美國醫院公司 (HCA) 2004 Q1 法說會逐字稿

Welcome to the HCA first quarter earnings release conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Victor Campbell.

Please go ahead, sir.

Good morning.

Thank you Amy.

Welcome to everyone for our first quarter earnings call.

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

Richard Bracken, President and Chief Operating Officer.

We also have Milton Johnson, Senior Vice President and Controller;

Beverly Wallace, who is President in our Financial Services Group.

Milton and Beverly are going to be joining Jack and Richard in the comments to provide some additional information on bad debts and charity.

And also Mark Kimbrough, Vice President of Investor Relations, and we have most of the senior management team based here in Nashville with us as well to help during the question-and-answer time.

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.

We've listed on pages 4 and 5 of that release this morning, the number of risk factors that you should consider.

And we also encourage you to examine the other risk factors that are detailed 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.

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

Again, we welcome those of you who are listening on the website.

And the call is the property of HCA; it should not be recorded or rebroadcast without our written consent.

With those introductory remarks, I'll turn the call over to Jack Bovender.

Good morning everyone and we all appreciate you joining us today for this call.

I'm not going to make a lot of opening remarks this morning.

You have heard enough from me, I think last week, when we made our pre-earnings conference call.

And I'm going to turn it over very quickly to Richard Bracken, who is going to give you a walk-through of the first quarter operations, and also he will at some point in his presentation, turn it over to Milton and Beverly to talk more about the bad debt issues and give you some flavor for that.

Richard will also talk about some of the strategies that we're beginning to employ to help control our bad debt situation.

However and this is a teaser obviously for our Investor Day which will be May 13, where we plan to give you a lot more detail on our proposed strategies for bad debts in that meeting.

In fact, we're going to tell you more about bad debts and charity cares and probably you ever wanted to know but you're really, if you come to the Investor Day understand all the issues around charity care and the uninsured and bad debts.

We'll assure you how we do our hindsight review take you through the issues relative to reserves on the balance sheet, give you a comfort level with what we're doing on both bad debts and charity care.

So, with that I'll turn it over to Richard for his presentation.

And Jack, I might add that we'll broadcast the Investor Day comments.

So you -- although we want you right here in Nashville, those of you who cannot make it, will have access to that information as well.

Richard?

Thank you Jack and good morning to all.

Clearly, the increasing level of bad debt expense was a major variable in causing a decline in our earnings this quarter.

As Vic mentioned, Milton and Bev are going to provide additional insight on this following my comments and accordingly to avoid redundancy, I'll focus my remarks this morning, primarily on other aspects of our operations.

First, some observations regarding patient volumes.

As reported, admission volume increased 6.4% for the quarter.

On a same facility basis, primarily adjusting for our April 2003 Health Midwest acquisition, admission volume increased 2.5% for the quarter and monthly volumes within the quarter, were a decline of 0.9%, an increase of 4.1%, and an increase of 4.5% during January, February, and March respectively.

While the monthly rate of growth is still somewhat volatile, on balance we noted improvements from our recent trends.

No doubt, the additional day recorded in February due to leap year, a Sunday, had some positive affect on our year-over-year comparisons.

However, volumes in the quarter, particularly in March were improved.

Growth rates were even more favorable if one considers the effect of our skilled nursing facility closures.

We've reported in prior quarter our strategy of closing under-utilized skilled nursing units to create medical surgical bed capacity.

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

Excluding skilled nursing closures and some of it being during the past 12 months.

Same facility admission volumes for the first quarter increased 2.8%.

Markets experienced strong same-facility admission growth in the first quarter included Nashville which increased almost 10.5%, and almost 15% of our new hospital, StoneCrest, which opened in November and therefore were not included in the same-facility statistics is considered, because of its location this facility has cannibalized some volume from existing Nashville hospitals.

Our Dallas Fort Worth the market was up 5.6%, Tampa Bay up over 3%, and Richmond up 5%.

The successful re negotiation of the Tennessee Blue Cross contract helped patient volume compared to the Tennessee market, but more importantly several significant capital projects began contributing in other markets more specifically in the Dallas Fort Worth market over $150m of major facility projects came online at our medical center of Louisville, Medical Center of Arlington, and

Medical Center facilitates.

We continue to believe that disciplined capital spending for our hospital facilities will differentiate them in their local markets and improve their financial performance.

Our outpatient business also showed improvement in the quarter.

Same-facility outpatient surgeries increased 1.8% for the quarter, driven both by increased ASC based surgeries, our freestanding units which are up 3.5% and hospital based outpatient surgeries up 1%.

This was the first positive growth for our hospital based outpatient surgeries in five quarters.

Emergency room visits increased 6.1% in the quarter, 2.3% on a same-facility basis, also inpatients surgery cases increased by 2.4% on a same-facility basis.

By comparison we were slightly down to flat for inpatient surgery growth in each quarter of 2003, a good surgical quarter by any measure.

Growth in outpatient imaging volumes also increased for the quarter in part due to strong ER volumes and our medical surgical facilities on a same-facility basis we recorded 19.8% increase in CT scans, 6.9% increase in MRIs, and 13.7% increase in cardiac catheterization procedures.

As you might recall, we have announced a reorganization of our outpatient services department and many activities are now underway to improve our market position in this line of business.

We plan on providing you more details of these efforts during our investor conference in May.

In our pre-announcement last week and our release this morning we indicated that we had a substantial increase in the number of uninsured admissions over prior year's first quarter.

I'm sure the first question on your minds as was on ours was given the stated improvement in patient volumes how much of this first quarter admission was due to the uninsured.

