美國醫院公司 (HCA) 2003 Q4 法說會逐字稿

Good day everyone and welcome to the HCA fourth quarter year-end 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.

Good morning everyone.

Welcome to today's call.

With me as usual this morning, Jack Bovender, our Chairman and Chief Executive Officer;

Richard Bracken our President and Chief Operating Officer, Mark Kimbrough, Vice President of Investor Relations and as usual, we have most of the senior management team based in Nashville here on the call to assist during the question-and-answer period.

This morning's call will contain some forward-looking statements based on management's current expectations.

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

Hopefully, everyone has the release that was issued this morning.

If you look at pages 5 and 6 of that release, you will see a number of risk factors that we think are significant and those that you should consider.

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 these statements, whether as a result of new information, future events or otherwise.

A reminder that this call will be available for replay and will be archived on our website.

Finally, the call is the property of HCA and should not be recorded or rebroadcast without our consent.

I would like to make just a couple of quick points before I turn the call over to Jack and Richard.

First, we reported GAAP earnings per diluted share for the fourth quarter of 63 cents.

Included in the GAAP results is a 5 cent per share favorable change in estimate related to Medicaid cost report balances for cost report years 1997 and prior.

You will see this clearly identified as a separate line on our income statement.

It is actually captioned "settlement with government agencies."

The amount of that settlement is $41 million pretax, 25 million after-tax, or 5 cents per share.

For the full year 2003, we reported GAAP earnings per share of $2.61.

And in addition to the 5 cents I just discussed, you may recall in prior quarters of 2003 recorded gains on sales of facilities totaling 10 cents per share, and we also recorded impairments and investigation-related costs totaling 17 cents per share.

And if you go to page 7 of our earnings release, you will see a clear reconciliation of all of these numbers for the quarter and for the year.

Our earnings per share for this year is in line with the Company's October guidance, which was $2.56 to 2.60 per share, and that was before any fourth quarter impairments or the gains, like the 5 cent Medicaid settlement.

One other note.

We have scheduled HCA's annual investor day here in Nashville for May 13th.

We will begin around noon and conclude with dinner that evening.

I hope that many of you will put this date on your calendars and visit us here in Nashville.

With that, I will turn this morning's call over to Jack Bovender.

Thank you, Vic, and good morning everyone.

I'm going to start this morning by stating the obvious. 2003 proved to be a very challenging year for the U.S. hospital industry on two fronts.

First going into last year, few if any would have predicted the significant volume softness hospitals throughout the country saw beginning in January of 2003.

Second, few if any anticipated the soft economy, high unemployment levels and other related factors would drive such an increase in the number of uninsured patients entering America's hospitals.

These two factors challenged all hospitals and hospital organizations, including HCA.

Looking back over the year, I am pleased to say our hospitals, their local management teams, along with the HCA senior management group here with me today, responded very well to these sudden and unpredicted operating challenges.

I would love to tell you both of these issues are behind us, but that is just not the case.

While our fourth quarter hospital volumes were a little bit better than the previous three quarters, they have not returned to pre-2003 rates of growth.

As I have told many of you, I will not predict when volume growth might return to formal levels, but our locations in high-growth communities and our continuing reinvestment in our markets, along with nation's demographics will serve us well long-term.

The good news is our management teams have proven their ability to adapt and produce solid results in the face of these volume fluctuations.

With respect to the growing number of uninsured in the United States, we recognize this as something HCA alone cannot fix.

As we all know, this is a major national issue which needs to be addressed by federal and state governments, employers and all in the public and private sectors.

We hope to participate in this dialogue over the coming months, both as a health care provider and as a large employer.

I might add that we believe HCA's charity care and financial discount policy, which we initiated in 2003, is the responsible thing to do to help uninsured patients with financial needs.

It alone, however, does not fix the problem facing this country.

Richard I know will be dealing with this with more specific comments on HCA volumes, charity care and bad debts, so I will leave that to him later.

Let me share a few additional observations of mine about the past year.

I believe the most significant highlight of the year was the reassessment of our long-term outlook and strategic plan, which I discussed with you on our third quarter earnings call.

As you may recall, we've reaffirmed our core business strategy to focus on maintaining large, market-leading positions in large fast-growing urban and suburban communities, primarily in the South and West.

We've recommitted ourselves to investing significant capital in our existing communities, approximately $1 million in 2004 and $1.6 billion in 2005 and annually thereafter.

We also made the strategic decision to restructure and move more aggressively in outpatient services.

You will hear more on this from Richard and Marilyn Tavenner during 2004.

We also significantly stepped-up our efforts in funding for our patient safety and services agenda.

We are convinced this will increasingly differentiate HCA hospitals in the coming years.

Clearly, one of the year's highlights was our purchase of 11 hospitals in Kansas City last April 1st.

We have had some nice wins there already, and I continue to believe that this will be a great market for HCA in the coming years.

One highlight on my list that might not be on yours is the completion of our third year of the Company's corporate integrity agreement.

And the good news here is that there is no news.

In today's environment, this CIA and the process is related to it serve us well.

We also resolved a significant amount of litigation last year, including our final DOJ issues and shareholder suits.

More recently in January, we won a summary judgment on our Salt Lake City antitrust dispute with Iasis (ph).

Now let me move to a couple of financial policy highlights.

