Tenet Healthcare Corp (THC) 2004 Q1 法說會逐字稿

Good morning and welcome to Tenet Healthcare's first quarter earnings conference call for the period ending March 31, 2004. Tenet is pleased that have you accepted their invitation to participate in this call. Please note that this call is being recorded by Tenet and will be available on replay. The call is also available to all investors on the web, both live and archived. Tenet's management will be making some forward-looking statements on this call. 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 is providing these alternative measures as a supplement to aid in analysis of the company.

Reconciliation between non-GAAP measures and related GAAP measures can be found in the press release issued this morning and on the company's Web site. Detailed quarterly financial and operating data is available on First Call and on the following Web sites: tenethealth.com, businesswire.com, and companyboardroom.com. At this time I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter, please proceed.

Thank you, operator. Good morning, and thanks for joining us. Our opening comments today will be quite brief relative to the last few conference calls. As our earnings call for the fourth quarter was only 7 weeks ago. And we issued a pre-release of the first quarter results last week. This shortened format will allow more time for Q&A, and we will try to keep the call to approximately 1 hour. We will have 2 other speakers today, Stephen Farber, our Chief Financial Officer, and Reynold Jennings, our Chief Operating Officer.

In our last few calls, we provided a detailed assessment of the problems faced by Tenet and a broad outline of our turn-around strategy. The transcript of those calls are available on our Web site. They make for a good overview of the origins of the issues that Tenet is confronting and the approaches we are taking to resolve them. Let me emphasize that the strategy laid out in those calls is the same one that we're following now. And our confidence continues to build that we are on the right path.

Rather than expand on that strategy, the theme of today's call will be to review the first tangible evidence that our strategy is gaining traction, and producing visible financial results. To quote one analyst regarding last week's pre-release, one quarter does not a turn-around make. We would be the first to agree with that assessment. It is still too early to claim that we have achieved a point of inflection or even to modify our guidance for break-even net income in 2004 before charges or unusual items. We have still a lot of work to do.

We have cautioned investors to anticipate some volatility in our results, as we advance through 2004. That's the nature of a turn-around, and Tenet won't be an exception to that rule. On the other hand, we believe that certain aspects of the progress we made in the first quarter are likely to be sustained as we move forward. And these successes should be recognized for the good news that they represent. It has been a while since we had some good news to bring to investors. And some of you are undoubtedly feeling that this quarter the good news is actually the absence of bad news.

One area where progress is likely to be sustained is operating efficiency. We've worked hard for these gains, and they will have required a lot of sacrifice on the part of our employees. We will not give up these gains easily and will push for more. As we described on our March call, we have targeted additional areas in which we are pursuing further cost efficiencies. Our continued focus on cost containment can be expected to provide momentum through our earnings turn-around, especially ones that we have gotten farther past the ramp-up costs in our quality and compliance initiatives.

Growth in controllable expenses defined as operating expenses excluding bad debt expense, was contained to 2.6%, relative to the first quarter last year. Supplies expense showed an increase larger than we would have liked growing by 6.9%. This growth is largely driven by two specific issues. If we back out only the costs of drug-eluting stent, the growth in supplies in stents would drop by about half. Increases in other cardiac devices and prosthetic devices added another quarter of the growth in supplies cost. So other than these specific items we did quite well at controlling costs.

Staying on the topic of cost control, I'm particularly pleased that we had a better than expected experience in the area of bad debt expense. It is still too early to determine whether this improvement reflects the first leg of a sustainable trend, but we are pleased with the tangible results achieved by our efforts in this critical area. Beginning with the initial spike in bad debt expense nine months ago, we assigned a task force to develop strategies to influence this at every stage of our revenue cycle. We are getting better information at the beginning of a patient's entry into our hospitals, we are structuring care more effectively in our emergency rooms, and we are dealing more efficiently with the collections process.

About 20% of our bad debt expense in Q1 was related to continuing difficulties in collections from our managed care business partners. Given the importance of this issue, to our turn-around strategy, I have asked Reynold Jennings to review later in the call the progress he and his team have made over the past few months, and to bring you up to date on the current state of our relationships in this sector of the business. Pricing and volumes remain challenging. And it is likely that the turn-around in these two areas will unfortunately be gradual.

Our core hospitals saw modest but positive growth in admissions, both note inpatient revenue per admission, as well as outpatient revenue per visit, continued to show modest declines. Those of you with a good feel for the structure of our business model will immediately and correctly conclude that these pricing declines can only be meaningfully addressed through our contracts with managed care customers. This leads immediately to the second factor that we have repeatedly identified as a pressure point on earnings performance. This is the deterioration of our relationships with some of our partners in managed care.

As you know, this deterioration occurred after the prior management's pricing strategy became common knowledge in late 2002. Toward this end, we have built a talented team of professionals to address this critical area and it should play a pivotal role in a successful turn-around at Tenet. Two senior executives have recently joined Tenet to spearhead this effort. Leading our managed care recontracting is Robert Yount, who joined Tenet in December. Bob brings with him more than 23 years of experience in the managed care industry. He has senior level experience with many managed care organizations, including CIGNA, Wellpoint and United Health Care.

We've also made a change in the reporting structure for the managed care function consolidating it under Bob and having it report up through the operations side of the business. This new structure should enhance coordination across our regions, and with our national payers. Supporting Bob's effort in managed care contracting is Doug Clarkson, who has recently joined us to run the managed care legal and litigation area. Doug came to Tenet just last month after nine years successfully doing this very same thing for HCA.

We are highly confident that these two individuals and our new structure will help Tenet to forge new and more productive relationships with our managed care business partners. Our discussions with the federal government on the litigation and investigation front continue. As I've stated previously, I believe that we have been successful in changing the tone of our relationship with the government and we are continuing to work cooperatively with them, and provide them with the information that they need to complete their investigations. That is not to say that we are nearing completion of the investigations that we face. There have even been two smaller investigations initiated since our last call.

Specifically, I'm referring to the two requests for documents that we received out of the U.S. Attorneys office in Los Angeles, related to third parties who provide services to our Desert Hospital and Centinela Hospital. In keeping with our policy of transparency, we issued a press release as soon as those requests were received and we have nothing more to add today to this earlier disclosure. While our General Counsel, Peter Urbanowicz, will not have any prepared remarks today, he is here in the room with us, and is prepared to respond to your questions.

