Tenet Healthcare Corp (THC) 2003 Q3 法說會逐字稿

Good morning, and welcome to the Tenet Healthcare earnings conference call for the quarter ending September 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. This call is also available to 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 10K and it's quarterly reports on Form 10Q, 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 add 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 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 web sites, www.tenethealth.com businesswire.com and companyboardroom.com. At this time, I will turn the call over to your host, Mr. Trevor Fetter, President and CEO. Mr. Fetter.

Thank you, operator and thanks to all of you for joining us. With me here this morning are Stephen Farber, our Chief Financial Officer; Randolph Smith and Reynold Jennings, who head our western and eastern divisions respectively; and most of the senior management of the company. Our prepared remarks are lengthy today because we have quite a lot to cover, particularly in the area of litigation. Our 10Q is 76 pages long, that's more than three times longer than at the same time last year. We filed it yesterday afternoon so that you would have an opportunity to read it prior to this call. I'd like to say a few words about the company before we talk about the third quarter. I've been president of Tenet for a year, but I've been Chief Executive Officer for less than two months.

The past year I have focused my efforts on launching some major initiatives in cost control, asset sales, and most importantly, quality. I've also tried to make progress in resolving the litigation and investigations that Tenet faces. All of these initiatives are continuing. But now, as Tenet's new CEO, I want to take a step back and share what I personally believe happened to this company. This is a troubled company. But at it's core, it is also an organization that has a great number of good and caring people. Over 100,000 employees, the population of a small city, come to work each day concerned only with saving lives and caring for people. That was true one year ago and two years ago, and it's true today.

My priority is now, and always will be, to protect the ability of all those good people to continue providing great care to our millions of patients. Today our people will deliver 365 babies and care for 30,000 patients. That's what's important to the people of Tenet. This corporation faces enormous challenges in rebuilding trust among the government, our customers, our physicians, patients, our employees and our shareholders. I am dedicated to rebuilding that trust. It is not done easily and it must start at the top. That's why I want you to know exactly how I approach the subject of responsibility and accountability for the team called upon to turn this company around. This is what I believe: Something went very wrong at Tenet. In certain cases, the company seems to have confused what was legal with what was right.

It was wrong for the company to pursue what it has called an aggressive pricing strategy. If unnecessary procedures were performed at any of our hospitals, that, too, was wrong. Today this company has launched on a new course. We are creating a better infrastructure to monitor and control what goes on throughout the company. We still have a lot of work to do, but the mistakes of the past will not be tolerated now or in the future and we intend to demonstrate that to all our constituencies. Some people have said that in the past, Tenet was an arrogant corporation and often acted with disdain towards those who had a dispute with it. This is true, not of our hospitals, but of the corporation, and the corporation is now paying the price for that behavior.

I am committed to changing our culture and the tone of our interactions with others outside the company. I believe that Tenet was too insulated and didn't listen when it should have. Since I've been in charge with this company, we have brought in the best outside advisers that we can find; and we are listening to them and implementing their recommendations. We will add new blood to the organization as well. This emphasis on listening and gaining outside perspectives is helping us create a more open and collaborative culture that will allow us to grow and regain respect.

Finally, under my leadership, this company will acknowledge responsibility for it's past mistakes. We will seek to resolve the issues created by those mistakes in a forthright, fair, and reasonable matter. But, and this is important, we will also resist those who seek to use our current vulnerability to their advantage because this is fundamentally unfair. We will seek the truth and we will tell the truth. But we will also defend ourselves against unwarranted attacks. I'm convinced that we are on the right course.

It will take time, more time than we'd like, in fact, to turn things around and earn back trust, but the new management team that we are building places integrity, honesty, and trust above all else in setting the forward strategy of this company.

Now, let's turn to the third quarter. I'll be blunt. Our third-quarter performance reflects the tough times that we are navigating. We are facing exceedingly difficult circumstances. The past pricing practices of the company employed until last year had far-ranging effects. The company's prior strategy of taking hard-line positions on many issues with unions, the government, and some of it's key customers have made it harder to resolve the many disputes that we now face with them. At the same time, we are fielding growing requests for information relating to investigations of various past practices in multiple locations.

The government has a duty to investigate allegations of impropriety. We understand that and we will work earnestly with them towards that end. However, simultaneously, plaintiffs' attorneys are lining up and taking out ads for clients to sue us. And in the midst of this, one of our major payors, Well-Points, Blue Cross of California subsidiary, has made serious allegations of unnecessary cardiac care at our Doctor's Hospital Medical Center of Modesto. I said that we will defend ourselves against unfair attacks.

And to that end, I've asked Randolph Smith, President of our Western Division, to tell you more about this WellPoint issue in Modesto. He'll do that a little bit later in the call. As we work to resolve the problems of the past, we are also now faced with new industry challenges. In particular, we are confronting a significant and dramatic shift in our payor mix towards patients who pay little or nothing for the care that we provide them. Accordingly, while admissions and utilization have historically driven hospital financial performance, with these new payor realities, more volume may, in certain circumstances, decrease profits.

Going forward, we have to assume that patients will continue to bear more and more of the cost of their care. And within that context, I'd like to now move on to the quarter's results. In the third quarter, in-patient admissions to Tenet hospitals rose 1.5% overall and 1.6% on a same-store basis. Last quarter, we pointed out that one of our hospitals had extraordinary admissions growth, because we converted a neighboring hospital to subacute status and consolidated our acute business at the remaining campus. That hospital again slightly skewed admissions in the third quarter, adding 3/10ths of a percentage point to our same facility admissions growth.

As in prior quarters, we'll provide admissions growth excluding the declines in three specific hospitals. Redding, Alvarado and Palm Beach Gardens. If you were to exclude these in the third quarter, same facility admissions would have grown 2%. Outpatient volumes were essentially flat in the quarter, down two tenths of one per cent overall and down three tenths of a percent on a same-store basis. Emergency department visits rose 2.8% overall, and 2.7% on a same-store basis. But there's more to the story than just straight volume numbers. As we reported last month, we have seen a rapid shift in our patient mix, with more of our volume growth coming from uninsured patients.

To offer some insight into this trend, we can look at a database that captures data from about 80% of our hospitals. By definition, this information is not complete and is not used for our public reporting, but it does provide important directional insight. Among this part of our portfolio, in the first quarter growth in uninsured discharges accounted for less than 10% of our growth in total discharges. In the second quarter, that grew to nearly 20%, and in the third quarter it jumped to approximately 40%. Again, I want to make it clear that we are talking about growth in uninsured discharges as a percent of total growth. The growth contribution is outsized.

In fact, uninsured patients account for less than 5% of our total discharges. The vast majority of this uninsured volume comes through the emergency room, which accounts for the particularly strong ER volume growth in the quarter. This phenomenon is happening across our portfolio of hospitals. And given recent announcements by some other hospital companies, it appears not to be limited strictly to Tenet. The growth in uninsured patients is the primary driver of the bad-debt charge that we took in the quarter. While Stephen Farber will talk more about that in a minute, I want to make an important point. In this environment, volume growth can in fact be growth in unprofitable volume.

Similarly, unit revenue growth may be affected because we must bill uninsured patients at gross charges. Simply stated, high growth in uninsured patients can mean strong admissions in pricing statistics in one quarter; but translate into bad debt in future quarters. That said, let's look at pricing in the quarter. Unit revenues defined as same-facility net inpatient per admission declined 9.5%. Excluding outlier payments, adjusted unit revenues grew 1.2%. There is a wide variability in pricing trends among our different regions. Same-facility unit revenues, excluding outlier payments, declined 2.4% in the western division, which is California and Texas, but increased 6.4% in the eastern division.

On the outpatient side, unit revenues declined 3.5% on a same-facility basis, and again there is wide variability in this statistic among our different regions. Outpatient unit revenues fell 7.5% in the western division, and rose 0.7% in the eastern division. As we've discussed throughout the year, we are in the process of renegotiating our managed care contracts. To date, we've renegotiated or renewed contracts representing approximately 65% of the managed care revenues under contract in November last year. About half of these were renegotiated, while the other half simply rolled over and renewed automatically.

