美國醫院公司 (HCA) 2009 Q2 法說會逐字稿

Good day, everyone, and welcome to the HCA second-quarter 2009 earnings release conference.

Today's program is being recorded.

At this time for opening remarks and introductions, I would like to turn things over to Mr.

Vic Campbell.

Please go ahead, sir.

Thank you, Kelly Anne, and good morning to everyone on today's call.

I also want to welcome any of you who are listening on the webcast.

With me this morning for the second-quarter conference call, our CEO and President, Richard Bracken; CFO, Milton Johnson; and the Senior Vice President of Finance, David Anderson, along with our Investor Relations Officer, Mark Kimbrough, and several other members of the Nashville team are here in the room to participate in the Q&A.

Let me remind you 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 in our SEC filings.

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 forward-looking statements, you should not place any undue reliance on those statements.

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

And, as you heard, the call is being recorded.

Replay will be available later today.

With that, Richard Bracken.

All right.

Thank you, Vic, and good morning, and thanks to all for joining our call.

We are pleased to announce our second-quarter results.

Our review of operating indicators reflects a solid quarter for our Company.

Most of the indicators show favorable performance over prior period, and we were particularly pleased with our patient care volume.

In short, for the quarter these volumes, coupled with an effective cost structure, led to improved earnings and margin performance.

As I mentioned on our call for the first quarter, we entered 2009 with a fair amount of concern and with questions relative to the macro environment and how this would affect our performance.

And to a large extent, some of these questions still remain with us more than halfway through the year.

Of most concern to us continues to be the effect the struggling economy is having on unemployment levels and the resultant increase in uninsured or underinsured volume.

Our strategy, as we started the year and as is it continues today, is to approach our operations in a very conservative and disciplined way with a very keen focus on expense control, a moderated capital spend, while at the same time continuing to support key growth in clinical initiatives.

And through the second quarter, this strategy is serving us quite well.

Let me recognize our facility management teams and all of our employees for not only a favorable second quarter, but really for a very strong first half of 2009.

In most cases, our local teams have done an effective job balancing the growth, efficiency and clinical service agendas.

In our second quarter, our Houston, San Jose, Austin, San Antonio, Dallas, Kansas City and Tampa markets showed particularly strong earnings performance over prior year's second quarter.

Overall our volume growth in the second quarter was better than we have experienced in recent periods and showed consistent improvement for each of the months within the quarter.

Same facility inpatient admissions increased 1.9% over prior year, and same facility equivalent admissions grew 4.4%.

Milton will be providing some more detail on all of these stats in a moment, but I think it is safe to say that the locations of our facilities and our focus on our growth strategies have positioned us well.

I would also like to call your attention to the fact that we continue to improve on our clinical quality outcome.

At the end of the second quarter, 73% of HCA facility core measure sets are at or above the 90th percentile of American hospitals, and 90% of core measures stats are at or above the 75th percentile.

And once again, please note that there is some limitation with this data.

Recall we are really only able to compare our most recent quarter to that data, which is publicly available, which had a trailing four quarters as of the third quarter of 2008.

Regardless, we are pleased with this performance and continue to realize and sustain a very strong performance in these important clinical indicators.

And finally, as all of you know, clarity regarding the timing and composition of the national healthcare reform agenda alludes all of us.

Obviously we are in no better position than you to predict the outcome of the debate.

But we remain hopeful that Washington will be able to efficiently tackle the issue of universal coverage, and at HCA we continue to look forward to participating in the process as the reform discussions advance.

And with that, let me turn the call to Milton.

Thank you, Richard, and good morning to all.

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

I will take a few minutes to provide several general observations and highlight some details for the quarter before we take a few questions.

In general terms, the key drivers for the second-quarter performance were improving volume trends and execution of our defense management plan.

We saw solid growth in our emergency room visits, which contributed to our increase in admissions.

We believe our ER process improvement initiatives have been effective in improving the efficiency of many of our emergency browns.

