Tenet Healthcare Corp (THC) 2003 Q2 法說會逐字稿

Good morning, and welcome to the Tenet Healthcare calendar 2003 second-quarter earnings conference call for the quarter ending June 30, 2003. 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 on replay. The call is also available to all investors on the Web, both live and archived.

Tenet's management will be making some forward-looking statements on this call today. Those 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 filings with the Securities and Exchange Commission, including the Company's transition report on form 10-K and its quarterly reports on form 10-Q, to which you are referred. Management cautions you not to rely on, and makes no promises to update any of these forward-looking statements.

Management will be referring to certain financial measures and statistics, including measures such as EBITDA, that are not calculated in accordance with Generally Accepted Accounting Principles, or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of the financial performance, but is providing these alternative measures as a supplement to aid in the analysis of the Company. Reconciliations between non-GAAP measures and related GAAP measures can be found in the press release issued this morning and on the Company's website. Detailed quarterly financial and operating data is available on First Call and on the following websites -- tenethealth.com, BusinessWire.com and companyboardroom.com. (CALLER INSTRUCTIONS).

At this time, I would like to turn the call over to Trevor Fetter, President and acting Chief Executive Officer.

Good morning, and thanks, everybody, for joining us today. We originally planned to hold this call next week, but because of our Redding settlement and the fact that we were able to complete our second-quarter financial reporting earlier than anticipated, we decided to accelerate the call.

I am joined today by most of the senior management of the Company. Stephen Farber and I will begin with an overview of the quarter, and then we will open it up for questions, and our whole team will be on hand to respond.

There are a few highlights for the quarter. Our inpatient volume growth remains strong, our earnings are in line with the guidance that we gave in the June, and we have made good progress in working through our portfolio of managed care contracts. We have also made solid progress toward putting the Redding matter behind us, which has been an important objective for the Company.

Now, I would like to add some details. As I mentioned, our second-quarter results were consistent with the earnings guidance that we provided in the June. We continue to face challenges from lower Medicare outlier payments, as well as pricing pressures from managed care payors. We also face upward industry pressures on cost, but we are aggressively moving to reduce our costs in a variety of areas, and bring them in line with our current revenue stream. Although we expect to realize the benefit of these actions later this year and in 2004, in the interim, we are experiencing the margin compression that we had led you to expect.

Our financial results are also being affected by the various restructuring and other charges, which are to be expected, given the transitional period that we are navigating through. In a word, I would describe Tenet's current situation as stabilizing.

We are also making progress on some important issues. For example, in the area of managed care, since November, we have renegotiated or renewed contracts representing 40 percent of our managed care revenues. We are currently in negotiations or expecting renewals of about another 34 percent of the contract portfolio, as measured in terms of revenue, and we expect that by the end of the year we will have renegotiated or renewed about 80 percent of the revenue represented by those contracts that existed in November 2002.

Additionally, as we announced yesterday, we have reached a settlement with various federal and state governmental authorities on the Redding matter, at a cost of $54 million. When I rejoined Tenet in November 2002, the Redding situation appeared to me to be one of the most serious issues facing the Company. While there may be ongoing litigation with non-government plaintiffs for many years, the government settlement is a very important step towards putting this matter to rest, and we are pleased to have achieved this outcome.

At the same time we are resolving some of the issues that affect the Corporation, our underlying hospital volume growth remains strong. inpatient admissions to Tenet hospitals rose 3 percent on a same-store basis. We saw similarly strong growth in emergency room visits. Total store admissions grew 2.5 percent, and the reason that this metric is lower than same-store is due to the removal of two hospitals that were included in 2002 and no longer included in 2003.

As you know, admissions vary by quarter, and they can fluctuate greatly by month. They also vary by facility; where one hospital may have a great quarter, another can be soft. Generally, the size of our portfolio irons out these variations. This quarter, our admissions growth was particularly strong in the eastern half of the country, for a variety of facility-specific reasons. The strongest performers tend to be those hospitals where the Company made significant investments in recent years in capacity expansion, or where the hospitals have improved the efficiency of their emergency rooms.

I should also point out that one hospital in our company had extraordinary admissions growth in the quarter because we converted a neighboring hospital to sub-acute status and consolidated our acute business at the remaining campus. That one hospital added 3/10 of a percentage point to our admissions growth in the quarter.

I would like to make a couple of further observations about admissions. In prior quarters, we have reported admissions growth, excluding the declines, in three specific hospitals -- Redding, Alvarado and Palm Beach Gardens. Over the next few months, we will pass the anniversary of each one of these specific situations, and we will stop reporting this adjusted statistic. Before the second-quarter, if you were to exclude these three hospitals, the same-store admissions would have grown 3.5 percent.

Outpatient visits declined 0.7 percent on a same facility basis, reflecting large specific declines at three hospitals. If you were to exclude those three hospitals, the outpatient visits would actually have increased by 0.6 percent.

The fact that overall volumes have remained strong in the face of our current challenges is encouraging. One of the reasons for this is that our patients are satisfied with the services that they receive. We survey patient satisfaction every month using an independent party to call patients randomly post-discharge, and ask them to rate our hospitals on a 10-point scale in several different categories. For the second-quarter, 84 percent of the patients surveyed rated our hospitals a 9 or 10, which is consistent with our rating in the March quarter and up slightly from a year ago. It tells me that we are continuing to meet our patients' needs. But we are committing committed to doing even better, and to do so, we have taken a number of steps to improve quality, which I will talk about in a few minutes.

But first, I would like to ask Stephen Farber, our Chief Financial Officer, to describe the financial results of the quarter.

Good morning. Before I start going through the numbers, I wanted to note that we will be filing our 10-Q later today, and once filed, that we will post it to our website. With that, let's get started.

Net revenue was 3.4 billion in the quarter, down 1.5 percent compared to the prior year. The main driver of this decrease was the reduction in outlier reimbursements to 16 million in the quarter, from 223 million in the prior year. As we have said on the past few calls, the most clear way to reflect Tenet's performance is to exclude outliers from revenue in both the current year and prior year periods -- put them on a consistent basis. We will continue with this approach today.

On this basis, total company net revenue was up 4.9 percent, and same-store net revenue was up 4.7 percent. Unit revenues, otherwise known as same-store revenue per admission, was down 6.6 percent in the quarter. But again, when we exclude outliers, pro forma same-store revenue per admission was up 2.8 percent. As for cost margins, salary and benefit expense increased from 42.2 percent last year to 43.8 percent this quarter of revenue, excluding outliers. There's one unusual item in here -- approximately $25 million of expense related to a change in the discount rate used to value Tenet's (indiscernible) pension liability. This accounted for a little less than half of the 160 basis point increase.

Significant increases in health insurance, 401(k) and other benefit costs accounted for most of the rest of the growth. When comparing Tenet's labor cost performance with others in the industry, (technical difficulty) to remember that stock option expensing has a significant effect on its cost margins. For the quarter, stock compensation expense was 36 million, or about 110 basis points of margin -- or of revenue. It was roughly the same amount in the year-ago comparison, so it did not impact the growth in wages year-over-year.

