Tenet Healthcare Corp (THC) 2004 Q2 法說會逐字稿

Welcome to Tenet Healthcare's second-quarter earnings conference call for the period ending June 30, 2004. Tenet is pleased that you have accepted their invitation to participate in this call. Please note that this call is being recorded by Tenet and will be available on replay. The call is also available to all investors on the web both live and archived.

Tenet's management will be making some forward-looking statements on this call today. These 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 alternate measures as a supplement to aid in the 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 website.

Detailed quarterly financial and operating data is available on First Call and on 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.

Good morning and thank you for joining us. With me this morning in our Dallas office are Reynold Jennings, Tenet's Chief Operating Officer; Stephen Farber, Tenet's Chief Financial Officer; Peter Urbanowicz, our General Counsel; and other members of Tenet's senior management who will assist with the Q&A portion of the call. We're going to try and limit this call to an hour, so my introductory remarks will be brief so that we'll have plenty of time for Q&A.

As I look at the second quarter I see tangible progress on each of our key priorities. That's not to say that the Company is where I want to be, but we are making progress. Our most visible successes are in the trends in pricing and costs. Let's start with pricing. As you know, it's been a painful and lengthy process to extricate ourselves from the Company's failed pricing strategy of the past. We inherited a host of seriously damaged relationships with our key managed care payers. As a result, by the fourth quarter of 2003 our year-over-year pricing for managed care was down approximately 8 percent. That rate of pricing decreased, moderated somewhat in the first quarter of this year, but it was still down roughly 5 percent year-over-year.

With the tremendous efforts that Reynold and his new managed care team have put into renegotiating these contracts, we achieved managed care pricing in the second quarter that was essentially flat compared to the same quarter a year ago. This trend from -8 percent to -5 percent to flat is solid evidence that we're making real progress on one of the worst problems this company has faced during the past 20 months. And coupled with the progress on cost containment, the two together provide a path toward margin improvement.

If you parse through the cost numbers, as Reynold will do shortly, you'll see an increase in controllable operating cost of only 1 percent from the first quarter and 4.5 percent from the second quarter of 2003. While I'm pleased that our focus on cost is showing results, sustaining or improving this level of cost containment is essential to improving our margins. You'll hear from Stephen later in the call that cash flow was stronger than anticipated and our liquidity is good.

The disappointment in the quarter was the lack of growth in volumes. It's almost always important to have volume growth in order to drive better financial performance. Volume growth in the quarter was -2 percent for our core hospitals, but this is a tough comparison with the second quarter a year ago when our same-store core admissions grew by 3.4 percent. These numbers also include sub acute admission in acute care hospitals and Reynold will explain our conscious strategy this year of reducing those types of admissions.

It's also important to know that more than a quarter of our hospitals had positive admissions growth compared to last year. Looking at the absolute numbers is also interesting. We admitted approximately 5,000 fewer patients this year than in the same period last year. Spread across 69 hospitals, that's a difference of less than 1 patient per day per hospital.

Because of the strong volume performance last year it's also interesting to compare today's volumes with those of 2 years ago. Over that period our core hospital admissions are up 1.2 percent. That's not great, but it's still positive compared to a period when the Company was perceived to have no problems and was spending heavily on capital. Given what our operators have endured with virtually every customer relationship needing to be renegotiated, plus the legal cloud hanging over the Company, I'm pleased we had any growth at all since 2003. If our core hospitals could retain their payer, physician and patient relationships through this period, we should be able to accomplish even more once we resolve our legal issues and put more distance between the new Tenet and the old pricing strategy.

Turning back to the financial numbers, accounting charges constituted almost three quarters of our loss this quarter. But what's important to say is that these charges do not involve any cash out the door. The impairment charge and discontinued operations is an expected part of our divestiture program. The charge this quarter was necessary to align the book values for these hospitals with the value of the offers that we are getting. Let me emphasize that this charge is purely an accounting adjustment required by GAAP and has no implications for our cash resources or the expectations we have for ultimate cash value of the divestiture program. Stephen will talk more about that in a minute.

The second charge, having to do with bad debt expense, is also a non-cash accounting entry. We took the receivables owed by uninsured patients that would have been written off over the next 120 days and accelerated the recognition of this bad debt expense into the current quarter. This is only a matter of timing.

Now I'd like to turn to some very innovative actions that we took in the second quarter. First, we began implementing the pricing discount portion of Tenet's compact with uninsured patients. Under the compact the uninsured are offered discounts on the prices on our charge master. These discounts approximate what managed care companies pay in each market. By doing this we avoid the traditional industry practice of rendering these patients a gross charges bill and then attempting to collect it.

As you know, that's an exercise in futility as we typically collect about 8 cents on the gross charge dollar from self pay patients. Under the compact we render a lower bill and expect to get paid a significantly larger percentage. We will have this program fully implemented in all of our core hospital in areas where it's permitted by state law before the end of the year. We are still working on a solution to introduce the compact discounts in Texas where state law effectively prevents it.

We're also making the billing and collection cycle more effective in other ways. One example is the care pricer; this is a system that Tenet has implemented to produce an invoice that get be presented to the patient as early as at the time of discharge from an emergency room. For example, if a patient has a level 2 ER visit and a CT scan, the registration staff enters this information into the care pricer. The system then renders an invoice on the spot for these services based on the pricing terms at that hospital. When the patient is discharged we've given him a bill and we've requested payment. We believe this new system has the potential to improve upon the amounts that we ultimately collect and our preliminary results are positive.

One of our biggest challenges has been to reposition the gross (ph) charges of our hospitals. The Company's former pricing strategy created an untenable situation. Some of our hospitals have gross charges that are significantly higher than the rest of their market. And it's important to stress that this is not the case with all of our hospitals. More than half of our 69 core hospitals actually have gross charges that have always remained within the competitive range in their markets. What we face is the need to fix our gross charges on a market by market, hospital by hospital basis.

As you may know, one of the first things that I did when I rejoined the Company was to freeze Tenet's gross charges. I implemented this across the board in November 2002 right after the outlier situation had surfaced. The vast majority of our hospitals have not increased charges for 20 months. Meanwhile most of our local competitors have raised charges during this period and the practical effect has been to bring charges at many Tenet hospitals more into line with their markets.

We cannot continue to freeze charges at our hospitals indefinitely. It's clear that given cost inflation many of our hospitals now need and deserve to raise their charges so that the remaining managed care contracts that are paid to charges are appropriately indexed to market rates. Over the next 9 months we intend to increase charges at about half of our core hospitals in the range of 3 to 9 percent depending on local market conditions. This will be done on a staggered basis by region. We believe this increases is fully competitive and justifiable and it will not put these hospitals out of the range of their competitors.

