Tenet Healthcare Corp (THC) 2002 Q3 法說會逐字稿

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Tenet's management will be making some forward-looking statements on this call today. Those forward-looking statements are based on management's current expectation and are subject to risk and uncertainties that may cause these forward-looking statements to be materially incorrect. Certain of those risks and uncertainties are discussed in Tenet's filings with the Securities and Exchange Commission including the company's annual report on Form 10K and its quarterly report on Form 10Q to which you are referred. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. Most of you have received our detailed quarterly financial and operating data. If you have not, it is available on First Call, Tenet's Web site tenethealth.com or on the Business Wire Web site, businesswire.com.

At this time, I'd like to turn the call over to Mr. Jeff Barbakow, Chairman and Chief Executive Officer. Go ahead, sir.

Thank you very much. Good morning everyone.

We are pleased to announce yet another outstanding quarter, in what has become a long series of terrific quarterly reports. Let me give you some highlights. Net income from operations increased 45 percent. Earnings per share from operations rose 43 percent. Same facility admissions rose 2.1 percent. Net operating revenues rose 14.8 percent while same facility patient revenues rose 11.5 percent. EBITDA rose by 25 percent in the quarter while EBITDA margins reached 20.7 percent, our highest level ever. Pre-tax margins from operations rose 3.2 percentage points from 10.9 percent to 14.1 percent. Pre-tax income from operations rose 48 percent. We improved even further on our cash flow generation, which is, as you know was already extremely strong. For the last 12 months, cash flow from operations was almost 2.4 billion. Bottom line, we earned 86 cents in diluted earnings per share from operations, up 43 percent from the year ago quarter and that despite more shares outstanding and a higher tax rate year, excluding acquisition related goodwill charges net income from operations was 92 cents per share compared 66 cents in the year ago quarter.

This is the ninth consecutive quarter where we've posted growth of 20 percent or better and the sixth in a row of 25 percent or better. There're been so many highlights this year that it gets very difficult to single out any particular one. This quarter, however, I believe two items really stand out. The first is overall profit margins both in terms of improvement and their absolute level. The second highlight is our cash flow generation while already outstanding, it improved even more in the quarter.

With each quarter we seem to raise our expectations and with a quarter as strong as this it should come as no surprise that we are bumping up guidance yet again. We now expect Tenet's earnings per share from operations, for its fiscal 2002, to be at least $3.20, an increase of 39 percent over the $2.30 we reported in fiscal '01. We had previously indicated expectations of $3.10 or better.

This'll be a significant improvement over last year's growth of 27 percent, which in itself, was an outstanding year and putting those two years together earnings per share from operations will have grown by at least 77 percent. These expectations do not include any impact from a change in accounting for goodwill amortization as approved by the Financial Accounting's Standards Board. We will be adopting SFAS 142 in fiscal year 2003.

As we discuss the details of the quarter on the rest of today's call it may sound somewhat familiar to you. That is because the same factors have been driving our performance quarter after quarter. One or another factor may be a bit more or less important in any given quarter but the only way the basic thesis has changed is to get even better over time. Our strategies and the quality of assets are driving volume and revenue growth. Cost controls continue to be excellent leading to higher margins. Terrific cash flow results in deleveraging, which in turn leads to lower interest expense and even more earnings growth. All of this enables us to continue to reinvest in our hospitals and strengthen our networks, which leads to more volume and revenue growth.

Others are beginning to take notice of this consistency. I am pleased that Business Week recently ranked us among the top 50 performers, from all the S&P 500 companies. We ranked in their very top category for one year and three year total return to shareholders and for one and three year profit growth.

At this time, let me turn it over to Tom Mackey, our Chief Operating Officer. Tom.

Thanks Jeff and good morning to all of you.

Third quarter provided further confirmation that our strategies are successful in driving admissions growth. Same facility admissions increased 2.1 percent in spite of a very weak flu season. We've said many times, that while flu epidemics can affect patient volumes, they have little effect on profitability and, I believe, this quarter further demonstrates that fact. We're averaging same facility admission growth of 3.2 percent for the last seven quarters, which is up significantly from the 1.9 percent average for the previous three years.

With acquisitions now contributing as well, total facility admission growth was quite strong, up 7.4 percent for the quarter.

And baby boomers continue to lead other age groups in admission growth, just as they have for the past year-and-a-half. On a same facility basis, admissions from the baby boomer age groups rose at approximately twice the rate of our overall admissions.

We continued to generate some growth in unit revenues. Same facility revenue per admission increased by 10.8 percent over the prior year quarter. This is actually down a bit from the second quarter peak of 14.9 percent, and we believe at least one reason for this slower rate of growth was an interesting nuance in our patient mix. Obstetrics volumes were quite a bit stronger than usual this quarter. I don't know exactly what happened nine months ago that would explain it, but we delivered a lot of babies this quarter. And since obstetrics bring relatively lower revenue per admission, more OB reduces the average rate of growth in this statistic.

