美國醫院公司 (HCA) 2009 Q4 法說會逐字稿

Welcome to the HCA fourth quarter 2009 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.

Lisa, thank you, and good morning to everyone on today's call and also to those of you listening on our webcast.

With me this morning for the fourth quarter call, our CEO, Richard Bracken; our CFO, Milton Johnson; Senior Vice President of Finance, David Anderson; and our Investor Relations Officer, Marc Kimbrough.

And as usual, we have a number of our senior officers here in Nashville here to help during 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 statement.

Many of these factors are listed in our press release and in our various SEC filings.

Various 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.

And as you heard, this call is being recorded.

Replay will be made available later today.

And with that, I'll turn the call over to Richard Bracken.

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

I'm sure most of you are aware of the information in our earnings pre-release of January 29 and the full release that we distributed this morning, relative to our fourth quarter and '09 results.

In just a minute, we'll provide more details about the quarter, but I thought it might be useful to start this morning by sharing with you a few observations that we have about the year in general.

As I have mentioned before, like most businesses, we were prepared for 2009 to be a tough year.

And given the problematic and uncertain economy, our strategy was to approach the operations of our business in a very conservative way.

This required an even more disciplined focus on expense control and a moderated capital spend.

The situation called for such a strategy to enable us to continue to operate at strong margins and to be able to continue to make the necessary investments in our key growth and clinical care initiatives.

This strategy served us very well in 2009.

We were able to show solid earnings, as we'll discuss in more detail in a moment, and equally as important, continue to make the necessary investments for the future.

And this is exactly the same approach we'll pursue in 2010.

From our perspective, many of the negative indicators in the economy remain and will continue to put pressure on our operating performance.

I would emphasize, however, that as we enter 2010, we are pleased with the effectiveness of our growth strategies, our financial performance, the improvement in our quality and service metrics, the engagement of our workforce, and the readiness of our organization to continue to perform in an uncertain environment.

2009 was a year in which we saw solid performance in several key operating metrics.

For example, same facility admissions and adjusted admissions grew 1.2% and 3.4%, respectively.

The emergency department visits grew 7% for the year and were actually up over 9% in the fourth quarter.

Even adjusting for H1N1 volume, emergency visit growth was 5.5% for the year.

This reflects, we believe, the strength of our suburban locations in large population centers and a focused patient service agenda.

Regarding our ambulatory surgery division observations, despite volume pressers throughout the year, mostly as a result of the poor economy and rising unemployment, EBITDA increased in this line of business 3.6%, with operating margins up 10 basis points.

Adjusted EBITDA margin for the Company was 18.2% for the year, up 210 basis points.

In most every labor expense metric, productivity, contract labor, and average hourly rate, we have seen improved performance throughout the course of the year.

And importantly, our net cash provided from operations increased 38% to $2.75 billion.

It's also important to note that throughout 2009, we made significant progress relative to our employee engagement and quality of care agenda.

Employee satisfaction and engagement scores are at record highs.

Turnover is down 22% and our employee vacancy rate has dropped to 5.9% from 6.8%.

I've been noting for awhile that our facilities continue to improve in clinical quality outcomes.

If one looks at all of the CMS core measures for heart attack, heart failure, pneumonia and surgical care across all hospitals, our system composite is a leader among major systems.

In fact, the most recent data available from hospitals on a trailing 12-month basis, compared to our most recent staffs for the quarter, shows that 90% of our facilities are now operating above the 75th percentile and 69% of our properties are now operating above the 90th percentile of all American hospitals.

And once again, remember I'm reporting fourth quarter performance.

I'd also like to take this opportunity to thank our clinical teams for their leadership in seasonal flu vaccination.

Recently, HCA was identified by the National Patient Safety Foundation as a model for patient safety.

Quite simply, they stated that an annual flu shot for healthcare workers, wearing a mask in patient care areas, are among the best ways to maintain patient safety and a healthy workforce.

Over 150,000 HCA healthcare workers were vaccinated in 2009, a rate of 97%, with the remainder wearing masks when they were around patients.

And nationally, CDC and Rand estimates that less than half our health workers are vaccinated.

We're very proud of our employees' commitment to the highest quality and safest patient care.

And a final comment about our strategic positioning involves our continued investment in our EHR and our physician integration strategies.

In '09, we continued to invest in the efficient design and development of an EHR system across our hospitals.

Given the size and complexity of our network, this has been an extensive process, but we are now entering the pilot testing phase.

We expect to be in a position to deploy these systems across our enterprise generally throughout the end of 2011 throughout 2012, and the first half of 2013.

