美國醫院公司 (HCA) 2005 Q4 法說會逐字稿

Good day everyone and welcome to the HCA fourth quarter 2005 earnings release conference call.

Today's call is being recorded.

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

Please go ahead, sir.

Thank you, and good morning to everyone on today's call and also for all of you that are listening on our webcast.

As you have seen this morning, we released our final fourth-quarter results $0.74 per diluted share which was right in the middle of the previous guidance we released on January 13, $0.72 to $0.76 range.

With me with morning, Jack Bovender, our Chairman, CEO;

Richard Bracken, our President and Chief Operating Officer;

Milt Johnson, Executive VP and Chief Financial Officer; and Mark Kimbrough, our Vice President of Investor Relations.

We also have most of the senior management that is based here in Nashville joining us to assist during the Q&A.

Let me remind everyone 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 actual results to differ materially from those expressed in any forward-looking statements.

These factors are in our press release listed toward the back pages.

They are also included in our SEC filings which I encourage you to review.

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

In light of the significant uncertainties inherent in our forward-looking statements, you should not place undue reliance on these statements.

The Company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events.

As a reminder, this morning's call is being recorded.

A replay of the conference call available later today.

During the call this morning, we may make some reference to some non-GAAP terms.

So let me refer you to page 10 and 11 of today's press release.

These pages are entitled "supplemental non-GAAP disclosures."

These pages provide a quarterly and year-to-date comparison of reported GAAP results to certain operating data that has been adjusted for the impact of the Company's discount policy for the uninsured, which we initiated on January the 1st, of 2005.

This schedule you will find is most helpful as you try to compare year-to-year cost as a percent of revenue.

So if you want to see how labor did as a percent of revenue, you need to go to page 10, 11 to see an apples-and-apples comparison as it is shown on that page.

With that opening, I am going to turn the call over to Jack Bovender.

Thank you, Vic.

And good morning, everyone.

By any measure, 2005 was a very good year for HCA.

This is especially notable given the tough operating environment we encountered during the year, especially with respect to sluggish volumes, increasing uninsured admissions, and a virulent hurricane season.

Obviously our operations teams did an outstanding job.

The Company reported revenue of $24.5 billion, an all-time record for HCA, with GAAP earnings per share increasing 24% from the prior year.

EPS excluding gains on sales of facilities, impairment of assets, and International tax at repatriation was up 14% from last year and excluding the cost of hurricanes from both years, that's $0.08 in '05 and $0.05 in '04.

EPS increased 15%.

The year was volatile from quarter to quarter.

As I have mentioned on several occasions, this is to be expected since volumes and the mix of business from month-to-month and quarter-to-quarter is difficult to predict and impossible to control.

However, over the long term, we are confident in our ability to grow our volumes and earnings.

Reflecting back, we had a very strong first quarter well above expectations.

We reported a solid second quarter generally in line with expectations.

Our third quarter was weaker than anticipated, and now we finish with a solid fourth quarter which came in at the high end of our October guidance.

Let me remind everyone HCA's core strategy continues to center around growing our business by making substantial capital investments in our communities.

In 2005, our capital investments totaled $1.6 billion, and we are targeted to invest approximately $1.9 billion in 2006.

We recently announced significant capital commitments in a number of our key markets such as Houston, $517 million;

Denver, $250 million;

San Antonio, $165 million;

Atlanta, $130 million; and Salt Lake City, $110 million.

Also we have announced some selective acquisitions in our existing markets.

One hospital in Austin, Texas and one in Nashville.

These transactions will broaden our service areas within those markets.

Also during the fourth quarter of 2005, we completed the sale of five hospitals to Capella Healthcare and anticipate the completion of our sale of five facilities to LifePoint during the first quarter of 2006.

In recent years, dividends have become an increasingly important component of shareholder returns.

Noting this, along with the strength of our cash flows, in 2004, HCA increased its annual dividend from $0.08 per share to $0.52 per share.

Since that time, we have twice increased the Company's dividend.

In January 2005 from $0.52 to $0.60 per share.

And this morning we announced the Board has approved a 13% increase from the current $0.60 or $0.15 per share quarterly to 68% per share annually or $0.17 per share, per quarter.

This represents on a run rate basis a payout of approximately 22% of the Company's normalized 2005 earnings.

As I have stated on several occasions, we believe a dividend payout of 20 to 25% of income is a range we currently feel is appropriate.

Each year, we will evaluate our dividend policy and make recommendations to our Board regarding any changes we feel appropriate for the coming year.

Another means of creating shareholder value is share repurchase.

Since 1997, we have repurchased approximately $12 billion of the Company's shares or over 50% of the Company's shares outstanding.

In 2005, we repurchased 36.7 million shares of HCA common stock at a cost of $1.9 billion.

Since January 1, 2006, HCA has continued to buy its shares in the open market.

Since the beginning of this year, we have repurchased 11.1 million shares at a cost of $557 million.

As of today, we have approximately $94 million remaining on our October 2005 Board authorization.

Let me close with some update comments about our plans for reopening Tulane Medical Center in New Orleans.

Our plans are to open the hospital for limited services in February, and hopefully have the hospital back to full service by the end of June.

