美國醫院公司 (HCA) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the HCA third-quarter earnings release conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Senior Vice President, Mr. Vic Campbell. Please go ahead, sir.

Dustin, thank you. Good morning to everyone on today's call and also to those of you who are listening to our webcast. This morning, we released our third-quarter results of $0.62 per diluted share; that was in the middle of the previous guidance we issued on October 13th of $0.61 to $0.63 per share.

With me this morning as usual Jack Bovender, our Chairman, CEO; Richard Bracken, President, Chief Operating Officer; Milton Johnson, our CFO; and Mark Kimbrough, Vice President, Investor Relations; and then most of the other senior officers of the Company, who are based here in Nashville are with us as well.

Let me remind all of you that today's call will contain some forward-looking statements based on management's current expectations. Numerous risks, uncertainties and other factors may cause actual results to differ materially from those expressed in our forward-looking statements. These factors are listed in our press release, and they are also contained in our various SEC filings, which I encourage you to take a look at.

Many of the factors that will determine the Company's future results are beyond the ability of the Company to predict or to control. In light of the significant uncertainties inherent in the forward-looking statements, you should not place undue reliance on the statements. And the Company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events. I also want to remind you the call is being recorded, and replays of the call will be available later today.

I draw your attention to just one schedule that we have been including in this year's quarterly releases; that's I guess two schedules -- page 10 and 11 of today's press release. It's entitled "Supplemental Non-GAAP Disclosures." This provides a quarterly and a year-to-date comparison of reported GAAP results to certain operating data that's been adjusted for the impact of the Company's discount policy for the uninsured, which we initiated January 1, 2005. I think you'll find this particularly helpful as you try to compare year-to-year cost as a percent of net revenues. It's probably a better way to look at year-to-year changes.

I will now turn the call over to Jack Bovender.

Thank you, Vic, and good morning, everyone. The third quarter once again presented extreme challenges for many of our employees, physicians, and their families, as three major hurricanes made landfall either directly or in close proximity to our hospitals.

Personal dedication and sacrifice made by our employees and physicians in these affected areas goes beyond words. The many letters of thanks I have received are a testament to the selfless acts by so many in extremely trying conditions. I'm extremely proud to be associated with such heroic and dedicated individuals.

As I've stated, the personal devastation created by these disasters is far more significant than the Company's property losses. To assist those employees displaced during this difficult period, HCA has donated $4 million to the HCA Hope Fund, a fund created to help HCA employees in times of crisis. In addition to the Company donations, we have received additional donations from the Saint David's Foundation in Austin, Texas; the Rapides Foundation; Meditech, a company that provides HCA with clinical information technology systems; and HCA employees, physicians and others, who have in total donated approximately $1.2 million to assist HCA employees.

So far, approximately $4.3 million has been given to over 2,400 employees for direct relief. A committee of employee volunteers reviews these applications and allocates an amount for each recipient. The Company has also donated $1 million to the American Red Cross to provide assistance to those impacted by Hurricane Katrina.

So let me update you on the latest Hurricane Wilma. Our preparation in Florida ranged from Tampa Bay to Fort Myers on the West Coast and St. Lucie County to Miami on the East Coast. The 20 hospitals in this area have now weathered the storm and are all operational. We are assessing the impact on our operations. But it is clear the operating teams have done an outstanding job of maintaining service in these storm-battered communities.

Moving on to the Company operations, on October 13, the Company announced the Board of Directors had authorized the repurchase of up to $2.5 billion of the Company's common stock. We are offering to purchase up to 50 million shares at a price not greater than $50 per share, nor less than $43 per share. The tender offer is consistent with the Company's commitment to enhancing shareholder value and reflects our confidence in the long-term future of HCA. This year as in past years, HCA management with the assistance of outside advisers undertook a review of the Company's strategic plan, more specifically its use of cash flows from operations where among other things -- capital expenditures, acquisitions, debt repayment, dividends, share repurchase -- along with a variety of other alternatives for use of or investment of the Company's financial resources.

Based upon this review and with the recommendation of management, a decision was made by the Board to increase the Company's financial leverage to fund the tender offer. We believe this is a prudent use of the Company's financial resources and an effective means of providing value to our shareholders. The Company's ability to invest in existing markets we believe should not be hindered by the announced tender offer. We have invested over $7.5 billion during the past 5 years and would expect to finish 2005 with approximately 1.5 to $1.6 billion of capital invested in our facilities.

Capital expenditures in 2006 should be approximately $1.8 billion. Some of these dollars are specifically focused upon expanding the Company's freestanding outpatient services as well as the construction of new hospitals, such as three recently-announced hospitals -- one in a suburb of Houston; another hospital in the suburban community of Salt Lake City, Utah; and finally a facility being built with our Methodist partners in San Antonio. These hospitals should be opening in 2007 or 2008.

