美國醫院公司 (HCA) 2007 Q4 法說會逐字稿

Welcome to the HCA fourth-quarter year-end 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 the Senior Vice President, Mr.

Vic Campbell.

Please go ahead, sir.

Thank you, Laura.

Good morning to everyone on today's call and also to those of you listening on our web cast.

With me this morning for our year-end conference call, our CEO, Jack Bovender; our Chief Financial Officer, Milton Johnson, Senior Vice President of Finance, David Anderson; and our Investor Relations Officer, Mark Kimbrough.

We also have several other members of the management with us.

Richard Bracken, our President, is traveling today and not on today's call.

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

Numerous risks, uncertainties and other factors may cause actual results to differ materially from those expressed in any forward-looking statement.

Many of these factors are listed in our press release and 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 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 and a replay of the conference call will be available starting later today.

With that, I will turn the call over to Jack Bovender.

Good morning and thank you for calling in today.

Before I turn it over to Milton to review our fourth-quarter numbers with you, I would like to give you my appraisal of our overall performance for 2007, our first full year as a private company.

It has been an extremely successful year from several aspects.

First, I want to pay special tribute to Richard Bracken, our President and Chief Operating Officer and his group presidents for an exceptional job in controlling expenses and growing adjusted EBITDA.

While such items as labor productivity and supply costs were well-managed, our management teams did an especially good job in reducing travel, advertising, legal fees and malpractice costs.

All of this was accomplished without negatively affecting the level of care at the bedside.

We had very strong growth in EBITDA in many of our markets, especially Nashville, Kansas City, Las Vegas, Denver, El Paso and San Jose.

We continued to invest in our quality and patient safety agenda, consolidating our activities into a new clinical services group.

We believe these investments will position us extremely well as hospital care in this country moves more and more into a pay-for-performance environment.

With regards to volumes, we believe 2007 should be viewed to a large degree as a rebasing year.

The convergence of one-day stays to observation days, the cancellation of the Sierra contract in Las Vegas and the closure of distinct part units in various markets pulled our numbers down significantly.

However the second half of the year showed improving trends in our outpatient services which resulted in modest growth and equivalent admissions in the fourth quarter.

A strategic focus on a growth-building agenda marked the year as we began to develop our physician sales organizations, service line strategies and the physician portals for the electronic health record.

While our capital spend was below our announced plans of $1.5 billion -- was $1.5 billion versus $1.8 billion that we announced in our plans, this really represents timing differences and the unspent $300 million will roll into this year.

We have many good growth opportunities we believe will yield good returns on invested capital.

Major projects were completed in 2007, in particular two new replacement hospitals in Kansas City which are fully operational in 2008.

While divestitures were not a part of our LBO model, we completed two very successful sales in 2007 -- our Cedars Hospital in Miami and our de la Tour Hospital in Geneva.

These went out at very attractive multiples, generating excess cash after taxes and fees of about $562 million which was used to pay down debt ahead of schedule.

Finally, I would be remiss if I did not once again mention the growing burden of the uninsured which had a significant impact on our financial performance in the year.

Our charity care discounts to the uninsured and bad debts continued to grow in 2007 and we expect to see similar trends in 2008.

The management team is working very hard to mitigate the impact of this on the Company, but as you know the ultimate solution to this societal problem lies in Washington and we will be devoting considerable time and energy to the political process in 2008.

With that, I will turn it over to Milton to review the numbers for the fourth quarter of 2007.

Milton?

Thank you, Jack, and good morning.

Most of my comments this morning will be directed at the fourth quarter results, but I would like to follow Jack's review of the 2007 accomplishments with a few comments on the year-to-date results.

First, our same facility net revenue grew 7.4% over 2006 with same facility equivalent admissions down 0.7% compared to 2006.

Our top line growth was driven by same facility net revenue per equivalent admission growth of 8.1%.

Second, we were pleased with our cash expense management in 2007.

Same facility cash expense per equivalent admission increased 5.9% over 2006.

