美國醫院公司 (HCA) 2004 Q4 法說會逐字稿

Good day and welcome to the HCA fourth 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 conference over to the Senior Vice President, Mr. Vic Campbell.

Please go ahead, sir.

Good morning everyone.

As you saw this morning we released our fourth quarter and year-end 2004 results.

They were in line with the previous guidance which we released on January 12.

With me this morning as usual Jack Bovender, Richard Bracken, Milton Johnson, Mark Kimbrough, and most of the other senior officers of the Company who are based -- all based here in Nashville with us.

Let me remind you that today's call will contain some forward-looking statements based on management's current expectations.

Numerous risks and uncertainties and other factors may cause the actual results to differ materially from those expressed in any of these statements.

These factors are listed at our press release and our SEC filings, which we encouraged all of you to look at.

Many of the factors that will determine the company's future results are beyond the ability of the Company to control or predict.

And in light of those significant uncertainties inherent in those forward-looking statements, you should not place undue reliance on them. (technical difficulty) obligation to revise or update any forward-looking statements or to make additional forward-looking statements, whether as a result of new information, future events or otherwise.

And as a reminder, as Regina said, the call is being recorded and a replay is available later in the day.

I'm going to stop my comments at that, turn the call over to our Chairman and CEO, Jack Bovender.

Good morning to everyone.

As I reflect on 2004 I would characterize our results as very solid given the significant environmental challenges faced this past year.

I'm particularly pleased with our finish to the year, a fourth quarter ahead of our expectations.

As you have seen, we reported earnings per share for the quarter of 70 cents.

If one adjusts our results for the year-end balance sheet change in estimate to our receivables and a slightly lower tax rate, our EPS results were still several cents about our expectations and guidance.

As each of you assess HCA's results and actions over the past year, I hope you come away with a couple of important conclusions.

First, this Company is firmly committed to using the strength of its cash flows to, first, invest in both inpatient and outpatient services in the communities we serve.

And secondly, provide significant returns to our shareholders.

With respect to reinvestments, our capital expenditures totaled $1.5 billion in 2004, and we invested another $44 million in various small acquisitions.

During the year we focused more of our capital resources on growing the Company's outpatient services.

We completed 5 outpatient imaging transactions in 2004, and anticipate we will be acquiring or developing a significant number of new centers during the next 12 months.

We also developed 3 and acquired 1 freestanding Ambulatory Surgery Center in 2004, and anticipate developing approximately 6 to 10 a year for the next couple of years.

To date our improving outpatient results reflect an enhanced strategy and focus in this area.

With respect to shareholder returns, early in 2004 after careful assessment of the best use of our cash flows, we substantially increased our quarterly dividend payout from 2 cents per share to 13 cents per share.

In the fourth quarter after a similar assessment of cash flows, along with our balance sheet position and current interest rates, we announced and completed a $2.5 billion "Dutch" auction tender offer repurchasing 62.9 million shares at an average cost of $39.89 per share.

In total in 2004 we repurchased 77.4 million shares at an average cost of $40.18 per share.

During the past 7 years, the Company has repurchased approximately 312 million shares at a cost of $10 billion, with an average cost per share of $32.13.

And this morning we announced a 15 percent quarterly dividend increase to 15 cents per share.

This represents a payout ratio in excess of 20 percent of our 2004 earnings.

As I have promised before, we will continue to assess and implement strategies that use our considerable cash flows to enhance value for our long-term shareholders.

Another highlight of the year of which I'm particularly proud is HCA's industry leadership in addressing the issue of the uninsured.

In January of this year we received approval from CMS to implement our uninsured discount policy.

This program, which will provide a discount to the uninsured 4 for non-elective procedures is similar to what we provide our managed care customers, and will go far to ease the burden on these individuals.

This discount program considered in combination with our charity care policy, which provides free care for all non-elective procedures for those individuals who are at or below 200 percent of the federally established poverty guideline, has been implemented at all HCA owned facilities.

A by-product of this new policy will be changed in metrics associated with our income statement as more revenue will be classified as uncompensated care discount with a corresponding reduction in bad debt expense.

This will create changes in all metrics tied to net revenues.

We will do our best to be as transparent as possible as we go through this change for the rest of the year.

Unfortunately, while our charity care and discount policies will help individual uninsured patients, it will not solve the underlying issue of uninsured Americans.

We hope to continue to work with others in the public and private sectors to develop a broad based solution for this national concern.

As I turn the call over to Richard and Milton, let me say I'm encouraged by several of the data points reflected in our fourth quarter results, including some of the bad debt and uninsured volume numbers.

I'm hopeful that we might see a continuation of some of these favorable indicators in 2005.

Good morning to all.

The release that we issued earlier this morning delineates the key metrics of our performance for the fourth quarter.