Supplies expense grew from 14.8 percent last year to 15.6 percent this year of revenue, excluding outliers. Pharmaceuticals was the largest driver of net cost increase for supplies. Bad debt is an issue that has recently received a lot of attention at (technical difficulty) companies, and we are seeing similar trends at Tenet, driven primarily by increased aging in the financial accounts of self-pay patients. I think the best way to look at this is on a sequential basis. Looking at it this way, bad debt went up -- from 8 percent of revenue, excluding outliers, in the March quarter, to 8.6 percent in the June quarter. This is slightly higher than our guidance range, and the main driver is self-pay patients.

While one quarter does not make a trend, we do not see this issue abating any time soon. We do expect to provide over time, as our regional business offices come online, and even further improvement once the government approves our compact with the uninsured, which will offer managed care-style pricing to self-pay patients.

Other operating expense increased from 21.6 percent last year to 22.4 percent this quarter of revenue, excluding outliers. About 1/3 of this increase was from malpractice, which went from 74 million last year to 86 million this quarter, including a $10 million adjustment based on a change in the discount rate for one of our self-insurance subsidiaries to reflect a change in the market risk-free rate. Please note that in quarters when interest rates increase, we will see a corresponding benefit from the same sort of adjustments, and we will break it out at that time.

Also, there were about $20 million of write-offs in the quarter related primarily to capitalized information systems cost, which are not expected to recur. (technical difficulty) is the rest of the year-over-year change. Before I talk about margins, let me just remind everyone that the new rules under Reg G allow us to talk about EBITDA only if it is, literally, earnings before interest, taxes, depreciation and amortization. And we cannot exclude any charges or make any adjustments to the calculation.

On this basis -- which is including the impact of all of the charges we had this quarter, except for the discontinued ops charge -- EBITDA was negative for 4 million, yielding an effective margin of zero. However, the various charges described in our press release, which I will discuss in a moment, reduced EBITDA by $402 million. With revenues of about 3.4 billion in the quarter, the 402 million of charges had a 12 percent depressive effect on EBITDA margin. Beyond this, recall that stock compensation expense of 36 million in the quarter had an additional 1.1 percent depressive impact on EBITDA margin. So just to be clear, under the Reg G definition of EBITDA, this margin was essentially zero, but included a 13.1 percent impact from charges and stock compensation.

Now let's turn to earnings and charges. Tenet's diluted earnings per share for the quarter was negative 42 cents per share. This result included 69 cents per share of charges and costs, most of which were previously announced. Let's go through them very briefly.

During the quarter, we incurred an impairment charge of $198 million pre-tax, or 27 cents per share after-tax. This charge related primarily to five California hospitals and resulted from the budget process, which indicated lower future performance from these hospitals, thus necessitating this charge.

There were 77 million of pre-tax restructuring charges in the quarter, or 10 cents per share after-tax. These were almost entirely due to termination costs of the portion of the approximately 1100 employees that have been terminated since January that were let go in the quarter, including severance benefits and other such costs.

There were 68 million of costs associated with litigation settlements, legal fees and investigation costs. Of this amount, 54 million was associated with the Redding settlement announced yesterday, and about 7 million was for settlement of the previously disclosed Franklin Fund litigation. The remaining 7 million was the incremental legal costs above our normal levels. These costs continue at about 2-3 million per month, as we have previously disclosed.

There were $59 million of items included in operating costs that are not typically incurred. I described 55 million of this amount earlier in my comments, related to the two changes in discount rates and the information systems write off. The other 4 million was a net amount from a variety of minor factors.

The last charge for the period was a 15 cent per share charge from discontinued operations. This relates primarily to the previously-disclosed IRS challenge to the tax deductions the Company took for a portion of the settlement paid to the government in 1994. This matter is currently being prepared for appeal, but we have taken a conservative position from an accounting point of view, and recorded the full charge.

Now let's turn to cash flow. Net cash from operations was 359 million, down from 722 million in the year-ago period, a difference of 363 million. 207 of this amount relates to the decrease in outlier revenue from the prior year. Cash flow performance was better this quarter than in the March quarter, and a significant contributing factor was accounts receivable. Net accounts receivable declined 66 million in the quarter versus March. AR days from continuing operations increased from 66.4 days to 67.1 days, an increase of 7/10 of a day. As absolute dollars of AR was down, days were driven up by the slight seasonal decline in revenue per day. We are very pleased with this performance, which was significantly better than our guidance, which assumes about two days of growth per quarter.

Cash interest payments for the quarter were 81 million, compared to 125 million in the prior year. Cash taxes were 100 million in the quarter, compared to 15 million in the prior year. Capital expenditures for the quarter were 198 million, at the low end of our guidance range of 200-225 million per quarter for the remainder of the year.

Finally, I will give a brief update on two projects and discuss our expectations for future margin performance. First, the asset sale program. This project continues on schedule and as planned. We have received another round of bids a few weeks ago, and the groups with the highest bids are now conducting field diligence. We continue to have a high level of interest by financially qualified buyers, and the process remains a competitive one. We expect to begin negotiating definitive agreements shortly, with transactions expected to close by year-end.

The other project is a regional business office project. Since announcing the initiative a couple of months ago, we have moved quickly to finish detailed plans and begin implementation. We have identified the specific locations for these operations and expect to have the majority of the core infrastructure up and running by early next year.

Let's switch now to future margin performance. Trevor Fetter and I have said repeatedly that we are not satisfied with Tenet's current margins, and that we believe there is room for improvement. I want to provide some color on a reasonable way to think about where we are today, and the potential for meaningful improvement. I will start by saying it is not likely that Tenet's margins will equal that of our largest public company peers anytime soon. The main reason is that we believe some of the markets in which we operate are lower potential margin markets. Let me break this down with a few statistics.

About half of Tenet's revenue is from markets in the Southeast -- south of the Mason Dixon line and stretching east from Texas to Florida. In those markets and for this half of Tenet's revenue, our margins are comparable to other public companies operating in those areas, and should continue to be so. The other half of Tenet's revenue is earned in California, Philadelphia, St. Louis and Massachusetts. These markets are much tougher environments, and margin in those markets are much weaker. These are also markets where our public company peers have little or no market presence.

We historically have not discussed market by market margin, but it is not difficult to interpolate performance for this half of our business. If half our revenue has margins similar to public company peers in the Southeast, and you know our total company margins, then the implied margin for the remainder of our portfolio can be easily calculated. Our ability to shrink the margin gap between Tenet and public company peers will depend significantly on our ability to improve performance in these difficult markets. Tenet's portfolio clearly has margin upside, with much of the opportunity based on our ability to improve performance in the half of the business not already performing consistent with our public company peers. The solution will clearly differ market by market. Improving performance has as much to do with individual hospital issues as it does with portfolio strategy and optimizing the mix of services between multiple hospitals in a given market. Improving margins will not happen, but we are confident in the potential and expect to make consistent and significant progress as we move forward.

With that, I will turn it back over to Trevor Fetter.

