美國醫院公司 (HCA) 2004 Q2 法說會逐字稿

Welcome to the HCA second-quarter earnings release conference call.

Today's call is being recorded.

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

Good morning to everyone and welcome to our second-quarter earnings call.

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

Richard Bracken, President, Chief Operating Officer;

Milton Johnson, our CFO;

Mark Kimbrough, Vice President of Investor Relations and we also have most of the senior management team based here in Nashville with us this morning to help during the Q&A.

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

There are numerous risks and uncertainties that could cause actual results to differ materially from those anticipated in those statements.

And as always we list on pages 3 and 4 of the press release some of those risk factors we suggest you consider.

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

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

As you have heard, we are recording today's call.

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

I might add a welcome to those of you -- the growing numbers of people that do listen to our calls on our Website, welcome to you as well.

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

With that, Jack Bovender.

Good morning to everyone.

Richard will cover in some detail and detail results for the second quarter so I won't be duplicative.

However, let me say I'm pleased with the overall performance of our Company for the quarter and optimistic about the trends we are seeing.

I and particularly pleased our significant efforts over the past 7 years toward improving patient outcomes, patient safety and overall quality of patient care have now generated a financial return for our shareholders.

We have always known patients were benefiting from our focus on an investment in quality initiatives.

While we were confident our shareholders would ultimately see a return on these investments, the significant reduction in our professional liability reserves which occurred in the second quarter, represents a milestone for HCA.

As we indicated in the first quarter this year, we had been given a preliminary indication from our independent actuaries that the Company's insurance company health care indemnity or HCI might be over reserved for future malpractice claims for as much as 40 to $70 million.

In the second quarter, the Company received a final report from the 2 independent actuaries and indeed HCI was over reserved.

Accordingly we recorded a reduction to the Company's malpractice reserves and insurance expense of $59 million which reduced other operating expenses during the second quarter.

Contributing to the improvement in claims data is the Company's continued commitment to technology and training that we believe improves patient care and reduces medication errors.

As an example, we now have 90 hospitals live on our e-mar (ph) bar coding initiatives and plan to have all of our hospitals live by early in 2005.

Data shows these systems are reducing hospital medication errors by nearly a third.

Our prenatal initiative has resulted in all 4600 HCA labor and delivery nurses being certified in fetal heart monitoring.

This project has resulted in a significant decrease in OB-related malpractice claims.

This fall we will begin our HCA cardiovascular centers of excellent program designed to recognize HCA hospitals that truly excel in cardiac care from credentialing (ph) to outcomes.

Another area of the Company where we have intensified our efforts and investments is outpatient.

I believe this area represents a great opportunity for HCA.

Late last year we began to reorganize our outpatient operations group and enhance the focus of operations in this service area.

Marilyn Tavenner, President of the Outpatient Services Group has been busy putting together her management team and working with hospital management to better understand the dynamics and competitive landscape of each market.

Last week Marilyn was joined by 1 of HCA's longtime Senior Officers, Bruce Moore, who will be the COO of our outpatient group.

We are encouraged by the growth in outpatient services, specifically outpatient surgeries during the first half of 2004.

Growth we have experienced in the first two quarters of the year are the results of several factors, including the following examples.

Two new surgery centers were added; 1 in Western (ph) Virginia and 1 in Denver, Colorado.

We syndicated 3 existing surgery centers over the past several months which provided improvement in the overall performance of these centers.

Over the past year we have added new partners and increased overall minority partnership percentages from 25 percent to almost 35 percent.

This increased the overall number of physicians who were treating some component of their outpatient cases in our ambulatory surgery centers.

Capacity was added to 6 existing sites positively impacting the volume of those centers.

Regarding imaging, we have completed 2 stand-alone joint venture or acquisitions in the second quarter and have several opportunities under letter of intent or in the process of definitive agreement.

We would expect to complete additional imaging acquisitions or joint ventures which complement our hospital networks by year end.

You can expect to see a more rapid acceleration in outpatient development activities during the rest of this year and into next year.

Let me conclude with a couple of comments on the uninsured.

As we noted in our release this morning, uninsured admissions and emergency room visits continue to grow, although at a rate somewhat slower than we have in previous quarters.

Uninsured emergency room visits increased 16.9 in the quarter, comprising 20.5 percent of our total emergency room visits.

While uninsured admissions grew 15.2 percent, representing 4.8 percent of our admissions.

Milton Johnson will talk more about bad debts later in this call.

Having said that, we do believe the process is implemented at our hospitals can and are beginning to mitigate some of our uninsured bad debts.

Improved upfront collections procedures and increased collections of patient copays and deductibles required deposits for those non-emergency patients seen in our emergency rooms.

In addition, enhanced patient evaluation in our emergency rooms has already started to provide encouraging results.

As you have heard me say many times before, the issue of the growing number of uninsured Americans must be addressed at the highest levels in this country.

I'm pleased to see growing interest from the public and private sector in discussing solutions to this significant issue.

Finally let me take a moment to recognize Milton Johnson as HCA's Chief Financial Officer effective last Thursday.

Milton is a 22-year HCA veteran.

His appointment streamlines the Company's financial operations and is appropriate in today's strict regulatory environment.

