Tenet Healthcare Corp (THC) 2003 Q4 法說會逐字稿

Good morning and welcome to the Tenet Healthcare fourth-quarter calendar fiscal year ending 2003 earnings conference call for the period ending December 31, 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 the 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 the 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 financial performance; but it's providing these alternative measures as a supplement to aid in 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 the following websites; Tenethealth.com, businesswire.com, and companyboardroom.com.

At this time I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter.

Good morning add thank you for joining us. We scheduled this earnings announcement to coincide with the release of our 10-K which was filed yesterday with the SEC. The 10-K is available on our website and provides a detailed review of Tenet's financial results as well as important disclosures that are critical to gaining understanding of the company.

I'm joined this morning by a number of members of Tenet's senior management team, including a couple of people who may be new to you. Immediately following my introductory comments, I will turn the call over to our Chief Financial Officer, Stephen Farber, who will take you through a detailed analysis of our financial performance in the fourth quarter. Stephen will provide some insight into several key aspects of Tenet's performance going forward, in particular liquidity and cash flow. Peter Urbanowicz, who joined Tenet in mid-December as our new General Counsel, will then provide a summary of the current status of the litigation and investigation issues facing the company.

Our fourth speaker will be Dr. Jennifer Daley, our Senior Vice President of Clinical Quality, who will give an update on the implementation of our Commitment to Quality. Finally, you will hear from Reynold Jennings, who was named Tenet's Chief Operating Officer in early February and who has direct operating responsibility for our 69 core hospitals. Reynold will review the highlights of his major operating initiatives and give you a sense of the progress that we're already making in implementing them.

Our formal presentation runs over an hour. Then we will take your questions. A transcript of these comments will be posted to our website shortly after the call. All right, so let's get started.

If I were to summarize 2003 in a few words, it would be that it was a year of tremendous and tumultuous change. The changes we initiated will put this company on a stronger footing. Unfortunately, many of our positive accomplishments were overcome by much weaker performance in two areas, revenue and bad debt expense. We met our budgets in all major expense areas such as labor and supplies, just not in the area of bad debt. In such an unpredictable year, I was pleased that we met our budgets in the other cost items, but the hits that we took to revenue and bad debt expense caused us to fail to meet our budget and the expectations that we set.

By the end of 2003, we had a better handle on the economic potential of our hospitals in an environment without outlier payments or significant managed care stop-loss payments. We also had realistic estimates of seismic costs and labor costs in California. I was named CEO in mid-September, at which point we developed and later finalized a plan to reshape this company.

We launched the plan in late January when we announced that we would divest 27 noncore hospitals and focus our operations on the remaining 69 hospitals. At the same time, we indicated we expect 2004 to be a breakeven year in terms of earnings from continuing operations, before any charges. We continue to face significant challenges as a company, and the breakeven performance we expect is the result of the impacts from these challenges. The near-term earnings power of this company has deteriorated dramatically over the past 60 months.

What has really made it difficult to recover from the pricing strategy that the company employed between 2000 and 2002 is not so much the absolute level of pricing that it achieved, but the way it achieved the pricing that was not transparent to our customers. That is why we have exerted so much effort in the past year in working to repair the relationships we have with customers, beginning with the federal government.

The most important elements of our current earnings challenges have roots in the destructive impact of the pricing strategy. Unwinding these effects has required us to address nearly every aspect of the business. I do think we now have a clear view of how to fix the problems, and we are in the process of executing an action plan that I believe will restore Tenet's profitability to more competitive levels.

While Tenet's financial results are still very weak and have yet to stabilize, our progress thus far in turning around qualitative aspects of the company has been considerable. Over the 16 months since the Medicare outlier issue came to light, we have transformed this company by building a new management team, restoring relationships with our customers one at a time, instituting advanced corporate governance policies, making progress on confronting and resolving the many legal and regulatory issues which we face, and taking industry-leading actions such as launching Tenet's commitment to quality and implementing our Compact with uninsured patients.

Our success at keeping operations running smoothly at the hospital level has been nothing short of extraordinary. Despite all the challenges the company has tackled and continues to confront, we are consistently meeting the needs of our most important constituents at the local level. One indication is that our patients, physicians, and employees remain highly satisfied with Tenet. Another indication is that our patient volumes have remained solid throughout this period.

Tenet's overall physician satisfaction score of 83 percent for 2003 was approximately the same as it was for 2002, and higher than in 2001. Some of the drivers of physician satisfaction were efficiency of patient flow, a safe patient care environment, our hospital management teams' responsiveness to and communication with the physicians, and our hospitals' commitment to our customer service initiative, Target 100, which forms the cultural underpinning of the company.

Our patient satisfaction levels also remained strong with 84 percent of our patients rating our hospitals 9 or 10 on a 10-point scale. This is consistent with prior quarters and slightly higher than in 2002.

Our hospital employee satisfaction scores have also remained very steady at around 80 percent, and our employee turnover statistics have improved during this difficult time. Our turnover among registered nurses declined by more than half a percentage point in 2003, and all employee turnover declined by 2 percentage points.

The reason that I mention these statistics is that no matter how big the problems may be at the corporate entity, our hospitals are continuing to do great things every day. Whatever disruption we may have experienced is at the corporate parent level, not at the individual hospitals. Don't forget that our hospitals have continued to increase their patient volumes throughout this very difficult period.

I would like now to turn to our relationship with the federal government. We are working hard to change the nature of that relationship from adversarial to cooperative. Our discussions with the government are frequent and constructive. It is still not possible at this time to project a time frame for resolution or to quantify the economic impact of any resolution, but let me be clear. We believe it is in the company's best interest to resolve the open issues with the government and other litigants and move forward. Our strategy is to seek a global resolution of all outstanding issues with the federal government. In so doing, we must demonstrate that the company will lead the industry in compliance.

Last year, we separated the compliance function from the legal department and created the Chief Compliance Officer position, reporting directly to the ethics, quality, and compliance committee of our Board of Directors. This is not cosmetic. There is tremendous substance in our new compliance efforts. We have dramatically expanded our compliance staff. We have enhanced Tenet's policies and procedures, our compliance training and our compliance auditing. In addition, we have hired compliance directors in each region. They are currently hiring hospital compliance officers for every core hospital. We are working towards creating a fully integrated compliance information system. In short order, we will have over 100 people dedicated full time, exclusively, to compliance.

It was very unfortunate that in late 2002, this company faced serious questions about quality in its Redding Hospital at the same time that it was beginning to correct the pricing problems that I discussed earlier. Today we are determined to become known for high quality and to build a competitive advantage in quality. It is a smart strategy and it is the right thing to do. We call this Tenet's Commitment to Quality; and it is our core strategic focus. We launched the Commitment to Quality in the summer of 2003, and it is already producing solid results. Dr. Jennifer Daley will cover this initiative in great depth later in the call.

Our strategy is completely different than 16 months ago and so is our organization. We have made some radical changes to the organization structure and we have introduced some key new people into the company to ensure that Tenet gains fresh points of view. We have removed two management layers from the operational infrastructure of the company. We have eliminated two divisions and six regions. Our structure is now substantially flatter and narrower than it was before. It used to be that some of our hospital CEOs had four layers between them and the company CEO. Now, there are no more than two layers of management between a hospital CEO and me. This streamlined organization has speeded up decision-making, increased accountability, and reduced overhead costs.

We have made sweeping changes to the corporate staff functions of the company as well. In total, we have replaced or eliminated the positions of 35 of the 97 executives listed in Tenet's 2002 annual report. We have also made major improvements to our governance. A year ago, our Board decided to substantially improve Tenet's corporate governance. We split the Chairman and CEO positions. We de-staggered the Board. And we are the first in the industry to expense stock options. Today, we remain the only company within the industry to do so. These and other corporate governance changes raised our ISS governance score to the 99 percentile of a broadly defined healthcare group.

We have worked hard to rebuild relationships with key business partners. At the end of 2002, we had tremendous union problems as well as litigation with groups representing uninsured patients. Today, we have no strikes, we have a constructive relationship with our major labor unions, and our Compact with uninsured patients has made us a recognized leader in finding solutions to a very difficult problem in this industry.

Perhaps the toughest decisions we made in 2003 relate to the restructuring of our hospital portfolio. In March last year, we announced the plan to divest 14 mostly rural hospitals. This generated 600 million of net proceeds in the third and fourth quarters of 2003, and exceeded our initial expectations by more than $100 million. We have since followed with the planned divestiture of an additional 27 domestic hospitals and the company's only international hospital. The 69 remaining hospitals in our portfolio are strong and well positioned to grow. I should point out that this divestiture program is already exceeding my expectations.

Now, I would like to turn to the unsettling recent trading activity in Tenet stock. Being so closely in advance of an earnings release, there wasn't much that we could say; but I will respond now that we can. I don't want to give you the impression that Tenet's problems are behind it. We have done a lot of work over the past 16 months and have a good sense of the challenges that we face. They are significant, but I believe they are fixable.

But the most bearish observers of Tenet make two assumptions that I believe are mistaken. The first assumption usually involves making an assessment this early as to an amount of liability for the company. As Peter Urbanowicz will describe, it is far too soon to be making any estimates of potential liability the company might have in the many investigations and lawsuits we face.

The second common assumption involves the possibility for a large liability to be imposed suddenly upon the company. Their reasoning goes that such an event could trigger a liquidity problem for the company as early as this year. This reasoning just doesn't square with the way these things typically play out. Some of the matters in dispute aren't even in litigation, so an unexpectedly large adverse judgment just is not possible.

Most of the people listening to this call are shareholders of the company, and I know that you wish it well. But please recognize there are others who express opinions about the company in an effort to exert influence on the company. Some of them have interests that compete with the interests of shareholders. Until we have resolved much of the litigation that surrounds the company, our shareholders will have to take some of what they read about Tenet with a very large grain of salt.

The bottom line is that I don't agree with the bear arguments around a liquidity squeeze; but I would prefer that you draw your own conclusion from the fact than to accept my opinion. Stephen will provide you with enough detail during his section of this call to help you reach an informed opinion.

Let me now make a few comments on the quarter. I mentioned upfront that the problem areas for Tenet in economic performance are revenue weakness and bad debt expense. A significant part of the revenues issue is driven by continued tension in our efforts to re-establish productive relationships with managed care payers. A quick review of the recent evolution of these relationships should help place the numbers in the fourth quarter in context.

In 2003, we made a purposeful effort to make amends with our managed care payers. We recognized that many of these relationships had been damaged by the aggressive pricing strategy from 2002 to 2002. For more than a year, we have been doing what is necessary to put these relationships on a more constructive foundation. We worked hard over the course of the year to rebase our managed care relationships and negotiate fresh contracts that respected the financial interests of both parties.

