美國醫院公司 (HCA) 2003 Q3 法說會逐字稿

Good day and welcome to the HCA third-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, Steve.

Good morning everyone.

Welcome to our third-quarter conference call.

With me this morning are Jack Bovender, our Chairman and CEO;

Richard Bracken, our President and Chief Operating Officer;

Mark Kimbrough, Vice President of Investor Relations, and as usual, we have the majority of the Senior Management team based here in Nashville with us to help during the Q&A session.

This morning's call will contain some forward-looking statements as did the earnings release that hopefully you have all seen.

The forward-looking statements are based on management's current expectations.

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

As you have seen on pages five and six of our release this morning, we have listed a number of risk factors.

We think you should consider them.

We also encourage you to examine the other risk factors that we detail from time to time in our SEC filings.

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

As you heard from the moderator, we are recording today's call.

It will be available for replay and archived on our Website.

We also welcome those of you who are listening on the Website.

Thank you for joining us.

This call is the property of HCA Inc. and should not be recorded or rebroadcast without the written consent of HCA.

Let me also point out that in accordance with Reg G you'll notice the consolidated income statements for the quarter and year-to-date in today's release have been modified from prior releases.

These income statements conform with the Company's presentation in our forms 10-K and 10-Q filings.

Also in accordance with Reg G, we will be moving away from discussions of non-GAAP financial measures such as EBITDA, EBITDA margins, which obviously all of you talk about and focus on, but we will not be discussing those non-GAAP measures on this call or in future presentations and discussions with investors.

One other point of clarification on today's release, and I draw your attention to the next to the last bullet at the bottom of page two and it actually carries over to page three, it contains a lot of numbers.

I apologize for any confusion this may cause you, but we felt like we needed to give you all of the information we possibly could to help you as you look at the 2003 results for the Company.

As you can see, the guidance we are giving for 2003 appropriately is a GAAP EPS range, and that is different from what many of you use in your models and estimates.

So in addition to the gains and impairments, which we quantify in this paragraph, the EPS guidance for the year does include the second quarter increase of $106 million to our allowance for doubtful accounts.

I know some of you have excluded this bad debt increase from your models and estimates; however, this expense is included in our guidance.

It is a GAAP measure, and it should be included in your financial models and estimates for '03.

With that, I will turn the call over to Jack Bovender.

Thank you, Vic, and good morning everyone.

As I promised you on our second-quarter earnings call, I will use my time this morning to share with you some of the findings from our recently completed environmental assessment and how these findings will impact our future operations going forward.

Before I do this, however, I would like to ask Richard to provide some comments on the third quarter.

Richard.

Thanks, Jack, and good morning to all.

Given that time is short this morning and our agenda full, let me get right to business.

As usual, I will focus my comments on what we believe to be are the key issues that may concern you, and as always, we will attempt to answer any questions you may have about any aspect of our operations during the question-and-answer session that follows.

Generally speaking, the third quarter was in line with our expectations and recent trends with the exception of bad debt expense, and I will comment on that in more detail in a moment.

While we still have uncertainty regarding inpatient volume growth rates in the near-term, certain of our markets experienced very favorable trends.

Outpatient volumes continued to be under pressure, although our emergency services volume, diagnostic imaging, and our ambulatory surgery division posted solid results.

And for the most part, despite an increase in our bad debt expense, I was pleased with the management of operating expenses which adjusted well with volume fluctuations and revenue trends.

More on all of these in a moment.

The key operating results for the third-quarter are as follows -- consolidated net revenues increased 11 percent for the quarter.

This performance reflects continued stability in our pricing agenda, as well as the revenue generated by our new Kansas City hospitals.

The 11 hospitals we acquired in the Kansas City market on April 1st of this year contributed approximately $232 million to third-quarter revenues.

Adjusting our results to a same facility basis, net revenue for the third-quarter grew 6.9 percent.

Same-facility net revenue per adjusted admission increased 7.1 percent for the quarter, which is consistent with the second quarter results and slightly less than last year's third-quarter of 8.3 percent.

We believe that a growing level of charity discount is causing this moderation.

Please recall that earlier this year we recorded efforts to have all of our hospitals record as charity those accounts for individuals who qualify as having income within 200 percent of the federal poverty guideline.

This policy change continued to increase charity care write-offs in the third-quarter, as did the many other macroeconomic factors that you may be aware of.

That is the sluggish economy, increasing number of uninsured, and rate and service intensity effects.

Overall in the third-quarter we recorded a $67 million increase in same-facility charity care, which compares to first and second quarter increases of 59 million and 61 million respectively.

Same-facility inpatient commissions increased 2/10 of a percent in the third-quarter.

Monthly volume within the quarter was down 5/10 of a percent, down 2 percent and up 3.2 percent for the month of July, August and September respectively.

As you can see, patient volume growth continues to have much volatility, causing difficulty in projecting future trends.

Also, please remember that the third-quarter 2002 admission growth rate of 3.4 percent was the highest recorded during the year, making year-over-year comparisons more challenging.