This means that Tulane will be the first hospital to reopen in downtown New Orleans.

Quite frankly, this is an act of faith on our part but one we are quite willing to make in order -- in support of our partner Tulane Medical School and in support of the rebuilding of the city of New Orleans.

Related to this, I want to reiterate the true heroes of HCA are all of our colleagues and affiliated physicians in New Orleans and Gulfport, as well as our other locations in Louisiana, Mississippi, Texas, and Florida, who have soldiered through nine hurricanes over the past two years.

I am pleased with the long-term outlook in cash generating capabilities of HCA resulting from the strength of our facilities, the organic growth in our markets, and the Company's ability to invest prudently its cash to provide returns to our shareholders.

And in that light, I would like to point out that if you were an owner of HCA stock on January 1, 2005, and you reinvested the dividends you received during the year, your total shareholder return on investment was approximately 30%.

This compares to returns of less than 10% from the S&P 500, Fortune 100, and an average of the peer companies in our sector.

With that, I would like to turn the call over to Richard to discuss operations.

Thanks, Jack, and good morning.

The prerelease that was issued on January 13, and our release of this morning delineate the key metrics of our performance for the fourth quarter.

So in the interest of time, I won't reiterate much of this information.

Instead, let me start this morning by stating that we were pleased to finish the year with a strong fourth quarter.

For the most part, the trends that we have been reporting throughout the year continued in the quarter.

Strong unit revenue and effective expense management were able to overcome softer patient volumes and an increasing level of bad debt.

Additionally in 2005 record levels of cash were produced in our company.

Volume trends for the quarter were generally consistent with our experience during 2005.

Same facility equivalent admissions, that is reflecting both inpatient and outpatient activities increased 0.7% and 1.4% for the quarter and year respectively.

As you would expect admission growth across our markets varied significantly.

Markets which experienced significant growth in equivalent admissions for the year, say above the Company average of 1.4% were Dallas/Ft.

Worth, San Antonio, Nashville, and San Jose.

Markets that experienced slower equivalent admission growth rates, or below the Company average included southwest Virginia, Kansas City, Houston, and Tampa.

Every market, of course, has a story.

As I have mentioned on previous calls, we believe the reasons for slower growth in patient volume boiled down to three reasons.

First, there has been a reduction in the number of rehab and skilled admission due to both unit closures which were decisions we made to better utilize our facilities and changes in Medicare admission guidelines or the 75% rule as it is commonly known..

The reduction in these units reduced our admission growth rate by approximately 60 basis points for the year.

Second, we have experienced a general decrease in the number of cardiology-related admissions to our hospitals.

The reason for these decreases, we believe are due to the following factors.

Credentialing decisions that we made at certain of our Florida facilities, increased competition from physician-owned heart hospitals, primarily in our Texas markets, as well as a general slowing in the number of cardiac admissions.

And third, we have experienced a reduction in the number of one-day stay admissions at our hospitals.

This reduction in one-day stays and their alternative treatment of outpatient observation patients was caused in part by more stringent enforcement of case management guidelines.

We believe that the vast majority of these patients are still treated in our hospitals in an outpatient observation classification.

The clinical care rendered to the patient remains very similar; however, the classification change does effect admission metrics.

This change influenced the overall growth rate in admissions by approximately 40 basis points in the quarter and 30 basis points for the year.

While I generally try to avoid normalized statistics, in the case of factors affecting our volume performance, I do think they provide some additional level of clarity.

If we adjust our admission growth rates for the effect of the rehab and one-day admission issues growth rates for the quarter and the year were 1.3 and 1% respectively.

Still somewhat softer than we have experienced in previous years, but significantly more in line with recent trends.

Growth in outpatient services was mixed for the quarter.

As reported, outpatient surgical volumes in the quarter decreased 1.7% but emergency department visits increased 2.2% and imaging center visits increased 10.4%.

As a reminder, outpatient surgeries include both hospital-based surgeries and ambulatory surgery center volumes.

We estimate that over 50% of the ambulatory surgery center decline in the quarter is due to competitive activities in just one market, San Antonio, with much of the remaining decrease due to hurricane-relate factors.

Remember, hurricane Wilma made landfall in South Florida in October and significantly disrupted all of our surgery schedules in those markets.

Adjusting for the hurricane, outpatient surgeries increased 50 basis points in the quarter and were up 30 basis points for the year.

Inpatient surgical volume performed more favorably and was up 1.6% in the fourth quarter and almost 1% for the full year.

As I had stated at the beginning of the call, the slowdown in patient volume was one of our biggest operating challenges in 2005.

We have based our growth agenda around five major areas: First, an increase in physician recruitment.

Second, an increase in the amount of medical office building space that is available on or near our campuses.

Third, organizing and executing our operating plans in a way which more effectively leverages our market position.

Fourth, development of selected replacement and de novo projects along with acquisition of outpatient units.

And fifth, the continuation of a fully funded capital spending program.

In each of these areas as well as our quality improvement agenda, much progress was made in 2005, and I believe has set the stage for contribution in 2006 and beyond.

During 2005, we recruited over 700 physicians into HCA facilities up almost 80% over the prior year and over half of those physicians recruited were specialists.