As we promised on our third quarter call, the Company's Board of Directors completed its dividend evaluation and this morning, we announced board approval of an increase in HCA's quarterly dividend from 2 cents per share to 13 cents per share.

Annualizing this quarterly dividend to 52 cents, this represents a yield of approximately 1.1 percent on yesterday's stock price of approximately $46 and a payout of approximately 20 percent of 2003 net earnings.

We believe this is an appropriate payout to our shareholders at this time.

The change in the tax law this past year has most definitely enhanced the attractiveness of cash dividends as a means of providing increased and more predictable returns to our shareholders.

The anticipated strength of the Company's cash flows enables us now to pay a meaningful dividend while continuing to reinvest in our communities, strengthen our balance sheet and maintain our commitment to share repurchase.

With respect to our share repurchase in 2003, we bought back a little over 31 million shares for about $1.1 billion.

We repurchased a little over 360 million in the fourth quarter and entered 2004 with a remaining board authorization of $600 million.

Since 1997, we have repurchased nearly $7 billion of our stock at an average price of $29.51 per share.

As we spoke with many of our shareholders during the past year, it was clear that many of you were increasingly interested in total return and that a meaningful dividend and share repurchase were not mutually exclusive.

We obviously got the message.

Let me close by reiterating my comments back in October on our third quarter call.

First, our long-term EPS growth target has been established at low double-digits and second, our guidance for 2004 remains in a range of $2.85-$2.95 per share.

With that, I will turn it over to Richard.

Thank you, Jack, and good morning to all.

As I reflect on the fourth quarter, I believe our operating results can be summarized as being in line with our expectations and recent trends, with the exception of bad debt expense.

In-patient volume growth in the fourth quarter improved from recent quarters but has not returned to the levels we experienced in the 2000-2002 period.

While the admission growth rate improved for the quarter, a significant portion of this quarter's volume growth, over 50 percent, were pulmonary admissions that we believe are a result of the much reported 2003 flu season.

Outpatient volumes continue to show mixed results, hospital-based outpatient surgery volume was down, but both our emergency departments and ambulatory surgery division posted solid results.

As I reported last quarter, with the exception of bad debt expense, the management of all of our other operating expenses was effective and adjusted well with volume fluctuations and revenue trends.

Other key operating results for the fourth quarter 2003 were as follows.

Consolidated net revenues increased 11.4 percent for the quarter.

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

Adjusting our results to a same-facility basis, net revenue for the fourth quarter grew 7.4 percent.

The 11 hospitals we acquired in the Kansas City market on April 1st contributed approximately 234 million to fourth quarter revenue.

In previous quarters, we reported that Kansas City operations were approximately 1 cent dilutive per quarter.

In the fourth quarter, the Kansas City operations were about 2 cents dilutive to earnings.

This slight deterioration was due to increasing bad debt expense similar to what we have experienced elsewhere in our company.

For the year, Kansas City operations were 4 cent dilutive.

We are however most pleased with the progress that is occurring in the market.

Patient volumes have stabilized and in some facilities are increasing, labor issues are improving and capital investment strategies are well underway.

As you may recall in May of 2003, we implemented our charity care policy, which provides 100 percent discount for those nonelective patients who have incomes at or below 200 percent of the federal poverty guideline.

As a result of implementing this policy along with other macroeconomic factors, charity discounts rose $45 million from 156 million in the prior year's fourth quarter to 201 million in the fourth quarter of '03.

For the entire year, charity care write-offs were $821 million, up almost 42 percent from 2002 levels.

The second phase of our charity program, which allows for a financial discount for nonelective patients who qualify as being between 200 and 400 percent of the federal poverty guideline was implemented October 1, 2003.

Due to the qualification timeline, we did not see a material impact during the fourth quarter of 2003 for this phase, but do expect to see this impact of bad debt and charity levels during '04.

As you know, effective October 1, regulatory changes occurred in the Medicare program which resulted in a reduction in the Company's Medicare operating outlier (ph) payments.

During the fourth quarter, the Company received operating outlier payments of $22 million, compared to $53 million in the fourth quarter of 2002.

This reduction is slightly less than the prior estimate we provided.

Accordingly, net revenue per adjusted admission increased 5.7 percent for the quarter, down from our year-to-date run rate of 7.5 percent.

The impact of our new charity and financial discount policy, reductions in Medicare, operating outlier payments and the low intensity nature of the increased number of pulmonary admissions reduced our NRAA growth.

Despite some slowing in this rate, we remain comfortable with the stability of our pricing.

Admissions increased 5.7 percent in the fourth quarter.

Same-facility admissions increased 2.1 percent in the quarter.

Monthly volume on a same facility basis within the quarter was up 9/10 of a percent, up 3/10 of a percent and up 5.2 percent for the month of October, November and December, respectively.

As can be seen, patient volume growth continues to experience some volatility causing difficulty in projecting future trends.

Also, please recall that in the fourth quarter 2002 and for the month of December 2002, same facility admission growth was 3 percent and 6.4 percent, respectively, among the highest recorded that year, making year-over-year comparisons challenging.

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

While most of these closures are completed, the volume loss associate with these closures does affect quarter-over-quarter comparisons.

Excluding skilled nursing and closures of some of our OB units during the past 12 months, same facility admission volumes for the quarter increased approximately 2.6 percent.