Before I conclude, let me update you on the progress of the hospital sales, which are underway. As previously announced, we have signed agreements to sell five hospitals to LifePoint Hospitals and five hospitals to Capella, a newly-formed, Nashville-based hospital company. We believe the five hospital transaction to Capella will be closed by the end of December. However, the LifePoint transaction most likely will not occur until the first quarter of 2006 due to legal challenges that have been filed in West Virginia over the sale. These dates are obviously subject to change, and we will try to keep you updated as they progress.

Now let me turn the call over to Richard to talk about operations.

Thanks, Jack, and good morning. Before I discuss our overall third-quarter operating results, let me take a few moments to comment on the hurricanes in Louisiana and Texas, Katrina and Rita, and their effects on third-quarter operations. Also let me add to Jack's thoughts regarding the incredible work and sacrifice made by our team, especially as it relates to Katrina in dealing with the dire situation both during and following the event.

With so much being said in the press today about who did or didn't do all that was supposed to be done, I can say without hesitation that our team's performance was extraordinary and exceeded anyone's possible expectations. It is comforting to know we have such dedicated people as part of our organization. Unfortunately, dealing with hurricanes is a drill that we're becoming all too familiar with, including Wilma this past weekend and currently. In case you've lost count during the last 14 months, we have had to cope with 9 major hurricanes, which have affected either directly or indirectly many of our markets.

In addition to the obvious problems these hurricanes caused to the community residents and to specific hospitals, they make financial and operational comparisons between periods difficult. They significantly complicate our ability to forecast the affected markets' future performance, and they distract management from pursuing normal business activities. These collateral complications just add to the storms' destructive effects.

As you know, New Orleans and Gulfport, Mississippi were at the center of Hurricane Katrina's impact, which created the most significant devastation during this year's third quarter. While Rita was also disruptive to the Houston-surrounding areas, our hospitals there were only affected for a short period of time and were able to rebound very quickly. The good news is that with the exception of Tulane, which includes our DePaul Behavioral Health Center, all of our hospitals in Louisiana, Mississippi, Texas and Florida including Wilma's effects are all operational.

Some facilities in Florida do have wind and water damage and are on emergency power due to Wilma, but only Tulane Medical Center is closed. You might recall that our Tulane Medical Center is operating in a partnership with Tulane University, which also is not yet operational in the New Orleans area. All future decisions regarding the medical school and the hospital will be made in concert with our partners over the next month. At this point, it is just too early to declare what will happen. Currently, the facility is undergoing cleaning, repair and restoration. And our best guess is that it will reopen at some level in the first half of next year.

Damages attributable to both Hurricanes Katrina and Rita in forms of property loss and business interruption loss will -- prior to insurance recoveries -- approach 200 million over the next 12-month period. Obviously, we are insured against such loss. And net of insurance recovery, costs incurred for the quarter -- that is our deductible -- is $33 million or $0.05 per diluted share.

Regarding Wilma, it is too early to determine the extent of any damages. And of course, this would be a fourth-quarter expense. It is interesting to note that over the past 14 months, we've taken almost $75 million of hurricane-related charges net of insurance recoverables.

From a statistical perspective although the third-quarter storms created significant dislocations and disruptions in the affected areas, the Company's consolidated volume metrics in the quarter were not significantly affected. Even though our storm preparations call for forced reductions of census and in some cases evacuations of hospital several days before a storm hits, plus the rebuild period, the amount of census in these markets at any given time is a relatively small percentage of HCA's overall census level. Accordingly for the third quarter, the effect of the hurricanes on volume metrics is minimal.

What is more difficult to judge is the longer-term effect these and other storms might have on the general economy of the Gulf Coast and Florida areas. If there are significant population decreases or relocations or business closings or a rise in unemployment levels, then the long-term run rate effect might be more problematic. For now, these issues are unknown. And what we do know is that our overall third-quarter volume results were not materially affected.

Please note that Tulane Medical Center; DePaul Behavioral Health Center; and Lakeside Hospital, which is partially reopened have been removed from our same-facility statistics for the third quarter and will continue to be excluded until they are reopened.

Overall, the way I view the third quarter is that for the most part, it was consistent with the trends we have been recently reporting. Patient volumes were soft with significant variations in growth rates by months and among our various markets. Revenue indicators as well as overall expense management remain favorable. We did experience an increase in both the number of uninsured and bad debt levels in the quarter. Considering all of this, third-quarter net income grew 10%, excluding a $12 million impairment charge in 2004 and a tax benefit of $22 million in the current quarter.

Reported same-facility admissions declined 0.7% in the quarter, while same-facility equivalent admissions, which reflects both in-patient and out-patient activity increased 1.1%. It is interesting to note that during the quarter, equivalent admission growth rates were -2.4% +3.9% and +1.9% for July, August and September respectively -- once again, a fairly significant variance from month to month. Markets that experienced favorable equivalent in-patient growth rates say greater than 1.5%, were Dallas-Fort Worth at 3.6%, Oklahoma at 5.3% and North Central Florida at 5.1%.