We are on track to achieve the expected 80% of completion by year-end, although there could be some risk of slippage over the holidays, particularly as it relates to a couple of the larger contracts. We expect to face significant continued challenges in managed care pricing and renegotiations well into 2004. On the cost front, our cost-cutting efforts are gaining traction. We are still facing industry-wide cost pressures, but the rate of growth is slowing. Unit cost, measured by a per adjusted patient day, demonstrates this improvement. Where salaries, wages and benefits costs per adjusted patient day rose 11.7% and 8.4% respectively in the first and second quarters of this year, we were able to slow that rate of growth to 6.4% in the third quarter.

We achieved similar improvement in supplies cost per adjusted patient day, which dropped from a growth of 8.6% and 7.3% respectively in the first and second quarters to 6.0% in the third quarter. In other operating expense, which had increased 11.0% and 11.8% in the first and second quarters, we managed to slow the growth to 7.3% in the third quarter. Now I'd like to spend a minute talking about labor issues, because we face some significant challenges on this front, particularly in California. As you know, California's nurse staffing ratios go into effect January 1st. Based on the regulatory language that was passed by the legislature, we had estimated earlier this year that this would add $30 million to our 2004 labor costs.

The state subsequently set new rule definitions that are more stringent than the earlier interpretations, and made the regulations even more onerous. Given this new development, we now expect that the cost of complying with these ratios may be two to three times our original estimate of $30 million. Further, we are still in the process of attempting to hire over 1,000 nurses throughout the state. If we cannot fill these positions with permanent or temporary nurses, we may have to put some of our emergency rooms on divert status and direct patients to other hospitals in order not to exceed the mandatory nurse-to-patient ratios. To put that hiring requirement into perspective, the 1,000 nurses that we need to hire represent slightly less than 10% of our total nurse workforce in California.

At the same time, California has become the battle-ground for two labor unions which are competing to organize our employees. Since we signed the labor peace accord with SEIU Ask Me, seven of our California hospitals have become represented by them. Active organizing campaigns are underway at some of our other hospitals and petitions have been filed by SEIU at eight hospitals. We have no peace accord with the California Nurse's Association, which has filed petitions at 19 hospitals. The CNA petitions have been consolidated into one case by the National Labor Relations Board, and no elections will be held at those facilities until the NLRB makes a ruling.

On a related note, you may have seen that the nurses of the OPEIU Healthcare Local 112 of AFLCIO called a strike today against our MCP Hospital in Philadelphia. In anticipation of this action, the hospital last week began suspending most elective admissions and began to divert trauma admissions. Systemwide, approximately 11% of our employees were represented by labor unions as of September 30th. This number is likely to rise in the future, particularly due to the organizing activities in California. Now, at this point, I'd like to turn it over to Stephen Farber for the financial report and then I'll return later with closing comments. Stephen.

Thanks, Trevor and good morning. Let's start with revenues. Net operating revenues declined 6.4% from the year ago quarter to $3.3 billion, down from $3.5 billion last year. This difference is entirely due to the change in outlier payments which were $16 million in the current period, versus $261 million last year. As we've noted on prior calls, the clearest way to analyze Tenet's performance is to exclude outlier payments from both revenue in the current period, and prior-year periods. We will continue to do so today and refer to that basis as adjusted net revenue. On this basis, adjusted net revenue rose 6-10ths of one per to $3.28 billion from $3.26 billion in the prior-year quarter.

As Trevor said, our cost management efforts are making progress. Although we are still experiencing general cost increases versus the prior year, we did achieve sequential improvements from the second quarter in both labor and supplies. Salaries wages and benefit costs were 43.3% of adjusted revenue. This is up 110 basis points from a year ago but down 50 basis points sequentially from the June quarter. Rising health insurance, 401k, and other benefits costs drove much of the year-over-year increase rising 15.5% from the year ago quarter. We have made incremental progress on contract labor, which fell 7.2% compared to the year-ago quarter and fell 12% sequentially from June.

Total salaries, wages and benefits costs include stock-based compensation of $33 million this quarter, $34 million last year, or about 100 basis points of adjusted revenue. Supplies expense totaled 15.9% of adjusted revenue. This is up 50 basis points from the prior-year quarter but down 30 basis points from June. Rising cardiovascular, prosthetic, and pharmaceutical supplies costs were the primary drivers of this year-over-year increase. Other operating expense rose in the quarter driven by rising malpractice costs as well as higher litigation expense and consulting fees. Other operating expense was 23% of adjusted revenues, up from 20.8% in the prior-year quarter and 22.4% in June. Malpractice expense totaled $90.4 million in the quarter, up from $56.4 million in the prior year.

This is about $10 million higher than our previous expectations, due to continued adverse trends. The growth of malpractice expense accounted for nearly half of the year-over-year growth in other operating expense, and continues to be one of the most significant cost challenges we face going forward. In prior quarters, we've broken out the effect of a change in the discount rate used to value our medical malpractice and retirement benefits liabilities. In the third quarter, the discount rate was essentially flat with the prior quarter and therefore had no material impact on either expense.

As we announced last month, we saw a significant rise in bad debt expense in the quarter, driven primarily by the increase in uninsured patients and the decline in the collectability of self-pay accounts. Total bad debt expense was $522 million in the quarter or 15.9% of adjusted revenue; $200 million of this, or 6.1% points of adjusted revenue relates to the additional bad debt charge we took to write down accounts receivable to their estimated net realizable value. This $200 million charge relates to continuing operations. An additional $12 million charge was taken for the impact of this issue on discontinued operations.

Approximately 80% of the $200 million bad debt charge stems from apparent changes in the collectability of self-pay accounts. When we talk about self-pay, we're referring to both uninsured patients as well as patients who are insured, but are personally responsible for a copay or deductible. This payor category accounts for roughly 16% of adjusted revenue, but it represents a substantial majority of our bad debt expense. As a matter of policy, self-pay accounts are written down to their estimated net realizable value as they age over the course of the first 120 days after discharge. At that point, they are turned over to our in-house collections agency. Historically our in-house collections agency has collected approximately 17 cents on the dollar on self-pay accounts assigned to it.

However, more recent collections approximate 12 cents on the dollar. Writing down self-pay receivables to this new 12-cent level, accounts for $75 million of the charge. Approximately $96 million of the charge relates to a change in our write-down methodology. Historically, in writing down these accounts over the course of 120 days, we employed a methodology that utilized gradual write-downs in the beginning of the 120-day period and escalated towards the end of that period. Given the speed and severity of the new trends in self-pay collections we are accelerating the write-down policy to a straight-line methodology. The remaining $41 million of the charge relates to changes in the collectability of managed care accounts receivable.

As we've said over the course of the year, we continued to experience significant payment pressure from managed care companies, including recent disputes with certain California managed companies over substantial blocks of past billings. We are aggressively pursuing these accounts and will use arbitration or litigation when necessary. Because the bad debt issue is the primary driver behind our adverse results this quarter, I want to spend a few more minutes talking about several key factors behind it. As Trevor said, we've seen a rapid shift in our business mix, with more of our volume coming from uninsured patients. In addition, these uninsured patients, on average, are requiring increasingly acute services.

In fact, we're seeing the highest growth in level 5 emergency room visits. The most acute kind. These higher acute services obviously generate higher bills. And statistically, we collect meaningfully less on large bills than on small bills, for self-pay patients. The bad debt issue is impacting all geographic areas of Tenet's operations; with the highest percentage levels of bad debt in Texas, Philadelphia, and Florida. Interestingly, California's absolute ratio of bad debt is among the lowest, but it, too, has suffered a meaningful increase. We are taking a number of actions to help manage and mitigate these trends.

