Tenet Healthcare Corp (THC) 2001 Q3 法說會逐字稿

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Good day everyone and welcome to the Tenet Healthcare's fiscal 2001 third quarter earnings conference call for the quarter ending February 28, 2001. Tenet is pleased that you have accepted their invitation to participate in this call. Please note that this call is being recorded by Tenet and will be available for replay. The call is also available to all investors on the West, both live and archived. By participating in this call, listening to the replay or the web cast, you are acknowledging that the call and the web cast are the proprietary property of Tenet, and the call, the recording, and the web cast may not be recorded in whole or in part or replayed or reproduced in any other form, without Tenet's express permission. Tenet's management will be making some forward-looking statements on this call today. These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Certain of those risks and uncertainties are discussed in Tenet's filing with the Securities and Exchange Commission including the company's annual report with form 10-K and its quarterly report on form 10-Q, in which you are 2 referred. Management cautions you not to rely on and makes no promise to update any of the forward-looking statements. Most of you have received our detailed quarterly financial and operating data. If you haven't, it is available on first call Tenet's web site, tenethealth.com, or on the business wire web site businesswire.com. It is also available on the conference call web site streetfusion.com. Graphics that complement the presentation today are also available on streetfusion.com. At this time, I'd like to turn the call over to Mr. Jeff Barbakow, Chairman and Chief Executive Officer. Please go ahead sir.

Thank you and good morning. With the kind of markets we've all been going through this year, it is time for some good news. So we are pleased to be able to kick off the quarterly reporting season for hospitals with some really good news. Our third fiscal quarter was another splendid quarter by any measurement. Let me give you some of the highlights. Net income from operations increased 30%, earnings per share from operations rose 25% over the prior year quarter. This is the fifth consecutive quarter where we posted growth of 20% or better and the second in a row at 25% or better. Net operating 3 revenues rose 6.5%. Same facility patient revenues rose 9%. EBITDA margins rose 11/2 percentage points to 19%. Every major expense line item declined as a percent of revenues. That includes labor expense, supplies, bad debts, other operating expense, depreciation and amortization, and interest expenses. As a result, pretax margins rose 2.2 percentage points, from 8.7% to 10.9%. EBITDA margins, operating income margins, and pretax margins all reached the highest level we have ever achieved since Tenet was formed in 1995, and cash flow from operations was again exceptional, hitting record levels both in terms of the highest level for a third quarter and also on a rolling last 12-month basis. We also reduced debt by 188 million, dropping our total debt to under 4.9 billion and our debt-to-equity ratio to under 1 times. Bottom line, we earned 60 cents in deluded earnings per share from operations, up 25% from the year-ago quarter, and at despite 4.5% more shares outstanding and a higher tax rate this year, excluding acquisition-related goodwill charges, net income from operations was 66 cents per share compared to 55 cents in the year-ago quarter. As we go through the details of the quarter today, I believe a couple of themes should stand out. The first is consistency. By that I 4 mean consistency over time with quarter after quarter of outstanding results. I also mean consistency throughout our business with meaningful improvements from the top to the bottom of the income statement, the balance sheet, and the cash flow statement. The second theme is that our strong results are driven principally by operational excellence based on cost effective delivery of quality patient care at outstanding hospitals. This is generating strong top line growth and significantly improved EBITDA and operating margins. We have also improved a wide range of business processes, which contribute to strong cash flow and reduced leverage, which further improves our earnings. This combination has generated internal growth, that is both impressive and, as I said, consistent. Looking forward, external growth opportunities, specifically acquisitions, should begin to contribute as well. Opportunities are definitely picking up, particularly for hospitals that have had some kind of operating or financial problems, which offer the potential for significant earnings growth as we turn them around and integrate them into our networks. The first acquisition will be South Fulton Medical Center in Atlanta, which we expect to complete in mid April. This hospital, 5 which generates about 85 million in revenues, will fit right into our Atlanta network where we already have, as you know, 4 hospitals. Intercoastal Health System is a two-hospital system in Palm Beach, Florida, with revenues of about 260 million that has selected Tenet as the acquirer in a competitive process. This will be an important addition to our South Florida network, and we hope to complete this transaction by the end of June. In Eastern Pennsylvania, we are in the due diligence and negotiation stage for Eastern Hospital, which has revenues of about 120 million. We are fairly early in the process here, with no date targeted for completion, as yet. It has been gratifying to us to find that in those markets of interest to us, we appear to be the acquirer of choice by not-for-profit systems looking for a strong partner. We find that several factors are responsible for our selection. These include our reputation and experience in the local marketplace, our successful record in turning around troubled hospitals, our track record in operating hospitals with religious affiliations, our experience in operating teaching hospitals, our community focus, and our physician-friendly reputation. Our focus on patient and employees, as exemplified by the Target 100 program, is rapidly 6 becoming another strong advantage as we talk to potential acquisition candidates. We remain focused on creative acquisitions that strengthen our existing networks. Now let me turn it over to Tom Mackey, our Chief Operative Officer, to discuss the strengths of our operations. Tom?