Remember while uninsured admissions do cause problems with our financial growth, the number of admissions is relatively small.

On a same-facility basis there were approximately 18,000 uninsured admissions in the first quarter out of an approximate total of 413,000 admissions.

Incidentally on a sequential basis these 18,000 uninsured admissions per quarter have remained relatively unchanged over the last three quarters.

While clearly up on a year-over-year basis, we have noted some stabilization in the number of uninsured admissions in recent quarters.

For the quarter, uninsured admissions comprised 4.3% of our total admissions and 19.5% of our ER visits.

Same-facility admission growth adjusting for uninsured volume was still favorable at approximately 2.1%.

In summary patient volumes for the first quarter were improved, it was a quarter in which the recent negative trends some what abated.

Generally our strong markets improved and our weaker markets showed no significant erosion.

On an additional positive note, almost all expense categories with the exception of bad debt were in line with expectations, labor cost fared particularly well during the first quarter, salaries, wages, and benefits expressed as a percentage of net revenue for the quarter were 39.3% compared to 39.8% in the first quarter of the prior year representing an improvement of 50 basis points.

Adjusting for our Kansas City operations, salaries, wages, and benefits, as a percent of net revenue for the quarter was 38.9% an improvement of 90 basis points.

We do remain pleased with the performance of our hospital executives in managing labor.

We continue to see favorable year-over-year comparisons in the cost of contract labor.

In the first quarter, contract labor expense expressed as a percent of total salaries were 6.5% compared to the prior year first quarter of 9.5%.

Our first quarter performance of 6.5% is in line with recent quarters and held steady despite the increase in patient volumes.

We believe the new facilities, we have successfully transitioned from the use of contract labor to fill basic staffing needs.

Supply cost expressed as a percent of net revenue was 16.5%, 50 basis points over the prior year.

Given this is due to the continuing increase in cost of medical devices and pharmaceuticals, we were pleased with our ability to keep growth in this category to a minimum.

Most of this year-over-year increase was due to drug-eluding stents, which were not approved by the FDA until May of last year.

Our strong surgical volume for the quarter also contributed to increasing supply cost.

The company's division-based contracting initiatives for medical devices continued to show promise and as an example of this, we recently completed contracts in each of our divisions for pacemakers and implantable defibrillators.

This generated approximately $7m in quarterly savings.

Now that these projects have been completed, we are working on divisional contracts for orthopedics.

Cash collections were also positive for the quarter at a 102.8% of trailing 60-day net revenue was bad debt, and importantly, our AR days decreased one day from 51 days prior year.

Net revenue for adjusted admission growth was within our expectations at 5.8% on a reported basis and 6% on a same-facility basis.

This ratio has been under pressure given declines in outlier payments in clinic and growing charity discounts.

Adjusting in our AA performance for reductions in outlier payments and increasing charity discounts in both periods and our AA growth would be 6.8%.

Normalizing for the growth of uninsured revenues was reduced just by approximately 200 basis points.

As I stated previously, we remain comfortable with the managed care pricing environment and having large portion of our current year contracts completed.

Currently, 83% of our 2004 contract negotiations are done and 42% of 2005 contracts at an average rate increase of approximately 7%.

Due to the multi-year nature of some of our contracts, we've completed 15% of our 2006 book at similar rates.

Before I turn this over to Milton and Bev for further analysis of our bad debt and comments regarding actions we are taking to improve our admissions, billing and collection processes, let me provide some general context for actions we are pursuing.

As we had previously stated, while some of the solutions for moderating bad debts must come from a change in national healthcare policy, we do feel there are steps to be taken which can incrementally improve the situation and we are vigorously pursuing such actions.

It almost goes without saying that while it is our highest priority to effect solutions to mitigate this problem, as you would expect, we will not only effect solutions that are fully consistent with all regulations mainly

, but also only do so in a way that it is consistent with our commitment to quality patient care, regardless if it is legally required or not.

Having said this, we see much utilization of our emergency rooms for routine care and use of hospital facilities out of convenience rather than utilizing other available and funded treatment options.

As Jack stated last week, we cannot continue to underwrite the total cost of care for the uninsured.

It is not feasible for a single hospital or company to do so and those who do pay for care will inevitably absorb this cost.

Our solutions focus on improved case management for those patients who do require admission, referral to alternative settings for nonemergent care, and refinement in the collection process.

Bev will provide details of all this in a moment and also during our forthcoming investor conference.

As a final thought, you will note that year-over-year percentages growth of uninsured admission volume is large 14%, the actual increase in uninsured admission is relatively smaller.

Of the 18,000 uninsured admissions during the first quarter, there are only 2200 more than our first quarter prior year, a relatively small number.

We do know - - what we do know is that for the most part, our uninsured volumes are concentrated in our Texas and Florida markets.

In addition to the general macro economic issues of unemployment, undocumented workers, and patient responsibility for increasing percentage of the healthcare bills, we do believe changes in Medicaid benefits may be having the effect of moving people off the Medicaid roles to the uninsured category.

We do think changes implemented in Texas Medicaid in the fourth quarter last year are an example of this.

Regardless of the reason, our response from the admission and collection process will be similar.

And with that, let me turn it over to Milton for his thoughts.

Thank you Richard.

Following last week's pre release of first quarter earnings, I read most if not all of the analyst report addressed in the bad debt issue.

Based on my readings of these reports, I like to take a few minutes to clarify a few points.

First, let me clarify how the hindsight analysis works and how they use this information each quarter.