This deployment schedule has been designed to maximize our alignment with the high tech dollars reimbursement to be provided by the federal government.

With regard to our physician integration strategies, we continue to refine a comprehensive approach to physician integration in each of our markets, based on their unique dynamics.

This reflects an increasing shift to an employed physician base; comprehensive and standardized hospital programs; management of clinical and outcomes variation; and a more sophisticated infrastructure to operate physician practices.

And before I turn the call over to Milton, let me briefly comment on the distribution we made on February 5.

Our decision to proceed with the distribution was reflective of the significant increase in earnings and improvement in debt coverage ratios we have experienced well ahead of our model.

Let me close by recognizing all of our management teams for their tremendous work during the year.

The ability to improve financial performance while continuing to invest in important growth initiatives, remain focused on a quality agenda, all in a tough environment, requires the best in facility leadership, and we expect to go into 2010 with the same focus and determination for performance.

So with that, Milton, over to you.

Thank you, Richard.

Each of you should have received our earnings release issued this morning that the Company's complete earnings announcement this morning is consistent with our preview of the fourth quarter and fiscal year 2009 results that was provided on January 29.

I'll provide some general comments and highlights from the quarter.

Fourth quarter of 2009 results were driven by continued solid volume trends and a focus on expense management.

We continue to see growth in our emergency room business, which contributed to our increase in admissions.

Our expense improvements moderated in the fourth quarter, when compared to the improvements we experienced in recent quarters.

During the quarter, we elected to increase our repair and maintenance spend, and certain other discretionary expenses, to improve our operating position.

Also, many of the Company's cost savings measures were implemented in the fourth quarter of 2008, making our year-over-year comparisons slightly more difficult.

I will provide more color on this in a moment.

Volume trends in the fourth quarter were consistent with recent trends, reflecting the ninth consecutive quarter we experienced same facility equivalent admission growth over the prior year.

Same facility admissions increased 1.2%, while the same facility equivalent admissions increased 2.6% over last year's fourth quarter.

Pulmonary, or flu-related volumes, were not a significant driver of admissions in the quarter.

Emergency room visits, which are a significant source for inpatient admissions, increased 9.1% on a same facility basis during the fourth quarter.

Although the H1N1 flu appeared to have some impact on ER volume in October and November, we continue to believe that our ER visit growth is a result primarily of our focus on ER strategies and operational improvements.

Our analysis indicates that this incremental ER volume reflects a payor mix similar to our normal ER payor mix.

Same facility Medicare admissions and equivalent admissions increased 1.4% and 2.9%, respectively, compared to the fourth quarter of 2008.

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

Managed Medicare admissions increased 8.7% on a same facility basis.

This represents approximately 22.3% of our total Medicare admissions.

During the fourth quarter of 2009, our same facility total Medicaid admissions, including managed Medicare, grew 9.7% compared to the prior year's fourth quarter.

We have seen continued growth in our Medicaid percentages during 2009 due to the increasing enrollment in many of our key states, such as Florida, which saw Medicaid enrollment increase 15.8% in the month of November over the prior year.

Same facility managed care admissions declined 2.7% in the fourth quarter compared to the same period of 2008, while same facility managed care equivalent admissions declined 1.7% compared to previous year.

These trends are consistent with our previous quarterly results in 2009.

Same facility uninsured admissions increased only 0.2% in the fourth quarter compared to the fourth quarter of 2008.

Uninsured admissions represented 6.4% of total admissions in the fourth quarter, a slight decline from 6.5% in the previous year's fourth quarter.

Admissions, excluding the uninsured, reflected positive growth for the third consecutive quarter in seven of the past eight quarters.

Surgical trends in the fourth quarter were basically flat with the prior year's fourth quarter.

Same facility total surgeries were down 0.1%, reflecting a decline in outpatient surgeries of 0.1% and a decline in inpatient surgeries of 0.3% during the fourth quarter, compared to the prior year.

Now turning to revenues.

Our same facility cash revenue per equivalent admission increased 5.8% in the fourth quarter over the same period 2008.

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

For the full year 2009, same facility cash revenue per equivalent admissions increased 4% compared to 2008.

As we mentioned in our earnings release, the Company revised its uninsured discount policy.

The change provides for a higher percentage discount to patients that do not have health insurance.

In the fourth quarter of 2009, our same facility uninsured discounts increased by $411 million over the fourth quarter of 2008.

The resulting effect is a reduction in net revenue and a similar reduction in our provision for doubtful accounts or bad debt.