For the nine-month period, same facility revenue per admission increased 13 percent. The culmination of good volume growth with improved unit revenues resulted in same facility net patient revenues growing 11.5 percent in the quarter. And with the addition of acquisitions, partially offset by a reduction in other revenue, total revenues grew 14.8 percent.

We are quite pleased with the performance of our recent acquisitions. Over the past 12 months, we have acquired six facilities. As a group, they contributed 150 million in net revenue for the quarter. importantly, the EBITDA margin of this group of facilities was already eight percent in the quarter, which is pretty amazing when you consider that we have only owned three of these facilities for three or four months, and every one of them was losing money prior to our taking ownership. I think we've demonstrated once again that we're pretty good at turning around hospitals.

As we've reported on previous calls, we are increasing our capital spending to meet growing demand in our markets. Capital spending this year should be about 800 million, up from 600 million last year. While we are still in the process of preparing budgets for next year, I expect it will increase again in fiscal '03.

For a couple of examples, just two weeks ago, we opened a new $10 million cancer center at St. Louis University Health Sciences Center. This new center brings together all of the outpatient oncology services in a very patient-friendly setting. Later this week, we will open a $34 million women's center at Piedmont Medical Center in South Carolina. This adds additional capacity in a rapidly growing market, again, with a very patient-friendly design. And this month, we're opening a new 40-bed, $13 million medical, surgical, and expanded ICU unit at our John F. Kennedy Memorial Hospital near Palm Springs, California -- another example of more capacity for higher-acuity patients in a growing market. These are just three recent examples of how we're expending our -- expanding our business by meeting growing patient needs.

At this time, it's a pleasure to turn it over to David Dennis, Chief Corporate Officer and Chief Financial Officer.

David?

Thanks, Tom.

And, as my -- good morning and welcome to everyone.

I'm going to start my discussion with a presentation about expense ratios and margins. Salaries, wages, and benefits came in at 38.8 percent of net operating revenues, which is even with the same quarter a year ago. On a same-facility basis, this dropped to 38.5 versus the 38.8 a year ago.

Our supply expense at 14.2 percent of net revenues was up from the 13.8 percent last year, but it continues to track well within the range that we've seen for many quarters. Our bad debt expense dropped to 6.8 percent revenues, down from 7.2 percent last year and 7.6 percent in the previous quarter. The improvement is the result of many changes to our processes and intense focus on a great number of details.

Our receivable days outstanding at 64 days were flat with the previous quarter, but down fourteen-and-a-half days from a year ago.

Other operating expense declined again in this quarter by 1.6 percentage points to 19.5 percent of revenues. This expense line continues to be the most important contributor to our margin improvement. Now, many of the cost items in this line are relatively fixed in nature, so our strong revenue growth helps to reduce them in percentage terms. Our utility expense actually declined from the prior year.

Putting all of this together, EBITDA margins increased by 1.7 percentage points from 19 percent to 20.7 percent, and that improvement was restrained by our acquisitions, again, certainly as we expected. On a same facility basis, EBITDA margins expanded by two full percentage points to 21.2 percent.

Based on our outstanding margin performance thus far this year, we now expect EBITDA margins for the full year to exceed 20 percent. For the first nine months, they were at 19.9 percent.

Interest expense declined by 34 percent from the prior year quarter or $38 million, reflecting the benefits of debt reduction and lower interest rates on our borrowing.

Pre-tax margins from operation surged again from 10.9 percent in the prior year quarter to 14.1 percent this year, and this is yet another new record for us.

You know, this was, as just mentioned, an outstanding quarter for cash flow. Net cash provided from operating activities more than doubled from the third quarter a year ago, reaching 475 million compared to 213 million. For the last 12 months, it was nearly $2.4 billion. Free cash flow, which we define, as everyone knows, net -- as net cash provided by operations less our capital spending, hit 1.58 billion for the last 12 months. That's another record high.

With the refinancing we've done this year, we've been able to smooth out some of the quarterly variations in our cash interest payments that you've seen in the past. There will still be some variation as well as variations in our cash tax pay -- payments, certainly. But overall our quarterly cash flows from operations should be a bit smoother here from here on. The last 12-month number will always give us the most accurate picture, however.

Now, all measures of leveraged interest coverage showed improvement in the quarter. The coverage ratio, or EBITDA to net interest expense, improved significantly, rising to 7.35 times in the quarter, up from 4.54 times only a year ago. During the quarter, we called in what remained of the old eight-and-five-eighths senior subnotes and repurchased some of the 8 1/8 percent senior subnotes, which gave rise to the two cent per share extraordinary charge.

Subsequent to the end of the quarter, we have tendered for the rest of the 8 1/8 percent notes with settlement scheduled a couple -- for a couple days from now. The tender for the eight-and-an-eighth notes will result in an extraordinary charge in the fourth quarter of approximately 18 cents a share.