Markets with slower-than-average equivalent patient growth rates include Houston at -3.2%; Southwest Virginia at -0.4%; and Hernando/Pasco County in the Tampa area, -3.5%.

In general, when we look at the reasons for variation in growth rate by market aside from the hurricane effects, we boil them down to two major issues -- first, a reduction in rehab and skilled care volumes due to both unit closures and changes in Medicare regulations. In fact, both admissions and adjusted admissions growth rate would increase 50 basis points for the quarter if we exclude these distinct part units. Second, a decrease in the number of cardiology-related admissions due to credentialing decisions that we have made, increased competition in the marketplace, as well as a general softening of cardiac admission rates.

One area where the storms' impact was noted was in the outpatient sector, while emergency room visits increased 3.7% for the Company as a whole. In Louisiana, emergency room visits increased at a rate of 9.7%. Outpatient surgeries in Houston, Corpus Christi and Louisiana markets or those markets in the hurricane strike zone, as you would expect, were adversely affected and declined by 22% for the month of September. In preparation for Hurricane Rita, we closed five freestanding surgery centers for a number of days. Because of their smaller volume base, these closures didn't negatively affect our composite numbers.

I'll leave the discussion of revenue, uninsured and bad debt issues to Milton in a moment. But let me say a few words about our managed care agenda and expense management. Currently, over 75% of our managed care contracts for 2006 have now been renegotiated with rate increases consistent with our expectation; that is with increases averaging between 6 and 7%. And from a cost perspective excluding bad debt expense, expense management in the quarter was exceptional, most notably labor costs even considering added costs due to the storms -- was skillfully managed by our facilities on almost every indicator -- productivity, contract labor, average hourly rate -- improvement was noted over the prior year.

Salaries and benefits expressed as a percentage of revenues adjusted for the increase in uninsured discounts was 39.6%, down 100 basis points from last year's third quarter. Similarly, supply costs for the quarter adjusting for uninsured discounts expressed as a percent of revenues were 16.1% compared to 16.7% last year, one of the best quarterly comparisons in some time. In fact, supply costs for equivalent admission increased only 3.7% for the quarter.

As you might have noted, several weeks ago, we announced we are making some adjustments to our organizational structure. More specifically, we were creating a third operating group and several new divisions and markets in our infrastructure. Our thinking behind this was really very simple.

As we continue to execute a very focused operations agenda built around patient safety, growth and efficiency initiatives, the three group structure creates capacity or lessens the span of control for our senior leaders. This helps assure that we can resource solutions more thoroughly, troubleshoot barriers and generally affect change more quickly. Three groups allow for a greater number of hospital and regional managers to interface with senior management, which will improve communications. We believe we'll promote better execution of our growth agenda and infuse both major markets and our smaller markets with renewed focus and resources.

And finally, our outpatient development agenda continues to get good traction. Since the third quarter of last year, we have purchased or developed a majority interest in 23 imaging centers, 3 cancer centers, and 8 ambulatory surgery centers. Our pipeline for outpatient growth remains active, and I would estimate adding 8 to 10 surgery centers and 15 to 25 imaging centers by the end of 2006. And for the third quarter, operations in Kansas City continued to perform well and was $0.01 accretive to earnings.

Before I conclude my comments, let me welcome Paul Rutledge and Russ Harms, newly-named Central Group President and Chief Financial Officer; and Don Stinnett, newly-appointed Eastern Group Chief Financial Officer; all are long-term members of our operating team. And we are delighted to see them in their new roles and have them participate in this call. And with that, over to you, Milton.

Thank you, Richard, and good morning. As Richard just described, same-facilities' adjusted admission growth overall was soft during the quarter at 1.1%. However, even with lower volume growth, same-facility revenue grew 4.6% compared to the third quarter last year. Adjusting for uninsured discounts, same-facility revenue grew 8.7%. A strong per unit pricing growth is one of the positives this quarter. Same-facility revenue per adjusted admission increased 3.4% over last year's third quarter. Adjusting for uninsured discounts, net revenue per adjusted admissions increased 7.6%, the best growth rate since the first quarter in 2003.

During the quarter, we continued to see solid growth in same-facility Medicare net revenue per adjusted admission of 5.7% and same-facility managed care net revenue per adjusted admission up 8.5% over the third quarter in 2004. As you recall, last year during the third quarter, we referenced lower acuity in our managed care admissions as a reason for a slowing growth rate in managed care per unit growth. No doubt that some of this year's managed care growth rate is attributable to favorable prior year comparables. The case mix index for managed care increased 1.6% in this year's third quarter over a year ago. For the 9 months ended September 30, 2005, our year-to-date managed care net revenue per adjusted admission growth is 6.2%.

During the quarter, same-facility admission changes by payor are as follows. Medicare decreased 3.4%. If you adjust the loss of rehab admissions during the quarter, the decrease would be 2.5%. Medicaid increased 3.6%. Managed care and other decreased 1.5%. And uninsured charity increased 15%.