This is down 130 basis points from 2006 growth of 7.2%.

Third, our adjusted EBITDA of $4.592 billion in 2007 exceeded 2006 by 2.7%.

After normalizing both periods for gains from [settled] investments; that is, $243 million in 2006 and $8 million in 2007, our adjusted EBITDA growth was 8.4%.

Now moving to the fourth quarter.

As stated in our earnings release this morning, net income for the quarter was $278 million compared to $122 million last year.

Interest expense increased by $168 million over last year's fourth quarter to $541 million.

Remember that we closed our LBO transaction in mid-November last year, so the period over period interest expense difference is not as great as in previous quarters this year.

Also in the fourth quarter of last year, we incurred transaction costs of $433 million related to the recapitalization of the Company.

In the fourth quarter of this year, we recorded a gain on sale of investments of $2 million compared to gain of $103 million in last year's fourth quarter.

We also reported a gain on the sale of a facility of $139 million this year versus $159 million last year.

This year's gain primarily relates to the sale of Cedars Medical Center in Florida.

Also during the fourth quarter, the Company's tax rate was favorably impacted by an estimated $70 million tax benefit primarily related to various estate tax accruals.

We saw solid revenue growth in the fourth quarter of 6.1% on a reported basis and 6.9% on a same facility basis.

Adjusted EBITDA declined 9.3% to $1.153 billion, compared to $1.271 billion in the fourth quarter of 2006.

However, last year's fourth quarter results included $103 million from gains on investments compared to $2 million this year.

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

Adjusted EBITDA margin for the fourth quarter was 16.7% compared to 19.6% last year.

We saw a 60 basis points improvement in salaries and benefits, a 30 basis points improvement in supplies, a 10 basis point improvement in other operating expenses.

Provision for doubtful accounts increased by 230 basis points from the fourth quarter of 2006 to 13.2% of net revenue.

Also note that last year's fourth quarter adjusted EBITDA margin benefited from 160 basis points related to the sale on gain of investments.

Same facility revenue per equivalent admission increased 6.6%.

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

In the fourth quarter, same facility managed care revenue per equivalent admission increased 5.4% over last year, and same facility Medicare revenues per equivalent admission increased 5.7% over last year.

This includes both traditional Medicare and managed Medicare products.

The fourth quarter managed care yield of 5.4% is below our year-to-date 2007 run rate of 6.9%.

During the quarter, primarily October and November, we experienced a service mix change in the commercial managed care business that slowed our rate of growth.

We did see December's managed care net revenue per equivalent admission growth rate bounce back to 7.6%.

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 was flat to last year.

Fourth quarter admissions declined 1% compared to last year's fourth quarter.

Although we're not pleased with the declining admission rate, the decline was the least we've experienced this year.

Just as in the third quarter, we did experience an improvement in outpatient services resulting in equivalent admission growth rate of 0.3%.

This is the best growth rate we have reported since the fourth quarter of 2005.

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 north central Florida to name the top three by number of increased admissions.

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

Same facility outpatient surgical volumes declined 0.8% in the fourth quarter compared with last year.

Same facility surgery center, or ASD volume, was flat with prior year while same facility hospital-based outpatient surgeries decreased 1.3%.

The hospital-based outpatient comparison reflects some cannibalization from our new ASDs which are not included in our same facility ASD certificates.

Including all ASD surgeries, total outpatient surgeries increased 0.2% in the fourth quarter.

We were extremely pleased with management of cash expenses during the fourth quarter.

Same facility cash expenses per equivalent admission, including SW&B, supply expense and other operating expenses, increased 4.6% over last year.

Labor cost, expressed as a percent of revenues, totaled 39.4% compared to 40% in last year's fourth quarter.

Same store wage rate growth continued in line with previous trends at 4.6%.

Supply expense was 16.2 of net revenue compared to 16.5 in the fourth quarter of 2006.

Supply costs for equivalent admission increased 3.9% in the fourth quarter.