Before I close, I want to remind everyone that one of the most important things we're doing at Tenet is to implement an initiative called Tenet's Commitment to Quality. I first spoke publicly about this initiative at our 2003 annual meeting of shareholders last July. Our 2004 annual meeting takes place on Thursday. And in my remarks at the meeting I will report on the substantial progress we have made and the successes we've had in improving quality at Tenet.

In the interest of time, I won't cover the topic of quality today, but it is incredibly important and my annual meeting remarks will be made available Thursday on our Web site. I would urge you to read them. With that, I would like to turn the floor over to our Chief Financial Officer, Stephen Farber. Stephen?

Thank you, Trevor and good morning, everyone. Before I start, I would like to make a couple of general comments. First I am going to keep my remarks brief this morning and refrain from going through basic facts that are in our earnings release and the 10-Q, both of which were released earlier this morning. Second I would like to clarify how many hospitals we consider as part of our core portfolio of hospitals. We have often used 69 hospitals as the number of core hospitals. However, there has apparently been some confusion because we have also used 67.

The difference between these numbers are the two hospitals under construction that we recently announced will be opened in the coming months. Centennial Hospital in Dallas, Texas, and Bartlett Hospital in Tennessee, represent the difference between 67 and 69. Third, I would like to point out that there are four noncore hospitals included in continuing operations that had a mild skew effect on Tenet's results. Currently, 29 of the 33 hospitals Tenet is seeking to sell or otherwise remove from the portfolio are out of results from continuing operations and included instead in the results from discontinued operations.

There are four hospitals from the group of 33 undergoing divestiture that are still included in continuing operations. One is the hospital we have announced an intention to close if not sold by June 30, MCP hospital in Philadelphia. The remaining three are leased hospitals in California, that we have previously announced our intention to let the leases expire later this year. These four hospitals are noncore but under GAAP are required to stay in continuing operations until they are no longer operated by Tenet.

Regulation G makes it difficult to provide pro forma results, so for the most part, we need to stick with results from continuing operations, which is how our numbers are publicly reported. I will do my best to give a good sense for the impact of these noncore hospitals, on continuing operations, but just wanted to be clear up front that most of the numbers I will cite today include their contribution to results. With that, let's start with volumes. Same store admissions were down .5% for the first quarter ended March 31, 2004. Which includes the negative impact of the four noncore hospitals.

Excluding these noncore hospitals, admissions growth for the core hospitals was a positive .6% on a same store basis. Outpatient volumes on a same store basis were down .1% for the quarter. For the core hospital, same store hospital visits increased .2% for the quarter. Emergency room visits on a same store basis were down 3.4% for the quarter. For the core hospitals same store emergency room visits were down 2.9% for the quarter. Even though ER visits were down in the quarter, a greater proportion of admissions came in through the ER.

For the quarter, a little over 52% of core hospital admissions came through the ER, versus about 50% in the prior year quarter. Now, let's look at revenues. Net operating revenues for continuing operations declined by 2.9% to 2.67 billion. Relative to 2.75 billion last year in the quarter.

This decline in revenue was the result of both -- of both admissions declines and the difficult pricing challenges the company is facing that are unique to Tenet. This is the first quarter in which the year-over-year comparisons are no longer materially impacted by the significant decline in outlier revenue due to our voluntary proposal to CMS that reduced outlier payments to our hospitals retroactive to January 1, 2003.

Same facility net inpatient revenue per admission was down 1.6% for continuing operations, down 1.2% for the core hospitals. Managed care unit revenue was down roughly 5%. This represents an improvement compared with an estimate of 8% decline we reported in our fourth quarter 2003. Outpatient net revenue per visit was also down significantly in the first quarter.

With same facility outpatient revenue per visit down 4.8%, from the first quarter of 2003, for continuing operations. And down 5% for the core hospitals. 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 revenue-generating services such as certain diagnostics and outpatient surgeries with alternate site providers. Many of whom are owned by physicians.

We expect outpatient pricing to remain under pressure going forward. Let's now turn to operating expenses where it appears we have positive trends developing. We stated before that the fundamental driver of the margin compression Tenet has experienced over the past 18 months is the result of costs growing faster than net operating revenue. Bad debt has grown the most in percentage terms 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 slightly better than expected. Salaries, wages and benefits were 1.15 billion, or 42.9% to net operating revenue in the first quarter of 2004. Up from 1.10 billion or 43% on a sequential basis. On an equivalent patient day basis, salaries, wages and benefits were $852 per day. Basically flat with $847 per day in the fourth quarter and up $1.7% from $838 per day in Q1 '03.

Wage rates, health insurance premiums, 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 to 20.3 million in the quarter, or about .8% of net operating revenue. Down from 39 million in the prior year. Also helping offset the increases was incremental progress on reducing contract labor. Which declined to 58.7 million in the quarter, down 26.9% from the first quarter a year ago.

Contract labor was up 2.8% on a sequential basis but that is not unusual or unexpected given that this is the seasonably busy time of year. Supplies expense for continuing operations were 449 million. Or 16.8% of net operating revenues in the first quarter. Up from 427 million, or 5.2% on a sequential basis.

On an equivalent patient day basis, supplies were $334 per day in the quarter, up 1.2% from $330 per day on a sequential basis, and up 7.7% from $310 per day for the first quarter of last year. As Trevor mentioned, conversion to drug-coated stents, accounted for about half of the year-over-year increase. Other cardiac care supplies and prosthetic costs accounted for another quarter or so of the increase. Excluding these items, supply cost growth would have been less than 2%. Other operating expense was 559 million, or 20.9% of net operating revenues in the first quarter.

Up on a dollar basis sequentially from 543 million in the fourth quarter but down on a percentage basis from 21.3% in that period. Including -- included in this change was a $9 million increase in malpractice expense from the fourth quarter. Excluding malpractice expense, other operating expense was approximately 495 million in the first quarter, up only 1% from approximately 490 million in the fourth quarter. Collectively, the three expense categories I just discussed, salaries and benefits, supplies, and other operating expenses, were up 2.6% year-over-year.