With respect to expand management, we continued to see improvement in productivity, reduced turnover rates and a reduction in use of contract labor.

Our supply chain initiatives such as our pharmacy clinical intervention initiative continued to yield good results.

Furthermore, our hospital management teams are effectively managing discretionary expenses.

Turning to some of the details, all volume trends in the quarter were strong.

This is the seventh consecutive quarter we experienced same facility equivalent admissions growth over the prior year's quarter.

Same facility admissions increased 1.9%, while same facility equivalent admissions increased 4.4% over last year's second quarter.

Emergency room visits, the primary source for inpatient admissions, increased 8.5% on a same facility basis during the second quarter.

Also, same facility surgical volumes increased slightly compared to last year's second quarter.

Same facility Medicare admissions and equivalent admissions increased 2.7% and 4.8% respectively.

Compared to last year's second quarter, our same facility Medicare admissions include both traditional and managed Medicare.

Managed Medicare admissions on a same facility basis increased 14.2% and represented approximately 22.2% of our Medicare admissions.

In the second quarter, same facility Medicaid traditional and managed admissions grew 8.4% compared to last year's second quarter.

Same facility managed care admissions declined 3.1% in the second quarter compared to the same period last year.

Managed care equivalent admissions declined 0.3% compared to last year's second quarter.

Same facility uninsured admissions increased 10.4% in the second quarter compared to the second quarter of 2008.

This is the highest growth rate we have reported in several quarters.

Most of our Florida markets saw uninsured admissions growth rate higher than the Company average.

We also saw higher uninsured admissions in Houston, Dallas and Kansas City.

In terms of actual admissions, same facility uninsured admissions increased by 2365 admissions, which represented approximately 1/3 of our total same facility admission growth in the second quarter.

Uninsured admissions represented 6.6% of our total admissions in the second quarter of this year compared to 6.1% in the second quarter of last year.

Same facility total surgeries increased 0.1% compared to last year's second quarter.

Same facility inpatient surgeries increased 0.5% compared to last year's second quarter.

Same facility outpatient surgery, both hospital-based and ASC cases, declined 0.2% in the quarter compared to last year's second quarter.

Surgical volumes continue to be negatively affected by reductions in elective procedures.

Turning to revenue, our same facility cash revenue per equivalent admission increased 3% in the second quarter of 2009 over the prior year's second quarter.

As a reminder, cash revenue is net revenue less the provision for doubtful accounts.

This quarter's cash revenue per equivalent admission growth rate declined by approximately 140 basis points compared to the first quarter of this year, primarily due to a weaker revenue payer mix, cuts in tricare outpatient payments effective May 1, and an increased rate of growth in bad debts related to co-pays and deductible balances.

Same facility Medicare, traditional and managed, revenue per equivalent admission increased 3.6% compared to the second quarter of 2008.

Excluding UPL revenues, same facility Medicaid traditional and managed revenue per equivalent admission increased 0.8% compared to the second quarter of 2008.

Same facility managed care revenue per equivalent admission increased 7.7% in the second quarter, primarily as a result of our contracted rate growth, an acuity increase of 0.9%, and the implementation of an ASAP-based model for ER coding.

Based on our estimate, the implementation of an ASAP-based model for ER coding increased adjusted EBITDA in a range of $75 million to $100 million during the second quarter, consistent with the first quarter of this year.

Adjusted EBITDA in the second quarter totaled $1.399 billion compared to $1.104 billion in 2008, an increase of 26.7%.

Adjusted EBITDA margin expanded 290 basis points as compared to last year's second quarter.

As a reminder, adjusted EBITDA is a non-GAAP measure and is reconciled to net income attributable to HCA Inc.

in the Company's earnings release.

At the cost same facility operating expense per equivalent admission declined 0.6% as compared to the second quarter of 2008.

Salaries and benefits were 39.3% of revenues for the second quarter compared to 40.7% in last year's second quarter.