We have reported in prior quarters our strategy of closing underutilized skilled nursing and OB units to create medical surgical bed capacity.

While most of these closures are now behind us, the volume loss associated with these does affect quarter-over-quarter comparisons.

Excluding skilled nursing and closures of the effect of OB units during the past twelve months, same-facility admission volumes for the quarter increased approximately 1 percent.

It is important to note that it does provide a prospective on the growth of our base business.

We continue to believe after a fair amount of study -- and Jack will provide some more details on this in a moment -- that the general softness in admission trends is an industry wide issue and related to macroeconomic issues rather than any deficiency in our strategic plan.

In fact, our studies indicate that we continue to maintain or grow inpatient care in most of our markets.

Obviously in certain specific markets, physician issues related to malpractice concerns, managed care contract disputes, new competition both in the inpatient and outpatient sectors have negatively affected patient volume.

Inpatient admission performance does vary widely across our markets, and admission growth has been particularly strong in our Dallas, Broward, North Central Florida and Jacksonville markets with growth rates for the quarter in these markets ranging between 5 and as much as much as 8 percent.

Patient admission volumes were soft in our Tampa, Houston, South Carolina and Dade County markets.

Outpatient Services growth rate showed mixed results.

For discussion purposes, please recall that when we define Outpatient Services, we group these services in three major categories.

First, emergency room visits.

Second, outpatient surgeries, which include those surgeries performed in our freestanding ambulatory surgery centers or ASCs, and those outpatient procedures performed in our hospital surgical units.

And third, all Outpatient Services such as laboratory, radiology, physical therapy, wound care, etc.

For the third quarter of 2003, same facility emergency room visits increased 2.9 percent.

While we have experienced emergency visit growth rates higher than this in the past, this was a fairly solid growth rate and exceeds what we experienced in both the first and the second quarters.

Overall same-facility outpatient surgery volume declined 2.5 percent for the quarter, but volume in our ASCs increased 2.3 percent.

I will remind you that one aspect of our outpatient surgery statistics that you may wish to consider is that our current method of counting outpatient surgery does not include non-invasive procedures such as endoscopies, [lipotripsy] (ph), and pain management treatments with have had a rather positive growth rate.

When both invasive and non-invasive cases are included, ASC volumes increased 6.8 percent in the quarter.

We believe our current ASC platform will serve us well in our development efforts.

We continue to pursue a strategy of adding ASCs on or near hospital campuses and are pursuing new opportunities for ASC development in existing markets but more distant from our campuses.

We think there's a fair amount of opportunity in our large urban markets for growth.

We remain comfortable with the managed care pricing environment.

Currently 62 percent of our 2004 contract negotiations have been completed.

Our 2004 book of business is being renewed at approximately 7 percent.

Now on the cost side.

Management of operating expenses, most notably labor and supplies which make up almost 70 percent of our cost structure, outperformed our expectations.

Salaries, wages and benefits expressed as a percentage of net revenue were 40 percent for the quarter compared to 40.6 percent in the third quarter of the prior year.

This represents an improvement of 60 basis points.

Adjusting for our Kansas City operations, which does not yet company offer wide productivity averages or benefit from full systems implementation, salaries, wages and benefits as a percent of net revenue for the quarter were 39.7 percent, an almost 90 basis point improvement.

Needless to say, we were pleased with the performance of our hospital executives in efficiently and effectively managing labor costs.

This result is even more meaningful given that both employee and patient satisfaction continued to be at record positive levels.

One component of labor costs were significant improvement was achieved was in contract labor levels.

Both utilization of contract labor and absolute dollars spent significantly improved in the third quarter.

Overall contract labor expense per equivalent patient day is down 27 percent from the first quarter level with nursing contract labor decreasing almost 30 percent.

On a dollar per equivalent patient day basis, contract labor is now at the lowest level we have experienced in recent memory.

We are most pleased with this result, not only because it is economically advantageous, but also because it indicates a more consistence workforce that is better able to provide higher quality inpatient service.

Additionally, the average hourly rate paid to employees on a same-facility basis increased 4.9 percent consistent with the decreasing trend we have been experiencing.

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

As a final note, total employee turnover for all employees is down from 24.1 percent annualized through September last year to 21.5 percent.

Vacancy rates for all employees are now at 6.5 percent and for nursing employees 9.9 percent, consistent with a decreasing trend.

In addition, our employee survey showed employee satisfaction at an all-time high with a Gallup score of 3.81 on a 5 point scale this year compared to 3.73 in 2002 and 3.38 in 1999.

Supply cost expressed as a percent of net revenue was 16.1 percent, unchanged from the third quarter of the prior year.

We are pleased that the many supply chain initiatives that we have been pursuing are allowing us to hold our own with this cost volume.

Other operating expenses stayed as a percent of net revenues with 17.5 percent compared to 17.4 percent in the prior year.

Adjusting for the Kansas City hospitals, other expense would have improved 40 basis points to 17 percent of net revenue.

We feel this is a reasonably good performance given our reduced volume and the fixed nature of many of these costs.

Cash collections remain strong in the quarter at 100 percent of trailing sixty-day net revenue less bad debt.