This is important to consider since it does provide a perspective on the growth of our base business.

Admission growth by payer did show some change.

In the fourth quarter, Medicare admissions, which account for 39 percent of our total admissions, increased 4.9 percent and uninsured admissions, which account for approximately 4.5 percent of our total admissions, increased 11.6 percent.

All other payers, which is primarily managed care, declined 4-10ths of a percent.

As I mentioned earlier, outpatient service growth rates once again showed mixed results.

For the fourth quarter of '03, emergency room visits increased 14.6 percent on a reported basis and 10.6 percent on a same facility basis.

Clearly, these robust growth rates reflect the early and strong flu season and we do not expect this rate of growth to continue.

Pulmonary related visits accounted for approximately 50 percent of the ER volume increases in the quarter.

Overall, same facility outpatient surgery volume declined 3.2 percent for the quarter with surgical volume in our free-standing surgery centers, or our ASCs, increased 1.3 percent in the quarter.

I will remind you that one aspect of our outpatient surgery statistic that you may wish to consider is that our current method of counting outpatient surgeries does not include noninvasive procedures, such as endoscopies, lithotripsy and pain management treatment, which all have had positive growth rates.

When both invasive than noninvasive cases are included, AFC volumes increased 3.3 percent in the quarter.

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

As announced last quarter, we're now involved in efforts to strengthen and enhance our outpatient services strategy.

As I've shared with many of you since that announcement, we view this as a refinement not a major overhaul of our approach.

HCA is a major player in the outpatient services market.

Over 37 percent of our revenues or almost $8 billion are derived from outpatient services.

For the most part, our opportunities we feel are in three areas.

First and foremost, in operating our existing units in a manner more consistent with the retail nature of the business, that is increasing the acceptability to and convenience of the service to the patient and the predictability and efficiency of the service for our physicians.

Secondly, to build or buy outlets that improve our market presence and thirdly, to develop a management structure that concentrates and is rewarded based on the success of outpatient services.

This will require a careful separation but close coordination with our hospital executives.

We believe if properly executed over the coming years, this strategy, considering a combination with our solid market physicians (ph), managed care relationships, extensive medical community relationships and management infrastructure will serve us well and improve our competitive position.

With regard to pricing, we remain comfortable with the managed care pricing environment.

Currently, 80 percent of our 2004 contract negotiations have been completed and 37 percent of the 2005 contracts at an average rate increase of approximately 7 percent.

Interestingly, we've also completed 15 percent of our 2006 book which reflects our recent approach of negotiating more multiyear contracts.

Although it is early in the process and much could change, current 2006 rates are at levels similar to 2004.

On the cost side, operating expense management, most notably labor and supply utilization, which comprised almost 70 percent of our cost structure, was favorable.

Salary, wages and benefits expressed as a percentage of net revenue for the quarter was 39.6 percent compared to 41.1 percent in the fourth quarter of the prior year.

This represents an improvement of 150 basis points.

Adjusting for Kansas City operations which does not yet operate at companywide productivity averages or benefit from full systems implementation, salaries, wages and benefits as a percent of net revenue for the quarter were 39.4 percent, an almost 170 basis point improvement.

We were pleased with the performance of our hospital executives this year in managing labor costs, especially given the monthly swings in volume.

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 where once again significant improvement was achieved was in contract labor levels.

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

Overall contract labor expense per equivalent patient day is down 33 percent from the first quarter level.

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

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

Additionally, the increase in average hourly rate paid to employees on a same facility basis held at 4.6 percent for the quarter, consistent with the favorable trends we have been experiencing throughout the year.

Total employee turnover was 20.1 percent for the year compared to 22.8 percent in 2002, while nursing turnover improved to a 16.8 percent compared to 17 percent in 2002, the fourth consecutive year of improving turnover rates.

Supply cost expressed as a percent of net revenue was 16.5 percent, up slightly from the quarter and the prior year.

Supply cost per adjusted admission increased 8.8 percent in the fourth quarter and 7.6 percent on a same facility basis.

We have been pleased with the success of many supply chain initiatives we had been deploying, such as division-based contracting, standardized operating room and cath lab procurement procedures and improved success with our commodity pricing that are allowing us to hold our own in this area.

Other operating expenses stated as a percent of net revenues were 16.9 percent compared to 16.8 percent in the prior year.

Adjusting for the Kansas City hospitals, other operating expense would have improved by 40 basis points to 16.4 percent of net revenue.

This is consistent with what we experienced in the third quarter and a reasonably good performance, given the fixed nature of many of these costs.

Cash collections remained strong in the quarter at 98 percent of trailing 60-day net revenue less bad debt and was 102 percent for the year using those same metrics.

As historically has been calculated, net days and AR at December 31 were at 63, the same as last year.

Beginning with the fourth quarter 2003 and for future periods, we will base the AR day calculation on net accounts receivable divided by average daily net revenue less bad debt expense over the last three months.

Net days in AR computed on this basis were 57 at December 31, '03 and 56 at December 31, '02.

We believe this calculation allows for greater transparency.

Virtually all of our hospitals and 90 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 11.4 percent of net revenues during the quarter compared to 8.6 percent in the fourth quarter of 2002.

This represents an increase of $205 million.

This was driven by an increase in uninsured admissions of 11.6 percent, calculated on a same facility basis.

