美國醫院公司 (HCA) 2008 Q3 法說會逐字稿

Good day, everyone.

Welcome to the HCA third quarter 2008earnings release conference call.

Just a reminder that today's call is being recorded.

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

Vic Campbell.

Please go ahead, sir.

Lisa, thank you.

Good morning to everyone on the call and also to those of you listening on our webcast.

With me this morning as usual, our CEO Jack Bovender, President, Richard Bracken, CFO Milton Johnson, Senior VP Finance, David Anderson, and our Investor Relations Officer, Mark Kimbrough.

Then we have several other members of the senior management team here with us today for the Q&A.

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

There are numerous risks, uncertainties and other factors that may cause actual results to differ materially from those expressed in any forward-looking statements that might be made.

Many of these factors are listed in our Press Release and in our SEC filings.

I encourage you to read both.

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 the forward-looking statements, you should not place undue reliance on the 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, this morning's call is being recorded.

A replay will be made available later today.

We are going to jump straight to Milton Johnson, to kick off the call, and after he and David Anderson speak, we will go to Q&A.

Thank you, Vic and good morning.

Each of you should have received a copy of our earnings release issued this morning.

We'll take a few minutes to provide several general observations before highlighting some details of the quarter.

Overall volume trends in the quarter were good.

For the third consecutive quarter, we have growth over the prior year's quarter.

Same facility admission growth was 0.4%, while equivalent admissions grew 1.9% compared to the third quarter of last year.

Similar to recent trends, we saw higher medical admissions but lower inpatient surgery volumes in the third quarter.

Consistent with our trends in the first half of 2008, Medicare admissions contribute significantly to our overall growth rate.

Same facility Medicare admissions grew 2% over last year's third quarter.

Our same facility Medicare admissions include both traditional Medicare and managed Medicare.

Managed Medicare admissions on a same facility basis represent approximately 21% of our Medicare admissions.

While traditional same facility Medicare admissions were down 1.3% from last year.

Same facility managed Medicare admissions grew 16.8%.

Same facility Medicare equivalent admissions increased by 3.9% in the third quarter compared to last year.

In the third quarter, same facility Medicaid admissions grew 0.7% over last year, and same facility managed care admissions declined 1.8%.

We continued to see a slowing rate of growth in same facility self-pay and charity admissions in the third quarter.

Same facility self-pay and charity admissions grew 0.9% in the third quarter.

Year-to-date, the growth in same facility self-pay and charity admissions is 2.3%.

Same facility total surgeries were flat with last year's third quarter.

Same facility inpatient surgical volume declined 1.2% from the third quarter of last year.

Overall, same facility outpatient surgery, both hospital based and ASC cases, increased 0.8% in the third quarter.

Same facility emergency department visits increased 2.9% in the third quarter.

As I mention each quarter, volume trends vary among our markets.

We have several markets that experienced good volume growth in the quarter such as Tampa, Miami, San Antonio, and New Orleans.

Our softest volume comparisons were in Las Vegas, South Texas, and Austin.

Turning to revenue, our same facility cash revenue per equivalent admission grew 5.6% in the third quarter over the prior year.

As a reminder, cash revenue is net revenue less bad debt expense.

Normalizing for our UPO revenue, same facility cash revenues per equivalent admission increased 4.5%.

We recognized $100 million in revenues related to Medicaid supplemental payments pursuant to Texas UPL programs during the third quarter of 2008.

Approximately $60 million of the revenues recognized during the quarter relate to the release of matching funds that had been deterred by CMS, pending its review of the expenditure claims for the previous period.

We currently expect our revenues related to Medicaid supplemental payments pursuant to Texas UPL programs to be in the $60 million to $70 million range during the fourth quarter of 2008.

Also during the quarter, we experienced an adverse swing in prior year cost report settlements of $17 million, although cost report settlements remain positive in both the current and prior year quarters.

Same facility Medicare revenue per equivalent admissions increased 4.4% over last year's third quarter.

Same facility managed care revenue per equivalent admission increased 7.1% in the third quarter.

This growth rate is somewhat better than we experienced in recent quarters.

Year-to-date, our same facility managed careful revenue per equivalent admission has increased 6.2%.

Adjusted EBITDA in the third quarter totaled $1.053 billion compared to $983 million last year, an increase of 7.2%.

