美國醫院公司 (HCA) 2007 Q3 法說會逐字稿

Welcome to the HCA third quarter 2007 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 Mr.

Vic Campbell.

Please go ahead, sir.

Anthony, thank you very much and good morning to everyone on today's call and also to everyone listening to our webcast.

With me this morning for our third quarter conference call is our CEO, Jack Bovender; our President and Chief Operating Officer, Richard Bracken; Milton Johnson, our CFO; and David Anderson, Senior VP of finance along with Mark Kimbrough, our Chief Investor Relations Officer.

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 any forward-looking statements.

Many of these factors are listed in our press release and also in our SEC filings which we encourage you to read.

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 and 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 you heard, the call is being recorded and a replay of the conference call will be available later today.

With that, let me turn the call over to Jack Bovender.

Good morning, everybody.

I'm going to be brief and turn the call over to Milton Johnson, our CFO, and then eventually over to David Anderson, our Treasurer, to discuss financial performance and the balance sheet and other issues related to our financial performance.

But before we do that, I just want to remind everyone that November represents the anniversary of our first year since we did our LBO and I think there's no question that we feel very good about our first year.

The management team feels extremely good about our performance and extremely good about our future as we go into our second year.

We're not only moving the financial agenda that we laid out for ourselves but we are also moving the other important agendas that we've talked about before including our quality and patient safety agenda.

And we believe this becomes more and more important, not just for the ethical considerations of taking the best care of our patients but also as it relates to the increasing pay for performance activities that we see among managed care and CMS.

So, again, we feel very good about our first year and even better about the years that we see coming ahead of us.

So, with that, I will turn it over to Milton to go into some detail about our third quarter performance.

Thank you, Jack and good morning.

Generally, just as in the first half of this year, earnings performance was driven by a combination of favorable net revenue per equivalent admission and strong expense management.

The third quarter trends for inpatient admissions remained consistent with the recent trends.

However, we did experience an improvement in outpatient services resulting in an equivalent admission growth rate that is much improved over the first six months of this year.

Also, just as in the first and second quarter, our volume performance looked better excluding the impact of the Las Vegas market as we repositioned our managed care portfolio.

As stated in our earnings release this morning, net income for the quarter was $300 million compared to $240 million last year.

Interest expense increased by $360 million over last year's third quarter.

In the third quarter this year, we recorded a loss on the sale of investments of $1 million compared to a gain of $40 million in last year's third quarter.

We also reported gains from sale of facilities of $316 million this year versus $41 million last year.

This year's gain primarily relates to the sale of two hospitals in Geneva.

Also, during the third quarter, the Company's tax rate was favorably impacted by an estimated $85 million tax benefit related to new information received relative to the prior taxable period examination.

We saw solid revenue growth in the third quarter of 5.7% on a reported basis and 7% on a same facility basis.

Adjusted EBITDA grew 6.9% to $983 million compared to $919 million and in the third quarter of 2006.

As a reminder, adjusted EBITDA is reconciled to net income in the Company's earnings release.

During the third quarter, the Company recorded approximately $32 million of revenue in Medicaid supplemental payments pursuant to Texas programs often referred to as UPL programs.

These programs which operate in Texas were premised on our hospitals assisting in the provision of indigent care with other area providers and the cost of that care in the second quarter was $33 million.

Claims from Texas to provide the federal match for the state Medicaid portion of these UPL programs are now pending CMS review.

It is important to note that we did not recognize any benefit related to Texas Medicaid supplemental payments in our operating results during the third quarter and will continue this revenue recognition policy until we have received further guidance from responsible federal or state agencies.

Adjusted EBITDA margin improved to 15%, an improvement of 20 basis points from the same period last year.

Improvement was primarily driven by a 70 basis points improvement in salary and benefits, a 30 basis points improvement in supplies and a 70 basis points improvement in other operating expenses.

Provision for (inaudible) accounts increased by 90 basis points in the third quarter of 2006 to 11.8% of revenue.

Also note that last year's third quarter adjusted EBITDA margin benefited from a 70 basis points related to the gain on sale of investments.

Same facility revenue per equivalent admission increased 7.5%.

Revenue per equivalent admission growth was the result of solid yields from our managed care and Medicare book of business.