Given the much higher pace of cost inflation in health care we are very happy with this performance with controllable costs. Bad debt is a much less controllable area. With about 70% of bad debt coming from uninsured patients, the economic and insurance trends over the past year drove a 29% increase in Tenet's bad debt dollars in the first quarter compared to the same period last year. We have numerous initiatives in this area that Reynold will comment on in a minute.

This is an issue that the whole industry has been grappling with and even though our bad debt percentage has gone from 11.9% in the fourth quarter to 11% in the first quarter, we expect continued volatility in bad debt performance. It is far too early to declare victory. Now, I will turn to cash flow. We gave a tremendous amount of cash flow detail in our pre-release so I won't take up time to repeat that information. In essence our cash flow performance is consistent with the views we have expressed over the past few months.

And we have the same expectations of operating cash flow after capital expenditures of negative to 500 million to 600 million for the year. As we've said before, this is prior to the impact of any litigation settlements or benefits from asset sale proceeds. We also still expect that 2005 will be much closer to break-even on a cash flow basis. As key issues detracting from cash flow in 2004 should be substantially resolved prior to the end of the year. The last items that I will touch on are liquidity and progress with the asset sale program. There really is not much new to say in either area, not already provided in the 10-Q we filed to date or in the earnings release or the pre-release.

Our cash position has stayed stable, even with litigation related outflows, the documentation for our recent bank amendment is complete and the hospital sale process is moving forward as planned. Again as I have mentioned, every time we have an earnings call, when we sell these assets, there will likely be both gains and losses on the sale relative to book value. We continue to expect both these charges and other charges going forward, as we continue the process of restructuring. We have a lot going on at Tenet. We are making incremental steps in each area to push this company forward. And with that, I will turn it over to Tenet's Chief Operating Officer, Reynold Jennings.

Thank you, Stephen. And good morning. Starting with my promotion to Chief Operations Officer on February 9th, the past 14 weeks have been an exciting period for the hospital operations team. I would now like to give you a snapshot of our accomplishments during this short, but productive period of time.

First, regarding bad debt, Trevor and Stephen gave you the numbers. Our focus on the operations side is on the processes necessary to reduce our bad debt expense. In March, we integrated our patient financial services with our hospital operations teams. Integration means more frequent organized communication, and collective decision making on process improvement. Most of our core hospitals have now assembled their own revenue cycle teams. Composed of related disciplines to attack the entire revenue cycle process from admitting through medical records, coding, billing, and collections. We expect all hospitals to have these teams in place by the end of May.

I would like to give you an example of the best practice that has come out of this team effort. Our hospital CEOs are now expected to assist the hospital medical records department by personally meeting with admitting physicians, who have demonstrated a tendency to be late in completing components of the medical record. Through these meetings, we identified further process improvement. Sometimes on the physician's side, and sometimes on the hospital's side. Regarding our labor cost management, while we were pleased with the first quarter labor results, we know that we must make continuous improvements in unit labor costs and productivity.

We're pleased with a couple of pilot programs in Texas and California demonstrating the effectiveness of an internally developed nurse scheduling tool. This tool was identified by our National Nursing Agenda search for best practices. We have asked our information systems department to make further improvements in this tool so it can be extended to all of our hospitals.

Regarding supply costs, I am drawing on my experience as a former hospital pharmacist to work with Dr. Jennifer Daley and our five new regional chief medical officers. Three areas of immediate focus are cardiac stents, orthopedic implants, and high cost pharmaceuticals. Some creative and workable ideas are starting to emerge that are user-friendly to physicians. For example, hospitals have previously tried to select a primary vendor for orthopedic implants. This approach is at odds with physician preference and experience. We are asking our physicians to now support a fair market value cost ceiling that allows any vendor to participate. Next, I would like to report on the reorganization of our regional operations.

Within the last two weeks, we standardized the functions necessary to provide proper leadership to our core hospitals. The core functions of operations, financial management, quality management, human resources, managed care contracting, and business development are now consistent throughout all five regional offices. As Trevor, Stephen and I conducted our fiscal '04 first quarter review of both quality and financial metrics last week, we were very pleased with the depth of knowledge demonstrated by each of these five regional teams. I would now like to talk about a pilot project we call the Balanced Score Card.

The Balanced Score Card, which is now being tested in eight hospitals, is a high-level metric report that contains both quality and financial metrics. It is our intention to complete the pilots in time to make this tool a major part of our senior management accountability in fiscal '05. The Balanced Score Card pulls data from our previously-reported physician, patient and employee satisfaction programs, our commitment to quality program, and classical financial metrics.

As a side note, I am happy to report that our satisfaction scores remain strong as we worked through the many challenges brought to light over the past 18 months. Turning to financial metrics, there are a lot of metrics that one can look at to judge the performance of a hospital. Based on my experience, there are seven critical metrics that I call the "must-haves." They are first net revenue per equivalent patient day. Second the number of acute admissions per year. Number three, the number of surgeries per year. Number four, the number of surgeries as a percent of acute admissions. Number five, the total salary, wages and benefits per adjusted patient day. Number six, the total other controllable expense per adjusted patient day. And number seven, bad debt as a percentage of net revenue.

Although these metrics are of no surprise, what is unique is their ability to accurately signal success or failure in aggregate margin performance. These bench marks are specific to the mix of hospitals and geography. Because of this specificity, as well as for competitive reasons, we will not provide Tenet's actual performance on these metrics. However, the most important aspect of this metric identification process is the simplification of a score card approach regarding the "must-haves" of hospital financial performance. To enhance our company's financial performance, we in operations are focusing on action plans for the seven "must-have" metrics.

Next, let's talk about managed care. As mentioned in the fiscal '03 fourth quarter earnings call, either Bob Yount, our Senior Vice President of Managed Care, or I have since made personal visits or phone calls to the large national and regional managed care companies that we do business with. We discussed Tenet's desire to be fair and transparent in the competitive negotiation process. I am happy to report that our approach was met with positive comments. This is not to say that some past debates with a handful of insurance companies will all find resolution short of mediation or arbitration.