As previously mentioned, we did record $100 million of Medicaid revenues related to the Texas UPL programs during the third quarter of 2008.

Of this amount, $60 million resulted from CMS completion of their review of the expenditure claims from previous period and a release of previously deferred federal Medicaid matching funds.

As to cost, cash expense for equivalent admission grew on a same facility basis 5.7% over the third quarter of last year.

This compares favorable to a 6.5% growth in cash expense growth in the third quarter of 2007.

Salary and benefits were 41.2% of revenues for the third quarter, compared to 41.1% in last year's third quarter.

Our performance was within expectations as we continued to invest in additional labor to support growth, quality, and electronic health record initiatives.

Productivity performance for our hospitals improved slightly, measured by man hours per equivalent admissions, and wage rate growth was consistent with recent trends.

Supply costs decreased from the prior year by 20 basis points to 16.3% of revenues.

On a same facility equivalent admission basis, supply expense increased 4.9% in the quarter.

Other operating expenses as percent of revenues were flat compared to the prior year's third quarter at 16.4%.

During the third quarter of 2008, certain of our facilities in Texas, Louisiana, and Florida were damaged by hurricanes and incurred uninsured or amounts less than our third party insurance deductible damages of approximately $15 million.

Certain of these facilities also incurred uninsured disruptions to their operations, reduce patient levels, reduced procedures, and increased costs.

We have estimated to have an additional adverse impact of $12 million to $15 million on our operating results for the third quarter of 2008.

Bad debt decreased as a percentage of revenues to 11.7% from 11.8% in the prior year.

No material bad debt adjustments were made this quarter, compared to $22 million of hindsight adjustments in last year's third quarter.

Same facility charity (inaudible) decreased -- increased I should say by $44 million to $445 million.

Same facility uninsured discounts increased by $80 million to $472 million in the third quarter of 2008.

Bad debt plus charity and uninsured discounts as a percentage of net revenue, plus charity and uninsured discounts, was 21.9% compared to 21.4% in last year's third quarter.

Net income for the third quarter totaled $86 million compared to $300 million last year.

In last year's third quarter, we reported gains from sale of facilities of $316 million compared to $50 million this year.

Interest expense declined $63 million in the third quarter of 2008 to $497 million.

During the third quarter of 2008, we recorded $44 million at that impairment charge on goodwill related to certain imaging centers in Florida in which we had acquired a majority ownership interest in 2005.

Cash flow from operations were strong in the quarter at $840 million.

Days in accounts receivable are 49 days, an improvement of two days from the second quarter.

Capital expenditures in the quarter were $398 million, and year-to-date, we have spent $1.115 billion.

Before I turn the call over to David Anderson to discuss the Company's balance sheet and credit for the quarter, I would like to take a moment to address our $1.5 billion, 9.625% senior secure toggle notes due 2016.

Currently, the Company has the option at its discretion to use a payment in kind PIK feature in lieu of making cash interest payments through 2011.

Currently, we have more than $2 billion of foreign capacity on our revolvers, and management believes we have sufficient liquidity to meet our anticipated needs without the use of the PIK feature.

However, the Company is electing to exercise the PIK feature for its May, 2009 interest payment, as a prudent method to further enhance liquidity, in light of the dislocation in the current capital markets and uncertainty as to when reasonable conditions will return.

So now I will turn the call over to David Anderson.

Thanks, Milton and good morning.

First topic that I will go into will be our cash balance at September 30th was $444 million.

This is up $76 million from $368 million at June 30.

$39 million related to an increase in the balance in HCI which is our malpractice captive.

Their investments, they were classified as cash and cash equivalents.

We have a $28 million increase in cash held internationally, primarily due to strong cash flow in the U.K., and our cash in joint ventures is up $9 million.

The composition of the cash is, in HCI, it is $112 million.

JVs are $74 million, international cash is $134 million.

Overnight investments are $58 million, and deposits and transits are approximately $66 million.

Long-term debt at September 30th decreased $574 million from June 30, 2008 to $27.041 billion, and in just a minute I will give you a further reconciliation of that reduction.

Leverage as measured by debt to EBITDA per our financial statements was six times at September 30th, a decrease of 0.25 times from June 30, 2008.

The ratio improved due to debt decreasing by that $574 million, plus our last 12 months EBITDA increased by $70 million.

Floating rate debt percentage at September 30th was 18.4% or $4.9 billion within the range of our targets of 15% to 20%.