Now turning to expenses. As Richard stated, aside from bad debt expense, expense management was exceptional. On a same-facility basis, salary, wages and benefits increased 4.6% per adjusted admission. The average wage rate increased 4.8% over a year ago and remains consistent with the trends over the past 2.5 years. The black (ph) cost per adjusted admission increased 3.7% over the same period of last year. The medical device expense per adjusted admission increased 5.9% compared to an 18% growth rate last year. Pharmacy expense per adjusted admission increased 1.8% in the quarter compared to a 7% growth rate last year. We are certainly pleased with the effectiveness of our supply cost initiatives in the quarter.

Next, a few comments regarding bad debt expense in the quarter. Bad debt expense was 618 million or 10.3% of net revenue. Adjusting for uninsured discounts, bad debt expense was 859 million or 13.7% of net revenue compared to 688 million or 11.9% of net revenue last year.

On a same-facility basis, uninsured charity admissions grew 15% over last year's third quarter or approximately 3,000 admissions. This is the highest growth experienced since the second quarter of 2004. As expected, we saw a high growth in New Orleans and other Louisiana hospitals and the Houston market. But we also saw significant growth in several Florida markets as well as the national market. In fact, we saw at least double-digit growth in uninsured charity admissions in over half of our markets during the third quarter. Excluding Texas, Louisiana and Mississippi, uninsured admissions from both periods -- uninsured admissions were 13.9% greater than last year's third quarter.

Now moving to cash flow. Cash flow from operations was 943 million compared to 1.056 billion during last year's third quarter. Last year's cash flow benefited from a 150 million reduction in tax payments related to the tax benefit from the 2003 government settlement payment.

Cash collected as a percent of adjusted net revenue, that is 60 days trailing net revenue less bad debt expense, was 102% in the quarter. Days in account receivable were 48 at the end of the quarter.

And in closing, a few comments regarding the tax benefit recorded this quarter and the Company's 2005 and 2006 earnings guidance. This quarter's results include an estimated tax benefit of 22 million or $0.05 per share. During the quarter, the HCA Board of Directors authorized the repatriation of approximately 190 million of accumulated earnings from HCA's international subsidiaries. Pursuant to a provision of the American Jobs Creation Act, HCA will benefit from a 1 year reduced tax rate of 5.25%. The repatriated earnings will be used to fund future capital expenditures. Historically, HCA has assumed that foreign earnings would be repatriated at statutory tax rates and therefore accrued deferred income tax from foreign earnings. Our tax gain in the third quarter results from a reduction in the deferred tax liabilities from the reduced one-time tax rate.

Finally, I must remind everyone that the Company revised its earnings guidance with our third-quarter pre-earnings release. Today, we are confirming that guidance. Please remember that the guidance is our best estimate as of this date. Also, please carefully consider each of the items listed in our revised earnings guidance for 2005 and 2006, those factors and numerous other factors -- many of which are beyond the ability of the Company to control or to predict will determine the Company's actual results in 2005 and 2006.

Vic, I will turn it back to you.

Milton, thank you very much, Richard and Jack. With that, Dustin, if you can come back on, and we will start our question-and-answer session.

(OPERATOR INSTRUCTIONS). Ellen Wilson, Sanford Bernstein.

Could you talk a little bit about what's included in your implied 4Q and full-year '06 guidance in terms of any sort of spillover drag from the recent hurricanes, so specifically on the assumption of some sort of high uninsured volumes in some of those specific markets -- that kind of thing continuing into next year? What kind of cushion do you have in your guidance?

Ellen, thank you. Milton, do you want to address that?

Sure. We really don't have any particular cushion in there. We've obviously presented earnings guidance within a range. I think that any potential spillover effect would be within the range we've given. Please remember that with respect to Tulane, which is closed, we are receiving business interruption insurance that would replace the run rate from that operation. So that would be included in our fourth-quarter earnings, so we will not be taking any earnings hit with respect to the closure of Tulane from an operational standpoint.

Also within your third-quarter provision for doubtful accounts, can you talk about -- were there any changes in the reserve assumption, anything that came out of the hindsight analysis? Also, how much were the upfront cash collections related to co-pays and deductibles this quarter?

With respect to the hindsight, we did see deterioration in the uncollectibility percent about 110 basis points, which is a little bit higher than recent quarterly trends have been. That's about $40 million of financial statement or increase in bad debt expense from the hindsight.

(multiple speakers) Upfront cash collections, Beverly, you want to address that?

Yes. Upfront cash collections were 63 million, approximately up 22% over prior year, and about 42.7% of the available dollars to collect.

And how much was that versus last quarter?

Last quarter was 68 million. And we did have a slowdown in the Houston/Louisiana markets because we were not requesting upfront collections from those patients as they were treated at our hospitals.

Darren Lehrich, Deutsche Bank.