Now Richard will discuss results of the second quarter.

Thanks, Jack and good morning.

Let me start by characterizing our second quarter as one generally consistent with our expectations and in line with most of the trends we have been sharing with you over the last several quarters.

In a nutshell, growth in patient volume was generally soft.

Pricing growth or net revenue for adjusted admission increases remain stable sequentially from the first quarter; expense management in most categories was favorable and the quality of our reported revenues measured as cash collected, was strong.

The 2 major factors which continued to negatively affect growth in our financial performance remain at inconsistent volume trends and difficult bad debt and/or uninsured levels.

Now I would like to comment on all of these factors in more detail.

Same facility in patient volume increased four-tenths of a percent for the quarter somewhat down sequentially from the first quarter which was 2.5 percent and the prior year's second quarter of six-tenth of a percent.

Please recall that during the last 12 months we opened 2 new hospitals in existing markets, Las Vegas and Nashville that drew some patient volume from other proximal HCA facilities.

Accordingly these patients are not recognized in the same facility calculation although they remained in our network of hospitals.

Adjusting to include the admission volume of those 2 facilities, or as we call it -- same market admission growth for the second quarter was 8/10 of a percent, approximately double that identified on a same facility basis and slightly ahead of our prior year's second-quarter experience.

In patient admission growth for each month within the quarter varied and growth rates for April, May and June were an increase of 4/10 of a percent, a decrease of 1.3 percent and an increase of 2.1 percent respectively.

As can be noted, volume growth continues to be somewhat volatile and therefore more difficult to project.

Although in some markets in patient volume growth trends were unfavorable, many markets experience favorable growth rates.

Markets experiencing particularly strong same facility admission growth in the quarter included the Jacksonville market, which increased 10.7 percent; the Florida Panhandle market, up over 6.5 percent;

Tampa Bay market, up 3.4 percent;

Brownsville, Mccallan (ph) markets up over 13 percent;

Corpus Christi and Austin markets, up 4 percent; and the Nashville and Chattanooga markets were up 6.1 and 10.3 percent, respectively.

These markets benefited from different factors including new capital projects and services and successful contract renegotiations.

Same facility equivalent admissions increased 1 percent in the second quarter reflecting an improved outpatient trend.

Same facility in patient surgeries increased 1.4 percent which followed a 2.4 percent growth rate in the first quarter.

This reflects 2 consecutive quarters of positive growth.

This is notable given that in every quarter of 2003 we experienced either flat or negative growth.

Total outpatient surgeries increased .9 of a percent for the quarter.

Outpatient surgical cases grew 4.1 percent at our freestanding center which incidentally have experienced 11 consecutive quarters of (indiscernible) growth and declined slightly in our hospital-based outpatient surgical units.

Our experience here is consistent with the recent trends that we have shared with you.

Net revenue per equivalent admission growth was within our expectations of 5.6 percent of a reported basis and 5.7 percent on a same facility basis.

This ratio has been under pressure due to 2 main factors; reductions in outlier payments which were $35 million less in the second quarter compared to prior year, and charity care write-offs, which increased 23 million over prior year.

Adjusting for these factors, net revenue per equivalent admission grew 6.3 percent compared to the prior year.

As I have stated on prior occasions, we remain comfortable with the managed care pricing environment and there is really no new information to report here.

We have approximately 44 percent of the 2005 and 20 percent of the 2006 managed care book completed at average rates of approximately 7 percent.

As stated in our release, net revenue growth in a second quarter increased 6.7 percent on a reported basis and a 6.8 percent on a same facility basis.

Outpatient revenues increased 8.2 percent.

From an expense management perspective, most indicators were in line with recent trends and our expectations.

Importantly, labor costs once again faired well.

Salaries, wages and benefits expressed as a percentage of net revenue for the quarter were 40 percent generally consistent with our prior year's performance.

Productivity levels have been managed effectively during the fluctuating volume periods and we continue to experience favorable year-over-year comparisons in average hourly rates and the cost of contract labor.

In the second quarter, average hourly rates increased 4.9 percent and contract labor expense, expresses as a percent of total salaries was 6.2 percent.

This compares to an 8 percent level in the same period of last year.

One expense area where we are beginning to see increased pressure is in the cost of supplies, most notably in our technology and pharmaceutical purchases.

Supply costs, expressed as a percent of net revenue was 16.6 percent for the quarter, up 70 basis points over the prior year.

Overall technology costs, including effects of both volume and pricing increased 21 percent while pharmacy costs increased 10.5 percent.

The largest area of supply cost increase was coronary stent.

Coronary stent purchases were $41 million for the quarter, up 17 million from the second quarter of last year due to the introduction of the drug-eluding feature.

Remember the drug-eluding stent was approved for use by the FDA in May of 2003 and therefore year-over-year comparisons for stent costs should improve as we move throughout the remainder of the year.

We do believe our supply chain initiative have been very successful in helping to mitigate these cost increases.

For example, our consolidated warehouse service centers have allowed us to direct ship with manufacturers saving distribution fees and reducing inventory levels.

Also we are forecasting over $40 million in savings this year due to our division based contracting strategy for pacemakers and defribulators.