On a rolling quarterly basis, the accounts receivables that existed one year earlier are analyzed to determine the disposition of the account, that is where they collect it, written off, or still carrying them in the books.

With this information, we can estimate the collectability, the accounts in the book at the end of the current quarter.

The current estimate is based on data generated in the previous 12 months period into the collection cycle of self-pay account, we believe they should have lagged in 12 months, but not generate reliable data.

By relying on this data, we use the most trending data available upon which to base our estimates of the amounts of bad debt.

Second, let me clarify what management considers when calculating bad debt expense.

On a monthly basis, our hospitals record bad debts using a 150 day metric that is, all accounts aged over 150 days are fully reserved as bad debt.

The existing 150 day policy in overall metric rather than account specific method.

It is applied the entire AR agent to generate and announce for bad debt sufficient to reduce self-pay balances to a realizable value.

While this approach has historically yielded inappropriate reserve, we have found it to be less reliable during periods of rapidly changing business trends such as larger self pay balances, changes in shared policies, and more effective collection of insured accounts.

On a quarterly basis, at the consolidated company level, management considers changes in payer mix, self-pay accounts, and other business trends to determine the best estimate of the allowance for bad debt.

Managements estimate is based upon actual data available both the hindsight results and data from the current quarters operations.

On a consolidated company level, at March 31, 2004 our reserve for bad debt equates to an approximately 110 day metric applied to all account or 89.3% on collectability percentage applied to self-pay accounts only.

Effective in the second quarter, we plan to change our accounting policies for bad debt, at the hospital evel, from the 150 day metric to 8% of self paid balances.

This change is made to respond directly changing business trends in our market.

We believe the following benefits will be achieved at the hospital operating level with its new approach.

One, better measure of individual hospital performance and second, business trends and management actions will be more quickly reflected in hospital results.

Let me make it clear that his change is only at the hospital operating unit level. s I described earlier, at the consolidated company level, management has been considering results of this approach, in addition to day metric in arriving at the estimate for bad debt.

Since we covered the numbers in

that explained the increase in bad debt last week, during the prerelease call, this morning I would just summarize a few key points.

First, comparing the first quarter 2004, to the first quarter of 2003, the primary reason for increase in bad debt expense is attributable to the increase in self-pay revenue of approximately $190m.

Also, to a decrease in the estimated collectability percentage during the quarter, we increased bad debts by $30m.

The remaining increase in bad debt expense was generated from copays and deductibles.

Second, comparing first quarter 2004 to the fourth quarter of 2003, the primary reason for increase is related to the increase in self-pay revenue of approximately $50m.

That is an increase approximately 8.5% primarily related to changes in price, and intensity.

Next, Beverly Wallace will address certain operational profit issues.

Thanks Milton.

I like to take this opportunity to share in more detail some of the actions we have either put in place or in the process of implementing in an effort to reduce our bad debt.

First, we are deploying an admission and collection review process at each facility to be led by the executive management team to include the Chief Nursing Officer to analyze their patient population in a more detailed manner and determine what action will drive appropriate change at their hospital.

We also feel additional metrics are needed to manage this issue.

This activity is now in place at many of our hospitals and following are examples of strategies, which were generated by this process.

In our ER, we are a pilot team, an enhanced case management discharge planning process and effort designs to determine whether there are appropriate community resources available to care for the non-emergent patient.

Next, we also have a pilot underway to determine if there is a more efficient way to provide the qualified medical screening required by

.

In short, we are creating a screening by a qualified medical personnel in addition to that provided by the emergency room physician.

Third, we will enhance our collection efforts in the emergency department, requiring that all patients after stabilization is complete would be routed to the financial counselor for collection effort.

This is not consistently being done in all of our hospitals today.

For uninsured patients that come to the emergency room, approximately 75% to 80% of our bad debt and charity, the collection process is necessarily modified by

.

With the above step, we should be able to enhance the collection effort on this patient population, but only after stabilization has occurred.

We will continue our efforts to attempt to qualify these patients for Medicaid or some other state, local, federal programs.

And if that fails, then we will pursue the patient to determine if they need our credit care or financial discount criteria.

Other actions that would be taken at our hospitals are executive and clinical approval would be required for all uninsured non-emergent admissions, outpatient surgeries, and the high-end diagnostics, which include MRI, CT, cath lab.

This will be added as a component to our admission policy and procedures.

We will also update our current pre-admission collection policy of copays and deductibles to include an increase of our current upfront collection goals.

From a collection perspective, after discharge we'll increase the intensity of impact, our uninsured and patient liability collection units to emulate an external collection agency process.

This will include credit scoring, extended paying guidelines, automated recurring payments by check or credit card, enhanced settlement campaigns, and negotiations training for our collections personnel.

Incidentally, actual cash collections at are in copays and deductibles have increased year-over-year, 19% for 2002 versus 2003, and 16% Q104 versus Q103, but have not kept pace with the growth designed to for more reliability to the patient.

As I shared with you earlier, we have established upfront collection goals at each facility.

And through this process, we have improved our collections; 40% in 2002 over 2001, 27% in 2003 over '02, and 14% for the first quarter of 2004.

Let me close by saying that recently comments were made in the press which indicate some confusion with respect to the admission and collection responsibilities that exist at each hospital versus that in our consolidated patient account service centers.

Today, as was in the case prior to the creation of the PAS, each hospital has registration staff, financial counselors, and cashiers.

However, these individuals now have an elevated skill set as a result of enhanced training and salary scales.

While they organizationally may report to the PAS management team, they are based in the facility to support that hospital's accounts receivable management team.