In the third quarter, same facility managed care revenue per equivalent admission increased 6.2% over last year and same facility Medicare revenue per equivalent admission increased 4.6% over last year.

This includes both traditional Medicare and managed Medicare products.

Same facility cash revenue per equivalent admission measured by net revenue less bad debt expense increased 6.4% over the third quarter of last year.

During the quarter, we continued to see an increase in acuity measured by case mix which increased 1.7% over last year.

Our average length of stay also increased 0.7% compared to last year.

Same facility admissions declined 1.6% compared to last year's third quarter and on an equivalent admission basis, that is adjusted for outpatient activities, the decline was only 0.5%.

Excluding the impact of the Las Vegas market from our same facility admissions calculations, equivalent admissions declined 0.2% during the third quarter.

It's important to remember that we have several markets with solid admission growth in the quarter over last year, such as San Antonio, El Paso, and Tampa to name the top three by number of increased admissions.

The gains were offset by declines in Las Vegas, South Carolina, and Kansas City to name the top three by number of decreased admissions.

Same facility outpatient surgical volumes declined by 0.7% in the third quarter compared with last year.

Same facility surgery center or ASC volume increased 0.9% while same facility hospital-based outpatient surgeries decreased 1.8%.

The hospital-based outpatient comparison reflects some cannibalization from our new ASBs which are not included in our same facility ASC statistics.

Including all ASC surgeries, total outpatient surgeries increased 0.8% during the third quarter.

We were extremely pleased with cost management during the quarter.

Same facility cash expenses per equivalent admission including SWNV, supply expense and other operating expenses increased 6.5% over last year.

Excluding the Texas indigent care expenses, same facility cash expenses per equivalent admission increased 5.8%.

Labor cost expressed as percent of revenues totaled 41.1% compared to 41.8% in last year's third quarter.

Wage growth continued in line with previous trends at 4.9% and productivity, measured by adjusted patient days which takes into account length of stay improved by 0.2%.

Supply expense was 16.5% of revenue compared to 16.8% in the third quarter 2006.

Supply cost per equivalent admission increased 5.4% in the third quarter on a same facility basis.

During the quarter, we saw a decrease in our same facility drug eluting stent cost of approximately 42%, driven by a decline of approximately 13% in coronary stent cases over the prior year.

Coronary stent costs per case declined by approximately 18% in the third quarter.

In the third quarter, pharmacy expense per equivalent admission increased just 0.9% due to our pharmacy saving initiatives.

Other operating expenses totaled 16.4% of revenues in the third quarter of 2007 compared to 17.1% last year.

Excluding Texas indigent care expenses of $33 million, other operating expenses would've been 15.9% of net revenue this year.

Compared to the third quarter of last year, we saw reductions in professional malpractice costs, legal and accounting fees and marketing expense.

We continued the recent trend of increasing professional fees primarily related to physician on call pay for ED coverage.

Same facility uninsured admissions grew 5.2% in the third quarter of 2007 compared to last year, down from the growth of 12.4% in the first quarter and 9.9% in the second quarter of this year.

This is the lowest growth rate we have seen since the second quarter of 2005.

Same facility charity care discounts increased by $123 million to $390 million and same facility uninsured discounts increased by $80 million to $403 million.

With respect to days in accounts receivable, we saw an increase of three days to 54 days from 51 days in the second quarter.

Two factors caused this increase.

First, we had only 19 baking days in September which slowed our cash flow and second, we saw an increase in receivables due to our consolidation of the Las Vegas patient account service center to our Atlanta Center.

Cash collections were strong in October and we expect to see our days in accounts receivables return to the 52 to 51 days level in the fourth quarter.

Now I will turn the call over to David Anderson to discuss balance sheet and cash flows for the third quarter.

Thank you, Milton.

If you will look at the cash flow statement for the nine months ending September 30, we will go through a few numbers here.

As you can see, cash flow from operating activities was done $368 million.

Our interest payments were $1.5 billion for the nine months in 2007 versus $554 million in 2006, a difference of $968 million obviously reflecting the fact that we did the LBO and a recapitalization of the balance sheet.

Also, our into income tax payments were down by $587 million during the same period, reflecting a reduction in the net income that you see on the cash flow statement, which is 596 versus 914 or a $318 million difference making up most of the difference I think between 2006 and 2007.