Currently we're finalizing a similar strategy for orthopedic implants and stents.

We plan to negotiate and begin implementation of these contracts by the fourth quarter.

The other operating expense line obviously benefited from the $59 million malpractice credit; however, even adjusting for this credit other operating costs improved by 70 basis points.

Relative to bad debts, I won't spend too much time on this since we have asked Milton to comment on more details, but I do want to say a few words.

First, bad debts for the quarter expressed as a percentage of revenues was 11.3 percent.

The first sequential quarterly improvement we have seen in approximately a year.

While this is a good data point and we are pleased with it, we feel it is far too premature to suggest that we have reached some level of stabilization.

As Jack stated unfortunately, many of the negative macroeconomic factors remain.

Despite these external issues, we do think there are things we can do and are doing to mitigate these factors and our operations and finance teams have many initiatives underway.

Generally, we continue to see opportunities to mitigate these costs in 2 major areas; that being improved collection of copays and deductibles and better utilization management for the non-emergency room visits and hospital admissions.

Additionally we are strengthening many of our internal collection processes.

Cash collected during the quarter was strong.

For the quarter, cash collected as a percent of trailing 60-day net revenue less bad debts was 103.6 percent, giving us continued confidence in our revenue recognition process.

Net days in Accounts Receivable were 49.

Before I turn this over to Milton, I would like to close with a couple of additional thoughts.

Earlier in my remarks I indicated that we recently opened 2 new facilities, 1 in Nashville and 1 in Las Vegas.

We also opened an additional hospital in our nonconsolidating Denver market last August.

All of these projects are doing very well and we are encouraged by their performance.

Additionally, I would like to welcome Charlie Evans, our new President for the Eastern Group.

I think many of you have met Charlie over the years and he brings a tremendous amount of experience to our executive management seemed.

Additionally because of various promotions, we have had the opportunity to place 3 new division presidents.

Let me recognize Margaret Lewis, President of our Central Atlantic Division;

Michael Joyce, President of our Southeast Division; and Maura Walsh, President of our Gulf Coast Division.

We look forward to introducing these folks to you in the months ahead.

With that, I will turn the call over to Milton.

Good morning.

This morning my comments will address bad debts, specifically our recent accounting change at the hospital level and the key drivers of uninsured revenues from the resulting bad debt expense.

First, as the Company announced in our first quarter earnings call, during the second quarter we changed the accounting method used by our hospitals to account for bad debt expense.

We made the conversion in April and I'm pleased to report the change went smoothly without any material issues.

As a reminder, we changed our method of reserving for bad debt at the hospital level to a hospital specific uncollectability percentage which is applied to self-pay accounts.

Previously all hospitals used a day metric aging approach to determine bad debt expense.

Now hospital methodology is now consistent with the approach HCA was using in recent quarters at consolidated level.

The change in methodology had no material impact to our consolidated bad debt expense this quarter; however, as expected, it did significantly impact bad debt expense at the hospital level.

Certain hospital's bad debt allowances increased while others decreased, dependant upon their collection trends and payer mix.

Going forward, each facility's collection trends and payer mix changes will be more timely reflected in bad debt expense.

We are confident this change in accounting method will allow our local hospital management teams to react more timely to changes in business trends that impact bad debt expense.

At June 30, 2004, approximately 89 percent of all uninsured and self-pay accounts are reserved.

Unreserved self-pay accounts are approximately 366 million consistent with recent trends.

Next, I would like to address the key drivers of HCA's increase in uninsured revenues and the resulting bad debt expense.

During the second quarter, uninsured revenues increased 32.7 percent over the second quarter last year.

Uninsured admissions increased 15.2 percent and uninsured unadjusted admissions increased 13.4 percent during the second quarter.

The increase in uninsured volume resulted in approximately 41 percent of the uninsured revenue increase.

Price increases were between 8 to 10 percent, using an average price increase of 9 percent, approximately 28 percent of the uninsured revenue increase would be attributable to price.

The acuity of the uninsured patient is up 5 percent over last year.

This would represent approximately 15 percent of the uninsured revenue increase.

The remaining portion, 16 percent is primarily related to higher resource consumption.

For example, in the ER we're seeing increases in the use of CT scans, lab and pharmacy.

Our data indicates uninsured patients have an increased intensity of service level from last year.

Keep in mind that revenue per adjusted admission from uninsured volume is expected by many factors other than price increases.

Net revenue per adjusted admission can be affected by acuity, the expanding use of technology and resource consumption.

In summary, in the second quarter our estimate indicates that the single largest factor contributing to the growth in uninsured revenue is uninsured volume growth.

Volume represents about 41 percent of the growth followed by the increase in the intensity of service consisting of acuity at 15 percent and resource consumption and technology at 16 percent, for a combined 31 percent and price increases at about 28 percent of the increase.

At this point, I will turn it back over to you.

Milton, Richard and Jack, thank you very much.

Gwen, would you like to come back on and poll for questions?

We would encourage everyone to hold their questions to 1 at a time in the interest of giving everybody opportunity to ask questions.

Thank you.

(OPERATOR INSTRUCTIONS) Ellen Wilson with Sanford Bernstein.