Thanks Jeff, and good morning everyone. Following two very strong quarters with growth in excess of 4%, same facility admissions increased by a more modest 0.7% this quarter. This is actually a bit deceptive. Volume growth last year was the strongest in the third quarter, making this quarter the most difficult comparison. Additionally, the quarter had one less day this year, as compared to leap year in 2000. This had the effect of reducing same facility admissions by 1.1%. We also had what appears to be the lightest flu season in the last 5 years. The lower incidence of flu-related admissions reduced same facility admissions by about 1.7%. Adjusting for these two unusual factors, leap year and flu, our same facility volumes would have grown about 3.5%, which is well above the historical average and close to the low 4s of the first half. We have often said that the flu just does not matter in 7 terms of earnings, as it is volume that brings little or no profit. Our experience this year bears that out with very weak flu volume, but very strong profits. Bottom line, flu did not matter. Our core services continue to drive our volume growth, with cardiology being particularly strong. Cardiac admissions grew 8% in the quarter. Orthopedics, neurology, and gastrointestinal medicine also showed above average increases. We saw further confirmation of the baby boomer thesis we talked about last quarter. Once again, the strongest admission growth occurred in the 41-50 and 51-60 age groups, which encompasses the baby boom generation. Just as in the first half, the hospitals participating in our Target 100 program generated admission growth significantly above the company average. As you may recall, this is the program designed to enhance satisfaction among patient's positions and employees. Announcing additional data on this program, which is very, very encouraging, hospitals that have fully implemented the Target 100 program are recording statistically significant improvement in patient satisfaction, which we measure continually through patient surveys. Employee satisfaction is also rising, which we believe is very important in this environment of labor shortages. By the end of 8 March, all of our hospitals had completed the initial training for this program, and we continue to be very encouraged by its success. All in all, we continue to believe there is an upward bias to our long-term admissions growth rate, which has averaged about 2%, and the fourth quarter will provide the easiest comparison of the year, as same facility admissions were up only 0.1% in the fourth quarter of last year. Shifting to reimbursement rates throughout fiscal 2000, in the first half of FY '01 revenue per admission has been growing consistently at slightly better than 6%. In our third quarter, that growth was even better with same facility revenue per admission up a robust 8.3%. Last quarter, we told you that increases in renegotiated managed care contracts, may have accelerated, and our numbers this quarter provide some conformation for that. An additional factor contributing to the strength is improved Medicare reimbursement, which will increase again this month under provisions of BIPA. The weak flu season may have contributed in a small way also, by increasing our average equity. The strength in cardiology has the same effect. These are typically high equity and high revenue admissions. While we don't expect revenue per admission increases in this range indefinitely, the outlook 9 continues to be excellent for the next couple of years. Managed care premium increases for 2001 provide a basis for substantial increases in contracts renegotiated throughout this calendar year, the benefits of which will carry through into the first half of fiscal 2003. In California, negotiations thus far between managed care companies and CalPERS suggest that premiums will increase about 16% for CalPERS in calendar 2002, which is well above the 2001 increases, and I believe well above what many analysts were expecting for 2002. This early indication bodes well for continued strong managed care premium and hospital revenue increases. In the final analysis, we are doing well in our managed care negotiations because of the strength of our networks, the quality of our hospitals, and the leverage these give us in negotiations. Overall, revenue growth accelerated to 6.5% in the quarter in spite of slower admission growth and a decline in other revenues. On a same facility basis, net inpatient revenues grew 9.1% and net outpatient revenues rose 8.8% over the February 2000 quarter. A little over 2 years ago, we embarked on what we call our back-to-basic strategy. There were many elements to this, but essentially, we were focusing on operational improvement in internal growth. One of 10 our first major initiatives, the net strategy focused on bad debts, receivables, and cash flow. David Dennis will give you the numbers in a moment, and they have been awfully impressive. Our second element was a renewed focus on core services as a way to drive our volumes. This focus carries through in our capital spending, our physician recruitment, and program development, and again, it's really working, just look at the cardiology volumes. The Target 100 initiative focuses on patient, physician, and employee satisfaction by building a true customer service culture. I am very excited by how well this program is working. Now that we have completed the rollout of all of our hospitals, we are going to build on our initial success by bringing all of our Target 100 teams together to share their experiences and successes. This year we launched our Employer of Choice initiative, which is designed to improve our recruiting success, our retention rate, and to provide improved education in career development opportunities for our employees. The early results are very encouraging, with significant decline in turnover among both nursing staff and all employees. We measure the results of these and our other initiatives with very specific monthly indicators. You can measure 11 the results of our overall strategy with the financial and operating data that we report. Our managers and employees have embraced our back-to-basic strategy, and it's working. At this time, I'd like to turn the call over to David Dennis, Chief Corporate Officer and Chief Financial Officer. David?