However, if a legal process is called for, we are endeavoring to construct a positive dialogue for go-forward negotiations unencumbered by past perceptions or issues. In summary, our five key accomplishments so far in operations are first, a quick and smooth reorganization of the operations infrastructure. Second, integration of operations, patient financial services, and managed care strategy. Third, a focus on seven key metrics central to hospital margin improvement. Fourth, improved managed care customer dialogue and relationships. And fifth, a core of 69 high-quality acute hospitals in attractive markets which as a group provide better leverage and managed care contract negotiations.

Lastly, I am happy to report that since entering into the Chief Operations Officer position on February 9, I have been able to balance office time with individual hospital visits. Prior to my promotion, I had general knowledge of all 69 core hospitals, including specific leadership involvement with 36 of the 69. In the past three months, I have completed on-site tours of 17 of the remaining 33 hospitals. I have scheduled an additional eight visits in May and will be visiting the remaining eight before the end of June. These on-site tours help sharpen my focus on the competitive strengths and weakness of our assets. The visits also provide a quick first-hand opportunity to reinforce important expectations that Trevor, Stephen and I have. In addition, these visits allow me to learn what the corporation can do to help the local management team succeed. Thank you and I will turn the comments over to trevor.

Okay, Reynold. Thank you very much. Operator we will pause for a moment while you give the instructions for asking a question and assemble the roster.

Ladies and gentlemen. If you would wick to ask a question, please press star one on your telephone. If your question has been answered, or you wish to withdraw your question, please press star two. Once again, please press star one to ask a question. We would ask as a courtesy to the many listeners who do not have questions that you limit yourself to one question. After your question has been answered, you may re-enter the queue with another question, which Tenet will address time permitting. And again, it is star one to ask a question.

The first question comes from AJ Rice with Merrill Lynch. Please proceed.

Hello, everybody. Just intrigued by Reynold's list of the seven "must-haves." Can you just maybe looking at that list tell us where is Tenet's current performance most deviated from where you think the potential to be among those seven metrics? And in answering that, too, maybe one question I have is, as the company's improved -- performance improves over the next year or two, are there some -- is there anything that will result in a significant improvement quickly or is it basically just blocking and tackling from here? I mean how much is sort of the regulatory overhang, or the asset sale program, if any of that gets resolved, can you foresee a bigger accelerated ramp in improvement in any of these metrics?

Well, AJ, this is Reynold. First of all when you look through those metrics, you know, the first two-thirds naturally are things that we always want to do to drive our total revenue up. And the bottom ones has to do with cost control. And you know, as we've said in our comments, and I said earlier in mine, you know, while we're pleased with progress, you know, we're working hard, because we've got to make more progress every day and every month, in our unit cost control, and our revenue enhancement.

So again, we're simply focusing on those by region and by hospital, and the key message we wanted to leave today is that this team is highly focused, and to those specific areas, and the sum total of things that we mentioned last time are 14 major initiatives and our commit to quality program, and our managed care effort are all working to drive each of those seven metrics.

Okay. So there is not one that stands out that this is really the one we got to target the most?

No, you have to drive all seven.

And in terms of the way to look for improvement over time, is it -- basically blocking and tackling from here or are there some things that if they fell your way could result in more dramatic margin improvement?

AJ, I think that -- look, we started off by saying, you know, one quarter does not a turn-around make and we're early in the process here. I think it is too early to predict, you know, if there is one thing that could go our way. And what might it be. Obviously, the most important thing that we need to have go our way, in a way that it has not been going in the past 18 months is revenue growth from our managed care payers and that's why we placed so much emphasis on that in the -- in the call this morning.

And as for whether it's basic blocking and tackling, I'm afraid it is. We are not under any illusion that there is a magic bullet to Tenet's turn-around and that is why we have place so much emphasis during the last year, really during the last 17, 18 months, in you know, basics like cost reduction, and resetting the relationships with our, you know, most important customers, and beginning to you know, see some modest gains in both those areas.

Okay. Thanks a lot.

And the next question comes from Lori Price with J.P. Morgan. Please proceed.

Okay. Great. I was wondering if you could tell us, I think you said that the percentage of your bad debt expense related to self-pay patients was around 70% and the percent related to managed care disputed claims was around 20. I was wondering if you could give us the same break-out for your allowance for doubtfuls on the balance sheet. And then tell us relative to the managed care claims that are in dispute, as you've now had a chance to go through some of the arbitration hearings, perhaps some of the litigation, what are you finding in terms of your propensity to win or lose, and how has it changed your thinking relative to potentially writing off or not having to write off some of the managed care claims that are still in dispute? Thanks.

Sure. Lori, the bad debt percentages are pretty much consistent this quarter in terms of the source of the bad debt as it was in the prior quarter. With roughly 70% coming from self-pay, about 20% from managed care and about 10% from balance after. That is frankly the most useful way to look at it. Looking at it in terms of the actual allowance on the balance sheet gets skewed based on the different agings of the receivables and it is not nearly as good of an indicator as the actual source of bad debt that we provided. So I'm not going to give that break-out.

In terms of the experience that we've had on the litigation side and whether or not that impacts our reserving methodology, we feel generally comfortable with our various methodologies for reserving when we have arbitration or litigation. And realistically, there are practical limits to what you can do on any individual case. Until that case is finally and formally resolved one way or the other. I don't know if Peter Urbanowicz would like to add anything to the legal side beyond just the reserving methodology.

Lori, this is Peter Urbanowicz. I just note that we've got over 5000 managed care contracts in place throughout the country so it is inevitable that some of these are going to wind up in claims disputes. Most of our contracts, almost all of them have arbitration clauses in them, so we wind up arbitrating our disputes rather than litigating them in court. Which provides some economy in moving them forward. We obviously, we don't give up claims very readily that we have. And you know, we push them very vigorously.

Some of the claims never -- most of them actually never come to arbitration. We do find a way to resolve those differences before they get to arbitration. So in terms of giving up anything, we don't do it very lightly. Sometimes as we enter into new negotiations or renegotiations with the managed care payers, our existing arbitrations become the subject of our negotiations, and we try to resolve it at that time.

Okay. That's helpful. But is there anything you can tell us with respect to, you know, as you've been moving through some of these arbitration hearings, do you have a greater propensity to win or lose them that you're finding?