For example, we are enhancing our intake in emergency room operating practices and IT systems. We have developed a data validation system that runs concurrent with the registration process and electronically verifies and validates patient information while the patient is being registered. This system is designed to ensure patient information is correct and complete, and that the patient has not provided false information. Rollout of this system began nine months ago, and it's currently operating in 50 hospitals. It will roll out to approximately 10 additional hospitals over the next several months, with the remainder of the portfolio to follow as their systems conversions are completed. Another approach to reducing bad debt is the use of patient advocates.

We have patient advocates in each of our hospitals, and their job is to meet with uninsured patients and determine whether they may be eligible for assistance, such as Medicaid or other state programs. If they are eligible, the patient advocate will help them complete the necessary paperwork to get signed up, which results in the hospital being paid some amount for the care it provides. Through September this year, we've seen a 22% increase in cases eligible for government assistance, from 38,000 last year to 46,000 this year; with about two thirds coming from the east. In addition, some of our initiatives announced in recent months should also help reduce bad debt.

For example, our previously announced plan to consolidate billing and collection activities into eight regional business offices is expected to improve receivables performance once the system is in place. We are six months into our three-year implementation plan and are on track with the first of the new operations to open in January. Planning and development of the regional business offices has focused on improving processes and systems, systems integration where we are enhancing and standardizing our collection systems, and developing automated workloads to improve efficiency and throughput. Additionally, our compact with the uninsured, which is our plan to offer of managed care-style discounts to uninsured patients, will make it legally possible for Tenet to offer lower rates to uninsured patients who are today, by law, charged at full gross charges.

Implementation of this compact is awaiting approval by the government. If approved, it will allow us to legally render a more modest bill to uninsured patients and reduce their financial obligation to a more manageable level. It would have the effect of significantly lowering both self-pay revenues and bad debt with a fairly modest estimated net impact of roughly $40 million. At the same time, it should simplify the billing and collection efforts for qualifying patients and result in a better overall relationship with it's constituencies. All of these actions, plus many others that we are working on, will not eliminate our bad debt exposure, but we do hope to mitigate it.

That said, given the speed of the patient mix shift and the increasing deterioration throughout the third quarter, it seems clear that the market trends have not yet finished playing out. If the trends continue to deteriorate, we will likely incur additional bad debt charges in the future.

Now, let's move on to margins. First, let me just remind everyone that the SEC's regular G allows us to talk about EBITDA only if it is literally earnings before interest, taxes, depreciation, and amortization. We cannot exclude any charges or make any adjustments. On this basis, EBITDA totaled a loss of $188 million, or a negative margin of 5.7% of revenue. The various charges described in our press release, which I'll discuss in a moment, reduced EBITDA by $462 million and EBITDA margin by 14 percentage points. For the quarter, Tenet recorded a loss of 66 cents per diluted share. This includes 76 cents per share of charges and costs. Let's go through them briefly. First, as previously discussed, we took a $200 million charge to write down accounts receivable to estimated net realizable value.

About half of this charge relates to changing the slope of our bad debt write-down to a straight-line methodology, and is a permanent timing difference that will have no current or future impact on cash. The other half of the charge related to future collections is non-cash today, but is expected to have a cash impact in the future. Second, we recorded a $253 million charge for litigation and investigation costs, which relates primarily to the adverse appellate court decision we announced recently in the Bedrosian case. This charge is non-cash at this point as we intend to pursue a possible rehearing, but it is recorded in other current liabilities on the balance sheet. Third, we recorded a $99 million non-cash impairment charge related to our previously announced asset sales accounted for in discontinued operations.

This will be offset by an expected $260 to $280 million dollar gain on asset sales in the fourth quarter. This gain will also be non-cash. Fourth, we took impairment and restructuring charges of $9 million, primarily related to severance and other exit costs as well as a loss on a long-term lease. And fifth we recorded a loss from discontinued operations of $12 million related to the bad debt charge I discussed earlier. Now, let's move on to the cash flow statement. Net cash from operations was $137 million, down from $646 million in the year ago-quarter, a difference of $509 million. Nearly half the difference, or $245 million, relates to the decrease in outlier revenue from the prior-year quarter.

Approximately $65 million of the difference represents the timing effect of claims that a Medicare fiscal intermediary prepaid in our second quarter in advance of their systems conversion. That $65 million would otherwise have been paid in the third quarter. This quarter's results also reflect approximately $98 million dollar of outflows -- of cash outflows related to prior-period reserves, the Redding settlement and other legal settlements, and discontinued operations; versus $10 million in the prior-year quarter. Much of the remaining difference relates to the bad debt issue and overall weakness in general operating trends. AR days from continuing operations were 64.5. An increase of 3.2 days from the year-ago period and a decrease of 2.6 days sequentially from June.

The write-down of accounts receivable to estimated net realizable value reduced AR days by 5.6 days. On the other hand, the $65 million of accelerated Medicare payments in the second quarter that otherwise would have been received in the third quarter essentially inflates the shift in AR days on a sequential basis by 1.5 days. Net net, we're continuing to see about one to two days of increased AR per quarter and we expect continued pressure in this area. Cash interest payments for the quarter were $48 million compared to $18 million in the prior year period, the increase reflects the impact of refinancings on the timing of interest payments, our debt balances have been essentially flat. Cash taxes were $20 million, compared with $94 million in the year-ago period. Capital expenditures totaled $145 million in the quarter, for a total of $563 million thus far this year.

We expect 2004 cap ex to be in the neighborhood of $700 to $800 million. During the quarter, we closed two hospitals and in November we completed the sale of six. Gross proceeds from those sales including working capital were $565 million and were received after the close of the quarter. After taxes, transaction costs and working capital liquidation, net proceeds should total about $430 million. We have entered into definitive agreements on another five hospitals with expected gross proceeds, including working capital, of approximately $187 million dollar. And net proceeds of approximately $165 million. We expect those transactions to close by the end of the year.

That accounts for 13 of the 14 hospitals in discontinued operations, and we are in discussions to sell the remaining hospital. We intend to keep the cash proceeds from these sales on the balance sheet for the immediate term. Additionally, in the past week, we gave notice that we would not renew the leases on two of our LA-area hospitals. Next October we will turn Suburban Medical Center back to its owner as a fully functioning acute care hospital. We will continue to operate this hospital in the meantime. We have also notified the landlord of our Century City Hospital that we will not renew that lease when it expires in December, 2004.

For the nine months ended September, these two hospitals reported combined revenues of $105 million, and a pre-tax loss of $7 million. I'll finish with a few comments on the company's liquidity and our credit agreement. As we announced last month, given the rise in bad debt expense, it seemed likely that we would exceed the leverage ratio in our bank agreement. The maximum allowed ratio was 2.5 times and it looked like we would come in at 2.56 times. We worked very constructively with our bank group, and successfully negotiated an amendment to the agreement raising the maximum leverage ration to 3.5 times and amending the definition of the leverage ratio including a change to net debt.

The agreement was deemed effective as of September 30th, and on the new basis our leverage ratio was 2.2 times at that time. Under the amended agreement, we have access to a $1.2 billion dollar revolving credit line, including $1 billion available for cash draws. As of today, the $1 billion available for cash draws is completely unused. We do have approximately $189 million of letters of credit committed under the facility. Additionally, reflecting the proceeds from our asset sales after the quarter ended, we now have approximately $650 million of cash on hand, with more to come from the pending asset sales. And now I'd like to turn it over to Rod Stone, Deputy General Counsel for a litigation update. Rod.

Thank you, Steven. Good morning everyone. I'd like to start by briefly walking through the way we've organized, uh, the legal proceedings section in the 10Q that was filed last night. As I'm sure those of you who had an opportunity to review it have noticed, the legal proceedings section is 15 pages long. This is because we decided to give a comprehensive discussion of the various litigation and investigation matters in which the company currently is involved, rather than merely listing the updates to our most recent form 10K.

Given the number and breadth of legal matters facing the company, we thought this would be the most useful approach for investors. We also organized the legal proceedings section differently than we have in the past. Rather than just separating matters into two simple categories, lawsuits and investigations, we have grouped matters together by subject-matter. Generally, the company is facing lawsuits and investigations in five principal areas. The first and perhaps most significant area involves relationships between physicians and our hospitals, regardless of the nature of the relationship, whether it involves an employment contract, a medical directorship, a relocation agreement, or some other type of relationship.