By the end of the fourth quarter, we had passed the first anniversary of having the prior pricing strategy come to light. At year end, as we expected, we had renegotiated or renewed contracts representing approximately 80 percent of our managed care revenues. But despite our success over the past 16 months in negotiating many new contracts, we find that we still have too many disputes with managed care payers over accounts receivable, including some accounts receivable generated under the new contracts.

One of the more difficult issues has been the practice of some of the managed care payers to use various administrative means to delay or deny payment with respect to new contracts to which both parties had agreed. As we have disclosed before, Tenet had significant arbitration or litigation with a small number of large California-based payers. It has been difficult to establish better relationships for the future at the same time as we are enforcing contractual obligations of the past. We need to do both, and we're committed to doing the right things for our customers as well as our shareholders.

In addition to revenue, the other major factor with a significant impact on fourth-quarter performance is the problem of bad debt expense. Tenet's bad debt rose to 11.1 percent of revenues in the fourth quarter, a significant increase from the already challenging increases experienced in our third quarter. And January indicated a further decline in performance to approximately 12 percent. Our preliminary results for February indicate a similar level of bad debt expense. But, our assumption for bad debt expense for all of 2004 is 12 percent of revenues before any impact of the compact with the uninsured. So at least so far this year we are tracking at a level that is consistent with our plans.

This issue is not unique to Tenet, but our relatively high gross charges somewhat distort the way that we compare with other companies. Higher gross charges result in higher bills rendered to the self-pay portion of our patient base. These charges are significantly higher than the cash that we collect. So, for equivalent services, Tenet's generally higher gross charges will tend to produce higher bad debt levels. Stephen Farber and Reynold Jennings will provide additional perspective on this topic in a few minutes.

In our January 28 press release, we said that earnings from continuing operations for 2004 will be approximately breakeven, before any unusual charges. We had an essentially breakeven month in January, and February appears to be slightly better. But we have learned from experience not to read too much into any individual month, so we reiterate that EPS for 2004 is likely to come in at about breakeven, although performance will vary a bit quarter-to-quarter.

I also want to clarify that breakeven does not mean exactly 0 cents. As we move through the year we could be up or down a bit in any given quarter and there is typically some seasonality. I just wanted to be clear about what we mean by breakeven so there isn't any undeserved excitement or concern about modest variations in results over the course of the year.

Having said that about the near term, what can we say about the longer term? Many shareholders have asked us when we will commit to achieving margins that are competitive with other companies in this industry. This is a very tough question to answer, particularly given the rapidly evolving issues in bad debt and managed care. But I do believe that HCA-level margins are a relevant benchmark for us in the long term, provided that they are realistically adjusted for the regions in which we compete.

Let me give you a sense of how this breaks down. After we complete our divestiture program, we will still have approximately a quarter of our revenue coming from hospitals in California. These hospitals in the aggregate are unlikely to ever achieve the types of margins that are routinely achieved by hospitals in other regions, particularly hospitals located in the Southeast. The realities of operating costs in areas like labor, real estate, and tax, as well as regulatory burdens, simply won't permit it.

In addition to California, in Philadelphia, excluding our MCP Hospital, we still have approximately 800 million of revenue from core hospitals that is just a bit better than breakeven. We believe there is opportunity for these hospitals to improve meaningfully, but the potential margin is still a single digit, much lower than the margin that we expect from many of our other core hospitals.

So, about a third of Tenet's core revenue going forward is from markets with significantly lower margin potential than the margin potential of our other core hospitals. But to be clear, the potential margins for this third of the company are much higher than their performance today. That is a key reason why they are considered core, as opposed to being part of the divestiture program. In states where we overlap with HCA, we do believe we can achieve similar margins, although we do not currently perform at those levels. The revenue and bad debt issues have impacted us companywide including these hospitals.

While we recognize that many of you would like us to provide a specific margin target, we're simply not comfortable providing such exact guidance, given a continuing uncertainty that we face. We do know it will take longer than a year to reach our potential margin. And it will be somewhat lower than HCA's at that time because of the geographic issues. But it will be higher than today's level of performance; and of that we are quite confident.

Before I turn it over to Stephen, I want to emphasize some key points. Since I became CEO we're taken many critical and strategic steps. First, we have carefully identified where Tenet went off course. Second, a new senior team is now in place. Third, we have made many critical changes in corporate strategy and operations. And fourth, I have made business decisions that are part of a comprehensive long-term plan. This management team is 100 percent committed to delivering quality healthcare and sustainable growth. Turning a company around is not done overnight, but we're acting with urgency and, most importantly, in a responsible and appropriate manner. I will now turn the call over to Stephen Farber, our CFO.

Thanks, Trevor, and good morning, everyone. Before I start there are a couple general comments I would like to make. First, I am going to spend most of my time today on bad debt and cash flow; so the review of basic operations will be brief, and I will refrain from going through basic facts that are available in our earnings release and the 10-K. I am also going to focus much more on sequential performance rather than year-over-year comparisons. So much has changed over the past year that year-over-year statistics are really only useful for volumes.

Also, I know many of you want to understand the performance of our core hospitals, the 59 we're keeping, versus the non-core. In a few areas I am able to comment on this; but in general, Regulation G makes it very hard, as our GAAP disclosure in the 10-K still relates to the total asset base, not just core. But starting with our Q1 2004 results, which we will release in early May, when substantially all of our non-core hospitals will be moved out of continuing operations and into discontinued operations, it will be possible at that time to separate core versus non-core operating results.

One last comment up front. In the fourth quarter we moved Redding Medical Center out of continuing operations, so all the Redding Medical Center numbers, both current and prior period, are now accounted for as part of discontinued operations.

Let's start with volumes. Admissions growth in the quarter was up slightly. Total company inpatient admissions rose 9/10 of a percent overall and 4/10 on a same-store basis. The core hospitals did meaningfully better than the non-core, with same-store core admissions up 1.5 percent for the quarter and non-core down 2.8 percent. Flu had a modest impact on these numbers, but more on last year than this year. In fact, eliminating from both periods the impact of flu, core hospitals grew admissions a strong 2.1 percent.

Outpatient volumes on a same-store basis declined 7/10 of 1 percent for the quarter. The core hospitals declined slightly more, down 1.4 percent. Same-store emergency department visits rose 8 percent for the whole company and 7.7 percent for the core hospitals.

As we discussed last quarter, there are important mix shifts taking place within these volume statistics. Continuing a trend that began to emerge about a year ago, uninsured discharges are growing disproportionately fast. I refer here to discharges rather than admissions because payer class is typically finalized at discharge instead of admission. On this basis, uninsured discharges were up 12.8 percent for the quarter, and up 12.2 percent for the core hospitals. Last quarter these discharges grew nearly 20 percent; so this quarter actually represents an improvement. But clearly the growth in uninsured represents most if not all of the overall volume growth. The vast majority of this volume came through the emergency room, which had growth in uninsured visits of 31.2 percent in the quarter. The core group had 30 percent growth in this same statistic.

Now let's go over revenues. Net operating revenues for the fourth quarter declined by 8.9 percent from the year-ago quarter to 3.18 billion, down from 3.49 billion last year. More than half of this difference is due to two adjustments identified in our earnings release last night.

First, outlier revenue. In Q4, 2002, outlier revenue was 135 million. In the fourth quarter of '03, normal outlier revenue was 21 million, a decline of 114 million. Offsetting this was 70 million of additional outlier revenue recognized in the fourth quarter of 2003. This additional outlier revenue was recognized in the fourth quarter based upon instructions we received in late November from CMS regarding reconciliation of Tenet's outlier payments primarily for the first three quarters of the year.

Remember that Tenet entered on January 1, 2003, into a voluntary outlier reduction agreement with CMS. An element of this agreement provided that payments would be reconciled after the fact for outliers incurred during the interim period between January 1 and later in the year when CMS finalized the new outlier rules. That is what this accrual relates to.

Now, I want to be very clear that we did not receive an extra 70 million in cash in the fourth quarter related to this issue. Substantially all of the actual cash was received prior to Q4. We simply couldn't recognize the income in prior periods until we receive the CMS communication in November. More relevant for all of us is that, going forward, we expect about 17 million per quarter of outlier revenue from the core hospitals.

The second revenue item to highlight was a $146 million negative adjustment primarily due to changing our approach to accounting for Medicare contractual allowances. In the fourth quarter we changed our approach of recording Medicare contractual allowances and cost report settlements. Under this new approach, we record estimated cost report settlements and contractual allowances based upon filed cost reports, and establish a valuation allowance for estimated settlement adjustments based upon historical settlement trends. This change in approach results in a refinement that more closely reflects the expected final settlement on our cost reports. This $146 million adjustment was also non-cash.

Eliminating the effect of these two adjustments, what I will call adjusted net operating revenues throughout my comments today, decreased by 3.8 percent, to 3.25 billion in Q4 '03, down from 3.38 billion in the prior year quarter.

Inpatient unit revenue for the quarter was down significantly, which accounts for the rest of the decline in adjusted net operating revenue. On an unadjusted basis, same-facility net inpatient revenue per admission was down 12.8 percent. Excluding the impact of outlier change and our change in approach to Medicare allowances, same-facility inpatient net revenue per admission was down 4.8 percent.

Managed care was down somewhat more. On an estimated basis, managed care unit revenue was down roughly 8 percent versus the comparable period last year.

Outpatient unit revenue was also down significantly in the fourth quarter, with same-facility outpatient revenue per visit down 7.2 percent from the fourth quarter of 2002. A portion of this is related to an adjustment in the fourth quarter of 2002 that increased outpatient net revenue in that period by $25 million. Excluding that adjustment, same-facility outpatient revenue per visit was down 4.9 percent.

Some of the reasons contributing to this decline are the same issues that have impacted inpatient pricing, such as managed care renegotiations. The other significant element is the increasing competition for higher cost services, such as certain diagnostics and outpatient surgeries, with alternate site providers many of whom are owned both by physicians. We expect outpatient pricing to remain under significant pressure going forward.

Let's now turn to operating expense. We have stated before that the fundamental driver of the margin compression Tenet has experienced over the past 16 months is costs growing faster than revenue. Bad debt has grown the most of any line item and has been the least predictable. As Trevor mentioned, we have actually done pretty well on a relative basis with the controllable lines of cost, which are performing essentially as expected.