During the quarter, we saw a decrease in our drug-eluting stent costs of approximately 30% driven by a decline of approximately 5.7% in coronary stent cases over the prior year.

Coronary stent cost per case declined approximately 18.3% in the fourth quarter.

In the fourth quarter, pharmacy expense per equivalent admission declined 2.1%.

Other operating expenses totaled 15.2% of revenues in the fourth quarter of 2007 compared to 15.3% last year.

We continued the recent trends of increasing professional fees primarily related to physician coverage.

However, we benefited from lower non-income based taxes during the quarter compared to last year.

Same facility uninsured admissions grew 10% in the fourth quarter of 2007 compared to last year, up from the growth of 5.2 in the third quarter of this year.

Same facility charity discounts increased $54 million to $382 million and uninsured discounts increased $120 million to $414 million.

Total (inaudible) care, bad debts, charity and uninsured discounts represented 22.4% of net revenue when adding back charity and uninsured discounts.

As expected with respect to days and accounts receivable in the quarter, we saw a decrease of two days to 52 days from 54 days in the third quarter this year.

Based on an annual computation, days [in AR] at year end was 53, flat year-end 2006.

Cash flow from operations in the fourth quarter totaled $411 million compared to $492 million in the fourth quarter of last year.

The decrease was primarily related to higher interest payments in the fourth quarter of 2007.

During the quarter, we spent $447 million for capital expenditures, and as Jack mentioned earlier for 2007 we spent $1.444 billion.

Now I will turn the call over to David Anderson to discuss the balance and our credit statistics.

Thanks, Milton, and good morning.

As you can see on the balance sheet we repaid $1.1 billion in fiscal year '07.

Debt was reduced from $28.4 billion to $27.3 billion.

Some highlights in terms of sources of cash, $767 million in pretax proceeds from the sale of our facilities in Geneva, $262 million in gross proceeds from the sale of Cedars.

$125 million excess cash at year end '06 was used in January to pay down debt and a $100 million equity contribution which was made early in '07 also which was a requirement of the LBO, this will sum to $992 million.

Out of total debt of $27.3 billion, we have $5.67 billion which floats with LIBOR at our stated -- plus our stated spreads.

That's a 20.8% percentage which is at the lower end of our current targeted range of 20% to 25%.

In terms of credit statistics, the major statistic, debt to EBITDA, improved on a reported basis from 6.36 times to 5.95 times at year end '07.

We currently have availability of approximately $2.5 billion on both our ABL, or asset-based loan facility, plus our cash flow revolver.

The ABL had a balance of $1.35 billion at the end of '07 and we had no usage under the cash flow revolver, with the exception of letters of credit of about $145 million.

The cash account totaled $393 million.

I usually give you some flavor about where the cash is.

HCI cash was $55 million.

Our overnight investments, or really the operating cash of the Company, was $92 million.

International cash was $88 million and deposits in transit $80 million and other, which is predominately cash at two of our joint ventures, was $78 million, for $393 million in total.

So that is my review of the balance sheet.

Jack, Dave and Milton, thank you very much.

Laura, if you want to come back on, we'll go ahead and move to questions.

(OPERATOR INSTRUCTIONS).

Lawrence Weiss, Citi.

Is there anything you want to call out on the bad debt expense number that would be considered to be I guess abnormal -- a write-down, a charge?

Because it's just significantly higher this quarter than the rest of the quarters.

Let me walk you through it.

If you look at our total bad debt expense compared to the fourth with last year, we're up about $202 million.

It breaks down pretty much like this.

We did have -- of course our quarterly hindsight that we always do, we did see a deterioration in the collectibility factor as a result and that resulted in a $61 million hit related to the hindsight in the fourth quarter.

That would obviously take the excess over last year down to about $141 million.

That's about a 20% increase over prior year and we had about a 10.9% increase in self-pay adjusted admissions.

The remaining growth of that of about 8% to 9% related to our Chargemaster increases that we have every year.