I just wanted to get an update on your gain sharing initiative. Last quarter, I think you said you had about 50 surgeons enrolled in various programs. Could you just update us where you are with that and what kind of impact you expect that to have in 2006?

Jim Fitzgerald, do you want to address that?

We have met with the OIG. We still have not received any formal answer as to their approval of that program as of this point. In terms of what we are doing operationally, we now have over 150 surgeons who have signed to participate in that program. And so we continue to work with the surgeons who are interested, and we will sign them up accordingly. And we are waiting on the OIG as to their response of approval.

Frank Morgan, Jefferies & Co.

A question about the change in the DRG post-acute transfer policy; I know that has been increased from like 30 DRGs up to I think over 182. Any thoughts on how much you think that could impact your overall revenues?

And then secondly on the rehab part of the business, you had mentioned some -- the impact of either rehab units or snip (ph) units affecting your admissions. Would you comment what you plan to do in the rehab units? Do you plan on closing any of those units as a result of the 75% rule?

Milton, you want to take that?

With respect to the transfer rules, yes, next year, that will have the impact of reducing the market -- we're looking at probably about a 3.5% market basket increase on our DRGs. We think that the rehab change or I'm sorry the transfer change will impact that -1%. So we're looking at somewhere around a 2.5 to 3% sort of Medicare per unit pricing growth next year.

With respect to the rehab preparing for the implementation of the 75% rule, in this quarter for example, our rehab admissions in this quarter on a same-facility basis dropped 832, down about 14%. Year to date, we're down about 3,000 or about 16%. Most of that if not all of it, is phasing in for the 75% rule.

Charlie Evans, you have some of these units in the East. Do you want to--?

We do. Most of the operating units have proceeded very aggressively in terms of positioning for the new rule requirements. We do expect to continue to operate most of the units into the new year and think we have absorbed much of the impact through the changes we've made during '05.

Ralph Garcea, Credit Suisse First Boston.

Can you talk about the outpatient side of the business and some of the trends you're seeing? I thank you had ASC surgeries up 1.6 and hospital-based down 1.1. So any more details around there would be helpful. And then, if you could talk about sort of the competitive dynamics on the outpatient side. And maybe what's working best with some of the initiatives and more aggressive tactics you have sort of laid out in the past?

Richard, do you want to lead it off?

I'm going to start and give Marilyn enough time to get her thoughts together on that question.

The outpatient agenda, as I mentioned in my comments, we're pretty comfortable with how it's going. I think most importantly, all of our hospitals in all of our markets are very attuned to the market dynamics and are complementing their strategies with pretty aggressive outpatient agendas. We have two pieces to our strategy -- one is the acquisition and development, and I commented on some of those statistics earlier. But equally as important is tuning up our hospital-based outpatient services. We have detailed plans in terms of service and convenience and quality -- all oriented to the outpatient, hospital-based outpatient programs as well.

So we are feeling pretty good. We've got a good infrastructure in place. Our metrics are improving. We are able to track the business much better than we were say even a year ago.

Relative to the competitive marketplace, it is a very, very hot market. There's competition from lots of different fronts. And we are feeling pretty good about our ability to compete. Marilyn?

I will just follow up. On our surgery center strategy, our most successful centers have been multi-specialty centers. There are usually between four and six operating rooms, and they are all joint ventured with physicians. In imaging, very much the same story. We brought 23 centers online. They are a combination of acquisition and development. Again, multi-specialty focus having at least four or five services. The pricing is different obviously in those centers, but our cost structure is also much lower. So we've been able to grow both the hospital-based and the freestanding side of the business.

Gary Lieberman, Morgan Stanley.

Was hoping maybe you could address the comments about the slowdown in cardiac procedures. I guess some of it's related to the hurricane. Is there anything broader than that that you think might be going on?

This is Richard, Gary. Let me take a first cut at this and then maybe Sam and Charlie can add to it. As I mentioned in my comments, there's a couple of reasons why we think the cardiac business is down. Some of it and I mentioned in our last quarterly call was self-inflicted. That is, we have made some pretty significant credentialing decisions in several markets, and they've had an effect in terms of loss of business.

No doubt in the Western markets, the competitive landscape is difficult. And in a couple of institutions specifically, we've lost some business to specialty-owned hospitals. And the comment about a general softening of cardiac admission rates I think relates more to the fact that we are seeing people that present with chest pains being treated in an observation status, whereas previously they might have had a 1 or 2-day stay.

And so we're seeing an increase in the number of observation visits and of course volume decrease in the number of low-intensity cardiac admissions.

What is driving that change in the observation visits? Is that something that HCA is doing differently? Or is this sort of preauthorization or authorization by managed shared companies that is affecting it?

Charlie Evans.

The view from the Eastern Group is that we see most of this through our emergency conversion rates, so patients coming to the emergency department. As we work closely with the Peer Review Organization for admission criteria with Medicare patients and as we apply new technologies that are available in cardiac care, patients that we had previously admitted, we're now able to treat either in observation or directly in an outpatient -- other outpatient setting. It's appropriate care. It tracks appropriately with the guidance through Medicare and our managed care arrangements. And we think it is the appropriate response at this point.