They interphase daily with hospital management with respect to admission criteria and upfront collections.

Also, our uninsured and copays collection unit, has been in place for approximately 20 years and continues to perform the same collection functions today with enhancements to their processes and expansion of their techniques and tools as they did in the past.

Hope this helps clarify this for you.

All right.

Beverly, Milton, Richard, and Jack, thank all of you.

And Amy if you want to come back on, we will poll for questions and Amy, I encourage you to help us -- we'd like questions to stay one each if we can.

So, everyone has an opportunity to ask their questions.

Thank you Mr. Campbell.

Today's question and answer session will be conducted electronically.

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

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

Should you be using speakerphones please lift the handset when you are asking a question.

Also, if you are on a speakerphone, please mute your lines to signal our equipment.

We will pause to give everyone a chance to signal.

Once again it is star one.

We will take our first question from Lori Price with JP Morgan.

Go ahead please.

Great, thank you.

I appreciate the comments that you made regarding Medicare, which you would roll back in states like Texas that have affected your uninsured volumes, but your uninsured volumes are still rising fast than it appears and I am wondering to what extent you believe that all of the press coverage you have gotten from your new charity care policy might have also contributed to further rise in uninsured volumes.

Lori, this is Jack.

I think that's certainly a possibility, but it is certainly not the driving force behind this.

As we mentioned before, there are more people on the uninsured rolls than we have seen in the past.

There are higher copays and deductibles than in the past and obviously and we are trying to quantify this now.

Hopefully, we may have some information for you by Investor Day about the issue of undocumented OEMs in certain of our markets is a big issue because as we told you last time, the most affected markets that we see or among the most affected that we see are Houston, along the real Grand Valley and El Paso.

So, this is a difficult issue, so I think you are right that probably some of the publicity we have gotten about our charity care policy has helped to add this, but more to the point or other economic issues and forces that are going on and plan design issues.

And Lori, this is Richard, along the same line, we question whether our past strategy of investing heavily in our ER capacity and flow through processes, you know, we have tremendous amount of efforts going on to minimize the wait time.

Our emergency rooms are pretty attractive places in our markets and we are wondering if this has been a magnet, if you will, to get more than our fair share of the uninsured and we tried to correlate our uninsured growth rates in hospitals, we have had a lot of capital spending to those that we didn't have a lot of capital spending and it didn't hold up.

And so at this point, we are not even sure if that has anything to do with it.

So, as I said, the numbers are relatively small and really trying to button down.

What's driving that increase is more anecdotal at this point in time than mathematical and they also -- when we tried to kind of get a feel, there was some anecdotal issues going around in some markets about maybe it would have been dumped on by some of the not for profits and we investigated that, as strange as that may sound and there was no credence to that either.

Okay, great, thanks.

Lori, I might just -- one last, I got to have chance here and that is, a market is not a market and I think when you start looking at whether it is other companies or even within our company, we have some big differences now.

Uninsured is going up everywhere, but clearly I think our markets and we have said in the past our big fast growing markets, Houston's of the world will really help us in good times and over the long period of time, the population growth and opportunities there are great, but clearly these big markets and several of which we have, are probably unduly being hit by the uninsured.

Okay, thank you.

Thanks Lori.

Thank you, and we will take our next question from Garry Taylor with Banc of America.

Go ahead please.

Hi, good morning.

Hi Gary.

I have a question about the labor cost and I think you've certainly done over the last two quarters especially a fantastic job and the question is, it looks to me that clearly as in the last two quarters, you have seen a little bit of pick up in volume, you are really experiencing some leverage on the labor cost side, at least to the components that's fixed and in the last few years, we have had sort of a rising admission trend, it didn't really get -- didn't appear to have a lot of fixed labor component leverage in the labor line, but now it's showing up pretty substantially and it has shown up in your margin.

Is there anything different that you are doing with labor now than you were the last couple of years when you saw volumes at bottom have started to come up again?

Is there any active, you know, headcount reduction happening anywhere in this company?

This is Richard.

You know, daily labor management is always an important activity of our local executives and it's always an area of focus.

I think we've been able successfully to move off such reliance on premium cost, contract labor.

When we can substitute, regulate price labor for that premium price labor it certainly helps on our salary wages and benefit line.

And so I don't know if there's been any major overhaul on our labor strategy.

Clearly as we take up other costs in our P&L, will it be bad debt.

There is a focus to try to tighten the belt somewhat and I know that's been going on both in Eastern and Western groups over the last couple of quarters.

Where would you say your benefits cost is running year-over-year?

Is it changed?

I know that delta has been coming down pretty substantially but is that a piece of it is well?

It's running.

Last year it dropped substantially from run-rate we saw in previous years.

Last year on a per employee basis it was probably down to about a 3% to 5% increase, and I think that this year, in the first quarter, it's a similar run-rate at this time.

Gary one another thing on productivity is that over the last couple of years,

as we were migrating into our PAFS we often new that we were pooling labor that was traditionally based in the hospital and moving in into the PAF center.

So there was some level of transition that occurred and now that that's over with and we have clear numbers and the comparisons are a lot easier.

So I think that the management of the labor line is a lot easier too.

Thank you Jack.

Thanks.

Thanks.

We will take our next question from Adam Feinstein, with Lehman Brothers.

Go ahead please.

Great, thank you.

Good morning everyone.

Hello, Adam.

I just, if Milton can maybe go back to -- you were talking about your new process going through

some sort of percentage of revenues.

Just wanted to get some more details on that?