Let me start by stating, as Jack did, that not only were we pleased to finish what has been a rather tough year with stronger than anticipated fourth quarter earnings, but and I think even more importantly, to see some improvement in certain key performance indicators that have been problematic for us over the last 12 to 18 months.

I will provide more detail on all of this in a moment, but let me first summarize the quarter.

In short, I believe for the most part our operating results can be summarized as being in line with our expectation and recent trends, with the exception of bad debt expense and surgical volumes which were marginally better.

Growth of inpatient volumes remain soft, although last year's significant flu related volumes make year-over-year comparisons difficult.

Pricing growth remained stable.

Expense management was generally favorable, and cash collected remained very strong.

Operating earnings benefited from strong surgical volumes, good expense control, and a moderation of bad debt related metrics.

Now a little more detail on all these areas.

Same facility inpatient volumes decreased 1.4 percent for the quarter, down sequentially from the third quarter when compared to prior year.

As a reminder, this is a very difficult comparison with last year's fourth quarter growth of 2.1 percent.

Much of last year's volume was given by an early and severe flu season.

In contrast this year our flu, or pulmonary related, admissions decreased by approximately 18.3 percent in the fourth quarter compared to the fourth quarter of '03.

Adjusting for flu or pulmonary related admissions in both years would result in same facility admissions increasing .6 percent, generally consistent with the trend we have been experiencing all year.

For the quarter, same facility equivalent admissions growth, that is taking to effect outpatient volumes, significantly outperformed inpatient volume growth.

Same facility equivalent admissions were up .1 percent.

Once again adjusting this metric for the decrease in pulmonary admissions and pulmonary related ER visits, equivalent admissions for the quarter would have increased 2.1 percent.

Additionally and significantly, same facility equivalent admissions had strong growth on a year-over-year comparison with a 1.3 percent growth in '04 compared to no growth in '03.

This increased equivalent admissions growth reflects an improving performance of our outpatient business.

And we are pleased with the development and implementation of this agenda.

Jack mentioned our recent acquisitions.

Not only are we pleased to welcome these to our network of facilities, but I'm also encouraged by the significant number of other acquisition opportunities in our markets.

As I have said before, we're very disciplined buyers of these units, and consider the build versus buy strategy in every situation.

Our Group President of Outpatient Operations, Marilyn Tavenner is with us today to answer any questions you may have.

But first let me say that her organization is now in place.

Her development teams are active in the marketplace.

And our strategic focus is not only on development and acquisitions but also on improvement of existing operations.

I look forward to continued progress of this business line in '05.

Overall, surgical volumes, whether inpatient or outpatient, were very strong for the quarter, increasing both sequentially and compared to the fourth quarter of 2003.

Total surgical volume was up 1.9 percent for the quarter compared to a -2.3 percent in the fourth quarter of '03, and up 1.7 percent for the year compared to a -1.9 percent for all of 2003.

Inpatient surgical volume also showed improvement.

During the fourth quarter same facility inpatient surgeries increased 2 percent, and were up 2.2 percent for the full year.

This compares to a decrease of .8 percent and .2 percent for the fourth quarter and all of 2003, respectively.

We believe this trend is notable given that in 2003 every quarter was either flat or down when compared to 2002.

Outpatient procedures performed at our freestanding Ambulatory Surgery centers also showed very positive growth in the fourth quarter, with an 8.2 percent increase compared to a 1.3 percent increase for the fourth quarter of 2003.

It is appropriate to note that some of this ASC growth does come at the expense of our hospital-based outpatient volumes.

But even considering this, I think it is important to recognize that on almost every metric outpatient surgical volumes showed positive results.

Total outpatient surgeries were up 1.8 percent in the fourth quarter compared to a -3.2 percent in the fourth quarter of 2003, and up sequentially from the third quarter .7 percent growth.

For the year, outpatient surgery volume was up 1.4 percent compared to a -3.0 percent for all of 2003.

Needless to say, we are encouraged by these growth rates.

Net revenues for equivalent admissions fared well during the quarter at 6 percent on a reported basis, and 6.5 percent on a same facility basis.

This reverses a soft third quarter and puts the year's same facility revenue growth rate at about 7.3 percent.

We believe several factors contributed to this growth, including stable managed care pricing, the increased surgical volumes I just mentioned, a lack of low intensity pulmonary admissions, the impact of the October 1, 2004 Medicare rate increase, and improving Medicare outlier payments.

These outlier payments are up approximately 4 million compared to the third quarter and 11 million compared to last year's fourth quarter.

Managed care revenue per equivalent admission increased 8.8 percent in the fourth quarter and 10 percent for the full year.

As you would expect, the vast majority of 2005 contracts are now in place.

Additionally, almost 40 percent of our 2006 managed care book is now completed at comparable rates, approximately 7 to 8 percent.