Floating our liquidity position at September 30th, our $2 billion ABL revolving credit facility, we had $1.88 billion drawn with availability of $112 million.

Our $2 billion cash flow revolver was undrawn with $1.9 billion available due to letters of credit that are issued under that facility.

Just a brief recap on our cash flow statement, cash flow from operating activities was $840 million, an improvement of $261 million over third quarter '07.

A few highlights -- cash flow increased due to lower income tax payments, $80 million in the third quarter of '08 versus $121million in '07, improved $57 million through decreased interest payments, $373 million in the third quarter of '08 versus $430 million in '07, and $163 million improvement in operating cash flow.

A few highlights there, obviously we have improved EBITDA of $70 million, and two days lower accounts receivable is worth approximately $120 million.

Cash flows used in investing activities were $323 million versus $53 million provided in '07.

$76 million due to an increase in CapEx, $398 million versus $322 million in '07.

And a net reduction in net divestitures due to the sale of Geneva for about $400 million in '07.

So that would account for them.

Cash using financing activities, the balance of debt was reduced by $441 million, and total debt, the additional $132 million to make the $574 million is actually translation adjustments related to our European term loan and also our Sterling debt, which is about $266 million.

The Euro term loan is a $887 million.

The $442 million repayment went to pay down the revolver and then bank term loan amortization and $22 million of other debt amortization.

And that is it for me.

David, thank you, Milt, thank you.

Lisa, do you want to come back on, and we will hold for questions?

(OPERATOR INSTRUCTIONS) Our first question will come from Adam Feinstein, Barclays Capital.

Alright, thank you.

Good morning, everyone.

Good morning, Adam.

Want to say congrats to both Jack and Richard, with Jack's retirement and Richard assuming his role as CEO.

So good luck to both of you, and I guess just my question has to do with volumes.

Just wanted to get more color.

One of the issues we have seen with some of the companies this quarter is this managed care volumes weakening.

So you guys showed relatively strong volume growth, but just curious in terms of getting couture thoughts in terms of what is going on with the managed care volumes, and whether you think we will see any significant change there going forward?

All right, Adam, thanks.

Richard Bracken wants to hit that first.

Let me just kick it off, and then actually I am going to turn it off to Bev.

We have done a lot of work to understand why and where managed care volumes have been effected over the last year in particular, and I think we have got some pretty good insight into sort of the factors affecting our managed care business levels, and where it is happening.

Bev, if I could just call on you to summarize the work we have done, and then we can go from there?

Sure, Richard.

We did take a deep dive into our managed care volumes looking at last year compared to this year.

And we had several takeaways.

The first takeaway is bed capacity in the markets where we do business.

We have had significant beds added in those markets, mainly in Dallas, Richmond, Houston, Austin, [Mcgalans], Las Vegas, El Paso and Wichita.

And we believe about 58% of our year-over-year volume impact is driven by that additional capacity coming into those markets.

The next factor is the economy.

The economy is down everywhere, but we have several markets where the impact is greater than the national average.

Those markets are Florida, Nevada, Virginia, Tennessee, Georgia, and Southern California.

And approximately 22% of our volume decline in managed care is probably driven by this economic downturn.

Now, you might ask why we did not see an increase in self-pay?

We did see some increase in self-pay, but we also think that some of that managed care volume is actually the baby boomers moving into the Medicare increase that we did share with you.

The next factor in that volume decline is contract losses.

We did have two losses, the Sierra loss in Las Vegas.

Our managed care volumes are still soft because of that volume moving out, although we have been back-filling some of that with some of the other payers.

That was a big piece of our business.

And then the Kaiser contract in San Jose.

They expanded their capacity, and took on some of the mainly cardiac volume that we were seeing in our hospitals.

They moved that into their system.

And then the last factor that we looked at was technology and other changes, i.e.

, pharmaceuticals.

We have seen a decline in our women's services, both on the surgery side, on the in-patient and the outpatient side.

And when we drilled deeper into that area, it was two things.

NICU, on the in-patient side relatively flat where we had been seeing growth.

And through that research, we found that quite honestly, there's fewer women taking fertility drugs, and therefore is fewer multiple births in the U.S.

And I think we are seeing a flattening of that volume this year compared to prior.