Salaries wages and benefits were 1.41 billion or 43.4 percent of adjusted net operating revenues in the fourth quarter of '03, up from 1.40 billion or 43 percent on a sequential basis. On an equivalent patient day basis, salaries wages and benefits were $846 per day in the quarter, basically flat with $849 per day in the third quarter, and up 3.8 percent from $815 per day in Q4 '02. Wage rates, health insurance premiums, (technical difficulty) 401(k) and other benefits contributed to the year-over-year increase, offset by overhead and nonpatient care staff reductions, and other cost reduction efforts.

Stock compensation expense declined $30.1 million in the quarter or about 9/10 of a percent of adjusted net operating revenue from 40.7 million in the prior year. Also helping offset the increases was incremental progress on contract labor which declined to 76.9 million in the quarter, down 4.9 percent on a sequential basis, and down a very significant 17.6 percent from the fourth quarter a year ago. On a full-year basis, salaries, wages, and benefits increased 6.5 percent per equivalent patient day versus 2002. The slower growth rate of only 3.8 percent in the fourth quarter indicates the company's cost savings initiatives are beginning to take hold.

Supplies expense were 533 million or 16.4 percent of adjusted net operating revenues in the fourth quarter, up from 514 million or 15.7 percent on a sequential basis. On an equivalent patient day basis, supplies were $320 per day in the quarter, up 2.6 percent from $312 per day on a sequential basis, and up 6.7 percent from $300 per day for the fourth quarter last year.

Increases in the cost of pharmaceuticals, prosthetics, and items relating to cardiac care were the primary drivers of this growth. On a full-year basis, supplies increased 8 percent per equivalent patient day over full-year 2002. Again, on this basis, the lower rate of increase in the fourth quarter versus the whole year is a good indicator that our cost savings initiatives are beginning to take hold.

Other operating expense was 706 million in the quarter or 21.7 percent of adjusted net operating revenues. This is down from 748 million or 22.9 percent on a sequential basis. Contributing to this decrease was a $21 million reduction in malpractice expense from the third quarter. Excluding malpractice expense, other operating expense was 639 million in the fourth quarter, down 2.7 percent from 657 million in the third quarter.

Let's now turn to bad debt. This issue has emerged over the past three quarters as perhaps the greatest financial challenge faced by the industry, and together with pricing pressure are the key issues impacting Tenet's performance. Here are a few salient facts. In 2003, we absorbed 1.4 billion in bad debt expense, with the trend increasing substantially towards the end of the year. Of that amount, approximately 70 percent came from the uninsured; roughly 20 percent from managed care; and the remaining 10 percent from co-pay amounts due from patients with insurance, which we call balance-after payments.

The uninsured component, approximately $1 billion in size, is clearly the largest component of bad debt expense. But much of that amount is related to the accounting for this revenue at gross charges, which has been discussed at length by the industry for the past couple quarters. For Tenet, with our high gross to net ratio, this issue is exacerbated. A recently announced implementation of our Compact with the uninsured, which I will refer to often as the Compact, will have a significant impact on this bad debt expense.

The Compact, by charging managed care style pricing to uninsured patients in the first place, will significantly lower the size of their bills. In essence, the significant amount of the revenue will never be recorded in the first place due to this managed care style pricing. So it will not have to be written off as bad debt. It is too early to know exactly what the impact of this will be, but once it is in place across our system I expect it could eliminate perhaps 40 to 60 percent of the uninsured element of bad debt expense.

There is one aspect of this that I want to make sure is absolutely clear. This change is largely accounting based; and we do not expect the Compact with the Uninsured to have a meaningful impact on the bottom line. Under the Compact, less net operating revenue will be recognized for uninsured patients. So there will be less to write off as bad debt. What is anticipated is that the same amount of revenue and bad debt will go away, with the bottom-line impact being essentially neutral. But it will eliminate a distortion that impacts all hospital companies, and in particular Tenet, because of our relatively high gross to net ratio. There is the possibility that since self-pay patients will now be presented with a lower bill, perhaps more patients will be inclined to pay. But that remains to be seen.

Next, I want to touch on co-pay, or balance after accounts, which represents roughly 10 percent of bad debt or 140 million. These are individuals that have health insurance, so they are not uninsured. They just don't pay. We are essentially going to require more upfront payments, improve registration and other front-end procedures to improve the likelihood of payment, and improve back-end processes to make sure we do better going forward in this area. For the most part this category has the ability to pay, and we are working to make sure these patients fulfill their obligations.

Finally, let's discuss bad debt for managed care, perhaps the toughest of all bad debt issues to address. In 2003, on a roughly $6 billion revenue base for managed care, we experienced $580 million in managed care claims that were still unpaid after 180 days. So about 10 percent of our managed care revenue was held up, particularly by some large managed care payers. Some payers used whatever means they can to deny their obligation to pay, be it requesting additional but often not relevant information, or auditing every claim over a certain dollar threshold so they can maximize their float and maximize the opportunity that we may accept a discount in return for prompt payment.

About half of this 580 million ultimately gets collected; but that means about 5 percent of managed care claims never get paid. This results in about 300 million of bad debt expense for managed care. This is a big number, and a situation that is unacceptable, and we are working hard to gain traction on this issue.

Let me now move to charges and special items in the quarter. For the quarter Tenet recorded a net loss of $954 million or $2.05 per diluted share. This loss included seven items that net to a total pretax loss of approximately 1.18 billion or $2.12 per share.

First, we had pretax impairment and restructuring charges of 1.45 billion, or 1.13 billion after tax, amounting to $2.42 per diluted share. These charges are non-cash and have no impact on the amount of cash taxes paid. Approximately 937 million of this was for a FAS 142 charge to impair goodwill, of which 735 million was for the California region, one of our reporting units as defined under FAS 142. In addition, approximately 498 million was for a FAS 144 charge to impair long-lived assets, approximately 55 (ph) percent of which was attributable to hospitals in California. These charges were previously disclosed in our January 28 press release.

Second, we recognized income from discontinued operations totaling a positive 29 cents per diluted share, largely the result of recognizing a gain on sale of the hospitals sold in the fourth quarter. This gain was 33 cents per diluted share. There was 4-cent loss on operations of discontinued assets; and that netted against this gain equals the reported 29 cents per diluted share.

The third group of items relates to costs for various litigation and investigation matters. In total a favorable pretax adjustment of approximately 45 million or 5 cents per diluted share was recorded in the fourth quarter. Included here was the $105 million partial reversal of a charge we took in the third quarter relating to a Court of Appeals decision to reduce damages awarded in the Bedrosian case from 253 million to 151 million, including 13 million for additional interest and legal costs accrued in the fourth quarter. This favorable item was partially offset by a $30 million accrual for other proposed legal settlements and $12 million in legal costs incurred during the period.

Fourth, we had a $70 million favorable pretax adjustment or 9 cents per share related to Medicare outlier revenue. I have already commented at length about this item and want to repeat that substantially all of the cash associated with this pick up was received prior to the fourth quarter.

Fifth, there was an unfavorable adjustment of $146 million or 19 cent per diluted share to net operating revenue, primarily related to Medicare contractual allowances. I've also discussed this at length, and want to repeat that substantially all of this item is non-cash.

Sixth, we had a favorable adjustment for reversal of certain accruals for retirement and employee benefits of 39 million pretax or a nickel per diluted share. This item was also non-cash.

Seventh, a gain of $7 million pretax or 1 cent per diluted share, primarily related to the collection of certain notes receivable associated with hospitals sold in prior years that had been reserved for in prior periods.

I have made the statement in prior quarters that as we continue to aggressively restructure this company and resolve litigation there will be additional charges, most likely every quarter. In particular, we know there will be gains and losses on sale associated with the hospitals we're divesting over the course of this year, and potential charges this coming first quarter of 2004 as a result of classifying the non-core hospitals as assets held for sale. We're not in a position to disclose those charges at this time, but will disclose them when we're ready to report results in May for the first quarter of 2004.

Now I'm going to turn to a fairly detailed discussion of cash flow. There has been a lot of speculation lately about Tenet's cash position and the underlying performance of cash flow. Hopefully my comments today will clear up any confusion regarding this topic.

Net cash provided by operating activities was 118 million for the fourth quarter of '03. This was prior to $269 million in capital expenditures in the quarter, of which $32 million was related to the construction of Bartlett and Centennial Hospitals that are due to open this summer. Putting these two together, net cash from operations less capital expenditures for the quarter was -151 million.

At the end of the third quarter of '03, we had $219 million of cash reflected on the balance sheet. At the end of the fourth quarter, we had $619 million of cash reflected on the balance sheet, an increase of 400 million. This increase was due primarily to $690 million of gross proceeds from asset sales, primarily from hospitals, but also a few other minor items, offset by the $151 million of negative cash flow I just described above, plus three other significant items.

First, in December, we completed the purchase of the Norris Cancer Hospital which used 19 million of cash. This was not included in the 269 million of capital expenditures for the quarter that I mentioned before.

Second, we took $87 million of cash from the asset sales in the quarter and established a 1031 exchange fund instead of leaving cash in our unrestricted accounts. This fund will be used over the first half of 2004 to pay for certain identified capital expenditures, while at the same time saving about $10 million in cash tax we otherwise would have paid on the tax gain of certain of the asset sales. This account is recorded in the investment and other assets line on the balance sheet, and it is not reflected in the cash balance.

Third, we had a $17 million debt maturity in the quarter relating to a bond issue substantially redeemed years ago. These items account for all but $16 million of the variance in cash at the end of the quarter, which is comprised principally of securities activities in our captive insurance subsidiaries and a variety of other minor items.

We announced last week that we currently have approximately $425 million of cash on hand, or about $195 million less than at the end of the fourth quarter. Two weeks ago we paid approximately $163 (ph) million for the settlement of the Bedrosian case pursuant to the final judgment we announced in February.

Also so far this year we have had about $40 million of other inflows from asset sales, primarily $22 million from the sale of Lake Mead in January and $14 million of the purchase price for the recent sale of some home health agencies. These inflows have been offset by approximately $100 million of capital expenditures funded in the first two months of the quarter, not including amounts funded from the 1031 account.

So that is the complete story on our recent cash flow performance and the status of our current cash position. With that context, let me spend a few minutes talking about our expectations for cash flow for 2004, and some items that we expect to be different in 2005.

Our January 28 restructuring release commented that we expect cash flow for 2004 to be significantly negative. That remains the case. For various scenarios, our internal model indicate that cash flow after capital expenditures but before asset sale proceeds and litigation settlements will likely be approximately 5 to $600 million negative. There are some very specific assumptions that drive this result that I want to explain. I also want to make clear how some of these items are very unlikely to continue into 2005, and we expect cash flow in 2005 to improve by at least 300 to $400 million relative to 2004, with a good chance of reaching or exceeding breakeven.