In short, we feel the overall pricing environment for 2005 is in line with our expectations.

On the cost side operating expense management, most notably labor, which as you know comprises almost half of our cost structure, was favorable.

As reported, salaries, wages and benefits expressed as a percentage of net revenue for the quarter were 40.4 percent, down sequentially from the third quarter of 40.6 percent, and one of the lower fourth quarter results we have had in recent years.

This same ratio on a same facility basis was 39.1 percent for the quarter and 38.4 percent for the year, slightly less than 2003.

We were placed with the performance of our hospital executive this year in managing labor costs, especially given monthly variation in volumes and the problems associated with the devastating hurricane season.

And I do believe we are well-positioned as we enter 2005.

This result is even more meaningful given that both employee and patient satisfaction levels continue to be very positive.

One component of labor costs where once again improvement was achieved was in contract labor levels.

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

Overall contract labor expense per equivalent patient day is down 9.6 percent from the fourth quarter of '03, and down 40 percent per equivalent patient day from the first quarter of 2003 when we began seriously addressing this issue.

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

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

Additionally, the increase in average hourly rate paid to employees was 5 percent for the quarter, consistent with the trends we have been experiencing throughout the year.

Supply costs, expressed as a percent of net revenue, is 16.6 percent, down slightly from the third quarter, but generally up for the year.

Supply costs per adjusted admission on a same facility basis increased 8.2 percent for the quarter.

As I have previously reported, increasing supply costs are a growing concern for us.

While we are pleased with the successes of the many supply chain initiatives that we have been deploying, such as division based contracting, standardized operating room and cath lab procurement procedures, standardized commodity utilitzation and the substantial contributions of our group purchasing operation, HPG, the cost being passed on to us by medical device manufacturers are becoming increasingly difficult to absorb.

Necessarily we're exploring new contracting strategies to deal with this problem.

And hopefully we will be able to provide more details on these initiatives at the end of the second quarter.

An important development for us in the fourth quarter was that the rate of growth of bad debt expense significantly moderated.

Some of this moderation was due to changes in our reserve estimation process.

And in a moment Milton will walk you through these changes.

However and I think more importantly, we noted a significant slowdown in the growth rate of uninsured admissions.

Uninsured admissions grew 3.7 percent for the fourth quarter compared to a 13.7 percent, 15.2 percent and 7.1 percent for the first, second and third quarters, respectively.

Uninsured revenue grew 38 million in the quarter compared to 184 million, 170 million, and 105 million for each of the first 3 quarters of 2004.

And similarly the uncollectibility factor of our patient due book of receivables, the uninsured and copays and deductibles, increased only 50 basis points for the quarter compared to an average 150 basis points per quarter for the last 5 quarters.

These data points are encouraging, and may reflect a slowly improving economic environment as well as our action plans beginning to gain some traction in our hospitals and patient service centers.

However positive they may be, we're not yet ready to declare these our new operating reality, and look for similar results in future quarters to establish any trends.

Generally we continue believe the opportunities to mitigate bad debt expense remain in 2 key areas, improved collection of copays and deductibles, and better case management and resource consumption.

Point-of-service collections in our hospitals are up 40 percent over the prior year.

On average we now collect approximately 24 percent of the patient portion to -- prior to or at the time of service compared to 15 percent in 2003.

Also accounts receivable related to copays and deductibles compared to December 31, 2003 has actually declined 9 percent.

In summary, bad debt as a percent of net revenue was 10.5 percent for the quarter, and 11.4 for the entire year.

Modifying the fourth quarter for the balance sheet adjustments of 46 million, bad debt as a percent of net revenue were 11.3, still showing improvement.

At this time, however, our projected growth level of bad debt expense for 2005 does not include this degree of improvement.

Obviously, after the first quarter's performance, we will be in a better position to comment on this metric.

One additional highlight for the year was that cash flow from operations reached a record level of 3.05 billion.

And Milton will be providing some more details on this in a moment.

For the quarter, cash collected as a percent of trailing 60-day net revenue less bad debts was 103.9 percent, and was 102.9 percent for the full year.

Net days in receivables were 48.

Now before I conclude, let me mention a couple of other items.

First, regarding the impact of the hurricanes.

Fourth quarter financial results were estimated to be negatively impacted by approximately 5 to 6 million.

This estimate consisted of the loss contributions to earnings from the volume shortfalls of 6 affected hospitals, Gulf Coast, Fawcett, West Florida, Lawnwood, St. Lucie and Raulerson.

Faucett, one of the more severely impacted facilities still had 75 beds closed and has portions of the facility still under construction.

At this time we're hopeful that our total 2005 estimated hurricane impact of $40 million might be on the high side.

More on this as we see first quarter seasonal demands develop.