Our net days in AR remained at 64 days, which is flat with the last quarter.

Virtually all of our hospitals and 88 percent of our net revenue are now being processed through our 10 regional patient collection centers.

Relative to bad debt expense, the Company's provision for doubtful accounts increased to 10.3 percent of net revenues during the quarter compared to 8.3 percent in the third quarter of 2002.

We believe this increase is due to both an increase in the volume of self-pay of uninsured accounts, which have increased about 7 percent, and continued deterioration of their flexibility.

The difficult economic environment and associated unemployment levels, increasing co-pays and deductibles and the flow through of effective rate increases and service intensity will continue to put pressure on this expense line.

Due to these factors, we anticipate that the bad debt expense for the fourth quarter will approximate 9.5 to 10 percent and should moderate somewhat next year due to the charity care policy change.

Before I close, we are pleased to announce that in the third quarter we had two major capital projects come online.

First, in the Denver market, we opened Sky Ridge Medical Center.

This facility began operating in late August, and through September had already generated 483 admissions, 2600 emergency room visits and 6.8 million in net revenues.

Please note that we operate this system as a partnership, and these results are non-consolidating.

The first medical office building with over 120,000 square feet of rent-able space is fully leased, and a second medical office is now under construction.

Incidentally the second building is already 65 percent pre-leased. 800 physicians have now been credentialed and are members of the medical staff.

Needless to say, we and our Health One partners are most optimistic about Sky Ridge's future.

Also, in late August, we opened the 180 bed replacement facility for our Tallahassee community hospital.

With this replacement facility also came a name change to Capital Regional Medical Center.

Response to this facility has also been extremely positive.

In their first full month of operations, that is September, admissions were 20 percent over the prior year.

We continue to feel that our strategy of disciplined deployment of capital and attractive growth markets will continue to create market share growth and sustain a healthier future earnings stream.

I know Jack is going to spend some time talking to you about our operating and financial strategy, so I will close here and send that back to you Jack.

Thank you, Richard.

Each year our HCA management team and Board of Directors goes through a process to reassess our long-term outlook and to determine appropriate changes to our strategic plans.

We have completed this process over the past several months, and I want to share some of our findings with you.

This effort more than anything reaffirms that our core business strategy remains sound.

Our focus will continue to be on maintaining market leading positions in large, fast-growing urban and suburban communities generally in the Southeast and Western states.

We believe over the long-term our primary earnings growth will be generated within our existing markets due to a combination of population growth, increased utilization due to the aging of the population, and continued capital investments targeted at generating increasing returns.

We will continue to leverage our size and operating platform to improve efficiencies and patient outcomes.

We believe patient outcomes will increasingly influence physician and patient choices consigning healthcare delivery.

We will continually refine the asset configuration of the Company.

We will be an opportunistic, but disciplined, acquirer of hospitals in large urban and suburban markets with attractive growth dynamics.

Second, this year's analysis confirms we are gaining inpatient market share in most markets.

Inpatient services represent approximately 65 percent of our net revenues.

We are very well positioned competitively in this business.

While our inpatient volume growth has slowed this year, our results have been better than the industry overall.

With certificate of need requirements in our Eastern states, along with the large capital requirements of most inpatient businesses, we are confident of our ability to maintain or improve our current market position.

We are also prepared to respond to physician-owned niche hospitals with or without pending legislative relief.

Third, we recognize the need to enhance our operating model to compete more effectively in the outpatient area where barriers of entry are low.

Let me provide some perspective on HCA's outpatient business today.

A little over 35 percent of the Company's total net revenues are generated by outpatient services with the primary components of outpatient revenue being generated by outpatient surgery, outpatient imaging and emergency room services.

Over the past few years, we have made significant capital investments to expand our emergency rooms.

We are now well positioned competitively, and our ER market share is growing.

As we have told you previously, we have begun to step up our investments in ambulatory surgery centers, and we are beginning a similar strategy with respect to outpatient imaging in our markets where it is appropriate.

While a reasonable portion of our annual capital expenditures has been going to outpatient surgery and imaging, we believe there is an opportunity for us to make these investments more effectively and efficiently.

Going forward, we anticipate making more of our outpatient investments in freestanding facilities.

In addition, we anticipate making some acquisitions in outpatient services.

We are presently working on outpatient imaging acquisitions in key HCA markets.

To move more aggressively on an outpatient agenda, we are establishing a senior level operational unit for outpatient services.

As soon as possible, we plan to name a new group President for outpatient services.

We will build a support team for this new group, not unlike what we did with managed care back in 1998.

Overall our goal is to position HCA more aggressively in outpatient services and our existing markets and to compete more effectively for hospital-based and freestanding outpatient services.

The next item I want to discuss relates to hospital volumes both near-term and longer-term.

First, from a near-term perspective, we engaged a research group to help us understand better changes in volume growth in the first half of this year.

We selected two markets to study, Dallas and Denver, and interviewed more than 1100 individuals across both markets including employers, insurance companies and brokers, physicians and consumers.