At the same time, the one-third of our hospitals with the highest relative charges will, over the next 18 months, reduce their gross charges to a more competitive level. This is not as easy as it sounds. We have to work with our managed care payers to structure arrangements to make it possible to reduce these charges. We have teams working on this part of the challenge, and if the managed care companies are not willing to work with us on this initiative, we won't be able to address the charge issue at these hospitals. That said, remember that we're talking about charges, not what we actually get paid.

My philosophy is that the Company needs to be both transparent and competitive in addressing this very sensitive area. Our managed care negotiators have done a great job over the last 20 months to put us in a position where we can now undertake these efforts to fix the problem of gross charges.

We've made good progress this quarter on our divestiture program. We've now announced the sale of 4 hospitals in Los Angeles and we've completed the sales of our hospitals in Brownsville, Texas and Barcelona, Spain. In addition, we completed the sale of Reading Medical Center, we have an agreement to sell MCP Hospital in Philadelphia. We've completed the process of returning Doctor's Hospital of San Pablo to the local hospital district, and we have returned Century City Hospital to its landlord. At this point we remain very comfortable with our original targets for the divestiture program, both in terms of completing the sale process by year-end and generating net proceeds as expected of approximately $600 million including the value of tax refunds.

Now let me talk about quality. Quality is my top strategic priority for this company. Its impact is less evident in terms of our near-term financial returns, but quality is crucial in building a long-term sustainable strategy. Tenet's Commitment to Quality program will become the primary reason that physicians send us their patients and why nurses come to work at Tenet hospitals. I also believe that patients and payers will increasingly differentiate between hospitals on the basis of quality. So for all these reasons the Commitment to Quality is essential to our growth.

We've made rapid progress in implementing the program. By the end of the second-quarter we completed implementation of our Commitment to Quality in 17 of our 69 core hospitals. And during July we launched the program in 8 more hospitals, bringing the total number in the program to more than a third of our core hospitals.

Everyday I see and hear more evidence that the Commitment to Quality is being embraced by Tenet hospitals and for good reasons. Within 2 months of launching the program, our hospitals demonstrate a 40 to 60 percent improvement in several key operational metrics. An example of this is in emergency department length of stay. Most hospitals have been able to reduce this metric from 4 to 7 hours to below 4 hours. This allows incremental patients to utilize the emergency department which intern should increase in patient admissions and surgical cases provided there's capacity in the hospital.

The program also drives adoption of evidence based medicine. By redesigning care processes, one of the first hospitals to adopt Commitment to Quality, was able to achieve 100 percent compliance in providing blood thinning drugs to every patient admitted with a heart attack within the standard recommended by the American Heart Association. And this is up from 70 percent before the program was implemented. These types of results are occurring broadly within the first sites. Our physicians and caregivers are embracing this program with tremendous enthusiasm and I couldn't be more pleased about it.

I'm very happy to report that much progress has been made in strengthening our overall compliance effort which is another priority for the Company. We have completed hiring full time compliance officers for each of our core hospitals. This is a central element of our redesigned compliance program and these compliance officers will find, fix and prevent compliance issues. Today only 2 levels of management exist between a hospital compliance officer and the quality, compliance and ethics committee of our Board of Directors. This structure is designed to foster greater independence, oversight and autonomy of our compliance team and it's consistent with our stated goal of building a strong foundation of quality, ethics and compliance for the new Tenet.

Turning to litigation and investigations, the reason that I haven't asked Peter Urbanowicz, our General Counsel, to provide a separate update on these issues this quarter is because there's nothing significant to report. Our conversations with various government regulators remain active and we're continuing to work cooperatively with government agencies providing them with the information they need in their investigations. As usual our 10-Q provides a full description in this area. But Peter is here with us today and available to answer any questions that you may have during the Q&A period.

Before I wrap-up, I'd like to comment on the other press release that we issue this morning in which we announced Stephen Farber's decision not to join our move to Dallas from Santa Barbara. I knew there would be disruption and fallout as a result of my decision to move the headquarters to Dallas. I'm 100 percent convinced it's the right decision for the Company. And I was disappointed when Stephen told me that he would ultimately prefer not to move to Dallas, but rather to move back to New York to work on Wall Street or in something related. I've worked with Stephen off and on for a long time and I was not completely surprised by his decision. I do appreciate the long leadtime that he is giving us.

We've not had difficulty recruiting great people for open positions. I've been able to hire an outstanding general counsel and I'm very excited about the new head of human resources who starts with us in three weeks. We've also been successful in recruiting other excellent executives this year throughout the organization. The people have brought fresh perspectives and the talent to the company. I'm sure we'll be able to hire a terrific CFO. I'll aim very high and in the interim Stephen will continue in the role.

We have deep bench strength in the finance area and Stephen has assured me that he'll stay fully engaged through an orderly transition. Some of you may not recall that I was the Company's CFO from 1996 to 1999, so I'm very familiar with the subject matter. We also announced last week that another of our senior executives would be leaving the Company. Barry Schochet, a 25 year veteran with Tenet who has served most recently as Tenet's Vice Chairman, will be leaving at the end of the year to pursue a second career as a health care investor. Those of you who know Barry are aware that he is truly unique and irreplaceable. And because he's irreplaceable I won't even try to recruit a successor for Barry. When he leaves we will eliminate the position that he has held.

Barry has given me consistently great advice over the past 20 months, and he's done an outstanding job representing the Company for many years. All of us at Tenet are very grateful for Barry's contributions. Speaking of somebody who's contributions I'm grateful for, let me now turn the microphone over to Reynold Jennings, Tenet's Chief Operating Officer. Reynold has now had a very strong impact in a short time as COO. He'll now share his thoughts on the initiatives he and his team are using to drive operational performance.

The past 2 quarters have been both demanding and exciting for my new operations management team; demanding from the standpoint of the sheer number of issues on our priority list; exciting in that good progress continues through a very focused set of tactical initiatives that are sequentially aligned. To begin with I would like to make a favorable note to some actions that I described on the last 2 earnings calls.

First, Bob Junk (ph), our Senior Vice President of managed care and I have continued frequent and transparent dialogue with virtually all of our major managed care customers and the stabilization of our pricing trends are an indication of the results. Second, several cost savings initiatives are showing growing trends. Third, we have successfully opened 2 new hospitals in Frisco, Texas and Memphis, Tennessee. Fourth, the restructuring and streamlining of the operations team is complete. And fifth, I will complete the on-site tours of all core hospitals by the end of August. These visits allow me to understand the competitive environment, to learn management and programmatic needs as well as meet members of the medical staff and answer questions they have about Tenet and receive their suggestions for operational improvements.