Secondly, progress continues to be made at our Kansas City operations.

Recall that we acquired 11 hospitals in the Kansas City area in April of 2003.

That year this market contributed approximately 698 million in revenues, and overall was approximately 4 cents dilutive for the 3 quarters of 2003 in which we held ownership.

Specifically for the fourth quarter of 2003 this market contributed 234 million in revenues and was 2 cents dilutive.

This picture improved throughout 2004 during the entire year.

Obviously, 4 complete quarters, the market contributed 885 million in revenue and remained 4 cents dilutive.

More importantly, in both the third and fourth quarters of 2004 there was no dilution from the Kansas City market.

We're optimistic that as we continue to install our system, infuse capital, and reposition these assets it will positively contribute in 2005.

And with that, I will turn it over to you, Milton.

Good morning.

Our comments this morning address the balance sheet adjustment of 46 million related to the evaluation of accounts receivable and our fourth quarter reduction in effective tax rate, resulting in a 19 million reduction in taxes spent.

With respect to the accounts receivable evaluation adjustment, during the fourth quarter the Company made 2 refinements to the hindsight calculations.

The first refinement was to decrease the allowance of doubtful accounts to reflect the estimated recovery of bad debt related to Medicare copayments and deductibles.

Currently, assuming the hospital can meet certain documentation requirements, Medicare will reimburse hospitals for 70 percent of the bad debts incurred from Medicare copayments and deductibles.

Until the fourth quarter of 2004 the Company's estimated recovery only included the accounts written off during the quarter.

Beginning in the fourth quarter the Company has increased the recovery amount to include the expected recovery of Medicare copay and deductibles that has had been reserved in the allowance for doubtful accounts, but not written off.

The second refinement relates to a decrease in the allowance for doubtful accounts to recognize the expected recovery of dollars in secondary collection agencies.

Prior to the fourth quarter of 2004 the Company recorded recoveries from secondary agencies on a cash basis.

Beginning in the fourth quarter, the Company's hindsight calculation now includes an estimate for future cash expected to be received from secondary collection agencies on accounts they have been assigned.

On a going forward basis, unless there is a change in CMS regulations regarding bad debt reimbursement, I would not expect either refinement to have a material effect on future quarterly hindsight results.

Now turning to the reduction in effective tax rate during the quarter.

During the fourth quarter the Company revised its estimated effective tax rate for 2004 to 36.82 percent from 37.77 percent.

As a result, the Company recorded a 19 million reduction to tax expense in the fourth quarter.

The primary reason for the change related to a reduction in estimated state tax expense for 2004.

Currently the Company expects its effective tax rate to be 37.5 percent for 2005 operations.

I caution that many factors, such as state and federal tax policies, the amount of tax exempt income from our insurance subsidiary, and tax settlements for disputed items may cause the Company to revise its estimates.

Next I have a few comments on cash flow from operations.

Cash flow from operations for 2004 were 3.05 billion, up 40 percent over 2003.

However, during 2003 the government settlement payments, net of related taxes, reduced cash flow from operations by approximately $650 million.

In 2004 the Company's cash flow benefited from higher depreciation expense and lower tax payments, after adjusting 2003 for the tax benefit of the government settlement payment.

Cash flow from operations in the fourth quarter was 539 million, down 267 million from the fourth quarter of 2003.

The primary reason for the change is attributable to income taxes.

In the fourth quarter of 2003 the Company had a source of cash from income taxes of 275 million compared to the fourth quarter of 2004 when income tax was a 29 million use of cash.

And finally, as Jack and Richard mentioned, the new uninsured discount policy is effective as of January 1, 2005.

Although this new policy will not have a material impact on operating results, it will have a significant impact on several key metrics that both management and investors follow to determine operating trends.

Beginning with the first quarter of 2005 earnings release and with each quarterly earnings release for 2005, we will provide a pro forma income statement and key operating metrics that will adjust actual results for the effects of new policies.

Vic, at this point I will turn the call back to you.

Alright Milton, Richard, Jack thank you very much.

Regina, if you would come back on the line and poll for questions.

And I would encourage each of you to hold your questions to one at a time so everyone will have an opportunity.

(OPERATOR INSTRUCTIONS) Ellen Wilson with Sanford Bernstein.

On the same store uninsured admission trends, I was wondering if you could drill down a little bit and tell us what that would have been if you adjusted out the, I guess I would call it negative (indiscernible) positive year-over-year flu comp.

So if you took the flu impact out of it a year ago, it was reported to be 3.7 percent up, what would that have gone to at that?

Milton, we haven't run that calculation?

No, we did not run the calculation of the flu impact on the uninsured volume.

But I mean it is safe to assume that would have been higher ex that?

My estimation on that would be that most of those flu related, or a lot of those flue related admissions, are Medicare so the more flu related the actual better the metrics are as far as bad debt.