You know, I don't know that, you know, that we've got more of a propensity to win rather than lose, or lose rather than win. Most of them do get settled or compromised. Obviously, the numbers for the managed care companies are significant enough, too, on their side, where you know, sometimes the risk of going ultimately to arbitration is very significant for them. And plus, we have these ongoing relationships with all these managed care payers as well and it is certainly not in our interest or their interest sometimes to, you know, go all the way with an arbitration when we have an ongoing business relationship and we're just continually trying to refine the terms of reimbursement.

Okay. That's great. Thank you.

The next question comes from Kemp Dolliver with SG Cowen Securities. Please proceed.

Thanks. And good day. This is probably more a question for Reynold than anybody, but you know, the seven items you've listed as "must-haves," you know, make a lot of sense, you know, don't seem to be particularly new or dramatic but I'm just curious, what were people -- what were you all focused on previously, you know, such that this is going to be -- you know, represent some kind of new change in operating tactics or the like? Thank you.

Okay. I think that, you know, in normal times there are many, many metrics that we all can use to try to determine, you know, the success of an individual hospital. But when you have a compressed agenda, it is just very important to make sure that the organization is dealing with those "must-have" metrics that help you get to where you're trying to get to in the future.

And so again, we are not excluding the normal number of metrics that you would normally look through up and down hospitals in general, or hospital departments within hospitals, but again, the importance of these seven is that the collective connection of our 14 key initiatives and our commitment to quality program, all connect to effect on the positive side those seven metrics. And if we effect those seven metrics, we will be marching down the road in the direction that we need to go.

That's great. Thank you.

And the next question comes from Adam Feinstein with Lehman Brothers. Please proceed.

Thank you. Good morning, everyone. Just a couple of questions. One housekeeping question. If you could just give a gross revenue number and a charity care number and then just secondly on the managed care pricing I was just intrigued with just the improvement there, you said down about 5%, versus about 8% last quarter. What would your outlook be for the full year there? And you know, would you sort of see a gradual change there or just see it just, you know, change rapidly after the first of next year? Thank you.

Sure, good morning. Our growth revenue was a little over 12 billion for the quarter. And charity care for the quarter was right around -- right around $160 million. And do you mind telling me again the second part of your question?

Yes, I apologize. I was long-winded there. Just on the managed care pricing side, you said was down about 8% in the quarter -- excuse me down to 5% and compare to down about 8% last quarter. I guess my question is what would your outlook be for the full year? Thank you.

We have been hesitant to provide any specific guidance with respect to managed care pricing. From a contracting point of view, if you look at where we are versus where we were, you know, I guess 12-18 months ago, we have turned over virtually the entire portfolio of managed care contracts, and that cycle is simply starting to repeat itself. In addition, there are a number of high level discussions as Reynold mentioned that he is having and Bob Yount is having and other folks are working on to not only try to resolve our outstanding managed care disputes but to continue to try to make progress on the relationships that are particularly difficult. So you know, our natural inclination would be to think that as we move forward, those numbers will get better. But we're hesitant to give any specific guidance and would really rather that the proof be in the pudding in the numbers that we actually put up quarter-over- quarter.

Okay. Thank you.

And the next question comes from Sheryl Skolnick with Fulcrum. Please proceed.

Hi, you always do this, you leave us with so many interesting questions to ask. First of all, just a point of reference, where do I find the seven key initiatives?

They were in Reynold's comments and those will be posted to our Web site a couple of hours--

Okay.

-- after the call.

So we'll get the transcript?

Yes.

Okay. I will have to pick it up there because I somehow missed them. Okay. And then there's been a lot of -- first of all, it has to do with cash flow which shouldn't be a surprise. So I guess in this quarter, there had been some -- two sorts of suggestions. One, that you might be close to doing some sort of a convertible deal or some sort of other fundraising, and I guess maybe the source of that was perhaps traced back to Trevor's comments that you would raise additional liquidity to, you know, fund a settlement or something like that.

So maybe we got a little bit over-anxious there. But I guess I would welcome your thoughts on timing of such a thing to the extent that you could discuss it and then as it relates to current period cash flows, there also had been I think some thought that you had gotten a payment from a managed care company in this quarter, and resolved some of the outstanding bad debt issues. So if that is true, did somebody else go sour that brings the outstanding bad debts due to managed care up to 20% or are we still in a steady state?

Okay, I'll take your timing question, Sheryl and then we will comment on the managed care question. As for the timing, you know, I think it is important to keep in context the amount of time that has passed in other situations in this industry between the time that investigations began and the time that they were resolved and it is measured in many years. Not in the kind of, you know, period that we're in. We're 18 months post-event. And we are working hard and feverishly, as I mentioned, to cooperate and sincerely cooperate with the government and provide them the information they need, but they need to complete their investigation and I think as I said in my prepared remarks, I believe, and this is an opinion, that we have succeeded in changing the tone that we have with the government, to one that is much more collaborative. But it would be, you know, we would be getting way ahead of ourselves to even begin to speculate as to how long this may, you know, take to reach some kind of resolution or what the resolution might be.

And Sheryl, on the convert question, before I get to the third managed care and cash flow question, it is sort of interesting because someone published that rumor, it was last week, I believe, and then I started receiving calls from basically every investment bank within an hour of that rumor getting out there, that we might be doing a convert with people wanting to [inaudible] doing a convert. The fact is we have no plans at the time to do a convert.

So we've got, you know, 400 -- I think as of last Tuesday, which is the last number we put out, $463 million of cash sitting on the balance sheet, and we're holding pretty okay on the cash flow position for the moment, that we have no need to raise incremental capital right now. On the -- on the cash flow and the managed care issue, you know, what is interesting or what is somewhat unique this quarter about looking at our cash flow is that there really -- for the first time in a long time, isn't anything unique about our cash flow. It was pretty straightforward.

I mean there were various elements that we broke out in the pre-release that we provided last week in terms of the inflows from discontinued ops and other things like that, but other than what we've broken out, there really isn't anything unusual that has happened. We didn't have any sort of major managed care settlement that gave us a big inflow or anything like that. It really was pretty much ordinary course of business items. In terms of the managed care question, you know, we are have been getting -- since we put out the numbers last week, quite a few questions about whether, you know, the 11% really represents something fundamentally different from the 11.9, or was there some sort of accounting-related issue that drove a lot of that change, and the answer is there is no major accounting-related issue that accounted for the 11% versus the 11.9.