So it's pretty much from a 28% growth rate about 8% is a hindsight charge, 10% -- about 11% is volume and the remaining piece is rate increases.

So besides the hindsight review, so you could take the 9, 12 and I guess less the 61 which should have been I guess ratably over the prior quarters, a 12.5% run rate for bad debt is kind what you're expecting going forward?

No, when I think about our bad debt, historically, how we've been running is our volumes for the last three years have been just about 10% increase in self-pay admissions.

And I don't see anything, as Jack said, until we have some additional help for the uninsured with respect to coverage.

I don't see anything that's going to really change that in the foreseeable future unfortunately.

So we're kind of planning on somewhere around an 8% to 10% volume increase with the uninsured activity, and then typically our pricing to our Chargemaster annually is around 8% to 10%.

So when you work that out, we pretty much expect an 18% to 20% in bad debts on a year-over-year basis.

The second question is on the other operating expense line I saw is flat for year-over-year, but that is -- with professional fees (inaudible) actually fall into that category.

Am I correct?

You're correct.

Professional fees fall under other operating expenses.

Henry Reukauf, Deutsche Bank.

I was just wondering if you could go through -- I think you mentioned Las Vegas, Kansas City, and I missed the third, is the problem markets, and maybe just review what the issues are in those particular markets?

I think one point I would make in terms of referencing those markets, those were the markets that had the largest declines in adjusted admissions.

I would not necessary say they were problem markets (multiple speakers) some of them were our best adjusted EBITDA growth markets.

And there's explanations for that, which I think we can let each group President speak to each of those markets you mentioned.

Sam Hazen, you want to go ahead and hit yours?

Sure.

In the Las Vegas market, the single largest issue as far as declining admissions was the termination of the Sierra Health Services contract that we had had for many, many years.

That contract by itself represented about 25 to 30% of our admissions in the market.

And economically, it just was not a viable contract so we couldn't reach agreement with them as you know at the beginning of the year.

Our admissions, however, were only down by about 10% for the year, so we backfilled about two-thirds of those admissions and actually increased our backfill, if you will, over the course of the year.

The results from a financial standpoint were as we expected.

Our earnings were actually up significantly on a year-over-year basis because of the economic arrangement that we had within the contract.

So Las Vegas from our perspective was a win in '07.

And statistically, it had some bad volume metrics, but we fully anticipated those and actually exceeded our expectations in our plan through our backfill strategy.

Paul Rutledge?

Wait a minute -- Milton?

Let me make one comment on Vegas just to Sam's point with how the backfill has been improving over the course of the year.

In the fourth quarter, although it was our largest market decline in terms of admissions, it was down only 6.9%.

Earlier in the year, we running 13% or 14% down.

So basically, we have cut that decrease in half as we have been moving through the year, to Sam's point.

Paul Rutledge, you want to talk about Kansas City?

Kansas City is really viewed as three submarkets.

We have the Kansas side, which is Johnson County; an area just across the border into Missouri we call the urban core; and then in Missouri on the east part of the market is Jackson County.

We really have three different scenarios.

Our Kansas side did very well in volumes, our urban core experienced a couple of things where, number one, it's our big teaching [quaternary] hospital and we experienced some physicians that have left and gone over across the state line where we have no CON and brought some of their volumes to the physician-owned limited service hospitals.

Our biggest volume misses are part of a transition where we had two replacement hospitals -- Center Point, which we combined or consolidated the two independent hospitals; and then Lee's Summit we replaced.

At the same time we were going through that, we had a competitor, St.

Luke's, that opened out there.

So we had a competitor open plus some transition volume leakage that was expected.

And then now that we are fully transitioned, we're building back up.

And then just to repeat the comment, this is one of our most successful markets.

In the quarter, we were up 23% quarter-over-quarter, year-to-date 27%.

We sort of gave you mixed signals there because we gave you down volumes to explain the volume declines.

However, two for two so far, they've been our best earners.