We have already received sufficient tenders and consents to eliminate the most restrictive covenants in these issues. With this accomplished, we now have eliminated all of the previous restrictive covenants associated with debt issued when we were a high-yield issuer.

Now, going forward, we will have much greater flexibility in managing our balance sheet, particularly with regard to stock repurchases. And as to that, thus far, we have embarked on a modest share repurchase program designed to offset the dilutive effect of option exercises. The board has authorized a repurchase of up to 20 million shares in total. Through the end of March, we've purchased 9,370,500 shares of stock at an average price of $57.84 a share. That represents an additional five million shares since our last conference call. Now, this slightly more than offsets the approximately 9.4 million shares of option exercises year-to-date. In addition, we have forward-purchase contracts in place for an additional 5,474,500 shares which we'll settle later this year.

With that update, I'd like to hand it over to Paul Russell, our Senior Vice President of Investor Relations. Paul?

Thanks, David, and good morning to all of you.

Earlier in the call, Jeff gave new guidance for growth in fiscal 2002. To reiterate, we now expect earnings per share from operations to be at least $3.20, which represents growth of 39 percent over the $2.30 reported in 2001.

Let me give you some detail on the key assumptions behind this forecast. We still expect revenue growth in full year to be at least 14 percent. We've discussed the key drivers of that growth on all of our quarterly calls. EBITDA margins for the full year should exceed 20 percent as David mentioned, compared to the 18.6 percent EBITDA margin reported in fiscal '01.

Now, this higher margin expectation is the principal reason for our increase in guidance. Depreciation will continue to increase sequentially in the fourth quarter, reflecting increased capital spending and recent acquisitions. And as we indicated last quarter, interest expense for the full year should be about 330 million. The tax rate is expected to be approximately 41 percent and diluted weighted average shares outstanding should be about 335 million.

As Jeff mentioned, we will adopt SFSA 142 for goodwill accounting in our fiscal '03. Then we'll add approximately 24 cents per share in earnings over and above the growth we would otherwise expect or six cents per quarter. For modeling purposes, the adoption of 142 will eliminate approximately 100 million of amortization expense and we expect the booked tax rate will decline by approximately 1.3 percentage points as a result.

Let me remind you again of our policies regarding earnings guidance under regulation FD. We will review earnings models for consistency with guidance and reported results between now and late May. From then until our next earnings report, expected to be about July 11th, 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 .

From every perspective we couldn't be more pleased with the results. Volumes and revenues are growing at robust rates. We've achieved across the board improvement in all measures of profitability and returns and we expect further improvement. Cash flow is outstanding, which we expect to continue. Our financial condition just gets better and better. We see continuing evidence of the benefits from our major initiatives and we see growth opportunities from acquisitions to add to our already strong internal growth. Quite simply, we continue to experience the strongest fundamentals and prospects we can remember.

Now, let's open it up for questions.

Operator, will you please give the instructions.

Thank you Mr. .

Our question-and-answer session will be conducted electronically today. Because of time limitations and it has not been able to answer all questions on recent conference calls, therefore, we would ask as a courtesy from any listeners that do have questions, that you limit yourself to one question only. After your question has been answered, you may re-enter the queue with another question, which Tenet will address time permitting. To ask a question, please press the star key, followed by the digit one on your touch-tone telephone. We will take your questions in the order they were received and we will take as many questions as time permits. Again, press star one to ask a question. We'll pause for just a moment.

Our first question will come from with the CS First Boston.

Yeah, thanks and good morning.

Your revenue for admission growth to the quarter was strong but not quite as strong as list of couple of quarters and I think you've touched on it by talking about the change in mix but, I wonder, if you could drill down a little bit more and discuss pricing trends specifically and, also, with respect to mix could you give us a sense of how the so-called baby boomer demand is doing, that is, cardio-neuro and orthopedics and I think you've given those admissions trends in the past, so if you could expand a little bit on those topics we'd appreciate it.

Tom, you want to handle that?

Sure.

John, let me answer the second question first. We did see a continuation of the trend by age group with, as I said, the baby boomer age group growing about twice the average of the rest of the other age groups.

We did not see the same continuation of the trends by service. This was a strange quarter for us where we had a lot more OB and our cardiac and neuro and ortho kind of grew with average of our other service lines this month. I don't necessarily see that as the one quarter as being significant but it is a change from what we have seen in the prior quarter.

On the pricing front, I mean, you guys know this better than we do, I mean, what we see in our markets is certainly a continuation of the premium increases that we've seen the last couple of years. In fact, the 2002 health insurance premium increases from most of our major payers were higher than they were in 2001. We continue to see negotiated price increases in the range of 4 percent to 8 percent, although we've seen many that are higher than that in individual markets. So we are very confident that, you know, that pricing trends that we've seen as we look out over the next 12 to 18 months continue. Our outlook continues to be for strong pricing gains.