As a result of higher uninsured discounts and the corresponding reduction in net revenue, salaries and benefits, supplies, and other operating expenses will reflect as a higher percentage of net revenue in the same period last year.

To offset this effect, I encourage you to analyze salaries and benefits, supplies and other operating expenses as a percent of cash revenue, which is net revenue less bad debt expense.

Same facility total Medicare revenue per equivalent admission increased 3.8% compared to the fourth quarter of 2008.

Same facility Medicaid revenue per equivalent admission increased 6.7% compared to the prior year's fourth quarter, excluding EPL revenue.

Same facility managed care revenue per equivalent admission increased 7.4% in the fourth quarter compared to the prior year.

Our same facility case mix index increased by 2.3% in the fourth quarter compared to the prior year.

Adjusted EBITDA in the fourth quarter totaled $1.343 billion compared to $1.237 billion in 2008, an increase of 8.6%.

Adjusted EBITDA margin in the quarter improved to 17.7% as a percent of revenues from 17% in the fourth quarter of 2008.

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.

In regard to expenses, same facility cash operating expense per equivalent admission increased 4.2% in the fourth quarter compared to the prior year.

Cash operating expenses is a non-GAAP measure and is comprised of salaries, benefits, supplies and other operating expenses.

Salary and benefits were 40.5% of revenues in the fourth quarter of 2009 compared to 39.6% in the same period of 2008.

Converting both periods to a percent of cash revenue, the fourth quarter of 2009 was 44.5% of cash revenue compared to 45.1% in the fourth quarter of 2008.

Salary expense per equivalent admission increased 2.4% in the fourth quarter on a same facility basis.

Productivity performance, as measured by man hours per equivalent admission, improved by 0.8% on a same facility basis compared to the fourth quarter of 2008, while same facility wage rate [of] 3.5% was consistent with recent trends.

In the fourth quarter, supply expense increased by 40 basis points to 16.3% of revenues from 15.9% in the fourth quarter of 2008.

Supply expense as a percent of cash revenue declined 20 basis points in the fourth quarter to 17.9%, compared to 18.1% in the same period of 2008.

Other operating expenses were 17.2% of revenues compared to 16% in the fourth quarter of 2008.

Other operating expense as a percent of cash revenue in the fourth quarter was 19.1% compared to 18.2% in the same period of 2008.

We experienced increases in repair and maintenance of about 30 basis points; insurance, likewise, about 30 basis points; and costs associated with the Texas Indigent Care programs of about 80 basis points over the prior year's fourth quarter.

Same facility charity care discounts increased by $56 million to $523 million in the fourth quarter of 2009.

As mentioned earlier, same facility uninsured discounts increased by $411 million to $927 million in the fourth quarter of 2009.

Bad debt plus charity and uninsured discounts as a percentage of revenues, plus charity and uninsured discounts, were 24.1% in the fourth quarter compared to 22.9% last year.

We currently have 94% of our total self-paid book reserved.

Upfront collections were approximately $67 million, up 2.4% from the fourth quarter of 2008.

Net income attributable to HCA totaled $216 million in the fourth quarter compared to $276 million in the fourth quarter of 2008.

The decline in net income is primarily due to a lower tax rate in 2008, attributable to favorable revisions of our reserves for tax contingencies.

Income before taxes increased to $451 million in the fourth quarter compared to $379 million in the fourth quarter of 2008.

The results for 2009 quarter include impairments of long-lived assets of $27 million and losses on sale of facilities of $7 million, compared to impairments of $11 million and gains on sale of facilities of $7 million in the fourth quarter of 2008.

The Company's cash flows from operations in the fourth quarter were $432 million compared to $575 million in the same period last year.

The declining cash flow related to changes in working capital, primarily accounts receivable, and other current assets.

For the year, cash flows from operations improved significantly from 2008, totaling $2.747 billion compared to $1.990 billion in 2008.

Based on accounts receivable at the end of the quarter were 45 days compared to 48 days in 2008.

Capital expenditures totaled $402 million in the fourth quarter and were $1.317 billion for 2009.

Now let me turn the call over to David Anderson to discuss cash, our capital structure, and our credit statistics.

Thanks, Milton, and good morning to everyone.

First, our cash balance was down $131 million to $312 million at the end of 2009.

This basically related to a lower balance of cash internationally of $27 million and a reduction of investments classified as cash and HCI, our malpractice captive of $79 million.

Long-term debt, as you can see, at the end of the year, was $25.670 billion.

This is a decrease of $244 million from September 30 and a decrease of $1.3 billion from the end of '08.