Also, uninsured ER visits grew on a same facility basis by 23.6 percent.

As of December 31, 2003, HCA's total accounts receivable was $5.745 billion, of which $3 billion is attributable to the uninsured co-pay and deductible accounts.

The reserve on the balance sheet for this $3 billion receivable is at 2.65 billion, leaving only 350 million unreserved for the uninsured and co-pay and deductible accounts, which is in line with our recent collection experience.

Going forward, our best estimate of bad debt expressed as a percentage of net revenue will be on the 10-11 percent range.

Clearly, there are a number of factors which could affect this rate.

In our view, the greatest risk associated with this estimate is with any payor mix shift that may occur or the rate of growth of uninsured revenue relative to other payors.

Although (indiscernible) collections have improved 32 percent over the prior year, we're implementing an action plan that includes a review of current registration and collection processes to determine what other types of financing opportunities, settlement campaigns and collection procedures could be implemented to enhance the collection of co-pays and deductibles.

However, for the truly uninsured, improved collection processes are not the issue or the solution to the problem.

Increasing numbers of the un- or underinsured and the concomitant bad debt maturity levels that are created are an industrywide issue and solutions will come from improvements in providing health care coverage for the uninsured.

Our collections -- our insurance collections do remain strong with less than 19 percent of those receivables aging past 90 days.

Before I close, let me take a moment to mention a few other items.

I would like to welcome and introduced Marilyn Tavenner, who was recently appointed as president of outpatient services.

Many of you have met Marilyn in her past role as president of the central Atlantic division and you know the strong clinical and business perspective she will bring to this new position.

I would also like to congratulate Phil Robinson, who has accepted the central Atlantic division president's position, taking over for Marilyn and is being promoted from our FK medical Center in (indiscernible), Florida.

I would also like to congratulate the staff at Medical City Dallas for its recent recognition for the American Nurses' Credentialing Center as a magnet hospital program.

For many of you who may not know, this is a preferred workplace designation which recognizes best nursing employment practices and quality patient care system and has only been awarded to less than 100 hospitals nationwide.

Let me conclude by indicating that our performance at our recently opened Skyridge facility in Denver and our Stonecrest facility in the Nashville area are exceeding our expectations both in terms of patient volume and earnings and that we are most excited about the recent (indiscernible) approval of our certificate of need to proceed with the development of a new facility in the suburbs of Atlanta.

And with that, back to you, Vic.

Richard and Jack, thank you very much.

Before we get to questions, I want to just correct one number, it's a very minor number.

But Richard when you're talking about cash collections, net revenue less bad that, I think you said 102 percent.

It is actually 100.2.

Very minor, but I want to make sure everybody who tracks that number has that right number for the period.

Felicia, if you would come back on the line, we would like to poll for questions.

I would encourage everyone to hold your questions to one at a time so that we can accommodate everyone on the line that has questions.

Thank you.

(Operator Instructions).

Lori Price, J.P. Morgan.

Thank you.

Can you maybe elaborate a little bit more on the component part that support your bad debt ratio rise?

I know you said that the uninsured admissions were up 11.6 percent in the quarter.

Can you tell us what happens your collection rates on that uninsured population when you look at third quarter versus fourth quarter performance?

And also, given that the unemployment rate has now stabilized and has started to fall, and that job losses have stabilized, would you not expect the uninsured population to fall over time?

And if so, why are you guiding to a 10-11 percent bad debt ratio, which is consistent or even higher than the average of what you experienced in 03?

I think you may have been on your speakerphone, but we got quite a bit of echo, but I think we did hear the question.

I'm going to go ahead and ask Milton Johnson, Sr.

VP, Controller, Chief Accounting Officer to start it;

Beverly Wallace, who oversees our collections may want to chime in and help.

Milton?

Sure.

You are right. (indiscernible) uninsured admissions were up 11.6 percent on a same facility basis in the fourth quarter.

And I believe the key reason basically also the outpatient area, uninsured ER visits were up in the neighborhood of 23-24 percent in the fourth quarter.

Both of those stats are significantly greater than our annual run rate.

So we saw a real increase in the uninsured revenue in the quarter, and that drove the increase in bad debt.

With respect to the change in the collectibility percentage, that contributed some of the problem, but was secondary to the payor mix.

The collectibility percentage in the fourth quarter deteriorated 130 basis points where now the collectibility percent of 11.7 at the end of the third quarter, we were at 13 percent.

So we did have some deterioration there.

But clearly, it was a payor mix issue in the fourth quarter.

With respect to our guidance, that is our best estimate.

Your comment about the economy improving and unemployment rates improving, we are hopeful that that is the case in '04.

We have not, however, seen that yet in our numbers, so we are not assuming that that is going to happen, so we have basically looked at the run rates in '03 and said that that level would continue into '04 and estimating where we're going to be as a percentage of net.

Okay, thank you.

Tim Lane (ph), Argus Partners.

I just had one question.

It sounds like you are maintaining your 2004 guidance, despite a little bit worse bad debt expense in the most recent quarter than in the prior quarters.

So I was just wondering if you could reemphasize what pieces of your business are going better than they were earlier this year, such that we can have a little bit worse bad debt expense, but be able to maintain our guidance?

Jim, thank you.

Richard, do you want to address that?

When I look at our revenue production for next year, obviously, as I mentioned in my remarks, we feel pretty good about the overall pricing of our business, our managed care book.