There's been a lot of talk in some of the markets of, you know, major shifts in the way payers pay, you know, shifting more of the burden to employees or to patients through higher co-pays and deductibles, to tiered pricing for depending upon their cost structure. The reality is for us is that there's been more talk than, you know, than action with regard to those products. Employers seem concerned in many of our markets about trying to shift substantially more burden to employees because employment is still, you know, unemployment rates are still relatively low in most of the markets in which we operate. So we don't see any fundamental change over the next 12 to 18 months in the pricing trends that we've seen this year. I don't think the 14.9 percent is sustainable but, you know, certainly rates like we saw this quarter may well be.

Thank you.

We'll now hear from with Salomon Smith Barney.

Hi, it's for .

Do you have what your same hospital outpatient revenue growth was and what it compared with in last year's quarter?

Hold on one second .

Tell you what, let's take the next question and while I look that up we'll come back with an answer to that.

And our next question comes from with Goldman Sachs.

Yeah, good morning and congrats.

You guys continue to hold the line very tightly on supply expense, I was wondering if you could address this coated stent issue and your thoughts and sort of walk us through your working assumption as to the potential impact, if any, on future earnings. Thanks.

Andrew, this is Tom Mackey. We're glad you asked that question because, you know, we know it's a concern to a number of people and we've actually done some analysis of this issue and let me walk you through it.

Bottom line is we don't expect any material adverse impact on our earnings as a result of this and there are a couple of different aspects that I'd like to walk you through. The first is the higher cost of the stent itself and our ability to obtain adequate reimbursement. We looked at our total usage of cardiac stents by payer . Clearly, the principle concern is Medi-Care, since in the past adjustments to the DRG codes have lacked, changes in cost resulting from new technology. Now, we understand that Johnson & Johnson is attempting to speed up this review process but for our financial analysis here, we've assumed that there would be no adjustment to Medi-Care payments any time in the first year following introduction. We expect to be early 2003. The further assume that drug coated stents would replace 90 percent of conventional stents by the end of the year. Now, that would be an extraordinarily rapid substitution for any new technology but it gives us what we would consider the extreme scenario here.

We further assume that there would be no competing products in the first year to put pressure on pricing, which we're assuming to be about $3,300 per stent versus the $1,100 for the uncoated stents today. Our major exposure is with Medicare patients, which account for 36 percent of the stent usage.

We are largely protected on the rest of our business. already have pass-throughs for a majority of our commercial volume. And where we don't, we can at least partially anticipate the added cost to our normal contracting activities.

If we take all of these assumption into account, we could be exposed to about $10 million in additional cost that would not be covered by an additional reimbursement from Medicare. This would be in the fist year, again, assuming this very rapid rate of adoption. With the passage of time, we expect that reimbursement will be adjusted and competition will bring down prices. This 10 million just doesn't seem very large when our EBITDA for the last month is -- last 12 months is over $2.6 billion, and we expect this to be considerably higher in fiscal '04.

A second element is the apparent fear that these new stents will significantly impact the volume of open-heart surgery. We've spent some time over the last couple of months talking to leading cardiologists and cardiac surgeons, and based upon their views, we don't anticipate any significant impact on CABG procedures. And to the extent that it occurs, it will be small and gradual. Patients who are good candidates for stents today receive them. Those patients where we go straight to open heart surgery due to the nature of their illness simply are not good candidates for stents in the first place. And these include diabetics, those with occlusion of the left main coronary artery, those with triple artery disease, and those with many or particularly lengthy lesions. But most cardiologists are going to want a lot more experience on these new stents before they take additional risks with this group of patients. Again, bottom line, we're looking at a worst case scenario of a $10 million EBITDA exposure, an infinitismal number compared with our earnings and the growth we anticipate nest year.

Great. Just one quick follow-up -- you know, obviously, you guys have all been in the business for quite some time. And I'm just wondering -- just a little bit of industry perspective here -- I mean, obviously, there's, as you've addressed it pretty squarely, a lot of -- lot of market buzz and concern about the issue. I'm just wondering as hospital operators, though, you know, where does this fall in terms of sort of the -- sort of the year-in and year-out sort of technology creep and push that you guys deal with? Is it much -- I mean, we sort of quantified it, but is it much more challenging than, say, or anything else that's sort of come along the pike over the last 10 to 15 years in the industry?

I think, you know, I'll take a cut at that.

I mean my perspective is that it is significant, but not in the any of the -- many of the issues we've over the last seven or eight years. Certainly not as significant in my opinion as the original introduction of stents, you know, a number of years ago. Not as significant as the big shift with -- of surgery from, you know, inpatient to outpatient with laparoscope -- introduction of laparoscopic techniques. So, yes, I mean, it -- $10 million is $10 million, but in the scheme of things, I think this is not as big an impact as other things we've coped with in the past.

Thanks very much.