That is a good point.

I was going to say that our -- in the fourth quarter our Medicare same facility admissions were down 4.4 percent, which is where you would expect to see the decrease.

Most of the older population would be the ones being omitted with flu related sort of illnesses.

Okay, and then if you just give I guess a little bit of color on what you think is really driving the moderation in that?

Is it anniversaring changes in Medicaid policies in some states?

Is it core economic improvement?

Milton, do want to address that?

Yes, it is a complicated question.

I think a few things.

One, of course we have had a lot of initiatives, as Richard mentioned in his call, that we think is having some positive impact on these trends.

But it is hard to quantify those especially this early in these changes.

But one thing that could be happening with the uninsured business is it could be that we have been over the 6 quarters possibly a rebasing of the uninsured activity in our hospitals.

And by that, if you go back to the third quarter of 2003, we saw a pretty big increase starting in that quarter where our total uninsured admissions in our hospitals were about 18.5 thousand per quarter.

It has been as high in the last 6 quarters as 19.5 thousand per quarter.

But it has been fairly -- within about 1,000 admissions over the last 6 a pretty tight band of admissions from the uninsured book.

And so we're starting to get some favorable comps quite frankly, as well that is helping these growth numbers.

So although we did the a dramatic growth in uninsured admissions over the past -- end of 2003 and the early part of 2004, we're not continuing to see the number of uninsured admissions, the actual numbers, continue to increase at this point.

So we are getting some pretty good comps now as well.

Just 1 more and I promise I will drop off.

What was the exact number of uninsured admissions this quarter then?

It was just under 19,000 in the fourth quarter.

Gary Lieberman with Morgan Stanley.

You said that the point-of-service collections were up 40 percent.

I believe you gave a number for that last quarter.

Do you have what the number was this quarter?

Beverly or Milton, either one of you.

Beverly Wallace.

This is Beverly Wallace.

We averaged about 17,300 each month of the fourth quarter -- I mean 17,300,000 for each month of the fourth quarter.

Do you have any feedback on how the discount policy, the early implementation has gone?

Have you seen any increases in admissions attributable to that?

Have you seen any increases in upfront collections because of lower bill that you're presenting to the individual?

Milton?

At this point it is too early in the process.

Obviously just got 1 month of experience with this.

And it is going to take a little bit of time to ramp it up and understand how it is going to impact it.

But at this point we're not seeing any impact in our admissions from the new policy.

This is Jack.

One of the things that is going to create a time lag here is that we try to get as many of these patients qualified for Medicaid as we can.

So it's got to go through a pending Medicaid process.

And then only if that fails, is the discount applied.

So there is a time lag in actually determining whether this is going to a Medicaid patients or an uninsured patient.

AJ Wright for Merrill Lynch.

Just 1 point of clarification in response to the first question.

The guidance for 2005 on the bad debt ratio it sounds like you're assuming right now it continues to deteriorate.

Can you give us some flavor for that?

And then my main question relates more to supply costs.

The HPGs picked up some new customers.

I think Community Health is joining this year.

Also I know you guys have some initiatives that are in the early stages of being rolled out relative to orthopedic implants.

Can you give us an update on those and how those might affect the outlook for supply costs this year?

Milton, do you want to address bad debts.

And I don't know between you and Jim talk about the supply efforts.

Sure, I will take the bad debt question.

In our guidance, in our 275 to 290 for '05 EPS guidance, we're assuming a growth in bad debt expense over '04 levels.

However, the level of growth that we have projected is moderating from the growth rates we have seen in '03 and '04.

But we're still projecting growth in bad debt at this point.

Jim Fitzgerald that runs HPG, do you want a talk a little bit about some of the supply efforts?

AJ, we were very excited when it was announced that Community Health Systems would be joining our GPO as one of our partners there.

They have 71 hospitals and that puts our combined purchasing power as a group to just over $6 billion.

So that is a very positive development for us as we continue to improve our leverage with pricing with the manufacturing community.

In terms of medical devices, and you specifically mentioned orthopedic kits and knees, if you look at it, as Richard mentioned in his comments, the trends in our medical device costs have been very, very significantly going up for the past 5 or 6 years.

As a matter of fact ranging 15 to 18 percent a year.

And these trends really just aren't sustainable in the future.

We realize we have to start looking at some alternatives of how we can better manage these costs.

And so we're looking at a number of alternatives right now, including the standardization of our vendor choices.

But I think the one thing that makes this different than possibly in the past is that we have spent a considerable amount of time involving our surgeons and physicians throughout the country in a series of different meetings where we're obtaining their input and advice.

And of the end of a day we will focus on, number 1, improving the quality of care in these areas, in particular hips and knees, as well as focusing on how we can reduce the cost.