But I think more importantly, we are anticipating that our volumes will strengthen as the capital investments that we have made over the last years begin to come online and hit their stride.

What we went through the budget process, we were careful to identify how we saw the base business moving from a volume perspective, and then add additional volume, incremental volume increases for the capital investments of the projects that we're bringing online.

So really when we think about what is going to step up and be more advantageous for next year, I think it's going to be on the volume side of the equation because of the capital investments.

Jim, I might add a couple of other things too.

Clearly, the Kansas City dilution of roughly 4 cents this year we think will get a little better next year as I look down to Sam Hayes (ph) and he is smiling.

We clearly think, although we think it could still be dilutive in '04, we think it will be less dilutive.

And the one other point, although not a big number in '04, the Medicare bill clearly had some favorable adjustments to hospital payments.

And rather than a negative adjustment, which many had contemplated, we get a small positive.

And then in the one other piece of the Medicare bill that may not have short-term consequences, but it helps a little bit, is the moratorium on physician-owned specialty hospitals.

So I think a number of those pieces -- and then market by market, we have some real strength, too.

One other thought on the expense side of the equation.

We are forecasting in our budget a slight increase in our labor cost.

And to the extent that they stay on the current trend rate, there might be a little bit of accretion in that as well.

Gary Lieberman, Morgan Stanley.

Thanks.

If you could comment quickly on the weakness that you saw in the managed care population volumes.

Do you have any thoughts on what specifically or even generally might be causing that?

I will take the first shot at it; maybe I can let (indiscernible) add some color or any of the operating guys.

The other pieces of our business went up as a percentage more.

I think the managed care book was essentially flat or slightly down really as a reflection of the strength of the economy.

And our assessment is that if the economy or when the economy starts to improve, that number should come back in line.

But would only be a guess at this point in time.

We don't notice any major market share erosion or anything of that nature.

We think it's more of a reflection of the economy.

Jay or Sam, anyone want to add to that?

The only thing I would add is just that we have to remember that here in Middle Tennessee and down in Chattanooga, we had the impact of the Blue Cross contract.

The fact that we were not in the contract, so that's going to have somewhat of a dilutive effect.

And we were also in a dispute with Vista (ph) down in South Florida, so that is going to have an impact as well.

Quick follow-up on the balance sheet.

Your investments in affiliates came down about 150, 140 million from last quarter.

What was it that you guys sold or divested?

Milton Johnson, you want to address that?

Yes.

That was the MedCap (ph) investment in medical office buildings.

We own 48 percent of that and sold that investment in the fourth quarter.

Thank you, Gary.

Darren Lehrich, Piper Jaffray.

Thanks and good morning.

With regard to the outpatient strategy, I'm sure we're going to hear more from Marilyn and (indiscernible).

But can you give us a sense for the division's game plan here over 2004, comment as to whether acquisitions will be a big part of that strategy this year?

And it does sound like you're going to have a little bit more of a retail focus based on what Richard said.

Does that involve additional capital or incremental capital to your hospitals?

Thanks.

Our outpatient strategy is -- our refined outpatient strategy is work in progress.

As a matter of fact, later this month we're meeting with all of our divisions to review all of their plans.

But I would say that the bulk of the strategy is not build around acquisitions.

We think there's a lot of opportunity to improve the nature of the business right now and it shows up in lots of different ways in our hospitals every day, inpatient surgeries -- outpatient surgeries being bumped for inpatient surgery, co-mingled with registration processes that are certainly not attractive to the public and the physician.

So we think there's a lot of things we can do within our existing operating structure to make the service more attractive.

For the most part, those kinds of things are not going to take a lot of capital.

There will be some if it involves the new OR suites of some processing areas, but we don't anticipate that being significant.

When we think about acquisitions, clearly, this is a very fragmented market and there are acquisition opportunities in the marketplace.

We have said before, and I feel strongly about this, that we're going to be very careful about acquisitions.

There is a lot for sale, pricing is high.

We're not going to overpay for these outlets.

They're relatively easy to build and we are going to make careful decisions market by market where we can buy and where we should build.

But to boil it all down from a capital plan perspective, we think we have enough dollars in our plan to fund both of these strategies.

As far as a team, just real quickly, is that fully built out at this point, Marilyn's team?

No.

Absolutely not.

She's in the process of looking at that.

Obviously, it involves working with our ASC division personnel, some of our physician services personnel, as well as hiring additional people at the division level and at the corporate level as well.

Thank you very much.

John Hindelong, Credit Suisse First Boston.

Thank you, good morning.

To talk about your dividends for a moment.

You have gone from 2 cents to 13 cents per quarter. (indiscernible) first what was the rationale to do that?

And second related to that, I think you said that the payout ratio of 20 percent seems about right at this time, this time being the time when you are buying back shares and you're somewhat more leveraged.

So I'm wondering what you think that ratio might be in a couple of years, assuming that the balance sheet gets better, no more share repurchase, etc..

If you're not buying hospitals, what are you going to do with the money?

That is a nice try, John, to try to get me and the team to commit to what it's going to be in 2005 and '06.

I think that does give me an opportunity to talk about the dividend from a general overall view as what we've talked about before and you and I have talked about John and I have talked to others, which is given the tremendous cash flows in this company, what do you do with it to increase shareholder value over time?