Productivity performance as measured by man hours per equivalent admission improved 3.8% on a same facility basis compared to the prior year's second quarter, and same facility wage rate growth was 4%.

Supply costs declined 30 basis points going to 16.2% of revenues in the second quarter compared to 16.5% in last year's second quarter.

On a same facility equivalent admission basis, supply (inaudible) increased 1.2% in the second quarter.

Other operating expenses as a percent of revenue declined 15% compared to 16.2% in last year's second quarter.

We saw slight declines in many expenses compared to last year such as utilities, employee recruiting, travel, repairs and maintenance and insurance.

Bad debt declined to 11.6% of revenues compared to 11.7% in last year's second quarter.

Bad debt hindsight adjustments were made this quarter totaling $35 million compared to $60 million in last year's second quarter.

Same facility charity care discounts increased by $146 million to $575 million in the second quarter of 2009.

Same facility uninsured discounts increased by $167 million to $583 million in the second quarter.

Bad debt plus charity and uninsured discounts as a percentage of revenues plus charity and uninsured discounts was 23.7% compared to 21.5% in last year's second quarter.

We currently have 93.9% of our total self-pay accounts reserved.

Upfront cash collections increased from $74.1 million during the second quarter of last year to $77.5 million during the second quarter of this year.

Net income attributable to HCA Inc.

totaled $282 million for the second quarter compared to $141 million in the prior year's second quarter.

We had a loss of $3 million related to the sale of assets and impairment of assets of $4 million this quarter compared to a loss on sale of assets of $11 million and an impairment charge of $9 million in the second quarter last year.

The Company experienced strong cash flows from operations during the second quarter totaling $548 million compared to $197 million last year.

Days and accounts receivable for the quarter were 45 days, an improvement of two days from the first quarter of 2009 and six days from the second quarter of 2008.

Capital expenditures totaled $282 million in the second quarter of 2009 compared to $409 million in last year's second quarter.

Now let me turn the call to David Anderson to discuss our cash flow, debt repayment and our credit statistics.

Thanks, Milton, and good morning to everyone.

Our cash balance, as you can see, was $450 million at June 30, up $94 million from the first quarter.

$59 million of that increase related to higher balances in international cash, while $38 million was an increase in the balance of investments in HCI, our malpractice captive, classified as cash and cash equivalents.

Our long-term debt balance at June 30 was $26.5 billion.

This is a decrease of $22 million from the first quarter and a decrease of $444 million from the year-end 12/31/08.

Our leverage as measured by debt to EBITDA ratio per our financial statements was 5.16 times at June 30.

This is an improvement of 0.32 from 5.48 times at March 31.

Our floating-rate debt percentage at June 30 was 10.6% versus 16.4% at March 31, reflecting the issuance of the $1.5 billion in first lien bonds on April 15 obviously of this year.

Our liquidity position at June 30, we had [2.359] available under both our revolving credits.

The ADL has [$1.545 billion] drawn; therefore, $455 million available, while our $2 billion cash flow revolver is undrawn except for approximately $100 million in letters of credit.

So we have $1.9 billion available under that facility.

If we turn to the cash flow statement, just a few highlights.

Cash flow from operating activities was $1.1 billion for the first six months of 2009 versus $424 million in the same period 2008, an increase of $691 million.

Some highlights were obviously an improvement in EBITDA, plus an improvement of three days in Accounts Receivable.

We did have $232 million more in tax payments.

A $100 million of that was extension payments and the rest really reflecting the improvement in income, offset by approximately $185 million due to lower interest payments, including a $72 million PIC permit during that period.

Cash flows used in investing activities was about $98 million less.

The main driver of that was about a $98 million reduction in capital expenditures period versus period.

During the first six months, we repaid about $1.78 billion of long-term debt, reflecting the mandatory pro rata payments on the issuance of both the second lien and first lien bonds on the A facility, the B facility and also the European term loan.