Jason Gurda, Bear Stearns.

Could you explain what impact changes in the number of days or workdays in each quarter has on your admissions and surgery volumes? And I'm thinking that July 4th fell on a Monday this year, where last year, it fell on a Sunday, so there was one extra workday this quarter -- I'm sorry, one less workday this quarter versus last year. How does that impact your volume numbers?

Anybody -- Milton, anybody want to take a slug at that or Sam?

We tend to look at it sometimes month to month. But typically in a quarter, it works out that it would be a material impact.

This is Sam Hazen. Just to give you sort of a highlight of a week. Obviously, Mondays and Tuesdays are heavy admission activities. Our census heats up on Wednesday and Thursday, as the activity levels are experienced from the admissions earlier in the week. So business days do have an impact on monthly results. Typically across the quarter, it tends to balance itself out, as Milton indicated. But our activity levels are clearly higher with Monday, Tuesdays and Wednesdays, and they start to taper off as the week progresses.

And one quick follow-up -- have you guys ascertained any reason why some of your uninsured trends might actually be worse than what I think a lot of your peers have been reporting recently, particularly this quarter's acceleration?

Richard, do you want to--?

Just maybe some general comments -- and obviously this is a very difficult area to predict. And we are going to be very careful about not speculating what the reasons are. We note there are some facts. We know that the third quarter typically tends to be a little bit higher than other quarters in that this quarter we had about 3,000 more uninsured admissions across all of our hospitals in all of our markets than we normally have. And recall, that's about 3,000 admissions out of over 405,000 total admissions for the quarter.

The increases occurred in the majority of our markets. But the greatest numbers of course, as I mentioned before, are in Texas, Florida and we can add Tennessee to that. Tennessee had a change in their TennCare program, which put more people into the uninsured category.

Now we roughly -- and I will underscore the word "roughly" -- estimate that the TennCare change probably was about 250 admissions just generally. And if we try to take a stab at what the hurricane created maybe around 400 or so. But let me just once again say that this is not an exact science, trying to determine exactly why this number goes up. But I think it is fair to assume that the third quarter across all the markets and independent of these two items were up. And it's just difficult to really answer exactly why that occurred.

Adam Feinstein, Lehman Brothers.

Just a couple questions, just let me start with the big picture one. Clearly, the stock buybacks are great, and you guys did a great job last year in terms of buying back the stock at a very low price. My question is in terms of really creating value, it seems like one of the things is the Company is having a hard time growing. And I don't know if you guys view it as some of that is just because you're such a big Company now that it is harder to show the same type of growth. Because if we look at your guidance for next year, the net income growth, excluding the stock buyback, is only about 3%.

So just want to get your sense in terms of -- would you ever think about splitting the Company up? You guys create a lot of value by spinning off companies in the past. I guess any thoughts there in why wouldn't you -- I guess is the first question.

Jack, do you want to address that?

Adam, I guess we should have invited you to our strategic planning session. This is certainly a big subject and cannot be covered completely today. Yes, we are a very big company, which means we can't grow at the same rate that a hospital company that has 10 hospitals can or 20 or even 30, 40. And so that by acquisitions, it is not in the cards for us.

We do, as you know, acquire. We are opportunistic about acquisitions. And when the right acquisitions are there, we are there and we are there aggressively. I'd take you back to Health Midwest and that very significant acquisition for us and one that was of big enough size to make a difference. But that implies for us different strategies of creating shareholder value. The primary one is to grow organically. And we think we've done a good job of that over time. And organically growing means to expand in existing markets by adding new facilities -- the new outpatient strategy is part of that -- but also to gain market share over time.

That gets masked sometimes when you run through a period like we are running through now, in which all over the country admission growth in any market is essentially flat or down. But we still believe over the long haul, given the demographics and particularly the demographics in our particular markets, that long-term organic growth will be there. And we are confident that many of the initiatives that we have undertaken will also gain us market share. And we really believe that is the basis for where we are with the Company.

We are a different kind of company than most other companies in our space. We are bigger, larger. We create incredible cash flow, as you know. And part of what drives our strategy is to ask ourselves constantly the question, what do we do with that cash flow that creates value for our longer-term shareholders? And obviously, share repurchase is an important component of that -- you know the data since 1997 with that -- also dividend policy, which we believe is a cornerstone for creating long-term total returns for our shareholders.

And quite frankly, talking just a moment again about the acquisition market, there are a lot of small start-up companies and smaller companies in our industry chasing quite frankly too few acquisition opportunities. And if you look at the multiples that hospitals that are on the market or selling for compared to what we can buy by the multiples, we can buy back our own stock. And I think it is a pretty clear, compelling strategy for us.