In 2005, we brought on line 420,000 square feet of medical office space and in 2006, we expect an additional 1.3 million square feet to become available to support our facilities and their recruiting efforts.

As I mentioned in our last call, we've adjusted our operations organization to create a third operating group which we refer to as the Central Group.

Even more significant than the group organization, we have created smaller focused divisions and markets along with market-based service line strategies to help guide and focus the growth agenda.

In 2005, we started design or construction on 9 new or replacement facilities and acquired or developed 33 outpatient imaging, oncology, or surgery centers in our various markets.

And finally, all of these initiatives were supported by a healthy capital expenditure program.

In 2005, we invested $1.6 billion, approximately 45% of that was devoted to maintenance of our technology and facilities and 55% for growth and expansion programs.

Please note that we expect our capital spend to increase to approximately $1.9 billion in 2006.

From a cost perspective, excluding bad debt expense, expense management in the quarter was exceptional.

Labor costs once again were effectively managed, even in the face of modest volume trends in some markets and increasing staffing levels in our seasonally sensitive markets, productivity levels were managed efficiently.

Salaries and benefits expressed as a percentage of revenues adjusted for the increase in uninsured discounts was 39.6% compared to 40.4% in the fourth quarter of last year.

Consistent with previous trends, supply costs for the quarter adjusting for the uninsured discounts expressed as a percent of revenue was 16% compared to 16.6% in the previous year's fourth quarter.

This is not only due to a more stable pricing environment and a stabilization in our usage of rates for drug eluting stents but we would also like to think is reflective of the many initiatives that we have underway.

I know many of you have questions regarding our orthopedic initiative and let me see if I can put this into some perspective for you.

As I have said before our orthopedic program is only one of many activities that we have underway to manage supply costs.

In fact, no one issue is responsible for the excellent results in managing supply costs we are now enjoying.

Our overall supply management strategy includes aggressive standardization of commodities, that is nonclinical products, division based contracting for clinical supplies, remediation of distributor costs where feasible, and a growing contribution from our group purchasing organization Health Trust.

Now, relative to the orthopedic program, please note that we are very pleased with our current position.

As some of you might know our program called for a committed compliance percentage with three National vendors, and included a gain-sharing component which is currently under consideration by the OIG.

In return, we received additional discounts.

This compliance percent was to be achieved by December 31; however, at that point in time, we were several percentage points short.

The good news is that we have now met our target and are anticipating pricing discounts for the remainder of 2006.

We thank all of our physicians and our vendors for their participation in this program and look forward to working with them throughout the years ahead.

In a moment, Milton will discuss the specifics concerning our bad debt trend, but before he does so, I would like to provide a different perspective on the matter.

In the fourth quarter we experienced growth in our uninsured and charity admissions of 15.3% compared as compared to the fourth quarter of the prior year.

This represents approximately 2900 incremental admissions.

These 2900 admissions spread over all of our hospitals represent about 16 incremental uninsured or charity admissions per hospital for the entire quarter.

Or not quite six admissions per hospital per month.

When you think about it, the actual burden we carry is only the variable cost of providing care such as supplies, pharmaceuticals, nursing care required for each of these incremental patients.

Most certainly the total cost of treating all of the uninsured is a major issue for the healthcare delivery system and a significant cost to HCA, but the costs associated with an incremental number of admissions is, of course, a much more manageable concern.

We believe it is important to consider both the cost to treat, as well as the revenue reductions when evaluating this issue.

And a couple of final thoughts before I turn this over to Milton.

During the fourth quarter, we were once again able to reduce our reserves for malpractice claims based upon the findings of our two independent actuaries.

We believe the improvements in our malpractice costs are in large part due to operational improvements that we have made and are consistent with the trends that we have established over the past two years.

Tort reform in Texas to be sure has had some positive impact; however, we also believe our focus on risk management and quality clinical initiatives are paying off.

For example, we saw the number of new claims that were reported fell 7% in 2005 compared to 2004.

We are seeing fewer claims in obstetric and emergency services than we did just a few years ago.

This is an area where we have conducted a significant amount of training for our clinical personnel.

Also in 2005 we experienced a decline of 14% in surgical and nursing related claims along with declines in claims related to medication errors and patient falls.

The severity or average settlement value of our claims also remained relatively flat.

This is noteworthy given the industry is increasing between 7 to 10%.

Our average settlement values remain at or below 2002 levels.

Over the past two years, we took 60% more cases to trial and achieved favorable verdicts nearly 80% of the time.

A study by AON, a leading insurance broker, indicated that our annual malpractice cost trended significantly outperforming industry trend.

And finally regarding our employees, the frequencies of lost time injuries continues to decline in our hospitals.

At the end of 2005, the rate was nearly 40% below our own level in 2000.

These are all significant accomplishments which are reflective of our quality initiatives and have added to our earnings performance.

Our claims, risk, quality, and patient safety professionals are working most effectively with our clinical personnel and have a pipeline full of improvement ideas to pursue.

We remain committed to aggressively pursuing our patients' safety and quality improvement agendas and have dedicated the necessary resources in 2006 to appropriately fund these efforts.