At this time we're not ready to announce exactly what our strategies are as we continue to, again, obtain input from the surgeon community, but in the second quarter we will announce what our strategies will be going forward.

Kevin Berg with Credit Suisse First Boston.

This Alex Christoff (ph) for Kevin.

Just wanted to get a little bit more detail from you regarding the ASC and the HOPD volumes.

What are you assuming here?

Is this sort of the trend that you expect to persist going forward in terms of some decline in your HOPD volumes and pretty significant increases in the ASC volumes?

This is Richard.

Let me start with that, and Marilyn or Bruce, maybe you can add your thoughts as well.

As I understand the question it is how do we see the interplay between growth of our outpatient surgery volumes and our freestanding ASCs versus outpatient surgery volumes in our hospital campuses.

And clearly as I mentioned in my comments, we do see the growth of outpatient surgery on the hospital campuses declining and more moving to the ASC environment.

One statistic that I didn't include in my remarks was that really in addition to the growth rate in the ASCs, we also had a slowing of a deterioration of volume leaving the hospital-based campuses.

So I do think the trend is that we will more more -- a larger growth rates in ASCs and some slowing in our outpatient based units.

In terms of the economics of this trend, how would you compare sort of the average reimbursement between the surgeries performed at ASCs and hospital outpatient departments?

Generally the same procedure performed in an outpatient -- an outpatient procedure performed in an hospital setting would be reimbursed higher than in the freestanding setting.

What would be the multiple of that?

I'm not sure I know.

Bruce or Marilyn, do you have a --?

I think it varies by market, but most of the time if you look at it it is probably around 80 percent of what you would be reimbursed in the hospital-based outpatient setting.

Even though the rates are lower in the ASC setting the cost structure is a lot lower.

And really the margins tend to be higher in the ASC environment.

So we think it is important to have a robust ASC platform in our markets as this business shifts to freestanding settings.

Oxana Butler (ph) with Smith Barney.

Can you please just explain what was the actual change in operations in the quarter that is reflected in the $46 million bad debt adjustment?

Milton?

Sure.

Really not any -- of any material amount would be relative to this quarter.

What that 46 million represents is a valuation of certain cash flows related to Medicare copay deductibles and accounts that have been turned over to secondary collection agencies that we previously didn't have on our balance sheets.

So it was more of a balance sheet revaluation to put those on our balance sheet.

And of course the result has had to run through the income statement in this period, but really does not reflect any change in operations during the fourth quarter.

And are the receivables that this refers to were (indiscernible) previously covering the prior year or 2 years, or what period of time?

We have never in our hindsight calculation recognized those.

So it really is a buildup over a long period of time.

And I can't identify which years it would be attributable to.

But really it is just attributable to the volume of Medicare copay and deductibles, as well as the volume of secondary collection agencies that is driving that valuation.

Okay.

And then just to clarify going forward then you are assuming this will not have any impact on a going forward basis?

Right.

We will continue to put any changes in the value of those 2 balances in our hindsight calculation.

It is my estimate that in any particular quarter that those changes will not be material to the quarter.

And just in terms of the bad debt, one last question, can you give us the actual percent of net revenues that you are assuming in guidance for the bad debt levels?

I know you said you're assuming an increase, but can you quantify it a little bit more precisely.

At this point we're not providing any guidance on that number, other than saying that we are -- in our guidance we have an assumption that it is growing, but again growing at a more moderate rate than what we have seen in the past couple of years.

We built in, again, our range of guidance, 275 to 290, it is pretty wide, a little wider than we historically have provided.

And it obviously has varying assumptions.

Bad debt is somewhat of a moving number, so it has got a range on bad debt not a specific point.

And there are other factors there too as we talked about earlier, the hurricane carryover, what happens with snowbirds next year.

So again, we have attempted to build in within that range, 275 to 290, several I guess broad ranges on both of those numbers as well as other items.

We're not going to provide specific guidance line to line.

Jason Beardo (ph) with Bear Stearns.

Have you guys taken a look at what you think the potential impact of the new Medicare or the expanded Medicare coverage for ICDs and congestive heart failure will be?

Jim, do you want to address that?

Yes, we haven't modeled at this point what we think the net reimbursement versus cost impact will be of that -- be with that change.

Clearly we know that this will significantly increase the number of units that we will be purchasing, and therefore our costs will rise.

But we do not have a number on what the net reimbursement impact will be.

Do you have any qualitative comments maybe on the expected increase in demand?

No, at this point I think you would have to get that guidance from the medical device community.

We really don't have that number.

And just the other question is, was there any business interruption insurance in the fourth quarter?

Milton?

No, nothing material.

No.

From Goldman Sachs, Chris McFadden.

2 questions if I can bleed them together here.

First of all, can you talk about some of the bad debt and uninsured experience on a year to date basis?