The $1.3 billion was used to reduce the outstanding balances under our revolving credits.

I might also note, as I'm sure everybody remembers, we issued two first lien notes in 2009 and one small second lien note, totaling $3 billion, which was used to make pro rata reductions on all our secured bank term loans.

Leverage as measured by debt to EBITDA was 4.69 at December 31, '09, an improvement from 4.83 at September 30 and a significant improvement from December '08, where it was 5.9 times.

Our liquidity position at the end of the year was $3.2 billion available under our revolving credits; $1.3 billion approximately under the ABL or Asset-Based Loan facility, and $1.9 billion available under our cash flow revolver.

Remember, we have $100 million in letters of credit outstanding under that facility.

So, thank you.

All right, thank you very much.

Lisa, if you'd like to come back on and pull for questions.

(Operator Instructions).

Shelley Gnall, Goldman Sachs.

Thanks very much for taking my question.

I guess if I'm limited to one, what I'd love to know is, any internal assumptions that you've made around -- if you have any -- around the timing for the unemployed that will be ultimately rolling off of COBRA, so any thoughts on timing?

And whether you've specifically taken into account the COBRA rolloff around your assumptions for reserving for doubtful accounts?

Shelley, this is Milton.

Let me try to address that.

Thinking about the uninsured, that's obviously a very difficult assumption to predict.

Keep in mind it makes up about 6% of our admissions.

And the other issue that we deal with and try to estimate that, when they roll off COBRA, also what's going on, and probably a bigger question, is what's going on out there with Medicaid enrollment and potential issues in states with respect to qualifications for Medicaid programs.

So, there's a lot of moving parts to trying to predict the uninsured.

That's based on our numbers that we had in the fourth quarter; we didn't see growth in the fourth quarter in uninsured and it's below 5% for the year.

My understanding from data that I've reviewed with respect to the COBRA extension that there's maybe 7 million people based on the data I've looked at that benefited from that coverage.

So, it's not a large number relative to our market, so, it's difficult to predict.

But I would be more concerned about the Medicaid enrollment in terms of the uninsured than the COBRA rolloff, quite frankly, in looking at our business.

And any assumptions -- I mean, I guess, are you making any forward-looking assumptions on your collectibility for doubtful accounts in 2010 relative to 2009?

No, we're not changing the outlook there.

You know, obviously concerned about really -- the uninsured, we have this low collection rate already.

It's an awful lot of room to go down, but more concerns about the collection rates probably with co-pay and deductibles in that area.

Ralph Jacoby, Credit Suisse.

Just wanted to go back to that change in charity and uninsured discount policy.

Just wanted to clarify.

One, that's just a policy change on your part, not anything accounting-change related?

And then just to clarify, that was sort of done at the beginning of the fourth quarter?

And then just lastly, around that same question, any more details in terms of what actually the changes were?

Was it just a greater discount in general?

So, I mean, were you given a 10% discount and now you jump that up to 20%?

Any details there would be helpful.

Ralph, thank you.

Milt, you want to lead with that?

Sure.

Yes, it's pretty straightforward.

People that are either admitted to our hospital or show up in our EDs that are uninsured, we've increased the discount that we apply to their bill.

The increase was approximately 20%, so it was a very significant increase to our uninsured discount policy.

And you can see that it's having a material effect on our net income and that we are not recognizing the uninsured -- as much uninsured revenue.

And correspondingly, since we're not recognizing the revenue, we have a similar reduction in our bad debt expense.

So, as we go through this change and we implement this change in the -- around August 1, that due to billing delays with the uninsured, it takes a couple of months for it to show up.

So that's why we're seeing it in the fourth quarter.

It will be something that we'll have to consider as we analyze our financials throughout the first three quarters of 2010.

On the calls in 2010, I will provide these percentages of cash expenses on a cash revenue basis, because really, you've got to do that to understand what's going on with those numbers now, because we will have less revenue from the uninsured and less bad debt.

And in my view, this, not only is it beneficial I think to the patients that are uninsured coming to our facilities, but also improves our accounting as well, because we're putting less revenue on our books that, historically, we were not collecting.

Milt, I'm not sure I heard you right, but you said it had a significant reduction to our net revenue.

I think -- or net income, and I think you meant net revenue.

I'm sorry, net revenue.

Net revenue.

It had no affect on income or EBITDA really because we weren't basically collecting that anyway.

I'm sorry.

Okay, great.

And then just a quick follow-up.

Can you maybe remind us what percentage of your bad debt expense is related to the insured co-pay deductible co-insurance?

