Tenet Healthcare Corp (THC) 2004 Q3 法說會逐字稿

Good morning. Welcome to Tenet Healthcare's third quarter earnings conference call for the period ending September 30th, 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 make 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 forward looking statements to be materially incorrect. Certain of those risks and uncertainties are discuss 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 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 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 following websites: tenethealth.com, businesswire.com, and companyboardroom.com. At this time I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter?

Thank you, operator, and good morning everyone. I'd like to begin by giving you my perspective on our progress and our performance. I'll then ask our COO, Reynold Jennings, to comment on operations. Reynold will be followed by Stephen Farber, our CFO, and we'll then answer your questions.

Two years ago, the Medicare outlier issue and the allegation of unnecessary cardiac procedures at Redding Medical Center surfaced within 48 hours of each other. Instantly the Company's reputation was damaged. Suddenly the Company was perceived as having hospitals with high prices but uncertain quality, and it was devastating. Two years ago was also the beginning of building a new company. Since then we've worked methodically, intensely, and consistently for two years to rebuild this company from the inside out. We've taken a planned and deliberate sequence of actions. First, we worked to resolve the most urgent and significant grievances against the Company. Where it was possible we resolved them quickly. We corrected the outlier problem with our largest customer, Medicare, and then moved on to our managed care customers. With our union, we achieved labor peace in an arrangement that we can live with. And with our uninsured patients, we outlined a plan for dealing with them in a manner that is fair to both those patients and our hospitals.

Second, we made dramatic changes in our Board and our governance. Today we meet or exceed New York Stock Exchange governance standards, and we have an excellent governance profile. Third, we changed the entire senior management of the Company. Next week is the second anniversary of when I rejoined Tenet, and since then about three-quarters of the top 100 corporate officers are gone. I have recruited new talent to the Company and have promoted the best managers from within. Fourth, I've established quality as our strategy. Towards that end we launched Tenet's commitment to quality with a ground breaking series of initiatives. Just in the past month, 3 of our facilities in Florida have been rated by health grades among the top 5 percent of all American hospital for clinical excellence. One of them is Palm Beach Gardens Medical Center, which only 2 years ago was under attack by the local press, regulators, and plaintiffs over its quality.

In addition, all of our core hospitals have been recognized by the American Heart Association for participating in their program to ensure consistent treatment of heart disease and stroke. We operate fewer than 1.5 percent of the hospitals in the United States, but Tenet hospitals represents 17 percent of the total U.S. hospitals receiving this recognition. And Dr. Jennifer Daley, the head of our clinical excellence initiative, was asked to sit on Medicare's advisory panel on the quality of patient care, and she was also asked to join the board of the National Patient Safety Foundation. Fifth, we laid out a plan to reshape the Company around stronger hospitals. We made the tough decision to divest one-third of our hospital, including more than half of our facilities in California. I knew this would be hard to implement, but we did what we said we would do. We're meeting the time line that we laid out, and we're generating the proceeds that we thought we could generate. We've been able so far to divest these hospitals to buyers who intend to operate them. The management of the divestiture group and the team working on selling these hospitals deserves a lot of credit for how well this project has gone.

Sixth, consistent with our strategy to focus on 69 core hospitals and drive operating efficiencies, I decided to consolidate all of the Company's corporate functions here in Dallas and to close the Santa Barbara office by June 2005. The headquarters relocation is on track, and the benefits of this consolidation will exceed my personal expectations in improving our effectiveness and in reducing costs. It's the right thing to do for Tenet. And finally, during 2004 we have turned to organizational and operational effectiveness. Early in the year, I decided on the portfolio of hospitals we would have going forward and the management team that would run them. Now we are intensely focused on the effectiveness and execution of our strategies.

I'm pleased with how much we've accomplished over the past 2 years. When I said we would do something, we've been consistent, and we've taken action; but we are acutely aware that while we've taken the strong actions we said we would take, when it comes to financial performance we have not met your expectations, nor have we met our own. We've hit some strong head winds these past 2 years, and only seldom have we caught a lucky break. To a great degree, these challenges were self-inflicted by the Company's past behavior, but there have also been industry-wide head winds such as the dramatic rise in bad debt expense. These pressures have made our job that much tougher.