Basically the ABL and the cash flow revolver were paid down by about $505 million.

And that is all I have, and I will turn it back over to Vic.

All right, David.

Thank you.

Kelly Anne, if you would like to come on and we will pool for questions.

(Operator Instructions).

Shelley Gnall, Goldman Sachs.

(technical difficulty).

(Operator Instructions).

Adam Feinstein, Barclays.

So everything looked really strong in the quarter here.

So I'm just curious to get your thoughts as you look out to the different markets in terms if there were some markets that stood out relative to others?

Or are you seeing broad-based improvement in volumes, as well as reduced operating costs?

Richard, do you want to start with that?

Yes.

Good morning.

Really the performance across most all of our markets was consistently positive.

I would say that on the expense side of the equation, the performance was really very good across virtually all of the markets.

On the growth side of the equation, a little bit more variation but really in many, many cases, we had the growth in the markets reflect the composite growth of the Company.

Had I known you were going to ask this question, we keyed up a couple of our group presidents to talk about some markets perhaps in a little more detail, and maybe I will highlight one, maybe Kansas City, and ask Russ Harms to make a comment on that.

Yes, thanks, Richard.

Kansas City continues to exceed our expectations.

You may recall we entered that market with the Health Midwest acquisition back in 2003, and we had steady margin improvement over the four years post-acquisition.

A significant event in 2007 was that we opened up two replacement hospitals, actually replacing three old hospital campuses.

As a result of the reduction of overhead and our ability to capture inefficiencies by moving into those two new hospitals, we have seen significant margin accretion the last few years.

I would also mention those two facilities were built in population corridors that are growing in the Kansas City metro market.

In addition, we have had significant outpatient growth, and we continue to focus our strategic efforts in Kansas City, especially around some of the outpatient opportunities we have got by looking at some areas of the city that we previously had not had access points.

And lastly, I would say that we have just had a lot of good efforts around overhead reduction.

As we continue to mature in that market, we continue to rationalize our expenses in such a way that is is having a really positive impact on margins.

All right.

Thank you.

I might just clarify that Russ is our CFO of the Central Group.

For those of you that would have expected to hear Paul Rutledge, he is actually helping our volumes.

He is getting a little knee surgery done across the street today, so Paul is still with us.

Paul, if you happen to be listening, you are probably sedated at the moment.

Next question.

Wei Romualdo, Stone Harbor.

I was wondering if you can just give a breakdown of the outstanding amounts under those loans after the paydown?

And the second question is regarding the ER.

Since you went on to the new pricing scheme, have you heard anything from your payers?

David, did you understand the first question?

Well, the balances of our bank debt at June 30, the ABL is $1.545 billion, the term loan A is $2.161 billion and the term loan B is $7.383 billion.

While the euro loan, which can fluctuate due to currency, is at $709 million.

Thank you.

And your question I think we did implement a new methodology in our emergency room coding, and you wanted to know payers' discussions.

Beverly Wallace, do you want to address that?

Sure.

Several payers have engaged with us around this change.

Many of them have acknowledged that our coding today is more aligned with the coding of other facilities in the markets where we are at, and this will be a topic of discussion as we enter into our 2010/2011 discussion.

Sheryl Skolnick, CRT Capital Group.

I'm not usually this effusive, but I bow to your supreme mastery of expense control and performance.

This is really an outstanding job that you have done, especially as in our last discussions on this topic, I think six months ago the notion was that HCA was already pretty much one of the most efficient operators in the business.

You are clearly surpassing I presume your own goals in that regard.

So my question is this, now that you have figured out how to save money, should we be at all troubled by the I will say significant moderation in your capital spending running at a rate of about $1.2 billion as opposed to maybe a rate of $1.5 billion were I sort of kind of thought you might be.

And I will recognize in advance that the pressure is off from the nuclear arms race in competition from the (inaudible) process.

But I'm wondering what you might think of as whether this is a sustainably low level or whether there might be more efficiencies in CapEx that you could generate?