Chuck Hall is not here, but he's I think on the line.

Chuck, can you talk about South Carolina?

Thanks, Vic.

South Carolina, we were off in volumes in that market during the quarter and some of the pressures there had been the out of state visitors as well as some cardiology issues at both Grand Strand and Myrtle Beach.

However, in terms of earning for the quarter for the market, it has been a good performer for the year but it was down $8.3 million for the prior year.

And that was because of --?

Primarily because of in the quarter cardiology issues at Grand Strand, as well as at Myrtle Beach -- pardon me, at Charleston.

Did you have doctors leaving?

Specifically in the case of Grand Strand, we had some movement of cardiology to competitors.

We are actively recruiting in that market and as well as some pressures at Trident in Charleston with the onset of the new tower opening downtown.

And the Sierra [laps] next -- second-quarter or Sierra that your (multiple speakers) termination of the contract?

The contract actually terminated 12/31/06, so we will be going forward on sort of an equal footing, if you will, from a comparison standpoint.

And so our first quarter '08 versus first quarter '07 will give us a good picture of where we are.

Mike Scarangella, Merrill Lynch.

This is probably a David Anderson question.

You guys also announced this morning that you're going to tender for $500 million of bonds.

You were fairly -- it looks like you were fairly particular about which bonds and the amount of which bonds you wanted to tender.

I was just wondering if you could fill us in on kind of the thought behind the tender and if that implies any other changes to the capital structure going forward.

The thinking behind this, as I mentioned earlier on the call, is that we are at the lower part of our target for floating-rate debt.

We have substantial liquidity, $2.5 [billion] available.

We're always looking at ways to try to manage our interest expense and we think that this is an effective way to help us do this.

Remember, the 10s and 11s and 12s are all maturities, what we call short-term maturities, and while the liquidity is reduced by borrowings under the revolvers to fund the purchase, that liquidity is -- the buckets if you will in 10, 11 and 12 will fill up because they were in our plan as original maturities anyway.

So that's basically the reason.

Miles Highsmith, Credit Suisse.

You mentioned the CapEx before.

Curious, as 300 kind of rolls into this year, should we be looking at something north of $2 billion for '08?

$1.8 billion.

$1.8 billion, yes.

Our model was originally $1.8 billion in '07, then going to $1.5 billion, so since we spent about $1.5 billion, this year we'll go to $1.8 billion next year.

Sheryl Skolnick, CRT Capital Group.

You mentioned that you are increasing your Chargemaster 8% to 10% per year.

Obviously, that has negative impact on the bad debt, but you can sort of set that aside as self-inflicted.

But what benefit does it give you?

Can you measure what improvements in price it might have through Chargemaster-linked reimbursements that you actually do get paid for?

Let me just make a general comment.

Basically, our managed care contracting strategies anticipate those sort of increases, as so the insurers expect as well.

And of course with the Medicare program, there's very little impact in the Chargemaster, except with respect to certain outlier payments.

And, again, those are reasonable rate increases, take into account the increase in wage cost and technologies and so forth.

Bev, you want to (multiple speakers) more detail?

Sure.

In our managed care agreements, about 30% of our rate is driven by Chargemaster on the increase, and we build that into our projections with respect our managed care increases because that's how we get the increase in that portion of the business.

Most importantly, it's the EU and stop loss and carve-out.

So that is how we get our rate increase on those, and that is how we negotiate with the payor.

[Roshan Pujari], Cypress Tree Investment Management.

Just a general question on bad debt.

I know the solution to the problem does indeed lie in Washington, but could you give some color on what you have done differently or maybe additionally this year to try and mitigate this problem?

Bev or Milton, you want to talk about collections I guess is the question?

Sure.

We introduced a couple of years ago our focus on the front-end collections, and we still continue with that focus on the front end.

We finished the year '07 collecting about 43.5% of the available co-pays and deductibles at the front end.

That does have a compression factor when we do our hindsight.

So we feel very good.