As to whether we will at some point in time break this Company up into smaller components, we are constantly looking at ways to create value. I'm not here to announce that we are going to break this Company up into four, five, six, seven companies, and we are not contemplating that. But we will constantly examine our alternatives and try to -- with always the shareholder in mind -- try to figure out those things that creates value.

Richard, do you want to--?

Yes, just a couple other thoughts. And I know maybe Sam and Charlie might want to talk about some of the initiatives that are specifically going on in their markets. We have a pretty robust growth agenda for our markets. And one thing that you may not appreciate is that we have many markets in the Company that are now growing robustly -- 3, 6% in some cases in terms of admissions. We also have some markets that aren't. And what happens at our Company is -- if a big market, say a Houston, is in a slow cycle, then it is going to drag the overall composite numbers down for the Company, despite that we have some great growth stories to tell in specific markets.

So when we think about our strategies and our composite results, we go with the cycles of the big markets. And when the big markets do well, our numbers are outstanding. And when they hit a slowdown in the cycle, you know it drags the overall number down.

We have put in place very specific growth plans, medical office building plans, physician recruitment plans, service line strategies, the new organizational structure. So we think we are putting together sort of the fundamentals to capture that growth. We know our market share is holding steady for the most part, and we're just generally in a soft cycle now.

I know -- Charlie or Sam have anything to add to that, but that's kind of how we see the organic growth story.

AJ Rice, Merrill Lynch.

Just maybe follow up on the last question. As we look ahead to next year and you offered a range of guidance for next year, there's some implicit assumptions about some of the key variables that everybody is focused on like bad debts and admissions in particular. Can you give us, if not the specific number embedded in your guidance, a sense of that? And I guess based on the comments that both Jack or Richard just made, is -- are we to take the fact that you have been as aggressive on the share repurchase last year and this year as you have been really since coming probably from the LBO in the early '90s? Can we interpret that to be that you see you the situation with bad debt today and the volatility in admissions we are seeing as sort of a cyclical situation; that we will see some rebound at some point and just is hard to predict the timing? Because I know there is a lot of debate about whether it is cyclical or secular. I would be interested if you guys have a view on that in light of your recent Company review.

AJ, this is Jack. Let me start with the last part of your question, and then we can move to the other part.

Obviously, a share repurchase again as we look at our best uses for cash, we believe is beneficial to the shareholder. Now that does, I think, imply that when management looks at the future -- and by that, I mean long-term future -- that we have a confidence in this Company. And I don't want to address whether we believe certain components of our cost structures are cyclical at any one point in time. But just looking at the future of the Company, how we are positioned in the markets we are positioned in, what our strategies are and what we think our long-term prospects are -- we are obviously bullish on that.

Now having said that, I reiterate what I have said to many of you in conferences and publicly. This is a very volatile environment we are in, more volatile than I've seen in my career, with more ups and downs in the different components that drive our business. And we cannot predict from quarter to quarter what specific components of that cost look like or what our earnings are going to be.

But I will say and I think I speak for everybody sitting around this table, when we look at the long-term future of this Company, we are quite confident that the Company will do well.

Milton, anything else you want to add to the guidance?

To the first part of the question, AJ, as you would expect, we are not going to give the detailed line items. And you did not ask for it, but just to be clear -- what we will I guess give some information on -- if you think about our model today and kind of how we view next year with respect to volume. That is -- there is two things that is most difficult I think for us to predict. That is volume and the quality of the volume, i.e., the level of uninsured activity.

But we are looking at our year to date through nine quarters today; we are up 1.5% same-facility adjusted admissions. I think that's kind of how we would view somewhere around that number, maybe 20, 30 basis points either side of that number for next year.

With respect to the pricing assumptions, you know, we have been pretty clear that our managed care pricing has been consistent. Recent trends, we've got about 75% of '06 managed care contracts priced at 6 to 7%, so pretty good visibility on the pricing side. Medicare pricing will not be as strong next year as this year but still will be I think a positive.

And then on the expense side, we are managing SWB (ph) very well and our supply cost very well. And I think that we will be able to continue to do that next year. So I think that is kind of how we view it, next year being somewhat similar to this year maybe not quite as strong, maybe on the pricing side for Medicare. The big variables in our model is really the volume and the quality of that volume.

Christopher McFadden, Goldman Sachs.

You have mentioned the success you are having with managed care contracting looking out to next year. I would be interested in whatever feedback or anecdotal illustrations you could provide relative to how you expect consumer-directed so-called high deductible plans to factor into the managed care environment next year. And what types of internal either operational or IT or pricing strategies you are developing to try to respond to that dynamic in the market, whether it's something that becomes important in '06 or even looking out to '07 of what types of things you are trying to do to anticipate enrollees in those types of plans?

Beverly Wallace, do you want to take a shot at that?

Chris, basically in our managed care contracting strategy, we look at all the variables. And that is how we come up to the 6 to 7% range on the projected rate year over year.