Good question.

Richard, do you want to take that?

We expect to spend about $1.5 billion by the end of the year.

We did have a slow quarter here by all comparisons.

But clearly in the pipeline through the remainder of the year, we expect the total spend for the end of the year to get to that $1.5 billion number.

So it looks a little low, but it will come back in line with what we have been forecasting.

And in terms of our capital spend, I've commented on this before, within this $1.5 billion spend, even prior to a couple of years ago, we made some large decisions that took up a lot of capital spend width in these current years.

And so from a marketplace perspective, we had a disproportionate amount of money going to relatively few projects.

That is all working out of the system as we go through 2009.

And, quite frankly, as we move into 2010 and we expect to spend about the same amount of money, we are going to have more flexibility to put more capital out across more properties.

So we're pretty comfortable with our capital spend.

You know, it is a capital spend that has been consistent over time.

It is adequate.

We have spent more, but we feel it is appropriate given the marketplace, and we are actually going to have a little room to move as we go into 2010.

Milton, did you want to add something?

Yes, just one click other I guess color on that is, although we're running about $100 million below our capital spend that we had last year at this time, I will say that where the reductions have primarily come is ITNS.

We have cut back on some IT spending again, which is we don't thing hurting our market capabilities out there.

Also, in the routine back in some of the smaller spend with respect to large capital projects, we are actually spending more.

We spent $333 million so far this year on capital projects versus $257 million last year.

So we are continuing to invest in some large projects that Richard mentioned that a lot of those will come on line later this year, and where we have hit some reductions it has primarily been around the IT capital spend.

Shelley Gnall, Goldman Sachs.

I was just wondering could you comment a little bit on whether any of your hospitals are seeing a spike in bad debt or whether the trends have really been moderate across the board?

And if you have seen hospitals with some spiking bad debt trends, can you sort of broadly describe those markets?

Milton, do you want to start with that?

Yes, I will take a shot at that.

I think when you look at -- what I'm concerned about in our bad debt is really the increase that we are seeing in co-pay and deductibles, and that is the smallest part of our bad debt because probably 85% of our bad debt expense is really writing off uninsured revenue.

We collect so little of that historically, and anyway I'm not -- that does not alarm me as much as co-pay and deductible balances that we are as seeing.

For example, in the first quarter, we saw a $70 million increase in bad debts related to co-pay and deductibles.

And then the -- I'm sorry -- in the first quarter, we saw a $47 million increase, and in the second quarter, we saw a $70 million increase.

So we are seeing that really impacting our bad debts.

I will say most of the increase that we are seeing is pretty much across from just looking at our groups right now in the second quarter, and it is pretty straightforward across all the groups.

I don't see any particular group where we have a material difference in terms of the growth in the second quarter in bad debts related to co-pay and deductible.

So we are seeing pressure across a lot of our markets.

Again, I think we are just seeing the effects of the general economy.

We are seeing co-pay and deductible balances increase, and what we are collecting is basically about the same level of cash that we had collected in the prior year, and that is causing some deterioration in our collectibility of those particular balances.

So is it -- am I right in thinking that the risk going forward for the back half of the year is that the collectibility rate -- the collectibility of those co-pays and deductibles may actually be a more important risk than more uninsured showing up at the hospitals and incurring bad debt in that form?

Yes.

Keep in mind that with respect to the uninsured, obviously we have the gross revenue charge related to their care.

We have applied charity discounts as they qualify.

We apply uninsured discounts, and then we have the remaining amount in net revenue.

And historically, as you know, we collect a very small amount of that net revenue, and as a result, each quarter we provide an allowance of doubtful accounts that basically offset most of that revenue.

So the remaining portion, of course, that we have to provide for is co-pay and deductibles.

And that is the part.

With respect to the uninsured, what I look at is not so much the bad debt under the GAAP presentations, but really it's the cost to take care of these people that we get no reimbursement.