Now I would like to talk about the three core drivers of operating results: volume, price and cost. First, as it pertains to volume, Trevor indicated our quarter-over-quarter growth was a negative 2 percent for the core hospitals. As we have indicated in previous calls, we continue to see no evidence of major volume loss due to defections of our loyal active medical staff positions. In fact, approximately 25 percent of our same-store core hospitals had very respectable inpatient volume growth. The remaining hospitals had independent, local market issues. And I want to give you a few examples of these local issues as well as what we are doing to counter act each situation.

First, in hospitals where we have medical surgical capacity constraints we have been consciously converting lower margins sub acute beds into higher margin medical surgical beds. This conversion accounted for approximately 25 percent of the shortfall over second quarter of fiscal 2003. Excluding sub acute admissions, acute medical surgical admissions were approximately 1.7 percent below last year's comparable time frame.

A second example, 2 hospitals lost younger physicians from group practices after being in those groups for 1 to 2 years. Our go forward strategy is to work with the senior physician members of medical groups to ensure that the younger physicians get stabilized in the community. One important note here is that since most of our hospitals are unaffected by the national publicity and have maintained their strong local hospital name brand, our physician recruitment efforts are on a level playing field with the competition.

A third example, one hospital surrounded by water with only a bridge access has been experiencing tremendous traffic problems causing off island patients to seek other places of care. In response, we are expanding off island medical office space as well as outpatient diagnostic and outpatient surgical services to counter this problem.

A fourth example, one of our hospitals historically provided a very large orthopedic service space, the physician component was provided by a group of 10 physicians belonging to 1 group. Following the lack of agreement as to the group's strategy of buying their own medical office building, the group disbanded and the physicians gravitated to several hospitals. 2 of the former groups stayed at our hospital. We are working to increased volumes and other clinical services to offset this overdependence on orthopedics.

And one last example; we have 1 hospital in a town which is predominantly 1 industry based. The bear market was tough on this industry creating an unemployment rate of 10 percent. Some good news on this situation is that the unemployment rate has improved by 30 percent in calendar 2004 and this market historically lags the general economic recovery by about 1 year.

These are a few examples of market specific inpatient volume shortfall issues that have overshadowed growth strategies. In addition, there are also some examples of inpatient volume losses that were business decisions made by Tenet which were in the best interest of Tenet. For example, 4 hospitals refused to accept specific renewal managed care contracts at rates that were not financially viable to the Company. Some insurance companies and medical groups have unfortunately believed that Tenet's national problems would cause us to accept contract rates that are not actuarially sound. We have dispelled that myth and we will continue to do so.

Lastly, I would like to touch on outpatient visits. Our gross visits were down 2.5 percent, but when excluding the visits from the home health agencies we sold and the conversion of chemotherapy business at 1 hospital into private practice, outpatient business actually grew by 8/10 of a percent. This growth is positive given the previously reported increase in competition by physicians and numerous business entrepreneurs especially those offering equity syndication opportunities to physicians over the past 2 to 3 years.

To sum up my comments on volume, and as Trevor indicated, we must continue to react quickly to counter market by market any negative pressure on 1 or more of our hospitals. I believe that any tensions (ph) in the second quarter on inpatient volume are hospital specific not general trends. We have no evidence of any large-scale strategic movement away from our facilities. One of our hospitals recently recruited a 40 person physician group into vacant, on-campus medical office space.

Next I would like to make some comments about our managed care negotiations and relationships. As I indicated in March, we entered calendar and fiscal '04 with less than a handful of difficult discussions with major insurance customers about the past. Those discussions have progressed to the point that they are no longer a hindrance to our go forward negotiations. Any disagreements that continue will be resolved as per the legal structures afforded in those specific agreements.

As Trevor indicated in his comments, I'm very positive about the centralized development of our managed care strategy and negotiations under Bob Junk and his team. We believe that the flat yield in the second quarter following 2 quarters of decline is evidence that we are in a stronger position as we now assume normal go forward negotiations with the payers.

Now let's turn to operating expenses which is the most positive aspect of the quarter's performance. As you are aware, cost control is central to my agenda as the Chief Operations Officer. We have been driving cost control for a year now and I'm pleased with the way our operators and our corporate staff are delivering results. Growth in controllable operating expenses was contained at 54 million or 2.5 percent. While this is higher than we would have liked, it includes a 37 million extra accrual in medical malpractice expense partially offset by an $18 million gain on the sale of the home health agencies. Net of these 2 items, controllable operating expense grew by 1.6 percent, well below the inflation rate of our business.

Of the 14 initiatives that we announced in March, 10 of them deal with cost control and cost improvement. We are meeting the annualized run rate for each of the 10 initiatives within the internally established timelines. For example, in our total cost management initiative we have put into effect 68 tactics equating to 50 percent of our annualized target savings potential. These include 55 supply initiatives, 11 other controlled expense initiatives; and 2 related to operational improvements. Some of our biggest impact items have been in standardizing radiology contrast media, reprocessing of sterile supplies, medical transcription outsourcing and consolidated telecommunication providers.

Our new Dallas-based earnings improvement team has been in place for about 2 months. For data comparison purposes we have grouped our core hospitals into 5 groups; geographically stand-alone city hospitals, large city teaching hospitals, and metropolitan hospitals broken into large, medium and small but size. We will soon be inviting our lower performing core hospitals to Dallas on a scheduled basis to explore best practice opportunities for volume growth, cost control and price negotiating leverage. While cost control is just one of the three strategic areas along with volume and price, given the historically high inflation and healthcare cost inputs our focus in this area will be relentless.

Before I finish let me say that I do believe we’re making a lot of progress that has not yet translated into improved financial results. We are driving numerous organizational, structural and procedural changes that will be of significant value to the Company in the future. However, the tens of thousands of employees and literally millions of patients translating these changes into financial improvement simply takes time. As Chief Operating Officer, I firmly believe we're on the right track and I'm very optimistic about the future. With that I will now turn over the comments to Stephen Farber Google felony remaining pieces of our financial picture.

Good morning. We had a complicated quarter from an accounting perspective, but when you sort through all the noise there are some very strong positive take aways. Operating performance has both its good points and its challenges. While volumes were week pricing is showing steadying steady progress and cost control was exceptional. Most importantly, cash flow for the quarter is significantly better than expected. I'm going to focus my time today on items that I think are most relevant rather than going through all the information available in our earnings release and the 10-Q that was filed this morning.

Tenet posted a net loss of $426 million for the second quarter or 91 cents per share. Net losses at 45 cents per share was from continuing operations, net losses of 46 cents per share was from discontinued operations. Nearly all of these negative amounts in both continuing and discontinued operations are comprised of charges and other items detailed in our earnings release.