I was wondering if you could drill down a little bit more on the uninsured kind of a couple of things related to that?

First, what was your same facilities admissions growth year-over-year, if you exed out the uninsured?

If you look at our same market which we think is more appropriate if you had those facilities, our same market admission growth was 0.2 percent excluding the uninsured.

Okay.

Related -- from my perspective, the year-over-year uninsured volume was still really, really high and higher than what I was expecting.

Could you go into when you actually started implementing the actions that you talked about at the investor day and in recent months and how far you are into that?

In other words, are you seeing any benefit of that in the 2Q results or is that still to come?

Ellen, thank you.

Beverly Wallace, do want to talk about that?

In May, all of the hospitals of the patient account service centers came together, created their plans specific to each hospital and started the implementation process.

June 1 was our kickoff date.

At the end of June, approximately 50 percent of those plans were in place and the remaining pieces were in place at many of the hospital but not at all of the hospitals.

We were focused on those hospitals which had a higher level of uninsured first.

At the self-pay collection units we have also had a deep dive into our processes there and what we have identified is an opportunity to further segment those accounts into collectibility ratios to identify where we should focus our effort.

We have also extended our payment plan for the uninsured from a 24 to 36 month payment plan to a 5-year payment plan if they qualify.

We have implemented check by phone which helps those that are paying to pay more regularly and efficiently and then we have also reinforced our advanced negotiation training.

Many of these pieces were implemented in June and the front end collection piece was implemented first of June so we have seen the best improvement there but all of these pieces and parts will come together over the next couple of months.

Your experience in June -- if you looked at it on a month-by-month basis in the quarter, could you tell an actual difference in the uninsured volume trends or collection?

The front end collection for our hospitals actually went up approximately 30 percent compared to the same quarter last year.

We felt very good about that and from a volume trend perspective, it is just too early to measure that because we really only have about half a month under our belt with all of the changes that we have implemented.

Okay, thank you.

Aaron Kumar (ph), J.P. Morgan.

Good morning.

Just a couple of quick questions on your balance sheet and where you see it headed.

Clearly there was some improvement in the quarter and now earlier in your conference call you have made pretty clear comments of where you want to be by the middle to end of 2005.

Could you give any guidance on that?

The guidance we have given before is that our original target was 55 percent debt to total capitalization which we are back to that level at the end of this quarter.

We anticipate that that ratio will improve between now and the end of next year and could improve to approximately 50 percent.

Earlier you said you could be targeting the high 40 percent range as well.

Could you also answer the question in reference to any share repurchase program, the program that you had is currently close to and end if not come to an end?

Could you give us any discussion on that as well?

Our original $1.5 billion share repurchase program has been completed.

There were some settlements of about $8 million in the first part of the third quarter, but that program is now completed.

As David says, we have completed the $1.5 billion share repurchase.

That means that we have repurchased since 1997 over $7 billion of our stock with an average price of between the 30 and $31.

That has been a very successful program.

We do not contemplate any more share repurchase for the rest of this year, however, we will take a look at it toward the end of this year and the first of next year with our eye to as we have said all along, to have a share repurchase program as part of our ongoing financial strategy that will at least manage our share account.

Having said that, we have also been very clear that when significant opportunities arise because our stock is depressed for whatever reason and we have seen that happen a couple of times in the last 3, 4 years, that we will in fact seek from our Board, permission for another share repurchase program and be in there aggressively repurchasing our stock on an opportunistic basis.

So we intend to be; number 1, flexible with a share repurchase program, to use it to benefit our shareholder if such unusual opportunities arise.

But number 2, an ongoing structured repurchase program at a lower-level designed to maintain our share count.

Gary Lieberman with Morgan Stanley.

I was hoping you could give us the statistic for the year-ago period; what were uninsured admissions as compared to total?

Then I had just a quick follow up that I will ask while you guys are looking for that number.

You mentioned at the investor day some of the work you had done with McKinsey (ph) in terms of improving the collection process.

Can you bring us up to date there?

Have you implemented all of the suggestions that they have made or are there additional things that may be coming down the pipe?

Thanks.

We are in the process of finalizing the McKenzie review of our self-pay collection unit.

Some of the parts that they identified i.e., account segmentation, we are in the process of implementing.

So we are implementing as they identify opportunities and they should be complete with that review by the end of August.

A year ago, Gary, it was 4.2 percent of total admissions -- that's self play and charity combined.

Again we are at 4.8 at this point.

Darren Lehrich with Piper Jaffray.

Thanks.

Good morning everyone.

Jack or Richard -- maybe -- could you just comment a little bit on the FTC report that we saw come out the end of last week?

I just wanted to get your impressions of that, particularly as it relates to their conclusions on CON (ph) and the definition of geographic markets and how that might impact you going forward with your acquisitions?

Thanks.

We got it and read it with interest and I think it is probably too early to really dissect it to be able to say what it means.

We have obviously seen some trends in parts of our markets to loosen up CON particularly on the outpatient side and in certain high technologies; for instance in Florida, pretty much opened up open heart surgery for all comers.

Those kinds of situations, I will be quite frank when it comes to this, we have a somewhat split personality about this.