And then the bigger driver was gynecological business moving, quite frankly, from our in-patient surgeries and our outpatient surgeries inside the walls of the hospitals, to the physicians' offices , hysterectomies, D & Cs are down, ablations in the physicians' offices are up.

So Richard, those are the main drivers of the volume from a managed

Bev, Richard, thanks.

Milt, do you want to add something?

Adam, I know you are familiar with our trends and that.

But just to clarify, Beverly's done a great job of describing all the headwinds in the managed care books.

This quarter we are down 1.8%.

In the second quarter of this year, we were down 1.6%.

But for probably a couple of years, two and a half or three years prior to that, our trends had been down closer to 2.5% to 3%.

So although we are not happy with negative growth in managed care.

The last couple of quarters, we have seen an improvement in the reduction of the amount of the decline that we have been seeing recently.

Adam, thank you.

Thank you.

Up next, we will take a question from Miles Highsmith, Credit Suisse.

Good morning, guys.

Just wanted a little bit related to kind of a general economic question, I think on a lot of people's minds are your views on what to expect for volumes and bad debt given the current situation.

Maybe I could frame it in the way of, if you could talk a little bit about the percent of your revenue that is more discretionary and elective, and maybe you could even reference -- I know it is a different time -- but back in the '02, '03 time frame and how that impacted?

How COBRA came into play and things of that nature?

Thanks.

Anybody want to take a swing at that.

I am not sure we can quantify anything, but any general comments?

Just with elective, I guess surgeries.

We have got in our ambulatory surgery centers looking at year-to-date for the first nine months, we do see a decrease in elective surgeries of about anywhere from 10% to 13%, So we do have some data there that those elective surgeries are decreasing in our ambulatory surgery centers.

And relative to the sort of the broader question of the effect of the economy on overall business, it is really hard to predict.

Of course you are aware that if the economy worsens, unemployment levels go up.

We can certainly foresee a situation where bad debt could go up or uninsured could go up, but then it gets offset in the short-term, access to COBRA, how many people actually take COBRA.

How much surgery -- elective surgery as Milton mentioned could be deferred and candidly, we would be guessing if we were trying to quantify these things.

We are going to have sort this out as we go along.

It is hard to think that there is any good news in any of this, but how difficult it might be is to be determined.

This is Jack.

I echo what Richard is saying.

Hospitals, as you know, are not recession-proof, but we do not suffer as much as some other industries like retail and auto does.

We do typically see, because of unemployment that Richard mentioned, an increase in the uninsured and taking care of the uninsured, but there is another factor in here that none of us can really quantify at this point in time and that's what the significant change in administration as well as the Congress means for healthcare spending by the federal government next year.

There's already signals out from the Speaker of the House, as well as others, that they are going to make Medicare and Medicaid funding a priority.

Healthcare reform is going to be a priority and typically, as you know, we have seen in situations like this, that the Democrats tend to spend more money on social programs, particularly healthcare, than does Republican administrations.

Again, we can not quantify that, but I think we would be remiss if we did not mention that is a factor that swings in the other direction relative to a recession.

Alright, thank you, Miles.

Up next, we have Sheryl Skolnick, CRT Capital.

Thank you very much, and I will echo the congratulations to everyone who is moving onto the next stage of their careers and lives.

I have a question regarding the cost structure at HCA.

When we back out the UPL payment related to the reserve reversal as opposed to what seems like might be a going forward number, so take the $60 million out, the cost ratio and margin ratios obviously change, and it doesn't look like it is as robust a quarter as it initially looked like.

My question is I am noticing some modest, not extreme, but some modest creeping up of salary and benefit expense ratios, not so much on the supply side, but other operating expenses and the like.

And since the company did do the LBO, I may have missed it but I have not seen any significant cost-cutting programs at HCA.

So I would like to hear your view especially in view of the fact that you have decided to avail yourself of the PIK option of what the Company might do over the next six to 12 months to bring its cost structure in line with what sounds like it is going to be a more difficult operating environment.

Sheryl, this is Richard.

I will start with this, and I know Milton wants to add a few thoughts.

Relative to your comment about overall cost-cutting relative to the LBO, we did take on some significant efforts.

Actually, we started before the LBO even ended, and put a lot of cost-cutting in place then.

But having said that, we do think that there is additional opportunity to take some costs out of the operating structure.

To your comment on salaries and wages, and it is appropriate to adjust that for the UPL dollars, and to look at the component part of the wage issue, our productivity on the hospital side is actually improved over prior year and all in, all labor, we are essentially flat or 0.4% up.