Key findings of the study included over 90 percent of general practitioners and non-surgeon specialists interviewed believe that the economy has reduced patient frequency.

Approximately 80 percent of physicians interviewed feel the economy has caused patients to consider surgery alternatives or delays to procedures.

A significant proportion of consumers -- 38 percent in Dallas and 30 percent and Denver -- reported delayed doctor visits and procedures.

The three reasons they cited were, first, they could not afford the care; two, they had issues with their health insurance, and three, they were uncertain about their employment or the local economy.

This was one of the more interesting findings in that some people are reluctant to take time off from work to receive healthcare services because of job uncertainty. 55 percent of employers interviewed in each market made changes to their employee health plans within the first six months of 2003.

Of those who made changes, over 90 percent of both Dallas and Denver employers increased premiums, while 73 percent of Dallas and 45 percent of Denver employers increased co-pays.

In summary, this research concludes the soft economy and benefit plan design changes are leading to deferred use of healthcare services.

While I am not going to forecast or project when volumes will turn, I am confident they will over time as our economic recovery continues and as we begin to see employment grow.

Obviously we have very difficult admission comparisons in the second half of 2003; however, in the second half of 2003, our comps will get easier when we get into 2004.

As we continue to manage the cost side of our business effectively, when patient volumes do recover, there should be significant positive operating leverage.

Longer-term our environmental assessment estimates socio-demographics could drive HCA volume growth at approximately 1.5 to 2 percent per year through 2015.

For the U.S. as whole, it is estimated population growth along with aging will grow volumes by 1.5 percent annually.

Additionally, HCA's faster growing market locations are projected to add approximately 40 to 50 basis points to this volume growth.

Now with all this as background, let me share some actions we plan to take.

First, we're going to moderate our capital expenditures from $2 billion in 2003 to 1.8 billion in 2004 and to approximately 1.6 billion going forward.

These amounts, of course, exclude any acquisitions.

We believe this change is prudent based upon the recent volume softness and the fact we have re-capitalized most of our markets over the past four or five years.

We are not canceling any approved construction projects, but future projects may be deferred or built in phases.

Now with respect to financial policies.

The Company's cash flow from operations continues to be strong.

For the twelve months ended September 30th, 2003, cash from operations totaled $2.146 billion.

Excluding the government settlement payment, the cash flow from operations was $2.729 billion.

Secondly, our use of cash for government settlement is now behind us with our July payment to the Department of Justice.

As a result, our balance sheet should improve in the coming year post the DOJ settlement and the Health Midwest acquisition.

We peaked at a little over 57 percent debt to total capitalization early in the third quarter, and as of September 30th, we were at 56 percent.

Mid to late 2005, we planned to move our debt to total capitalization level from the mid-50s to the low 50s or high 40s.

As you know, HCA has utilized share repurchase as an integral component of its financial policies over the past seven years.

Since 1997, HCA has repurchased 226 million shares of its common stock at a total cost of $6.6 billion or an average price of $29.11 per share.

In April 2003, we approved a 1.5 billion share repurchase authorization.

As of September 30th, we have utilized $556 million of that authorization to purchase 16.8 million shares at an average cost of $33.17 per share.

While we have set no time deadlines, we expect to complete this repurchase plan in a judicious manner as dictated by market conditions.

We will be opportunistic in the timing of such purchases.

Going forward, share repurchase will remain an integral component of our financial policies.

The final component of our financial policies relates to dividends.

As I have indicated throughout this year, we are evaluating our existing dividend policy.

We have saw input from many of you over the course of this year, and I thank each of you for your input.

Our Board of Directors discussed dividends at its September meeting, and I have asked our Board's Finance and Investment Committee chaired by John McArthur, former Dean of the Harvard Business School, to continue to work with management and come back by early next year to me and the full Board with a recommendation.

You should expect to us to announce a dividend policy decision early in 2004.

Now I would like to make some comments regarding our earnings expectations going forward.

As many of you will recall, in 1997 we initiated a restructuring of the Company which included asset sales from spin-offs that were generally completed by the second quarter of 1999.

At that point, we established a long-term EPS growth target of mid-teens.

This target has served us well, although we actually grew over 20 percent in all but a couple of quarters since the target was set.

In the earlier years, we expanded margins faster than expected, and in more recent years, we grew revenues faster than expected.

Based upon our environmental assessment and our best assumptions going forward, we are now targeting long-term EPS growth of low double digits.

That is not to say that we expect low double digit EPS growth in every reporting period.

As in the past several years, we would expect to have some quarters they grow less and some that grow more.

Longer-term, the most significant factors that might affect earnings growth we believe are hospital volumes, uninsured levels or bad debts, and pricing both government and private.

More specifically, in the short-term, we have two earnings challenges we have previously noted in our public filings and statements.

We estimate the Medicare outlier change, which became effective October 1st, 2003, will reduce our Medicare payments approximately $12 million per month through September 2004 or approximately 4 cents per share per quarter beginning in the fourth quarter of 2003.

In addition, we estimate our charity care or financial discount policy which we put in effect October 1st, 2003 will reduce EPS in 2004 by approximately 3 to 4 cents per share in 2004.