Before opening it up to questions, (technical difficulty) the second quarter to the future of the Company, and talk briefly about our strategy. My top priorities can be summarized in three areas -- first, to stabilize operations; second, to resolve the litigation and investigations facing the Company; and third, to position the Company for future growth.

In terms of stabilizing operations, a couple of key factors are already in place. We have kept volume growth solid and patient satisfaction high. Our biggest challenges in the areas of operations are pricing and bringing our costs into line with the realistic level of revenues. We have already addressed pricing issues with Medicare by adopting a new policy for Medicare outlier payments last January. In effect, we have been operating under CMS' new outlier rules for seven months. So the new rules that take effect for the entire industry beginning tomorrow will have an immaterial but slightly positive incremental impact on Tenet's results.

In terms of managed care pricing, we are well along the way to reaching a stable baseline from which we can resume the level of growth that is more consistent with industry norms. And at the same time, we have been moving aggressively at all levels of the Company to reduce or contain costs. Some of these initiatives have shown results immediately; others will take longer to be reflected in our financial performance. Let me give you a couple of examples. Some of the first moves we announced in the first and second quarter are already bearing fruit.

In the area of overhead, we have been aggressively reducing headcount and non-patient care costs. I mentioned at our annual meeting that over 1/3 of the executives who were listed in the 2002 annual report have either retired or resigned. And since November, we have reduced the corporate headcount already by 10 percent, and the hospital headcount by 1 percent. As part of our effort to cut costs without impacting patient care, in March, we surveyed our hospital CEOs on the value that they saw in over 90 corporate services. As a result of that survey, we were able to eliminate or curtail half of these activities.

In the area of nurse agency labor, we launched an aggressive company-wide initiative in February to stem the growth of these costs. This is an area where it is unrealistic to assume that costs year-over-year can actually decrease, so our objective is to cut the rate of growth. Although in the quarter our contract labor was up 5 percent over the prior year, it was down 11 percent from the March quarter, and I consider this a great success.

In the area of (indiscernible), we have launched a focused effort to reduce costs in supplies and other controllable expenses. The baseline (indiscernible) that we think we can effect is $3.4 billion, and our internal savings goal is now well above the $100 million target that we announced in May. These initiatives are primarily centered on standardization, contract compliance and rebidding contracted purchases.

My second priority after stabilizing operations is to resolve litigation and investigations. I expect that this will take time, and it is unacceptable to all of us for the Company to be faced with the variety and quantity of investigations and litigation that it is today. I assure you we are taking action and dealing with the issues in a forthright and cooperative manner. Our goal is to resolve these matters, put them behind us and focus all of our attention and resources on running our hospitals and providing quality patient care.

When we have the opportunity to settle matters on a fair basis, we will settle. When that opportunity is not available, we will have to let the legal process take its course. Because the timing in these matters is often out of our control, I am encouraged that we were able to reach a resolution with the government on the Redding case relatively quickly, and we will strive to reach appropriate resolution in the other matters, as well.

I would like to turn now to the third priority, which is to lay a foundation for future growth. As I have described, our turnaround strategy in revenues is to continue the efforts that have generated our strong volume growth, while reaching a stable base of unit revenues, from which we can resume industry level rates of growth.

On costs, our strategy is to attack all of the major cost categories with a zero-based approach. We are paring down our hospital portfolio with selected asset sales, and we have been very pleased with the level of interest in these assets, and the process continues on track. When we finish this project, we will have a core group of hospitals on which to concentrate our turnaround efforts.

In my mind, there is only one long-term sustainable strategy for healthcare providers, and that is a relentless emphasis on quality. In May, I introduced 300 of Tenet's top hospital and corporate executives to a major initiative we are calling Tenet's Commitment to Quality. It has gathered tremendous momentum within the Company. Today, I would like to (technical difficulty) this initiative to you.

We are defining quality broadly, encompassing several elements. In terms of clinical excellence, we are creating an entirely new medical infrastructure to advance clinical quality in our hospitals. (technical difficulty) weeks ago, we named Dr. Jennifer Daley as Senior Vice President of Clinical Quality for Tenet. Dr. Daley is a widely-recognized authority on the quality of patient care and patient safety. Over the past 7 years, she has held senior positions in quality-related functions for both Beth Israel Deaconess Medical Center and Massachusetts General Hospital in Boston. In her new role, Dr. Daley will oversee a newly-established clinical quality team, including 9 chief medical officers situated in each of Tenet's major markets.

Our operations leadership, together with the clinical quality team, is rolling out our company-wide Commitment to Quality program that will address 4 performance themes -- first, ensuring patient safety and reporting results; second, supporting physician excellence; third, improving the practice, resourcing and leadership of nursing; and fourth, facilitating patient flow and care delivery to create operational efficiency.

We also appointed Lauren Arnold to the newly-created position of Vice President of Nursing. Lauren has held nursing leadership positions at the University of Pennsylvania Health System and holds a Ph.D. from U Penn. She has worked in the field for over 25 years as a staff nurse, in nursing management and in academics, health policy and consulting. In her new role, she will lead initiatives to improve the practice and leadership of nursing at our hospitals, and oversee the newly-formed Nursing Executive Council, made up of 7 regional nursing chairs from across the Company. The council's role will be to design strategies to address the complex challenges of nursing and to work closely with hospital chief nursing officers and senior management to implement solutions.

We also announced last month that Tenet is participating in a voluntary quality initiative launched by the American Hospital Association and other hospital health care associations, which is supported by CMS and the Joint Commission on Accreditation of Healthcare Organizations. As part of this initiative, Tenet hospitals will post various quality metrics on the CMS website for Medicare beneficiaries and other consumers. We will also take part in the 2003 Leapfrog Group survey that publicizes ways to reduce medical errors and improve hospital safety. The Company has typically not participated in these types of third party initiatives in the past, but we have now committed to doing so as part of our clinical excellence efforts.

In addition to clinical excellence, we also continue to strive for service excellence. Three years ago, Tenet launched a program called Target 100, with a stated goal of achieving 100 percent satisfaction among patients, physicians and employees. Our people did an incredible job of embracing that philosophy and achieving real results. Our recent patient satisfaction scores demonstrate that, and we will continue to build on that success.

Finally, quality at Tenet means an absolute commitment to ethics and compliance. We now think of ethics and compliance as the foundation of Tenet. Of course, the two are different -- ethics is doing the right thing while compliance is ensuring that everything that we do is within the rules and regulations of our industry -- but they are both essential to our ability to build a company with high integrity. In concert with our Board, we have taken steps to make our ethics program more independent. We have rewritten our standards of conduct and we have made substantive changes to our ethics training, right up to the highest levels of the Company.

And, as we announced on Monday, we have also expanded and reinvented the compliance function, which consists of a team of clinicians, accountants and people with legal expertise, to bring a multi-disciplinary approach to our compliance efforts. The restructured department reports directly to the Ethics, Quality and Compliance Committee of the Board of Directors, and is led by our Chief Compliance Officer, Cheryl Wagenhurst (ph), who is a nationally-recognized expert in her field.