And secondly, just wanted to see -- I know that is

.

I know you guys are probably reserving a 150 place.

But do you have any details on the number of days until you actually write it off, and give us any ranges you could get us bear?

Thank you.

Adam, first of all I mean, when we compute bad debt expense, our objective of course, in theory and in practice is to match the bad debt with the amount of self pay revenue that we booked during that particular period.

So that's obviously what we are looking at the self-pay revenue and trying to do that matching.

With respect to the day metric, although our hospitals have been using a 150 days, the company is actually now on a 110-day policy.

So the 150 days is what they were using in the facility, had been using, but we adjust that at the top 5-year to get to the right day metric overall and we are a 110 currently.

With respect to write-off, it varies.

There is no particular policy that at a certain point in time we write it off.

It's based on facts and circumstances surrounding each account.

When we believe that the account is no longer collectable and no action been taken on that account, typically then we write it off.

So there is no standard time that a particular account is automatically written off.

Thanks Adam.

Thank you.

Our next question comes from Ellen Wilson from Sanford C. Bernstein.

Go ahead please.

Yes.

I was wondering if you can give me a little bit more detail on the uninsured stuff.

Specifically if you can break out how much of the uninsured volume came out of Florida and Texas.

So, for instance your total uninsured volume was 14%.

What would it have been if you exed out Texas and Florida?

60% of our uninsured volume, almost two-thirds really is out of Florida and Texas.

Okay.

And then related to that e's any chance that you are getting some sort of adverse selection on this fund, confined to single specialty hospitals of the When you kind of eliminated the company dumping from the north of the profit.

But to what extent you think it is specialty hospital?

Ellen, I'm not sure that there's enough data there to say that there's is no question in some of the markets that the business is moving, is clearly not the uninsured business or the Medicaid business. (Multiple Speakers) No I did not have emergency rooms and obviously the major portal of entry for uninsured patients to an acute care community based hospital is through the emergency room, so that as we lose to some specialty hospitals, commercial and decent paying governmental business.

Our payer makes will suffer but just necessarily impact the growth per say, but it does the impact of pay or mix.

And so the fact that they don't have emergency rooms obviously leaves us with the uninsured population.

I would caution you, this is Jack, that this is a phenomenon in the West only.

It's not a phenomenon in the East and Florida as we mentioned is one of our worst States for the uninsured, so there is not a co-relation with our worse markets as far as the uninsured with the opening especially hospitals.

So, all in all -- although it contributes to the problem it is not one of the big drivers in this problem.

Okay, and a quick clarification on my first, and actually what percentage of your total volume, I guess would be helpful also

if 60% of the uninsured does, what's the total out of it you save?

Anybody have that number, I don't think.

We can probably get it before this call is over.

And if we do, we'll come back.

Okay.

Great.

Thank you.

Thank you and our next question comes from Jim Liang with Argus Partners.

Go ahead please.

Jim, you're there?

Mr. Liang your line is open, you may proceed with your question.

Mr. Liang, do you have a question?

No, my question was answered, thank you.

Thank you.

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

We will move on and take our next question from A.J.

Rice with Merrill Lynch.

Go ahead please.

Thanks.

I wanted to just ask you a little bit about -- we talked about how you refer these issues, just trying to understand where we start on this path I think what is the management process of the people that are responsible for, you know who the patients are, how do they report to corporate and who ultimately has the responsibility for this and how much interaction is there over sided the senior management and the facility versus some of the patient account in central business office functions and then maybe just add - with that, can you just comment a lot of this is obviously macro effect which is sort of beyond your control, -- some of the processes in more depth here.

Do you have any flavor for what the opportunity might be -- this issue as opposed to just riding the economy and all this turnaround?

We couldn't get the second point of your question.

I think you must be on speaker phone and part of your -- at least the last part of your question, bleaked out I must say, you might need to repeat that.

Yes, just real quick, what was the potential maybe as opposed to just waiting for the macro economic factors to turn around for you to manage the profits a little tighter, do you think that's the significant part of the issue here that might improve the financial results just by managing processes better, do you have any flavor, how much you might be able to pick up on that?

Beverly, you want to take that.

Sure, A.J.

I'll try to respond to your first question.

Organizationally, the PAS Organization reports up to an individual that works for me in the company, having said that we have senior management teams at HPIS, that these are the divisions in the hospital, it's on a monthly and quarterly basis to go through their performance refund issues and questions.

The individuals that are located at the hospitals, the registrars, the financial counselors and cashiers actually have a patient access director at their facility that daily works with the hospital management team on any questions, concerns, or ideas that they may have with respect to the collection activities, the collection process, admission policies, and funding collection.

So, even though its done in an outside location, it is very connected at each level of the organization, so I don't think that has impacted our results.

Now going to your second question, what do we think these activities will do for us?

We believe that incrementally we will see some improvement.

We have through this consolidation process been focused on enhancing our funding collections, our insurance collections, and our soft pay collection, and on soft pay side it has been addressed more from shifting more of those patients to Medicaid or State local funding sources, and we have seen approximately 15 to 25% increase in that qualification process as we have consolidated into the payer's strategy.

So I think that has worked for us.

We just feel like, you know, with a little more intensity, we might be able to enhance the collection effort more importantly on the campaign deductible side than the true self pay side.

A.J. to your question now in terms of, have we put some measurement on it, quite candidly it's too early to do that yet.

We are still in a situation when the numbers are going up.

We think there's a lot of - as Bev mentioned a lot of actions we can take but at this point, we would be guessing to try to size the impact.