As we have said in the 10Q, we believe all aspects of our relationships with physicians, potentially are being scrutinized. The second area involves pricing. The company is facing an investigation into whether the charging practices employed at it's hospitals violated the law with respect to Medicare outlier payments. There are also numerous private class-action lawsuits that have been filed by patients, who allege charges for medical products and services were excessive and unlawful. Certain managed care companies are also disputing the level of charges at our hospitals, as Stephen referenced earlier.

The third area is securities and shareholder matters. The company is subject to a pending SEC investigation, as well as to securities class action and shareholder derivative lawsuits. The fourth area is the litigation and other proceedings involving Redding Medical Center. As the company disclosed in a press release in September, the Office of Inspector General has initiated a proceeding to exclude Redding Medical Center from participation in Medicare and other federal healthcare programs. I will address the status of that proceeding in a moment. We are also facing hundreds of civil lawsuits by patients based on allegations of unnecessary coronary procedures performed at the hospital.

The fifth and final area involves Medicare coding. The most significant matter in this area is the civil lawsuit filed by the Federal Government last January alleging upcoding by certain of the hospitals owned by the company's subsidiaries. There are also litigation or investigation matters that do not fit within these five subject areas, such as the investigation by the Senate Finance Committee. In the 10Q, we have grouped these matters in the category entitled, other litigation. Now let me highlight for you some of the significant litigation developments that occurred during the quarter.

The 10Q contains a full discussion of these and other pending matters. I should point out that there are no new government investigations that are being revealed for the first time in the 10Q, any new investigations since the second quarter 10Q was filed have been previously disclosed in a press release or form 8 K. In the area of physician relationships, let me first address the criminal case involving the use of physician relocation agreements at Alvarado Medical Center in San Diego. On September 25th, the grand jury returned a second superseding indictment adding Nina Nazarian, the hospital's Business Development Director, as a defendant in the case. The United States attorney's office in San Diego had previously indicted Barry Weinbaum, the CEO of the hospital, as well as the hospital itself and a Tenet subsidiary.

The second superseding indictment charges the defendants with conspiracy to violate the anti kickback statute and 19 substantive counts of paying illegal remuneration in connection with certain relocation agreements entered into by the hospital. The indictment also alleges that Ms. Nazarian received personal payments from certain doctors who received relocation agreements at Alvarado, and obstructed the government's investigation into these matters, and engaged in witness tampering. All of the defendants have entered not-guilty pleas to the new indictment, and the court has now set the case for trial for February, 2004. As we announced in a press release last month, there is a new investigation being conducted by the U.S. attorney's office in Los Angeles concerning physician relationships and invasive coronary procedures at three Southern California hospitals.

We are voluntarily cooperating with the request for documents in this investigation. The request seeks documents primarily relating to certain cardiac physician agreements, coronary procedures, and billing practices at Centinella Hospital center, Daniel Freeman Memorial Hospital, and USC University Hospital. Finally, there is the United States ex rel. Barbera case which has been outstanding since 1997. This case involves, among other things, allegations that certain physician employment contracts entered into by North Ridge Medical Center in Fort Lauderdale violated the Stark Anti-referral Law. The United States district court in Miami, where the case is pending, recently delayed the trial from this December until January, 2004.

These are the significant litigation developments in the area of physician relationships. The status of the remaining investigations involving physician relationships is set forth in the 10Q, and I will not report on those matters here.

Now, let me briefly turn to the area of pricing. In the ongoing federal investigation concerning Medicare outlier payments, the company in October received another subpoena for documents from the U.S. attorney's office in Los Angeles. This subpoena seeks medical and billing records from 1998 to the present for certain patients who were treated at Tarzana Regional Medical Center and USC University Hospital, two of the companies Los Angeles-area hospitals. The government attached a list of the specific patients at each facility for whom it requested medical and billing records. Additionally, the subpoena seeks documents relating to the two hospital's gross charges for the same time period.

With respect to the pricing class actions pending against the company and its subsidiaries in five states, the status of each of those matters is set forth in the 10Q. I would point out that each of those cases is still at the pleading stage and no class has yet been certified in any of those matters. In California, where the highest number of cases have been filed, the cases have now been coordinated before a single state court judge in Los Angeles and defendants demur; in other words, motion to dismiss, is set for hearing later this month.

I will briefly address the various securities and shareholder litigation matters facing the company. The SEC investigation that the company disclosed in June is proceeding. The company has continued to produce documents to the SEC, and the SEC has issued a series of subpoenas for depositions of various current and former employees of the company. In the federal securities class actions, which have been consolidated before Judge Lu in Federal Court in Los Angeles, discovery has been stayed under the Private Securities Litigation Reform Act pending the outcome of the defendant's motion to dismiss that was filed in July. That motion is now fully briefed and the hearing is set for next week.

The plaintiff moved to lift the discovery stay, but the court denied that motion on October 20th. Similarly, in the federal shareholder derivative cases, which have also been consolidated before judge Lu, the defendant's motion to dismiss is set for hearing next week, and discovery remains stayed pending a decision on that motion. The shareholder derivative cases is filed in California State court in Santa Barbara remained stayed in favor of the federal shareholder derivative cases. A status conference in the state derivative cases is set for mid-December, 2003.

I will now turn to the Redding-related matters facing the company. As you know, on August 4th, we reached a settlement with the United States and the State of California in the amount of $54 million. The details of the settlement have been previously disclosed and are set forth in the 10Q. In general, the settlement resolved all civil and monetary administrative claims the United States may have had against the company and its subsidiaries arising out of the performance of and billing for alleged unnecessary cardiac procedures at Redding Medical Center. The office of Inspector General agreed to the settlement, but reserved it's ability to pursue non-monetary administrative actions against the hospital, including exclusion from Medicare and other federal health care programs. As we earlier announced, on September 3rd, 2003, Tenet received notice from the OIG of its intention to begin administrative proceedings to exclude Redding Medical Center from participation in Medicare and other federal health care programs, based on allegations that the hospital provided medically unnecessary cardiology and cardiac services.

Under the regulations, the hospital has an opportunity to oppose the exclusion. The hospital recently made a lengthy written submission to the OIG arguing that exclusion is not warranted. We have had one meeting with representatives at the OIG, and another meeting is scheduled for later this month. Once the OIG receives the hospital's evidence and information, it will decide whether to exclude the hospital. We do not know when that decision will occur. If a decision to exclude is made, we would have the right to appeal the decision to an administrative law judge.

We are also facing a huge amount of civil litigation involving Redding. In the last quarter a number of new cases were served by patients. Indeed, the list of cases alone now takes up three pages in the 10Q. Additional cases are likely to be served and the company's received more than 1,400 notices of intent to file suit. We do not know the total number of suits that eventually will be filed. Other than the filing of the additional cases, the status of the cases remains largely the same. All the cases are still at the pleading stage, and there are demurs scheduled for hearing later in November and in December.

Plaintiff's counsel in these cases are attempting to get around California's $250 thousand dollar cap on malpractice claims by alleging fraud claims instead. To date, not a single complaint has been found to be sufficient when challenged on demur by defendants, although the court has allowed plaintiffs opportunities to amend their complaints to address its concerns.

Moving on to the Medicare coding area, there have been no new developments in the U.S. versus Tenet Healthcare case pending in federal court in Los Angeles. The court has not yet issued a ruling on the motion to dismiss the complaint that was argued in July.

Let me now address some significant litigation developments that have occurred outside of these five general subject areas. One important recent development involves the California court of appeal decision to award $253 million in contract damages to John C. Bedrosian, one of the three co-founders of National Medical Enterprises, or NME, which is Tenet's predecessor company. The case involved Mr. Bedrosian's allegation that when NME terminated him in 1993, it failed to provide him certain stock incentive awards. Earlier this year, the lower court had awarded Mr. Bedrosian a judgment of about $7.6 million dollar plus another $1.6 million in attorney's fees. Mr. Bedrosian subsequently appealed this decision.