Obviously, as we re-assessed our strategy back in the summer and early fall, that issue and the value of the dividend really took part of the front stage in our analysis.

We had listened to a lot of our shareholders through the year and evaluated what we ought to do.

Obviously with the change in the tax law, it made the dividend more attractive to at least a significant number of our shareholders.

And so our strategy was to talk about this company going forward in the sense of its strength, particularly its ability to generate cash flows, but also the fact that we've put a lot of things behind us, including the government issues and the government settlement and that we were on a new footing and that we felt it was appropriate at this lifecycle of this company, its size and its strength to consider a more significant dividend.

And as we looked around generally at other industries, at other people in the health care space; not just in the provider side, but other parts of health care and looked to talk about what was a meaningful big step dividend-wise, but also recognize the fact that we continue to have we believe significant investment opportunity, particularly in our existing markets.

And so obviously picking a number is somewhat of an art, not always a science.

But we've felt that being in and around this 20 percent payout number at this point in time was entirely appropriate to us.

What that number will be going forward as we look at 2005-2006 and on out is dependant upon a lot of things.

First of all, the continued earning capacity of this company obviously impacts what dividend increases might occur.

But also again, other investment opportunities, both in terms of our own markets, but in acquisitions like a Kansas City outside our market, although we don't expect to do one like that anytime soon, we will be opportunistic when the right opportunities come along.

And then there is also the issue of continuing share repurchase, which we have continually stated we would be opportunistic if there are market opportunities created by headline risk or other kinds of things that drive our share price down at any particular point in time as it did in 2003, then we will come back and be as aggressive as we were in 2003 with share repurchase.

So that is a long way to getting to the issue is we cannot predict and won't predict what the dividend will be in 2005 and 2006, but we are committed to the share payment that we have announced and are making now.

We will certainly reevaluate our dividends on an ongoing basis based upon the performance of the Company and the other opportunities out there.

Thank you.

Adam Feinstein.

Thank you, good morning everyone.

My question is on the bad debt.

Just wanted to get you to talk a little bit more about that and I guess just two parts to it.

One, talk about the change in charity care.

I understand that there is some lag period until we will see the changes show up there, but just wanted to get a better sense of that and how that has impacted the current quarter.

And secondly, if I heard the number previously about the reserve balance, it sounded like you boosted the reserve some in the quarter.

And I want to make sure I got that number right and was wondering whether there was some change with the hindsight test you guys did?

Adam thank you.

Milton, you want to take a shot at that?

Sure.

First of all, charity care, in the quarter 201 million of charity care versus fourth quarter a year ago, 156 million.

Almost all of that is attributable to the 200 percent and below discount program and not the 200-400 percent financial discount.

We knew we implemented this new charity program in October 1 of '03 that there would be a lag before the accounts would start to qualify.

We take them through a Medicaid qualification effort first or other types of programs before we apply that discount.

So I think we will see that number increase throughout '04 and see some increase I think you'll see that in the first quarter and throughout the rest of the year.

With respect to bad debt, again, we did have as I mentioned earlier a deterioration of 130 basis points in our collectibility percentage.

At the end of the year, we got about $3 billion of self-pay receivables on the books.

That is a combination of the uninsured accounts as well as the co-pay and deductibles.

We only have about 350 million unreserved at this point in time relative to those accounts.

At September 30, 2003, we had 377 million unreserved.

So you can see that there has been a $22 million decrease in the unreserved portion during the quarter.

Again, the collectibility percentage of 130 basis points is about roughly 135 -- I'm sorry -- about $35-$40 million.

So not the significant driver to the problem in the quarter; it really is a payor mix issue driving the bad debt in the quarter.

Milton and Adam, thanks.

A.J.

Rice, Merrill Lynch & Co.

Thank you, hello everybody.

I'm just going to follow up Richard and Jack on your comments about the managed care recontracting.

I guess you’re sort of where (indiscernible) to the summer to get to the same point you are now relative to forward (ph) year contracting and you even got a significant portion of '06.

I think Richard you said that was partly because your decision to just go ahead and do multi-year contracting.

But is there any dynamic change in the relationship in the way that you are dealing with managed care to give you the ability to contract so much of the business this early in the cycle?

Maybe walk us through what the dynamics are in the negotiations out there now?

I will take a start on this one.

I really don't think the dynamics between HCA and the managed care companies are changing in any way.

We tried to, as I have said for years, it is in their and it's in our interest if we can forecast where we think our cost structure is going so they can appropriately include it in their planning as well.

But I think in terms of contract negotiations, we have been moving it out to a two-year cycle where we can and where we can make some sense out of the out-year numbers and the managed care companies, obviously those are signing up are comfortable with that kind of logic as well from their prospective.

The details of the negotiations and what we're talk about really have not changed that much either.

Obviously we're putting more pricing collars in for stop loss provisions and that kind of thing.

But for the most part, it's pretty standard, pretty stable and doing what we have been doing.

The only thing I would add is that with our language in our contracts, we've gotten that pretty well cleaned up.

So that was one of the things that was keeping us renegotiating every year.

So we feel good about our contract language.

We feel good about our carve-outs in those contracts to assure that on those high-risk areas we get incremental payment if the technology changes or if the acuity level changes.

So our comfort levels for a two-year contracting cycle is much higher now than it was I would say about 1-2 years ago, and that is why we have moved forward with the strategy.