With that, over to you Milton.

Thank you, Richard, and good morning.

Similar to the third quarter of 2005, soft volume but strong pricing growth contributed to the same facility net revenue growth of 4.8% this quarter compared to the fourth quarter of last year.

Adjusting for uninsured discounts of 231 million, same facility net revenue grew 8.9%.

For the year same facility revenues increased 4.7%, adjusting for 756 million in uninsured discounts.

Revenues increased 8%.

Same facility net revenue per adjusted admission increased 4.1% over last year's fourth quarter.

Adjusting for uninsured discounts, the same facility net revenue per adjusted admission increased 8.1%.

During the quarter we continued to see solid growth in same facility Medicare net revenue per adjusted admission of 5.9%.

Medicare net revenue per adjusted admission growth continues to exceed our expectations primarily due to increases in acuity which reflect the impact of fewer skilled nursing unit admissions and fewer one-day admissions in our overall Medicare business.

Same facility managed care net revenue per adjusted admission was 6.6% over the fourth quarter in 2004.

For the year, Medicare in our AA grew 5.4% and managed care net revenue per adjusted admission grew 6.3% over 2004.

Remember that our new Medicare rates rates and provisions were effective October 1.

In addition approximately one-third of our managed care revenue was repriced in the fourth quarter.

At this point, we have contracts covering 88% of our 2006 managed care revenues and 30% of our 2007 managed care revenues and an average increase in yield of 6 to 7%.

Now turning to expenses.

As Richard stated, aside from bad debt expense, expense management was solid.

On a same facility basis, fourth quarter salary wages and benefits per adjusted admission increased 4.9%.

Same facility supply cost per adjusted admission increased 4.3% over the same period last year.

Medical device expense per adjusted admission increased 5.7% in the fourth quarter compared to an 18% growth rate in 2004.

Pharmacy expense per adjusted admission increased 5.9% 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 and throughout 2005.

As Richard described our malpractice trends have been improving and as a result, malpractice trends was flat in 2005 compared to 2004 at approximately $298 million.

Next a few comments regarding bad debt expense in the quarter.

Bad debt expense was 625 million or 10.1% of net revenue.

Adjusting for uninsured discounts, bad debt expense was 860 million or 13.4% of net revenue compared to 625 million or 10.5% of net revenue last year.

Remember that the fourth quarter of 2004 provision for doubtful accounts processed was refined to include a favorable change of 46 million related to expected recoveries associated with the Medicare co-pays and deductibles and collection agency placements.

Just as overall volume growth rates vary significantly by market, uninsured admissions growth varied significantly, but generally increased in most markets.

Particularly affected was the Nashville market due to recent TennCare enrollment cuts along with several of our markets in Texas and Florida.

We continued to focus our efforts to manage the financial impact of these increasing uninsured and charity admissions.

For example, based on the success of pilots in Houston, we are expanding the use of qualified Medicare professionals in high-volume, uninsured emergency departments.

Speaking -- Medicaid qualification when appropriate and improving our point of service collections.

With respect to point of service collections, we collected 255 million in 2005 up 68 million or 36% over 2004.

Now moving to cash flow.

Cash flow from operations during the fourth quarter totaled 530 million and for the year 3.16 billion.

Cash collected as a percentage of adjusted yet revenue, that is 60 days trailing net revenue less bad debt expense was 100.3% in 2005, consistent with the past few years, this metric remains at 100% or higher.

Days in accounts receivable were 50 at the end of the year.

With that, Vic, I will turn the call back to you.

All right.

Milton, Richard, Jack, thank you very much.

If you would come on, we will move to Q&A and I do encourage everyone to hold your questions to one at a time as we have a lot of people on the call and would like to give everybody a chance and our time is somewhat limited.

Thank you, sir. [OPERATOR INSTRUCTIONS] Gentlemen, we will take our first question from Jason Gurda with Bear Stearns.

Good morning.

Good morning, Jason.

My question concerns the rehab rule, the move to the 75%.

What -- you have talked about the impact on volumes over the last six months, but have you given out a number or would you be able to give out a financial impact of that rule?

Milton or Trish?

Well, no, we haven't tried to measure that at the bottom-line level.

We know that on average, rehab admissions on average is about $10,000 reimbursement, so it is a good business, but we haven't measured the bottom-line impact.

And how many admissions did you lose over the last six months because of the rehab rule, the tightening of it?

I think we do--.

Bear with me just a second here.

Jason, I don't have the exact number.

Do you have the numbers on that?

We have -- year-to-date we're down 3400 admissions, year-to-date, that's about 14% from the year previous year.

Okay, thanks.

And then just really quick, it looks like there were some changes on the balance sheet, particularly like with your accounts payable from what was previously given the last third quarter.

Was something restated?

Well, I believe we made a restatement of negative cash, minor reclass there would have affected that.

Okay.

Thank you.

Jason, thank you.

We will go next to A.J.

Rice with Merrill Lynch.

Hello, everybody.

Just to follow-up on Richard's comment.

Is the point about the 16 incremental admissions per hospital, are you trying to say at this point, yes, it is at a high level but it's sort of stable and manageable?