The appellate court's increase of that award to $253 million was totally unexpected. We do not believe the evidence in the case justifies the massive award ordered by the Court of Appeal and we will be filing a petition for a rehearing in the Court of Appeal. If necessary, we will ask the California Supreme Court to review the decision. Further review by either the court of appeal or the California Supreme Court, however, is entirely discretionary, and even if review is granted by either or both of those courts, no relief may be granted from the judgment.

As far as timing goes, our petition for rehearing in the Court of Appeal is due to be filed this week. The Court of Appeal will have until November 28th to rule on the petition for rehearing. The petition for review in the California Supreme Court must be filed by early December. Mr. Bedrosian will have 20 days to file a response, and the Supreme Court has up to 60 days to decide whether to grant review. On that schedule, we should know by the end of February whether further review will be granted.

Another development in the other litigation section is the New Orleans U.S. attorney's office investigation relating to People's Health Network or PHN. PHN is the management services provider for Tenet Choices Inc., a Tenet subsidiary that operates as a Medicare HMO in the greater New Orleans area. As we disclosed in our October press releases, PHN received two subpoenas from the U.S. attorney's office in New Orleans. In addition to various categories of corporate documents such as bylaws, minutes, policy manuals, and membership information, the subpoenas seek patient information for patients who were admitted to a rehabilitation unit; and members for whom in-patient rehabilitation services were ordered, recommended, or requested and then denied by PHN as the patients HMO.

Final development in the other litigation section relates to congressional investigations. As we announced in September, Senator Charles Grassley of the Senate Finance Committee notified us that the committee is investigating the company. The committee has requested documents relating to Redding Medical Center, Medicare outlier payments, patient care, quality reviews at certain hospitals, and other matters. The company is providing documents in response to the request. Additionally, Tenet is one of 20 hospital systems from which the Committee on Energy and Commerce of the U.S. House of Representatives has requested information and documents related to hospital billing practices and their impact on the uninsured.

We are cooperating with this investigation and have provided data and documents in response to the request. We do not know what further actions the committee may take in this matter. That is all I have in terms of the litigation update. Now I'd like to turn the call over to Randolph Smith, President of Tenet's Western Division. Randy.

Thank you, Rod. As Trevor mentioned at the start of this call, in the past two weeks in one of our major payors in California has made very serious allegations about the cardiac care provided at our hospital in Modesto, California. We take this situation very seriously and I want to take this opportunity to address it. Here are the facts: Blue Cross of California, a subsidiary of WellPoint Health Networks reviewed 23 coronary artery bypass procedures, out of over 1800 procedures performed at Modesto during a three-year period. They allege that in 12 of the 23 cases, patients received unnecessary procedures. It is my understanding that these 23 cases were not randomly selected.

Further, in reviewing the cases, Blue Cross supplied criteria developed by Rand as a research tool more than 15 years ago. These criteria are not generally accepted for use in making professional recommendations regarding the appropriate use of coronary artery bypass graph procedures. We have collected the medical records for the 23 patients identified by WellPoint and have commissioned an independent review of these cases using clinical appropriateness criteria developed in 1999 by the American Heart Association and the American College of Cardiology. These criteria are the professional standards accepted by cardiologists and cardiac surgeons summarizing recommendations for clinical care. We will communicate the results of our study shortly.

It is important to note that the medical decisions that WellPoint is now questioning were made by 12 cardiologists and five different surgeons who practice at Doctors Hospital Modesto, not the hospital itself. These physicians are on Well-Point's approved provider panel and perform procedures on Well-Point's members at neighboring hospitals; though WellPoint has raised no issues with the neighboring hospitals.

It is also important to note that we are in a significant financial dispute with WellPoint regarding approximately $50 million of bills that have not been paid for services our California hospitals have provided to their members. We will continue our efforts to resolve this matter with Blue Cross. State-wide, our well point contracts represent about $550 million, or 11% of our total revenue in California. And now let me turn it back to Trevor. Trevor.

Thank you very much. Rod referenced the Senate Finance Committee investigation in his update. I want to touch briefly on this. In his letter to us in September, Senator Grassley indicated the subject of the committee's investigation is the company's, "corporate governance practices with respect to federal health care programs". Senator Grassley has sent several letters requesting the company to provide to the committee various categories of documents. Primarily documents relating to Redding Medical Center, alleged unnecessary medical procedures and other quality issues, and Medicare outlier payments.

We're working very hard to cooperate with the committee staff and to provide the documents requested. We've already provided over 150,000 pages of documents to them. We intend to work productively with the committee staff to satisfy their requests, but we must also take the necessary and appropriate steps to safeguard privileged information, which we are entitled to do under law; and indeed, in certain cases, we must do in order to fulfill our fiduciary duty to shareholders. These issues are particularly important since the company is facing hundreds of civil lawsuits regarding alleged unnecessary cardiac procedures at Redding and other litigation relating to the issues being investigated by the committee. As I said at the start of this call, our third-quarter performance reflects the tough times that we are navigating.

Making it even more difficult is that as we work to resolve the problems of the past, we are now faced with new industry challenges, such as the increasing cost of caring for the uninsured. It has now been 54 weeks since Tenet's problems hit, and 52 weeks since I re-joined this company. We've come a long way in the past 12 months, but we still have a long way to go. But we have taken some important steps. We have installed new management through multiple areas and layers of the organization. In the process, we have streamlined our organization and cut overhead.

Tenet's board has significantly improved the company's governance, appointing three new independent outside directors. The board separated the Chairman and CEO positions and Ed Kangas, former worldwide Chairman of Deloite and Touche, was appointed non-executive Chairman. We adopted a new approach to pricing our services, and have now renewed or renegotiated contracts representing 65% of our managed care revenues. To promote quality, we have joined the National Quality Forum and are implementing company-wide the American Heart Association's guidelines to improve treatment for coronary artery disease.

We were the first nation-wide hospital system to participate in a voluntary quality measurement initiative put forth by the American Hospital Association, the Association of American Medical Colleges, and the Federation of American Hospitals. With the support of HHS, CMS, JACO and the National Quality Forum. We took part in the 2003 Leapfrog Survey to reduce medical errors and improve hospital safety. Six Tenet hospitals were named to Solucient's Annual 100 Top Hospitals Benchmarked for Success Study and three were named in U.S. News and World Report magazine's 2003 edition of America's Best Hospitals.

We appointed a nationally recognized authority on quality of care and patient safety, Dr. Jennifer Daley, to the newly created position of Senior Vice President, Clinical Quality; and simultaneously launched our company-wide commitment to quality strategy. We formed a nursing executive council among our nurses nationwide, and appointed a nurse executive to the newly created position of Vice President, Nursing to direct nursing initiatives throughout the company. We significantly enhanced and broadened our compliance efforts, engaging as a special adviser Mac Thorton, the former chief council to the OIG and appointing a chief compliance officer separate from the company's general council. We reached a settlement with state and federal agencies on the Redding investigation.

We reached a labor peace accord with two unions activity organizing our employees in California. We sold six hospitals for gross proceeds of approximately $565 million; and reached agreements to sell another five hospitals for expected gross proceeds of approximately $187 million. And we've maintained good liquidity and recently amended our credit agreement to ensure continued access to a $1.2 billion credit line of which $1 billion remains undrawn and we have roughly an additional $650 million in cash on hand.

So as I've said, we've made a lot of progress, but there's still much work to do. We are working to fill some of the gaps in our management team. We are currently recruiting for several senior positions. We were recently successful in recruiting a senior operations executive to manage our Texas region, as well as a new head of investor relations. We are working to consolidate our hospital business offices, and standardize our patient accounting and other information systems; in order to capture and rapidly analyze a broader range of our hospital's financial and operating information. And we have embarked on numerous cost-saving initiatives which are on track to meet our initial expectations.