The largest charge for the quarter in continuing operations was related to our provision for doubtful accounts, commonly known as bad debt. This quarter the implementation of the discounting provision of the compact with the uninsured that Trevor spoke about earlier, caused us to change the way we estimate net realizable value of self pay accounts. This charge had a $204 million pretax impact or 27 cents per share on continuing operations. It also had a $50 million pretax impact or 7 cents per share on discontinued operations. Let me try to explain this in as close to English as the accountants will let me. Prior to this quarter we wrote down self-pay accounts that are estimated at net realizable value over 120 days on a straight line basis.

Because of the implementation of the compact, this approach no longer makes sense. We will no longer always 120 days and instead will write self pay accounts down to estimated net realizable value when recorded. In other words, immediately. For those who want an even more detailed explanation, there's lots of information in the 10-Q we filed today. I'll spare the rest of this audience from the torture. Excluding the impact of this charge bad debt from containing operations was about 11.5 percent of net operating revenue, up from 11 percent in the first quarter but still significantly better than our 12 percent guidance.

Along with the bad debt charge there was a variety of other items that impacted second quarter results. The earnings release mentioned that we wrote off unamortized financing costs from the $450 million of bonds we repurchased. This had a 1 cent non-cash impact. We impaired long-lived assets in containing operations mostly marking down the value of MCP Hospital's assets to the transaction price of $1 which rendered a 5 cent non-cash hit. We took a 3 cent charge for employee severance and restructuring charges and we had litigation and investigation cost in the quarter of a penny a share. These 4 items together had a total impact of 10 cents.

We also had a $23 million net operating revenue reduction or 3 cents per share from the initial discounts granted under the compact. Now I want to be sure that you understand that the compact is expected to be essentially neutral to earnings. During implementation there will be decreased in net operating revenue from self pay patients as we grant these patients large discounts, as Trevor previously described. These decreases in net operating revenue will result in smaller balances to be written off as bad debt. Therefore bad debt should drop by a similar amount having very little if any impact on operating earnings. So going forward we expect net operating revenue will be lower but so will bad debt expense and both in about the same amount. Again, the net impact should essentially be a wash.

The earnings release also highlighted a pre-tax loss of $17 million or 2 cents per share for the 3 hospitals that GAAP requires us to report of part of continuing operations, but which are not a part of our 59 core hospitals. We announced yesterday that 1 of these 3 hospitals is already no longer part of the portfolio. We turned over Doctors Medical center of San Pablo to the West Contra Costa Healthcare District at the end of July. Another of these is MCP Hospital in Philadelphia. We announced last Friday we had reached a binding letter of agreement to sell this hospital at the end of August for $1 rather than closing the facility as previously announced.

The third hospital is Suburban Medical Center in California which we lease. We had previously announced we intend not to renew this lease and to let it expire later this year. We also referenced 2 other items in the earnings release, a gain of $18 million or 2 cents per share from the sale of several home health agencies and hospices which were booked as an offset to other operating expense. We also received another penny a share in gains on the sale of various long-term investments.

There is one item that is not part of the list in the earnings release but I want to highlight its impact on the quarter. Malpractice expense was up $37 million or 5 cents per share compared to the first quarter. Substantially all of the increase was related to the development of specific clients and did not reflect a general or broad trend in our malpractice expense. That completes my review of continuing operations; now I'll spend just a minute on discontinued operations because I really want to get to talking about cash flow.

Discontinued operations generated a loss of 46 cents per share which included 3 items that had a negative impact of 39 cents. I already addressed the charge resulting from the write down of self pay accounts receivable which had a 7 cent impact on discontinued operations. There was also a 1 cent gain that came from the sale of 2 hospitals, Brownville (ph) Medical Center and the Company's last remaining international hospital in Barcelona, Spain. The balance of this charge, 33 cents per share, came primarily from the impairment of long-lived assets of the hospitals held for sale.

This charge is completely non-cash and is the result of the required accounting under GAAP to impair long-lived assets when their carrying values exceed their fair values including cost to sell and requires that we record a charge. In January when we announced our intent to sell these 27 hospitals we also announced that we expected to receive roughly $600 million from their sale including tax benefits. We still expect to receive the same amount.

Over the past few months we've signed up some specific transactions and have received multiple bids on all the hospitals, in some cases high numbers, in some cases very low. We now have hard evidence based on these events on which we are required to reassess the book value of these hospitals. I want to make very sure that this charge is seen for what it is. The results of the rules of GAAP and has no impact on cash or on anticipated net proceeds.

Now let's turn to cash flow which, along with the managed care pricing progress Trevor spoke about, is clearly the strongest indicator of financial progress at Tenet. In simple terms we are doing much better than expected. Cash balances were $1.2 billion at June 30th, up nearly $700 million from Q1 and as of Friday July 30th we still had $1.2 billion of cash in the bank. Operating cash flow was $144 million in the quarter which is defined by GAAP as prior to capital expenditures. This is, however, after a $32 million outflow related to government settlements announced in March but paid during Q2 and about $25 million of outflows related to reserves. It also includes the impact of about $20 million of cash tax payments on discontinued operations.

To put this into context, at the beginning of the year we gave guidance that we expected operating cash flow from continuing operations for 2004 for the entire year to be approximately $300 to $400 million positive before capital expenditures, litigation settlements, asset sale proceeds and outflows related to reserves. For the first 6 months Tenet has already generated $300 million on this basis. Now a lot of this has to do with the improvement of our business practices involving the billing and collection of accounts receivable.

In spring 2003 we launched a massive project to consolidate business offices, standardize systems and reengineer our entire revenue cycle process. I am more than pleased to see that these efforts are starting to produce tangible results. In the current quarter accounts receivable for continuing operations declined by $304 million and days outstanding came down 8.7 days to 56.1 days. Most of this, 7.2 days of the 8.7 day decline results from the write-down of self pay accounts receivable I previously discussed. But this is the first time in a long time that we have seen an actual reduction in AR days, a 1.5 day decline excluding the special impact.

To put this into context, early in the year we said that we expected an unfavorable increase in accounts receivable of $250 million during 2004. That concern has not materialized and, in fact, performance has improved. I am by no means committing to straight line performance improvement for the accounts receivable going forward. Like every other aspect of Tenet's business, we continue to have both challenges and opportunities and some variability from period to period. I am, however, very happy with this quarter's indication that we are on the right path.

Our guidance in the first quarter suggests a negative cash flow from discontinued operations of approximately $150 to $200 million for the year under the assumption that we retained all 27 hospitals through December 31st. Fortunately we are currently doing significantly better than that. While we are losing money on an accounting basis in discontinued operations, year-to-date on a cash basis discontinued operations is positive approximately $30 million. Most of this relates to continued accounts receivable collection from hospitals we sold last year net of various online costs associated with those hospitals. But this means that we are essentially cash flow breakeven at the hospital's we are currently in the process of selling.