As a result of the significant outlier and charity care changes along with increasing provisions for bad debts, including the $106 million pretax increase in bad debts recorded in the second quarter of 2003, we expect to report earnings per diluted share for 2003 of $2.56 to $2.60.

This includes all previously recorded gains and impairments.

We believe that the factors and trends that adversely affected our results in 2003 will continue in 2004 and expect earnings per share for 2004 to range from $2.85 to $2.95.

This assumes no significant gains, losses or impairments.

I hope you recognize we are going well beyond where we have historically been in an effort to be as transparent as possible during this somewhat less predictable time in our industry's history.

In summary, we have great assets.

We have excellent investment opportunities.

We have strong cash flows.

We have an excellent long-term growth outlook, and we have a prudent financial strategy that provides for a strong balance sheet and return of cash to shareholders through share repurchase or dividends.

With that, Vic, I will turn it back to you for questions.

Steve, if you could come back and poll for questions.

(OPERATOR INSTRUCTIONS).

Lori Price, J.P. Morgan.

I want to see if you can elaborate a bit more given that your bad debt ratio is continuing to rise.

Do you think there's a possibility you'll have to take a second charge to replenish your bad debt reserves?

Secondarily, can you elaborate on some of your efforts to try an improved collections?

Are you trying to redesign the process on the front-end collection effort to work with patients while they are in the hospital, or you doing more pre-registration before patients enter the hospital?

What are you doing differently to try and get your arms around this issue?

Thank you.

Milton Johnson, Senior VP and Officer, do you want to address the first, and then maybe Beverly Wallace will pick up on the collection front.

Sure Lori, Lori we do not expect that because of our change in the methodology for accounting for bad debts, where we are now performing at the hindsight on a quarterly basis rather than an annual basis.

And as a result, we should be getting the trends on a current basis, reflect the current trends, so we don't expect with a new methodology that we would be facing any additional special charges related to bad debts.

Beverly.

On the front-end piece, we have actually improved our collection rate on front end collections for approximately 40 percent year-over-year.

So we have changed that process.

We're seeing the benefits of that, and we will continue to see that grow.

We are also doing as much pre-registration as possible, and then on the back-end, we are focusing on settlement agreements with patients who can pay the balances in a more timely manner.

I think also our charity policy, once we implement that, we will have balances that are more attainable by our patients, and they will be able to pay more.

Great.

Thank you.

Darren Lehrich, SunTrust Robinson Humphrey.

I am wondering if you can give us some more flavor for your dividend policy for next year?

I guess I am just looking at your de-leveraging plans.

It appears that your priority for free cash flow at least next year and the next 18 months or so is depending on debt.

Is that an accurate assessment?

Maybe just if you could give us what your sense of an appropriate payout level is on the dividends?

What I can say about dividends, we have already said in this release today.

We have it under active study about what the right level of dividend payout should be for this Company given the dynamics going on in our industry, as well as the characteristics of this Company.

I would certainly not at this time jump in and prejudge a number.

It has not been decided.

We are just not being clever in holding it back.

It really has not been decided.

There are lots of scenarios that are being studied now.

So I guess everyone will just have to wait until the first quarter in which we will, in fact, announce an ongoing dividend policy.

I tried.

Thanks.

No harm in trying.

Gary Lieberman, Morgan Stanley.

Can you talk a little bit more about your strategy to make some of the strategic acquisitions of the Outpatient Services; specifically have you done any of these so far?

What is the typical, what sort of a structure, and what kind of guarantees or comfort do you get in that the participants that had started that outpatient facility don't move across town and start another one?

Thanks Gary, Jack you want to take that?

We have some projects under active study or negotiation right now.

You get to the heart of all of these matters obviously in any kind of situation in which you are going to buy an existing -- let's take as an example -- imaging center, group of imaging centers.

First of all, you want to make sure that your geographic footprint fits what you want in a specific area and these services are appropriate to what you want to do on outpatient basis.

Secondly, as you point out, it has got to be done in such a way that the people who you are buying the facilities from don't try to replicate it again.

So all those are being taken into account as we look at possible projects and study possible acquisitions.

We hope we will have some announcements in the not to distant future, but we are just not at a point to be discussing that right now.

I don't know if Richard wants to add some color to that.

Yes Gary.

Each outpatient discipline has its own set of features.

If you are looking at surgery centers, obviously our typical surgery center model has physician ownership in it, and generally part of that there are non-compete provisions within a given market.

If you look at an out-patient imaging center, those ventures are usually done with the radiologists, and often they include some sort of an employment clause or a non-compete as well.

So it looks a little bit different depending on the type of outpatient service, but there are plenty of opportunities to try to build those kind of protections in.

Kevin Fishback, Lehman Brothers.

It is actually Adam Feinstein with Lehman here.

I just wanted to ask a couple of questions here.

Just, first, housekeeping.

Give me some monthly volume numbers.

You went through them kind of quick.

I did not get those.

Can you give those very quick, and then I have a quick follow-up?