Thanks Tom, and good morning everyone. As Jeff and Tom have both said, the results for this quarter have been exceptional, but I'd like to start off with a little more detail on the margins. Every major expense line item, except for taxes, declined as a percent of revenues, that's every one of the [_______________] line items. Salaries, wages, and benefits, as a percent of net operating revenues, dropped 50 basis points from the year-ago quarter to 38.8% this year. Our expense as a percent of net revenues dropped 30 basis points to 13.8% of revenues. Our success at controlling supply expense directly results from Broadlane's purchasing and utilization strategy. This has been further validated by two very significant [_______________] quarters. Kaiser Permanente one of the largest integrated health systems and its partners of New York have both contracted with 12 Broadlane to in effect outsource their supply chain management to Broadlane. Both of these systems based their decision in part by contract. The additional volume from these contracts and what they represent should enable us to do even better in the future. Broadlane is now the fourth largest and fastest growing healthcare group purchasing organization, and it is the largest outsource provider of material management service. We are very pleased with their development so far. Bad debt expense as a percent of revenues dropped 30 basis points in the quarter to 7.2% of revenues. This improvement comes in the face of a continued shift of our payer mix. Net revenues from Medicare dropped almost 3 full percentage points to 30.1%, while managed care increased 3.2 percentage points to 43.8% of net patient revenues. Despite this continuing shift, receivable days outstanding declined a full day from the November quarter to 781/2 days. While the progress comes in this area in small increments, the days outstanding have declined by nearly 4 days from a year ago, and I think that's real progress. Even other operating expense declined in this quarter by 40 basis points to 21.1% of revenues. A shift of costs resulting from our outsourcing program had previously kept this line 13 item from declining. Putting all of this together, EBITDA margins increased by 11/2 percentage points from 17.5% to 19%. As Jeff said, this is a new high for Tenet since it was formed in 1995. We do expect further improvement in our EBITDA margins in the future. Moving on down the income statement, depreciation and amortization expense declined from 4.7% to 4.6% of revenues, interest expense declined from 4.1% to 3.7% of revenues, investment earnings were up, majority interests were down, which completed the clean sweep of improvement on every line item down to pretax income. Pretax margins surged from 8.7% in the prior year quarter to 10.9% this year, and again, the highest pretax margin quarter since Tenet was formed in 1995. As Jeff said, cash flow continues to get even better. Net cash provided by operating activities rose to 213 million in this quarter, compared to a small deficit last year. On a rolling 12-month basis, cash flow rose to a new record level of 1 billion 485 million. Free cash flow was particularly remarkable, and we define free cash flow as net cash provided by operations less capital spending. For the first three quarters of this fiscal year, free cash flow was 541 million. This compares to a negative 74 million in the first 9 months of last year. We 14 have already had an outstanding year for free cash flow, and our fourth quarter is typically our best for both operating cash flow and free cash flow. As you may recall, cash flow tends to be higher in the second and fourth quarters and lower in the first and third due principally to the timing of our interest [_______________]. Clearly our initiatives to improve cash flow are working very well, and we are certainly gratified by these results. Returning to the balance sheet, the strong cash flow combined with proceeds from option exercises enabled us to further reduce our debt loan. Option exercises due to the higher stock price and employee stock purchases, generated proceeds of 94 million in the quarter and 233 million for the first 9 months, and as you know, we also get some additional tax benefits. This adds to equity, as well as reducing debt. The higher number of shares outstanding did reduce EPS growth to 25% compared to the 30% growth in net income, but together with cash flow, this enabled us to reduce debt by 188 million in the quarter and combined with the reduction in the first half we have reduced debt by 808 million thus far this year. As of quarter end, 235 million was drawn on our revolving bank [_______________], and our total debt had dropped to 4.87 billion. With this 15 ongoing debt reduction, our strong balance sheet grew even stronger. Our debt-to-EBITDA ratio dropped to 2.27 times, down from 3.14 times a year ago. Our debt-to-equity ratio dropped to 0.99 times, down from 1.46 times a year ago. This is tremendous improvement in only one year's period of time. Similarly, our coverage ratio or EBITDA to net interest expense has improved, rising to 4.54 in the quarter, up from 3.92 a year ago. With this across-the-board improvement, it came as no surprise to us when Standard and Poors revised its outlook from stable to positive for Tenet's credit rates. On March 1st just after the quarter ended, we completed a new $2 billion unsecured revolving credit facility to replace our previous facility. That facility was due to expire in January of next year. We were very pleased with the participation in this facility, particularly given the relatively tight bank credit market. This facility extends our maturities, offers efficient pricing tied to quantifiable credit measures, and has more flexible governances than the previous facilities. From every perspective, operations, revenues, cost control, cash flow, and the balance sheet, we couldn't be more pleased with the results for the quarter and the year to date. We remain optimistic about our prospects as we complete this fiscal 16 year and certainly look forward to fiscal 2002. At this time, I am going to turn the call over to Paul Russell our Senior Vice President of Investor Relations.