In addition, our compliance function is advised by Max Thornton (ph), the former Chief Counsel of the Office of (indiscernible) of HHS. Max is working closely with us to ensure that we are implementing best-in-class practices in every aspect of compliance.

In brief, I have described our goals and the roadmap for the Company's future. The near-term will continue to be difficult, but we are making steady progress on several fronts. And we are supported by a strong, independent new Chairman and Board of Directors.

Immediately prior to our annual meeting two weeks ago, Edward A. Kangas was named Non-executive Chairman of the Board. Ed is the former chairman of Deloitte & Touche, and was instrumental in the integration and growth of that firm. Four of our Board members retired, and Ed and two other new directors, Bob Nakasoni (ph) and John Cane (ph), joined the board as independent outside directors. Ed, Bob, and John each have impressive backgrounds in business, and have already proven to be dynamic additions to our Board. Our Board today consists of 9 members, 8 of whom already meet the strict new standards of independence that were recently adopted by our Board. The board is continuing its search for at least one other independent director.

I can also tell you that the CEO search, which began in early June, is entering its final stage. The Board search committee will be interviewing candidates, including me, during the remainder of August, with a decision expected to be made and announced in September.

And with that, I would like to open it up for questions.

(CALLER INSTRUCTIONS). A.J. Rice of Merrill Lynch.

A point of clarification and then a question. First of all, if you exclude the special items that Stephen Farber laid out, it looks like to me -- continuing ops type of thing, normalized (indiscernible) about 27 cents. Obviously, you've given guidance for the next year of 80 cents to $1 on a full year basis. It would seem to me that your commentary up to this point suggests that pricing could continue to slip a little bit, as some of the renegotiated managed care contracts kick in. But alternatively, there's cost savings that you hope to achieve. Given that you are at a 27 cents run rate, does that make you feel better about the 80 cents to $1 than you were five or six weeks ago when you gave the guidance, or is it even potentially that that is conservative?

The other broader question I was going to ask -- with the renegotiation of 40 percent of your contracts since November, is there any reason to think that those are just a random sample of contracts, or is there any reason to think that those are the more contentious contracts that got renegotiated first? Does that give you more visibility than maybe just having 40 percent negotiated suggests?

Thank you, and that was probably three or for questions rolled into one. I suppose my answer would be that -- first, I do not think we disagree with your math, although as Stephen Farber explained, due to Reg G we can't exactly do the math for you. Second, with respect to the question relating to our sentiment about guidance, we issued that guidance recently enough that we see no reason to change the guidance, but we are still comfortable with the guidance that we issued. And the third part of your question related to the managed care renegotiations, and I think it is a safe assumption to make that where there have been more contentious relationships, that those were brought to the surface earlier in this process. And remember that the Company's pricing issues came to light in November, roughly 9 months ago, so we have had plenty of time to be working on those. So I think on that metric, you should expect contentious (indiscernible) surface earlier, but they do take longer to resolve, and that is why we are where we are today. And again, all of those metrics I gave with respect to where we are in the renegotiation or renewal process relate to percent of revenues represented by managed care contracts. As you know, we have literally thousands of contracts, the vast majority of which are very small.

John Hindelong(ph) of Credit Suisse First Boston.

Trevor Fetter, obviously these days you have the title of interim CEO. I am wondering if you could explain to us what the challenges are that are different for an interim CEO versus a permanent CEO? And along those lines, we understand that you've lost a number of very good hospital CEOs. Are you having trouble keeping folks in the fold under the circumstances, and what are the things that you can do to stem the tide? And to roll this up into one other big question and follow-up on A.J.'s question -- 80 cents to $1 -- it sounds like the low end of that range would suggest significant disappointment, really, in the second half of the year. So do you want to walk us through what you really mean on guidance?

I will start with the interim CEO question and then I will ask Stephen Farber to clarify on the guidance. I think the good news for you and the other listeners is that I will not be writing a book about being interim CEO. I would answer your question by saying that there are only a few areas where being an interim or acting CEO has proven to be challenging. I think those are, essentially -- it makes it more difficult to recruit talent to the organization in certain key positions that are vacant, and there are certain cases where dealing with external parties may take longer than would otherwise be the case because of their uncertainty about whether we would -- the company would follow through on a commitment that I might personally make. Other than that, I do not think it has been a significant handicap at all in our ability to make progress for the Company. As for your question about losing hospital CEOs, that is something I pay close attention to. I believe it is correct that since January, we have lost approximately 12 of our hospital CEOs in voluntary resignations. And it is obviously something that concerns us, and as the Company's situation continues to improve and stabilize, we would expect that that rate of attrition would be reduced. Stephen Farber?

On the guidance question -- recall that the 80 cents to $1 was not for calendar 2003, it was for second half of 2003, first half of 2004. So really, the guidance that we gave for this your alone related just to the back half of this year, which was 40-50 cent guidance. Clearly, when you look at Q1 and Q2 so far this year, they do aggregate to over 50 cents on the basis that you are talking about. And I think the most important statistic to look at is the unit revenue -- the revenue per admission excluding outliers -- which the growth in that stat was 5.8 percent in Q1 and 2.8 percent in Q2.

Clearly, the trends that we identified when we released guidance about six weeks ago were -- our greatest -- the item that has the greatest impact in our numbers is what happens with unit pricing, and that is -- and while these managed care negotiations continue, as Trevor Fetter spoke about, that is probably the largest swing factor in what results we'll actually turn in over the next few quarters. It is too early for us to revisit that guidance, other than confirming we are still comfortable with it, especially given that we just put it out six weeks ago, and it does not relate to Q1 or Q2 of this year, just the periods that are upcoming.

Just to be clear -- it's not as though you are suggesting that the earnings level in the out quarters is going to be significantly lower from that which we saw in this current quarter -- best you can tell?

The current quarter was consistent with the guidance in practically every respect, yes.

Gary Lieberman of Morgan Stanley.

Could you clarify what line items on the income statement, the $59 million charge and also the $70 million charge, are in?

The $70 million charge -- you mean the litigation? Let me pull out the right schedule. The $70 million charge is actually below the line, so when the Q gets filed later today, it is broken out below the line related to discontinued operations. So that does not hit the core cost items. The $59 million charge -- I had indicated during my comments that 25 of it is FW&B, and approximately 30 or so is in other operating expense, and the other $4 million is spread in different locations.

If I could ask a quick follow-up. In thinking about the potential liability at Redding or from Redding, can you give us any detail on how your insurance there would work for any potential malpractice claims?

Right now, the remaining liability exposure at Redding has to do with the civil cases that the plaintiffs have been filing over the last couple of months. As you will see in our Q when it is filed this afternoon, despite a lot of early press, the plaintiffs have yet to get an operable complaint on file with respect to the civil litigation up at Redding. Assuming that they do over come the procedural issues, those cases are being plead as both fraud and malpractice cases. So the fraud aspects of them, if successful, would not be covered by insurance. To the extent that we are successful in focusing these pieces of litigation where we think, if they have merit at all, they would be more appropriately focused -- which would be (indiscernible) malpractice front -- then, of course, California cap of $250,000, and that would be covered by our malpractice insurance.