Let me get back to the previous question now that I've found the numbers. Outpatient revenues on a same-store basis for the quarter were up 7.7 percent, and outpatient revenue per visit was -- were up 11.3 percent. For the nine months, outpatient revenues up about 8.7 percent.

And we'll now move on to with .

Thanks. Good morning.

Wonder if you can just comment a little more on the labor market, particularly in California now that the staffing levels have been put forth. And if you could, just quantify your registry cost versus last year, labor turnover versus last year, and your man-hours per adjusted admission versus last year. Thanks.

Tom, do you want to ...

Yes, , I'll take the first part of that. I don't have the statistics in front of me, so I'll turn it over to Paul, and he can dig for the next 30 seconds while I .

The -- in terms of California staffing, I mean it's important to recognize that the only thing that is of the governor's thoughts on this. We still haven't seen anything from the Department of Health Services, and, you know, we're not even quite sure when DHS is going to publish these. And there will be a period for public and industry comment, and then hearings held, which we're really not expecting, you know, through this entire process, implementation until next summer.

We believe, and we have done some fairly careful analysis of this, that our current staffing levels are generally in line with the proposals from the governor's office. But we have to see the much finer level of detail from the Department of Health Services before, you know, we can, you know, pinpoint the exact impact. And, you know, quite frankly, there are lots of variables. The governor's proposals are based upon licensed staff. So there'll be some opportunity to change skill mix between RN and other categories of licensed staff to meet those requirements.

So it's a kind of dynamic analysis that we will have to do once the regulations are out. But bottom line, we think we're basically OK with the regulations today.

You want to take the rest of it?

Yes, , contract labor picked up sequentially from the November quarter, which had ticked down. That is somewhat consistent with just the seasonal factors in our business.

We saw a small decline in turnover for the quarter, particularly among non-nursing personnel. And in looking at a lot of the detail of our salary and wage expense, one of the areas, not surprisingly, that we saw a pretty good increase in was employee benefits, specifically health insurance premiums for our . So, you know, we're seeing this as a cost. We're clearly getting this on the other side in our pricing as a provider of these services.

Is the $60 million per quarter a decent number to work with for your registry costs?

I'm sorry. I did not hear all the question.

Is $60 million per quarter the level you're seeing in your registry costs ...

That -- that's certainly the ballpark.

OK. Thanks very much.

Moving on to with Merrill Lynch.

Hello, everybody.

A quick question about use of the cash flow you're generating. I think David's comments, he mentioned that some of the debt restructuring you've done gives you more flexibility on the repurchase side. Also, you've pointed to the benefits from the acquisitions. Can you comment maybe on what the acquisition pipeline or an outlook is and also what the prospects for maybe accelerating the repurchase activity?

David, do you want to handle that one?

Sure.

, you know, we aren't able to comment specifically on any acquisitions. Obviously, as everybody knows, we're continuing to look to add assets in the markets that we serve specifically. You know, that's our second use of funds right after investing in new programs and services in the places that we already own. And our budgeting process to use the cash is really in those priorities, making sure we have the right amount of cap ex to spend on the facilities we have, you know, budgeting effectively, and making acquisitions where we can, and then looking at the share repurchase.

The board is not and management hasn't yet really come up with a proposal to increase the share repurchases dramatically. But we now, with getting rid of all of the restricted payments that were in the covenants in a lot of that, that we certainly have the leeway to do a lot more of that if the timing is right. But it will be a function of timing and what -- because we'd rather earn that 20 percent on that money for the shareholders by in capital improvements and acquisitions first.

Maybe just on the acquisitions if you look at the ones you've highlighted that you've done in the last year, you're an eight percent margin on those now, do those have the potential over time to be at or close to the corporate average and what's the timeframe to realize that benefit?

Absolutely. I think that, you know, what we look at is, if you look at that whole group, without going into any specific assets, if you look at those six facilities as a group, they were at sort of zero to close to negative EBITDA margins and then they average, you know, we've owned them any where from 11 months down to as little as three months so far. So to have them an average EBITDA of up over eight in that period of time and our target is clearly to get it up to the corporate average and that probably takes two years to get it there. But at the same time, you know, we expect revenues in those facilities to increase as well. So it's kind of a plus, plus.

OK. Great. Thanks a lot.

And we'll move on to with CIBC World Market.

Good morning and congratulations.

Quick modeling question on your other operating expense line, clearly this has been a source of margin improvement but over and above that it's actually shown an absolute decline over the past two or three quarters and I'm curious about what pieces are in that other operating expense line that could continue to come down and when this gets whittled down or starts to become a bit more of a variable expense and starts to move along with revenues.

Paul will handle that.

Charlie, it's now down, the other revenues is now down to less than 5 percent of total revenues, which is actually the lowest it's been. The most significant declines will continue to be position practices although that's getting to be a pretty small number. Health plans was a fairly significant decline this quarter as we have begun phasing out of our Northern California HMO. Skilled nursing facilities is down as well on the other revenue.