Thanks David and good morning to everyone. Let me remind you all of our policies regarding earnings guidance under regulation FD. For the next 6 weeks, we will review earnings models for consistency with previous guidance and reported results. From the end of that period until our next earnings report, we will not review or comment on earnings models or earnings guidance, except by means of a press release if warranted, and you should send any models either to me or to Diana Takvam. We are now posting slides from presentations at investor conferences on our web site, tenethealth.com. These will be regularly updated with the most recent presentation. Currently playing is a presentation from the recent SG Cowen Healthcare Conference with a detailed discussion of our South Florida and New Orleans' markets. Next week we will be appearing at the Merrill Lynch Healthcare Services Conference. In may, we will be at the Deutsche Banc Alex. Brown Healthcare Conference. Then in June look for us at the Goldman Sachs 17 Healthcare Conference. Let me summarize the quarter. We had strong top line growth, across-the-board reduction in expense ratios, across-the-board improvement in all measures of profitability and returns, continued outstanding cash flow, a further deleveraging and balance sheet improvement, further evidence of the benefits from our major initiatives, a resumption of growth opportunities from acquisitions to add to our already strong internal growth. Quite simply we are experiencing the strongest fundamentals we can remember. Hardly a day goes by without new earnings warnings from various companies in many industries. In contrast, Tenet has been surpassing your expectations and our own, and we have been doing it consistently for several quarters now. Rather than facing shrinking demand as many industries are, we are anticipating a long period of accelerating demand as the baby boom generation uses ever more healthcare. At Tenet, we have been preparing for the opportunities created by this, by strengthening our hospital networks, by expanding our core services to meet the demand, and by improving virtually every area of our operations. Let us recognize this to some extent with higher stock price. We still sell at a discount to the market. We also believe that we 18 represent the best value in the industry. Now let's open it up for questions. Operator will you please give the instructions.

Our question and answer session will be conducted electronically. If you would like to ask a question please press the star key followed by the digit 1 on your telephone. We will take your questions in the order that you signal us and take as many questions as time permits. Once again, if you would like to ask a question please press star, 1, and we will pause for just a moment to assemble our roster. Our first question comes from Adam Feinstein with Lehman Brothers.

Yes, great quarter guys. Just wanted to say that. Two quick questions for you. First, could you quantify how much your Medicare and Medicade revenues were up in the quarter, and then secondly, just wanted to get maybe some thoughts about, you guys have been talking about acquiring again, really want to get your thoughts about why that's the best strategy, and you guys have been doing so well, doesn't seem like you really need to do anything here, so just really want to get your thoughts on the opportunities you think from more consolidation. 19 Thank you.

Well, we are looking at the numbers and let me, Jeff Barbakow, let me answer the second side based on acquisition, but I hope that we have made it clear that we are really focused on the markets that we currently serve. The yields that we have announced right now fit right into our marketplace. They are very creative. They help us tremendously in those markets. They allow us to build larger and stronger networks, which obviously you are well aware of all the benefits that come with the services we could provide. So on the acquisition front, I don't think you are going to see us go crazy in any way, but you are going to see things that make sense to us in a remarkable way in the markets we currently serve, and in those markets, we think there are, and will continue to be, some very select acquisitions that are very, very beneficial. So that's sort of what we are doing and will continue to do and we're very pleased that the market is receptive to that, the acquisition market, that is, and that we are at least looked at when we show up to visit with these organizations, as the better alternative or one of the better alternatives. Now in terms of 20 the Medicade and quality of some areas, really the strong growth in the quarter came from the non-government program business. As a percentage of revenues, Medicade dropped from 8.6 to 8.2, Medicare dropped from 33% to 30.1%. Now we are beginning to get some improved reimbursement from Medicare in the quarter that just ended, and we will get an additional benefit beginning in April, but thus far, that has had very little impact on our results that's yet to come. The strong growth that you are seeing, this quarter and in previous quarters, is really coming from the commercial and private side, not the government side.

And as a reminder to our listeners, because of time limitations Tenet has not been able to answer all questions in recent conferences, therefore we ask that as a courtesy to many listeners who do have questions that you please limit yourself to one question and one question only. After your question has been answered, you may reenter the queue with another question, which Tenet will address, time permitting. And now let's move on to Peter Costa with ABN Amro.

Great job on the quarter guys. Question for you. You talked about Broadlane 21 doing well, and I wanted to understand a little more about what's going on there, nothing seems to have happened with the AmeriNet, and you guys got rid of Ventro. What are the positives still yet to happen from Broadlane, and how much has that actually helped you today?

Yeah Peter, it's David Dennis. What's really going on there is, if you look at the contracts with these new organizations, the two that I mentioned in the prepared remarks, the Kaiser and [_______________] amongst others, when you're taking the Tenet and the other prior BuyPower members, if you take our volume plus now the contracted volume as was published before, the Kaiser transaction basically, Broadlane has taken over the entire Kaiser materials management business. So that is really the amount of volume to come, as those contracts are converted to the BuyPower contracts, will more than double and in some areas triple the volume that is being purchased under some of those contracts. So we expect as that volume comes online, that we will get continued benefits quarter over quarter.

Okay, but what was the reasoning for dropping Ventro and what happened 22 with the AmeriNet.