So on that small uptick or spread from an improve on the hospital side to a little bit up all in, is really as Milton mentioned in his comments, we have been funding some efforts around our growth agenda and our EHR and our clinical improvement processes, and some of the employment of physicians.

We feel very good about our productivity in all of our operating units.

On the wage front -- on the wage rate front our numbers are pretty much right where we expected them to be.

Going forward to your comment, we see some opportunity to perhaps moderate wage rates, and I think that will play out as we put our '09 budgets together.

And where we have seen some increases in costs, have really been in the other cost categories.

Professional fees, we have had a hit on utilities and repairs and maintenance.

We have seen some increase in those categories.

Richard, I thank you.

Sheryl, you are right on some of the other operating expenses.

I do want to remind you that in this quarter, we do have $15 million of hurricane reserve accruals that hit other operating expenses.

And also some other costs related to the hurricanes that, not included in that deductible accrual that, were not insurable, but did increase our costs in this particular quarter.

One other area I just mentioned in other operating expenses, and this is not a new area but proceeds physician subsidies for ED call, and so forth continue to grow about 20% year-over-year.

And that has been a trend we have been seeing the last couple of years.

But that is also putting some pressure on other operating expenses in our numbers right now.

And I might as well just go ahead and add while we are talking about future cost structures, some of our thinking around our capital spend.

Obviously, given the volatility and uncertainty in the economy and the capital markets, we definitely felt necessary to review our spend, especially over the next couple of years.

'09 and '10.

And we have not fine-tuned that number yet, but I fully expect our capital spend to be reduced from our previously stated amounts.

We had previously announced $1.65 billion in '09.

I am certain it will be south of that.

And our thinking about capital spend and our approach to sort of moderate it, is we will continue to fully support those projects that we have internally approved and are construction projects underway.

Obviously, support our smaller, more routine capital spending, but where we see opportunities to perhaps moderate our spends, it will be in the scope and pacing of larger projects that we have been considering.

So we will create some cash space, so to speak, around the capital spend.

Sheryl, thank you.

Thank you.

Gave us a chance talk about a lot of things we wanted to talk about.

We will hear from Michael [Bomb], Blue Bay Asset Management.

Hi, I am sorry it's Mike [Bynum] of Blue Bay Asset Management.

Just following on from the last question in terms of if you like contingency planning.

Given where the high-yield market is at the moment, the fact that your bonds are trading, over the second [lean] at least, is trading at a reasonable discount to par.

If it is that markets do not reward you more fully for your conservativism and paying down debt, and you are left in a position whereby the spread on your bond is still particularly high, this capital structure does eventually sort of start to run into trouble if you are refinancing at higher and higher rates.

I just wondered if you have had any, I know it is early, but initial discussions at least with equity your sponsors regarding any potential equity or further equity investment into the group just to alleviate that risk from the LBO?

Milton, you want to take that?

We are always looking for the right opportunity to deal with the capital markets, and certainly there's no plans or no announcement today regarding any sort of equity sort of offering here in the short-term.

But we are always going to be opportunistic as we have been in the past, whether it be acquisitions, and we will continue to look at the market and look for the right opportunity for the Company to address those issues.

Okay, can -- just as you a follow-on, can you tell us what, for example, would maintenance CapEx for the group be?

If you were to sort of go bare bones, shall we say?

Well, historically, maintenance CapEx we might refer to that as what we call routine internally, and that has been anywhere on a historical basis probably from $650 million to $750 million a year.

Going forward, we are working through those details right now, and we do not have a target that we are going to announce.

But it will be most likely something less than that, but no particular target right now.

We are going through that effort to decide what is the appropriate level in this environment.

Thank you, Mike.

Thank you.

And now we will hear from Darren Lehrich, Deutsche Bank.

Hi, Darren.

Are you still with us.

Darren, your line is open.

Please check your mute function.

Hearing no response, we will move to Lawrence Weiss, Citi.

Hi guys, something back on bad debt.

I think in the prior calls you said, I think on the first call or second call that the actual dollar amount of bad debt is going to be growing 18% to 20%, and that has not really materialized.

So is that 18% to 20% number going to be moving out into '09.

Is that not the case anymore?

Just give us a little color around that?

One thing we did not anticipate this lower level of self-pay and charity admission growth.