And what your collection rate is in that bucket and how it's trended?

Beverly Wallace, want to take a shot at that?

Sure.

Our bad debt is about 15% to 20% co-pays and deductibles, and we collect around $0.60 on the dollar in that area.

And then under Medicare, if we don't collect, then we get $0.70 on the dollars through the Medicare cost report.

And as we go forward, of course, with that new policy, those ratios will change.

Those are historical ratios based on our prior uninsured discount policy.

Thank you.

Thank you, Ralph.

Erin Bloom, Goldman Sachs.

Thanks for taking the question.

This is about managed care contracting.

And so I'm wondering, now that you've been through a contracting cycle since you implemented the improved ER coding, do you expect to be able to maintain the positive bump that you got for that?

So I understand there's a lot of factors that go into your negotiations with managed care, but I just want to understand if that's going to be a little bit of a headwind in 2010?

Erin, thank you.

And Beverly, you want to address that, please?

Sure.

For 2010, we've completed just over 90% of our contract negotiations and we're ranging between 6% and 6.5%.

The [ASOP] discussion has been brought into those negotiations, but we've been able to successfully resolve it and billed it in our go-forward rate.

Thanks, Erin.

Henry Reukauf, Deutsche Bank.

Just for me, first, on the distribution under the revolver, any thoughts of making that permanent?

And then just a second one, if I could.

I think possibly the change in accounting policy may have skewed your pricing a little bit.

So if you kind of backed that out, what sort of underlying pricing did you see this quarter and what was the shift in mix in 2010 Capex, if you could?

All right, Henry, thank you.

I think that was three questions.

You're pretty slick.

Well, somebody want to take a (multiple speakers) [leap]?

Milton, you want to (multiple speakers) --?

Well, let me take the -- I think the revenue per unit you mentioned.

It does, obviously, since it affects our net revenue, as I said earlier, it will affect our net revenue per AA growth rate.

That's why it's so low this quarter, because of those revenues.

But when you look at the -- I think I gave it by payor in my comments.

Let me see if I can find it here.

So, for example, Medicare revenue per equivalent admission in the fourth quarter increased 3.8%.

Medicaid revenue per equivalent admission increased 6.7% and managed care per equivalent admission, 7.4%.

So that accounting change does not affect, obviously, those numbers at all; just the overall NRAA is affected because we have less uninsured net revenue.

All right.

And somebody want to address -- I think it was Capex and the distribution?

I can do the distribution.

All right, David Anderson.

I think -- remember, we had $3.2 billion of liquidity at the end of 12/31.

So -- and we continue to have adequate availability under our current revolvers.

As I'm sure you know, we always continue to evaluate our alternatives in the markets and -- but I don't have anything to talk about currently.

And Richard, do you want to talk about Capex?

Sure.

On the Capex side, we finished the year at $1.317 billion.

We see that number probably in the $1.5 billion range for 2010.

One thing I would mention about the Capex, and I've mentioned this before on the calls is, because capital spending in healthcare takes a long time, especially when large projects are involved, decisions are made and the cash is expensed over sometimes a couple of years.

And we worked through a lot of that through 2009.

So, the good news for us is while we have a $1.5 billion budget for 2010, we have a lot less committed dollars than we've had in recent years, which gives us a lot of flexibility to think about the marketplace, take advantage of opportunities or tighten up if we need to.

All right, thank you, Henry.

(Operator Instructions).

Gary Lieberman, Wells Fargo.

It sounds like the Medicaid enrollment was very strong and probably a big factor in keeping the uninsured growth in check.

I guess, as you look through 2010, to what extent do you think that continues?

And how do you think that, I guess, the continuation in the FMAP money and some of the provider taxes or new provider taxes in a couple of states might impact you?

All right.

Beverly, you want to lead with that?

And then if any of the Group Presidents have anything to add.

Sure.

Gary, about 50% of our Medicaid revenue comes through two states -- Texas and Florida.

And in both of those states, we saw growth partly driven by the FMAP dollars, partly driven by the expansion of the coverage for children.

So I think that's what drove the growth in 2010 plus more uninsured qualifying for Medicaid.

Keep in mind that Medicaid does not cover men or women without children.

So it's basically for women with children that Medicaid covers.

FMAP, obviously, is on our radar screen and we're watching that.

It's extended through 2010; hopefully, there'll be some dollars in 2011.

Provider tax, we are seeing some creep in that area in the states.

And in those states, we work with our hospital associations to make sure that the hospitals are treated fairly in that process.