It just -- it just so happened that we had a very strong March in terms of cash collection, but to Trevor's point where he said that a single quarter doesn't make a trend, I would say one month doesn't make a trend from a bad debt perspective. Where January was not great for bad debt, February was in the middle and March happened to be pretty good. So it is still a number that is likely to be volatile. We have not changed our overall thoughts for the year, where we indicated previously that we thought, you know, our budget showed a 12% bad debt for the year. We have one quarter that was better than that. That's great. We're certainly doing everything we can. But it will take a lot more proof, a lot more evidence for us to be comfortable in modifying our actual thoughts going forward.

Okay. And the four hospitals that are either being closed or pending sale that are included in it, we should assume that those are significantly or moderately cash flow negative? Or slightly.

Yeah, you know, they are -- they are cash flow negative, I mean I will give you a sense, those four hospitals together lost about $20 million pre-tax. But I would caution against just adding that back to our operating results, because there was also a laundry list of small items in the quarter that gave pickup as well to our operating performance, and I know historically, we have had these tortured earnings calls where it is I spent a half hour walking through every last minor item that has impacted. We decided since they basically offset each other this quarter not to do that, so the results -- the results clean of those four noncore hospitals and clean of these other nonrecurring items end up about the same as the aggregate reported results. So we didn't -- that's why we didn't put everyone through that process of breaking out both the good and the bad, because they basically offset one another.

Will you have recurring-nonrecurring items to offset the $20 million loss?

Well, for these four hospitals, I frankly don't see any reason to believe their performance would improve materially.

Me neither.

Until they leave the company, where as the -- where as the other items certainly were more of a nonrecurring nature.

Okay. Fair enough. Thanks.

And the next question comes from Gary Lieberman with Morgan Stanley. Please proceed.

Thanks. Could you give us the dollar amount of the managed care claims that you currently have in arbitration?

You know, the most recent number that we put out was somewhere in the 200's and it is clearly above 200 million, but those claims vary, you know, literally day by day as new ones are added and other ones are resolved so I think for now, the most useful number we can say is they are in excess of $200 million.

Okay. Could you give us some idea of sort of what maybe the win/loss ratio is on the arbitrations that you're winning versus the ones that are going against you?

Gary, this is Peter Urbanowicz. Again, a number of these things, we find that we do resolve before -- before we get to arbitration. They're the subject of many of the arbitrations are with companies that we have ongoing relationships with, and so as we renegotiate rates or deals with them, it is a good time to bring forward the outstanding disputes that we have.

Okay. So I guess was the -- was the announcement of the one today, did you announce just because of the size of it and you're not announcing sort of the smaller ones that get resolved on a day to day basis?

The one that we put out today was 8 million actually would be below the size that we would normally announce, the only reason why it was specifically announced was because we had done a pre-release and this altered the reported results from what we had indicated in the pre-release. Otherwise, the fact is, every week goes by, you win some, you lose some, things get negotiated out and it -- normally, it all basically sort of washes out relative to the reserves that we've established.

Okay. And then just one final question, was the 8 million, was that a single claim, or was that a number of claims with one payer that was resolved?

That was a -- this is Peter. That was a single company scan with one of our hospitals in California, Whittier, which was part of a previous acquisition. This contract went back many, many years, back to 1996. And so it was from -- for some fairly-dated claims with a single hospital.

But it was more -- it would have been multiple admissions on that, obviously?

Yes, yes absolutely.

Okay. Great. Thanks a lot.

And the next question comes from David Common with J.P. Morgan. Please proceed.

Yes, good morning, all. Thanks. My questions relate to bad debt. Steve I think you appropriately said that this is perhaps the hardest single item to predict. But I just find it very difficult to have an intelligent discussion with investors without the numbers associated with the -- I guess two principal things, the percent of your admissions that are uninsured, self-pay, and also the percent of your reported net revenue that is uninsured self-pay.

I'm happy to give those to you. They are -- and I'm going give them to you in somewhat rough terms. They are -- they are roughly -- the admissions from self-pay is roughly around 3.5% to 4% of our total admissions. And the -- and the impact on net patient revenues is roughly between 11-12% of net patient revenue. They also account for approximately 9% of our outpatient visits.

Excellent. Okay. That's what I was looking for. Thank you.

Sure.

And the next question comes from Ellen Wilson with Sanford Bernstein. Please proceed.

Yes, thanks. I was wondering if you could give us any kind of update on the discussions for the hospitals being held for sale? You know since we last heard from you in mid-March, kind of, you know, how those are going, how those are developing.

You know, I did make just a brief comment in my prepared remarks that they are going along as planned. We have had a significant level of interest. Really what has been happening since we did the earnings call seven weeks ago is we are just working through this fairly long list of buyers. We got initially about 300 indications of interest. We whittled that down to about 80 or 90 parties that could demonstrate they had enough financial wherewithal to be worth continuing to have discussions with, and then we have been -- we have simply been working through those parties, having management presentations, doing facility visits, providing due diligence materials back and forth.

And just working through and just working through the process. I do believe over the next -- the next few months before we report our results for Q2, we will -- that list will get very short, and we will have reached, you know, some agreements with some of the people that we are -- that we're currently talking to.

Okay. And on that, are these lists primarily other hospital buyers? Or are they also, you know, sort of financial backers, real estate developers? Kind of, could you give us a sense of that?

You know, there aren't any real estate developers. There are a range of different types of buyers. There are some -- there are some traditional hospital buyers, there are some financial buyers, but who typically link up with some people with hospital operations expertise. So I don't think the list would really surprise anyone to any great extent. There are a number of -- you know, there are a number of very traditional names who are looking at larger numbers facilities, and then there are a large number of small groups or local groups looking at individual or small groups of hospitals.

Okay. Thanks.

And the next question comes from Ken Weakley with UBS. Please proceed.

Thank you. Good morning. Trevor, can you maybe walk through some specifics on managed care recontracting here in '04? I would like to know how many contracts are coming up for repricing, what percentage of managed care revenues they represent, one year versus multi-year, and I guess, most importantly, how do your efforts to restructure your charge master or help or hinder your ability to get fairly-priced contracts?