I will start with operating cash flow. We expect operating cash flow from continuing operations for 2004 to be approximately 300 to $400 million positive, before capital expenditures, litigation settlements, asset sale proceeds, and outflows related to reserves. Subtracting 580 to 630 million of capital expenditures, 150 to $200 million of cash outflows on non-core discontinued hospitals, and 50 to $150 million of outflows related to previously established discontinued operations reserves, the positive 3 to $400 million becomes a -5 to $600 million.

Just to be clear, this amount does not include any possible impact from significant litigation settlements or unanticipated items. I will make a few comments about each of these areas plus the impact on this forecast of working capital.

The expectation of 3 to $400 million of (indiscernible) from continuing operations in 2004 includes an estimate for deterioration of approximately $250 million in net accounts receivable combined growth for the core and non-core facilities. A disproportionate component of this expected growth is from non-core assets. Our experience is that during the divestiture process accounts receivable grow at an accelerated rate and are then recovered after the asset is sold.

The rest of this growth relates primarily to managed care. We expect an elevated level of working capital pressure from managed care while we work to improve our relationships and hope that in 2005 this pace of growth will slow and at some point reverse.

In the fourth quarter, net accounts receivable declined approximately 50 million from the third quarter of '03. There are a number of factors that make this overall reduction not indicative of future expectations. First, approximately 45 million of receivables from sold hospitals were collected in the quarter. Second, the $70 million outlier adjustment and $146 million Medicare adjustment discussed earlier had a net effect of reducing accounts receivable by 76 million.

Third, cost report settlement payments of approximately 41 million in the quarter increased accounts receivable. The most important fact to take away from accounts receivable performance in the quarter is that net managed care accounts receivable grew by approximately 50 million. This is the key fact upon which we base our accounts receivable assumption in our forecast for 2004.

Capital expenditures are another significant item. In our January 20th announcement, we said we expect capital expenditures for 2004 of between 500 and 550 million, including about 70 million from the company's systems standardization and business office consolidation projects. In addition, we announced we expected to invest an additional $80 million for completion of the Bartlett and Centennial Hospitals, some of which will be funded out of the 1031 exchange trust. This totaled estimated CAPEX for 2004 of 580 to 630 million.

Looking into 2005, with the hospital construction projects completed, and only a modest amount of spend remaining to complete the systems standardization and business office projects, this will reduce existing capital expenditure commitments significantly. In addition, about half of the spend in '04 relates to larger construction projects that are already well underway, many of which are expected to be completed over the next year. As these projects are completed, there should be more discretionary room to adjust CAPEX to current levels of cash availability. We in the January 28 release that we preliminarily expect that 2005 CAPEX will be in the 4 to $500 million, representing a significant reduction compared to 2004.

During 2004, we expect the assets held for sale to be a net consumer of approximately 150 to $200 million of cash until such time as they are sold. The key variables in this range are the timing of the sales and the performance up until the time of sale. Our historical experience is that assets held for sale deteriorate rapidly in performance once they are announced to be sold, despite the best efforts of their management team; but also recover fairly quickly once a new owner takes charge and brings stability. We do expect the majority of the sales to close by year end, some perhaps a bit earlier and at most a few a little later. Our expectation is that this cash drain will not exist in 2005 and represents a significant part of the pickup we expect in 2005 cash flow.

As for asset sale proceeds, these are not factored into any of the calculations. I will address those in a moment when I discuss overall liquidity.

The final aspect of 2004 cash flow I want to mention is outflows related to reserves, restructuring, and other non-operating matters. In 2004, we expect between 50 and $150 million of such outflows. This will likely still be a significant number in 2005, resulting from further restructuring in 2004, but should shrink significantly starting in 2006, several quarters after the restructuring is complete.

Taken together, the likely reduced pressure in 2005 on net accounts receivable, the reduction in our CAPEX spend, and the completion of asset sales that will eliminate the operating drain on cash from these facilities to be sold, it is fairly straightforward to project a significant improvement in 2005 cash flow. On top of these issues, we also expect significant improvement in the performance from our core operations in 2005 which will add to the cash flow turnaround.

While there are a lot of moving pieces and it is impossible to predict with certainty, there are enough positive elements at work to give us confidence that 2005 should be much closer to a breakeven cash flow year, and perhaps significantly better.

Now I want to wrap up with a few final comments on liquidity. Last week we announced the successful amendment of our credit line. At that time we 94 percent of the banks voting for the amendment; and as of now we have reached 100 percent voting in favor of the amendment. This credit line gives us access to $500 million in cash, plus another $300 million for letters of credit.

There have been many questions asked and commentary in the media since our announcement of this amendment, a number of which speculate about the merits of the amendment and opine on signals that an investor should read into the structure of the amendment. Let me add my perspective to the mix, since I'm the person ultimately responsible for the transaction.

I believe we arrived at a very fair transaction with the bank group. We completed the amendment with terms that were consistent with our expectations going in. We had a choice of either amending the existing credit line or trying to do a new credit line at this time. For a variety of reasons, we chose simply to amend. As a result, we gained the covenant flexibility we needed, and in trade we reduced the size of the facility and provided security. This was a very traditional trade-off; and the concessions made by both the company and the banks were balanced. Notice that we did not change the pricing for the facility. This is a strong indicator that the transaction terms were balanced.

We have received questions about why we did not extend the maturity of the credit line. This is something we did not seek to do as the credit line has two years of remaining life. In addition, all of the other changes we asked for only required a simple majority vote. Extending maturity requires a 100 percent vote. Even though we ended up with 100 percent, that was far from clear going in.

For the many people commenting on the amendment who don't do this sort of thing for a living, I understand that putting the many trade-offs into context can be difficult; and it can be tough to figure out whether the deal was good or not for the company. Had it not been good, we would not have agreed to it. Remember, while we were anticipating a covenant violation sometime this summer or fall, we were not currently in violation. We simply made a preemptive effort to renegotiate so there would be no question about our access to our bank facility.

One other point I want to make about our current capital structure which we included in our press release last night is that our current capital structure is not designed to fund a significant litigation settlement. If and when we can settle outstanding litigation, we will likely access the capital market to finance a good portion of any such settlement. Resolving litigation will reduce uncertainty about the quality of Tenet's credit. Given that, it does not make sense to prefund that type of speculative liquidity need. It is much better to have a settlement in hand and then approach the market. That way investors have a more definitive sense, post settlement, what the financing needs are for the company, and we can raise the necessary money on better terms at that time.

Putting all of this together, currently Tenet has about 425 million in cash, plus about 60 million left in the 1031 exchange fund. So counting cash on hand and cash availability under the credit line, as of now we have access to nearly $1 billion.

When we announced our restructuring, we anticipated approximately $600 million of net proceeds from the asset sale, with a significant portion of the proceeds to be received in the form of tax benefits. The process is moving right along. We have had close to 300 inquiries from interested parties, about 80 of which made the first cut and many of whom have already submitted initial bids. We aren't going to provide any detail at this time, but we do have multiple bids and indication of interest for each and every facility that is for sale.

Some buyers are interested in large groups, some are interested in small regional groups, and others are interested in individual facilities. Based upon these initial indications, we still feel comfortable with our initial estimate of $600 million of net proceeds. Again, we do expect a good part of this to come from tax benefits, which we previously announced would not be received until 2005, even though we expect the deals to close later this year.

With respect to the company's liquidity, a decent rough estimate was we should get about half of the 600 million later this year when the transactions close and the other half in the summer of '05 when the tax refund is processed.

The largest wild-card in forecasting Tenet's liquidity is the ongoing investigations and the possibility of significant litigation settlements. No material settlements are included in the forecast. Trevor already commented about our perspective on this, and it should be clear from his comments that any settlement must be of a range that we can comfortably finance; otherwise we will not be able to enter into the settlement agreement.

I want to be extremely clear that, at least in the intermediate term, surprise litigation settlements are not a realistic risk for the company's liquidity. Acceptance of any settlement would be subject to agreement by management and the Board, which cannot be granted unless the funding can be arranged without jeopardizing the liquidity of the ongoing company. I should also point out that we're spending roughly 4 million per month related to pursuit of these various cases. To the extent we can settle, this spend should decrease dramatically and improve our ongoing results.

One last item to touch upon is the previously announced pending IRS audit for the open fiscal years 1995 to 1997, with contested issues representing approximately 279 million of tax exposure, including accrued interest. We continue to work through the appeal process; and if we cannot resolve the matter in due course with the IRS in the next few months, this matter will progress to court.

If this case progresses to court we will have to choose at that time between U.S. Tax Court, where no cash payment is required until final judgment, and federal court, where the claim would have to be paid in full and then litigated. Assuming we would litigate in U.S. Tax Court, it will likely take several years until final judgment. No cash will be needed until such time. And the claim will simply continue to accrue interest until such time as a final judgment is reached.

This completes my review of the company's current performance, expected performance, and liquidity. It is clear that we are a company with significant issues and many remaining risks. But we're confident with all of the efforts we're making to improve the performance of this company, and believe our liquidity is sufficient to support our needs while executing our plans to turn Tenet around and restore it to a competitive level of profitability. With that, I will turn it back over to Trevor.

All right. Thank you, Stephen. We will now turn to addressing the various litigation and investigations that are currently facing the company. Resolving these issues is the primary responsibility of the company's new General Counsel, Peter Urbanowicz. I was delighted when Peter joined our senior management team in December.

He comes to Tenet with a distinguished resume in healthcare legal practice. Most recently, Peter served as Deputy General Counsel of the United States Department of Health and Human Services with responsibility for about 100 government lawyers. Peter is deeply familiar with the various government agencies with which we are in discussion; and since Peter's arrival three months ago, we've enjoyed a more productive tone in these conversations. I've asked Peter to spend a few minutes this morning to provide a status update on these discussions. Peter.

Thank you, Trevor, and good morning. This is the first time I have formally addressed our investors as the company's general counsel. As some of you know, I spent most of my legal career in private practice representing healthcare providers. Before coming to Tenet, I spent the last two and a half years in Washington as Deputy General Counsel for the Department of Health and Human Services, where I worked on a number of national healthcare issues.

I believe I have a good understanding of the legal challenges confronting hospitals and doctors. I was attracted to this position because of the extraordinary opportunity to assist Tenet in rebuilding itself as a preeminent healthcare provider. The company's legal and regulatory challenges may be complex, but the issues are not unique. On a daily basis, every provider has many of the same challenges. Complicated rules for government programs, structuring payment arrangements between hospitals and doctors in a way that doesn't violate federal referral laws, making sure that patients in emergency rooms are treated properly.