Ventro's technology didn't work. AmeriNet is really when once you got into it, when you look at AmeriNet, AmeriNet, in fact, did not have much capability on the compliant side. It was basically just an open book of business where people come and order if they wanted to, and as you know, in this contracting business, being able to guarantee volumes is what gets you your big price discount, so for the amount of work and the amount of potential volume that was to come there, there wasn't going to be much addition to price discount.

Do you expect future contracts too with other hospital systems rather then GPOs?

That's true.

We'll now move on to Matthew [_______________] with UBS Warberg.

Yes, it's Matt [_______________] from UBS Warberg. Congratulations on the quarter. One question just related to your Employer of Choice initiative. You 23 commented that where you had rolled that out, you were observing higher retention levels. I wanted to see if you could provide some color as to how much higher those retention levels are at those hospitals, and what that could potentially mean to you in terms of your salary costs going forward.

Matt, this is Tom Mackey. The Employer of Choice initiative was rolled out to every one of our facilities in the fall of this year. We shared best practices from within the company, from within the industry, and from other industries as well, with the leadership of all of our hospitals. We now have several quarters of data that are coming from our hospitals, on turnover. Clearly, there are some issues of seasonality, which we don't have enough background to make adjustments. But it is clear, just based upon the breadth of the improvement that we're seeing and a lot of anecdotal information from the facilities, that we have seen a very significant decline in turnover. You can put any number you want on it, depending upon what kind of variable cost you include with turnover, but it's quite material for the company, and I think the improvement we saw in SWB as a percent of our net revenues this quarter, is clearly an 24 indication for seeing some very immediate significant benefits.

Thanks very much.

We'll now move on to Ken Weakly with Bear Sterns.

Thanks, good morning everybody. I was wondering if you could quantify the positive impact on pricing that the drop in the flu would have had.

It is very difficult to quantify the impact on revenue for admission. It is relatively low equity business.

I know.

And what flu we did see, we saw less flu overall, and what we did see seemed to be milder cases as well.

That's correct.

No, so what I am saying is because the flu dropped, it gave maybe an artificial price increase that maybe we won't say, is unfair to say. 25

Well, I think that that was a small factor in the overall revenue per admission growth, but very definitely a small factor. We are able to quantify the volume of that fairly accurately, but trying to do the price effect is, that's a bear.

Okay, thank you.

And now, with us is [_______________] Security's [_______________].

Thank you. Could you discuss the current profitability of the three pending acquisitions, and also if there is any reason to think that their profitability will not move in line with the corporate average overtime. Thank you.

Yeah [_______________], this is Tom. South Fulton, as you may have read, has been in bankruptcy. They actually have a negative EBITDA margin. The two facilities in Florida have been operating at a loss for the last several years. As we have looked at these facilities and engaged in our due diligence, and we are still heavily engaged in due diligence in Florida and as Jeff mentioned at Eastern 26 Pennsylvania, there is nothing that we have discovered so far that gives us any indication at all that we can't relatively quickly achieve the same kind of operating margins that we do in the rest of the market. I mean, for example, in South Florida, these facilities are very much like the facilities that we operate, wide range of facilities and types of market in Florida, we know the market, we think that the participation of those hospitals in our networks will drive additional managed care volumes at better pricing, we see lots of cost opportunities at those facilities, and quite frankly, as Jeff said, we are not going to do these deals unless we believe there's a significant upside to the company, and we clearly believe it's there in the facilities where we've completed our due diligence.

Is Eastern profitable now?

I don't believe so.

Thank you.

And now moving on to Robert [_______________] with [_______________]. 27

It's just a simple number question. Rent expense in the quarter, and then also could you comment on whether you think there is more to go with the margins. Thanks.

Rob, in the quarter, rent expense was approximately $62 million, down from 69 million in the prior year.

And as we said in the prepared remarks, we do believe there is additional margin here, above the 19%.

Thanks.

[_______________] with ING.

Good morning and good quarter. [_______________] with ING Bearings. With two Medicare bills under your belt at this point, I was hoping you could give us some comments specifically on what you see is the key lobbying efforts and goals at the federal level, and in addition, if you could give us a sense as to what kind of advocacy issues you have at the state level, particularly in some of your key states. Thanks. 28

This is Tom, [_______________]. On the federal front, we just actually finished a meeting at the federation this week, here in Washington. As you may know, the AJ is pushing hard for additional BBA relief. I think they had a proposal for $17 billion bill. We haven't completed our analysis yet, in terms of how actively we would propose to support that. There are some very specific things, which we still believe are appropriate and beneficial to hospitals, which we will be pursuing. On the non-financial front, we also are pursuing very aggressively Medicare regulatory simplification, which we believe will have a very significant impact on the company, both in the short and the long run.

And at the state level?

At the state level, there are hundreds and hundreds of issues at the state level. I couldn't even begin to comment on it.

Okay, and if I could put one more in there, just remind us where you stand on your buyback. If I am not mistaken, I 29 think your current credit rating would not preclude you from undertaking a buyback initiative. Is that correct?