On the monthly volumes, the month of July Adam was down .5 percent.

The month of August was down 2.0.

The month of September was up 3.2.

Again, these are not adjusted for OB and snip closures.

These are just pure same facility numbers.

Again, we caution you that we are always hesitant to provide these.

I know we started the first quarter this year because there was a lot of interest in monthly trends, so we have done it now for nine months, but we step back and say they really don't mean much of anything.

You've got to be very cautious.

Don't -- if you will recall in the second quarter, June was a very good month to month relative to its first two months, and that did not mean a turnaround.

Again, you have seen that.

So volumes move back and forth for lots of different reasons, for which many of you have documented very well.

My question is the stop loss payments.

Obviously pricing has held up very well.

You are talking about having a majority of contracts negotiated for next year at the 7 to 8 percent level, but how do we think about that when we think about potential changes in stop loss contracts, and even if you can quantify what stop loss is currently in the current contract structure?

Beverley you want to take that.

We are continuing to see the desire from the payers to have some sort of collar around charge master protection for stop loss.

This is something as I have stated in previous calls we are not opposed to, and we are working with the payers on the language.

Our stop loss is, if you look at basically the incremental revenue that we are getting from stop loss, year-to-date we're running about 5 percent.

Our cases are running about 3 percent.

Both of those indicators fall well within the actual studies that have been done on what should hit the stop loss levels, so we feel very comfortable that our thresholds are appropriately placed.

We are working with our payers to give them that protection with the callers around charge master protection.

Adam, the only thing I guess I would add, when we cite a number as we did in Richard's comments that our pricing continues at a level of 7 percent that is our base pricing level obviously.

Obviously there are other components to it that work each way.

But just the base pricing is that 7 percent.

Okay.

Thank you.

A.J.

Rice, Merrill Lynch.

Good morning its David Supra for A.J.

Maybe if you can provide more detail on what is coming out of that CapEx expectation going forward?

Do you expect to spend $1.6 billion?

Percentage in terms of revenue generating CapEx versus maintenance.

All right thank you David, Richard you want to start that.

I will start and maybe Raj you can fill in with a couple of extra thoughts.

As Jack mentioned in his comments, the capital is moving from the 2 billion level this year to the 1.6 billion over the course of a couple of years.

To understand and also mention that we are not canceling any projects that have already been approved, but that is the fuse of how long it takes for these capital projects to work their way through the cash system.

How we are able to reduce it we think is twofold.

One, we have done a lot of capital spending in our market, and so the demand is slowing ever so slightly and I do say ever so slightly.

The hospital administrators never have an opportunity to spend money, but in general, the pace of projects coming through is slowing some.

The other thing that we can do in terms of moderating the number is phase projects.

There has been a tendency over the last five years -- we needed we had some catch-up work to do -- we would take on a full scope project all in one bite.

As we are going forward, we're able to approve portions or phases of a project and let them roll out sequentially over time.

That is a very manageable situation.

We think this is plenty of money to do what we need to get done.

One thing I might add as we look really look back at the projects we have completed, and I know Raj you have put some numbers together, if you could look at the last three years in terms of total dollars by market, just a couple of these just jump off the page.

In Dallas, we have invested over $200 million.

Denver, 188 million.

Down in the Panhandle of Florida, right at 180, and Tampa Bay, 140.

It goes on and on, so we really have re-capitalized many of these markets.

But I think that relieves us a little bit.

And Raj,if you would just mention the split between routine capital and overall capital.

When we look at in 2003, we look at gross capital of about 60 percent and routine capital at 40, but as we move forward, we are probably looking at more 55 percent growth and 45 percent routine as we move forward.

Ken Weakley, UBS.

I was wondering if you could quantify the degree to which you are taking market share, and given that market share gain, perhaps what are the competitors doing to offset the losses?

Are they beginning to cut price?

Are they trying to take doctors?

There must be some strategic response to the market share gains that you're generating.

Thank you.

I guess we can't really give you a global response on market share.

It is very market specific.

So maybe we will ask Jay Grinney and Sam Hazen for any particular thoughts you have in some of your markets.

Ken this is Sam Hazen, I think if I were to try to generalize what the competitors are doing, we are not seeing, first of all, any kind of trying to buy the business with price.

So from that standpoint, the revenue line has been somewhat preserved by the competitive tactics that have been deployed in most of our markets.

There are plenty of markets where our not for profit competitors are spending capital as we are to try to gain market share.

Most of their tactics are generally consistent with what we do.

It is about our service.

It is about trying to create access relationships with physicians and so forth, and it is really about who can outrun the other in those areas at the end of the day.

There is no significant tactic other than in some markets where not for profit competitors have chosen to syndicate components of their inpatient business with the physicians are there any dynamics that are changing in the marketplace.

I think a lot of what we are seeing from our share gain is the fact we are well-positioned in these markets.

As far as locations, we have multiple units, and we are well distributed geographically.

Couple that with the capital spending that we have historically put in place and the focus that we had on our physician relationships and our service, we have been able to pickup share we think.

So the tactics that our competitors are using generally consistent with what we are doing.