There are areas where we think the strictness of CON is good and important.

There are areas in the country where we would like to see it be not so strict.

And I guess that quite frankly is a reflection of where our specific positions in each of those markets might be.

I hate to sound selfish when I say this from a public policy standpoint, but it is obviously the way we see it.

I think at least from the preliminary report there are some significant problems with some of the information that is in this report.

Obviously when they make -- they say they make or take no specific formal position on limited service physician-owned hospitals, but do go on to say that it might be a new form of competition that may benefit consumers, they have obviously not looked behind the curtain at this and what it really means as far as the potential for devastating general acute care hospitals that serve all parts of the population regardless of the ability to pay as well as provide services that are not as lucrative as some of the specialty hospital services provide.

I think as I read this, they didn't do a lot of deep diving into this whole issue about either certificate of need or specialty hospitals and a lot more work needs to be done on this.

As you know, the GAO (ph) is right in the midst of an in depth look at the whole issue of limited service physician-owned hospitals and we are certainly participating in providing the kind of information needed for that.

I think at the end of the day, a lot more work will need to be done on this and I don't see this report as a huge threat on the horizon right now.

We just have to monitor it and be careful about what is going on as this develops.

I think you were referencing -- when you said GAO was studying, it's CMS.

CMS -- excuse me.

If I could just follow up and clarify 1 thing.

I think you previously had disclosed for Health Midwest what the earnings impact had been.

Could you just talk about that and give us metrics there on the salary line?

Thanks.

While I'm starting out, maybe you can look at this salary line impact.

Health Midwest in general -- it was a really tough quarter for Health Midwest.

It was slightly less than 2 cents dilutive.

We had been running about 1 cent so just a very slight bit in the quarter.

Quite frankly we are pleased on a lot of fronts in Health Midwest.

We are pleased with our management teams, the implementation of our systems, some of the cost management.

But like the rest of the industry, it is affected by all of the other issues so it is a little bit slow going right now.

We are still optimistic about hitting a breakeven on a quarterly basis by year end and I think we have a lot (technical difficulty).

This is Jack.

I had the opportunity the week before last to make a visit out to Kansas City, my first since the acquisition was completed and visited most of the hospitals, spent time with the leadership teams.

I feel even more optimistic about Health Midwest and its future than we did when we actually acquired the facilities.

We are making some important, significant changes in leadership at some of the bigger hospitals.

The morale is good out there; the motivation is good.

They are very appreciative of the equipment that we are moving particularly on the imaging side.

I think we are going to see some significant progress made there over the next 2 or 3 years and it is going to be one of our flagship markets going forward.

On a salary basis, just to answer that number, the Company would be at 39.7 without health Midwest consolidated at 40.

Thanks a lot.

Lori Price with J.P. Morgan.

I have a question for you Jack and then a quick follow-up.

The first question is this is now the second quarter in a row where you have experienced a rise in uninsured ER visits and hospital admissions.

It really seems disproportionate shift to your peers.

And I am wondering if you have had any further thoughts on whether there may be some other factors influencing your particular situation like your generous charity policy that has drawn some real national attention or the increased centralization of your billing and collections over the past couple of years?

No, I think the main drivers in relation is to shift to peers has to be that first of all we are concentrated in the 2 worst states in the country for this problem of uninsured and indeed collections on accounts; whether it be hospital or any other form of consumer debt, that is Florida and Texas.

That has had obviously a significant negative impact on us in that case.

The second thing is that we are located in some large urban areas different from our peers where the impact of the uninsured is a lot more sensitive as far as its impact on earnings.

For instance, Houston, which has been a significant negative factor for us over the last year and we provide high-level services in these institutions, not just primary or secondary hospitals but tertiary hospitals, many of them with certain levels of trauma centers.

I think those are the main factors.

The PAS' or the patient service centers had mitigated a lot of this problem that we would be seeing.

It would be in fact significantly worse if we didn't have the discipline and the consistency of practice that is coming out of these service centers.

In fact, the ability to change collection procedures to get more focused in certain areas such as collection of co-pays and deductibles on the front end is a lot easier to implement out of 10 different service centers than trying to implement our new policy in 190 different locations.

So I think those have helped us significantly and the problem as I say would be a lot worse.

As far as the generosity of our charity policy, it has quite frankly been hard to as Beverly would tell you, to get the necessary paperwork even though we've reduced the complexity of that significantly to get some of these people qualified for charity care.

We don't see that as a big factor.

We see it as the major factor --as the macroeconomics in the specific markets that we are serving.

That's helpful.

Let me add 1 thing and somewhat related and you probably saw I think it was Friday that the CMS came out with a proposal and it is a fast-track -- they want comments by August 16, funding for undocumented aliens.

This is actually part of the MMA bill, which included $250 million a year, starting in '05 through '08 to help providers defray that cost.

It is way too early for that to be in place.

It is way to early for us to know whether or not we can get those funds but if in fact it is a good plan, we should in fact be able to access some of that so we will see on that and it could help us some.

One last thing, Lori.

I think -- and this is not meant as a comment about anybody except us, but I think as you know we are very disciplined in our process of both how we recognize revenue and how we account for revenue deductions before the net revenue line as well as our recognition policy on bad debts.