Also, to Ellen's question earlier about how much overall admissions came from Texas and Florida, 52% same facility basis.

Thank you.

And our next question comes from Sheryl Skolnick from Fulcrum.

Go ahead please

Thank you very much.

If we could go back to your change in the way in which your local hospitals are looking at their bad debt balances.

I understand what you said is that -- it sounds like what you are trying to do is conform what's going on at the facility level to be more consistent with the way the corporation looks at the amount of bad debt reserve you have to have by going to 8% of the outstanding or rather the percent of the self-pay revenue in the current month, is that right?

Milton you want to answer that?

Sure.

That's correct.

Historically, the company at the hospital level has always used a day metric to account for bad debt, and

again because of the trend we're seeing we are going to change that to a percent of class methodology, which is more reflective of how we've been doing it in recent quarters, here at the consolidated company level.

We will still Sheryl be doing a quarterly hindsight, because that percentage could change inside a quarter and the most accurate at the end of each quarter we believe as we've stated before you have to do the quarterly hindsight to be able to pick up change in trends.

Right.

So, each quarter is much different, this year versus the last.

Is it the hindsight analysis roles forward on a quarterly basis as opposed to once a year.

That is correct.

Okay.

So, therefore that's more current and it picks up the current changing on certain trends a little more currently --

Specifically, it picks up the change in collectability which is kind of important, because across the country, not just with us but everywhere that change is happening, and it needs to be picked up as currently and for us that means quarterly, because we want to report to you on a quarterly basis, the most accurate number we can.

So, you pair the collectability to the revenue being earned in that particular quarter, and we -- hopefully that's the most accurate look at bad debts on a quarterly basis.

Okay, that makes very good sense.

Thank you very much, appreciate it.

Thanks Sheryl.

And our next question comes from David Dempsey with Avondale Partners.

Go ahead please.

Good morning everyone.

Question for you on charity care.

The charity care was up 20% this year over last and some of the comments during last week's call indicated that the process was not necessarily applied consistently across the number of hospitals and some of the paper work wasn't always getting in and then the new policy, obviously there is a potential for that.

I guess my question is looking forward would we expect and I guess we would expect that percentage of charity care to go up, what percentage of that really represents gross revenue just to get a flavor for that, and I guess those are the questions I would have about charity care.

Milton would take first shot at that.

Sure.

First of all there are two parts to our charity care policy.

First is the 200% and below poverty level guideline where we write off a 100% of the account and the second piece is 200% to 400% federal poverty guideline where we apply discount to the sliding scale discount.

It's the first part of the charity care policy, the complete write-off policy that's driving the increase in our charity care quarter-over-quarter.

The second piece, that's where we are having problems getting the documentation to support the sliding scale discount, and we are not seeing much increase there.

It's maybe running 1m to 2m a month for example.

So, it's not moving or adding much growth to the overall charities.

So, again the growth is coming from the 200% and below pieces of policy.

You want to add Beverly --

Can you give me an idea what relationship that -- the charity care would be to gross revenue

Let me see that, I don't -- David let me get that for you.

I don't have that off the top of my head.

If we look at, there is one number we do think about internally -- if you look at charity and bad debt in total as a percent of growth, it is roughly what Milton if you look at the two combined.

Bad debt and charity percent of growth is about 5% roughly.

Okay.

Yes, thank you very much.

Thanks David.

And our next question comes from --

Kemp Dolliver with S G Cowen.

Go ahead please.

Hi.

Thanks.

Could you give me a little more color with regards to how you change your emergency room processes in the context EMTALA just because I have seen some anecdotes that the number of EMTALA violations in certain areas.

It has really gone up there.

There is more scrutiny etc. and this looks like a potentially risky mine field.

Kemp thanks.

Beverly you want a shot at that.

This is Beverly.

What the example that we gave you is that we've actually just added one step in the process.

In our current environment we have a triage nurse that triages the patient they go back to see the emergency room physician.

What we are doing is instituting a physician's assistant who is also taking it once step further with what gets qualified as non-emergent patient and so we figured would be an enhancement to that process as opposed to creating any EMTALA issues for us.

I looked with both of the group guys and neither one has seen any increase EMTALA violations at our facilities year-over-year.

This is Richard.

That is a very good point.

We are obviously very very sensitive to EMTALA regulations and certainly don't want to any way, shape or from run into some of those.

And in this program that Beverly was mentioning is a pilot program and the pilot program is setup with strict adherence to EMTALA.

It just provides another screening mechanism that before the patients gets to the ER in the back by a qualified medical personnel.

So it is too early to tell whether this is going to have any material affect -- we think it is important.

We do know that in many cases, it is a lot easier to declare someone an emergency even if the clinical condition does not indicate it.

It is something we are studying to see if it has any applications.

Allen Yuspeh is here too.

He is our Senior VP of Ethics and Compliance and I think a lot of you have met him and I know Allen you are involved in this process now, obviously is important.

You want to add any comment.

It will be kind of great to.

I think Bev and Richard had covered it well.

I will just add that we are all obligated under our corporate integrity agreement to provide to the office of inspector general any cases with which we become aware of even potential violations of EMTALA and we actually find that they are quite -- quite minimal.

We have had huge push on distributing a whole set of EMTALA policies that goes back many years now and we have a good deal of training.

I think we are comfortable that we are implementing it properly.

But I think as Beverly pointed out I think there is the inclination in many of the emergency rooms in some instances to provide care that exceeds the standards of EMTALA either as to determining whether or not there has been an emergency medical condition and in some cases its our intuition that we will probably go well beyond the stabilization requirements of EMTALA.