And then Milton also on the bad debt, can you just expand on what is it about Houston with the qualified medical professionals that you guys did?

Where are you at in rolling that out?

And how extensive would the rollout be?

And what could be the impact of that?

Richard, do you want to address the incremental charity.

Sure.

I mean, I guess our thinking around the incremental admission perspective is that obviously the -- we are trying to focus on the cost of treating these patients rather than the revenue deductions or the bad debt expense because that's really what, from an earnings perspective we are required to cover.

And while the percents are high, 15% for the the quarter and certainly something that we are very concerned about.

When we really spread it out and think about it in terms of the number of admissions, the number of costs, the amount of costs that we have to cover, it is a much more manageable number.

That is not to take anything away from sort of the aggregate load that we carry as a company for all of our bad debts and uninsured but as we think about movements in this number, it is really on a very small base of admissions.

Okay.

A.J., on the Q&Ps.

Sam Hazen, President of West, do you want to address that?

Let me sort of frame it.

Basically this qualified medical professional program is nothing more than a screening process that we have established with our physicians in our emergency rooms where the physicians evaluate the emergent or urgent need of the patient and from there make a clinical decision about where the best setting should be for that individual patient.

If, in fact, the patient is not emergent and is in an uninsured situation, we do evaluate alternatives for the patient, give the patient a choice, and allow the patient to make a decision.

I think it's important to understand that that mostly effects emergency room traffic.

It doesn't effect sort of inpatient activity.

If the patient needs the care, whether it is in the emergency room or in the hospital, the patient gets it.

I think the important point, A.J., with our program is more around eliminating congestion in the emergency room and opening up capacity for patients that tend to leave because of the backlog.

And so what we have seen in Houston is really a combination of some reduction in uninsured activity in our emergency rooms, but increased activity with our paying patients who would leave because of the backlog.

I think as you look at the program, that's a more relevant indicator.

As far as rolling it out, we have rolled it out to a number of facilities.

We are rather selective about doing it because it does require physicians -- certain facilities need to have certain characteristics in order to implement the program and I don't know that I can give you a number of how many facilities have rolled it out, but we do roll it out incrementally, and somewhat selectively.

Sam, thanks.

Beverly, do you have some numbers?

Yes, we have approximately 18 Q&P programs up and running and then we have several others that are in the process of establishing it.

It takes about 90 days to six months to get that program established and through all the medical committees in the hospital.

Okay.

Thanks.

Thanks, A.J.

We will go next to Bill Bonello with Wachovia.

Yes.

Just I am wondering if you can give any more -- you mentioned the San Antonio competition.

I am just wondering if you can give any more color on that?

All right, the question about the San Antonio competition in outpatient surgery.

Sam or Bruce.

This is Sam Hazen again.

We have four -- last year we had four ambulatory surgery centers in San Antonio.

One of them we actually closed for a different set of reasons and merged most of that activity into one of our hospitals because the facility was rather old.

The number of physician partners that we had were at a point where they did not want to resyndicate and reinvest so we made the decision to close.

That was part of the answer.

The other two centers that were impacted -- it was impacted because of new competition.

There was a new facility that opened and a number of our physicians reinvested in that facility then moved their activity levels to that new center.

It is important to understand with San Antonio in particular and even with some of our surgery centers, while it is a critical strategy from relationship with our physicians and our activity levels, the economics within those surgery centers are not that material in and of themselves individually, and as an example, we own 50% of these two centers that suffered some volume loss, but within the partnership of Methodist Ministries that we have in San Antonio, we only own half of that, so the economics on those two cases is really 25% to HCA, once you work through all the minority interest implications.

But that was just due to a new center, more attractive deal I guess on the part of the doctors' perspective and they relocated their business.

We are resyndicating and reestablishing new relationships and we think our activity levels will grow.

Thanks, Bill.

We'll go next to Adam Feinstein at Lehman Brothers.

Good morning, thank you, everyone.

Hello, Adam.

A couple of questions here, if I may.

You were talk before just about volumes.

I just want to see any sense in terms of how things looked in January?

And then in that same context, you mentioned earlier about cardiac volumes.

I just wanted to see what was driving that and just to get some more clarity in terms of what exactly is going on on the cardiac side.

Thank you.

Adam, thank you.

With respect to January, we do not comment on interim months during quarters.

So our January volumes will be part of our first-quarter report.

Cardiac -- Richard, do you want to start that?

Yes, as I said in my prepared comments, there were a couple of issues for us.

One, of course, is our decisions that we made regarding some credentialing decisions in the Florida market.

So this was just a case where we were -- a part of our case review and quality review.

Made some decisions and we simply lost the business.

So that business left.

On the -- on the one-day stays -- admissions.

We do know that a lot of the conversion in one-day stays were relative to cardiac admissions, and that is, someone would present at the emergency department with a rule-out for a heart attack and they would be put in a one-day admission status, and now we are seeing that move more to an observation day status.

So once again, the employee -- I mean the patient comes in and they get the same level of treatment but it is done in an outpatient setting rather than with an inpatient classification.