So, as we manage our costs better, that is probably one of the best ways to manage the burden of the uninsured with respect to ACAs, cash flow and EBITDA growth.

But with respect to co-pay and deductibles versus prior years, as we see that continue to erode, I think that is a risk factor that we have for the rest of the year.

Walter Branson, Regiment Capital.

It would seem that one of the key highlights in terms of the performance for that quarter was the improvement in labor productivity of 3.8% and a reduction in other operating expenses in actual dollars despite higher admissions and revenues.

Could you maybe talk to those things a little bit more as to how you managed to achieve those?

And I guess, most importantly, do you see those improvements as being sustainable for the balance of the year?

Thank you.

Richard?

Let me take the first part of it, and maybe Milton, you can do the second half on the other expenses.

On the productivity question, of course, in this quarter we were benefited by volumes being up, and, of course, this is how the ratio works.

When you spread your fixed labor out over a larger patient volume base, you get improvement in productivity.

So that obviously with our improved volume is helping.

Additionally what is helping on the productivity side of the equation is our turnover is down.

We are at some of the lowest turnover levels that any of us can remember, and we would like to think that this is due to all of our healthy work environment and employee outreach, which has been very, very positive, but also it is a reflection of the economy.

Our vacancy rates are down.

People don't switch jobs as much.

And the cost, the inefficiency associated with that is coming out of the system, additional training and the like.

So with turnover being down, that helps us as well.

And then, as I mentioned in the first-quarter call, we did take a pretty serious stab at reducing overhead costs and overhead labor costs in particular across the entire organization both in the field and at the corporate office.

And, of course, with that and with increasing volumes, you are seeing the kind of strong productivity performance that we are reflecting in the second quarter.

Milton, do you want to address other operating?

Sure.

Let me just -- first of all, we have been -- as I mentioned, our management team and our hospital management teams are very effectively managing other operating expenses.

One item, though, that is increasing that is in that category that we have talked about over the recent years is professional fees.

We continue to see professional phase.

Again, that is on call pay, primarily for ER coverage.

Anesthesiology and so forth is up about 18% in the second quarter.

That is kind of in the trend it has been in actually over the last several quarters.

But on the improvement side, we continue to see things like our malpractice insurance is down in the second quarter.

Things like one area is employee recruitment costs.

Again, if turnover is reduced significantly this quarter versus last quarter, we are incurring less costs to recruit employees as you would imagine.

Also, things as discretionary spending like travel costs down compared to last year as we have really tightened our belts with respect to travel.

And marketing being another one, it is down to prior year again as we are just looking at all discretionary spending and make sure that we invest things like our marketing dollars wisely but trying to manage those appropriately during this environment.

So that is just a few examples.

But I think we are taking advantage of the overall economic environment we have, combined with again some pretty good continuing malpractice costs.

Let me just add one thing on the second piece of the question on sustainability of the productivity improvement.

Of course, if we continue to see the kind of volume that we have seen, we will continue to yield we like to think about a point, point and a half in productivity.

We don't see any significant turnaround in the economy in the near-term.

So I would think in the relatively short-term we should continue to see pretty good productivity performance in our property.

Maybe to add one more thing.

If you recall, though, the 2008 year, we made some improvements throughout the year.

So when you get to the fourth quarter of '08, our comps versus prior year will be more difficult because we were taking costs out throughout the third quarter and fourth quarter of 2008 as well.

Could you just quantify the malpractice decrease for the quarter year over year?

Let's see, I believe our total insurance costs was approximately $74 million last year versus about $66 million, $67 million in the second quarter this year.

(multiple speakers) $75 million to $66 million.

Darren Lehrich, Deutsche Bank.

It is actually [Peter Chickering] in for Darren.

Looking at your uninsured admissions, can you give us some details on how the trends correlate with unemployment patterns?

Where has that accelerated, and how do you expect bad debt to trend in those markets?

Yes, we have looked at that.