We've set our target of between 40% and 50% of what we identify as dollars available to collect on the front end, and so we're staying right within that target.

The other thing we have done is roll out our qualified medical practitioner programs in several more hospitals throughout the year, and that is done mostly for education and flowthrough in our ERs.

And we treat all payors the same in that program.

So it's not directly targeted at the uninsured, but obviously it gives us an opportunity to educate the uninsured when they show up at our facilities, our ERs, for what we call level 1 care, which is the colds and the flu, and help them find an alternative source of care.

So we did roll that out in several hospitals in '07.

Thank you, Bev.

Milton, do you have something to add?

Just add real quickly, the impact of uninsured on our EBITDA and cash flows is the cost to treat the uninsured, not what we charge and then turn around and write off.

And so one of the key things we do is manage that cost and with case management with respect to not only the uninsured, but other patients as well, but focused on really managing our cost to treat.

And that's probably the most effective way for us to manage the impact of the uninsured with respect to our cash flows.

Adam Feinstein, Lehman Brothers.

My question is -- when are you guys coming public?

Just a joke there.

We like where we sit, Adam.

Adam, this is Jack.

Do you miss us that much?

Yes, yes.

You got me excited, and then I saw the Wall Street Journal article there and you said that you liked being a private company.

So I was wondering if I could ask you guys about pricing.

Milton had made some comments about the managed care yield, just wanted to get some more details.

And you talked about some mix issues in the quarter.

And then in that same context, I wanted to see if you could comment on national contracting.

We've seen some large national contracts signed in the past year.

Just wanted to get your thoughts in terms of whether you think this is going to be the trend going forward?

Thank you.

I will make a couple of general comments and turn it to Bev.

For the year, our managed care contracting, we yielded 6.9% for the whole year versus that 5.4% for the fourth quarter, and that's pretty much in-line with where we expected it.

So no surprises at all in our managed care pricing for 2007.

Bev, any details on that?

No.

I think originally, we shared with you that we thought we saw somewhere between 6.5% and 7%.

So I think we hit at the upper range of that target.

We feel very good about those contracts.

We continue to negotiate our contracts for a period of about two years and we stay on that target.

Any income on national contracting, Bev?

The only national contract that we did obviously was with United, and that was completed last year and we shared that with you at that point in time.

We stick mainly to regional and market contract strategy.

Rishi Sadarangani, AllianceBernstein.

Quick question, actually a couple of questions.

One is, when you look out to 2008 and possibly even beyond in terms of volumes and you are thinking about them, what are some of the things that maybe need to happen for volumes to turn our better-than-expected versus worse-than-expected or to not to happen or things?

What might be worse -- what might cause volumes to be worse than expected?

And my second question is, do you anticipate any further asset sales this year to pay down debt?

Thank you.

Jack, you want those?

Yes.

Let me talk about volumes to begin with.

We, as I mentioned in my remarks, are really focusing on strategies in our markets to target both service lines that we feel we have a particular ability in and physician sales organizations to go out and call on physicians, obviously, our loyalist positions, but also splitters and those who use other hospitals, and really increase the participation of physicians in our communities and using our facilities.

And you will see more and more of this over the next two to three years from us as we focus on these kinds of strategies.

We are going so invest, continue to invest in the right markets.

We feel we have adequate capital to make a difference in these particular markets.

And so we think that, combined our specific sales and service line strategies, will increase volume for us over time.

Now, there are other things going on.

Obviously some of these markets, in fact most of our markets, are growing faster than the population of the country as a whole.

But in some cases, that is somewhat spotty and has been affected by some environmental conditions.

For instance, Florida is not growing as fast as if you had asked us four or five years ago what we would project Florida to be.

And that obviously was driven by the hurricane seasons of some three and four years ago that really impacted Florida and where Florida is going.

We than expect that to change over time and some more aggressive growth pattern to appear in Florida.

So we believe that will help us over time.