That's correct. We currently have almost 1.4 billion available under our credit agreement for buybacks, but as you have seen from the transactions we have announced so far, we clearly believe that acquiring assets that have 19%-20% margin potential in them, is going to do a lot more for us on earnings than buying back stock.

Thank you.

Let's now move on to Kathleen Lamb with CS First Boston.

Thank you. Just to clarify a little bit on Broadlane. Does that actually contribute to EBITDA at this point, and also in terms of revenues, just what the contribution is?

Insignificant on revenues and a tiny loss on EBITDA margin.

Great, thank you.

Moving on to Andrew [_______________] with Goldman Sachs. 30

Hi, good morning. Congrats on the quarter. I was wondering if you'd just provide color as to sort of the state of affairs between you guys and your managed care counterparts, and how the negotiations are going? Whether there is any material change from that of the past? Obviously we have noted that you have signed a multi-agreement in California. Would you expect additional pipes of multi-agreements going forward? Thanks very much.

Hi Andrew, this is Tom. I think the environment is better. Clearly the managed care companies have been able to secure some pretty substantial premium increases. That clearly makes our negotiations much, much easier. The negotiations are never easy. They are often unpleasant, but at the end of the day, I think we have secured, and I think the numbers clearly reflect, that we are securing much, much better increases than we were a year or 2 years ago, and that has even accelerated somewhat in the most recent quarter. So, I would characterize our relationships as generally pretty positive. We still have a lot of issues with some of the managed care companies in getting paid on a timely basis. We continue to fight that on a variety of 31 fronts, but just in terms of rates, it is much better than it was.

Is it fair to say that in addition to the overall environment for the managed care companies, that Tenet's ability to garner these increases is also a reflection of the portfolio and the overall shape, and is market position of the portfolio relative to even the recent past of the last 3 years or so?

Yeah, there's no question about that. I mean, the strength that we have been able to achieve in South Florida, in California, in Pennsylvania, and a number of our other markets, has clearly given us an advantage when we sit across the table.

When we started, Andrew, and you have been around long enough, in '95 with forming Tenet and talking about networks, what we are seeing today 6 short years later, is exactly what we had hoped for. These integrated delivery systems in the markets we now serve, with the power we have in those markets, are really paying off for us big time, and we can go on and on with that one, I mean in a number of ways, but financially you are seeing the results. 32

And it's clear, one of the things implied in this acquisition strategy in market acquisitions, has the potential for increasing revenues in the entire network in the market.

Let's now take our next question from Charlie Lynch with CIBC World Markets.

Thanks a lot. I want to follow up on that question from Andrew a little bit. You guys face some pretty high-grade problems in terms of your capital structure and use of your funds, and you have kind of discussed why you prefer acquisitions over buybacks. Can you talk a little bit though in terms of the networks you operate, and if you are facing capacity constraints anywhere that might justify an uptake in capital spending, and also if you have got any markets where you don't consider yourselves a strong player, and maybe there is some potential for further portfolio management in that case?

I am going to let Tom get into that, but let me just give you an overview to begin with. Yes we are. I mean, fortunately we are facing constraints in our 33 market places, and we will get into that in a little more detail, but I think one of the things that is the key, is what we did a couple of years ago, in the sale of those hospitals. We believe in most of the markets we are in, if we can't be number 1 or number 2, we are going to get out. So, in the markets that we are currently in and doing very well and are positioned very strongly, we have actually increased the capital allocation to most markets to improve our hospital, build bigger and stronger systems, and it is maybe the very best use for our capital that we can find with that. Though let Tom get into some of the specifics. That's a great question.

We have a lot of capacity constraints, as one of our strategies when we kind of hit the wall with BBA and some of our cash flow issues was to hold back pretty substantially on our capital spending, and we have now completed an evaluation, or actually we haven't completed, we are in the process of completing an evaluation of where those opportunities are. A lot of the opportunities that we have pursued over the last year or two have been in emergency rooms, and we have seen excellent returns there. We have a number of 34 fairly substantial projects that we are pursuing right now that will increase by 50% or more, the inpatient capacity at some of our facilities. We have got some [_______________] Hospital development projects, which we are pursuing in several of our markets, and we are also looking very hard in the markets in which we operate, those consolidated markets, some additional significant expenditures in the free standing outpatient area. We believe there are some great opportunities to fill in our networks of inpatient acute facilities with outpatient diagnostics, outpatient surgery centers, and we are being very aggressive in pursuing that as well. So there are lots of opportunities internally to spend our money, and fortunately lots of good acquisition opportunities, and fortunately lots of cash flow. So, it's working well for us right now.

That sounds great. Can you try to translate that a little bit into some better-defined Capex expectations, just to kind of wrap that up for this year or next?

David?

Our Capex budget this year, we haven't finalized it because, as most of you 35 know, we are right in the middle of our budgeting process, but it would not surprise us at all to see Capex increase just on what we have got out there in the system now by 100 million this year, over last year.

David I think you are talking about '02...

Right, I am talking about '02 budget. This year's budget will be, I mean our budget started off at 450, and it will be about 550 by the time we wind up the year, this year, and that could potentially increase by as much as 100 million next year.