We are now 1 month into the quarter.

And then you have talked positively about your outpatient surgical trends.

You have talked about downward biased tax rates, and clearly better bad debt experience.

I guess when you think about the 2005 EPS guidance that you provided a scenario in which you might think about upward revising those targets?

I guess the point I would make, our guidance stands as it is.

We're one month into the year.

We're not providing any guidance as to what has happened in January.

Obviously we have even close our books on January.

So we still feel very comfortable with the range of guidance that we provided.

And we will look at it as the year proceeds.

John Ransom with Raymond James.

I wanted to explore labor just a minute.

What do you think your acuity adjusted same-store layer costs increased in the fourth quarter?

I'm sorry, can you repeat that?

What do you think your labor costs increase was in the fourth quarter if you adjust for same-store and for, I presume, higher acuity?

I'm not sure how to answer that question.

Of course our labor on a real-time basis is adjusted for acuity and it rolls up into the number.

As we said, our staffing each day in the hospital is based upon the acuity of the patients.

And so those numbers that roll up are acuity based.

The overall numbers on SWD, as I mentioned in my comments, are generally favorable.

I will caution everyone as we start implementing the charity care and discount policies the net revenue numbers are going to change.

And metrics that we are used to talking about relative to labor are going to have to change as well.

We typically run anywhere, I have said this before, 38 to 41 depending on the quarter, depending on how the volume moves.

I remain very pleased with the management of labor.

We were a little higher in the fourth quarter compared to the prior year's fourth quarter.

But of course we had a real slowdown in volume.

And the labor is well managed on a variable basis.

But when you have a shrinking of the volume, the fixed labor doesn't get spread out, and that is really why you see movement in the number.

We really have a very stable management of our labor.

The other thing is if you look at our fourth quarter SWD as a percent of net revenue over say the last 5 years, it is one of the lowest numbers that we have experienced other than last year.

And so overall the management of labor is very good.

And I think we're very well-positioned as we go into '05.

Thanks for that.

Just to follow up.

It looks like the year-over-year costs went up about 8 percent.

And your adjusted volumes were roughly flat.

So I guess if we pulled an acuity increase out of that, is it fair to say that your just underlying labor trend may be rising kind of in the 6 to 7 percent rate, or is that too high?

Probably a little high.

We are about 5 percent on wage rates.

And we did in the fourth quarter have a slight deterioration in productivity because of the fixed nature of the labor of about 1.5 percent.

So that might help you.

So it is 5 plus 1 and it says so almost 7 percent?

Yes.

Adam Feinstein with Lehman Brothers.

I want to start by saying congrats to Jack for being named in the recent II survey of the top CEOs.

I just wanted to mention that.

That's very kind.

Thank you very much.

Sure.

Absolutely.

I hope you voted for me.

You know I did.

My question here is just on the pricing.

Revenue per case, we saw the improvement here.

I know you highlight several things that drove out.

I was just wondering whether you could just give more details so just a better understanding of really how much each item contributed?

I guess my other question on that same topic is last quarter you spoke about that mix shift in your managed care book.

I was wondering whether you are still seeing that, and whether you are seeing any change there in terms of the shift to the larger pairs and less small PPO business?

Beverley or Milton, who wants to --?

I can take that, Vic.

I guess I will answer the second question first with the shift in managed care.

We're really seeing the same sort of trends that we have been seeing over the last several quarters with regard to that.

But again we don't see it having a material impact on our operations.

It is a very, very small book of our total volume.

It is about 1 percent, a little less than 1 percent.

So it is just not material to the Company.

But it is the same trends we have been seeing recently.

With respect to the first question, and the net revenue per adjusted admission trend, probably the biggest impact, the biggest change in this quarter has been the change in Medicare reimbursement, including the change in outliers.

Again we picked up about during the quarter about 11 million increase in outlier payments.

And of course last year we were going through a rebasing in the fourth quarter where we were losing about 12 million a month in outlier payments.

So I think that is probably one of the biggest changes in addition to the market basket increase that we received on DRG rates as well.

And again, you put that on top of our consistent managed care pricing increases of 7 to 8 percent, and higher acuity from the surgery book versus last year, less flu, all those things contribute to the growth in net revenue per adjusted admission in the quarter.

One question for you.

I understand you voted for Jack, but I am still trying to figure out who voted for Mark Kimbrough as the best IR guy.

So when you all figure that out let me know.

Will do.

(OPERATOR INSTRUCTIONS).

Ken Weakley with UBS.

In terms of inpatient admissions can you discuss which specific factors both subtract and add to your visibility regarding inpatient admissions over time?

How are these factors changing?

And what do you think is going to develop in 2005 within this context?

And then secondarily, what is the tie in to your capital spending relative to admission growth?