Lori Price of JP Morgan.

Relative to the increase that you have seen in bad debt expense year-over-year and sequentially, can you tell us what percentage of your revenues came from self-pay patients in this June quarter versus the year ago June? And what percentage of your self-paid bills are being collected today versus a year ago?

In terms of the revenue categories, it is very difficult to break out the exact percentage, as we have spoken about before with you, where there are components of each area that ultimately end up being classified as one sort of self-pay or another as they progress through the system. For instance, someone may start out as a managed care payor and get booked in that manner, and then through the collections process it is determined that they do not actually have coverage, and they become a self-pay. So it is tough to look at it on that basis. What I can sell you is that we have seen a significant increase in the level of assignments from our hospitals to our in-house collection agency of self-pay patients, where pretty much the accounts that they are getting are generally in worse shape by the time that they get to the collection agency, and they are more difficult to collect. We have seen both an increase of assignments to our in-house collection agency and we have seen a decrease in the ultimate collections from those. And that is really the best way for us to get a clear sense of what is driving the bad debt as these receivables age out are, in fact, coming from self-pay, and that there very clearly is a deterioration in the quality of those accounts.

I know that, Stephen Farber, you talked a lot about this on the call on your prepared comments -- but I was wondering if you could elaborate a bit more on your same-store inpatient growth rate -- the 3 percent? And I know that you have been heavily investing in your facilities and spending capital where appropriate to take advantage of growth opportunities, but many of your peers have been doing the same kinds of things and are taking share as well, and are still not able to achieve the kind of growth rate that you have. So I wondered if you can elaborate a bit more, and tell us how you are able to achieve that when your peers have been unable to?

It's an awfully tough question, because you are asking us to comment on the activities of our peers, and I am not sure we know enough to speak intelligently on that topic. Our numbers are what they are. They have been relatively consistent and consistently strong through this period, and obviously, we are all very grateful for that. We attribute a lot of that to the heavy investment that the Company has made targeted in areas like capacity expansion, the investments -- and these are not capital expenditures I am talking about -- but the investment of time and cost in areas like programs that are designed to improve the satisfaction of patients and of physicians. And -- I could speak about our own results, but I can't really give you a very valid comparison to the peer companies, because I just do not know enough about their specific results or geographies, or those kinds of issues.

I understand that it's unfair to ask you to comment on your peers, so thank you for what you have been able to elaborate on.

Adam Feinstein of Lehman Brothers.

My question is twofold. One, I did not hear a same facility revenue number, so just curious whether you have that? Secondly, just trying to get a handle on stop loss payments. I remember with the presentation you guys provided several months ago, you were saying about $1 billion a year. I'm just trying to understand when we look at the revenue per admission trend here in the quarter, how much of the weakness there would be a function of just less stop loss payments? You break out the impact from stripping out outlier payments -- I'm just curious whether you could give us any ballpark of the impact from any changes in our stop loss payments?

The same-store revenue for the quarter wasn't very different; it was about 3.44 billion.

The stop loss number for the second quarter -- and this is a bit of an estimate -- is $260 million, which is about 11 percent lower than what it was in the March quarter.

How about from the same period last year?

We don't have it from the same period of last year. I think -- you may recall that in December, when we made a fairly comprehensive presentation about the Company's prior pricing approach, we had had to pull that number together. Which at that time was roughly $1 billion, and Ed had to do it on a specific historical basis. So we do not have the quarter by quarter numbers (inaudible) 2002.

Thank you.

I have got a clarification, I read from the wrong column. The same-store revenue is 3.37 billion. I apologize for that.

Kemp Dolliver of SG Cowan.

With regard to the 8 or 9 cents -- the 8 cents related to the changes in the discount rates, are you changing the discount rate quarter to quarter, or is this essentially what you had done in the March quarter and then that same rate is now in effect through the balance of this year?

The change -- there are kind of two parts to that. For the $10 million associated with the self-insurance subsidiary, that was simply marking the market for change for the drop in interest rates between March 31 and June 30, because that portfolio had already been marked to market. For the $25 million for revaluing the pension liability, that was more of an adjustment than just the change in market rates -- it was during the last couple of months that I was reviewing that pension plan, and we reached a conclusion that the discount rate being used for that was not the same level of conservatism that I had tried to bake into the rest of the rest of the balance sheet. So a portion of that $25 million change was related to a general adjustment to the approach to discounting those liabilities, and then another portion was simply the decrease in interest rates.

Interestingly, recall that all of these calculations are done as of the June 30 quarter, and since then there has been -- and interest rates were at a multi-year low at that point, and there has been an increase in the risk-free rate since then. To the extent that nothing else changes, what you will likely see at the end of this quarter is some positive benefit, positive contribution from exactly these same calculations, and we will simply break those out separately. So the short answer is yes, they are being calculated quarterly, and we are just going to break it out each quarter because we do not think that to a decent analysis of our operating performance it makes sense to have interest rate sensitivity liabilities clouding the true underlying operating results.

More broadly, as you think about the portfolio and where you have to do work, in terms of turnaround -- to me it seems like you can view it this way, is you have got markets essentially where the cost structure reflected a revenue base or revenue stream that has now gone away. And the question is, as you look at what it takes to get from point A to point B, how much of that is dependent on what you do on the cost side versus over time recapturing the lost revenue that you were getting from the Medicare outliers?

I think it is unrealistic to expect that we can recapture lost revenue from Medicare outliers, although having had in certain markets a high level of outlier payments -- it's stating the obvious -- but that would lead operations in any business, not just this hospital business. But if you had a higher level of revenues, it might lead you to provide in their hospital services or costs or other elements of operations that do not make sense under a lower platform of revenues. So in essence, we are trying to do two things.

Obviously, we are trying -- assuming that our volume growth remains solid -- and you noticed in everything we have said we have hesitated to cut into anything that would affect volume growth -- assuming the volume growth remains steady, and assuming it is the right kind of volume, we are seeking to establish a baseline of revenues on a unit basis from our customers from which we can grow appropriately for the industry. And at the same time, taking a very hard look at cost -- and not just costs assuming a static portfolio of services -- but we are looking at whether the services we provide in every hospital make sense, and all of the kind of comprehensive analysis of our business operations that you would expect. But I would tell you this -- that as we do that, we have a very sharp eye on our topline volumes. And we are loathe to do anything that would -- certainly we wouldn't do anything that would affect patient care; and secondly, we would be very hesitant to do anything that would negatively affect our volume growth.

Adam Schwartz of First Manhattan.

Could you provide an update on the other government investigations at this point? The outlier, Alvarado and anything else?

We'll ask Christy (indiscernible) to run through the major categories.

With respect to the outlier investigation, we are continuing to cooperate with the US Attorney's Office in Los Angeles and the Department of Justice, with respect to their request for documents related to the outlier investigation. And that is really ongoing. There is nothing material to report, in terms of an update on that. With respect to Alvarado, as everybody on the call probably is aware, the grand jury in San Diego did return an indictment against the hospital, and the next tier subsidiary -- Tenet Health Systems Hospitals Inc., which was actually the entity that operated -- owned and operated the hospital during part of the timeframe there -- that case is really proceeding towards trial at this point, and we are continuing just in the litigation there with respect to Alvarado.