I think we will have, you know, a little team approach to answering the facets of your question, Ken.

Okay.

But let me first say that, you know, virtually all of the contracts, I think 95% of the contracts are now evergreen. That's a statistic that we had been giving on previous call, the percentage of contracts renegotiated or renewed on a dollar basis, now, you know, Stephen -- Stephen alluded to this in his comments, you know, exceed 100%. And as for the real thing you're asking which is about, you know, how is it going, what are we seeing in recontracting and so forth, this is where we're being so cautious not to set expectations, and trying to point everybody instead to looking at our numbers quarter after quarter, as we see what we've actually been able to accomplish. Now, the second part of your question with relates to at least how I remember the second part, was really about the charge master.

Right.

And you know, what you're pointing out is again, that Tenet, you know, beginning in November of 2002 was left in a position of having very high gross charges relative to any benchmarks that you might have, whether it is competitors or you know, historic levels, and that's not true of every hospital at Tenet. That is true of many hospitals at Tenet. True of many of the hospitals we are divesting from Tenet.

And our efforts to realign our charges to, you know, levels that are more realistic or you know, are better-positioned is something that is going to take some time. I think in future calls, we will be talking about -- a little more about how we're doing that and part of what, you know, Bob and his team are trying to accomplish is to reset these relationships, and be re -- recontract in a way where our portfolio is not as sensitive to gross charges as it has been historically.

Okay. Do you have any -- many anecdotal evidence that where your focus on quality is perhaps been met with some success relative to the core portfolio, that it is actually resulting in improved relationships with better pricing or, you know, better economics, or is it just too early to tell?

Yeah, I will let Reynold address that.

Ken, as you all know, I think we previously announced that last year we did one alpha site, two beta sites and we are currently in ten of our hospitals with our full commitment of quality transformation rollout. And to speak to the inter-connecting questions that you asked, a couple of classic examples here: in the emergency department, with the growth in volume at all hospitals, you know, all hospitals have been experiencing a certain amount of patients who get frustrated by wait times, and they leave of their own decision. And so part of our initiative in that is working that process through so that patients can be seen in a timely manner.

A second offset of the waiting times has been what hospitals refer to as periods of time of diversion from ambulance calls. And so we've seen immediately a tremendous improvement in the process of patients cutting down on what you would call the percentage of "left without being seen" and secondarily, minimally being on diversion, compared to many of our competitors. These all inter-link into improved quality for the patient as well as enhanced financial opportunities for Tenet and receiving patients that we can render services to. Second example has been one that has been a real exciting to our surgeons which is pulling a team together of our employees and our surgeons, and determining what barriers prevent the first case from starting at 7:30 in the morning.

If that case doesn't start at 7:30, it creates tensions with every doctor who is on the schedule thereafter, you know, with his commitments to his or her patients, getting back to the office and those type of things. So we found in our pilots that that issue has been resolvable and cases are starting on time, a time of higher percentage of the time, and that then creates additional surgical capacity for our business development activities to go out and talk to other surgeons about OR time and space that they can use in our hospitals. So, I mean, those are two very concrete evidences that we've seen right off the bat in both the alpha beta test as well as the first ten 10 hospital rollouts.

Okay. Thank you.

And the next question comes from Mike Scarangella with Merrill Lynch. Please proceed.

Hi, guys. My question was on cash from operations versus your guidance. I'm trying to do an apples-to-apples comparison but I don't know exactly what you guys put in your 3 to $400 million number that you gave last call. Should I be comparing the negative 59 million? Should I be adding back to that the litigation restructuring charges? What is the right apples-to-apples comparison?

You know, Mike, there are a lot of different factors that feed into it, and it is not -- it is probably will take more time than we should spend on this call to try to reconcile to it. Relative to that projection, this first quarter was actually a fairly small percentage. So it is not like of the 5 to 600 million that we expect to have in negative cash flow this year, that we expected Q1 to have 25% of that, since Q1 is the -- probably the seasonally strongest quarter and a significant component of the negative cash flow for the year, it's expected to be from the discontinued operations, where the sales were just announced in this quarter, and their operations are continuing -- are going to have an increasing amount of difficulty as we go through the sale process.

I think we will see those elements become larger factors in impacting the negative cash flow as we go into Q2 and into Q3. I would also point out that we were -- that we were able to manage cap ex extremely tight during Q1 by juggling the timing of some various projects. And that will not be the case as well as we move further in the year. We are still -- we restated last week, that we expect cap ex for the year to approximate $600 million. And we did in Q1 only have about $114 million of cap ex, of which only 81 million as I said in the release last week was really for cap ex, and the remainder was for the completion of those two new hospitals that are building and 5 million going to the assets that are being held for sale.

So I think there will be some higher levels of core cap ex to fill out that $600 million number as we move further into the year. So I think that does lead to Q1 being a -- you know, a very light quarter from the perspective of negative cash flow. There also was one element that you will notice when looking at the 10-Q where we had a $100 million -- a $100 million swing in AP in Q1 which does offset some of that, but that is -- you know, a fairly meaningful swing and it does tend to bounce back and forth around a sort of central number. So AP is probably at a fairly low point for us right now and we will see some bounce-back in that, most likely in Q2, that is a number that just tends to have a degree of volatility and that skews the overall results.

Just to keep it simple is it safe to say that on a cash from operations business you are probably at or ahead of schedule versus your projections?

I would say we're pretty much on schedule. That is what I said in our prepared remarks, that I haven't seen anything that would lead me to believe that we are being overly optimistic or pessimistic with our expectation of the year of negative 5 to $600 million.

Great and just one unrelated question. Are there any updates on the dispute with the IRS?

No, that continues to progress in the normal manner, those things tend to go very slow.

Okay. Thank you.

And the next question comes from Anhkar Ghandi (ph) with Goldman Sachs. Please proceed.

Good morning. Thank you for taking my question. On medical malpractice, I was hoping to understand a bit better what coverage you guys currently have, and maybe if we could specifically take the example of Redding. You have 1500 cases outstanding against you, how could those potentially be settled? And how much coverage do you have available under that bucket?

