank you, guys.

We'll take our next question from John Hindelong with Credit Suisse First Boston.

I was interested in your comment regarding the upcoming comprehensive review recognizing that you've spent billions of dollars on Cap X in recent years, and obviously performance hasn't been great, you don't change strategies overnight, but I'm wondering if among the things you consider in this strategy session if you might consider paying a significant dividend as opposed to the current almost nominal dividend?

Yeah.

Obviously, that will be one of the issues that we will discuss.

Particularly since there's been a change in tax law that favors that for those who hold our funds that do pay taxes.

And obviously, any changes that might come out of this planning session relative to dividend policy would have to wait to completion of the stock repurchase.

We're not going to be in there significantly increasing our dividend at the same time we're in the process of buying back $1.5 billion worth of sock relative to to the issue of capital spending, again we're going into a planning process here, but again, our fundamental outlook about the future of healthcare has not changed.

The aging of the baby-boom generation, the increased technological changes in medicine drive increasing utilization over time.

It's not a smooth, linear progression.

Obviously there are hills and valleys in this.

Last year, as you well know, we did 29.5% EPS growth, but we can't do that year over year, there are going to be some years where utilization drives down earnings and where utilization drives up earnings.

But fundamentally, if we don't invest and continue to invest in our facilities across the country, the loss of utilization is a self-fulfilling promise.

That is, if you don't make the investment you can be sure someone else will and, therefore, you will not benefit from the increasing utilization for healthcare over the next few years.

So this is, as it always has been, a balancing act.

And we will make the necessary investments in our markets and in our communities but we also know, and you know this from long experience with this company, that this company is a significant cash flow generator.

And with the burden of the payment to the government behind us now, there obviously are other things that we can do that have not been available to us in the past as far as our free cash flow.

And obviously looking at dividends going forward is one of the prime things that we ought to consider, particularly at the point in the life of this company that we're at, and it will get a lot of attention going forward.

Thank you.

Thanks, John.

We'll take our next question from A. G. Rice with Merrill Lynch.

Hi everybody.

Just on the managed care, you said you have about 55% of your contracts for next year locked up with decent pricing gains.

Can you comment about any change in terms such as the stop loss provisions and how that factors into that anticipated pricing?

And maybe specifically any update on your run rate of volume with blow cross Blue Shield of Tennessee.

Beverly, you want to start with the stop loss?

And Jay can talk about Tennessee.

from the stop loss side, payers are asking for some collars around pricing adjustments but we are not having any pushback on having stop losses in our contracts.

For us that's a must-have.

We will not accept that risk and we have no problems with the pricing collars.

Jay, you want to talk about Tennessee?

Sure.

If you look at the retention rate, which is really just a measure of how much of prior year's volumes are we seeing again back in our facility, and looking at it on an admissions basis, we have been, in February, March and April, when we were really in the thick of the contract disputes, inpatient retention rate was down in the 25% range.

As you recall in May we made the decision to waive the out of network co-pay deductible differences.

That number went up in May to 45%.

And then in June and what we're seeing more recently, that's hovering in that 54% range.

Thanks.

We'll take our next question from Ellen Wilson with Sanford Bernstein.

I was wonder to go you could comment on the Medicaid environment, specifically, the unit revenue increase in the consolidated companies that you saw from Medicaid in 2002, what you are seeing in 2003 and what you expect in 2004?

I don't have the specific numbers in terms of the Medicare unit increase but think it's been very nominal, what we may want to do is talk about some of the key states, east and west and what we're seeing.

I know expectations are very minimal in terms of Medicaid, but Jay and Sam, you want to address some of your states?

I don't have any of the specific net revenue per adjusted admission information, but across the eastern group, we're seeing really tough Medicaid environments.

In the state of Florida there was the potential that we were going to see a 6% reduction, we are looking at a similar reduction up in Virginia, none of those materialized but the environment is very, very tough out there.

Here in Middle Tennessee with the (indiscernible) situation, we've seen a deterioration in our reimbursements as two of the three plans have been taken over by the state.

And so that's really probably some pretty significant challenges.

This is Sam Hazen from the west.

Medicaid accounts were about 11% of our admissions in the Western Group, most of which are concentrated in three states: Texas, Louisiana, and Oklahoma.

In each of those states, we have generally had budget problems with the state governments and that's put pressure on the Medicaid funding.

For the most part we are generally flat to down somewhere in the low single digits on a unit price basis for our Medicaid business.

That's fluctuates obviously with the acuity of the business we get because a the lot of our neonatal business in the Western Group is Medicaid.

So as we get more intensive, mix the patients that can moderate the year-over-year changes.

But on a per sort of patient day to day basis as far as the type of revenues that we get, we're slightly down in each of those states.

Okay.

So it would it be safe to assume that sort of nominal, sounds like as far as the consolidated company, probably Medicaid in '03 is flat to down slightly then?

Yeah, Ellen when I think of those years, '02, '03 and '04 in our Medicaid book, I would say in '02 the Medicaid book was probably up about a percent, I would say '03 was generally flat.

And '04 we're thinking that that number's probably going to be down a percent.

So that's -- you know those are generally where we see the business moving.

Okay.

Great.

Thank you so much.

Thanks, Ellen.

Our next question is from [Neil Goldner] from State Street Global Advisors.

Hi, good, how you doing?

Good.