Since I arrived at Tenet two and a half months ago, I had been closely scrutinizing the cases and investigations facing our company. My impression so far is that many of the legal and regulatory challenges facing this company are familiar to other providers. But obviously, ours are much larger and much more complicated. What this tells me is that we have our work cut out for us. And there are steps we can take and are taking to deal with them. The company must always defend its financial and legal interests, but when appropriate, we must be prepared to reach reasonable resolutions to avoid costly and protracted litigation. We ought to be resolving more of our disputes with regulators and business partners outside of the courtroom than we have done in the recent past.

To that end, we have been establishing a more cooperative and collaborative tone with government investigators. We are voluntarily providing them with the information they need about our business practices. I firmly believe that we should always be confident enough in our business practices to be candid (technical difficulty) our patients and our business partners. That is how I intend to conduct our legal affairs.

As part of this effort, we need to make sure that we're providing our hospital operators with counsel they need to navigate the difficult and sometimes conflicting world of regulations. I recently reorganized our law department to emphasize our role in giving direct, real-time, and daily support to our hospital operations. Our lawyers are scrutinizing all of our policies, from physician relocation and medical directorships, to the way we deal with managed care payers. In that vein of team building, I'm happy to report that Doug Clarkson (ph) recently joined us as our lead managed care lawyer to work through many significant issues that we have with our payers.

Now I would like to briefly highlight some of the significant developments that occurred since our last conference call and filing. Let me say at the outset that we're not disclosing any new government investigations in this 10-K. Any new matters that we learned about since our third-quarter 10-Q have been disclosed promptly in the interim through a news release or an 8-K. We have again organized the legal proceeding section of the 10-K by subject matter, rather than just by lawsuits and investigations. I would direct you to the detailed descriptions in the 10-K to understanding these matters.

In general, the company is facing lawsuits and investigations in five main areas. Physician relationships with our hospitals, pricing and billing issues, securities and shareholder matters, litigation involving our hospital in Redding, California, and Medicare coding. Let me address recent developments in each area in that order.

First, physician relationships. We believe virtually every aspect of our relationships with physicians is under potential scrutiny by the federal government. As you know, a federal criminal case involving physician relocation agreements was brought last summer against Alvarado Hospital Medical Center in San Diego, the hospital's Chief Executive Officer, the hospital's business development director, and a Tenet ownership entity. All of the defendants have entered not guilty pleas to charges of making illegal payments and violations of anti-kickback laws. The trial in this case is now set to begin in October of 2004.

In a separate matter, we announced last July that the U.S. Attorney in Los Angeles is conducting an investigation into physician relocation agreements at seven other Tenet hospitals in Southern California. We are voluntarily cooperating with this investigation and providing documents. The U.S. Attorney in Los Angeles has also requested documents related to certain cardiac physician agreements, coronary procedures, and billing practices at three of the Southern California hospitals. We are also voluntarily providing documents to the office of Inspector General regarding agreements that four hospitals in California and a former Tenet hospital have with a physicians' group specializing in women's cancer.

We are voluntarily providing documents to the Justice Department related to financial arrangements between 23 physicians at two of our El Paso, Texas, hospitals. And we are providing information to the U.S. Attorney in New Orleans as part of an investigation into a management services provider for a Medicare Plus Choice Plan in New Orleans that Tenet owns a 50 percent interest in, and issues regarding inpatient rehabilitation services. In all of these investigations, we are continuing to work cooperatively with government agencies. At this time, only the investigation in the Alvarado matter has evolved into a formal claim.

I can report today on a good step forward we have taken to resolve some of the physician/hospital issues. In the 10-K we disclosed that Tenet has entered into a letter of understanding with the federal government to settle the Barbera case in Florida. This case which we disclosed a few years ago involved allegations that certain physician employment contracts entered into by Northridge Medical Center in Fort Lauderdale, Florida, in the early to mid 1990s violated federal laws affecting relationships with providers. We are currently formalizing a settlement agreement with the Justice Department that will include a corporate integrity agreement with the OIG for that hospital.

Simultaneous with resolving this case, we anticipate settling Medicare transfer and discharge issues at substantially all of our hospitals. We believe that the resolution of these two matters indicates progress in our efforts to establish the more cooperative and collaborative tone with the federal government. The company has made an accrual in its financial statements for settlement of these matters and related costs.

The second major area of litigation and investigation involves pricing, with a federal investigation into Medicare outlier payments, private class-action lawsuits alleging excessive charges for medical products and services, and disputes by some managed care payers on charge policies at some of our hospitals. In the Medicare outlier investigation, we are continuing to cooperate with the United States Attorney's office for the Central District of California and providing it with documents related to Tenet at least 19 of our hospitals.

In the state class-action pricing lawsuits pending against the company and its subsidiaries in California, Florida, Louisiana, South Carolina, and Tennessee, we believe there a number of legal defenses existing in these cases, and we intend to work towards having them dismissed as a matter of law. All of these cases are civil actions brought by private parties and remain at the pleading stage. No class has yet been certified in any of these cases.

Our third litigation and investigation area involves various securities and shareholder matters facing the company. Last June, we disclosed that the Securities and Exchange Commission had opened an investigation which we believe is focused on the inadequacy of Tenet's disclosures regarding outlier payments and managed care stop-loss payments in the company's financial reports in 2000, 2001 and 2002, as well as sales of securities by current and former directors and officers of the company. Since our last investor call, the company has continued to produce documents to the SEC and the SEC has conducted depositions of various current and former employees of the company. We are unable to project today how or when the SEC will ultimately conclude this matter.

From November 2002 through January 2003, 20 securities class actions were filed against the company and certain of the company's current and former officers and directors. These federal class actions have all been consolidated in federal court in Los Angeles. Discovery and depositions in these suits have been stayed under the Private Securities Litigation Reform Act while we present our arguments to the court on why these suits should be dismissed as a matter of law. The federal shareholder derivative cases have also been consolidated in federal court in Los Angeles. In these cases we are also presenting arguments to the court on why the suits should be dismissed as a matter of law. The shareholder derivative cases filed in California state court have been stayed, while the federal shareholder cases are proceeding.

The fourth area of major litigation involves allegations that two physicians at our Redding, California, hospital performed unnecessary cardiac procedures. As you know, last August the company reached a settlement with the Department of Justice to resolve also civil and monetary administrative claims that the United States may have had against Redding Hospital. We later reached an agreement with the OIG to sell the company's ownership interest in the Redding Hospital. We are currently engaged in a bid process for that sale.

We still face significant civil litigation arising at Redding. At present, there are 73 individual cases filed on behalf of more than 700 patients. These complaints allege various state law claims including fraud, conspiracy, deceptive business practices, negligence, and wrongful death. Additional suits may be filed. These cases have been consolidated before a single judge in Shasta County, California. The plaintiffs' lawyers in these cases wish to avoid California's $250,000 cap on malpractice claims by alleging fraud claims instead. We continue to believe that these cases should be handled in the manner that other medical liability cases are handled in the State of California.

The final area of significant litigation and investigation involves Medicare coding. The most significant matter in this area is the civil lawsuit filed by the federal government in January 2003, alleging up-coding at several of our hospitals. In December, the court ordered the government to amend its complaint and plead its allegations with more specificity. The government did so on February 6, and our response is due to be filed soon. No trial date has been set in this matter.

With the exception of the Alvarado case which is scheduled for trial in October, none of the significant litigation matters I've described has a pending trial date this year. Two other significant legal matters, the Bedrosian matter and the Internal Revenue Service review of our tax returns for 1995, '96, and '97 are detailed in our 10-K. Because Stephen Farber discussed those a few minutes ago, I will not go into further detail.

Finally, we are continuing to provide documents and other information to two congressional committees. As we previously announced, the Senate Finance Committee requested documents related to Redding Medical Center, Medicare outlier payments, patient care, quality reviews at certain hospitals, and other matters. Tenet is also one of 20 hospital systems providing information to the House Energy and Commerce Committee on hospital billing practices and their impact on the uninsured. The Energy and Commerce Committee may hold hearings in the near future, inviting several hospital systems to present information about their billing practices.

In brief, to summarize, in the past few months we have been working cooperatively with federal agencies and providing them with requested information. We have been reviewing and evaluating our legal policies and business practices to give us confidence in our ongoing operations. We're defending our financial and legal interests; but when appropriate, we will work to reach reasonable resolutions to avoid costly and lengthy litigation.

Visiting hospitals around the country and talking to patients and nurses was always a favorite part of mine, of being in government service. Recently I had the pleasure of spending the day with are great nursing and administrative staff in El Paso, Texas. Being in our hospitals or any hospital is a healthy reminder of our mission. And protracted litigation and investigations is not a part of our mission.

As the company's chief legal officer I want you to know that my top priority is to solidify our legal policies and business practices so that we can get back to spending more time in the patient's room and less time in the courtroom. Now I will turn the call back over to Trevor Fetter who will introduce Dr. Daley.

Thanks, Peter. I would now like to introduce you to another member of Tenet's senior management team. Dr. Jennifer Daley joined Tenet in the summer of 2002 to build our clinical effectiveness program. Prior to joining Tenet, for seven years she held senior positions in quality-related functions for both Beth Israel Deaconess Medical Center and Massachusetts General Hospital. Both of these hospitals are teaching hospitals for Harvard Medical School where she also served as Associate Professor of Medicine. Earlier in her career Dr. Daley led a comprehensive quality improvement effort in surgery for the Veterans Administration.

In summary, she is a widely recognized authority on patient safety and quality of patient care. Last year, Dr. Daley was promoted to Senior Vice President of Clinical Quality, and has provided leadership for Tenet's commitment to quality. Dr. Daley and her team have identified a clear set of activities to implement as part of this strategy, and I've asked her to share them with you in addition to providing you with a sense of what is being accomplished at Tenet in terms of quality of care. Dr. Daley.

Thank you, Trevor. I would like to tell you about an important initiative that is at the core of what this new management team stands for. It's vital to our go-forward plans, and it will be a competitive advantage for us when fully implemented. We call it our Commitment to Quality. It is an industry-leading program that will further improve the standard of care offered by Tenet hospitals. This will truly set us apart. I am excited to implement this strategy and I've built a highly credible team to do so.

This assignment gives me a unique opportunity to bring my 20 years of clinical experience to bear on a worthy objective. I want to thank Trevor for devoting the requisite resources to deliver on a commitment to the highest level of quality in all Tenet hospitals.