So I think we are probably doing more than the law requires and I think we can make some adjustment as Beverly has suggested that would be completely consistent with the law both from a compliance standpoint and an ethical standpoint.

But the bottom line is that we still -- we find very very few violations in our facilities overall.

All right.

Kemp thank you for your question.

And our next question comes from Julie Peterman with Wachovia.

Go ahead please.

Hi guys.

We have been hearing that Florida has changed the charity care policy from 150% write-off below poverty to 200%.

Does that impact the way that you can implement your charity care policy in that state and likewise are there other states that have different ratio levels and that hinders the way you implement your charity care policy?

Beverly, you want that?

Yes.

This is Beverly.

No actually that change in Florida enhances our ability to use our charity care policy.

The only state that has the guideline that is a little bit above our guideline of 200% is Georgia and they are at 250%.

So obviously we apply the Georgia guidelines that they have established in that state at the 250% level.

Hey thanks.

Thanks Julie.

Our next question comes from

with

.

Go ahead please.

Thanks guys.

Based upon the way you have laid out the methodology both at the corporate level and the hospital level.

That is in perspective of using pair percentages as well the days aging.

The look-back methodology -- will that in fact give you a improve -- as your collection rate improves, assuming that it does improve as the year progresses, what does that do to your provision over the course of the rest of the year versus the way you are currently doing it under the look-back method?

Well, let me make a statement first and then let Milton maybe expand on it, but essentially if we are doing hindsight on a quarterly basis and start on a yearly basis.

Again, any collectibility trend changes, both bad and good, we pick up faster than people who only do it yearly or don't do it at all, and so, you can draw your own conclusions from that if in fact collectibility would improve either on the deductibles and Co. insurance or only insured.

That's going to flow through in that quarter to our income statement.

And just as declines and collectibility over the last three or four quarters, I've also flowed through in that quarter because of doing hindsight would be.

I don't know if Milton has, will expand on that, sir?

No, Jack would add that when you talk about our collectibility percentage in that, that is an important fees of our analysis and coming up of bad debt.

But clearly does the bigger component of the bad debt expense is driven by the change in some soft pay revenue, which of course is impacted by volume, pricing, and intensity of the service we're delivering.

So, that's

a bigger impact from our buyback extent in the secondary impact would be the collectibility percentage changes that would be applied to the existing balance sheet.

Could you give us the dollar value of what you are fully reserving against that -- either the one-tenth or the one 50-day level on say average a patient account?

Well, not going to give it to you by patient, but I can tell you overall, our total balance sheet exposure with self-pay they are, it's $320m.

That's the total amount, unreserved related to the balance sheet.

To make sure everyone understand, we're reserved at 110 days, not 150 now.

Thanks.

That's very important that gets kind of confusing because, as we said earlier, in the hospitals, our reserve and everything over 150 days, but because of the work we do up here that the additions that we put to it, bring that number to 110 days.

So, essentially, everything over 110 days, not 150 and that's an important distinction here.

You can track this on, let's say, it's like $5000 per patient account or $10,000 or whatever?

I'm sorry.

Joe, I didn't understand your question.

Well, I was trying to figure out.

What's the average write-off per patient, is it $5000, $8000, or $20,000?

You have $320m that are fully reserved against, but if you will - how many patient accounts?

We don't analyze it that way.

We literally, when we think about our accounts receivable with the number of admissions and adjusted admission in patients we treat during the course of the year, it's millions of account.

So, we don't try to look at it that way.

Okay, thanks.

Thanks, Joe.

And our next question comes from Arun Kumar with JP Morgan.

Go ahead please.

Good morning.

A question from the fixed income side following all these lengthy discussions on everything else.

Just a quick question on your policy on balance sheet leverage and deleveraging and so on.

I know in the call last week, David Anderson made a case that nothing has changed in that front in terms of bringing your leverage to let's say the low 50s by the end of this year, and potentially even lower next year, but just wanted to clarify that one more time, to make sure there is no change.

David Anderson.

If you look at the debt to total capitalization ratio, it's basically flat in the first quarter.

Our target is to reduce that same ratio down to approximate, somewhere around 50%, but that sometime in the middle-to-the-end of next year.

Okay.

So, is the high 40s now off the table or?

High 40s are off the table.

No.

No, not necessarily.

I think Vic said it's either low 50s to high 40s, that makes it a little flexible.

To make a little flexible.

In terms of the share repurchase program, I know, you mentioned you have of 200 plus million outstanding in the current observation.

My expectation is that sometime over the next quarter or so, you'll complete that.

At any time, any plans I should say of hoping a new program and have you discussed that with ( Indiscernible) anyway?

Not at this time are there any plans.

We obviously look at that on a consistent basis and we would discuss this with the Finance and Investment Committee of the Board as well as the Board as a whole, but we're not ready to make any announcements, only additional share repurchase at this time.

Great.

Thank you very much.

All right, thank you.

And our next question comes from David Shove with Prudential.

Go ahead please.

Good morning guys.

Hi Dave.

I was just wondering have you seen any correlation, and I know that you just started sort of beefing up your hindsight work, but any correlation or seasonality to the collectibility, in other words, most people get their, you know, deductibles and co-pay increases in January or is there any correlation with, you know, when you institute price increases or anything or do you just not have the data to see that yet?

I am looking around.

We have seen since last year's hindsight, which was down in the second quarter and then we switched to quarterly hindsight, we have seen a deterioration in collectibility at each hindsight.