And, most importantly, we are working to resolve the numerous investigations currently underway. We want to cooperate with the government on these issues. As an indication, two weeks ago we agreed to voluntarily provide to the U.S. attorney's office in Los Angeles the documents it requested relating to three of our LA-area hospitals. I'm hopeful that, with time, these various agencies and investigators will come to recognize that Tenet's new management is eager to work with them to resolve their questions about the company, and to ensure that our patients receive the quality care they deserve. I'd like to close with a few of my personal observations of Tenet over the past 12 months.

This is a strong and a good organization. The caliber of the care and compassion that our employees provide is evident in the satisfaction that our patients express about their treatment. In the third quarter, 84% of our patients ranked our hospitals a nine or ten on a ten-point scale, which is a strong showing and very stable with prior quarters. Our consistently strong ratings demonstrate that we are continuing to meet our patients' needs. Our patients may be satisfied with Tenet, but until all of our constituents, including regulators, customers, shareholders, and employees, are also satisfied with the company; our management will not have succeeded. We know that, we acknowledge it, and we are committed to turning this situation around.

We're now ready to open up the call to questions. I know that we've used quite a lot of time for prepared remarks and we thank you for staying on the line for the duration. We need to end this call by shortly after 9:30 a.m. Pacific time, so I'd like to get started right away with questions. Operator, will you please give the instructions.

Ladies and gentlemen, if you wish to ask a question, please press star one. If you wish to remove yourself from the queue, please press star 2. We would ask as a courtesy to our many listeners who do have questions that you limit yourself to one question. After your question has been answered, you may re-enter the queue with another question, which Tenet will address time permitting. Our first question comes from AJ Rice of Merrill Lynch. Your question, please.

Sure, hello everyone. Just, uh two quick items I wanted to really highlight. One is, uh, obviously there's a lot of demands on management time, one of the things that's been successful in the last few months has been the divestiture program. I think your proceeds have been more than you thought. How about looking at additional divestitures, is that in the cards, is that something you focus on? And then a point of clarification on the labor numbers you're showing now. Do they basically reflect the terms of the SEIU contract or is that still in front of you?

AJ, thanks. This is Trevor I'll address both questions. The -- with respect to the first one on asset sales, we chose to divest the 14 hospitals and as you point out I think this has been a very successful effort. The proceeds did exceed our initial expectations.

But, as you can imagine, when we, you know, choose to announce asset sales, it has a very destabilizing effect on the company. What we need to be doing right now is to stabilize our operations, so we have no further asset sales contemplated at this point. On the SEIU question, because those contracts are literally just, you know, beginning to get implemented, the labor costs in the third quarter do not reflect the impact of the SEIU arrangement.

Would you expect that to be a negative or positive once those are implemented?

I think it's hard to say. You're talking about a relatively small number of hospitals in the entire company as they get implemented and as there's roll in over time. So I wouldn't look for any noticeable trend over the next quarter or two.

Okay. Great. Thanks a lot.

Our next question comes from Lori Price of JP Morgan. Your question, please.

Yeah. I was hoping that you could elaborate on the nature and extent of your disputes with managed care companies, and what I was thinking about specifically is that your queue says the disputes cover substantial amounts of AR and that these disputes were in various stages. Can you give us some idea of how much AR is at risk in these disputed claims.

Lori, it's Stephen Farber.

Hi, Stephen.

We're really not discussing, uh, the individual claims or the sort of aggregate magnitude. In these matters, as in most other legal matters, you tend to get numbers thrown around that -- that tend -- that tend to be in excess of whatever the heart of the dispute is. So the -- the numbers themselves, I think, would be somewhat misleading. We also have, in a number of agreements, there are confidentiality clauses which require us to keep these sorts -- these specifics and the numbers associated with these sorts of disputes confidential until -- generally until they reach the point of litigation when arbitration and all other paths have been -- have been worked through and eliminated as a resolution option.

Well --

Lori, I would just add, this is Trevor. That, you know, you would detect in many of our remarks today a new tone of contrition. This area that you have brought up is one of these difficult ones in which we need to do what's right in resolving going forward issues with our payors. But at the same time, if there are monies that are owed to us contractually under contracts that existed, and the services were rendered appropriately, and the contracts were in force; we must and have an obligation to pursue all of our remedies including litigation, if necessary, to make sure that we are getting paid appropriately by the -- by our customers.

Okay. I understand that. And then, um, with regard to the disputed claims, most of these do relate to past bills and past contracts, not the current contracts?

Um, yes.

Okay. Then finally, you said that you had renegotiated 65% of all of your managed care contracts through the end of the third quarter, and that compares to 40% in June in general. Are your most recently negotiated contracts reflecting rate increases, flat rates, or downrates, overall?

And just to clarify the number, those are percent of dollars, uh, revenue dollars that existed as of a year ago, not percent of contracts.

Okay. Okay.

Stephen, would you like to make a comment on the trend.

Sure. And Lori, the other comment that we made, uh, and we put it in the Q as well, is that 55% is comprised of both contracts that have been renegotiated, and those that have simply just rolled over; so -- so roughly half of them have been resolved through face-to-face renegotiation, the other half is simply a contractual reality where they roll over if no one gets in the way of that rollover.

Okay.

In terms -- in terms of giving any guidance with -- from my pricing perspective, I'm not sure that we really, uh, can offer guidance at -- at this point. It is -- you know, we have heard a lot of anecdotal stories about individual contracts, and it does appear that -- you know, the easier ones to fix or redo likely were done earlier in the year, and the harder ones tend to take longer to negotiate. So I -- I can't give specifics about the changing complexion of the portfolio that's open to renegotiation right now. But I definitely would not -- not characterize it as anything other than, you know, having a lot of difficult deals to work through.

Okay. That's very helpful, thanks.

Sure.

Our next question comes from Kemp Dolliver of SG Cowen Securities. Your question, please.

Hi, thanks and good morning. With regard to the lease -- you know, the leases that you've announced that you'll terminate. Um, Trevor, could you give us a flavor for what has transpired, you know, between the announcement of the asset sale package in March and the decisions regarding these hospitals, because you have -- you know, you essentially have other leased hospitals. I want to get a sense for just how many -- how many times we might get other decisions like this unfolding over the next, say, six to 12 months. Thanks.

Thanks, Kemp. In these cases, there were defined notice periods under the lease so we faced deadlines by which to make a decision as to whether we were going to renew the lease or not. These are not preemptive on our part, they're following the terms of the contract.

And are there any others that are up for -- in the -- between now and then, where you have to make these decisions?

Not that I'm aware of. And this -- you should not read into this -- you know, in general we will be terminating leases of leased hospitals. We have a number of hospitals that are -- you know, very viable and important to us that happen to be leased due to, you know, historical transactions, both with AMI and NME. This has nothing to do with that. These are unique circumstances where there are particular leases where going forward we do not believe that the -- it was in our best interest to renew the leases.

Okay. That's great. Thank you.

Our next question is from John Hindelong of Credit Suisse First Boston, your question please.

Thanks, good morning. Obviously based on your comments, bad debts are going up as a percent of revenues, but I gather from the comments that whatever the run rate is now, uh, it's going to go higher; and so I'm wondering, A, you know, how much higher, how quickly and, B, from a macro point of view, um, are you suggesting maybe that this whole uninsured issue could possibly be solved or mitigated by a stronger economy; in other words, if the economy gets better, does the problem get less severe? And I guess last along these lines, if in fact, as a cost of doing business, bad debt expense goes up, does that not give you ammunition to go back to the payors and demand higher prices because presumably your competitors are facing the same issues.

John, it's Stephen, good morning. You know, you've asked -- you've asked the -- you know, the most -- the most cogent question on the whole situation and really asking what's going to unfold going -- going forward. And -- and I think, frankly, there are lots of people in our organization and in other -- and in other healthcare organizations, uh, folks like yourself, who are thinking along those exact same lines. The speed of the growth in the bad debt issue over the past, you know, four or five months, I think, has been quite a surprise to pretty much everyone participating in this industry.