This is primarily due to very tight working capital and capital expenditure management. On top of this, some hospitals in this group have already been sold or are under contract. So we know for a fact that some will be gone well before the end of the year. We are very comfortable that this original estimate should definitely be considered conservative.

Capital expenditures in the quarter were $136 million which includes $38 million to complete the construction of the Bartlett and Centennial hospitals which opened in the second-quarter. Only $5 million of this total was in discontinued operations. Year-to-date capital expenditures have totaled $250 million, a little off the pace of $600 million we had viewed as likely for 2004. We have spent much of the first quarter completing an exhaustive review of our capital expenditure plan for the year and that slowed the outflows in the early months. We do expect the pace to pick up a little in the back half of the year and are comfortable reconfirming the original $600 million estimate.

In Q1 we said we expect cash payments from previously accrued reserves to consume approximately $50 to $150 million in cash for the year. In defining this range I specifically excluded the $153 million cash payments made in March for the adverse judgment relating to a former company executive and litigation settlements such as the $32 million I mentioned before that was paid in Q2. Excluding these items outflows for this category have been about $50 million year-to-date so we are on track for the previously indicated range.

Putting all this together, in Q1 we said we expect cash consumption for the full year 2004 of $500 to $600 million excluding legal settlements and proceeds from asset sales. While it is too early to declare victory, we are currently doing much better than that and we hope to maintain this performance throughout the year. I want to thank the more than 5,000 people in our business offices, our billing and collection centers, our admissions and case management departments, and the hospital at regional and corporate financial staff that have all played a key role in keeping cash flow strong while we worked through our operational challenges.

Turning to liquidity, it is undeniable that Tenet enjoys a much more liquid balance sheet than it did 3 months ago. On June 15th we issued $1 billion of senior unsecured debt with a coupon of 9 7/8 percent. This offering was very well-received by the market and was significantly oversubscribed. We used about half this money to retire $450 million of existing debt with maturities in 2006 and 2007. The remainder of the cash was retained and we now have $1.2 billion cash on the balance sheet. We have less than $600 million of debt due between now and the end of 2011 and the 1.2 billion of cash on hand that gives us great comfort.

Tenet still faces many challenges as a company and this strong cash position should reassure our employees, patients, physicians and creditors that we have plenty of cash resources to address our issues and move Tenet forward as a company.

Now before turning the microphone back to Trevor, I'd like to offer a few personal comments on this morning's announcement that I will be leaving the Company at some point in the next several months. Those of you who know me well have realized that the time would come when events would begin to settle down at Tenet and the roll of the CFO would become more conventional and operationally focused; I see that happening now. Most importantly, Trevor's decision to move our headquarters to Dallas, which I strongly agree is the right thing to do for the Company, required that I reflect upon whether it was right for my career and for my family. Together my wife and I decided not do accept the offer to relocate to Dallas and that this was the right time to figure out the next challenge.

I've spent my career engaged in transactions and turnarounds focused on critical moments in the lifecycles of companies. It feels like we've compressed a decade of experience into the past 2 years and that experience is something I'm honored to have been part of. By 2005 I expect most of the structural and transactional aspects of Tenet's turnaround will be complete and installing an operationally focused CFO in my place is the right thing to support the management team during the next phase of Tenet's growth as well as the right thing for me personally.

I'm exploring the a range of alternative next steps and expect in the next few months to let you know where I'm going. There's a very strong management team in place at Tenet and I have every confidence that they will continue to move this company forward. And with that let me turn it back to Trevor.

Thanks, Stephen. Before launching into Q&A let me summarize. We've made good progress in the second quarter on several fronts, most notably in pricing and cost containment. We've also achieved key milestones regarding our commitment to quality initiative and other efforts to create growth and build for our future. To get to where I'd like to be financially we need to keep up these trends in pricing and cost control and have stronger growth in admissions than what we saw this quarter. I'm increasingly convinced that we're in the right course to build volumes. Our relentless focus on quality is really what our future is built upon and our physicians and caregivers will get us there.

I believe we're at an inflection point on the pricing issue. Our managed care pricing has reached breakeven after several quarters of declines and our negotiators expect that trend of improvement to continue. If this assessment proves correct it will have a material positive impact on margins going forward. Cost containment has shown improvement for the third quarter in a row and our cash flow performance has exceeded our expectations. We have enhanced the liquidity of our balance sheet by substantially eliminating the pressure of near-term debt maturities, providing the requisite staying power to see us through the next steps in our growth strategy. But we still have a lot to do. The concrete evidence of progress is beginning to tell a positive story. Operator, let's begin the Q&A period.

(OPERATOR INSTRUCTIONS) A.J. Rice, Merrill Lynch.

Two things just real quick. First, you've never really broken out Hahnemann, Doctors Medical Center of San Pablo and Suburban Medical Center, but those will now be rolling off in the last half of the year. Can you give us some flavor for how significant -- it sounds like from the admissions number that there's a pretty significant adverse impact that they've been having. How about at the EBITDA or even the net income line? How much goes away? And then just to clarify on Stephens comments about the cash flow -- your original guidance it said in '05 you expected to be negative cash flow but less so than -- significantly less so than '04. Is there a chance now that in '05 you might be positive cash flow?

A.J., Let me start by making a very important clarification. You said Hahnemann, what you meant was MCP. The hospital we're closing in Philadelphia is MCP. Our Hahnemann University Hospital is a core hospital. But we will, even despite that error, we will let you proceed with your questions. He's quickly looking up an answer.

The earnings release, A.J., indicated that we lost about 2 cents at those 3 hospitals. We've basically been losing roughly $7 to $10 million a month at the EBITDA line from those 3 hospitals -- with probably the majority of it coming from MCP. With respect to your question about an update on 2005 cash flow guidance, we're not going to update that until later in the year.

A.J., I also have to add that your initial error was contagious so I made one of my own. I said that we were closing MCP, we are not closing MCP. We had originally announced that we would close MCP and the final resolution of that long story is a successful one in which the hospital will be sold to a community group for a dollar and they will continue to keep it open.

Okay. Thanks.

Sheryl Skolnick, Fulcrum Global Partners.