We were expecting to see something more around 10%, which is where we had been for the last several years on an annual basis.

And you factor in a charge master growth rate and you would get somewhere 18% to 20% expected growth in the actual dollar amount.

We are not seeing that growth in admissions.

Again, we are at about 2.3%, something like that year-to-date.

I think that accounts for the major portion of the reduction in our growth and bad debts in terms of the actual dollar amounts.

Thank you, Lawrence.

And Stone Harbor's, [Hway Ramyaldo] is up next.

And, just in line with your decision to go PIK, and I calculated you would save interest about -- cash interest of about $144 million.

And given the cash balance you have right now in the liquidity and the potential free cash flow, you would generate, given CapEx cut and what you have, I have to -- it left me to think that you are doing something proactively to deal with maturity or am I not thinking that correctly?

If so what are you thinking about dealing with some of the maturities that will be coming as early as February, 2010?

MIlt?

David?

I am aware that some companies have elected to pick so that they can buy short-term maturities sort of a tradeoff here, but that is really not part of our thinking.

The election to PIK is, in my view, just a prudent decision to try to maximize liquidity in a very uncertain capital markets environment.

But, I mean to maximize liquidity, I think you would have to pinpoint clear need of liquidity, and that would point to the short-term maturity.

Does this Company have any plans about how to deal with the 2010 maturity?

We have significant availability under our revolving credit.

All of our projections indicate -- those maturities to me are expungeable amount of money, and our target is to make sure that we always have enough liquidity to meet all of the cash needs that we project to have on a go-forward basis.

And that would include items like capital expenditures and our current maturities in the coming years.

So we obviously take that into account as we project forward.

Okay --

I'm sorry?

Does the credit facility, particularly the revolver have any maintenance test, and what is the current level you are at right now?

Our major debt covenant on the revolving credit is debt to EBITDA which is currently 8.75, and on a credit agreement basis we are at 5 .8.

Thank you very much.

Thank you.

Our next question comes from Henry Reukauf, Deutsche Bank.

Just kind of a follow-up to the last one.

Just with the toggling of the second lien.

To me, I am not quite sure I see the reason for that $140 million of savings versus $2 billion of interest or considerable amount of interest.

I look at hindsight.

I do not think you took the hindsight charges.

Maybe the first quarter you have not done that, and bad debt was not that bad.

It looks like you are able to kind of carry this debt.

Are you really, I guess, one, are you anticipating a tremendous deterioration in the business in the coming year because to me that is signaling if you do not have any intention of maybe buying back bonds in the future?

Then that would be a question are you going to do that?

So I guess there are two questions, one is, are you really signaling that you are really thinking that you are going to see a dramatic deterioration in the business from going forward from here and then two, are you planning to buy back any of the bonds I know that you pre-emptively bought back some bonds earlier on in the year at a discount.

Things are more discounted today.

This is Jack.

Let me take a stab at this.

First of all, we are not, in any way signaling or anticipating, as you put it, any significant decrease in our business next year.

I go back to what David said earlier, and Milton has talked about, which is, in unstable capital markets like we are seeing, and hopefully they will improve next year, it is very prudent to conserve cash and be in a situation where you are maximizing your liquidity and that is simply all we are doing.

I want to emphasize that point.

Maybe this suspenders and belt kind of thing, but we think given all of the dramatic turmoil in the capital markets over the last couple of months, it is the prudent thing to do right now.

Will we buy back some more bonds?

It depends.

We will be opportunistic.

If it makes economic sense to use some of this cash to do that, we will in fact do that.

But I really want to emphasize to you that this is financial planning, and it is not based upon our thinking that our business is going significantly downhill next year.

Because that is not the case.

We have a lot of opportunities, Richard mentioned our growth agenda that we are putting significant resources into, and even in a recession, as I mentioned before, while we are not recession-proof, we think we will do much better than a lot of other industries in this.

And we expect to see some reasonable growth next year.

And just to clarify.

The revolver can be used to pay off any debt below the first lien level.

Just to confirm that?

Is that true?

I think that is what you seemed to infer a little earlier?

Well, we have certain limitations.

This is David again.

There's certain limitations but any maturity prior to the maturity certainly of the bank agreement can be prepaid from any source including a revolving credit.

Thanks.

Thanks, Henry.

Rishi Sadarangani of Alliance Bernstein is up next.