And -- and it is very difficult, if not impossible, or anything more than speculation, to try and guess at what the ultimate end game will be with what is essentially a macro economic societal issue that is driving the majority of this -- of this situation. Clearly in historical periods, employment trends have helped, but there's also a meaningful change in the benefit patterns that people are getting now. On -- there are a number of things that we at Tenet can do, and are doing, to specifically address the problem as we see it today. And I think I went through a great number of those during my -- during my previous comments, but -- but beyond that, I think we're really subject to whatever happens with the macro trends.

And -- but price increases are not a solution or -- or are they an issue in the negotiation? Because, again, presumably you're -- your competitive hospitals have the same issue and if you -- if your payors need your hospitals, then it seems to me, um, this -- this should at least help mitigate the issue, but I guess that's -- is that true or not?

Well, it certainly is a payor relevant issue with the -- with the copay portion of -- of the bad debt situation that we're facing. But the copay portion is -- you know, less than 20% of the issue. The majority -- the vast majority of the issue really relates to truly uninsured patients. But there is -- there is always an element of negotiation and probably increasingly so going forward with payors about exactly what their copays will be, how they will be calculated, and how -- how appropriate those copays are.

There are some insurance products where the patient ends up paying a higher copay than the amount of monies that the insurance company paid in the first place. That -- that clearly leads to a less collectable bill than if the copay is more moderate.

Thank you.

Our next question comes from Sheryl Skolnick of Fulcrum Global Partners. Your question, please.

Yes, thank you. On the bad debt, the $200 million charge, how much of that is related to 2003 receivables.

Sheryl, you know, it's really difficult to -- to break down that way because the way that our book of receivables is built. I think the best way to break it down is how much relates to the slope and then how much relates to just the --

I guess -- I understand, because you're changing the methodology, but arguably, what's happening is you've got accounts that are running over 120 days, and those accounts that are running over 120 days, once they get shipped out, are harder to collect. So you're fixing the problem of having those oops big surprise 120 days out, by making it a more constant slope. I understand that. But clearly the issue has accelerated. This is my point.

You basically said, the bad debt issue has accelerated during 2003, so I think it's fair to say that had you known in the first quarter or the second quarter that what you were recording as revenue was going to be so tough to collect in the second quarter and in the third quarter, you probably would have had a higher provision. And so that it would be inappropriate, I'm guessing, and I think this is true, to say that, you know, the complete amount of the $200 million charge is extraordinary and that it should not count as part of the company's year-to-date performance.

Right. I mean, if I were to try and go down that road, Sheryl, what I would do is say -- you know, take the $200 million, I would look at -- I would -- I would ignore the half of it that relates to the slope, because the change in slope is just a timing difference. And I would focus on the amount of actual receivables that we -- that we thought were at net realizable values that are not, and that number's a lot closer to $100 million rather than $200. Of that, the uninsured piece is $75 million, of that. So.

I -- I understand that part.

Right. And of the $75 million, some piece relates to receivables created over the course of this year, some piece relates to receivables over -- you know, that were created in prior periods. I would suggest that, um -- that a very significant portion of it related to, uh, to receivables created during the course of the current year.

Right. Okay. So it's fair to say that your nine months year to date that there should be some impact on the performance from that amount of the charge.

Absolutely.

Okay. And then I guess, two other questions that I have related to all of this. When you were going through describing all of the things that, you know, better collections at the emergency room doors, grab their credit cards as they roll in, that sort of thing. I mean, I'm being a little bit blunt here. But I thought you guys did all of that already.

Sheryl, very good point. This is Trevor. And -- and the -- in the late '90s, when we faced -- as a company when I was here before as CFO, we faced higher bad debt expense in the number of quarters, we implemented a series of initiatives and rolled out a tool kit; and what you hear today is us saying that we are placing a new emphasis on those same, you know, basic operating practices that, uh, are not -- these are not new discoveries, these are, you know, blocking and tackling basics of improving our rate of collections.

Right. And by the way, Trevor, I want to commend you on the comment that -- just because you got a head in the bed doesn't mean it's a good head unless it pays. But, I guess, the next -- because that's important and worrisome. And I guess the next question I have --

Spoken ever so eloquently by you.

Of course. Naturally. Collections. I mean -- excuse me. The charity care, is there a difference between charity care and indigent care. And I guess the question that I want to ask is: Once you put something into a charity or indigent bucket where indigent might be defined as pending the -- the Medicaid application or other assistance program application, are you still trying to collect that from the patient while it's pending? And at what point do you make the decision that a case goes into charity care or into an indigent care bucket, and what impact will that have on your bad debt provision.

Okay, Sheryl, nice simple question. I think -- I think the -- the easiest way to answer it is let me first start defining by what charity and indigent are and what they are not. Charity care and indigent care relates to patients who, by policy, have income up to two times national poverty level income. And it is something that they basically need to apply for and our patient advocates and our hospitals will work with them to do that. If -- if we are -- if someone becomes qualified for charity, we do not, after that qualification, seek to collect from them.

If someone is qualified as indigent, the only -- the only reason why we would qualify someone as indigent rather than charity, is that we think there is a high likelihood that we will have an opportunity to collect from them in the future. So, for instance, if you have a college student who, uh, who doesn't have any money today but, you know, is graduating from college, they will likely have a job, you know, when they graduate, and will have some ability to pay. So it wouldn't be appropriate to qualify them as charity but they do qualify as indigent.

So indigent is very similar to charity except there is a forward-looking component where we keep an eye on the patient. In terms of -- in terms of -- of your question about the concurrent collectability efforts, charity classifications -- happen fairly quickly and of course these patients do receive bills in the ordinary course of business, but they -- they get addressed typically working through it with their patient advocate.

Okay. So when -- I guess what I'm getting at here is that there's going to be some moving around here, um, in the difference between the charity care and the indigent care, and there's sort of a -- well, I'll let it go at that. I understand what you're saying.

Those -- both of those items do get netted against revenue so if someone is -- is classified as charity or indigent neither of those patients will ultimately show up in revenue or bad debt. It's a contra to revenue.

Ultimately they're going to get netted out.

Yeah.

Very good. And then just one final question. You've gone the route of increasing price and I doubt seriously that there's going to be much pricing leverage going forward even with the valid argument about copays; but you've gone the route of price, you've gone the route of taking steps to control costs. Clearly patients are happy at the hospital. You may have an issue or maybe you don't in attracting new physicians to the facilities, but what can you do on the day-to-day level to improve the operations of the facilities, or is that not an issue for the company.

That's --

Is the problem higher up in the organization.

No. It's a huge issue for the company. I mean, we are attempting to turn around this company's performance, there are a number of areas where company's reliance on a pricing strategy, which as you point out is fairly one dimensional, has meant that other operating strategies that you employ at a time when you have less pricing leverage, you know, are far more important now than they were in the recent past. Now, if we could, you know, expand on that, I have with me Reynold Jennings and Randolph Smith, we have literally hundreds of years of operating experience sitting here in the room and we could talk all about that. But because it's really your fourth or fifth question Cheryl, we should move on.

Sorry, thanks.

Our next question comes from Adam Feinstein of Lehman Brothers, your question, please.

Thank you. This is Farukami on behalf of Adam Feinstein. We have a question on the stop loss payments. Could you give us a sense for, um, you know, how much the stop loss payments impacted the revenue per admission in this quarter?

You know, we don't give revenue breakout by payor, but I will tell you, because we've -- we will wind up getting the question a hundred times today. We have seen a meaningful decrease in stop loss payments from some of the contracts that we have renegotiated. When -- when the troubles began a year ago, we were at a run rate of about a $1.2 billion of stop loss and, uh, we're now down to roughly $200 million a quarter, so analyzed that would be about $800 million, so I think we have, through renegotiation, um, worked through about one third of our historic level of stop loss receipts.

Okay. Thank you.

Sure.

Our next question comes from Gary Taylor of Bank of America. Your question, please.