Good morning. I assumed this was going to go longer than an hour, folks. My question is with respect to asking you to walk us through the implications of what you did with the self pay -- excuse me, with the increase in the provision for bad debt expense. And if I understand what you're doing correctly, then what you're doing is taking every dollar of self pay and basically writing it down through the provision to 8 cents on the dollar. And you do that as soon as you record it. So I need you to walk us through with the compact, my understanding of what you were doing with the compact would be this -- that you write it down as a contractual adjustment, you get to a net revenue number, argument's sake it's $1000. If it's $1000 are you now writing that down 92 percent to get as your bad debt reserve or you're writing it down something substantially less? And the reason is that I'm trying to understand why your provision for bad debt should be going down from what you recorded this quarter as opposed to going up to 90 percent -- 92 percent of whatever your self pay revenues are at the net revenue level?

Maybe the easiest way for me to do this is to give 2 examples, an example for a compact hospital and an example for a non compact hospital. You are essentially right with everything that you had said, but let me just clarify. If you have a hospital that is not on the compact yet and all the hospitals except the hospitals in Texas are going to get rolled in over the next few months, let's say for example a self pay patient shows up and they have a bill of $1000 of gross charges. For a non compact hospital $1000 of gross charges will also be $1000 of net revenue and our historic rate of collection on that sort of bill is 8 cents on the dollar.

Now remember, the 8 cents on the dollar is on gross revenue, not net. So if you have a $1000 bill, it's $1000 gross, $1000 net, under the new approach we will take $920 of bad debt at the same time and we'll have $80 of leftover -- $80 of operating income from it. If you have a compact hospital and let's say the compact discount -- just to use round numbers -- let's say the compact discount was 50 percent. So you'd have a $1000 gross charge bill, $500 of net revenue, you would take $420 of bad debt and you'd still have $80. So the 8 percent concept or the 8 cents on a dollar will change over time. The dollars themselves won't change --.

So if you know you're only going to collect $80 or only have a chance of collecting $80, I don't understand why you're not just discounting it to $80.

The design of the plan is to provide a rate that is consistent with managed care pricing otherwise you create all -- it depends on the states. There are all kinds of legal complexities and contractual complexities that come into effect.

So in order to get an answer to my question -- and I have to ask this -- what is your self pay net revenue contribution today either as a percent of revenue or absolute dollars and what will it change do as a percent of revenue or absolute dollars once everybody but Texas is implemented assuming no change in admissions from the current level?

I can get you most of the way there, Sheryl. If you bear with me for a second, I'm pulling up what our self pay revenue is. It's typically around the low teens percentages of total revenue.

So is it "17.8 percent in the quarter for self pay, indemnity and other" in your 10-Q. Obviously it's something less than that.

Yes, I think it's probably around 13 percent or so. But there's all kinds of little programs and other things -- workers comp and other things that are in there. I would use about 13 percent as a good guestimate. And Texas is about 20 percent of our business. So I think I would use those numbers to get to a rough approach and you can get a good sense of both what will come out of net revenue and what will come out of bad debt.

Because you took 23 million off this time and it's only implemented in some of the others. Do you think your average discount might be as much as 50 percent of growth.

Yes, I think it might in some cases be higher than that.

50 percent or better.

Yes. And a lot of that depends on the specific state and the specific market what we're able to do with all our contracts and the law. And those same amounts will just come out dollar per dollar from net revenue and from bad debt.

Now I have the mechanism. Very good, thanks a lot.

Adam Feinstein, Lehman Brothers.

My question is on the pricing front. Clearly you made some great progress there, so a couple of follow-up questions just on the pricing side. One, were there any extraordinary items in the quarter that would have benefited that number? And then two, could you just give us some more details about some recent contracts? I guess that you announced a big contract in South Florida -- just want to get a sense for just some of the details. I know you can't give all of the details about a specific contract, but was there a price increase and just give some details about what future managed care contracts will look like.

Let me (multiple speakers) and then I'll pass it over to Reynold to talk about managed care. In general on pricing, as Trevor made in his comments, we were up 1.8 percent overall, not managed care, but overall, and 2.4 percent for the core hospitals. One thing that's important to point out that I don't think we mentioned in our prepared remarks, but it was in our Q, is that Medicaid pricing was significantly lower in the quarter. Medicaid roughly 8 percent of our business and Medicaid pricing was down approximately 8 to 10 percent. So when you're trying to -- if you're trying figure out what happened with each component of pricing and you figure Medicare is up roughly 3-3.5 percent, Medicaid down roughly 10 percent and you can get to the point where you understand -- we made the comment that managed care was essentially flat quarter over quarter. Those are kind of the 3 main elements that are going on in our pricing. I don't believe there was anything significant in the quarter that was unusual that would have skewed any of those factors one way or another. Now I'll turn in over to Reynold to give you any more anecdotes that he can.

Adam, on the pricing side, again, we've made it pretty clear that we do not want to be in a competitive disadvantage of staking out the territory for the managed care companies, so we'll conduct to shy away from any specific percentages. The one thing I would like to reiterate that we have over the last 6 months is that with Bob Junk coming in along with the recruitment of numerous professionals from the managed care side, we have greatly strengthened our negotiating position and leverage with accurate data information about what is an appropriate competitive range of net revenues that we should be structuring our contracts and our negotiations under. And so the strength of that position gives us a lot of optimism that we've been moving, as I indicated, pretty aggressively over the last 4 or 5 months into a positive arena with the contracts we've negotiated. And we will again, as I indicated before, to the extent there is a few historical past tensions, we'll continue to try to resolve those if we can person to person. If not we'll let the specifics of the contract move that in whatever direction it needs to go.

Do you have a gross revenue number, Stephen, also and then I'll get off?

Adam, I don't have that here with me but let me call you back with that.

Okay, thanks.

Oksanna Butler, Citigroup Smith Barney.

First with respect to the divestitures, I know we had anticipated about 300 million in cash proceeds from the divestitures and it looks like at this point you're over 160 million. Are you expecting something different for the remaining divestitures and can you give me a little bit more color on timing?

Sure. We are holding fast to our estimate of $600 million of total proceeds including cash and tax benefits. You are correct with your current count. We received about $58 million on Brownsville and we did ink a deal about a week ago for four hospitals in California for roughly -- a little under $100 million all in on a net basis. Those hospitals had somewhat higher tax bases so there was not much tax benefit from those individual sales. I think on some of the future sales there will be larger amounts of tax benefit and less amounts of up front cash. So we're still good on the $600 million number.

Okay. And on the litigation front, you said there's nothing material that was new. Can you comment on the subpoena from the U.S. attorney's office in New Orleans? Are these new allegations or is this similar to the physician -- the financial reinsurance (ph) issues that you previously settled in Florida and some of the issues that already came out of California?

This is Peter Urbanowicz, the General Counsel. Again, most of the things that we see right now are the same things that the federal government has been looking at. This is an outgrowth of the investigation that we disclosed last year related to an HMO that we are a part owner of in New Orleans, Louisiana. And so this is an extension of that or rather it's a continuation of that review. We continue to be involved in discussions on nearly a daily basis with federal law-enforcement officials and we have taken the position since last year that we would provide information voluntarily, that we are working aggressively to get them the information that they need and we're doing that.