With respect to the other items that were set forth in K, to the extent that there was anything to update -- it's in the Q -- there was really nothing too significant. The only other new thing, I think, during the quarter was the receipt of a subpoena out of the US Attorney's Office in Los Angeles related to relocation agreement on a broader basis, and we are in the process of responding to that subpoena.

Do you have any reason to feel more positive or any different about the outlier investigation today than perhaps six months ago, or it's too early?

I think that there has been a lot of discussion about the CMS regs. I think Tom Sculley (ph) has made it pretty clear, in terms of CMS' view, the outlier -- how Tenet was performing given the CMS regulations. I think that it is too early to try and assess whether or not there is exposure on behalf of the Company, and what that could be.

I would just add -- I do not know if you read Modern Healthcare, but there has been a series of articles in Modern Healthcare on the topic, including one recently that pointed out -- again, information that has been in the public domain -- that it was not -- this practice and the high level of outlier payments was not limited to hospitals owned by Tenet, that there are literally hundreds of hospitals in the United States that (technical difficulty) have been following this same approach to charges and outliers in the past.

Just one last thing. Early on, there was a lot of attention given to the OAS (ph) audit that was being conducted of a couple of the Tenet subsidiary hospitals. Ultimately, OAS did a full audit of three hospitals, and we received a letter a couple of weeks ago basically saying that they have finished their activities and were simply going to refer it over to the Department of Justice. So that OAS audit, I think, now you can view as just being rolled into the overall outlier investigation.

Sheryl Skolnick of Fulcrum Global Partners.

I am going to go back to the operating performance in this quarter, and while I hesitate doing that because it is past and the future is different, I do need to understand -- sequentially and going forward -- what the differences are likely to be between June quarter, September quarter and the going forward in the following sense -- it sounds like, Steve, you are taking a different approach to the pension issues and the discount rates that you are using (indiscernible) -- insurance generally, whether it be the captive subsidiary malpractice or the pension issues -- than was taken before.

So we are hearing more about these kinds of changes in the discount rate, which, quite frankly, I do not remember ever hearing before. So the core of the question is, what is the assumption on the interest rates underlying the 40-50 cent second half 2003 guidance and the 40-50 cent first half 2004 questions? And another question related to your margins in the several markets -- the 50 percent of your business that is not doing well?

The first time this issue actually came up was on the February quarter, when we took a big charge effective 12/31 for a revaluation of the malpractice portfolio using a lower discount rates. The practice has been moving towards using a form of risk-free rate, and depending upon the particular measure, there are different rates that the actuaries use. So there was approximately, if I recall -- I'm doing this off the top of my head -- about a $40 million component of the charge in December for the malpractice portfolio, which brought that interest rate down to the risk-free rate, which is effectively the risk-free rate for the average duration of the malpractice portfolio. And then, from quarter to quarter, to the extent the risk-free rate changes, you have a discount rate effect of a little up or down. So that is the $10 million number this quarter. The change in the pension discount rate is, frankly, the same type of issue.

I understand that's the same issue, but it just seems to me that this is going to be ongoing in the business, so I am worried about what's underlying the guidance?

The guidance does not assume any change in interest rates, so it assumes that interest rates say stable. To the extent that rates go up or down, you will see these sorts of hits. What is interesting is we have, over the course of the last two quarters, marked the portfolios now down to the risk-free rates at the end of July -- which I believe were the lowest risk-free rates in several years -- and rates have since moved up 100-120 basis points since then. So those will be positive contributions as opposed to negative contributions as it's been over the past couple of quarters. But again, we are separating them out, because from my own personal perspective it is simply an accounting convention, and there is very little resemblance to anything to do with operating reality.

I guess I don't understand that, because presumably if you are actually earning less on the assets underlying the pension liability, then at some point when you have to -- and especially since the nurses want more pensions, not less -- it seems to me that this becomes a much bigger issue going forward, and an important part of your negotiating thought process with the unions?

And now it is much more clear to me. These are generally unfunded or only partially funded liabilities, like the malpractice liabilities, for instance. There is some money in the self-insurance subsidiaries, but they are not fully funded in any way, and the (indiscernible) liability is a completely unfunded liability.

That's supposed to make me feel better?

(multiple speakers). So we don't have an issue with the return rate on assets underlying -- so you don't have a (indiscernible) mismatch, you have a soft mismatch.

The other question is -- maybe it is an observation, but it seems to me the markets that you described as being the relatively low margin markets -- the California, Philadelphia, St. Louis and Massachusetts -- are markets that had very significant acquisition growth; markets in which I think it was fair to say -- with the exception of maybe -- let's just look at California and St. Louis, where you have very significant market share presence in those markets, and a visible brand name and visible hospitals -- is that merely a coincidence? I guess what I am getting at is you acquired them, you got the new state-wide average cost ratio cost ratio, you have got the outliers came in -- you never turned those buildings around? Is that what we're talking about here?

I do not think that is a fair statement, but it is a provocative one.

That would be not new for me.

I was not going to say that. In fact, in those markets -- and I am glad you described them as low margin markets, not poorly performing markets -- because within those markets, first of all, there are individual hospitals that are not only very fine hospitals -- in fact, if you look at the US News and World Report ratings or some of the other objective quality ratings of hospitals, some of our finest hospitals in the Company happen to be in some of those markets.

So we have very high margin markets -- hospitals in some of those markets, and we have low margin hospitals in some of those markets; it is not to say that the market is a bad market; it is not to say that the hospitals are not attractive hospitals in those markets -- it is just stating a fact that I think we have been trying to elaborate upon now for a couple of months -- that as people in the investment community look at the different public companies, although there are only a handful of public companies, we have some unique characteristics -- particularly in terms of the markets in which we operate -- that lend -- all things being equal, and assuming that they (indiscernible) in terms of where geographically we operate -- this company would have lower margin potential than its largest public company peer, which we believe is the most relevant comparison.

I did not hear what you said -- did you tell us what the core labor inflation rate was?

I did say what the margin was. Hold on, let me get that number. FW&B's went from 42.2 percent to 43.8 percent.

I got that.

So if you back out -- that was 150 basis point increase, of which about half of it was the change in the discount rate and the other half was health insurance and 401(k).

Karen Wilth of Barclays Capital.

I was wondering if we could go back to the insurance, back to the Redding settlement. Of that $54 million, could you tell me how much of that would be covered by insurance?

None of it.

On a similar vein for cash flow -- of the charges that were recorded this quarter, how many of those are cash and how much is non-cash?

Let me get the press release and I will run through it in the same order. I will have to use round numbers for some of this. The impairments of 198 million are non-cash; the restructuring charges of 77 million -- ballpark, about half of that will be cash, but the incurrence of that cash expense will be over the course of time for severance payments and those sorts of things; the litigation and investigations, that is pretty much all cash, the $68 million; the 59 million of the various other charges, those are primarily non-cash; the 70 million after-tax charge for the income tax dispute is non-cash now, pending whatever happens with the resolution of that dispute. If we win the case it stays non-cash, if we lose the case, we make the payment.