Beverly, thanks.

All right, thank you, Gary.

[Cheryl Goldsmith], CRT Capital Group.

You only limit us to one, which makes it very tough, so here goes.

I'll bet you can figure it out, [Cheryl].

Yes, I'm going to try.

So, I hate to do this but I am going to anyway -- your cash flow for operations for the year was up 38%.

But I'm going to quibble with that, because in the quarter, your EBITDA was up very nicely, your cash flow was down.

Number one.

Number two, you've also taken on some additional debt in terms of the revolver, in part to fund the $1.75 billion special dividend, the distribution.

So, I guess the question is this -- what I'm getting towards is, one, how do you reconcile that issue with the cash flow and the EBITDA?

And what should we think about in terms of your cash -- your ability to produce cash flow from strong EBITDA growth going forward?

And two, what impact will that have on your balance sheet and debt management strategy for 2010?

In other words, are you going to focus on the revolver paydown the way you have in the past?

And how can you, if you are still going to be in the position of seeing cash flow from quarter -- on odd quarters or even as a trend, being below EBITDA?

All right.

I knew you'd figure it out.

Yes, and if you want to talk about headwinds versus tailwinds and reform in that, and the lack thereof or if you have a different view, that would be really helpful.

All right, Milton, there you go.

Well, let me take that.

That was a lot of questions wrapped into one.

Let me maybe take the -- obviously, the cash flow question first and walk through that.

Obviously, for the year, as you say, we've had wonderful cash flow pickup -- obviously, from increased earnings, increased EBITDA -- and also a reduction in our days accounts receivables, as I mentioned earlier.

But in the fourth quarter, we did see our net accounts receivable increased by $89 million.

So when you look -- but first of all, when you look at the decrease in the fourth quarter of '09 versus '08, and our cash from operations, we saw an $89 million increase in our accounts receivable.

We saw a $137 million increase in our marketable securities.

Now, that has the effect of decreasing our cash flow from operations.

Accounts payable increased by $113 million, of course, which helps to reduce -- or generate cash.

And then a timing issue we had in the fourth quarter, accrued salaries of $112 million.

And then there's other liabilities increase of $51 million.

So there's a lot of moving parts in that change.

It's not unusual for us in this industry to see our fourth quarter cash flow slow down a little bit, due to the holidays and so forth, with our processing and FI's processing as well.

But we've been very successful in reducing our days in accounts receivable in 2009.

I think our processes are working as well as ever, and feel good about our continued success in being able to collect our accounts very efficiently, and comfortable with our days in accounts receivable in that 45 to mid -- just call it mid-40s range, I think, going forward.

Now with respect to the revolver, I mean, our plan was free cash flow after Capex, so cash flow from operations after Capex, we would see going to pay down our revolver balance.

That would be the use of that cash in 2010.

Cheryl, thank you.

Miles Highsmith, RBC.

I'm not sure if an earlier question touched on this, but I guess I was just wanting to hear maybe some comments from you guys on the Medicaid front, in terms of pricing and any expectations as we get into kind of mid-year going forward.

And any important or noteworthy -- important states or noteworthy states or trends would be appreciated.

Thanks.

All right.

Goes back again to Beverly.

You want to --?

Okay.

As I mentioned earlier, Texas and Florida are where about 50% of our Medicaid revenues come from.

In Texas, just recently, there's been a little bit of noise out there that, at the end of the year, during our fourth quarter, they may put in some small reductions in payment there.

They're talking -- you're hearing 1% out there.

So, obviously, we'll stay very close to that.

Florida -- Florida has been very active over the last several years in reducing their rates.

And we anticipate probably seeing a rate reduction there in the 5% to 7% range.

And if that happens, then it will probably be around July.

In the other states, there is activity going on.

And as I mentioned earlier, we're working with those states to make sure that the hospital systems are protected.

And I think a lot of is riding on what happens with FMAP going forward.

Good, Beverly, thanks.

Thanks, Miles.

Kemp Dolliver, Avondale Partners.

Yesterday, there was an announcement in Austin involving you purchasing a surgical hospital with physician ownership.

And I'm curious if you have any changes in your philosophy toward physician-owned facilities and your strategy there?

Thanks.

All right.

Kemp, thank you.

Richard, you want to lead it?

Yes, and then I'd like maybe have Sam from our Western Group comment on it.

No change in our position regarding syndicated hospitals, to answer your question directly.

This was an opportunity that came to our attention in the Austin market, and was an opportunity for us to increase some of our capacity in an efficient rate.