I guess relative to a baseline of what it would have been had you not spend the money?

Let me take a shot at this and maybe Charlie and Sam could add some flavor as well.

On the overall factor that will improve our inpatient admissions, I think it is obvious a combination of issues.

I guess what I look at most is the successive or overall recruitment efforts in our markets, the availability of medical office buildings to support additional physicians coming to our campuses, as well as the facilities themselves providing a updated and state-of-the-art operating environment for the physicians.

You pile on top of that the service issues of course.

But as I think about growing the volume over time, and what it takes to really make the volume work over time, we have to continue to have an aggressive and appropriate physician development program and an appropriate medical office billing program to support those physicians on our campuses.

You obviously know the overall economic impact of a strengthening economy and more jobs.

And I will leave you to factor that into the growth equation.

But obviously as our large urban markets continue to improve in terms of their economic position, I think that flows to the hospital sector as well.

On the inpatient side of our business our market share has remained relatively stable.

We tended to have had growth problems more in the outpatient side of our business in terms of market share.

And of course that is why we have the emphasis on that side of our business right now.

But Sam or Charlie, anything to that, service development?

I guess one question before that is why isn't it the case that with the capital spending as being an aggressive as it has been, why isn't it the case that your admission growth has not been greater than say at least your market average where you would be picking up market share?

I wouldn't suspect your not for profits have been able to keep up with you on a per bed basis?

One line of thinking might be that the slow down might have been greater had we not put the capital spending in.

The other thing about the not-for-profit industry is that, of course, we operate in large urban markets.

And many of the not-for-profit systems that operate in these marketplaces are financially stable and have put a lot of dollars into their hospitals and outpatient strategies as well.

And so if you think about the not-for-profit sector across all of America, we tend compete with the well-heeled ones in the larger urban markets.

Charlie or Sam, do you want to provide any flavor from Easter or West?

The only additional comment on positioning for volume growth, we're really renewing our commitment right now to collective effort in our markets, and really attempting to more effectively link our facilities so that we're able to serve a patient across the full continuum of services in the market.

We have not been as effective in the past in that regard.

So we think there is a volume upside and a better service level for our patients as well.

So that is an ingredient over the next 2 or 3 years that we think is going to make a difference.

One of the great strengths of this Company over the years has been our decentralized approach to management allows each hospital to really -- has allowed each hospital to really capture the essence of the dynamics in their local markets.

Also, one of the great weaknesses of our system has been this decentralized approach in that we often don't capture the collective strength of a market position.

Now clearly we have some markets that do that well and other market that don't.

So what Charlie is referring to as we go forward, we're looking at ways to standardize certain aspects of the market approach so that we can maximize the leverage of our collective facilities in the marketplace.

We have 4 pilot studies going on that will be rolled out through the first 6 months of the year.

And we're looking for those results to help shape how we roll this out in other markets.

One last part.

Do you have any visibility on the cost containment efforts of the largest employers in your markets?

Or is that just something that you have to wait and respond to as the patient volume trends come out?

Beverly, do you want to address that?

Yes.

We believe the increase in deductibles that the employers are applying to their employees is having a little bit of an impact on the volume.

But we're not seeing much year-over-year change in that dollar once they took the big leap in '03.

Will take one last question.

Please.

David Dempsey with Avondale Partners.

Go back to the outpatient business a little bit.

It sounds like obviously the efforts are starting to bear fruit.

And as I heard your comments, Richard, you talked about adding 6 to 10 to ASCs over the next several years.

Didn't hear you indicate anything specifically on the imaging centers.

And I know you're looking add imaging centers.

Can you just talk about that part of the business and where you see the investment coming from?

In terms of acquisitions?

Is that what you're referring to?

Yes.

There's a lot of imaging centers available for acquisition in the marketplace.

And we obviously are considering a pretty long list of these right now.

The issue for us I think is to be smart buyers of these centers.

And while there might be a lot for sale, imaging in many markets is saturated.

And so we're very careful about just buy into a saturated market.

In cases such as that, we look at a build decision where we can start up on our own, and we won't see as much acquisition.

We have stratified our markets in terms of this saturation factor so to speak, and have prioritized our acquisitions where we think they will allow us to really pick up some market share and add some value.

In this markets where there is a lot of facilities available, we're going a little bit slower and we're looking towards building these over time.

On the ASC side of the equation the 6 to 10 that we you talked about today and talked about in prior quarters is a combination of new centers in new geographies in our markets, as well as some major recent syndications that bring new physicians into the centers.

So it really varies by market.

But we think there's a lot of opportunity in both fronts.

Alright.

Thank you very much.

We thank everyone for participating on the call.

And Mark and I will the here all day long to take additional calls.

Thank you so much.

And that does conclude today's conference.

We thank you all for your participation, and have a great day.