So, you would tend to think that it is not directly related to any of those factors, in other words the timing of our new co-pays and co-insurance.

So, I don't know that we could make that case.

No, I don't think we can tie the correlation of uncollectability percentage changes to that.

I think clearly, you know, in the first quarter, we see an increase in co-pay deductible from our balance sheet resulting from new plan years and so forth, that historically occurs, but we can't really tie that to the uncollectability percentage.

Right, so, the collect -- so it doesn't jump in January, where somebody says, you know, last year the deductible was $200, they say I'll pay the $200 and all of a sudden they got a $500 deductible and they said heck with it?

No, we don't -- I couldn't support that and keep in mind the way we do the hindsight, we do it on a rolling quarterly basis, but we're looking always at a 12-month period of time.

So we really -- there is always, you know, the four quarters in the analysis.

So, we really wouldn't see it in the hindsight, we're not limited to this one quarter of the announcement.

Right, you may not pick it up at that level of timeliness so to speak?

Right.

Okay, thanks.

All right thanks then.

And once again star one for questions, we will take our next question from Darren Lehrich from Piper Jaffray.

Go ahead please.

Thanks and good morning everyone.

Just wanted to ask Richard perhaps, you know, if you look at the outpatient strategy that you've been working on since I guess later last year with Marilyn team, can you just maybe give us a sense of looking out a year or two from now, what you think would be the most likely outcome of that strategy and obviously the intention is to drive better outpatient volumes but can you just give us a flavor for where you think that strategy is most heavily focused and what we might see over the next year or two there?

Let me take an opening shot at that and maybe I will give Marilyn a chance to comment.

What I would like to see out of this strategy and the direction and goal that I am giving to our operating teams is really in two major areas.

First, while there is certainly a lot of interest in buying and building new outpatient units, whether they be surgical units or imaging units in our various markets, either on our campus or off our campus.

You know, we certainly have a lot of activity around that right now.

In this last quarter, we've processed lots of potential acquisitions and quite frankly many of them we have taken a pass on.

But there certainly is going to be a component (Audio disturbance) unit development over the next couple of years.

But equally as important to me is that we've obviously a huge asset investment right now in our existing outpatient units within our hospitals, on our campuses, inter-medical office buildings, and we believe based on the work we've done to date, there is a lot of opportunity for improving the operating and service levels at those units, whether it be in terms of processing the patients more efficiently, working on price competitiveness in recruiting and new physicians to participate, we think there is a lot of ground to be gained in making our existing outpatient units a lot better.

So, when I kind of set this up over time, I am looking for an equal thrust and I think that's really what the hospitals and divisions are doing.

Remember of course that for 40 years, our strategies have been developed -- primarily our operating -- local operating strategies have been developed by our local management teams in concert with local physicians and physician dynamics, and that continues to go on today as well.

And what we are doing with Marilyn's group is overlying an organizational structure on it, metrics on it, and some broad focus on it and our ability to get to the market quicker when there are acquisition or development opportunities.

Now that I take all the thoughts, is there anything else you'd like to add?

I'm thinking you have covered most it.

I think that physician partnerships will be a big part of what we do going forward supporting that as well as just looking at processes that are -- our opportunities are in the indoor storage territory, where we have got a pretty good base and then expanding and imaging, I think those will be our areas of focus.

If I could just follow-up you know.

I think you've talked openly about your interest in maybe being a little more aggressive on the imaging side, perhaps looking at some more local regional kinds of operators to acquire.

I'm just surprised we haven't seen anything major announced yet, maybe if you could just comment on that as to whether that is likely to happen or if it's more just localized and we won't see that, thanks.

I think you will see some activity, perhaps as early as the second and third quarter, but I think it will be selective and it will be a small part of a process.

You know, our desirability for acquisitions depends upon obviously what's going on in the market.

If it's a market that's heavily inundated with three standing centers, our interest in acquisition might be small enough we can get a lot of them or depending upon the price.

As I've mentioned we have been considering a lot of acquisition opportunities, and quite frankly as I stated at the outset of this, we're not going to be spending money unwisely in this area.

We think there're opportunities where we are going to be disciplined about our acquisitions that we always are.

We always know that if an acquisition opportunity doesn't present itself -- this is a business, quite frankly, where the barriers to entry are pretty low and so we will create it.

We're doing it in concert with our local facilities and where we see opportunity, and we said, this is a refinement of our strategy, not an overhaul.

Thank you, Amy, we probably have time for one last question.

Thank you, and we will take our final question, there is a follow-up from Sheryl Skolnick from Fulcrum.

Go ahead please.

Thanks very much.

Did you say a total for charity care plus self-pay revenues in the quarter?

I am trying to get a total -- the concept is total uncompensated care in the quarter.

Yeah, the revenue of our net in the quarter again is about, 10.8% of our net revenue is self-pay.

Charity was $219m in the quarter.

All right I can do the math.

Thank you very much and just a follow-up.

You cash flow this quarter was up year-over-year.

I think you reported 772 versus 755, and in particular with the net income, I believe having been down year-over-year.

What was favorable in that?

We did receive a tax refund this year, and then of course the provision for doubtful accounts increase is a non-cash impact on the quarter, which also was an add back to net income.

Yeah, but that also gets netted out in the AR balance change.

So when we see the detail, one wonders how to get to that?

The numbers are

to tax refund.

Excellent, thanks very much.

All right, I want to thank everyone;

Mark and I will be here all day for any follow-up calls.

We thank you very much.

Thank you, and that does conclude today's conference.

We appreciate your participation.

You may now disconnect.