So we are very disciplined and we are very conservative in the way we approach that.

I think that gives you the ability to rely on the numbers that we are reporting to you when it comes to bad debts and charity debt.

I do appreciate that.

It looks like your same-store revenue per admissions were up sequentially but revenue per equivalent admission was slightly down sequentially.

I'm wondering if there was a reduction in outpatient acuity or outpatient pricing in the quarter?

Actually we saw good outpatient --.

Volume.

So was there a pricing impairment in the quarter?

No, nothing I am aware of.

Okay, thank you.

I would say over time and as a general strategy, we do in our managed care agreements preferentially price toward our inpatient business, and we see that as a trend going forward.

Great, thank you very much.

Kevin Berg with CSFB.

A follow-up on the Health Midwest.

You guys did a little bit weaker than expected.

Could you go into a little bit more detail on what was going on there this quarter?

And then I guess, you also mentioned breakeven by year end.

What gives you the confidence that you will be able to reach that level?

The quarter for Kansas City from a volume standpoint was generally consistent with the first quarter.

We were actually up on an inpatient basis by about 1 percent for the quarter year-over-year, in our outpatient activities, we are generally consistent with that for the most part.

As it relates to the issues that drove the deterioration, it is really the same issues that are affecting the rest of our hospitals.

We're seeing a little bit of a creep in bad debt expense and we had to deal with that in the quarter.

That contributed to the variance somewhat.

We were actually up a little bit over our budgeted expectations with bad debts in that market.

And then secondly, supply costs have trended up in this market primarily because of the technology creep that we have seen in the rest of our hospitals.

Those 2 factors are the primary factors that are driving the performance deterioration in the quarter.

We think that bad debts have generally been stabilized and the adjustment that we took in the second quarter was more of a hindsight that was related to Kansas City in particular so we don't anticipate that same adjustment going forward.

So that will be part of the improvement that we see.

From a labor standpoint, we continue to improve our efficiencies.

We were about 1 percent under our budgeted labor costs for the quarter, so that cost category looks good.

Our revenue was generally in line with what we though, although we haven't achieved all the volume that we would have hoped in this market.

We did receive this past week approval to replace the 2 hospitals in Independence, Missouri.

We think that is going to create both a consolidation efficiency opportunity going forward as well as marketshare opportunities.

We're in a process of submitting a second certificate of need to replace another hospital which should position us we think, favorably as well for both efficiencies as well as marketshare gains there.

So as it relates to breaking even in 1 of the last quarters, we have a number of system conversions that are underway with our Medi Tech (ph) system as well as our patient accounting system -- that is generating efficiencies as well as some cost opportunities for us as we consolidate into our patient account services.

And we continue to leverage the ITS (ph) platform that we have here in Nashville.

I think that, coupled with our supply chain consolidation that is underway, will continue to generate improvements in performance that should lead us toward a breakeven proposition by year end.

Okay, thank you very much.

A.J.

Rice with Merrill Lynch.

Just to maybe switch gears with some of the other discussions.

I was going to ask you about managed care contract.

I didn't hear you say -- maybe you did -- where you stand for '05 and '06 contracting and if you can give us any flavor for aspects of the contract structure that might be changing if any?

As well, just an update on Blue Shield Blue Shield, Tennessee?

I know there was a big announcement earlier last quarter and last year had had some impact on you.

Is there any return of that volume that you can point to?

Let me start with the managed care and Charlie maybe you can chime in on the Blue Cross of Tennessee contract.

We have 44 percent of the 2005 and 20 percent of the 2006 managed care book completed and these are all at rates at about 7 percent.

In terms of the nature of the negotiations, there is really no news, A. J. here as well.

We continue to get technology pass-throughs as we can and really to a pretty large extent, the rate negotiation we continue to look at on a market-by-market basis so we're able to really leverage all of our assets in a given markets in the rate negotiations.

I would say on balance, the managed care book is really pretty predictable at this point in time.

As you know, we recontracted with Blue Cross April 1, for 30 months.

The good news is that the inpatient volume is already at 98 percent of where we were prior to losing the contract in the '02 period.

So we have really recovered all of the inpatients back to our run rate.

The outpatient business has not recovered as quickly although as we move into July, it looks like we're almost back to a full 100 percent recovery with outpatient as well.

It looks very positive.

Kenneth Weakley with UBS.

I was wondering -- you had mentioned earlier your top 5 or 6 markets down in Jacksonville and the Florida Panhandle and all of that, Tampa, Mcallen.

In terms of looking at how stable that set of markets has been in terms of being in the top 5, I am just wondering how consistent your top 5 markets are through time maybe what variables account for that stability or lack thereof?

As an add-on, how much more difficult is it to manage your operating cost in an inconsistent volume environment?

I will take a stab at it first.

I would say generally our growth markets are pretty consistent over time.

They do vary a little bit from quarter to quarter, but in general we have had over the last couple of years of strong growth trends in our Texas markets, even considering the uninsured levels.

I would say for the most part that would be the case this year as well.

The only exception to that in the Texas market has been in our Houston market per se.