But I think as you think about those kinds of natural things in some of our biggest markets, Texas and Florida being our two biggest, that we are not relying on the kind of a strategy of a rising tide raising all boats.

That is that volumes are going to come because the populations will come.

We're going to be aggressively working in our markets to take market share and gain market share over time, and that will done through these strategies, operating strategies, on the ground, different for each market but coordinated on a group and national, basis.

And combining that with the right kind of capital investment in our particular markets, we think we will see the volume change over time.

We still expect, however, that we will see continue migration into the outpatient space, and we are aggressively, as you know, investing in ambulatory surgery centers and imaging centers to take advantage of those trends.

So that's I think generally the comments that I would make about that.

The second part of your question was --?

Asset sales.

Asset sales.

We have no specific plans right now, but we -- if you've followed our Company over the last few years, we view our portfolios on a routine basis and look for those assets that might make more sense for us to sell and redeploy the capital, or in the case of what we did over the last year with Cedars and with Geneva, to pay down debt more aggressively.

And so we have a very disciplined analytical process about that and we're very careful about it.

But, we're always opportunistic and will do that when it makes sense.

So you should not be surprised if you see some additional assets over this year.

That would be just natural for us to do.

David Common, J.P.

Morgan.

Just one more question relating to bad debt.

Do you have handy the percent of admissions or adjusted admissions, however you look at it, that are self-pay for the fourth quarter and year ago?

With respect to admissions, roughly it's probably somewhere around 6% of our admissions now are uninsured.

And you go back probably a year or so ago, my guess is it was around 5.5 or so.

So -- that is revenue, not --.

And so, it has been obviously the only payor group where we have seen any growth this year with any uninsured.

So as a percent of total, it is gaining, increasing versus the other payors, but it's still only 6% of our total admissions that we have every year.

It is a little bit higher percentage of our adjusted admissions because we see a lot of uninsured.

About 20% to 25% of our ER volume is uninsured volume.

Erin Blum, Goldman Sachs.

My questions are about the ASCs.

First, I just wanted to know if there are any factors you can point to have contributed to the slowing of volume growth there.

And then also, if you could give some information on what the development landscape looks like there?

Bruce Moore heads up our Outpatient Group.

Bruce, you want to address Erin's question?

Yes, I will talk to the development first.

We had five developments last year as far as three de novos, one acquisition and one conversion.

And what we are seeing is a lot more -- we're going to be a lot more aggressive in our acquisition strategies.

Historically, we've done more de novos around our current facilities and I think over the next couple of years, we'd like to do somewhere between five and ten both acquisitions and de novos, and we think most of those will probably come from acquisitions.

So we're seeing more and more physician interest and potentially partnering with a provider, so that.

And then, I also think that we are seeing pretty good growth in most of our markets.

It goes back to what you've heard from several other comments earlier.

Florida has been a little bit tough, and I think a lot of that's just kind of the macros as far as some of the population there and not seeing as much influx.

But we are seeing in both the Central and the West pretty good adjusted admission growth and surgery growth within our new centers.

[Mark Athersoby], PIMCO.

Sorry to follow-up here on bad debt.

You mentioned bad debt, you expected -- I think I heard you say it was going to grow you think around 20% per year.

Is that right?

That's correct, Mark.

Again, I'm basing that on an assumption that our historical -- last three years have been growing our uninsured admissions around just under 10%.

Assuming that trend continues with our normal Chargemaster increases, I would expect somewhere around an 18% to 20% growth rate based on recent years' actual results.

Okay.

I was just running the math on that, and it sounded like looking at that, if you sort of grew the top line, for example, just hypothetically, sort of 6% for the next few years and bad debt grew at 20% and you held all your other OpEx constant as a percentage of sales, it looks like that would sort of cause 200 bps roughly per year of EBITDA margin compression.

Am I doing the math wrong, or is that the implication of what you are saying?

Well, first of all, Mark, let me explain.

When you do the math, you're going to get compression from the increase in bad debt expense because of both the growth in the volume and the pricing that I just discussed.