The general malpractice coverage that we have -- we are largely self-insured now, where we have, for the first $15 million, we are essentially self-insured for current claims incurred and we are going through a recontracting process like we do every year, where we will know in the next few months where we come out for what our coverage will likely be for the next year. That has been something, as has all hospital [inaudible] have changed over the last few years. We used to be self-insured only for the first few million dollars and it has gone up each year over the last several years. For the Redding matter, given that we are currently involved in litigation, that is not something that we will be discussing.

Okay. But later on in the year, you will provide us updates as to how you're --

Yeah, that is not something that we will be discussing until the cases are resolved.

It is covered pretty thoroughly in the 10-Q.

Second question, in terms of physician relations, you know, I've heard mumblings that physicians have been leaving Tenet. Anecdotically what are you seeing? And maybe just on the broader issue of employee retention as well, in addition to that, what are you seeing in terms of staffing turnover?

I'm sorry, your voice is coming over a little low. Were you asking about patient-physician satisfaction?

No, I'm sorry if you can hear me better now. I've been hearing that physicians have been leaving Tenet, they're being murmurings about that in the market and I wanted to hear from you, you know, how the physician relations are, and then generally speaking, with regards to employee retention, if you could talk about maybe nursing turnover and what's been going on there as well.

Sure. In regards to -- let's take each one of them. We have been pretty consistent in indicating, you know, that our acute admission volumes has been stable. You know, our medical staff are private physicians. So you know, we've seen no major evidences of defections of our core medical staff support. You know, we've also been clear that in metropolitan areas, it is not uncommon for a large number of doctors to have staff memberships at two or three hospitals.

But we've seen no major changes within that category of physicians. You know, typically in our core hospitals. It does, you know, go without saying that in some cases, like the situation up in Philadelphia, with Medical College of Pennsylvania, you know, once you announce that a hospital may be closed, then, you know, doctors start looking for a professional opportunities, and you know, we can't control the pace at which that happens. So within, you know, those kind of situations, you know, you naturally would expect, you know, some degree of moderation in support, even though we have a large number of doctors who stay with you through whatever completion you go through in those [inaudible] processes.

Our satisfaction scores in general for our physicians and patients and employees have held very constant and very stable, again throughout the last 15 months, you know, even with the tensions and issues that we've been dealing with. So we're very happy as we've reported, you know, that our Target 100 customer satisfaction program, and all of our efforts to communicate openly with our employees, you know, has been a success in that typical regard.

Just to put a number on it, the physician satisfaction for 2003 was 83%. Which is quite good. And very consistent -- about the same as 2002. And then on your last part of your question, was nursing turnover. Nursing turnover was higher in the first quarter of 2004 than it had been in the same period in 2003. And it is in the, you know, low 20% type of range.

Was there any specific reason why it was higher or --

It is not enough higher to really ascribe a particular reason to it.

Perfect. Just -- and then lastly a number question. And I apologize if it has already been provided but what was the stop loss provision?

The stop loss is still fairly consistent with what I've said before, it is just to -- just to foot this to my historical comments, when we -- when we still had about 100 hospitals and continuing operations last quarter, I had said stop loss was running about 200 million per quarter, down from a prior level of about a year and a half ago of 300 million a quarter. Now that we've moved all of these hospitals into discontinued operations, and just pretty much about 70 hospitals or so are reflected in continuing ops, we're running about 150 million a quarter, which is what you would expect just on an arithmetic basis.

Perfect. Thank you.

And our final question today will come from John Ransom with Raymond James. Please proceed.

Hi, just under the bell. Just wanted to clarify the company's expectations for cash proceeds from asset sales. We're looking at a $900 million-plus number in the discontinued ops line. You know, previously referenced comments you've made about Redding and about the $600 million, half of which is cash for the -- I guess the 27 hospitals, could we just get a latest expectation for cash proceeds including what you would expect to collect on your 394 million in receivables that you cite in the Q? Thanks.

Sure, John. Nothing has changed with our expectations. We restated our expectations I believe last week, that we are -- or I'm sorry-- in the Q we filed this morning, we restated our expectations, that they are the same as they have been. We expect roughly $600 million of which roughly half in cash at closing and the other half through proceeds from tax deductions.

In terms of the receivables, yeah, we have not -- we have not separately identified what we expect to get for AR, versus what we expect with everything else. All of that is basically baked into those general proceeds expectations. It is going to depend on the buyer whether or not they AR and you have to remember there is AP, another accrued liability offset pretty significantly that AR. So we're talking about -- about basically our net proceeds expectations. You do -- you do point out a very good -- a very good fact with respect to the level in the assets held for sale book account, versus the expectations for proceeds, those two numbers basically never really synchronize.

There are -- it is impossible to determine which hospital will get what value until you actually will have a deal that is signed up. So to the extent as I made the comment, as I made a mention of in my prepared remarks, if we have some hospitals that are on the books for X and we get, you know, half of X for that hospital, then there will be a loss on sale at the time we sell it. If we have a hospital on the books at X and we sell it for 2 X then there will be a gain at the time that transaction closes.

Then let me make sure I'm clear. The $300 million, let's take out the tax effect. The $300 million in cash proceeds includes everything, including Redding, including the receivables, netting the liability, is there anything that we would add to that in terms of thinking about in flows for the company for --

It does not include Redding. We indicated that the Redding proceeds will be retained in the Redding subsidiary for litigation purposes. So that should not be considered to be a general source of cash for the company. General. And also the $600 million of proceeds does not -- that was announced prior to the decision to sell our single hospital in Spain, but we have not disclosed any guidance or expectations with respect to that. It is a modestly-sized hospital.

Right. And just lastly, following up on Redding, it appears to an outsider that what the company is attempting to do is to in effect put a fire wall around Redding, such that if the malpractice litigation spirals out of control down there, that you have the option to bankrupt the sub, and thus insulate the parent company from any liability spreading northward. Is that a fair assessment of what you're, you know, implicit legal strategy is there?

You know, John, we just can't comment on that. I know people have speculated to that, but again, because of the litigation, I would just point you to the 10-Q and the other disclosures we've already made.

Okay. Thank you.

If you don't have any more parts to your question, I would like to thank everyone. We said we would keep it to an hour. We actually had a hard deadline of an hour and 15 minutes and we came in on that so I appreciate your participation. Thanks.