Maybe this is a dumb question, I apologize if it is, looking at same-store facility growth, same-store ER visits going back the last couple of quarters, it's obvious the last two quarters kind of gone up a cliff and kind of a weird one because this is something that ER visits would not be discretionary, go to an ER because something is serious, I wouldn't think it would have an economic impact as well.

On the economic side, I always thought a little bit that as employment went up, and people start losing their health insurance that the ER kind of plays the role as a primary doctor in some cases, which is something you don't want but what are you going to do?

So what's the offset that's keeping same-store ER visits down relative to where they've been?

This is a question we've been struggling with here over the last couple of quarters.

And at the end of the day, we don't really know why people choose to come to an emergency room or not.

When you really get to the bottom line.

We have a lot of speculation about it.

We think our numbers were big in prior quarters for a number of reasons.

Recall, we had a lot of development projects, we opened a the low of units, there might well have been backlog volume there.

And so we took the rush of that business in the prior quarters.

So we've kind of rebased and now it's growing at about what the population's growing.

There are no good market-share numbers for emergency visits in this business.

Certainly nothing realtime.

We wish there were but there are not.

We also speculate that due to the economy, increasing co-pays and deductibles that that will keep people away from the ER where perhaps before if the pinch was a little bit lower, they might come.

In an effort to try to get at some of these answers, and try to button it down more, more closely, we are now involved in a pretty significant survey out in our markets, focus group surveys with the physicians, with the physicians' offices, with the public, with the brokers, et cetera, to try to get a sense for this.

But I'd be misrepresenting the facts if I said we know exactly why.

We think these are the reasons, but we're going to try to pin that down as we go forward.

Okay.

Any guess as to what the competitive situation would be?

Possibly losing ER visits?

The only thing, I mean, the new hospital that opened up obviously might drain some ER volume to the extent they have emergency rooms.

But most likely, where the visits are being -- if they're going elsewhere, they're going to the physician's or offices or clinics.

Your notion that the really serious ill don't have a lot of flexibility is how we view it as well.

It's probably the less intention visits that are being dropped off.

Thank you.

All right.

Neil, thank you very much.

Next question?

We'll take our next question from Dan Ehrich with SunTrust.

Thanks, good morning everyone.

Jack, if I heard you correctly you plan to complete the buyback before you do anything with regard to dividend policy.

I'm just wondering if you guys can discuss the structure of the buyback program going forward?

Should we expect a plain vanilla buyback?

Are you using purchase contracts?

And maybe discuss ow tax rules or accounting issues might influence any change in the structure of your buyback if you go after that remaining billion two to repurchase?

Let me let David Anderson, our treasurer who directs the buyback program, speak to that.

We plan on using just an open market purchase program.

Forward contracts are now mark-to-market under the accounting rules which we don't particularly care for.

So the flexibility that we had in just doing open market is what we intend to continue to use.

All right.

Thank you.

Thanks, David.

We'll take our next question from Charles Heff with Bank One Investment Advisors.

Good morning.

I apologize if I missed this, but EPS guidance for the third and fourth quarter as well as 2004 given the fact that you said your capex budget is going to come in to 1.8 to 1.9 billion, can you give us some guidance?

You did not miss this, we didn't provide guidance.

We have pointed out clearly, the bad debt issues that we spoke about last week, and we gave some guidance in terms of expectations for bad debt as a percent of revenues going forward.

And we estimated that bad debts would run probably nine to 9 1/2% of neat revenues, the balance of this year, and then we're expecting them to be somewhere in the 8 1/2 to nine range next year.

The other point that we had made is our charity care policy we would expect to start rolling out likely in the third quarter.

It will have some moving components as it will reduce revenues and actually reduce bad debts and have some margin overall impact and it will be a nest cost to the company.

But that will be rolling out partly this year, partly next year.

And then the third issue that we've noted since early this year are the outlier rule changes.

We're still waiting to see the threshold and final impact there but clearly we'll see -- would expect to see negative impact beginning in the fourth quarter of this year which will then continue through three-quarters of next year.

So those are the points we've made but again we're not providing specific EPS guidance this year and next.

So the long-term EPS guidance of mid teens growth, is that at risk or do you think that's still intact?

Well, it's obviously at risk for this year, and it's not going to happen this year but until we go through our strategic planning process and get some more data points on this volume issue, it's hard to say what 2004, 2005 is going to be.

So we're not prepared to issue you guidance on that.

Perhaps we will be actively, as I say, get some more data points on this.

And that will obviously, if we believe that this is going to slow from mid teens to low teens, or you know, 10% or some number like that, we will certainly give you our guidance on that.

And that will obviously affect this year's like how fast capital is deployed and what we do with issues like our free cash flow that I mentioned before such as dividend policy or stock buybacks or other alternatives.

So it's just too early to, after two quarters, to give you a definitive answer to that.

All I can say is what I've said in the past, is that you look at the long-term prospects of this company, talking five and 10 years, the changes in the demographics of the population coupled with the markets we are in, will drive increasing utilization.

And we think a bright future for this company.

But whether the turnaround in volume happens in the last half of this year or the first half of next year or some time later than that is impossible to know now unless you can safely predict changes in the economy and how fast the economy is going to grow and how fast employment is going to pick up going forward.

Okay.

Thank you.

All right.

And I tell you, on that note, I don't think there's a better place to conclude.

Out of courtesy to HMA we promised we'd be off the line so they can start their call in five minutes.

So we thank you very much.

Mark and I will be here the balance of the week and look forward to talking to all of you.

Thank you and have a great day.

This does conclude today's conference call.

At this time you may disconnect.