And if you look at our model that was part of I think proxy filing when we did the LBO, you will see that our model reflected that; a good bit of erosion margin from bad debt.

But not to confuse the factors here, but a lot of that is, it's just the accounting, that we have to account for this revenue at the top line, at the net revenue level that we're not going to collect, and we immediately under our policies reflected them at bad debt expense.

And it does erode the margin.

Internally how we really manage the Company is really looking at cash revenue and cash expenses.

And by that, we internally show bad debt as a revenue deduction.

So we don't show it really in our view of cash revenue.

And then, we really try to manage our cash expenses.

That would of course be labor costs, supply costs and other operating expenses.

And if you that it that way, you don't see the margin compression nearly to the extent as you do with the way that we have to report it under accounting rules.

So from an operational standpoint, really I would view it as what's going on with cash revenue and cash expenses with respect to any margin impact.

Could I follow up with you?

I'm going to follow up with you just later today.

I don't want to bog down the call here.

Just give Mark Kimbrough a call, and Mark can work with my schedule and get some time.

[Etai Burn], [Arks] Investment Management.

Just to follow-up on Mike Scarangella's call, question earlier, why isn't the other, I believe it is 2011, the 8.7% being tendered for?

We made a decision to tender for the parts of the three shortest dated maturities.

The 8.75%'s do sell at a slight premium to par, and it was our goal to cap them -- we just decided to cap them at $200 million.

And then the way it's structured is a 1-for-1, assuming an oversubscription on the other two.

It also spreads out the change in the maturities schedule in the out years.

David, thank you.

We have time for one more question.

[Matthew Delacroix], PNB Paribas.

Good morning.

Actually, my question has been answered on the tender offer.

Thank you.

I guess we will let one more happen then.

Steve Valiquette, UBS.

There's been a lot of questions on bad debt, I think we got that covered.

I think if you could spend a minute talking about the other expense lines in let's say over the next year or two, how much can you reduce those further to offset the increase in bad debt?

So, where could EBITDA margin really trend?

Let me just speak at the cash expenses, based on where we are with inflationary rates and so forth, assuming there's not something that changes drastically there.

We have been successful with our average wage increases being around 4.5% to 5% in the last couple of three years.

And so we keep this level of inflation.

We hopefully will be able to maintain somewhere around a 5% wage rate increase.

And then with respect to productivity, all of that is going to be volume.

We were very successful this year in basically maintaining almost flat productivity.

And although we did have a volume drop, I think if we can get our volumes flat to up, that should drive a little bit of productivity for us.

Additional volume of course would even be more productivity we typically get.

So we think we can maintain our wage increases, hopefully attracting to the last couple of years.

And then with supply costs, we had a really good year this year primarily related to medical device costs and driven by a drop in stent usage and stent pricing of the drug-eluted stents.

Looking at next year, even though that's behind us, we have been through that.

Our merger with Consorta allows us to really improve our pricing with most of our vendors and we're in the process now of renegotiating pricing with additional volume, purchasing power with Consorta and we think that will allow us to continue a growth rate in supply cost similar to what we had this year.

Of course, that could change if we see an increase for example in surgical volumes.

That may drive more supply costs, but that would actually be a good thing if it's driven by the volume rather than rate.

And then other operating expenses there, we did -- we were very successful this year in eliminating some costs in marketing and travel and malpractice and legal costs.

Going forward, we probably will not be able to repeat that level of decrease, but we don't see adding that cost back either, and that's -- and we'll always be looking at our discretionary spending and trying to manage that.

So really with cash expenses, I think going forward, we think our recent past couple of years is reflective of what we can do hopefully next year when you factor out -- and again, eliminating the bad debt as a revenue item.

I want to thank everybody for participating on the call and feel free, Mark Kimbrough will be around all day and I will be around as well.

Thank you very much, have a great balance of the week.

This concludes today's presentation.

Thank you for your participation and have a wonderful day.