That's a great overview. Thanks a lot.

And next, with First Boston, John [_______________].

Yes, good morning. I wonder if you could comment on the impact the economy has had so far on demand, apparently none, but going forward, particularly in California, are you taking precautions, and are there issues out there that we need to be aware of in making a projective decision going into 'O2. 36

We are very cautiously optimistic. We have not seen any effect. Obviously, you see the numbers with the economy. Who knows yet how far this goes. Some feel obviously we are just beginning to get an understanding of what all these factors are going to mean for the economy. We don't know what's going to happen in Washington when some of the positive effects, whether there would be a tax bill or further interest rate cuts, so it's a little early, but at this point, we are cautiously optimistic. In the longer term, we are very optimistic. We touched on it this morning, but we keep coming back to the demographics, and the 80 million baby boomers that are moving through the system. We seem to see them in our system beginning, and it's going to take a few quarters, and maybe a couple of years, to get a little better feel, but they are intensive users of what we are providing. So John, I guess in general we feel very comfortable about what is happening today. We are not overly concerned about the economic environment as it relates to our business. Certainly, we are concerned for our customers and the effects on them, but it seems to be working. 37

Thank you.

And let's now move on to AJ Rice with Merrill-Lynch.

Thanks. Hello everybody. I guess, it looks like the 3 acquisitions that you guys have appropriated will be about 465 million in acquired revenues. I am wondering if you could give us some flavor for what the average outlay for those are, and mainly, would broadly talk about the pricing dynamics in urban deals. Are there many people coming to the table to bet on these properties? Is there a non-profit bidders at the table? Some flavor for that.

AJ, as stated, there is all of the above. There is lots of potential acquirers in these markets, as you know. The Palm Beach market, there were several potential interested parties there. South Fulton, different story, that was in bankruptcy and had been, I think, available for quite some time. That was one that clearly fit with us, especially with the teaching hospital aspect of it and the clear turnaround aspect of it, and what Reynold Jennings in the Southeast can do with that, in addition to his market. As to pricing, there is no pattern 38 yet. I mean, when there was a real active market, it was easier to say average pricing is X, Y, or Z, as a percentage of revenues. There has not been a real active MNA market for hospitals, and maybe that's because we and HEA, or whoever, haven't been active acquirers. That will change, but suffice to say we are not ready to give specifics on what we are paying for these properties until we get total final on a contract, but we believe that we got them at very attractive prices, certainly compared to what it would take for new construction, and what we believe we can do with them in margins.

I sense that they'll be at a reasonable discount to the revenue base that you are acquiring.

You are correct.

Just lastly David, you mentioned that your new bank agreement gives you full-blown flexible governance. Is there anything in particular that would be noteworthy for us to know about what those flexible governance are.

No, only to the extent that it does give us; in the prior bank deal we didn't have the ability to buy back stock without redoing 39 the agreement. We clearly have that capability here, if we ever so chose to do that. The other flexibility is this one. The governance here really look at credit quality, and as credit quality improves, the pricing goes down, and so we think this gives us a lot more flexibility than we had before.

Okay, great. Thanks a lot.

Moving on to Ellie Radinsky with Jeffries & Company.

Hi, this is Ellie Radinsky, and congratulations on a fantastic quarter. Can you just talk about a little bit more on caring and portfolio management here? Does the company have any other assets that they are looking to reduce, e.g., any sniff wards or any physician practices, which have already not been sold, but the company is still looking to divest?

Yeah, we have closed or divested off most of our skilled nursing facilities. We have made a decision at this point that the remaining facilities, I believe there are 6 or 7; that we will continue to operate within our portfolio for strategic reasons at this point. We have completed about 70% of the 40 [_______________] divestitures, but the termination of our physician employment or management agreements across the country; we expect to continue that over the course of the next year-and-a-half or so as the contracts terminate. There probably won't be any more substantial buyouts of those agreements over the next year or so. So that will continue to dwindle as well. In terms of other aspects of the portfolio, we are really quite happy overall with what we have today, not that we don't have a problem here or there, but we believe in most cases that those are fixable over time.

Thank you very much.

Let's now move on and take a question from Sam Levitt with Conning & Company.

Hello, good morning. I am just curious on the payer mix shift. I am wondering to what extent the flu season comparison affects that, and possibly if the 9-month comparison, which is closer to a 2% change in Medicare, is probably more of a run rate at this point, rather than 2.9% or 3 % in the quarter.

Sam, the flu season 41 could affect that slightly, in that flu patients have a certain propensity to be Medicare. It's really the oldest who tend to be hospitalized for this. Our third quarter, the one that we just completed, is our seasonal high quarter for Medicare percentage as well, that really relates to Florida, the seasonality of the Florida business, with lots of people going down there for the winter, and going into the hospitals, but I don't think the flu is going to have that much impact overall on this payer mix. The trends you have seen in this quarter are certainly consistent with the trends that we have seen for several years, rising commercial and declining Medicare. Maybe, little bit stronger this quarter, but I don't see those reversing right away.