The change in unemployment compared to really not so much our increase in uninsured, but our change in managed care of volume.

And there is some correlation as you would imagine.

We have got markets, however, that don't correlate, so it is not across the board.

Beverly, I know you did some work on that.

I don't know if you have anything you want to add to that.

There's special circumstances in certain markets that explain variation to that.

But generally speaking, we have -- most markets show unemployment down -- I'm sorry, unemployment up.

We are seeing our managed care volumes go down.

Any color from anybody else?

All right.

Thank you.

Kyle Smith, Jefferies & Co.

Fantastic quarter.

First, a clarification.

The $47 million in the first quarter and $70 million in the second quarter for co-pays and deductibles, were those flow amounts or outstanding receivable balances at the end of the quarters?

I'm sorry, I did not understand the question.

Were they --?

You earlier said that the first quarter saw $47 million of an increase from co-pays and the deductibles and then $70 million in the second quarter.

Were those -- was that revenues from those, or was that receivables at the end of the quarter?

That would have been receivables in the quarter for which we are providing an allowance for doubtful accounts.

Okay.

And looking at the provision for doubtful accounts, I was a little surprised to see the 10 basis point decline with the sharp shift in mix towards uninsured.

Even if I make an adjustment for the $35 million hindsight adjustment and $60 million a year ago, it is only a 30 basis points worsening.

How should I be thinking about that as we move forward over the course of the year?

Are there some lag effects that still have to kick in, or is there something going on with collectibility or something else that is keeping the number down?

No, what is keeping the number down is really our recognition of net revenue related to really the uninsured revenue that is generated in the net revenue line.

For example, last year our uninsured net revenue in the second quarter was $627 million, and it was only $636 million for the second quarter this year.

So we just had a slight increase in uninsured revenue.

And the reason for that, even though we had this volume increase, is higher uninsured discounts in charity care.

So we are writing off more of the gross revenue before it gets to the net line.

And, therefore, the provision for doubtful accounts, of course, is there to recognize bad debts related to the uninsured revenue that is included in net, plus any co-pay in deductibles.

So, as we have increased our discounts, increased our charity care, you are seeing in the GAAP presentation very little deterioration in bad debts because we are not putting the revenue on the books.

That makes the revenue growth all the more impressive.

Could you talk a little bit about your rate outlook for 2010 and also how you are thinking about the wage inflation dynamic?

I know unemployment and the bad economy is keeping a lid on it for now.

Is that something that you don't think will come back until we start seeing the employment rate come down, or is the pressure likely to build and you will need to pay some increases next year regardless of what happens in the economy?

Let me try the wage piece of that.

At the end of the day, wage rate changes are very market-specific and they are very reflective of what happens in the competitive give and take in a marketplace.

So there are always exceptions to the rule.

But to your broad question, I would think that from a wage perspective, we are going to see it pretty much in this zone until there is a pretty material turnaround in the economy.

When we looked at our wages for 2009, we were very tight on overhead positions and a little bit more forthcoming on all the people that are working in the hospitals.

And we kept that in the 2.5%, 3% zone.

And I kind of think that is probably what we are looking at as we go forward.

Great.

Very helpful.

And then the rate outlook?

You are talking about rate outlook on managed care?

Yes.

Okay.

Beverly, do you want --

Sure.

We have completed about 70% of our contracts for 2010, and we are staying within that 6% to 7% range in our negotiations.

Okay.

Thank you very much, and again congratulations on a phenomenal quarter.

Kemp Dolliver, Avondale Partners.

Two questions.

The first is, you had mentioned the hindsight adjustment to bad debt was $35 million versus $60 million a year ago, which strikes me as a little counterintuitive given the backdrop and some of your comments about collectibility.

Can you give a little more color on the dynamics this quarter?

Well, the hindsight calculation that we do every quarter to determine what the change in the uncollectibility factor of our receivables would be is a very complex multiweek project.

So it is hard to summarize why it would be 60 in one period and 35 in the next.