On the other operating expense, we expect that should continue to decline as we have a high revenue growth.

Yeah, Charlie, that's really the fixed things as Paul's gone over before, I mean, it's really the rent expense and leases, which is pretty much fixed is in there and so when you've got those fixed costs as your revenues go up they're going to decline as a percentage.

OK and just as a quick follow up, I mean, were there any kind of consolidation activities that you've potentially were able to go through on the acquired hospitals that could have benefited from that line?

Nothing material in this quarter, no.

OK. Great, thanks a lot.

with Lehman Bros. has our next question.

Yes, great, thank you and I'm glad, David, I'm glad to see you're keeping us busy as promised on the last call.

Just, maybe, two questions from me. One, could you just touch on, I guess last quarter you spent some time talking about converting beds, I guess, as being a key driver, could you talk a little bit about what's going on there and the benefit you got from that in the quarter and then, secondly, could you just comment on what's driving the outpatient revenue per visit gross to go up so much here, I guess, it sounds like it was actually higher than it was for the inpatient and just wanted to understand what's going on with outpatient that would driving a higher revenue per, per visit? Thank you.

Adam, the outpatient revenue per visit growth is driven by a shift in mix principally as our home health visits continue to decline and they're much lower unit revenue business and as those go away the average increase is and you've seen this now for the last two or three years as a factor. We continue to increase our outpatient surgeries as well, which, of course, is a very high revenue per visit type of service.

On conversions, which we discussed last quarter, we will continue to convert beds as appropriate to get into that discussion again that we had last quarter, the relative growth of our higher acuity services versus our lower acuity services has certainly been an important factor in our overall unit revenue growth. We saw that again this quarter in a variety of ways and here we go, here's the numbers. Looking at patient days while our total patient days were up about 6.9 percent our acute days were up 8.8 percent and our sub-acute were down 1.8 so we continue to see this stronger growth in the higher acuity. It's not just conversion; it's the relative growth in our high acuity business.

OK and to just to follow up on the outpatient, what kind of pricing are you guys seeing? You spent a lot of time talking about in terms really telling us about the pricing for inpatient services but with managed care payers what's the pricing environment for outpatient?

You know, Adam, I -- we continually ask this question every quarter and I have not seen any fundamental difference.

OK.

Rate of contract increase in pricing for inpatient and outpatient. You know, we took some outpatient hits a few years back and it's seems to have pretty much stabilized with the growth in the overall contract being about equal in the inpatient, outpatient side.

Great, thank you.

We'll now hear from with Morgan Stanley.

Morning.

Morning.

Just wanted to follow up a little bit more on the first question that John had asked and sort of if you had to harbor a guess as to why some of the higher QD cardiac and orthopedic services slowed down in the quarter, what they were? Do you think they'll come back to sort of the growth rate that they had and then if you can give us a little bit guidance in terms of, you know, where you think revenue for admission will go in the fourth quarter if that does pick up? Should we similarly see a pick up in revenue for admissions? Thanks.

Boy, you know, I wish I could answer that question but, you know, this is a business where we have 116 business units and, you know, the mix changes that we have reported are really the result of changes in activity across all of those hospitals. So when we have a month where we don't see quite the same impact -- it really has not been possible for us to evaluate what happened, I mean, as we said, you know, as we looked at the numbers we had this spike in OB. Now, I can't explain that either because it really occurred across the entire company.

As to our forecast on pricing, you know, I think our view is that this, you know, four to seven, 4 to 8 percent range that we've talked about for a long time in terms of pricing increases on our contracts, on the managed care portion of the business, is going, you know, continue as it has. I think the continued shift of our business, the faster growth on the more acute, slower growth on the sub-acute, the continued conversion of beds. Randy Smith and I were at one of our hospitals yesterday and basically it was running up against capacity limits and they have a substantially sub-acute unit, which we're now looking at what's the proper time to close that down and how quickly do you have to back fill it to stay neutral in a short run. So there'll be more of those opportunities as a company so I don't, again, I don't see us painting the revenue pet admission growth that we saw last quarter but I think, you know, in that 10 percent range, you know, or slightly less than that is a reasonable figure going forward.

Great, thanks a lot.

with ING Asset Management has our next question.

If I can just get a couple of numbers I didn't clearly.

You gave, Paul, the acute patient census, which I think you said was 8.8 percent. What about the intensive care census?

I don't have those numbers today. I think that based on what we've seen earlier in the year, they're probably even stronger.

Yes, OK. And you said that the acute was up and sub-acute was down one ...

.

. Great.

And one other thing -- the outpatient revs, Paul, you said -- did you say revenues per patient procedure were up 11 percent? I missed that.

Yes, I did.

OK. And actual -- and actual procedures were down, then?

Yes, and I think the principal driver of that is the continual decline in home health.

Great. Great job -- keep it up. Thank you.

Thanks.