We had a very good quarter in contracting with our payors.

For Humana, we finished Georgia, Tennessee, San Antonio, Texas, Indiana and Kentucky.

For Cigna, we finished Richmond and Dallas; for Aetna, we finished west Florida, Dallas, Houston; and for Blue Cross Blue Shield, we finished Florida.

So we had a very active quarter of that helped move that ball forward.

Okay, thanks.

Sheryl Skolnick, Fulcrum Global Partners.

Sheryl Skolnick Good morning.

Could you tell us what the cash flow was for the quarter and the year and cash flow from operations?

For the year, the number cash flow provided by operations was about 2.2 billion.

However, that includes the payment to the government as well back in the first quarter.

And excluding that, it would have been about 2.8 billion for the year.

And for the quarter, cash provided by operating activities, 806 million.

Sheryl Skolnick Thank you very much.

David Dempsey (ph), Avondale Partners.

Good morning, guys.

We (indiscernible) bad debt expense up enough; let's try supply expense for a second.

I noticed that it increased sequentially over the last three quarters, and I guess I did not hear Richard you say anything about the impact of Kansas City.

Is there anything going on there that would cause supply expense to be down going forward?

Jim Fitzgerald (ph) oversees all of our purchasing.

Hello, David.

I think from the Kansas City perspective, we're right now involved in the implementation of all of our health (indiscernible) purchasing group contracts and the other supply cost initiatives that we have implemented in the rest of the Company.

We will get that completed early this year, but that would result in us having a slightly higher experience than the rest of the Company.

In terms of the other from an overall standpoint with the Company, the increases that basically are the same old story that we have had in previous quarters.

In 2003, you had the introduction of drug-eluding stents, which was one of the key factors driving the cost increases.

And then also increases in the spine and the pharmaceutical areas.

Thank you, Jim and David.

Andrew Bhak, Goldman, Sachs & Co.

Good morning.

Obviously, predicting the trends with the uninsured is an inexact science, and it seems to me that at least relative to the third quarter levels, that the expectation is going to be a little higher, not only in the fourth quarter, but relative to next year.

So with that as a back drop, I just want to one make sure we understand how you guys view the trends in the fourth quarter with respect to the uninsured, the admissions levels, the utilization of outpatient and then what you have embedded in your assumptions for '04?

If you could just use that as a starting point, please?

Milton, do you want to take first shot at that?

Sure.

First of all, you have to keep in mind, although we have a pretty significant growth in that payor class, for the year, it only represented 4.4 percent of the Company's admissions.

And looking at -- and it's also, as you said, very hard to predict that.

Just looking at the third quarter of '03 compared to fourth quarter, actually the number of admissions between charity and self-pay was down almost 2.5 percent.

But obviously when you compare fourth quarter of this year to last year, is where we're seeing the big growth.

So it moves around quarter to quarter, it's hard to predict but the trends have been in recent quarters more rather than less, but the fourth quarter has really stepped up significantly from '03's run rate in the prior three quarters.

And the other piece that we've looked at with many of you has been the unemployment levels in many of our markets, and clearly we saw a lot of increases in unemployment which put people on the uninsured roles.

I think that is stabilizing somewhat, but we have not necessarily seen the job growth come back like we would hope to see.

So hopefully as we get on into 2004, we'll see some positive impact of people getting back on the insurance roles, and that will help a little.

But again, it is a national issue, as Jack talked about before.

Okay, with that then, I guess we kind of think of the bad debt forecasting methodology almost like a regression analysis.

And in that context, is it the case then for your '04 that the slope of the line, if you will, the forecast captures what you saw in the fourth quarter, or is it more as third quarter -- like back half of last year kind of forecasting trendline?

We're not forecasting a trendline that reflects the fourth quarter growth over the fourth quarter of '02.

We don't believe that is a reasonable assumption.

We are forecasting that the payor mix, self-pay relative to other payors for '04 will be somewhat to the whole year of '03.

And of course, there's risk with that, and that is I think the most significant risk in our estimate is the payor mix issue; that is, how self-paid growth will compare to growth from other payors during '04.

But our assumption is that the trends, the level that we saw in '03 would continue in '04.

So the 10-11 percent guidance is pre-charity care impact?

Yes, and that again, as we go through the year if we have more charity under the program than we think, then our bad debt should come down and that number as a percent of net should be less of course.

But that is our best estimate today of what bad debt expense would be on a percent of net.

But of course, that could move around as we get more visibility on that, as we see more of the actual results from our 2-400 percent program; if we need to update that, we will.

I want to make sure we're right on that.

You said that is estimate of 10-11 was pre-charity (indiscernible).

I think the 10-11 includes our expectations for what we think charity care will (multiple speakers).

Make sure that's clear to everybody.

It does include anticipate what we think will happen in movement between charity and bad debts, but obviously that's somewhat unpredictable.

Ellen Wilson, Sanford Bernstein.

Thanks.

One more question on the bad debt front.

Taking a different perspective or different slice at it.

If I ask you to break out the 280 basis point or so year-over-year increase in the bad debt expense ratio, between how much is just simply due to the uninsured, the economic cyclical aspect, versus how much of that is due to managed care actions that maybe will not go away.

Roughly how would you split it out?

Milton or Beverly?

(indiscernible).