I think that the most important thing is the trend continues to be negative.

If you can look back over the many, many quarters we have been doing this, you will see in the history there that the hindsight -- it is not unusual to see it spike up to maybe the high 50s or 60s, $65 million range and then see a period where it moderates.

And I think it's just a process of the various factors that are going in and out over the seasonality of the business as well.

But it would be very difficult to really explain any great detail for that variation.

Okay.

No problem.

And on the subject of rates, what are you thinking about IPPS increase on October 1?

We are watching to see the final rule come, just like you are.

You're not making -- taking any book on this one?

I never take book on Washington.

[Doug Dieter], Imperial Capital.

I just have one question.

You discussed the year-over-year trends in Medicare and Medicaid and commercial admissions.

With the economy as it is right now, it is easy to explain commercial volumes them being down and Medicaid being up.

But can you talk a little bit about why Medicare admissions were so strong this quarter and just any other color there?

Anybody want to --?

I would recommend since the Florida -- the Eastern Group, which Mike Motte, the CFO and in particular Florida has had tremendous success in their ED process improvement and EMS strategies that is really driving a lot of Medicare volume because that is the population in many of those markets.

So, Mark, why don't you talk about what is going on in Florida?

Sure.

With our emergency room focus, it really has three primary elements.

The first is our efficiency agenda where we have seen remarkable improvement in our wait times for patients arriving at our emergency room until the time it takes them to see the physician and in the length of stay, the total length of stay that they have to stay in the emergency room.

What we are seeing is a creating of a competitive advantage by having much more efficient emergency rooms.

The second would be marketing of that.

So we have been very focused on putting our wait times on our Internet sites and creating marketing campaigns that communicate to the public that our emergency rooms are better than our competitors.

Attributable to that as well is our EMS strategies where we have a dedicated outreach to ensure that we are unloading the ambulances as they come to our urgency rooms very timely and very quickly, which allows our EMS agencies to have confidence in bringing their patients to our emergency rooms.

So really these elements have driven nice improvements in our ED admissions, primarily Medicare.

And just as a follow-on to that, do you think that we can continue to respect government admissions to drive overall volume growth?

I'm not sure we can predict that any better than you.

I think clearly the older population, the Medicare population, is going to have less elective surgery, and that is where we have seen that cutbacks in terms of elective admissions.

So my guess is, you will continue to see more growth in the Medicare book than you might in other books.

In recent trends that has been the case.

Kristen Stewart, Credit Suisse.

I am just wondering if I could dive a little deeper into your supply expense.

Last year as a percentage of revenues, it was down 10 basis points.

It looks like last quarter it was down about 20, and now this quarter it is down about 30.

Can you give us any more insights into what kind of areas you are making the most headway in and where you might see some of the greatest opportunities ahead?

Alright.

Beverly Wallace, do you want to take that one?

Sure.

Milton mentioned in his comments our pharmacy initiatives where we are basically taking the input function of our pharmacists into our shared services centers, keying in orders, etc., and focusing our pharmacists more on clinical intervention and standard formularies, and that is driving significant improvement in our hospitals.

The other area that we have been focused on is our medical device efforts.

And it is more of a regional effort where our divisions and markets focus on driving working with their physicians driving their medical device usage to fewer vendors than in the past, which gives us a price advantage.

So those two initiatives are really the drivers of what we are seeing in our supply expense.

And then I guess a couple of years ago you had also mentioned about gain sharing efforts.

Are you seeing greater efforts to do more things with physician alignment, maybe not necessarily gain sharing, but has that been an improving trend helping you control costs?

No, we are not participating in gain sharing events with our physicians in this area.

All right.

Thank you.

I tell you what, we will take one last question.

Actually that was the end of the questions.

Well, that's -- I predicted that one.

All right.

Thank you very much.

Thanks to all of you and look forward to talking to you next quarter.

That will conclude this HCA teleconference.

Thank you all for your participation.