Sometimes we do get caught up in a subpoena because there are other individuals not related to Tenet that are part of investigations as well. They may not have voluntary disclosure agreements with the government that we do. But we look at this as being part of the overall investigation into physician relationships that we've seen in other parts of the country with the Company.

Okay, thank you. And final question. Can I just ask you to give a little bit more flavor in terms of the geographic areas? Are you seeing either on the pricing or the volume front real disparity in terms of the geographic (inaudible)?

I think we prefer just not to get into geographic areas. I think Reynold gave several examples without disclosing the geographies.

It's Stephen again. One comment that I will make is that there is no major skew factor going on in the portfolio so it's not as if one area is doing tremendously well and another area is doing poorly. It is pretty well mixed throughout the portfolio.

Well, you had said, for example, when we're looking at the comps in the second quarter of last year there was some strength in the eastern area in particular. So are we to assume that that's now down or that there's just stabilization throughout?

There really is fairly balanced performance throughout the portfolio. So it's not a useful exercise to get into graphic discussions, as Trevor said.

All right. Thank you.

Lori Price, J.P. Morgan.

I was wondering if you could tell us, if you held self pay revenues constant sequentially and year-over-year, would your revenue per day net and net revenue per admission still have been up or would it have been down?

That would require some calculation, Lori. Can I call you later on that.

Yes, no problem. And then -- I guess that's it. Thank you.

James Lane, Argus Partners. Mr. Lane, your line is open at this time. Ellen Wilson, Sanford Bernstein.

I was wondering on your cash flow guidance for the year, the -500 to -600 million, if you could just walk through one more time for me what's in that. I'm assuming that includes the 600 million CapEx spend that excludes -- I think you said asset sale proceeds, settlement payments, etc.?

Yes.

And could you walk through therefore, if I'm reading this correctly, your cash from operations for the year is implied to be basically zero to a positive 100 million, is that right? If I'm thinking about that correctly then?

I'm not sure that I -- oh, you mean, so if -- since we're talking about $600 million of CapEx that you'd start with -500 and -600 and you back off and you get to cash positive of 0 to 100 and in the original guidance -- is that what you're saying?

Exactly. Is that the right way to think about that?

No, the original guidance is actually +300 to +400 from operations, but then there were other things that were deducted from that.

Would you walk through those deductions then?

A meaningful part of the impact was the 300 to 400 positive, Ellen, was including an estimated $250 million growth in Accounts Receivable, and then there was the impact of discontinued operations.

Okay, so -- okay, that's fine. And then also on your cash proceed assumption this year for the 300 million cash proceeds related to the hospitals to be sold, how are you thinking about that assumption just to clarify? Is it actually cash received from the buyer at the time of the sale? Or is it some assumption that you're keeping the AR associated with those hospitals and collecting cash on that?

It's probably something of a blend of that, Ellen. We said of the 600 million that we expect to receive from the sale of the hospitals to be roughly half cash upfront and half tax proceeds which we would not receive until the summer of '05. We haven't tried to split the hairs so finely as to discern how much we're going to get from working capital, liquidation and how much we're actually going to get in cash up front. It's really going to vary on this transaction as well. Some transactions the buyers want the working capital, others they don't. So I think that's something that we're going really just see over time. I think the most important thing to focus on is what the overall amount of cash is that we receive for the hospitals and that we are well on track towards achieving that.

Okay, thanks.

Joseph Chiarelli, Oppenheimer & Co.

If you could pull a couple of things together for us prospectively over the next 6 months. You have renegotiated a certain amount of your managed care contracts and you still have more to go. And your volumes, because of economic conditions or the elimination of sub acute have been down. Could you give us some sense of how this will play out for the rest of '04 and into '05? The managed care contracts where you have renegotiated the rates, what that can do to volumes? And those where you still don't -- haven't accomplished your renegotiation, what percentage that is of let's say managed care volume and then how you see that playing out for the rest of this year? Thanks.

I'll take that as a suggestion, something that you'd like to see us talk about going forward because we've been very careful not to make specific predictions in areas like that, particularly predicting volumes I think would be very difficult for us. But as I mentioned in my comments, we try to focus everyone on looking at results when you're talking about managed care pricing rather than making predictions or giving real-time anecdotal evidence of what we're getting in negotiations. But as I said in my prepared comments, the sentiment of our managed care negotiators is positive and they're pleased with what they've been able to achieve. So I would hope at this point -- I wouldn't make that an expectation quite yet -- that this trend we've seen for 3 quarters would continue in a positive direction.

Trevor, I appreciate that you wouldn't give specifics, but the question is what's the lag time from when you have these renegotiations completed to where you would see that let's say showing up in the business, number one? And then number two, how many more contracts as a percentage of all the one that you have to do remain to be renegotiated?

We've now renegotiated or renewed since late 2002 well over 100 percent of the revenue representative contracts and we've worked through virtually all of the customer relationships. And as to that lag time and its effect on volumes, it depends widely by customer. Some of these managed care customers never terminated a relationship or we didn't see volume drops from contract disputes or difficult negotiations that we have. In other cases we have seen it. I couldn't begin to try and quantify that for you. We've been watching it more on a case-by-case basis.

Joe, it's Stephen. There is one bit of color that I'll add to that which is the same comment that I made when we reported Q1 in response to a question somewhat like this. There were a number of contracts that were renegotiated sort of the middle of last year, kind of Q3 of last year, where typically it would have been a 12 month contract, but given everything that was going on with the Company, many of those contracts were extended basically through the end of '04 instead of ending in August or September of '04, whenever the time was that we renegotiated in '03, they were extended through the end. And some of those were fairly sizeable. So I think those renegotiations will be coming up over the next few months with a Jan. 1 start date or an early 2005 start date. So I do think in terms of when you will likely see meaningful better comp quarter performance, we've at a very nice path of improvement over the last 3 quarters, but I think there will be just by virtue of a bulging contracting, a little extra impact when you get to Q1 '05.

Okay, thank you.

Ken Weakley, UBS.

Kind of a math question. I was wondering if you could walk through the calculation in terms of when you tell us that pricing is flat? I imagine you win thousands of contracts (indiscernible) the gross charge and all the changes. How well do you know what your pricing really is?