Let me briefly describe our program. There are four main elements. The first is a focus on patient safety. The second is on physician excellence. This means giving our hospital governing boards and medical staff tools to assist them in selecting physicians to be affiliated with Tenet hospitals who are of the highest professional quality and are practicing state-of-the-art medicine. The third is a concentration on nursing excellence, providing Tenet nurses with the tools, leadership skills, and clinical knowledge to offer excellent clinical care in a work environment in which they are proud to serve. The last component of the Commitment to Quality is making our patient flow process more efficient in our emergency room, operating room, and other critical areas of our hospitals so that our patients and their families experience few if any delays. This last objective increases both patient and physician satisfaction, while simultaneously increasing capacity in our hospitals.

To give you a sense of where we are in terms of implementation, the program was developed and piloted over the course of 2003. We formed regional support teams known as transformation teams to guide the implementation process at each of our hospitals. A total of eight Tenet hospitals have gone through the transformation process, and every two months an additional 8 to 10 hospitals will follow. All Tenet hospitals will have completed the Commitment to Quality transformation process by the end of the first-quarter 2005.

It's important for me to note that while the transformation teams will eventually disband once our hospitals have successfully implemented the program and established monitoring processes, I have a permanent team in place to continue the focus on quality patient care. I have established five regional chief medical officer positions and have already recruited highly qualified medical doctors to fill those positions. These individuals join the overall quality reporting structure alongside the regional directors of clinical quality improvement.

The people in these positions are important contributors to Tenet's Commitment to Quality, and to our ongoing monitoring of these prophecies. This new infrastructure provides the company with much greater visibility into and influence over the quality of patient care delivered in our hospitals. Furthermore, we have merged this infrastructure with our former quality auditing function, with an eye towards proactive measures.

Regarding patient safety we have identified focal points for our hospitals. such as the prevention of pressure ulcers and patient falls. As part of the Commitment to Quality areas such as these will be systematically addressed through best practice implementation and monitoring. Also, we will be upgrading supporting technology for the prevention of adverse drug events and hospital-acquired infections.

As part of our capital plans for 2004 and 2005, we will upgrade where necessary laboratory and pharmacy systems that will ultimately serve as the base system for significantly enhanced order entry, results reporting, and in the future, computerized order entry.

Under our physician excellence theme, we are in the process of convening evidence-based reviews and clinical advisory groups in eight major clinical product lines; bariatric surgery, general surgery including perioperative care, obstetrics, cardiology and cardiac surgery, neurosciences, oncology, orthopedics, and critical care/trauma/emergency care. Our goal will be to establish physician-led care standards to be adopted by our Board and medical staff that are consistently applied (inaudible).

Over the course of 2003, we educated all of our hospital governing Board members and key members of our medical executive committees in the Commitment to Quality programs and their critical roles in physician credentialing and privileging. This part of the program will enable a consistent model of hospital governance and medical staff infrastructure to monitor the outcome of patient care as well as the appropriateness of it. This program incorporates a consistent fact-based peer review of physicians' care processes, utilization, and outcome. The peer review programs continuously identify and teach physicians how to meet current professional standards.

Nursing excellence is also a critical component of our Commitment to Quality. We have created a national nursing counsel that provides our nurses with a voice in identifying relevant issues related to productivity, staffing, and quality, and finding the solutions to these issues. We have also initiated a competency-based nurse manager education program, as well as nurse team leader training. And we have begun to implement a user-friendly nurse scheduling and patient placement system. In addition, we're improving nursing recruitment and retention, through strategic alliances with schools of nursing in major Tenet service areas such as Georgia and South Florida.

As for the efficiency of patient flow, we're focused on increasing throughput in our emergency rooms and those areas of the hospitals that are impacted by the increased volume through our emergency rooms, such as critical care units and operating rooms. This theme of our quality program is meant to tackle upfront the biggest bottleneck problems, so that our hospitals can increase their capacity with less capital investment.

To improve our patient flow processes and ensure a high degree of quality, we're also deploying a Web-enabled care coordination system in each of our hospitals. We have developed an internal system and integrated it with external technologies. We call the system eCare, and we anticipate that the system will be implemented in all our hospitals by the end of 2004. The system will assess the appropriateness of several aspects of patient care, such as admissions, days in acute care settings, and discretionary surgical procedures. It will facilitate clinical data collection and outcomes reporting. It will assess evidence-based practice in acute myocardial infarction, community-acquired pneumonia, congestive heart failure, and coronary artery bypass graft. Lastly, it will enable our discharge planning and placement processes.

As Trevor has previously mentioned, quality will be Tenet's competitive advantage going forward, and I am confident we will reach that goal. With out Commitment to Quality, Tenet is working together with physicians to execute continuous improvement in quality, through disciplined collaborative and standardized practices. Nurses at Tenet hospitals will continue to improve their skills and have the systems to support caring for their patients. Ultimately, everyone wins.

Our preliminary results are exciting in both clinical quality and efficiency of operations. At one of our hospitals which completed the transformation process, there was a 70 percent reduction in the number of minutes that the first case in the operating room was delayed. This is significant when you consider that a delayed start of the first case of the day has a domino effect on every other case. Not to mention the inefficiency it creates with all the related processes. This same hospital also increased its operating room utilization by 30 percent and has sustained that increase for three months.

Another hospital which completed our Commitment to Quality implementation experienced dramatic improvements in its emergency room operations, decreasing diversion hours from 200 hours per month to 0, and reducing those patients who have left the emergency room without being seen by 400 basis points.

These are indicative of the results we hope to achieve in all our hospitals. We will monitor our progress through a balanced score card that we are currently piloting in seven hospitals. Key metrics that balance the company's quality and financial goals will be made available to hospital executives on a real-time basis and will form the foundation for the performance standards going forward.

In sum, this is a very exciting time to lead quality at Tenet. Now I would like to turn it back over to Trevor who will introduce Reynold Jennings.

Thanks, Jennifer. I expect that a lot of value will be created through the Commitment to Quality, and it's important for our shareholders to understand what we're doing in this area. I am now going to ask Reynold Jennings to cover the operational strategies that he and his team will execute to enhance the financial performance of our 69 core hospitals.

Reynold's appointment last month was a critical step in rebuilding Tenet's operations and it completes our new senior management team. As our Board and I considered the attribute that we wanted in a Chief Operating Officer, it was clear that Reynold had them all. He has an outstanding record as a hospital operating executive who understands all the aspects of this business. He began his career as a hospital pharmacist, gradually assuming increasing responsibilities in investor-owned hospital systems; and most recently he successfully managed a division of 45 Tenet hospitals with more than $6 billion in annual revenues. These were focused primarily in the Southeast.

And very importantly, as an engaging, thoughtful, hands-on leader who knows how to motivate people to reach high goals, he already enjoys the respect and trust of our hospital managers and employees. Because of his deep knowledge of Tenet and our industry, Reynold is uniquely positioned to make an immediate difference by leading people to reinvent operations and get our hospitals back on the path to competitive, sustainable growth. Reynold.

Thank you, Trevor, and good morning. When Trevor approached me in late January and asked me to serve as Chief Operating Officer, I was immediately drawn by the incredible opportunity to play a key role in stabilizing Tenet, positioning it for the future, and restoring the pride that our hospital operators have traditionally felt in this company.

I have spent my entire professional career, more than 30 years, managing hospitals. I believe I am a pretty good judge of what works and what doesn't hospital administration. I have worked my way up from director of hospital pharmacy, to hospital chief executive officer, to senior executive over a large group of hospitals. My experiences and knowledge were shaped in six different companies. In the past seven years at Tenet, I have come to know this company's hospitals well, and in just five weeks as Chief Operating Officer, I have formed a definite opinion that this company's go-forward core group of 69 hospitals gives us a very solid base to build on.

As Trevor mentioned, these hospitals have continued to do a good job by increasing admissions and satisfying our patients and doctors, in spite of all of our challenges. I have confidence in the overall strength of these core hospitals, especially the quality and commitment of our local management teams. And that more than anything else is what gives me a lot of optimism today about the future of this company.

My passion is operational excellence, making sure that our hospitals get the right balance of resources and supervision they need to deliver quality patient care. That will be my only focus in my new role at Tenet. I know the functional needs of every department in a hospital. That is what has allowed me to gain the respect of physicians, nurses, and other hospital professionals throughout my career. On several occasions through the years, I have been asked to help turn around difficult operational situations. I actually enjoy that kind of challenge, and I look forward to the tough but doable task ahead of me now.

Another lesson I have learned through my 30 years in hospital management is that sustainable growth in this business comes from a balanced focus on four big things; volume growth, competitive managed care rates, clinical service development, and a relentless focus on cost control. This is not revolutionary stuff. But it addresses every one of the challenges mentioned by Trevor and Stephen earlier.

Success comes when you have the great execution of your strategies in these areas. I believe that my rise in the Tenet organization has come in large part because of my demonstrated ability to produce balanced performance on these big four themes.

Stephen made it clear in his remarks that the main reason our margins have been shrinking is that our costs are rising faster than our revenues. I know that it is my job and the job of all of our hospital operators to step up to the plate and deliver the simultaneous growth in both revenue and reduction in costs that will be needed to get this company back where it belongs. I am confident that we're up to the task.

Now let me tell you about the key initiatives we are implementing to address virtually every operational challenge this company currently faces. Shortly after I took this job last month, I immediately convened a meeting of our senior leadership to define 14 high-impact initiatives with great potential to help us generate more revenue and reduce our costs. We believe these initiatives have the capability over the next 18 to 24 months to significantly close the gap in our margin performance compared to our peers.

Like any portfolio, some elements of this operational plan will deliver better results than we expect, while some will not do what we had hoped. While today I am not going to mention our specific targets for these initiatives, we believe that in the aggregate they will deliver hundreds of millions of dollars of improvement. Some of these will have near-term impact in the second half of 2004. But most will deliver their most noticeable impact in 2005 and 2006. It is likely that in 2004, short-term benefits will be substantially offset by the incremental cost of the longer-term initiatives.

Instead of going into detail on all 14 initiatives, I will present them grouped into three central themes; managing our revenue cycle, improving the efficiency of our patient care, and rightsizing our cost structure. Let's start with the revenue cycle. First we made a major move in this area last month by consolidating for the first time our patient financial services and managed care strategy efforts with our hospital operations management under my direct supervision as Chief Operating Officer. This gives us a greater ability to integrate all aspects of operational strategy and to react quicker to such things as rapid changes in our payer mix.

Second, late last year, we centralized our historically decentralized managed care strategy efforts, and recruited Bob Yunk (ph), a very experienced managed care expert, to lead that area. We have also hired managed care specialists to handle region-level negotiations; and they will report directly to Bob. In addition, we're designing our contract templates to make them more user-friendly for our larger managed care payers in the areas of precertification and adjudication. That should really help with retrospective denials and speed up payments to Tenet. Bob Yunk and I will begin personal visits to all of our major insurance customers next month to reinforce the positive changes we have made and to continue to put our relationships back on the right track.