Houston has been a very difficult market for us, not for all of the hospitals in the market -- there are really just isolated around 2 of our smaller hospitals and they do have the effect of bringing down the growth rate of the overall market.

But I would say in general, strong growth rates in our Texas markets and in many of our Florida markets as well and even adjusting for the uninsured.

In terms of the costs -- the question about how do we deal with managing cost with fluctuating volumes?

It is more difficult and that is why I said in my comments I was pleased with the productivity performance of labor; generally flat, actually it was up just a tiny bit unfavorable -- just a tiny, tiny bit.

But given that these volumes are fluctuating that means there is a lot of attention by our operators, our hospital managers on effectively managing their labor costs.

I would say that the notion of continuing to bring down our contract labor costs while volumes are moving around is another symptom of that as well.

Another signal that we're really managing our labor costs well.

And labor cost really is the major cost factor we pay attention to labor and supply.

If we can effectively manage labor and supplies and fluctuating volume levels, we are a long way along.

Do you think the definition of what is a good market will have to evolve at some point in the future if the uninsured issue does not self correct?

I mean we have always used demographics and your capital spending strategy is the primary determinant to your local market success.

But if you can't get paid for your patient volume, how much pain do you need to absorb before perhaps certain markets of which under the previous environment were considered good, you will have to redefine and then reconsider your resource allocation?

That is a fair observation.

Obviously, some day and some way we have to get paid for these uninsured patients and if there are no changes forthcoming in payment for the uninsured, what is a positive market?

What we define as a positive market might change.

We're not ready to go there yet on that.

We think that the underlying characteristics of the markets that we are in now are overwhelmingly positive.

We are in large urban markets.

We tend to be in the in suburban markets.

There is a lot of population growth.

I think it creates a lot of upside for us.

The uninsured load is an effort for us to deal with but if there is some payment for the uninsured, it is going to be contributory.

Thanks.

Just to reiterate what Richard said, even if we could theoretically and ethically close some of these emergency rooms because of the "bad debt issue" we would not do so simply because a great majority of these patients still come into these emergency rooms being admitted indeed with trauma or heart attacks or other situations that require high levels of care have insurance or are covered by Medicare or Medicaid.

Even though we have seen this number rise significantly and it is a burden for us, I don't see any place in the country -- and I am looking at Charlie and Sam as I say this that we would choose to absolutely redo, close emergency rooms or whatever trauma centers or whatever because they still generate a significant portion of covered patients and that is indeed what allows us to bear the cost of the uninsured and the indigent in these markets.

I just had some information given to me that we prepared for a study we have been doing.

In our top 15 markets in admission growth grew over 5.5 percent and if you adjust that for the uninsured, it was still at 5 percent.

So it is still a pretty solid growth rate for us.

Some of those markets that I profiled in my comments, like the Jacksonville market, I said grew 10.7 percent.

If you adjust for the uninsured, it is 10.4.

Florida Panhandle, I said 6.5; adjusted its 5.4.

These markets, even though there is a pretty healthy uninsured level there, they still have strong underlying growth characteristics to them.

Is it true that the profitability correlates strongly with the volume or is that no longer factually correct given all the changes in the market?

No, I would say very much so.

Okay, thank you.

Oxana Butler (ph), Citigroup, Smith Barney.

First on the orthopedic implants and stent contracting that you mentioned, can you just give us a sense of what is the magnitude of the savings that you expect and the timing?

With the CV (ph) contracts and patient and defribulators, we were to realize average savings of about 15 to 17 percent depending on the product category.

We have begun some contracts and have actually have completed 1 division contracts for hip and knee implants and the savings we think we can generate in that area will be consistent with what we achieved with the CV (ph) agreements.

At this point, it is unclear on the stents.

We're in negotiations right now with both of the providers there so I don't have a good feel for that.

But I would suspect when you're consistent -- when you can commit volume at a division level related to medical devices, that pricing improvement seems to be consistent across these various classes of technology.

But the 15 to 17 percent savings, what is the timing of that?

Is that retroactive partly but going forward, what do you expect to achieve there?

Is it '05, '06?

Yes, the CV agreements are in place right now and will be effective going forward over the next year.

The orthopedic agreements and stent agreements will generally be in the 1 to 2 year time frame.

In terms of the uninsured -- just a couple of quick clarifying questions.

You mentioned that the acuity is going up about 5 percent and you're also seeing higher resource consumption.

What is your expectations for that going forward?

Again obviously you are implementing various measures on collections, but are some of the operational improvements you think going to improve the resource consumption as well?

One of the things I think you can expect is as we put in tougher measures on the front end as far as less urgent patient, then you would expect the patients that the uninsureds and the indigent do in fact make their way in would in fact have higher acuity levels by definition.

What kind of outlook to put on that -- how much it is going to increase is a little hard to say but I would think you would expect to see it increase simply because of our front-end processes.

I just want to say one thing, we're seeing the acuity increases in the ER for the uninsured patient and I think that in that environment it is very difficult to segregate the uninsured from the insured in the ER.

I think that again, that presents some difficulty in managing it because most of -- again it is coming into the ER environment and a lot of that resource consumption.

Joseph Chiarelli with Oppenheimer.