We have data that we collect, but I always double check it just with a gut check using essentially the map that I think I started to talk about when I was answering someone else's question earlier but I don't think I closed the whole loop on it. We know just from our published results that our pricing -- that our inpatient unit pricing was up 2.4 percent for our core hospitals. And we know that roughly -- I don't have the numbers in front of me -- but a little more than a quarter of our business is Medicare, like 26 percent or so is Medicare. And we know on Medicare we're up 3 odd percent. We know that about 8 percent of our business is Medicaid and on that we're down 8 to 10 percent on a unit pricing basis. So -- and then if you include the piece of the business which is self pay, which is about 13 percent of revenue, you can easily impute from that that you kind of have to be roughly flat on Medicare. I'm sorry, on managed care. So that serves as a good double check and that logic holds true as well with what we reported in Q1 and what we reported in Q4, how we got to the -8, -5 to flat. Those are certainly not precision numbers, but they are close enough for horseshoes and plenty good for understanding that there is a fundamentally solid trend at work.

Can I ask one follow-up then? In terms of -- Reynold, you had talked about pricing -- I guess some contracts were being offered you that were not actuarial founded. It sound like you're being offered risk contracts. Is that becoming a larger proportion of your contracts or was that just a side comment?

So far it's not becoming a larger part of the contract. These would be in typical annual or 2 year renewal processes and, you are right, it is mostly down to the medical group risk level to where it is very important for that doctor group to get the best price that they feel like they can get.

Okay, thanks.

Kemp Dolliver, SG Cowen.

I am sympathetic to your problems at Hilton Head. I hope you get them fixed. First, you opened 2 hospitals in the quarter. Did they have any -- did they cannibalize any business in the 2 markets that surround them?

This is Reynold. No, they did not. There is a little bit of fringe area in one of those, the one in Memphis. But that hospital is in a new growing bedroom community. And also those hospitals opened up very late in the second quarter. So there's no impact of any significant report in the second-quarter numbers.

Okay, great. And then could you give us a quick update on labor trends in California particularly relative to the staffing ratios and how that plays into the outlook for next year?

On published data, Tenet, along with every other hospital and hospital system, continues under the staffing ratios to struggle to figure out how to come in full compliance with those given the level of the nursing shortage in California. I will indicate to you that so far that we've held 74 union elections and the union has won 58 or 78 percent of those. Some of those will go through a second election process. And it does appear that so far into the second quarter we are seeing about 28 percent SWB inflation higher than the other regions in the United States. We attribute that, again, mostly to the staffing ratios and that all hospitals are paying whatever the market demands for competitive rates before we started the union process. But that may add some part of it to it, but it's the application of the staffing ratios that generally is driving the inflation above the other regions in the country.

Has compliance been a problem with regard to having to turn away any business?

Not that we're aware of. Again, the difficulty of these regulations, as has been historically reported by the California Hospital Association is that even on lunch breaks or other breaks you're supposed to maintain those particular ratios. And so as patients come in through your emergency department, which in today's hospital is a huge percentage of your admissions, it's very impractical for any hospital in a short 15 or 30 minute period of time to comply with those ratios. And so the California Hospital Association has been working aggressively along with other professional hospital groups to try and get some common sense approach there. But again, we, like everyone else, if we know when shifts start, then we elect whether we have diversion in the emergency department or not as to whether we have enough nurses to render care based on those ratios.

That's great. Thank you.

John Ransom, Raymond James. Sheryl Skolnick, Fulcrum Global Partners.

Sheryl, we're way over an hour.

Okay. We appreciate it because there's still lots of questions, but I'll try to keep it brief. I'd like you to talk about the other operating expense just a little bit. You had this $37 million of additional expense associated with the reserve for the malpractice. So if you backed that out then you're still running somewhere around the $573 million level of other operating expense. At what point, or does it ever actually go down? Are you just looking for your cost containment strategy to mitigate the increase? And I have a follow-up.

This line grows along with everything else. Except it is not nearly as volume sensitive as the other three major lines of expense. So it tends to be sticky when volume goes up or volume goes down other than the normal inflation rate. I do think that you are likely to see this number continue to grow but with the various cost-cutting efforts hopefully we can mitigate that rate of growth. If you look back over the last several quarters and you pull out malpractice expense and I will be happy to go through it later with you if you need some of the numbers.

You're running around roughly at $500 million a quarter.

Yes, it looks a whole lot more favorable when you pull out malpractice than when you leave it in.

Yes, but you can't do that, you have to pay malpractice insurance. So how realistic is that?

I mean that only from the perspective OF if you are trying to understand what is going on with that line item it is malpractice that creates far greater volatility than the sum of everything else in the line item.

Okay. Once you implement this compact with the uninsured that you have and you start reducing the reported revenue assuming volumes don't change and pricing doesn't change that much, one of the things we have to be careful about is as you have mentioned your other operating expenses are fixed. Salaries and benefit expenses don't go down. Supply expenses aren't going to go down just because you are reporting revenue differently. That does suggest though therefore that these fixed expenses relative to what you're doing with the way you record revenue that your margins actually aren't going to be up just from I think there is a sense here or I am concerned that there is a sense here that estimates may get out of hand a little bit if you just set the percentage and you don't look at the absolute dollars.

I think that is a very important safety tip (ph). The compact is expected to have very little, if any, impact on our net operating performance. It is really just going to be a shift between the net revenue line and the bad debt line.

But --.

So you are right, if people are running their models just based on x revenue and x margin their models are going to be wrong.

That is kind of what I thought. Thanks a lot.

Unfortunately, as we are out of time for today's session, I will introduce the final question which comes from the line of Charles Lynch, CIBC World Markets.

Hey, I made it. Just one real quick also margin related question. On the 3 hospitals that you still have planned for sale, MCP, Doctors and the other, do you have a revenue contribution in the quarter from those hospitals since they were consolidated?

Do you have a second question and I'll look that up while you're asking it?

Sorry, that was it.

Well, if you hold on for one second I can give you an approximate. Can I just call you later and give it to you? It's not a big number.

That's fine. Thanks.

Well, before we wrap up I'd just like to make a couple of final comments. Our intent on these calls has been to provide you with a window into the initiatives that we have underway at Tenet and to provide some insight into our financial results. I just want to conclude by saying that I'm pleased with the progress that the management team is making in enhancing efficiency, building productive relationships with payers, and creating a clear, competitive differentiation in our hospitals. I believe we have the right set of people on the task in front of us and we're fully engaged in wrestling these issues to the ground. Within our core hospitals we've instituted an unrelenting focus on clinical quality and the quality of the patient experience. And there are victories large and small which are occurring every day and that's the energy that will drive the Company forward. As this management team extricates itself from the problems that we inherited, I'm confident that we're on the right path and the future will be rewarding for our shareholders. Thank you and this will conclude the call.

Ladies and gentlemen, thank you for your participation in Tenet Healthcare's second-quarter earnings conference call. This concludes the presentation and you may now disconnect. Have a good day.