The change in operating assets and liabilities you can obviously look at the current assets and current liabilities.

One thing I would point out is that the cash in HCI, our malpractice insurance captive was redirected into fixed income securities in an amount of $217 million during this nine month period which is also included in that change line.

If we go to cash flow from investing activities, you can see that capital expenditures are $997 million a $333 million reduction from the run rate in 2006.

I think we still expect capital expenditures to come close to $1.6 billion which we have previously disclosed and believe we will still be on pace to spend $1.7 billion next year.

Disposals of hospitals -- that's basically the other large line item in investing activities and obviously, that's the sale of the hospitals in Geneva, Switzerland.

From financing activities, we have paid down on a gross basis $993 million in debt and also issued common stock during the first nine months of $100 million.

This was a deal if you will that was left over from the LBO.

We sold approximately $40 million I believe in stock to certain employees of the Company.

And the sponsors put up the other $60 million to make up the $100 million.

As a result, our cash and cash equivalents at the end of the period were $347 million.

Just to give you some idea where cash is located, HCI cash is $11 million, corporate cash is $67 million and overnight investments -- international cash is $131 million and various other locations of cash including deposits in transit of $76 million.

Debt at September 30 was $27.5 billion.

Our debt to EBITDA was 5.85 times and our floating-rate debt as a percentage of total debt was 21.5%.

And, that's my report.

All right.

David, Milt, Jack, thank you very much.

And if you would like to come back on, we will pull for questions.

(Operator Instructions) Sheryl Skolnick, CRT Capital Group.

I think that's a first.

Very nice job managing through the challenge of the third quarter.

With respect to the pricing that you are seeing with managed care right now, you've obviously done a very good job of maintaining discipline with these contracts.

But are there more contracts coming up that we should look to you to maintain your discipline stance and can you give us a feel for where those contracts that you're negotiating now are coming in in terms of sort of stated contractual price increases?

Richard, you want to address that?

Yes I will at least give it a start and maybe Bev can add to it if needed.

As we think about our book for next year, our contracts that are already completed probably reflect greater than 90% of revenue.

So, we have very good clarity about our managed care book for next year.

And actually on into 2009, obviously a lesser percent in 2009.

So I wouldn't expect any major contracts up for discussion throughout 2008.

And, the range of the price increases if you would, that you're seeing?

It's consistent with where we've been and we're very pleased with where it's at.

Darren Lehrich, Deutsche Bank.

Jack, you mentioned the quality in patient safety initiatives and I guess I just wanted to ask a question here about the pay for performance activity that you're seeing at this stage of the game.

Where is it the greatest and could you just give us a sense as to what percent of your managed care contracts are incorporating some of these features at this point and I guess what your view is of where that might be headed?

First of all, I'm going to let Beverly get into specifics as far as where she's -- where we're seeing this being raised and talked about across the country.

And in our negotiations with managed care, it's not just them that are raising it.

We are raising it too because we think this will over time give us a competitive advantage in our markets.

But, why don't I let Beverly go ahead and talk about what we're seeing specifically in our markets?

Thank you, Jack.

Our largest managed care contract was with United and as we announced when we signed that contract last year, we built in some pay for performance parameters going into the 2008 calendar year.

So, that covers across all of our markets.

The other payer that is out there doing this is Anthem WellPoint.

We do have a contract in Richmond that has some pay for performance parameters in it.

And we anticipate seeing more of this as we renegotiate for the 2009, 2010 contract period.

Henry Reukauf, Deutsche Bank securities.

I jumped on just slightly late and I only caught the last bit of what you were saying on the UPL, accounting for the UPL this year.

Could you just review that and how that is going?

Milton, you want to do that?

Sure.

In the third quarter, we have recorded about $32 million of revenue from the -- from what we call the UPL program.

We also incurred about $33 million of indigent care expenses during the quarter.

So, basically we had about a $1 million loss in the quarter from the UPL programs.

And what I had covered in my comments is that the CMS is currently reviewing these programs for the federal match piece and until we get additional guidance from either the state of Texas or the CMS we're not recording any EBITDA or any earnings from these programs.

I know last quarter you were -- you had delayed some either reporting or collection.

Did that come through this quarter?