So that is pretty much what we see in our markets.

The story in the Eastern Group is very similar to what Sam just discussed.

Obviously we have the seal in protection so we don't see the specialty hospital phenomenon that we do in the Western Group.

If you look at just our top six markets, which represents about 50 percent of our cumulative EBITDA, every market has grown in market share from as little as 20 basis points to as high as 50 or 60 basis points with the exception of Nashville, and that is because of the situation we have with Blue Cross.

But we are not seeing any of our competitors going out and trying to buy market share.

We have got one situation down in Broward County where we compete with some large not for profits.

That's probably the only exception where they are under pricing the market.

The rest of our markets I think everybody is competing pretty logically.

Our situation is very similar, and we are seeing good market share growth, and I think a lot of that is attributable to the capital we have invested and the focus that we have been putting on physician recruitment and building new programs and new services.

Jay Thank you.

And I know you meant to say when you said 50 percent of your earnings, not that other word that you used.

Thank you.

Sheryl Skolnick, Fulcrum Partners.

I have a half of a question and another question.

On the first, the half of a question is -- and I don't mean this facetiously but just to reiterate -- the September June numbers do not adjust for timing differences and holidays during that month.

The September monthly numbers I am sorry that you gave.

Absolutely.

We make no adjustments, and again, that is why those numbers look like they do to a large degree.

If you'll allow me to ask another question.

Could we go through what the cash flow was before the government settlement over the last 12 months and also for the third quarter?

Mark, go ahead.

Can they hear you?

Sheryl, I think Jack said in his comments it was 2.7 billion.

Right, Jack? 2.729 excluding the government settlement. 2.146 with the government settlement.

If I did the math correctly, that is about 583 million of government settlement?

That's also net of tax benefits.

That is why it does not equal the actual supplement.

So that's why it does not dovetail with the 603 I think in the fourth quarter of last year that was paid at some point and then the 250 that was in the second quarter?

Are those the right numbers?

You have the correct gross numbers, and then the reason it does not add back 100 percent is we have to take out the tax benefits when you take the government settlement out.

So it nets out to the net number that you computed.

Okay.

Fine.

So does that mean that the cash flow in the quarter was somewhere around $618 million?

Third quarter net of the government settlement approximately $715 million.

715?

Okay.

Very good.

Thank you very much.

Bruce Wilcox, Cumberland Associates.

I thought the characterization of the strategic plan had a central theme of focus.

So my question for you is how about some of the items like the affiliates that are carried in the equity method, the non wholly-owned securities that show up on the minority interest line?

Insurance subsidiaries?

What thought or plans do you have about further rationalization of the capitals committed in these various activities?

The prospect for maybe the equity and affiliates turning to a positive number, not a $200 million annual loss?

The number you must be looking at is the minority interest expense.

That would be a deduction because those non-whollyowned ventures are consolidated, and what we are doing with minority interest expense is taking out the earnings that we don't own.

I understand that, but I'm also talking about the $50 million equity in earnings of affiliates higher up in this in the P&L?

Speaker: I am sorry.

That is earnings.

The reason it is bracketed in that line is we are grouping that with expense item -- (multiple speakers).

That is bracketed, so that is actually earnings coming in from those -- (multiple speakers).

The question if I can just broaden it, you have got a geographic focus in the Southeast, etc. in the United States.

I was wondering where your European operations -- if I could maybe broaden the question as to what additional opportunities are there to high grade the deployment of capital?

I am sorry.

I missed the last thing. (multiple speakers)

To further focus -- the question was additional opportunities to high grade the deployment of the capital in addition to what you articulated.

I think I think we do about as good a job as is possible in rationalizing where we put the capital.

We don't put it into low growth under performing hospitals.

We are constantly rationalizing our portfolio as you know.

We don't -- at this time, we're not selling a lot of hospitals, but we have been net sellers, and we have spun out two companies over the last four or five years.

So we are constantly, as I have said in the past, looking at pruning our portfolio.

But it is always, as you look across the portfolio, you have got to determine where you are going to put your capital because the growth opportunities and market opportunities, you have also got to look at some of your facilities that don't have that growth picture but are strong cash flow generators that fund the rest of the investment portfolio.

So I think we are very deliberate and focused on doing that.

When we talk about a disciplined acquisition strategy where I think we have also been disciplined about how we view our portfolio and how we prune that portfolio from time to time.

Maybe another slant on that is how to make that capital spend go farther.

We talked a little bit about outpatient development, but fundamentally where that leverage occurs is when we can get additional volume increases.

And although there are no magic answers to that or silver bullets, we have pretty comprehensive plans built hospital by hospital, market by market on how to properly grow the volumes in those areas supported with the proper kind of management metrics, incentive compensation, programs, all those kinds of things that our management team is doing on a day-to-day basis to make those volume numbers come alive.

That at the end of the day is what is going to drive the yields off these capital spends.

I think we have shown you on our investor days over the last couple of years that the proof of the pudding in all this is that the return on invested capital and return on equity of these projects that we have put in service over the last two to three years has been greater than the company average.