Yes, good morning.

Two quick questions.

One is with Corporate America essentially going through the pains we are seeing.

Do you anticipate seeing some pushback from managed care in terms of pricing going forward?

Because they are pushing for better deals on their healthcare plans?

And I guess a question related to what some questions have been in the past is, on a free cash flow basis, just given the amount of debt you have and servicing that.

There is not a lot of free cash flow.

Probably just break even and has been for the last couple of years.

To address some of these risks that have been touched about.

Is there some sort of a plan or how important is it to get to a sustainable positive free cash flow situation where some of these risks that have been discussed are not as much of a concern?

Thank you.

Thank you.

Bev, you want to talk about managed care, and what you are seeing there and then David and Milton can deal with free cash flow.

As far as the pushback for managed care payers, we are not experiencing anything more now than we have in the past.

All negotiations tend to have a little bit of toughness to them.

We have completed 72% of our contracting for '09, and as in past years, we are ranging between that 6% and 7% increase.

You are seeing that performance this year, and that is what we are anticipating.

We do have three large contracts that are not in that number.

Blue Cross of Texas, Blue Cross of Florida, and Blue Cross of Louisiana.

We will be finishing those up in this quarter, and then that will carry over into 2010 where we will have approximately 50% to 55% of our contracts completed in that same range.

So I think we are far enough out in advance of this, and we ha've got pretty good visibility into it.

Bev, thanks.

Milt, you want to deal with free cash flow.

I think Richard actually addressed it in his comments earlier.

We are looking at ways to increase free cash flow.

Most significantly would be our CapEx expenditure going forward as Richard mentioned.

We do not know where it is going to be just yet, but we know it is going to be at a reduced level then where we have been and where we had targeted under our plan.

That will certainly achieve additional free cash flow.

And our cost structure is under review looking for opportunities to address discretionary spending, overhead cost where appropriate.

All of that is under review and expect to implement that in 2009.

Both of those actions should drive additional free cash flow.

All right, thank you very much.

May be a couple more questions.

Up next, we will hear from David Common, J.P.

Morgan.

Hi, David.

Good morning.

Thank you very much.

Question, I just wanted to go back to the capital expenditures.

As you said, you internally refer to just shy of a one billion as routine.

But I am wondering, I think you had different layers including patient safety, MIS, etc.

And I am wondering what sort of a reasonably foreseeable base level of CapEx over the next two or three years because it is probably, I would imagine, a fair bit more than that routine number that you put out?

This is Milton again.

First of all the routine number is $650 million to $750 million is our range of routine spending over the last few years.

With respect to capital expenditures to support technology improvements, electronic health records, and so forth.

We generally spend $150 million to $200 million in that area.

We will probably be at the lower end of that range going forward, but it is nowhere near the routine capital spend to maintain our hospitals.

That $150 million to $200 million was on the ITS side of the equation.

Milton said technology, Obviously, there is clinical technology that would be in the routine spend, but the ITNS technology is in that $150 million to $200 million number.

Alright, very good, thanks.

One last question.

And our final question today will come from Janet Sung, Loomis Sayles.

Most of my questions have been answered.

Can you let us know what the current environment is -- give us your assessment for what the current environment is for facility sales or asset sales in general.

Asset sales environment, Milton?

It is difficult.

When you look at multiples are down, as you know, capital markets in distress.

Lack of liquidity in the markets to, I think ,to enable purchasers to acquire.

There's exceptions to that.

We do have, in our industry, some very well-heeled and financially stable competitors out there that have maybe some options.

But when you talk about it in just broad terms, like any other industry, it is a difficult environment, with respect to liquidity right now.

And therefore that is going to effect, I think, the ability to do any sort of significant transaction at any reasonable cost.

That applies for the non-for-profit buyers as well?

Well that will vary again widely across the country based on this system.

As I said, there are very, very well capitalized systems out there, and there are some that are not.

So that is a market by market sort of analysis.

Remind you that we announced and have on the block right now -- it is in process, the sale of our West Florida facility in Pensacola, and that is moving along, of course we cannot predict when there will be a close on that.

That is the one large divesture that we have got out there right now.

That was at a very acceptable and very good multiple.

All right, Janet, thank you.

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

Both Mark and I will be around all day if you have additional questions, and thank you very much for participating on the call.

And everyone that does conclude today's conference.

Thank you all for your participation and have a great day.