Well, last quarter -- in the first half of the year, we recorded -- in the first six months -- about $46 million of earnings from these programs.

So we did record the federal match in the first half of the year when the CMS started their review of these programs and made the decision to change our revenue recognition policy not to recognize basically the federal match until we get more guidance from CMS or the state of Texas.

Janet Sung, Loomis, Sayles & Company.

My question has to do with the increase in bad debt expense; all in, the uncompensated care expense exceeding 21% of revenues by my calculation for the quarter.

I just wondered how that stacks up to your original expectations at the time of the LBO a year ago.

As I recall, the proxy statement for the projections on just the bad debt component is increasing or is projected to increase around 0.5% per year.

And in 2007, I think the projection was for 10.9% of revenues -- the bad debt component.

And, this quarter, we're looking at 11.8.

And I just wonder where do you think it's going, whether this is part of your expectations despite the fact that the percentage is higher because maybe because of the pricing being better or were there any other explanations for that?

Milton, you want to address that?

Sure, sure.

First of all, the way we calculate total and compensated care as a percent we come with 19.3.

And what we do for the quarter, we're looking at our net revenue adding back discounts and adding back charity and adding bad debt and looking then at bad debts, charity and discounts as a percent and we get just about 19.3.

That is a high number for us.

But it's higher than where we were last year.

A lot of that is caused by increases in (inaudible) would be driving a big piece of that (multiple speakers)

I'm sorry, I missed that -- what was that?

You said caused by --?

Well obviously as we increase our charge master, that's going to (multiple speakers)

Oh, charge master okay.

Yes.

But also we're seeing some acuity increase in the uninsured admissions as well driving some of that as well.

But, relative to our plans, we're pretty much on track.

This quarter, I would say we're slightly higher in bad debt or uncompensated care than we had expected but not materially off.

And for the first nine months, we're pretty much where we thought we would be.

So, bad debts and the uninsured activities continue to be an issue for the industry and continue to be an issue for HCA.

But, I feel like we have so far this year we've been able to -- our actual results are pretty close to where we had expected it to be coming into the LBO.

All right; okay.

I mean it is higher but over 200 basis points year-over-year from about the 18% range to the 20% range.

Over last year, that is correct.

But, when we modeled, getting back to what we expected, we expected that level of growth and when we modeled our bad debt for from the LBO standpoint.

So, again, although it is up, it's not significantly higher than what we expect it to be at this point in time.

Well, is it possible to say -- how high can this go going forward?

Do you think it will stabilize at the 20%-ish area or would the growth going forward be the same as in the last year?

Are we going to see 200 basis points growth next year?

(multiple speakers) that actually does impact EBITDA or maybe doesn't even impact your EBITDA because your top line is growing commensurately.

That's what I'm trying to get at.

Yes, when you -- keep in mind that when you think about uncompensated care, of course the accounting for it -- we report as some of it as a net revenue.

We show it then as bad debt.

Really, from the standpoint of the impact on earnings, the cost of uncompensated care is the cost to treat.

So, really, the impact on earnings is, what is our underlying cost trend?

Labor cost, supply cost, and so forth.

So, as we effectively manage our costs, that's the way the Company can best manage the impact on earnings from the uninsured admission trends that we're seeing.

Janet, this is Vic Campbell.

Let me add and I think we've said this many times before and we can't project where that number is going.

We have to manage the cost of the uninsured but the uninsured is a major issue in this country.

Jack Bovender, myself, and others in this Company spend a lot of time -- have spent a lot of time over the course of the last year through the Federation of American Hospitals with a proposal that we believe is an appropriate move to get all Americans covered with insurance.

The good news is we're seeing from a fair number of the presidential candidates a lot of discussion around this.

You may or may not be aware of the various forums that we're holding with the presidential candidates in essence asking them to talk about this issue and how would they propose to fix it.

We are hearing a lot of good things, a lot of movement.

Obviously it is something that is very challenging but I think it's getting a lot of attention and I'm hopeful that we're going to see some movement after the presidential election in this area.

But it is a broad, nation wide issue.

We can't deal with it alone.

We have to manage our way through it which I think our folks are going.

Do you want to go on record as to which presidential candidate you are rooting for?

Not today but we sure want somebody that addresses getting coverage for all Americans.