I much appreciate it by the way.

Thank you very much.

Bruce, thank you.

Maybe a couple of more questions, and we will close out.

Ellen Wilson, Sanford Bernstein.

I was wondering if you could walk through some of your insight on how you get to your long-term EPS growth, low double-digit level.

On specifically, how much do you basically assume is organic normalized top-line going forward versus margin improvement versus what I would call other return on cash flow deployment?

Ellen let me just set the tone here a little bit.

Again, the long-term low double-digit target, we have not gone through and provided specific components.

If you really look back at the early years when we set a mid-teens target, sometimes the growth was driven more from profit margins.

The growth in other years was driven more from a revenue line.

So they are moving components as you look at periods of time.

As we look at this, I guess we could get specific if we were talking about next year or the following year.

But as we look at it longer-term, we look more broadly at the fundamental opportunities in this business.

Clearly there will be years where it will be more top-line driven than others.

I am not sure how much more specific we can or should be on that.

Jack?

No.

I think you have framed the issue.

As we look at our situation going forward and the volume picture that we see right now, we think it is prudent to scale back expectations somewhat.

We did not have this year the kind of growth picture we had last year and don't expect to see it in 2004.

In addition to that, we're taking some significant hits with outliers.

It is still unclear of when the noninsured situation is going to at least ameliorate somewhat.

So I think it is prudent to think about a company going forward even with a reasonable and prudent share repurchase that looks like a company that grows in the low double-digits and not in the mid-teens.

I think that is what our expectations are looking out.

Now does that mean that hopefully we may beat that number in quarters and maybe years in the future, just as we beat the mid-teens number?

Well, yes, we are hopeful.

But that would be predicated on a much more positive volume picture going forward.

Other issues, for instance, some bounce back in outlier payments as an example in fiscal 2005 for the government to make up for this significant cut in outlier payments in 2004.

As you well know, there are a lot of moving pieces in this, and we are just trying to set expectations that take into account all of these moving pieces.

We are not trying to paint a scenario of doom.

I think there are literally thousands of companies in this country that would love to have a low double-digits predictable growth rate going forward.

So this is not a picture of doom, and it is not a picture that just takes into account all the negative trends in our business.

A realistic appraisal done over several months as part of this strategy and planning session that culminated with the Board, that really looks at our business on a realistic basis going forward.

That is what we're trying to do with you.

We try always to be dependable and transparent in what we tell you, and that is what we're trying to do here.

We are obviously hopeful that we can beat these numbers going forward, but these, at this point in time, these numbers; these estimates are the best expectation of what our business looks like for the future.

We appreciate that question.

One last question.

Andrew Bhak, Goldman Sachs.

You guys have identified a debt to cap target in 2005 of low 50s to upper 40 percent.

A couple of questions.

One, what does this compare to or equate to in terms of debt to EBITDA target?

Secondly, I am just trying to understand more fully your thinking about potential dividend increase, and I am not trying to get to the yield itself, but I am trying to understand how you think about it.

What is the rank priority of achieving that leverage ratio target relative to a dividend yield increase?

Is that dividend increase secondary to achieving that target?

And then finally, if we think whatever the ultimate dividend yield is to -- I take it that this is largely the output of an internally driven and financially driven process for the calculation or estimation.

But I am curious, are there any external factors that you dial into you are thinking about that?

For example, market yields or other healthcare stocks or pharma stocks or anything like that?

That is a lot to cover.

First of all, there is no such thing as debt to EBITDA.

We are not allowed to talk about EBITDA.

It is a non-GAAP measure, and Vic is sitting beside me and would cut my head off if I tried to answer that question.

So sorry, Andrew.

Good try.

Also good try on trying to get to the dividend and how we are looking at it.

We are looking at it from all viewpoints.

There is not a rank priority as far as it is more important for us to get to the, say, low 50s on debt to total capitalization, or it is more important for us to buy back X number of shares of stock.

This is I go back to what I said before, a strong cash flow generating company.

The government settlements are behind us.

That gives us a much clearer view of what our expectations can be from a cash flow generation aspect.

And so, we believe, as we adjust our long-term earnings growth targets and look at the cash flow, we believe that it is very prudent and in the shareholders interest to balance, to look at a balance between debt to total capitalization and how we get there, a dividend policy, as well as an ongoing share repurchase program that helps to manage the share count going forward.

So all of that is being cranked into the equation.

A lot of thought has gone into these issues, and we will, as I said, talk about a dividend policy sometime in the first quarter of 2004.

I am sorry I cannot get any more definitive than that.

We are not trying to -- we obviously looked across all industries and looked at similar companies as far as payout ratios and dividend yields, but that is not what is driving this.

What drives it is our own internal view of what is in the best interest of the shareholder looking at it from a total return viewpoint.

So that is essentially what we are in the last parts of the process and doing right now.

Okay.

That is helpful.

Andrew, thank you.

I want to thank everyone for being on this call.

Mark and I will be around all day and all week should you need any follow-ups.

Thank you very much.

This does conclude today's conference.

Thank you for your participation.

You may now disconnect.