Then on a more general note, and we don't have a lot of statistics at our fingertips to really, quantify it, but we do think that the technology has -- is having an impact, and we are seeing an overall softening in our stent volume and perhaps Lipitor and some of those drugs are slowing down some of the admission rates.

Adam, thank you.

Thanks.

We'll go next to Chris McFadden with Goldman Sachs.

Thank you and good morning, everyone.

Three sort of local market questions.

Firstly, you mentioned Dallas was sort of above Corporate trend.

To what extent do you think that market is being benefited by a transplant of New Orleans citizens.

Secondly, relative to Kansas City, you've obviously invested a lot of time in that market.

It sounds like results are not to your expectations.

Any diagnosis there?

And then finally, could you give us some sense of what financial impact will be of the reopening of the Tulane facility.

I certainly understand the commitment to that community.

But could you just talk about what your expectations are and how that might impact the 2006 outlook or just near term the financial characteristics of that reopened site.

Thank you.

Thanks, Chris.

Sam, I know you want to do Dallas.

And then you or Paul want to address the Kansas City and then we'll see who wants to have Tulane.

Sam?

Okay.

In Dallas, as far as the hurricane impact, I don't think in Dallas it's that material.

As a matter of fact, I don't even think we've heard that as an explanation for any indicator in the Dallas market.

Now in Houston there is a little bit more potential for that to have an impact on our volumes, but not in Dallas.

I don't think that's the case.

On Kansas City, Paul?

Kansas City actually is meeting if not exceeding expectations.

We are and have committed significant capital out there.

We have a lot of growth.

New facilities coming online so we are very pleased with the current level of outcome there.

The only thing I would add on Kansas City is that while the volumes are down, those were due to some managed care decisions that we made, their earnings are right where we expected them to be so we are very pleased with our position in Kansas City and its outlook.

I think that was last quarter we may have reported that or sometime during this year that we did renew a managed care contract which had some adjustments to volumes, but it was financially positive.

That was under Sam's watch, I think.

Milton or somebody want to address the Tulane?

The financial impact of reopening Tulane and how that will impact our financial results this year?

Sure.

We have the business interruption insurance coverage still applying to Tulane and will, we believe, through most of '06.

So basically we expect the '06 run rate from Tulane to be comparable to '05 mainly because -- because business interruptions would replace that lost earnings.

Jack, do you want to add to that?

Yes, the issue because of the insurance about 2005 is not the real step of faith that I talked about before.

Obviously by rebuilding the hospital and reopening it, even though the insurance is covered in 2005, the bigger unknown is 2006 -- excuse me for 2006 is covered.

The bigger unknown is for 2007 and 2008.

Now obviously we are not certain exactly what is going to happen in that community there.

We are not sure exactly what the patient mix is going to be as we look out into 2007 and 2008.

And that's really the unknown. 2006 is essentially covered.

The outyears are where our concerns are obviously, and where we are really making this leap of faith.

Is there anything about your relationship with Tulane that would help to shelter you from some of those uncertainties?

No.

We're at risk, as is Tulane Medical School for what they are doing.

We are both taking leaps of faith here to bring these facilities back into play and to bring Tulane Medical School back to its former level of performance.

You may know that Tulane, I believe this is correct, is the oldest medical school in the South.

And it would be an absolute tragedy not just to New Orleans but to the State of Louisiana and the South to lose that fine school with the great reputation and great history it has.

And so we, together, are going to do everything we can to make this work.

Chris, thank you.

We will take our next question from John Ransom at Raymond James.

Hi, good morning.

Just two quick easy financial questions.

It looks like you got $1 billion dollars from option exercises.

What was the average price per share on that number?

All right.

Anybody have that number?

No.

The $1 billion, John, is correct, but we had option exercises there probably from high single digits up to probably over $40, so it was a wide range of option exercise prices this year.

John, Mark will get you that number.

Obviously, it will be in our 10-K, but we'll get you that number.

Okay.

Do you expect that to slow down this year?

You lost about almost 60% of your share repoes just from dilution from option.

Do you expect that to slow down this year?

Yes, we do.

We don't expect to see a repeat in '06 of the cash generated from option exercises nor the impact on dilution with weighted average shares outstanding.

Okay.

And then just secondly, the bad debt expense, I know there are always timing issues and year-end audit issues but I guess just on the surface with charity going up 15 and bad debt going down sequentially, is there a metric that -- as you look at '06, does your guidance have a 10 in front of it for bad debt expense or is it going to look more like the blended average or more like the back half of the year average?

I will stop there, thanks.

Well, John, that's a good try.

We are not going to give guidance on bad debt like that.

Fortunately now, we have now been through this change with the uninsured discount program, and our numbers -- reported numbers hopefully will be more comparable in terms of understanding it.

So I think some of the noise will be eliminated in '06 because of that.

But that's probably about all I can say about bad debt in '06.

I mean our guidance that we previously guided and reiterated today anticipates that we will see continuing increases in the numbers of uninsured and obviously that will result in growth in bad debts and doubtful accounts.

We did not quantify that and have no plans to at this point.

We will go next to Ken Weakley at UBS.

Good morning, Ken.

Good morning, everyone.

I was wondering, pricing power is a little better than I would have guessed and historically there's always been somewhat of a link between occupancy and your ability to get the price you need relative to your cost structure.