If you look at our accounts receivable portfolio year-over-year, our uninsured, which is no insurance whatsoever, the number of accounts have grown about 10 percent and the account balance has grown approximately 17 percent.

If you look at the co-pay and deductibles, which is your managed care component, the number of accounts have actually dropped, which is a reflection of our improved front-end collection process, but the account balance has gone up 10.9 percent.

So for those accounts that we have not collected on yet, that balance is growing due to the nature of the higher co-pays and deductibles that payors are putting to the employee.

I think in summary on that information is that the issue has been driven by the uninsured population more so than the co-pay and deductibles.

Both are having an adverse impact on our bad debt experience, but it is primarily driven by the uninsured population.

Thank you.

I continue to thank all of you, you're making me look I said we would answer -- 90 percent of the questions would be bad debt today, so keep it up.

Next question.

Kemp Dolliver (ph), SG Cowen.

Sorry, (indiscernible).

Could you talk in detail about what you're planning to do in Kansas City over the next two years?

I know you have some asset reconfigurations and plan, etc.

Could you give us an update on what we should expect to see?

Thanks.

Sam Hazen, president of the West.

Let me tell you what we have done thus far and then we can tell what we're going to try to work on going forward.

First and foremost, we did put a number of HCA people into the hospitals, either in CEO positions, chief operating officer positions or chief financial officer positions.

So to date we have in every hospital an HCA representative that has come from another market.

So I think that is going to help us as we move a number of organizational issues, as we move our culture and so forth through that system.

On the second big front, we have repriced about 90 percent of the contracts.

We did not accomplish every objective there, but we accomplished some significant objectives, so that has happened and that will play out over the next two years as well.

From a capital expenditure standpoint, we have started to implement a number of projects; not the very large projects, because we have certificate of (indiscernible) issues we have to deal with, we have some planning that we're still sorting out.

And I will speak to a couple of the big projects in just a second.

As it relates to overhead, we have taken out I think about 400 FTEs this year, compared to where this system started when we acquired it in March.

And so we have had significant improvements in efficiency this year.

We will continue to make incremental improvements in efficiency as we implement our information systems, as we implement our shared service agenda, as we implement some of our general productivity initiatives throughout the organization, so that is an ongoing sort of effort if you will that will play out over the next two to three years as well.

Finally on the growth agenda, we have a number of opportunities we believe in this market.

One of the larger opportunities is a consolidation effort on the eastern side of the Kansas City market where we have acquired about 70 acres of land.

We are in the final stages of planning for a consolidated new facility that will allow us we think to reap some synergies in operating two facilities, as well as grow market share on that side of the city, and so that is a big opportunity.

We also have with the research medical Center, an opportunity to growth some programs, to grow some share with some improved facilities.

We will see a large project play out on that campus some time probably in the latter part of '04 and '05.

And so capital is a big part of our business, development initiative.

Working the physicians as we work the physicians in our other markets, as far as service, equipment, nursing, systems and so forth, will help us we believe drive some activity levels.

And as Jim Fitzgerald mentioned, as we continue to implement our supply chain initiatives, we expect some efficiencies from there.

That's sort of the short story on where we are headed in Kansas City.

I think as Jack mentioned, we've had some nice wins.

As you may have heard in the third quarter, we won a union election at our largest facility there that what was a lingering issue what we inherited from the Health Midwest System.

We have also settled with a contract on what we believe to be reasonable terms with the union for three years at three hospitals, so that is a positive event that has occurred and will position us we think to just operate the facilities in a way that will enhance what we do there and enhance the financial results.

Thank you for your question.

We will take two more questions if we can Felicia.

Charles Lynch, CIBC World Markets.

Sorry, Vic, also not about bad debt.

I wanted to talk a little bit about your capital spending and your project plans.

Can you put any kind of numbers around what expectation we should have for any capacity increases through this year and possibly into 2005?

We have those numbers are there.

Roz Elton (ph), who oversees our capital investment plan.

In 2004, we will of the one new facility coming online in Las Vegas, which is 129 beds and then other beds throughout the markets of another 343 beds for a total of 472 beds in 2004 coming online.

Do you have the number for how much capital actually opens and comes into service in '04?

900 million will come online.

900 million that will actually open for service during the year.

Thanks a lot.

Gary Chandler, Bank of America.

The question I was going to ask, I heard your caterer went out of business.

I was going to ask what we're having at the picnic this year.

You're spending too much time in Nashville.

(multiple speakers) This is Jack.

He also caters for our board lunches, and I asked him that question and he thinks he's going to be around, but I will guarantee you that we well do equally as well.

I know that that is the only reason a lot of you come down here for this meeting.

Well, that is not true.

A couple of quick questions, just point estimates.

What are you modeling for benefits costs in '04 versus '03, just rate of change?

The employee benefit cost, for example, is modeling low double-digits, Gary, for '04.

That is about $800 million of our benefit cost.

My other question was charity care in the quarter, 3.6 percent of revenues.

Can you tell us approximately what percentage of admissions that represents?

We're showing in the quarter on a same facility basis --- I'm sorry, I have the change here, I don't have the actual output number.

Gary, give Mark a call and he will run that down and have it a little bit later.

I just want to thank everyone for participating this morning and we will be around to take calls, or at least Mark will.

Thank you.

That does conclude today's conference call.