Gary Taylor of Bank of America.

I wanted to go back to the Redding settlement and just ask a question, just to hope to understand directionally how you are going to handle some of the things. But I guess the question at Redding is, what exactly is being settled there, given that there were no charges filed against the Company? And historically, you had stood by the corporate compliance policies. I guess I am unclear what and why there is this sizable settlement for a single hospital?

First of all, just to make sure we all start from the same point, there have been no charges filed against anybody or any entity related to Redding. What we had said historically was that the criminal investigation was targeted at the two physicians -- we still believe that that is true -- but that clearly the hospital was involved and going to be looked at as a result of that investigation of the doctors. To the extent -- without addressing any of the specifics -- that at any point in time in the future, other clinicians would take a look at the procedures done by the two physicians and have a disagreement about the medical necessity of those procedures, then the hospital would have been in a position that it would have needed to have repaid the government for the money it received as a result of any procedures that at some point in the future would have been deemed to have been unnecessary.

We believe that -- being as this hospital has clearly been decimated, virtually, as a result of this investigation -- that it was the best strategic decision to make to reach this resolution. It is a completely civil settlement with the government, and resolves all the civil claims the government could potentially have for reimbursement or damages against Redding. In addition, we have a declination letter from the US Attorney's Office of the Eastern District, specifically stating that they will decline any further criminal prosecution -- to the extent we were at risk for that -- for either Redding Medical Center or any of the upstream corporations. So in total, what it does is allow this hospital to draw a line in the sand and move forward from what has been a huge black cloud overhanging that hospital.

I would only add that we find that market to be an attractive market, and historically, it has been a high performing hospital for the Company. And we are very eager to rebuild our business there. And as Christy said, this was a strategic decision we made having to do with looking at the future of the market and the future of the hospital, and what was in the best interest of our shareholders in moving towards a brighter future, where we can rebuild a business.

You made a comment earlier about how you would address some of the investigations and so forth, and I did not quite catch it. But did you say or did you suggest that we should be expecting the possibility of future settlements for things for which, at this point, we have not seen charges filed? Are there active negotiations into some of the other issues where we have not actually seen any formal charges filed?

I think you are referring to the comments I made in the beginning, and just to clarify -- all I was saying was that we are proceeding on all of these matters in a very forthright and factual and cooperative manner. And where we can settle matters, we will settle them. And where we can't settle them, we will litigate them. And it just depends entirely on the circumstances, and I was not intending to send any signal about what you should expect; in fact, I also added that in these types of matters, often the way they progress is outside of our control.

Leon Cooperman of Omega Advisers.

Three questions, if I may. One, assuming you are lucky enough to remain CEO -- you go from acting to active to actual CEO -- do you have a view as to what you are capable of generating in the way of normalized earnings in this enterprise? To justify your compensation, the options you're getting, things like that, have you developed a view about what this revenue base is capable of generating once we get out of this quagmire and we resolve the main issues facing us. The concept of normal earnings -- because I don't think anyone who has invested in the Company is looking (indiscernible) the next quarter's earnings -- that would be silly -- we were wondering whether this enterprise could generate an industry-competitive EBITDA margin on this 13 or $14 billion of revenues you're generating. That is question number one.

Second, I would like to make a suggestion -- I think your new lead director should have a conference call with the investors to share with us his vision for the Company, since he's the lead man on the Board representing all the shareholders. (indiscernible) get my questions out and in a hurry. Third, what is the likelihood of the Company pursuing strategic initiatives to create shareholder value, much along the lines of HCA, where they spun out Life Point, Triad and sold off the hospitals that were non-strategic and wound up creating a lot of value for shareholders? Fourth, why can't we, or when will we get in a mode where we will be a significant cash generator? HCA was able to go private in an LBO and make their investors a substantial amount of money. And characteristic of an LBO is you have got to be in a business that generates cash. So given all the issues facing us, when are we going to get into a mode of generating significant amounts of cash?

Obviously, some of those questions are difficult to answer without engaging in some guidance that it's premature to do. The first question on normalized earnings and what can we generate -- we have been forthcoming in providing short-term earnings guidance. I realize, and I know from the conversations I have had with you in the past, that you would like longer-term guidance and specific predictions as to what the margin potential of the Company is. And while it would certainly make our lives easier, and I think it would be very satisfying to many investors for us to engage in that type of forecasting, I think it is just too early.

We need a few more quarters to gain a greater understanding of exactly what is the baseline level of unit revenues that we will achieve, when will we achieve it, and what type of growth in revenues will we be able to achieve off of that bottom? I also think that because of the nature of our company's portfolio, in particular (technical difficulty) in a market like California, where there are many moving parts at this time -- both on the revenue and labor, and essentially all of the different elements of our business -- it just would be -- I think it would be a mistake for me to try and be any more specific about future margins or margin potential or earnings potential, or any of the related types of questions at this time.

But I think as each quarter unfolds, and particularly as each quarter we are achieving the types of levels of earnings that we have suggested in the guidance that we gave last month, I think that gives us all greater visibility into what we can do in the future and beyond that. I am going to take your questions a little bit out of order, because I think a related question is this question relating to HCA about strategic initiatives like spinoffs and carve-ups and so forth. Obviously, our mission is to build a business on a foundation of quality that will provide solid, consistent long-term returns to shareholders. And at the same time, we obviously look at different types of ways of improving shareholder value. I do not think that the situation Tenet faces today is directly analogous to HCA's in 1997, in several respects, but just on the portfolio question. At that time, HCA was a dramatically larger company then Tenet, had, I believe, 3.5-4 times the number of hospitals that Tenet has. There was a very wide variety in the locations and types of hospitals that, at that time, Columbia HCA had. I think that the strategy they pursued in carving up the company or spinning off Life Point and Triad and the turnaround that they did was absolutely the right strategy for them, and they have done it expertly and they have generated terrific results for shareholders.

When we look at our company, those types of spinoff opportunities -- just to focus on that -- are not readily apparent. I would tell you that if we ultimately find that we have two distinct companies that have entirely different types of profiles, that could be something that we would consider, but I don't think that that is the case here. And again, it is a little early to make a definitive statement about that. As for the significant cash generation, I think my answer would be similar to the response that I gave you on the earnings guidance question -- except to say that, obviously, our generating cash is a characteristic of a business like this.

We are very mindful of HCA's history and their ability to generate cash and how helpful that was to them in their turnaround in the late 1990s. And you know from the comments we have made that we have been working hard to reduce the level of capital expenditures from a run rate where they were in late 2002 -- which was essentially taking the quarterly capital expenditures from something like 300 million a quarter down to something less than 200 million a quarter. And that is difficult to do in a short period of time. I am also pleased that during this period of time when we are working through difficult negotiations with our managed care customers, that our accounts receivable performance has been as good as it has been. So I would not declare victory over cash flow today -- that would certainly not be appropriate -- but I think that we are obviously very mindful and very focused on cash flow. And then, as for the last point, about our new Non-executive Chairman Ed Kangas hosting a conference call with investors -- I do not necessarily think it is a bad idea. Ed is somebody who is very comfortable with investors. After having run Deloitte & Touche, he's obviously very familiar with all of the aspects that affect public companies in all different industries -- governance issues, issues of restoring confidence in companies, working through very difficult problems and so forth.