So I'm just wondering if you can spend some time talking about pricing power and especially, maybe how your capital spending over the years has either affected mix or just relative pricing power in a local market such that you can sustain pricing despite a relatively soft volume environment.

All right.

I am looking around.

We have got a whole bunch of people that can jump into there.

I know Beverly does the pricing.

We've got the market guys.

Somebody have at it.

Ken, this is Beverly.

I will just take the pricing piece and then let the market guys talk specifics.

Our pricing agenda is based on our cost growth, and so we price to the managed care payors based on what we see our cost trends doing including the growth of the uninsured.

So as we've mentioned before, 2006 is for the most part done, and we are focused on '07, and we continue to see the same thing going forward.

This is Sam Hazen.

I will speak for the Western markets.

Ken, I don't see any situation where there's been so much supply added to the marketplace, that it is affecting sort of the pricing equation.

I mean, clearly there are some markets where there is more supply being added, but generally speaking, it's to me population growth and general demand requirements, and we are not seeing just excess supply being added to the point to where it is compromising sort of the pricing trends.

I think that is sort of how I would answer the question about pricing power and so forth.

But I think it is clear to me anyway that had it not been for our capital spending, our overall market positioning within these markets would not be at a level that would allow us to sort of compete in both the volume equation as well as the pricing equation.

So from that standpoint I think it has kept us at par or exceeded par in certain markets, but -- so it was sort of critical in that overall sort of positioning I think.

Charlie, you want to add -- Charlie Evans, President of the East.

The only additional thought is that both our capital investment and our quality agenda have positioned us very favorably with payors across these markets.

We are contracting on a multiyear basis.

We have very desirable facilities.

We have a great quality agenda that is playing through to the benefit of the enrollees in these various programs.

So we are in a very desirous position with both the capital and quality program initiatives.

So is it -- so it is not really the composition of patients that are coming into your facility such that the revenue fragment on a weighted average basis is much greater.

It's just that the overall ability to get the price you need to cover your cost is better because of your strategy in place for time.

Getting lots of nods in here.

Okay.

Lots of nods.

Anybody else want to offer anything on that.

Milton.

Well, yes, with respect to the capital invested, Ken, one thing we are looking at is our return on invested capital and return on stockholders equity.

Looking at '05.

Again we measure this excluding the gains on sales facilities, excluding the tax settlements and the tax pickups so it would be excluding those and our returns this year on invested capital is 11.3%.

That is versus 10.8 last year and our return on stockholders equity 24.3% this year versus 21.1 last year.

So good solid returns and growing.

So we think that is reflective also of our investment in our capital investment strategy.

And I guess related to that, Jack, do you think the DOJ recalibration will have an effect of pricing power for cardiovascular down the road or is it too early to tell?

I think number one it is too early to tell.

Our preliminary look at it shows that it is of no consequence to us.

Okay.

Ken, I would like to make one comment about this pricing issue as we go forward.

We remain convinced -- and I think we are beginning to see at least the glimmer of this starting in our own contracting process about the efforts that we've made in patient safety and quality.

Our negotiators for managed care in our markets are starting to push this agenda, starting to show the payors the results of our quality in patient safety initiatives, and we believe that that will slowly but surely give us additional pricing power in the market simply because we can demonstrate that we can save costs due to the prevention of untoward events to their enrollees.

Okay, thank you.

We'll go next to Gary Lieberman of Morgan Stanley.

Thanks, good morning.

Hi, Gary.

Was hoping you'd talk about CapEx a little bit more.

It looks like CapEx in the quarter ticked up substantially.

I was wondering how much of that is associated with the hurricanes versus how much of it is associated with this increased run rate for CapEx.

And then just sort of associated with that.

Can you talk about incrementally what -- what is the incremental CapEx going to be spent on in '06 versus '05.

What kind of projects are you targeting that maybe you didn't do last year or the year before that?

Okay, Gary, this is Richard, our capital spend really was right on our number at 1.6.

It did pick up a little bit in the fourth quarter and what we find happens is with a big number like this and a lot of construction projects, is that sometimes we -- there's some movement in the flow of funds to these construction projects based upon the pace of the construction, et cetera.

What we actually ended up doing in the latter part of the year is because we saw a slowdown in the funds relative to construction payout is went ahead and increased our spending on routine equipment and refurbishments that kind of thing for the year.

So we were actually able to hit our number and actually add more to the technology component.

As we look at '06, as I mentioned in my comments, we are going to step it up a little bit.

Most of the increase is due to these big projects that I mentioned.

And our IT&S spending.

So we were able to cover a lot of the routine spending as I mentioned with some of the incremental spend in the latter part of the year and we're going to step it up a little bit to cover the big projects that will be coming on line in increased IS spending.

I am just looking at one schedule here, it's Elton that oversees this area for us.

And it shows new and replacement facilities spanned, it looks like it was roughly 85 million in '05 going to 250 in '06.

We have got some really big projects.

We've got about $1.3 billion of new hospitals in the pipeline that we will be spending over 2008.

And IT&S will move from about 150 to 225.

That 1.3 number, that's between now and 2008, was that?