Pearl Chang, SCM Advisors.

My first question is just a follow-up with respect to bad debt.

On the self pay you know you said the volume increases slowed somewhat this quarter and I was wondering if you could -- obviously there are a number of unknowns -- but if you could comment on what you're self pay volume growth assumptions are for 2008 right now?

Yes, you know, although we had a 5.2% growth rate which is as I mentioned in my comments, the slowest or the lowest growth rate we've had since early 2005, still though in the third quarter in the absolute number of uninsured admissions was the high point that we've had.

For whatever reasons, the third quarter of each year for the past several years we've had our highest absolute number of uninsured admissions in our system.

And, that's been at least four years to five years back that's been the case.

You see that reflected in -- we talked about bad debt growth for the year.

And when you think about going forward and how we see uninsured volumes, until there is some change with the number of uninsureds in this country, and in our markets, we really don't see the recent trends training.

The last three years or so, we've been 9% to 10% growth in uninsured admissions.

And right now, we think that's going to be the trend until there is someone addressing the uninsured problem.

We don't see what's going to change that trend.

And that's the way we've modeled our uncompensated care going forward.

And if I could ask just a follow-up just on that, I was wondering if you could comment on your collection rates if there's been any change.

I think it's been in kind of the 8% to 10% range on self pay.

You know, there's really no major change in our collections from either copay and deductibles or the self pay AR.

It remains basically where it's been and the combination of the uninsured and then the copay and deductibles is around $0.09 to $0.10 on the dollar.

So, that hasn't changed significantly in this period.

Miles Highsmith, Credit Suisse.

Some people would argue that your -- in terms of your allowance where they're looking at a percent of gross AR relative to the self pay is pretty healthy.

I know there is some potential reasons for that that are maybe company specific, AR specific, patients specific to you guys.

My question is, back a number of years ago, Triad for example would talk to the street about having a cushion with respect to what their allowance was and kind of what they internally thought they would need.

And I'm wondering if you had any such cushion or maybe if you could just make any comments about the allowance.

Thanks.

Milt, you want that?

No, we don't have a so-called cushion.

I do remember Triad's statement on that.

We go through a very very extensive hindsight review each quarter and it's a rolling four quarter review.

And so, we book what that hindsight work indicates that we should have to have our receivables properly valued on the balance sheet.

And we don't book more or less than what that hindsight would indicate.

So, in our view there is certainly no cushion on the balance sheet for bad debts.

Lawrence Weiss, Citigroup.

Just two questions.

One on the CapEx.

I'm just going through the transcripts of last quarter.

I think you kind of guided to the 1.7.

You are taking that down now to 1.6, is that correct?

(multiple speakers)

Yes, let me just comment.

Just quickly, recall that our plans for capital spending in 2007 was set at 1.8 and next year we had set it at 1.5 ,3.3 for the two-year period.

How we actually are spending our money, we've actually slowed down a little bit in 2007.

I think we're going to come in closer to 1.6, perhaps even slightly below 1.6.

And what happens in a lot of this, we've been very careful about our capital spend as you know.

But the additional dollars will roll into next year.

So, it will still be the same amount for the two-year period.

We might be up a little bit 1.7 when we include that rollover amount.

But for the two-year period we're right on our model of capital spend according to plan.

Okay, thanks.

And the second is, you said that you benefited about $217 million from transfer of cash from HCI.

Is that largely done or how much can we figure that is going to be benefiting you guys more going forward?

David?

HCI cash is running right about $11 million.

That's what we would typically target.

As you may recall we went to a self-insured mode effective January 1.

So, in HCI really what we're doing is paying claims and expenses out of HCI.

That's being a little bit simplistic but that's running frankly right around $20 million a month.

I think what you may be thinking of is, we move -- we had cash in HCI that was invested in marketable securities and it moved within HCI from a cash to a marketable securities investment but did not leave HCI.

No; that's right.

We do fund basically the Company also to cover the claims payments because it goes through the AC system but that's right.

Doug Peter, Bank of New York.

Most of my questions have been answered but I did want to ask (multiple speakers)

Wait a minute then.

You can't keep going.

Just kidding.

Go ahead.