Moving on to with .

Good morning, and a very nice job.

A couple of related questions -- first, the cash flow clearly was very, very impressive in the quarter, as it was on the 12-month trailing basis. And one of the ways that I have been looking at this is as a percentage of EBITDA just to -- as a proxy for quality of earnings on the theory that the more of your EBITDA that ends up as cash, recognizing that there are timing differences between when things become cash and when they become EBITDA, but generally, the bigger the percentage, the better the quality of earnings. And it was about 90 percent on a 12-month trailing basis this quarter -- about 84 percent last quarter.

So that was good, and so the question that comes of that is, "How did you do that?" Was there something that intensified in this quarter or something that happened in this quarter that was a continuation or better than we saw in the previous 12-month period ending November? That would be the first question related to that.

And the second question, which is more detailed, is when we had the Investor Day, you talked about the percentage of your facilities that met goal for reductions and denials and days of -- and claims outstanding -- excuse me -- days of sales outstanding, i.e. collections. And that about 25 percent of your facilities at that point had met goal. So the question is how -- "What has happened to that statistic over time?"

Great question, . David, do you want to handle it?

Sure. , it's -- I mean the facts are that, you know, we've now had six to eight quarters of very, very high success in improving in our whole processes from the admitting desk to out the backdoor and then the collections afterward. And what is happening is we've -- now that we know that the changes we made in those processes work, we just keep tweaking them and dialing them in. And the process is -- everyone is now getting used to this process. They're doing a better and better job each quarter. But I think more importantly with the success that our folks have had, they are gaining a confidence that they can do it and that they keep trying to beat their own records.

As to the 25 percent of facilities meeting our cash flow goals or our goals in a specific area, whether it's denials, whether it's, you know, discharge not final bill, whether it's point of service cash, we have a lot of different things that we measure that help us manage this process. But the luxury we've had with the success that all of our facilities and the hard work that they've put in and the success that they've met is, while we -- what we do is we look at the top 25 percent of the facilities and how they're performing, and that's where we set the bar. So each quarter, the bar goes up. So it's not -- we will always have, because we believe that if the top 25 percent can do it, they all ought to be able to do it.

OK. So, one of the concerns that I've heard raised by some this morning and my conversations has been, "OK, well, if it's at close to 90 percent, this has got to be a peak."

Well, remember, I mean by definition, you can only go -- you can only go over 100 percent if you're collecting all the old stuff.

Right.

We've collected a lot of the old stuff. I mean that's how we paid off $2 billion of debt. And the fact of the matter is when you're growing our EBITDA the way that we are in a what I believe and we all believe is a growth company, as long as we collect 90 to 100 percent of what we bill on an ongoing basis in cash because what we bill keeps increasing at such a rapid rate, we're going to do very fine, thank you very much. And the whole idea is for us to have our earnings that we report to everyone be cash earnings.

OK. Right. And there was a very high percentage of it during the quarter despite a low provision for bad debt, which presumably comes from all the improvements that you've made as opposed to trying to make the quarter.

Exactly.

OK. Excellent. Thank you so much.

OK.

Thanks, .

has our next question.

Yes, two years ago I think most of the -- there were a lot of questions in every earnings conference call on Philadelphia. We sort of lost track of it. Could you -- could you tell us, having talked about margins on your recent acquisitions, where is Philadelphia relative to your corporate average right now? Give us a little color on that.

, do you want to comment on that?

Sure. let me make a couple of comments.

And I know, Paul, you're going to give us numbers, too.

OK.

I -- we are making progress every month. We -- on average, it's fair to say that the collective portfolio is not quite at the company's margin performance. But the collective portfolio has improved consistently every quarter since our ownership has occurred, and is -- and, in fact, is improving more rapidly than we originally expected that those facilities would.

We continue to see solid volumes. We continue to see redirection of market share. We continue to see an opportunity to attract physicians from other hospitals in that market. And we're continue -- we continue to be bullish about what our -- what our incremental opportunity is there.

The number of facilities that are performing at a superior level dramatically outnumbers those that are not performing as we would expect. But those that are under-performing, we have a good idea about what needs to be done to improve them. And we feel pretty comfortable about being able to execute against that.

OK. And would it -- would it be fair to say you're -- for the all -- for the market you're in, you're over 10 percent now on your EBITDA margins?

Yes, it would be fair to say that.

Yes, it would.

OK. And then one other question -- with a lot of discussion on -- for Medicare of raising the rates for physicians for nursing homes -- for even some of the other areas, do you have any -- can you give us any color on your expectations of whether there'll be a move for the budget neutrality on this so that that could adversely affect the hospitals or are you hearing any rumblings to that effect?

Sure. You know, there always seems to be a lot of posturing going on, but after all, I mean, this is an election year, right? And, you know, we expect that the update will be the market basket minus for the federal '03 fiscal year. That's what's called for in current law. That will be about what we get.