But I would also suggest to you, it is essentially a volunteer type of position; there is a very nominal amount of compensation associated with it, and it is not intended to be a full-time job. His focus to date has been on governance, on organizing the Board, focusing the operations of the Board. And I think that he would not be shy in expressing his views about the Company and the importance of restoring solid, strategic direction, and building a company with integrity. I do not want to speak for him, but that is what appeals to him about this opportunity.

I have to say, I don't know what (indiscernible) said nominal, and I don't know -- I haven't looked at the proxy lately -- but I would say that 90 percent of the people in this country would not consider what the Chairman of the Board of the Company is being paid as being nominal.

In this case -- it is not in the proxy, but the fee for being Non-executive Chairman is $50,000 in addition.

On top of his board fees, I assume; on top of his options, on top of his committee attendance. I am sure that he'll wind up making $150,000 a year for being Non-executive Chairman of the Company -- but what transcends all of that, frankly, is he took the job, and therefore he has got to do it in a (indiscernible) and a certain enthusiasm and a certain way. And I think telling all of us what his objectives for Corporation are would be very instructive. Let me get back to one thing. I wasn't really asking you for earnings guidance, so to speak, but -- you have a compensation package, you have an option package, you are incentivized by the Board, and the Board basically has every reason to know what this compensation is going to buy them, just as the shareholders have every reason to know what kind of normalized level of earnings should this corporation generate.

The sad thing is -- and I know it's a non-cash charge -- but we are (indiscernible) charged 19 cents a year here, whatever the number is, for option expense. And we really -- it has nothing that much to do with you, but there's been nothing but value destroyed here, in terms -- the notion that we are paying a lot of money for option expense, and given what value has not been created here, I think it is important for us to understand what is a reasonable level of earnings for you guys to generate so you could be properly evaluated as management? I'm not looking for a near term earnings forecast, I am looking for something I could evaluate you in the future to determine whether your performance is good, bad or indifferent?

I do not intend to debate you about that. All I would say is that -- first of all, we are running a little bit low on time; and second, I think that as -- I could just tell you that as the visibility on our business increases, and as it has increased in the past six months, we have added to guidance and predictions and visibility on our forward performance. And we will continue to do that as those issues become clear to us. But at this point, I would like to ask the operator to move onto the next question.

Charles Lynch of CIBC World Markets.

I wanted to touch on labor costs real quickly. Steve, could you put some data points around what you view as unit labor cost trends, if you stripped out some of the discount rate adjustments? And along the same lines, Trevor Fetter, I am wondering if you can give an update on some of the union relationships in California? What has progressed there over the last couple of months?

Why don't we start with the union question? Randy Smith is here with me. He sat here patiently, so I will ask Randy to comment on the union situation in California.

Let me characterize that in two separate commentaries. First, as everyone on this call is aware of our agreement with the SEIU, and as a result of that agreement, we continue to conduct elections under the terms of that agreement in our hospitals. And those have proceeded since the time at which those agreements were reached, and we have currently conducted some 22 elections. And the union has won 21 of those elections and the hospital has won one of those elections.

The process of the petitions by the C&A to organize some 19 of our facilities is, as I think you may be aware, under hearing by the NLRB. Those hearings have begun, and are currently scheduled through the fall for purposes of the NLRB to evaluate the C&A petitions, versus the labor accord reached between the Company and SEIU and the manner in which elections might be held for purposes of our nurses to select between being represented by a union or not. And if they are to be represented by a union, to either select the California Nurses Association or the SEIU alternatives. So we expect that process to continue going forward for those hospitals where the elections have been held. Our agreed-upon collective bargaining agreements have been fairly quickly addressed and resolved, and our operations proceed forward under the form of those agreements.

In terms of the unit labor costs, I do not actually have a schedule here with all of the unit labor cost stats. But you're actually able to calculate those pretty easily on your own. My suggestion would be that you take our total FW&B, I would subtract out the identified $25 million charge this quarter, and that charge is not (indiscernible) listed in prior periods, so you don't need to adjust for the prior periods. And then I would strip out stock compensation expense, just to get to a sort of base labor cost. And simply divide by admissions or divide by patient days, and that would get you to a unit labor cost trend.

Because we have been going now more than an hour and a half, we are just going to take one more question.

Andrew Bhak of Goldman Sachs.

Following on the labor theme -- I guess -- when we look at the Company's volume performance, it would suggest to us that the hospitals -- and I guess more specifically, the Company's relationships with community physicians -- pretty much remain solid. And we assume that a big part of this underlying strength, particularly with respect to the docks, ties back to the nursing staff. So as you think about the potential for future margin expansion, is the leverage that you will derive on FWB more a function of the resumption of normal pricing dynamics for the Company, or actually working down FW&B costs?

I think there's probably no more powerful lever in the economics of this business than pricing, and that -- I think that was demonstrated in the industry from 2000 to 2002 in a different kind of way. That is why we focus so much attention on managed care, and the objective of reaching that baseline and then resuming an industry type level of growth has a very powerful economic impact, on not only Tenet but any company in the industry. Pricing growth is probably more important an economic driver than anything else,.

So specifically, with respect to the staffing levels and some of the other labor costs, you feel as though you are essentially appropriately staffed, and it really will be a resumption of the normal pricing dynamics going forward? And that is the sort of timelines we should embed into our expectations (inaudible) margin expansion?

Remember that we are attacking costs all over the company, but we are being very deliver in not cutting patient care related costs. And as you pointed out in the beginning of your question, those relationships with community physicians, the appeal to them of practicing in our hospitals -- which is directly a result of the type of nursing care that we provide -- that is something that is essential to maintaining our volume growth and to driving pricing. Because more satisfied physicians and patients lead to better relationships with managed care companies that enable us to get stronger pricing growth.

The only addition that I would make to Trevor Fetter's comment is, in the area of salaries, our focus has for sometime been and will continue to be -- and in fact, part of our savings going forward is in the area of utilization of contract labor. And our focus on looking to have a much more stable workforce that is employed by each individual hospital versus the utilization of agency help. And as Trevor Fetter talked about in his comments, our objective is to change the rate of growth and the amount of our costs in the contract labor arena going forward. And while progress was made in this quarter, that continues to be a key focus of our operators -- for both the financial and margin improvement opportunity it presents, but also we think it drives higher levels of patient satisfaction beyond the (inaudible) levels we already have.

Thanks to anybody who is still listening. We appreciate your participation in the call, and that's it. Thanks. See you next quarter.

Ladies and gentlemen, that does conclude your conference call for today. You may all disconnect, and thank you for your participation.

(CONFERENCE CALL CONCLUDED)