It was good to see this quarter that you paid down a good chunk of debt and I just want to get your thoughts on your intent to -- moving forward on what you hope to pay down maybe over the next year or so.

And if you could also just break down the 551, what that was actually used to pay down.

Milton, David -- somebody want a shot at that?

Well, I don't think I can really give you a projection on how much debt we think we can pay down.

That might get into areas I can't go to.

But, the fourth quarter is a big quarter in terms of payments because we have interest payments, principal payments, and a 1215 tax payment.

So, I would be little surprised if we had a lot more debt paydown this year; let we put it that way.

Okay.

And obviously, your CapEx for the fourth quarter is going to be pretty high as well right?

So, you're not looking much -- can we think -- I'm just trying to model in terms of modeling this next year, is it possible to be paying down an equivalent amount next year?

Are your intentions obviously maybe to be more aggressive next year as maybe cash flow improves and some of the initiatives you've been taking during the LBO kind of take foot?

And I guess I just want to follow up on the 551 -- do you pay down your entire revolver?

The one revolver I think it was 400 something.

Just a little color there please.

I'm going to let David do -- if he can do the 551, give some color there but I'm going to take him off the hook in terms of projections.

We're not providing any forward guidance in this regard.

We're going to do the best we can obviously.

But we want to pay down debt just as fast as you want to see it paid down.

And we'll use all our free cash to do that.

But at this point in time we're not going to provide guidance or projections.

Right and obviously I can't give you what we expect free cash flow to be in 2008.

But, one major source of cash to pay down debt in the first nine months is obviously the sale of assets which -- Geneva, we used to pay down the European term loan.

I don't know today we have other dispositions that are in process but I don't -- I can't give you a number and couldn't give you a number for 2008 on disposition.

Yes, we are public that we are selling our Cedars facility, University of Miami.

The price is not not public and won't be until the deal is completed.

We would hope to have that completed by the end of the year.

And that would be the one material one that is in the works.

Adam Feinstein, Lehman Brothers.

Just a couple of questions here.

I was pleased with the uncompensated -- the uninsured volume growth numbers slowing down as you noted.

Looking back at the model it's the slowest we've seen it in quite a while.

I was just curious if you could just comment you know, the two troubled states are Florida and Texas.

That is what the industry talks about.

Just curious if the trend got better in those states.

If you don't want to give a number for those states just I'm curious whether you saw the same improvement.

And I guess just a second question is just the labor costs.

You guys have done a great job in terms of managing the labor cost over the past year and I'm just curious if you can provide some more commentary in terms of the trends there.

Thank you.

One of the groups, you want to take a shot of debt Florida or Texas guys?

Yes, this is Don Stinnett in the Eastern Group and Florida is part of the Eastern Group and our trends were fairly consistent with prior quarters.

No material change.

Just doing the math real quickly, Adam.

This is [Sam Hayes] in Texas.

We're generally a little higher growth than the Company average.

I'm trying to just sort of do some quick math.

It's probably about 7.5 to 8% self pay and charity admission growth for the quarter on a year-over-year basis which is slightly higher than the rest of the Company.

The group as a whole was right in line with the Company's overall year-over-year growth in self pay admissions but, Texas was slightly higher.

Thank you, Adam.

Oh, I'm sorry (multiple speakers) -- on the labor side, Richard.

Well, thanks for the question on labor.

Our management team both in the field and at the corporate office have spent a lot of time thinking about that and working on that over the last year and we're pleased to see the numbers reflect that work.

To your point about how do we think about it going forward and you've got to kind of break it down into the component parts.

From an operation's perspective, obviously we have -- the major drivers would be productivity, wage rate, and perhaps what we call premium pay situations.

And, for the most part we don't really see a lot of significant change in any of those variables as we go into 2008.

Wage rate we might pick up a bit as we stay competitive in our markets.

But on balance we think that's going to be in the zone that we've experienced in 2007.

On productivity, if -- we've had a favorable quarter as Milton had mentioned, and that's in the face of some pretty soft volume, we get any upticks in volume and we're going to have incremental gains from a productivity perspective.

And on the other big piece, contract little labor, we are slightly up in terms of dollars over prior year but in terms as a percentage of all of our salary dollars, we're down.

We're using about the same amount of contract labor as a percentage of hours worked.