Sam, why don't you add to that?

Well, the acquisition is for the whole hospital, not for a piece of the partnership that existed with the physicians who were previously invested.

And in Austin, we needed some additional cardiac capacity.

There was an opportunity to acquire this particular facility.

It made more sense than building a heart tower at one of our other facilities.

So there's a lot of synergies in it and we're excited about the prospects.

All right.

Kemp, thank you.

I think bottom line, there will be no physician-ownership in that hospital when the transaction is completed.

Kyle Smith, Jefferies & Company.

When I recast the salaries and benefits, supplies and other operating expenses as a percentage of revenue, less bad debts, that normalizes out the -- some of the year-over-year change in the SW&B in the supplies.

But other operating expenses is up very sharply, both year-over-year and sequentially.

I think you had mentioned some increases in insurance and also the cost of the Texas Indigent Care program.

If you could go into a little bit more detail about some of those drivers and how we should be thinking about those -- are those a stair-step up?

Or is some of this temporary?

That'd be very helpful.

All right, thank you.

Milton?

Yes.

As far as year-over-year, our Texas Indigent Care expense was up about $60 million to $70 million, to put it in perspective.

We also had some additional costs in SW&B related to some pension plans, where in the fourth quarter of '08, we had a $14 million reduction due to the market valuations.

And this year, we had a $10 million hit related to market valuations.

So there's a $24 million adverse swing in our SW&B related to a pension plan, for example.

With respect to other expenses, malpractice, about a -- we had about a $25 million increase in malpractice costs year-over-year.

That's related to really not having as much redundancies on the balance sheet.

We had -- last year, we had to recognize a reduction in malpractice to bring reserves down, because we're otherwise been above the top of the actuarial range.

So we had to make that move last year.

We did not do that this year.

And then with respect -- another -- with respect to another non-cash SW&B hit we had in the fourth quarter of this year we didn't have last year, we did have some option expense, option compensation expense, non-cash, of $20 million that hit SW&B in the fourth quarter of '09.

We did not have that last year, so there's a movement there.

And then lastly, I'll mention repair and maintenance.

There, we had an increase in the fourth quarter of probably a net difference of around, including a couple of other things, around $58 million net-net this year over last year.

Our repair and maintenance costs, that's more of a one-time step-up.

We should see that come back to the normalized run rate in 2010.

So a lot of this was timing at the end of the year as opposed to establishing new levels of run rate.

And regarding the repair and maintenance number, we did -- we elected to make and accelerate sort of some of our improvements at our properties.

Obviously, we were in a good position throughout the course of the year in terms of our earnings.

And we really dug deep to make sure that our properties were in the shape they needed to be in.

So we stepped up the spend in the fourth quarter on repair and maintenance; but as Milton said, we expect that to sort of rectify itself here as we go forward in 2010.

All right.

Thank you.

Got time for a couple more questions.

Adam Feinstein, Barclays Capital.

Just -- my question is, I guess, would just deal with costs.

You guys did a great job managing costs throughout 2009.

And I appreciate you calling out some of the items earlier with your comments.

I guess just as you think about salaries and benefits, and supply costs growth going forward, do you still see opportunities there?

Or do you think the current growth rate is indicative of the run rate going forward?

So just, I guess, what initiatives do you guys still have in place and how should we think about cost management?

Thank you.

All right.

Well, Richard?

Let me take salaries and maybe, Bev, you can be thinking a little bit about supplies.

You know, we think there will be pressure on salaries going forward.

Not so much because there will be a lot of wage movement in the market or lapses in productivity, but the nature of our business is changing somewhat.

And what I'm referring to is that hospitals all over America, including HCA, are increasingly employing physicians in their networks.

And this is a cost that didn't exist before, that is growing in our book.

And it's not just the cost of a single physician, but all the ancillary labor that goes along when you purchase a practice and operate a physician practice business.

So, my view over the long pull is that the labor view of the hospital industry is going to be changing and that's going to put some pressure on the SW&B line.

Also, as I mentioned in my comments, there's a lot of costs, labor costs, required to get the organization ready for the next five and 10 years, in terms of investment in EHR strategies, clinical improvement strategies.

And once again, these are costs that didn't exist even three years ago.

So while we're continuing to be able to harvest improvements and efficiencies, we do have new labor costs that are coming online.

And I think the important thing to think about when you're analyzing the Company, is to bifurcate labor costs relative to our hospital-only operations, and then the additional costs that's required as we expand the scope of the business.

I don't see that as overwhelming in 2010, but as a larger trend going forward, I think that's something that's out there.