For the next federal fiscal year -- the '04 year, the current law calls for a market basket update. But, you know, we've only received a full market basket update in this business once, I think, in the last 17 years, and I assure you, we don't build our budgets around that kind of a full market basket. So, ...

Sure.

...the answer is, in the near term, we expect some noise, but we don't think there's really going to be any substantive changes to our current expectations.

So you're -- in other words, are -- you're not anticipating that efforts to help the physician is going to come out of the hide of the hospital at this point -- that they'll just do what they did with the defense budget -- just spend it?

That seems to be what they do.

Yes. OK. Well, thank you.

Let me just make an additional comment on Philadelphia.

As you said, we, up to a couple years ago, got a lot of questions all the time, and I think the questions really stemmed from concerns as to why we did it in the first place. And we've talked a lot about that. It was a little different for us and it was at a time, too, when I think the market was a little more concerned with some of the other things that were happening to this industry.

We took, basically, a bankrupt system losing a million dollars a day the prior year that before we acquired them, turned that around pretty quickly and as we said, earlier, we feel very comfortable with that suggestion of 10 percent of EBITDA margin. The system's moved from, you know, fourth in terms of a lot of financial different measurements whether financial, quality or whatever to a much higher levels in our marketplace that we'll continue to consolidate and it's an incredible opportunity for us. But I think it also showed many in the not for profit world what we're all about, you know, it is an extremely important transaction for this company to take an entity like that and to allow it to survive, to keep those hospitals operating, to save 10,000 jobs in a marketplace, to show what Tenet's all about and I don't know to what extent this acquirer of choice that has happened since then where we usually, if it's close or certainly in our market, are the first ones to be called to look at transaction whether it's stemmed from, you know, doing that, whether it's just a general reputational change, but, if you look at the six transactions last year or the 10 or 15 since Philadelphia I have to say that by doing successfully what we did in Philadelphia it's helped us in a tremendous way. So, you know, even though it's not raised much anymore, it was really a very interesting part of this organization.

OK. Thank you.

Jeff, this is Paul. Let me just make one final remark on that and, you know, perhaps we should -- it is a good time to sort of revisit how'd we do there and you may recall, we made certain assumptions as to what we would be able to accomplish in Philadelphia, we've met those goals in terms of margins and profitability. Those goals were certainly last in our corporate average in terms of profitability but it was a level that would give us a really outstanding return on our investment there. So from the perspective of Tenet shareholders, this has been a home run. We have earned and are earning a great return on their investment in this market and as Jeff said, we're doing a lot of good things at the same time.

OK. Thank you.

And our next question comes from with Advest.

Hi, I just got three numbers looking for rent expense and I don't know if you have these two, cash paid for taxes and cash paid for interest in the quarter?

Yes, rent expense in the quarter was $61 million.

OK.

And cash paid for taxes was 161 million. Cash paid for interest was 63 million.

OK. Thanks a lot.

Moving on to with UBS Warburg.

Thanks and good morning everyone.

I was just wondering if you could spend some time on, I guess, management. A lot of your contracts are obviously, well I don't know if it's a lot, but what percentage of your contracts are based as a percentage of charges and how have those charges changed over time? How frequently do they change and what's happened to that average discount of charges over time?

Tom you want to hit that?

.

No, I can touch on that>

OK.

A relatively small percentage of our contracts are straight discount from charge contracts and most of our contracts are per diem agreements with some kind of stop, loss threshold once the case has reached, you know, 75 or $100,000. It depends on the market and the individual contract.

We have over the last several years sought to, you know, kind of increase our prices once a year. In general, our price increases have been in the last several years in the 10 to 15 percent range. Over the longer haul, we feel our price increases have been pretty consistent with the premium increases of our major customers in the HMO business and, you know, we'll probably continue at about that same trend rate.

And when you say relatively small, is it less than 10 percent? We're just trying to get a ballpark.

You know, I would think probably less than 10 percent, Ken, I mean.

OK.

You know, 10 to 15, maybe Randy says but, you know, it's not a big piece of the business any more.

OK. Thank you.

Frank Morgan with has the next question.

Good morning.

I was curious if you could comment about the effect of prior year settlements on revenues, were there any adjustments either positively or negatively related to prior year settlements? Thank you.

Hold on one second.

Nothing unusual there, Frank.

I think he hung up.

Oh. Well, hopefully he heard that. No. The answer's nothing.

Anything else Mr. Morgan?

That's it thank you.

Thank you.

Operator, we'll take one more question.

Our last question will be a follow up from .

Hi, it's again. Just a quick number question. Do you have your case mix index versus last year?

, that is not a number that we track that closely or give out and we only calculate it for Medi-Care patients any how.

OK. Thanks.

OK.

Thank you all very, very much and we'll talk to you all soon and certainly in the next quarter.

And that concludes today's conference. On behalf of Tenet and for Premier Conferencing, we'd like to thank you for your participation.

END