So, I would expect that trend to remain consistent in 2008 as well.

As you know, we want some level of contract labor in our workforce that allows us to flex.

We do certain amounts of outsourcing etcetera.

So, I would expect to be pretty consistent too as we go into next year.

So, I'm not looking for major changes in these metrics.

I say that we are starting our budgeting process with the field right now.

We'll get a lot more clarity on that over the next 60 days.

But, right now, up top that's kind of what we're feeling.

Walter Branson, Regiment Capital Advisors.

Just a couple of things.

Tell me about the seasonality of bad debt.

Is it seasonal?

Milton, you want --?

Well, in terms of volume, it is pretty consistent.

But, we do have typically, as I've stated, as far as the absolute number of uninsured admissions, typically the third quarter is the highest quarter of the year.

Over the last several years, as far as absolute number of uninsured admissions you see a decline in the fourth quarter versus the third quarter.

And then again, it comes -- build back up to the third.

So, that impacts our bad debt obviously somewhat.

But, the variation is not significant.

I'm talking about maybe 15000 to 2000 admissions difference between a first, second and third quarter.

So, it's not a big swing but it is typical a little bit higher in the third quarter than any other quarter of the year.

Remind me, do you book bad debt on self pay upon admission or billing or do you wait for receivable to age to a certain point?

We book it when we record the revenue.

Okay and just also a nit on the third quarter last year, it looks like there was a reclass from tax expense to other operating expenses, about $17 million versus what you reported in the third quarter last year.

What was that?

That was -- that would've been tax-exempt interest.

Last year -- in January this year, we adopted the new accounting standard FIN 48 which as a result of adopting that, tax-exempt interest now is part of the tax rate in prior years tax-exempt interest was a charge EBITDA and so, I believe last year we had a favorable settlement where we had a reduction in tax-exempt interest.

Milton, I'm impressed.

That shows you used to run the tax department about 30 years ago.

[Mark Afrosiavy], Pimco.

Just focusing on same facility inpatient admissions last quarter, we saw a negative 1.8% same facility inpatient.

This quarter it looks like negative 1.6%.

Those numbers seems to be a bit worse than the sum of the numbers I've seen from your peers and what's maybe the industry average at the current quarter and last quarter.

And so, maybe could you help me understand why this isn't a problem -- recurring why it's not a real trend to be losing inpatient admissions at this rate over the next several quarters and maybe what voluntary actions you've taken or intentional actions that could be feeding some of this.

Thanks a lot.

Richard, do you want --?

I will take a shot at this.

No doubt, we're not excited about our volume growth and hope -- and are planning for it to improve.

But, let me give you some clarity around our growth numbers.

As you mentioned for the third quarter we were off on admissions 1.6%.

We can define any number of items that cause that that we don't -- that will not be recurring.

Of course, the Las Vegas contract with Sierra is a major choice we made to reposition that portfolio and, that is not recurring as we go into 2008.

Jack mentioned the sale of Cedars.

That property volume has dropped pretty significantly as well.

You might be aware of the one day stay focus.

That is where rather than one day stays, those patients are being treated as an outpatient observation visit rather than a one day stay.

That added to what we think most of that or at least a fair amount of that has worked out of the system and we still have a few residual closures of distinct part units throughout the system.

When we make the adjustments for all those -- and I always am cautious about making adjustments because the numbers are what the numbers are.

But if we do normalize for those events, the loss gets a little bit closer to about 0.5% percent -- about 6/10 of percent.

And that's more in keeping with what you've heard reported throughout the industry.

So, yes, our volume is soft.

We have a lot of plans in place, a lot of activities under way relative to the growth agenda.

Every market has a different story and strategy but they are clearly built around the kinds of things you've heard us talk about in the past -- our service line strategies, our physician recruitment strategies, our quality and electronic health record engagement with physicians etcetera.

And that is being deployed throughout the markets in a very robust way.

[Ray Garcon], Greenwich Capital.

First I was just -- just directionally I was hoping you could give some macrolevel comments with respect to the Medicare reimbursement outlook, particularly as we head into year-end with a lot of speculation around various legislation being put forth.

And then I was also hoping you could give just a little comment at the state level.