Maybe I'd just add just a couple points.

When you look at our costs outside the walls of the hospital, there, I think that there's going to be two buckets that we'll see cost increase.

Richard mentioned one, our physician costs -- our strategy there to employ more physicians and tighter physician integration across 2010; and our continued investment in our electronic health record and quality agenda.

And those are the areas where we'll see cost expansion in our P&L and also some capital in our thoughts for 2010.

But in the other areas of overhead, our cost increases will be minimal in 2010.

And relative to supplies, I mean, there's a lot of things that we have going on to stay on top of that number.

Bev, why don't you --?

Sure.

As we've mentioned throughout 2009, we've got two large programs going on.

In the pharmacy area, we call it COE, where we're collapsing basically the order entry piece, and moving the pharmacists in the hospital into more of an interactive role with the physicians, to make sure that we stay attached to our formularies and using the best drugs at the right time at the right price.

In the OR, we are expanding a program that we basically piloted in 2009.

We're going to be moving into 33 of our operating rooms, and managing the supply chain in those ORs like we've been managing it throughout the rest of the hospital.

And we anticipate savings there.

And then, lastly, I'll mention our divisions have been very engaged in collapsing some of the medical device spend to fewer vendors at the market level.

And we anticipate some of that continuing throughout 2010 also.

All right, very good.

Adam, thank you very much.

Got time for one more question, Lisa.

Duncan Brown, Wells Fargo.

On the year-ago Q4 '08 call, you guys indicated that you're comfortable you'd see positive volume growth in '09.

And if I remember right, driven by sort of a slowdown in new competition and then also a ramp of Capex projects coming online.

Obviously, you guys did a nice job delivering on that this year.

Wondered if you could comment on any thoughts on volumes heading into next year?

And then similarly, on the Capex front, do you have -- what projects do you have coming online?

Anything material that we should be aware of?

And how does that compare versus a year ago at this time?

All right.

Duncan, thank you, and I'm actually going to look down the line at our Group Presidents.

Maybe they can talk a little bit about some of the activities they have going forward.

Sam, do you want to start it?

Sam Hazen, for the West?

Sure, I'll speak to the Western markets.

I mean, what we saw really that we're not sure we can predict safely in 2010 is a ramp-up in overall market activity over the course of '09.

And if you look at the first half of '09, our overall market growth -- not in HCA facilities, but across all markets and all facilities -- was actually flat to slightly down in overall activity and demand.

In the second half of the year, we saw an escalation in activity across the markets.

And on top of that, we picked up share.

I'm not in a position to really predict what the market demand will do as we move into '010.

I do think our strategies are sound, and if the market demand is there, we should see similar growth.

So, that's what our plans are for this year.

All right.

Paul Rutledge, Central.

As we look into 2010, we have one new hospital coming online, in Spotsylvania, Virginia.

And that will come online in mid-summer.

So we have a bump there of new volume based on one of those long-term investments in capital that we have been rolling out for the past couple of years.

Overall, our volume, the way that we actually think about volume and kind of budget for that, is really more on a conservative basis.

Even though we have very strong service line development initiatives and a lot of actions, we're just cautious to tee ourselves up too strongly around volume growth, and then the -- all the other stats that our managers work on might have an inflated number.

So -- but basically, we feel very confident that we are teed up for a good growth for this year.

All right.

And Chuck Hall.

As Sam commented, we too saw nice growth in our market share in 2009 -- 20 markets in the Eastern group.

We saw growth in 15 of those markets.

A lot of our growth in my group is driven through ED.

We're confident that we'll still continue to see nice improvements on a go-forward basis in our ED.

In terms of major projects for us, you'd have to look to the Jacksonville market.

We brought on a new Bed Tower at the very end of '09, late December -- $80 million plus project.

Additionally, we brought on a project in Augusta late '09, which will be fully implemented in 2010, as well as a couple of other small projects in Jackson, Orange Park and further expansion in North Florida regional.

All right.

Just one final comment, Vic.

All right.

Just slipped in there on the ED.

Once again, about 60% of our volume comes through the EDs.

And as I have mentioned in my comments, that number was up 7% last year.

And even adjusted for the flu volumes, it comes down to maybe 5%.

So, our footprint in these markets allows us to have a pretty good funnel for admissions growth through these EDs.

All right.

Duncan, thank you for your question.

Thank everyone.

And we're here today; if you have further questions, please feel free to call Mark Kimbrough or myself.

Thank you and have a great day.

This does conclude today's conference call.

Thank you for your participation.