Trevor mentioned earlier that we have already been successful in renegotiating or renewing 80 percent of our managed care contracts over the past 15 months. We are in the final stages of renegotiating the handful that remain. I think it says a lot that we have been able to get this done with relatively little disruption to our ongoing relationships with most of our managed care partners.

In the third area of focus on revenue cycle management, we're taking several specific actions to reduce bad debt. These include implementing front-line initiatives to increase point-of-sale cash collections, and improve scheduling, preauthorizations, and financial counseling.

Fourth, we will realign our hospital charge masters to eliminate the distortions caused by the rapid price increases of the years 2000 through 2002. This will involve both short and long-term steps; and some of them may actually cost us some near-term earnings; but it will provide our 69 core hospitals a level playing field on which to build future growth. This will take us a while, but our plan is to begin midyear of this year and have this accomplished by the end of 2005. We expect to say more about this process within the next 45 days.

Now let's move on to our initiatives to improve efficiency in our patient care delivery. First, next month I'm creating a small quick-acting earnings improvement team, or a SWAT team if you will, comprised of some of our best hospital-based content experts with proven success in a variety of areas. This group will take a close look at ways to bring best practices learned throughout our system to particular situations at individual hospitals. (technical difficulty) They will start immediately with our lower-margin hospitals, but eventually they will look at all of our facilities. This will include among other things leveraging our labor databases to find opportunities to deliver the service our patients need within the labor budgets we have.

So many of our challenges sound huge but are actually intensely local in nature. With the diversity of our hospital portfolio, we have probably faced a similar problem elsewhere that a hospital may need a solution to but is not aware of it. This team will analyze local situations and offer counsel on how to solve problems. For instance, it will perform service line assessments to determine why some services are producing substandard volumes or margins. This will give us a much clearer sense of which lines should be eliminated, regionalized, restructured, or expanded.

The team will also address some of the issues that Stephen discussed, such as why outpatient volumes may be declining at a particular hospital; what can be done about increased competition for higher-cost services; and how to address the decline in revenue per admission. A quick diagnosis of these kinds of problems at the local level will almost always give us a better chance to solve negative trends before they grow.

Second is our Commitment to Quality which Dr. Daley has already spoken about. I do want you to know how very excited I am to be working with a person of Dr. Daley's caliber and enthusiasm to tackle perhaps our most important objective, to enhance the quality of care delivered in our hospitals. I can tell that in a very short period of time Dr. Daley has won over our regional and hospital executives with her knowledge and can-do attitude.

Now let me talk about operational efforts to reduce cost. As Trevor mentioned, with the exception of bad debt expense, our cost performance has not been out of line over the past year. But it is obvious that our current revenue situation demands much more streamlining in areas of cost control that do not affect the quality of patient care we deliver.

First, we delayered the operational management structure. We eliminated our two-division structure as well as our market-level management structures in New Orleans and Philadelphia. We're continuing a larger realignment of staff and resources away from our corporate offices and the divisions into the five remaining regions.

We have found that decision-making and accountability is far superior when there are more resources and management authority at the regional level. I should add that our five regions are led by very seasoned executives with 10 to 20 years or more of experience in managing large groups of hospitals. These executives are currently engaged in a very thorough cost reduction and streamlining process for their own regional operations; and I expect final decisions to be made by the end of this month.

Second, we're performing a detailed review of our corporate functions above the regional level. Our purpose is to right-size the corporate staff to support the smaller base of 69 core hospitals. But we want to do it in a smart way that preserves the resources those hospitals will need going forward. Major decisions will be made in this area by the end of March. But reductions will be phased to run parallel to the process of divesting the 27 hospitals.

Third, we have launched what we're calling our total cost management initiative which brings, in Phase I, group purchasing discipline to a dozen or more controlled expense areas. These include nurse contract labor, transcription, telecom services, natural gas, security, management recruiting, and freight. The groundwork for this initiative was accomplished in the fourth quarter of last year, and my goal is to accelerate the implementation in the days and weeks ahead. Phase II will move into clinical cost savings opportunities, such as reprocessing pharmacy formularies of lower-cost bioequivalent drugs and high-cost prosthetics.

Fourth, we have identified a number of opportunities to reduce discretionary corporate and hospital expenditures not directly related to patient care. These include limiting employee travel, greater use of webcast for educational purposes, and limiting advertising mostly to call to action items that support business development.

I hope that my remarks give you a better idea of the breadth of work now being done in our hospitals to turn this company around. My team is organized and motivated; and we have a solid operational plan to attack our challenges. On the operations side of Tenet we have applauded the right decisions that Trevor has made in a very short period of time to stabilize the corporation and put it on the path to recovery. Now it's the hospital operators turn to do our part, and we're ready for the challenge.

I want to thank you for your patience during this presentation. At this point we're ready to take questions. Operator, could you please give everyone the instructions.

(OPERATOR INSTRUCTIONS) (technical difficulty) Lori Price, J.P. Morgan.

I was hoping that either Trevor or Steve, you could answer this question. I was hoping you elaborate on the close to $300 million you talked about that is aging managed care AR that is in excess of 180 days. Can you tell us how much of that actually comes from the old managed care contracts versus the new contracts that were recently negotiated?

And then related to that, can you tell us, of the 12 percent bad debt ratio objective that you've outlined for 2004, are you expecting that managed care piece, relative to the uninsured and co-pay piece, to rise or fall versus '03? Thanks.

On your first question, on the $300 million of managed care that ultimately turns into bad debt, it is actually closer to $600 million. In fact, $580 million over the past year that aged over 180 days, of which only half of it is ultimately collected. So the total amount is 300 million.

In terms of whether it is a mix from new contracts or old contracts, it really is sort of a blend. That is our current run rate. We haven't seen any significant change in it. So, it is really a combination.

In terms of the 12 percent bad debt target, there are so many variables that go into it that it is really not a worthwhile exercise to try and tease out the impact of any individual elements. For our accounts receivable growth, I did mention that we think the majority of our AR growth will come from managed care, because that has been our experience. Our other payer groups tend to be fairly consistent, while managed care continues to grow.

As the balances grow, the aging out of that AR does by definition increase the amount of implied bad debt that at least we take reserves on, until those accounts are ultimately settled. But the 12 percent is just an overall mix.

I know they said just one question, but just a very quick follow-up. Philadelphia, the Independence Blue contract, is that still not signed? Or what is the status of that?

That contract is signed and it is effective for five years.

Thank you.

Sheryl Skolnick, Fulcrum Global Partners.

Thank you for a very interesting conference call. I guess since I only have one question, I'm really curious as to what the most critical assumption is that you're making underlying the breakeven guidance from continuing operations. I guess if I have to, if I can ask something that is related to that, can you discuss how you are allocating overhead cost between the discontinued and continuing operations? Because you're getting rid of 25 percent or a little bit more of the assets. Can you allocate 25 percent or a little bit more of the overhead cost to those discontinued operations? Because if not, I don't understand how you get to breakeven.

Let me take the first part of your question I will ask Stephen to comment on the second part of your question. As I mentioned in my comments, the issues for 2003 that cause us to miss our own internal budgets, and therefore the expectations we had set, were revenues and bad debt. I think that those continue to be the most critical issues in this year's budget and this year's expectations that we have set.

So, to answer your question, clearly revenue and bad debt, those are the two issues to watch with this company. On the other line items, we have actually done quite well in relation to our forecast.

On the second part of your question, in terms of the allocation cost, the allocation of overhead cost that you should expect to see starting with Q1 of '04, there will be some limited degree of allocation of cost to the divested hospitals; and that will be included in discontinued instead of in continuing operations. But it will be a far cry from 25 percent of our total overhead.

There are many overhead costs that are essentially fixed; and variable costs probably represent less than half of the company's different overhead categories. Some of the specific individuals who are managing the assets to be divested will be included in discontinued operations, and some of the direct expenses of those hospitals, to the extent that they can be broken out separately, will. But I think it won't be that significant of an allocation.

So I'm left to conclude that there is going to be some significant progress on your overhead cost allocation initiatives fairly early on in the year in order to get to that breakeven assumption. (multiple speakers)

There are so many initiatives at work, whether they're initiatives started last year or initiatives that we're starting now, that will have an impact on all of the various cost items and will be -- our plan, it is really nothing more than a plan. It is as thoughtful of a plan as we can put together; and it takes into account literally hundreds and hundreds of pages of different assumptions from hospital level on up that resulted in the expectation of breakeven performance.

So far, this year, it appears that we are tracking on plan. I really am not sure what else we can say beyond that at this point.

I guess we will all be frustrated and have to wait and see. Thank you.

Charles Lynch of CIBC World Markets.

Just getting back to the question of revenue trends, when you mentioned that your managed care unit pricing is down about 8 percent year-over-year, and blended looks like down just under 5 percent. I'm just curious, Trevor, in your comments that you are most of the way through a lot of the renegotiation cycle, such as it is.

As we look at the absolute level of revenue per admission or equivalent admission, how should we try to plan that out going through 2004? Do we still have a downward trend, say through the middle of year? And then once you annualize a lot of the renegotiations, things stabilize?

There clearly is some more time to go in terms of the annualization. There was a lot of recontracting effort that took place over the course of last year. But, many of the contracts took quite some time to renegotiate, and some of them are in fact still in negotiations. So I think it does make sense to expect that there will be another series of quarters before the full impact of those renegotiations are baked into the numbers.

I think the other thing to point out, which Trevor mentioned earlier, is that we have a number of folks with whom we renegotiated agreements, and left the negotiating table with the belief that the issues had been put to rest, and in fact are still experiencing operational difficulties with a number of those payers, where there are still disputes over newly created AR as opposed to old AR.

So I would not take it as a given that just because we got through a renegotiation that all problems have been resolved. There are a number of specific situations where unfortunately that is not the case. So it is probably a bit too early for us to declare victory in that area; and I would expect, again, a series of quarters before those results are fully baked in.

I would just add one other point out to help clarify this. As we are now in the first quarter of the second year following the pricing strategy coming to light, we will expect to cross this quarter the 100 percent mark on that statistic that we have been using for the last year. Percent of managed care contracts on a revenue basis that have been renegotiated or renewed. That is largely being pushed over that 100 percent mark by contracts that are being renegotiated or renewed now in a second cycle since November 2002.

Okay. Any comments on what the nature has been of that second cycle of renegotiation?

Many of those are automatic renewals. I don't have any comments beyond what we have already said in the lengthy prepared comments.

Great. Thanks.

Gary Lieberman of Morgan Stanley.