On consumer directed plans, we have been seeing high deductible plans now for the last 1.5 year. And so we just project that we will see more of the same there. Then, they fall under HSAs, but they will be high deductible plans just like they have been in the past. And because of those, that's why we have implemented our aggressive front-end point of service collection strategy. So we will continue to do that. We will continue to push that agenda, refine our tools and techniques for establishing what that patient will owe at the front end and collect as much as possible at that point of service time.

We include in our pricing strategies that growth in the deductible and co, and it is part of the blend of what we give you in the 6 to 7%.

In markets where you have had experience for the last year or so, are there any observations you can make about the utilization patterns, about the competitive dynamics, things that might help us anticipate more enrollments on a go-forward basis?

No, I think we believe that the trends as far as utilization will continue. I believe that the high deductibles and cos have already impacted utilization trends, and we just anticipate those to continue.

Anything else anybody wants to add?

No.

Kemp Dolliver, SG Cowen.

On the Salt paid (ph) admissions, was there any significant deviation by month say in July/August compared to September? Because there was obviously -- the disruption from the hurricanes is essentially confined to a discrete period in the quarter.

Milton?

Kemp, I don't remember the exact month, but I do remember July being a single digit growth rate. I remember August being approximately a 15% growth rate. And then September, it had to be something higher than 15 to average 15. So I don't remember the exact numbers, but we really started seeing the acceleration in the month of August.

Ken Weakley, UBS.

I was wondering if you had talked about, Richard, you had mentioned how certain markets tend to have -- or maybe just this particular quarter were much stronger than some others. I was wondering how -- I think we had talked about this before -- but how persistent the relative performance of certain markets are relative to others. And to what extent maybe capital deployment plays a role in promoting above-average growth?

And then secondarily, as I look at return on capital for the Company, I know you're spending 1.8 billion next year. How do you allocate that? How do you know you're spending the right level? And to what point do we start to see returns in capital starting to go back up?

Richard?

Let me start by saying, I do think that -- I mean, it's important to invest the right amount of capital in the market. Hospitals in our delivery systems, as you know, are very capital-intensive. And you have to have a pretty robust reinvestment program to be in the game. And we think we have a pretty good process for determining that. Of course, we let all the capital decisions emanate from the market as the source of the request. And then we put our review on top of that in terms of return.

Over time -- over the last say 5 or 6 years, we have invested in almost all of our markets. A lot of the really big projects that have been on hold or in prior years have been fully funded, they are online now. So we are thinking that our investment strategy has been really fully funded. That's why we were comfortable in rolling it back a little bit this year. And we really had a rather modest amount at 1.8 billion next year, including the development of some new hospitals.

So over time, I think markets move. If we didn't make the capital investment, I think they would forever be down. And if you do make the right amount of capital investments, there are natural cycles and pricing cycles that occur in some of these markets. So I think you are going to see some movement, even if it's a fully-funded capital program in any given market.

So in other words, if you were to cut your capital spending by half -- just to throw a number out there -- you're convinced that within 5 years, your market share could be significantly lower just simply because you're not keeping up with the local not-for-profits?

Yes.

Is there any evidence to support that in terms of what you've spent today versus maybe what others have spent? And you are seeing out-performance because of that? That's what I'm trying to get at it. Or is it not--?

I think you can look around at some of the other organizations that have not been able to fund for whatever reason, their capital investment strategies. And for the most part, they are hurting. So I do think that you can delay a capital investment for a period of time, a short period of time. But if you do it for a long period of time, these organizations will suffer.

Charlie, Sam, you guys want to add a little bit here?

Well, just looking at a couple of specifics, we've made major investments for example in Dade County at our Aventura facility with the new patient tower. Our volume is up 11% year over year in that facility.

Osceola Regional in Orlando is another facility that we have been able to support pretty significantly with capital year-over-year growth rate 8 to 10%. So we are getting very strong growth, where we've made some of these major capital investments.

The persistent problems in the East have really focused more around medical staff issues. If you look at those markets where we're having reoccurring volume problems, it tends to be where our medical staff and Board have stepped up to dealing with quality issues and peer review challenges that have affected admission patterns at those hospitals, and those have created the lingering problems.

We've had instability with the large physician group in the Southwest Virginia area, which has destabilized admissions in that area. So the core of persistent problems have tended to be around medical staff relations.

Sam?

The only thing I would add is, if you look at sort of in reverse and you look at Health Midwest, that was a system that historically and sort of annually underinvested in its facilities, and the system was ultimately crippled by that fact along with a couple of other strategic mistakes I think. So if you look at it from that angle, you can clearly lose your position. You can lose your image. You can lose opportunities for protracted periods of time. And it takes a huge effort to recapture that. So I think that gives you some perspective on the deficient capital spending and what it can do to a particular system.

I think at this point, we will close. We are within the hour, closing in on it. I want to thank everyone for your questions. Mark will be around, as I will be all day and the balance of the week. Thank you very much.

And that does conclude today's conference call. Thank you for your participation. You may disconnect at this time.