Hey, good morning. Um, your previous guidance for inpatient revenue per admission would be that it would run flat to possibly negative by the end of the year, it looks like it was up 1% in the quarter. Are you still anticipating continued deterioration there?

Uh, hi, Gary, it's Stephen. We -- you know, I did make in my comments that we do expect a very -- you know, a continued difficult managed care environment going well into 2004, we -- we have not since we pulled guidance given any more specific guidance on that. One thing that I will repeat, because I want to make sure people understood it, is that to the extent you have -- you have an unusual bulge in self-pay patients and uninsured patients, this was in -- I believe it was in Trevor's comments, that those uninsured patients are booked at gross revenues. And that can have a skew effect on the revenues that are important.

If you think about it, I don't have the exact number in front of me, but I recall when we used this number several quarters ago that while the company booked $13.5 billion of revenue for the prior year, the gross revenues that the company had, if they had reported that, would have been -- it was roughly $60 billion. And so the -- the gross to net ratio is sort of a -- you know, a 4.5, five times ratio. That -- you know, that sort of explains if you have even slight increases in the uninsured patients that are getting booked at gross revenue it can skew that figure. So the positive 1.2% that you were confused about because you thought the number would be negative, that -- from an arithmetic point of view, that is -- that is a correct adjustment to try and make.

Got you. My one other question was, um, other operating costs. I know you made a few comments about it, but up 31 sequentially. Have you identified just legal costs and costs of complying with, um, all the investigations and subpoenas? Is there kind of a run rate that's in there that you would almost view at nonrecurring in more normalized periods?

Gary, the legal costs for the quarter -- that's -- that's not really -- give us one second. The -- I believe it was $26 million in the quarter versus $14 million last year, same quarter. So you can reach your own conclusion. We've always had a meaningful level of legal costs just from the operation of the size of business that we're in and the nature of the business that we're in; but, you know, we've said over the last few quarters we're seeing $2 to $3 million a month, roughly, of incremental legal costs and I think that's exactly what we've seen during this quarter.

Okay. Thanks.

Our next question comes from Kenneth Weakly of UBS. Your question, please.

Thank you. Good morning. Trevor, I guess a complicated question. What would the financial impact be on revenues if the feds were to force or maybe just strongly urge the company to lower gross charges down to a rate where they would have been had the rate of increase been kind of more normalized over the last three years. Would there be any financial impact?

Ken, there is -- thanks for that question, in fact a very reasonable question. I'm glad you asked it. We said beginning a year ago that of the many options available to us, uh, reducing gross charges was not one of them. For all sorts of reasons.

The impact it has on our many managed care contracts, and, um, and others. What we have done to address the concern of the government and payors, uh, pre-empted was for example, in the case of the outlier payments we simply suspended the outlier payments under the old rules and voluntarily, effective January 1st, adopted a substantially reduced level of outlier payments that was consistent with the new rules that were ultimately adopted in August. With other payors, we have, you know, case by case addressed the impact that high gross charges had on those payor contracts to get the payor contracts to what we believe to be appropriate market levels with of course our goal being to stabilize the payor environment and resume normal industry levels of increases as appropriate.

So what we have done, in short, to address your question, is to enter into a variety of fixes with payors, both governmental and private, to address the -- you know, the issue of gross charges rather than reducing the gross charges themselves. Now, you also know that a year ago, we -- one of the, you know, first things we did was to freeze gross charges. And for the vast majority of our hospitals, those freezes have remained in effect.

Okay. So in terms of understanding the financial impact of the aggressive pricing strategy. I know we can look at obviously at the outlier gains. I don't know if you quantified how much stop loss revenues increased by over this time frame. Have you done that, or will you do that?

Um, hi, Ken, it's Stephen. You mean over which time frame.

Over the time frame which this aggressive pricing strategy was executed.

We -- we actually endeavored to do that towards the end of last year and unfortunately since it wasn't something collected along the way the records were not available to compile it. We did a -- a highly manual, you know, massive effort, frankly, towards the end of last year where we concluded that our run rate at that point was about $300 million a quarter, so we would have something to compare against. And over the course of this year, we've made steady progress to where I made the comment a few minutes ago in response to another's question that we're at about $200 million run rate now.

Okay. Thank you.

Thanks, Ken.

Our next question comes from Steve Finley of Bear Stein investments. Your question, please.

Hi. I am wondering on the -- on the bad debt if you can actually break out, um, either exactly or roughly what percent is actually uninsured versus just self-pay deductibles and copays. So -- like, for the -- the 16.3% of revenue that's coming from other, you know, what portion of that is -- is actual uninsured at gross charges versus just the self-pay portion of an insured patient.

Yeah, the bad debt breakout is about 80/20, with -- with 80% being uninsured and 20% of the charge being people with insurance but having a copay.

Okay. I thought the 20% was -- was, uh -- so it's 80/20 of the 80% that's related to self-pay and then the other 20.

Is managed care.

Care. So it's --

Yeah. I mean, there is a little nesting going on with the percentages. It depends what piece of the charge you're talking about.

Talking about 80/20 within the 80 that's self-pay.

Correct.

Got it thanks.

I am sorry, uh, operator, that we're going to have to cut this off after one more question. I know this is a shorter Q & A period than many of you would like, but following the next question, we're going to end the call. Our team will be available on a limited basis during the rest of the week. We leave this afternoon for the CSFB conference, but Tom Rice will be available periodically through the remainder of the week to answer calls. And with that, operator, why don't you ask for one more question.

Our last question comes from Gary Lieberman of Morgan Stanley. Your question, please.

Thanks. You mentioned that the -- in the managed care contracts that you have yet to renew, it's the more contentious ones that you haven't yet renewed. Can you give us a little bit of detail in terms of what some of those issues revolve around? Is it specifically that some of the managed care companies want to basically renegotiate monies that are owed you before they're willing to renegotiate the contracts going forward, you know, if it's that or if it's something else. What -- when do you see getting it resolved before -- before you are able strike new contracts with these guys?

You know, Gary, those -- the whole situation is very multi-faceted because each one of the contracts is very unique and the issues tend to be very unique. Perhaps I overstated it a little bit or at least I didn't provide full context when I made that comment as part of a previous answer. There are -- there are anecdotes where there are situations that have been dragged out, where -- where we have been sitting all year negotiating with certain parties and we are still sitting in negotiation with certain parties. There are other parties with whom we sat down and resolved matters fairly quickly. So -- so I was trying to more give an anecdote than I was to make a general statement.

But -- but we are -- like I've said, basically seeing everything under the sun. Some contracts have just lain dormant awaiting the renegotiation period, others are laying dormant for a normal sort of rollover and we've had a great many contract rollovers where there has been no contentious issue raised. That's why I made the comment earlier, that of these 65% of -- of the contracts on a dollar-waited basis that have been redone over the course of the year, that -- that nearly half of those were just straight rollovers. Uh, and that to me was an interesting statistic. In terms of going forward, the nature of the issues that we're facing are very unique among contracts, I'm not even sure that I could characterize, you know the vastness of themes but they tend to be -- they tend to all circle around the same theme, which is manager companies like to pay us less and we'd like to get paid more.

So it's not -- you wouldn't say that it's specifically an issue in -- in a majority of the cases, where there -- they -- this they're withholding payment of -- of monies owed to you from previous contracts in order to try to strike a better deal on the newer contracts.

That -- that clearly has been an issue, we've discussed with respect to the larger payors in California. But California is a very different animal from -- from the rest of the country in general and -- and the most aggressive tactics on that front generally have been in -- have existed in greater -- in tosh a greater degree in California than anywhere else in the country. That's not to say that there aren't other parts of the country where you have individual payors with whom you have a very contentious trench warfare approach to renegotiation. But California's clearly an environment unto itself.

And so when do you think you're going to resolve the issues in California.

Uh, as -- as soon as -- as the other parties are willing to sit down and we can work through mutually acceptable solutions.

Thanks a lot.

Thanks everybody for listening to our call.

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