A couple of quick things.

Just, Jack, you had presented in front of the House subcommittee some potential for new pricing policy.

If you could maybe give us -- again reiterate what that would be and possibly when that would be implemented?

Secondly, on the malpractice insurance improvement, can we expect malpractice insurance prospectively then to the premiums to be down or was this just kind of a one-time adjustment?

Thanks.

Let me take the first one and I will let Milton address the second one because that is a very important question relative to the changes in process that we have made relative to patient quality and safety that will impact us going forward.

What I testified before the House Subcommittee was that in addition to and with some changes to our charity care policy, what we wanted to look at was a new methodology of discounting to the uninsured regardless of ability to pay for the uninsured.

As you will recall, part of our situation with the uninsured was we felt our hands were somewhat tied behind us by CMS pronouncements about discounting policies being related to indigency tests, but it is pretty clear that they've changed up a lot.

What is going on right now is that Beverly Wallace and Eric Ward in our revenues cycle program are working with their people to develop a new charging methodology aimed at the uninsured and essentially it will be developed in order to give the uninsured the same discount essentially that around the average PPO plant in our Company is getting.

We don't have the percentage discount that creates that yet or what the number will be.

I testified before the House Subcommittee for instance, that we might be looking at a program that would relate to the 95th percentile of our average PPO programs.

That number may change in fact, it may come down some as we try to find -- if you will forgive the expression the sweet spot of where this ought to be located.

Then the methodology will be developed around some diagnosis coding, grouping and so forth so that there is not a myriad of charge master discounts, but simply depending upon what your incident of illness is and what the diagnosis around that is then you will get essentially a discounted flat price for that.

And there will be a similar methodology used on the outpatient side that we'll group into outpatient codes to do that.

Then after that is done, for people who don't have the ability to pay -- not just a simply uninsured, we will apply a discount or a charity care program that looks similar to what we have got now, 200 percent or below the care would be free; 200 percent or below the federal property guidelines, the care would be free, again after it has been discounted.

What we do with 200 to 400 percent, we are not sure yet since the discount is being applied before we ever look at the charity care program.

A lot of work has got to be done on that.

Essentially we are working on getting this rolled out for the fourth quarter and I'm glad you brought this up because part of the challenge we will have between now and the end of the year, first of next year when we report fourth-quarter earnings, obviously the geography of things on our financial statements, our income statements will change significantly.

You will be taking an uninsured discount before the net revenue line that would normally have gone into bad debts, thereby reducing your net revenue reported but at the same time, you get a significant decrease in your bad debt line.

The net of all of that is it doesn't change reported income 1 bit.

It just rearranges where it appears on the financial statements.

It does change some of your ratios, for instance your salary, wages and benefits as a percent of net revenue will increase but your margin numbers will also increase.

So that is probably more than you wanted to know, Joe, but it gives you a flavor and as we get further into it, define what our program is, we will obviously report this to you and then give you our estimated impact as far as the geography on the income statement of some of the items that you are used to seeing certain ratios that will now change and change significantly.

Any further, before I give Milton the malpractice question?

It is also going to play havoc with quarter to quarter because I assume that the bad debt expense will be lagged to some degree even when you change your policy?

No, we will work that all into the policies so that we are not false footing you on any of this and we will try to give you a comparison to a the previous quarter that you are looking at as if we had been using the same policy as best we can.

So that you are looking at apples to apples in all of this.

Okay, think you.

The 59 million that we picked up this quarter related to reserves prior to '04.

Whether or now we will have another opportunity to do that in the future will depend upon the trends.

What we saw in our report that we just received is both the frequency or the number of claims declined or were less than the actuarial previous picks and the severity.

The amount of the claims also growing at a rate slower than the actuary previously had picked.

And as a result, we got this pickup.

If our trends continue as they have been recently, very favorable trends as far as number of claims and especially a decrease in large claims, claims over $2 million, then it could be more good news.

Then again if those trends go the other way, obviously it would present a different issue for us on malpractice.

Looking at '04, a big pickup for '04 -- right now we're projecting our premiums to be slightly below the '03 run rate primarily because of tort reform in Texas and Florida.

That is realized in the '04 run rate and as we go forward past that, hopefully, maybe we can get some more benefit from the tort reform but that is where we are right now.

So the only change that you are making for your '04 accruals for the third and fourth quarters would be for Texas tort reform?

You are not including the benefit of what let's call it a catch-up adjustment for arguments sake, you're not including this in the way you are accruing the third and fourth-quarter premiums?

The '04 premiums that we are accruing is based upon the actuarial study.

Again, we did put in or they put in benefits for Texas and we do have the trend related to the favorable frequency and severity also in the '04 but actuaries are -- the tendency to bring that in at a slower rate than maybe realizing it all in one year's trends.

Also we should point out that the trend that we are seeing in our insurance company, HCI (ph), we are beating the industry results.

Again, these favorable trends are not shared across all hospitals in the country right now.

Okay, thank you.

I thank you very much.

I want to thank everybody for being on the call.

Mark and I will be around all day and all week and look forward to hearing from you.

Thank you very much for joining us.

That does conclude today's conference.

You may disconnect at this time.