Thank you.

Next is Pioneer Investment Management, Leo Murphy.

Hi, good morning, can you hear me okay Paul?

Sure can Leo.

Congratulations. You put up a hell of a quarter. Here's the question. Return on 42 the standing outpatient, December report, you showed similar revenue numbers okay, in terms of year to year. Should I interpret from that, that you have been able to glean reasonable increases from managed care on outpatient, and should the flu or lack of flu have affected that in a negative way?

Well, flu business is something that you see in the emergency room, as well as in inpatient admissions clearly, so you do get flu volumes on outpatient, as well as inpatient. Haven't been able to measure the flu volumes in the ER however, so I can't give you a number on that. The other part of your question had to do with outpatient revenues in general, I think.

Yeah.

Leo, this is Tom. I am not sure I can answer that question. We have, as I think we have said before, 7000 contracts out there with managed care companies. We clearly are getting overall increases in our managed care reimbursement. We are getting them on the inpatient and the outpatient side. We still have, in some cases, more pressure on the outpatient 43 side, as some of the managed care payers seek to go to more fixed costs reimbursement payers, so that is sort of a negative variable, but I don't think any of us could add it up and give you a number.

Okay, thank you.

Thanks Leo.

Next up is [_______________] with Goldman Sachs.

Hello?

Hello.

Hi, this is [_______________] on behalf of Roger. Really wanted to follow up on the question that Andrew asked about pricing. One of the concerns that many of your critics have is that ultimately the increase in commercial pricing will level off, and if you look at the admission trends, people would ask the question, are you concerned about that, and if so what kind of time frame, what should be remodeling in specifically going forward for pricing trends and also for admission trends.

Hi, this is Tom. If you 44 really look at what happened over a period of several years with declines in managed care premium increases or managed care premiums, we believe that there was not just a sick locality factor there, but kind of a one time shot, as everybody tried to respond to the growth in managed care. When you look at the financial health of hospitals today, not Tenet Hospitals, but the hospital industry on the whole, margins are still inadequate. We are not seeing our competitors out there giving away the store in return for committed volume. Capitation has pretty much gone by the board in the marketplaces that we see. I don't necessarily think, and you could probably find 10 people who would give you a different number on this. I don't think we will see rate increases in the 15% to 20% indefinitely, but at the same time, I don't see us returning to a period for the foreseeable future, where we are not going to be getting any rate increases at all. And I think as long as we can do what we have been doing, which is to continue to improve our productivity and drive our expense ratios down, I think that that can continue for quite a good long time.

And [_______________] 45 as we discussed in our earlier remarks, we see a trend toward higher growth in volumes that is likely to continue, and indeed accelerate, for many years to come. We will take two more questions at this point since we have been at it for an hour. Operator?

Yes, and our next question comes from [_______________] with [_______________]. Mr. [_______________] your line is open, please go ahead.

Let's try the next one.

Our final question will be a followup, which will come from John [_______________].

Yeah thanks and good morning. Not to beat a dead horse to death, but this pricing issue I think is so important, so I'm wondering Tom, I think what you said in your original comments was that we don't expect these kinds of pricing trends indefinitely, but I think you said something like in two years out it might change. In other words the point being that these kinds of trends maybe extrapolateable if you will, for at least a couple of quarters and another 46 year, and if that's true could you break out the pricing trends, private pay versus Medicare.

I will let somebody else take a crack at the private pay versus Medicare, although I think on the Medicare side, I think the odds are, just based on what I heard yesterday, that we may have some success getting full market basket on Medicare, on the commercial and managed care side. I think your assessment is correct John. We feel pretty comfortable. What we are seeing this year, the longer term contracts we are negotiating, the premium increases that the managed care companies are getting in some of our major markets, that through 2003 the kind of increases in the net revenue per admission that we have seen over the last year should continue. Beyond that, it is anybody's guess. My opinion is that it may temper a little bit, but I do not believe we will return to [_______________] cutthroat competition and rate declines. The provider community can stand it given their financial position.

John, in other words we have got pretty good visibility for at least the next couple of years on pricing, both on commercial and government programs, and that gives 47 us a lot of comfort in the next few years.

Let me add one final item, that we did not get a question on, on the call, although I have gotten quite a few questions on this lately, and that has to do with the California electric power situation. Our electric costs in California are approximately 25 million per year, but of that about 5 million is really quite protected from any increase because it is through the Los Angeles Municipal Utility. So we are exposed on about 20 million of purchased electric cost in California. We don't know what the price increases will be, but something around 50% is not outside the area of possibility. So a 50% increase would cost us about 10 million annually. We are not happy about it, but it is preferable to no power at all, and it is certainly something that we can readily absorb, given our very strong growth in revenues and success in keeping other costs under control. At this point, we will end our formal call for today. We thank you for joining us, and if you have follow-on questions, please call my office, and we will do our best to get back to you with answers, although we are not in the office today, and we thank you very much for joining us today. 48

That concludes today's conference. Thank you for your participation and thank you for using Premier Conferencing.