New hospitals that Richard mentioned in his opening remarks.

Okay.

Thanks a lot.

All right, thanks, Gary.

We will take our next question from Oksanna Butler with Citigroup.

Good morning, Oksanna.

Good morning.

Thank you.

Just a couple of quick questions just on the numbers and then just a trend question.

If you have it, could you please give us the self-pay gross receivables for the quarter?

I don't know if you can break that down in terms of uninsured versus co-pays and deductibles and the allowance?

And just in terms of trends.

If you look at the growth rate in uninsured over the last couple of years, it looks like -- you saw double-digit growth in the first half of '04 then that really dropped off in the second half of '04, the first half of '05.

Then the last couple of quarters we have seen a reacceleration, but do you think that is really indicating a trend?

Or do you think that is mostly a reflection of market specific issues, hurricanes, those types of things.

Thanks.

All right.

Milton do you want to take it?

Sure.

On the self-pay receivables.

In total, including Medicaid pending, it is probably about 3.4 billion on the balance sheet.

We've got about probably 80% approximately of that reserved as allowance for doubtful accounts.

That's kind of the numbers roughly, Oksanna, where we ended the year.

The breakdown is probably two-thirds of that would be uninsured and probably a third co-pay and deductibles generally is how that falls out.

I haven't checked that number in the past quarter but it doesn't move that much or that often so I would say it's somewhere in that zone.

Hey, Oksanna, this is Mark.

On the allowance for the bad debts in the quarter it was 2.897 at year end.

And at the end of September, it was 2.84 billion.

And Oksanna. back on your uninsured and trends and whatever.

To be perfectly honest, we don't know the answer to that, I don't think.

We looked at it.

Richard tried to quantify as best he could.

We really are obviously looking at it and it gets market-to-market and you are talking about maybe six -- on average six more admissions in a month that are uninsured.

So it's -- per hospital.

So it is really tough to quantify it.

Obviously it is important, it's a number we all focus on and look at.

But it is just very difficult.

It's very market specific.

We do not believe that the increase that we saw on the last few quarters is directly related to the hurricanes.

Obviously there will be some of that but that is not a material reason for that.

Right.

Thank you so much.

You are welcome.

We will go next to--.

About one, we have got time for about one more question.

All right, thank you.

We will take our last question from Sheryl Skolnick with CRT Capital.

Thank you very much.

Hi, Sheryl.

Good morning.

A clarification when you said the negative cash.

Was that bank overdrafts that were accounted for as accounts payable instead of as cash?

Yes, it was really the float where we operate generally without the cash on hand and have positive pay accounts.

One of the things that we changed was the classification of that as AP versus negative cash.

So that was just a reclassification on the balance sheet.

Okay.

That is a good clarification.

Thank you.

Then the second, the real question is, a couple of the companies have commented on some significant changes in accounting and in markets, and I guess the biggest one that has had an impact is the change in the accounting rules with respect to physician recruiting expenses where now they have got to be capitalized going forward instead of expenses incurred.

You hired 700 -- recruited 700 docs, presumably in '06 you are going to be very active.

Do you need to change your policy?

And if so, what is the impact?

Sheryl, thanks.

A good question.

Milton, do you want to address that?

Sure.

Sheryl, we don't have a financial impact with that this morning.

We will have that, of course, when we release our first quarter earnings.

We are still analyzing -- that's under FIN 45 is the accounting guidance that now just recently made a change to that that makes physician income guarantees fall under FIN 45, previously it was clear they did not.

We're analyzing, it's a fact and circumstance situation about how you go in and capitalize or put the obligation on the balance sheet, so we are still going through all that, but I can -- I don't -- we've sized it enough to know that it would not result in HCA changing guidance for that.

So it will fall within our guidance that we have out and we will have more details on that at the end of the first quarter.

Just to be specific, you are currently expensing as incurred and -- and the depending on the situation, you may have to capitalize?

Well, we current -- you are right, we currently expense as we make the payments to the physicians and what FIN 45 is indicating is that there would be an obligation on the balance sheet and then we anticipate booking an asset and the issues are around what would be the amortization period of the asset and that is really the facts and circumstances and we're still going through that analysis.

So it might be one end of guidance to the other as opposed to out of the range completely?

That's correct.

And it is a positive.

Well, we think. it is a positive.

We are still going through it.

If we get to a one-year period which I don't know we will, then it would be no change.

So -- there is a range of possibilities that we are still analyzing, but, again, wherever it falls out, it will be within our -- it will not cause this.

It will not be enough of an impact on our financials to cause us to change our stated earnings guidance.

Right.

And the tax settlement of the $0.01 the quarter.

Is that something that is likely to continue going forward and also in your guidance?

No, that will not go forward in '06.

That was a one-time opportunity we had, to complete by the end of '05 and we had a few pennies of that pickup in the third quarter and that was just the final adjustment as we transferred some of the last funds in December into the country.

Terrific, thanks a lot.

All right.

Sheryl, thank you.

And I want to thank everybody.

Mark will be here all day, as will I, and we look forward to talking to you.

Thank you very much.

That does conclude today's conference call.

Thank you for your participation.

You may disconnect at this time.