Trevor, if we could maybe just stay on that last point a little bit, since it sounds like that 100 percent number includes some guys that are coming through a second time. Could you tell us what percent of your managed care contracts that you believe there is some sort of issue with them?

I don't know that we have identified a statistic on that publicly; and I don't think it is in our interest to do so now. We still have some payers that we're working through difficult issues with. As Reynold mentioned in his remarks, he and our new head of managed care are now taking a major initiative of going through all of our largest customers to make sure that our business is on a fair and sound footing with them. That is about the best we can do with it, is just to go customer by customer.

The one thing that I would add to it is there are several different broad categories of dispute that we can have with managed care companies. With some, we negotiated new agreements and going forward from that date of new agreement things are fine; but there may still be disputes with respect to historical periods.

There are others where there's issues of both historical and current periods. There are some where the issues are priced related. There are others where the issue is contract interpretation related. And still others where the issues are payment related. There really is a very multivariate set of problems; and it really is impossible to categorize, other than really to review it just on a payer by payer basis.

But in your comments about having issues with some of the contracts that had been renegotiated, it sounds like you have issues on those renegotiated contracts and not the historical issues.

I think it really goes to both categories, depending on the specific payer. Because really it is a payer-specific equation.

Can tell us what stop=loss payments were in the current quarter?

Stop-loss payments have come down from back in November or Q4 of '02, stop-loss payments were running about $300 million a quarter. They're now running about $200 million a quarter.

Great. Thanks a lot.

A.J. Rice, Merrill Lynch.

Just wanted to ask about some of the comments on cash flow. You've got now under the new bank agreement $500 million of availability. As you lay out the cash needs and you have given us a projection on free cash flow, what do you think over the course of next year the maximum drawdown on that bank loan is going to be? Because you think about the seasonality of the business and contrast that with the initiatives you're undertaking. What part of the year are you likely to have that maximum drawn down on that bank line?

I do not believe -- it is unlikely over the course of the year that we would have much draw at all on the bank line. We do have $425 million in cash today; and then on top of that we have the $50 million or so that remains on the 1031 exchange fund. So, I think it would be sometime until we would reach the point. If we do to hit the sort of 5 to $600 million negative cash flow expectation for the year, I think it would be sometime before -- pretty late in year before we would have to access the bank facility.

I think there is also a very good chance that we complete the sale of a number of our hospitals that are currently undergoing the bid process and receive whatever cash proceeds we are going to get for that, prior to reaching a point in time when we would have to draw on the bank line.

But the bank line is designed to be available. So we do not have it for window dressing. We have it because we want it to be available if there is an intelligent and smart reason to utilize it. So there may be an opportunistic purpose for which we would consider using the bank line, but in terms of a pure operating need basis, I think that it would be later in the year; and to the extent that we did use it, it would be fairly minimal.

Maybe part of that as well is if you laid out that 5 to $600 million cash need over the year, can you talk about, and maybe you're doing that with what your comments were on the asset sales, but is there one or two areas, both from a positive perspective and a negative perspective, that are the biggest swing factors in that guidance? That if you beat that negative cash flow you will beat it because of these one or two things; or if you miss it, you will miss it because of these one or two things?

Yes, clearly CAPEX is not going to change much for the year. That is subject to a plan and subject to a significant series of controls and fairly long lead-time. So I think CAPEX is not that large of a variable within the equation.

I think a AR performance is definitely one of the largest swing areas as I detailed in my comments, being a $250 million component for the expectation of AR growth during the course of this year. With a significant chunk of that related to the noncore assets that are being divested, that very clearly is a major swing area.

The other major swing area is the cash flow performance and the operating performance of the divest hospitals themselves. As that represents about 150 to $200 million of the expected cash outflow, independent of the AR performance for those divest hospitals.

I guess the only other area that I would comment on really would be more of a short-term issue, where if we found additional opportunities to restructure aspects of the company that may require a cash investment in return for some form of significant improved performance over the next couple of years, that could expand the 50 to $150 million number that I said would be an outflow related to reserves and other matters. But I would view that more as an investment with a decent return. It would be the only way we would make that decision, as opposed to having it be something that would be imposed upon us.

Okay. Great. Thanks.

Adam Feinstein of Lehman Brothers.

Just a quick question here. You gave some details before in terms of just what was implied in the guidance for 2004, in terms of bad debt expense being at about 12 percent. Do you have any other details for other line items? I was most interested in labor and other, just in terms of what is implied in that breakeven guidance. And if you can't give a point on number, maybe if you could just talk about what sort of wage increases you're looking for, and what sort of increases for malpractice you are looking for also. Thank you.

I would like to accommodate you, but we have gone about as far as we feel comfortably going at this point from a guidance perspective. I guess absent specific numbers I can you give you a little bit of color. I will reflect back on the comments that I made earlier today about the individual line items.

On the SW&D side we have seen continued labor pressure. In many markets it is probably a little lighter than the pressure that was seen a couple years ago, but we still see significant labor cost pressure, particularly in California and particularly with the nurse shortage. We did see only 3.8 percent growth in that state on an adjusted basis in Q4. But that reflects probably an actual underlying labor cost trend that is meaningful higher than that, offset by cost-cutting initiatives, of which there has been a very significant number over the last year.

I think those cost-cutting initiatives will continue. Reynold made I think some very strong comments on that front. But I certainly don't see it being much lower than we had in Q4; and it is probably more likely going to be more likely a little bit higher because a lot of the low-hanging fruit in terms of labor cost cuts have already been made.

On the supply side, in '02 for the full year we saw 8 percent growth, and we saw 6.5 percent growth in Q4 on the supply side. I think that again reflects -- maybe the full-year growth was a little more reflective of underlying trends for the entire industry, particularly with pharma and some of the specialty items and high-cost items being an especially major element.

Again offset by the various initiatives to have better contract compliance or broader contracting with respect to repurchasing and all the other initiatives that Reynold mentioned. So I kind of think for those items the way that I described them earlier on the call should give some sense of what we may see over the next year, from the combination of the natural rate of underlying inflation for these areas, offset by the various initiatives that we are undertaking.

On the other operating expense side, that is an area where there is less variable cost, but there also is generally a lower rate of inflation. What we have seen historically is kind of a 4 to 5 percent rate in other operating expense. And while we're not giving specific guidance on that line for this year, I don't really see a reason why that would be materially different. Again whenever the national rate of underlying inflation is, offset by all the initiatives that Reynold spoke of.

Just to follow up on the malpractice cost, what sort of growth would you anticipate there? It seems like we had a lot of catch-up over the last couple of years. Do you feel like we are probably done with that? Thanks.

I'm not going to provide a specific forecast on malpractice. It does change from quarter to quarter, and the actuaries update, a very complex analysis every quarter, based upon our most recent claims experience. So in terms of whether or not we are adequately reserved on the malpractice front, we are currently reserved at the conservative end of what we have been directed by the third-party actuaries is the appropriate level of reserving for outstanding claims.

There really is very limited discretion in this area given the method that we have undertaken to set the accruals in the first place. So it will change from quarter to quarter. You could have an adverse case settlement that makes you bump it up; you could have a favorable case settlement that ends up reducing it. So that is why you see the quarter-to-quarter variability. But malpractice expense very clearly continues to be a significantly growing element of our other operating expense.

Okay. Thank you.

David Common, J.P. Morgan.

I was hoping if we could nail down a couple of definition or interpretation items with respect to your cash flow guidance. In particular the way you talk about free cash flow, does that give benefit for the fact that your non-cash options expense is a non-cash item?

Yes.

It does? Okay. Similarly, did I interpret something correctly, that you are sort of baking into your working capital approximately a $50 million consumption of working capital per quarter principally on account of managed care?

Roughly. We actually have in the forecast for '04 $250 million for the entire year in growth in AR. So a little more than 50 a quarter.

Perfect. Thank you.

Michael Gerangela (ph), Merrill Lynch.

I had a question about your comment on the likelihood of settlements this year. I understand that you think it's not likely you will get hit with a large adverse government settlement. Could you just common on the likelihood that you might get hit with some non-government settlement? Some of the civil actions against you?

And then if you could also confirm, I know you are potentially going to settle two issues. You have reserve for it; and what kind of payout that might be in '04?

I will start with the second part of your question and then I will pass it to Peter Urbanowicz to answer the first part. We noted in our press release a $30 million item related to the proposed settlement matters. So we cannot identify specifically what it is for each of the items; but there was $30 million pretax that was identified in the press release. So that is a fairly small matter. And with that I will turn it to Peter to address the first part of your question.

Thank you, Stephen. On the timing of the settlement, again, as I indicated from my remarks and Trevor indicated from his remarks, we continue to have conversations with the federal government with regard to all the investigations that are outstanding. The timing of any settlement really is really between them and us, in terms of their proceeding far enough with their investigations, and our proceeding further enough in conversations with them.

So, it is a timing issue that would be made mutually by the Justice Department and by the company. Obviously, we are going to work to whatever the appropriate timetable is. As Stephen said in his remarks, that is going to have to take into account how such a settlement could be financed by the company.

Sure, I understand. My question was more about non-government settlements, like maybe civil actions against the company; i.e., the Redding patient suits for example?

Why don't you comment specifically on the status and timing of the Redding matters and where they stand in the process? I know you covered that Peter in your prepared remarks; but just maybe to make it a little bit more --.

That's fine. The Redding cases are proceeding as medical malpractice cases would proceed in a state court. These are unusual in the number of them. They have been consolidated before a single judge. We wouldn't anticipate any of those cases coming to trial before mid to late fall of this year. If we were to proceed down the scheduling order that we have been talking about with the judge. So, we would not start seeing cases go to trial perhaps not until the end of this year.

Those would have to be in seriatim, because they are individual claims. It looks like a class action, but it really isn't. It is individual claims and individual cases.

Additionally, as you know, once you go through the trial, and if there is a judgment, that there is not a settlement before then, both parties have rights of appeal after that. So, it could be well into the next year or more before you start seeing a judgment from any of the Redding cases.

Obviously, from the tenor of my comments and Trevor's comments, if in those cases or any other cases we were able to reach an accommodation with the plaintiffs in those cases that makes sense for the company and makes sense for the plaintiffs, we're certainly going to do that. But again that is one of those things that is timed on our basis and not necessarily the basis of a court order.

Okay. Thank you.

Operator, we have been running well over two hours now. What I would like to remind everyone is that we're going to post on our website a transcript of the prepared comments. I think those comments together with the very lengthy earnings release and 10-K should answer virtually any question that somebody has. If there are any of you still listening that have further comments, I would just ask you to follow up with our investor relations department, Tom Rice. And thank you all for your patience on this very long call.

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