I know at least one of your competitors highlighted some changes in Florida and Georgia specifically that may impact next year and I was just wondering if you could just directionally give us any kind of things to think about as it relates to any changes in those programs that we should incorporate into our thoughts.

Thanks.

Let me talk about the Medicare side of it and then I will look to others to if there's anything they want to add on the state levels.

We know where our Medicare payment rates are for 2008 as everyone does as of the fiscal year started October 1.

The Medicare payment rates, we're going to see something that appears a little north of 3% for 2008.

That's with all adjustments, with the behavioral adjustments.

The one challenge that we all saw as we started the fall was the proposal to -- as they rolled through MSDRGs to have a substantial behavioral adjustment which was inappropriate.

Fortunately, Congress stepped up and reduced that adjustment.

So, net net now we look like we'll have rates a little north of 3% in 2008.

The activity on the Medicare side between now and the end of the year primarily centers around the issue of the physician payment reduction that will happen if no legislation is passed.

Physicians across the country in Medicare are going to see roughly a 10% reduction in payments effective January 1.

We have seen this happen in prior years and it's been fixed before.

I saw this morning where Senate Finance Committee's starting discussions today, meeting today to begin to try to figure out how to fix it.

The question has been, do they fix it for one year or two years?

Grasselli is leaning toward a one year fix just because it takes less money to fix it in the pay go environment.

They've got to find (inaudible) to fix it.

The physician payment fix is for one year somewhere around 12, $13 billion and there are various ways to go get that money.

Some discussion around the Medicare advantage payments; clearly there are some that think there are some overpayments there and would like to get some of the money there.

There are others that are resisting.

One of the areas where there is a potential help here is, there's roughly $2.9 billion that CBO has scored if you ban physician ownership and self referral on hospitals which we clearly support.

We think it's the right policy.

That ban was included in the House CHAMP bill which was part of [STIP] at one time and I know that's on the table for discussion.

There are numerous other pieces of that.

I'm sure all of that will work its way through but needs to happen before the first of the year.

Everything else appears to be pretty straightforward.

Anything from the states that any of the groups see or -- yes?

State of Florida obviously since the storms of 2004 and 2005 continues to be challenged in tax revenues and collections.

The Medicaid program there is working on a set of reductions that at this point are approximately 3% on inpatient, 3% on outpatient and there's a variety of other aspects of that rate reduction.

And it obviously is going to have a negative impact on us.

We're working on calculations and believe that could be somewhere in the 18 to $20 million range for us at this particular point in time.

But there is more meetings likely to occur in the early part of next year which could in fact change that positively or negatively, probably most likely negatively.

So, it's not a particularly good outlook for Medicaid reimbursement in the state of Florida.

I think that's probably consistent with our view of that, probably consistent with what you've heard from some of the other calls.

Brad Duncan, Bear Stearns.

I was wondering if you could provide an update on your M&A strategy from here out.

Do you still see yourselves as net neutral in terms of asset purchases and divestitures?

Jack, I assume you would like that one.

Okay.

I don't know if I would call it neutral.

We are constantly scanning the environment for the right kind of acquisition opportunities that fit the kind of company we are and want to continue to be.

But, as I've described in the past, our attitude toward this is to be opportunistic.

The leveraged buyout is not predicated on a growth strategy relative to a big acquisition program.

But it has also formulated around the LBO as the strategy that we will commit capital to the right kind of acquisitions should we have an opportunity to do so.

And from the standpoint of the divestitures side, as you have watched us this first year, we are being very prudent with that.

This LBO was never built on a strategy of divesting ourselves say, 10 or 15% of our assets as some people thought when the LBO was first announced.

What we're doing is what we did as a public company.

We look at our portfolio of assets and you've heard me say before, prune the tree when it is prudent to do so.

So, we will continue our emphasis on outpatient acquisitions.

We're being aggressive in that arena but also opportunistic to get the right assets at the right price.

And so in ambulatory surgery centers and imaging centers and other outpatient rounds, particularly when we have opportunities close to our existing facilities, we will be aggressive in that area.

Brad, Jack, thank you.

I think at this point we will call it a day.

We will be here and reachable if you need us.

Mark Kimbrough, myself and others, we want to thank all of you for participating on the call and we will see you soon.

That does conclude today's presentation.

Thank you for your participation.

You may now disconnect your lines.