As I've said before, the key economic drivers of our business are volume, price, and cost. All year we've had weak performance on volume. Some of this, and it's hard to know how much, is due to the lingering effects from the events of 2 years ago. When you start, as we did 2 years ago with a perception of being high-priced with questionable quality, it certainly does not help volumes. When the government launches multiple investigations of our relationships with physicians, it does not help volumes. When we cut capital expenditures from a run rate of $1.2 billion in 2002 to roughly $600 million in 2004, it did not help volumes. I do want to stress, however, that 600 million is adequate to remain competitive. It's what we spent in 1999 when we had around 100 hospitals.

But many of the things that we've done to build a better company have also had negative short-term effects on volumes. Some of our actions have deliberately reduced some admissions. For example, we've undertaken more rigorous physician credentialing. We've strengthened our peer review processes. We've implementing more rigorous appropriateness screening for admissions. We've established higher standards for clinical programs, and we've made our standards for recruiting physicians through relocation agreements more stringent. Now, why do these moves make sense? Because they are part of our emphasis on quality and compliance. They may depress admissions temporarily, but over the long run they should also reduce malpractice costs, compliance risks, bad debt expense, and denial of payments from our customers. We believe that the best doctors prefer to practice in an environment that places an emphasis on quality and compliance.

Now I'll make a few comments on price. Two years ago, this company had very little visibility into its managed care contracts. They were negotiated principally at a regional level, and the tools that we had available to gain insights into these contracts were insufficient. It turned out that Tenet's stop-loss payments were high relative to the industry. The structure of Tenet's managed care contracts was badly out of whack. In December 2002, I told you that one of our top priorities would be to renegotiate our managed care contracts and to provide a payment structure that was less tied to gross charges and less dependent on stop-loss payments. We have achieved great success in adjusting those contracts, but it has been difficult. We've achieved pricing gains even though we still have disputes with a few managed care partners, and we're also in the late stages of a favorable managed care pricing cycle.

We've removed a tremendous amount of overhead at Tenet, but I've purposely expanded in some areas by creating 3 centralized functions that did not exist or were much smaller before. They are compliance, clinical quality, and managed care contracting. We recruited a senior executive from the managed care industry to head the managed care contracting function, and today we are negotiating with better tools and better information than we ever had before. Although it hasn't been reflected as fully as I would like in the numbers, I'm confident that we're making good progress with every new contract.

Turning to costs, we have better results to show because this is the area over which we have the most control. We focused on costs because it has a near-term impact, and it's a necessary discipline in this business. We've been aggressive on all fronts on cost, and we're just as energetic about finding new cost reduction opportunities for 2005 as we were in finding opportunities for 2004. We've also focused on cash flow and liquidity. We created real financial flexibility. We had $1.3 billion in cash at the end of the quarter, and 90 percent of our debt maturities take place after 2011. Throughout the year we've managed to make our cash flow much more stable than we expected, and we are continuing to run essentially cash flow break even. Stephen will cover these metrics, but I know that you realize how important it is that we maintain strong cash flow and liquidity.

Now, with that overview, I'd like to turn to the third quarter. We've repeatedly cautioned investors to expect continued volatility in our performance in the near term. In the June quarter, we were beginning to see favorable trends in pricing and costs. But we didn't see those trends as strongly as we would have liked in the September quarter. Our biggest challenges in the quarter were weak volumes and a spike in bad debt expense. The third quarter is historically the weakest for all hospitals. The volume of elective procedures usually declines during the vacation period between the 4th of July and Labor Day. And since elective patients generally pay their bills, their absence magnifies the impact of uninsured patients.

Our bad debt expense, whether you adjust it for our compact with uninsured patients or not, is very high. The compact is doing exactly what we said it would. It's offering help to our uninsured patients and reducing the relative amount of bad debt that we write off. But being forced to write off 10.4 percent of revenue as bad debt, as we did if you include the compact discounts, or 13.8 percent if you don't, is still an enormous burden. This quarter's increase over Q2 was substantially impacted by a handful of large managed care accounts aging over 180 days, but the underlying problem is still driven by individual patients who either lack insurance or lack the means or the willingness to pay their portion of a bill. We are continuing to take aggressive actions to control bad debt by tightening intake procedures and capturing better information in the registration process. But our efforts are swamped by the growing numbers of uninsured people, as well as working insured people with deductibles or copayments that they can't afford. We have a mandate to screen these patients and treat them if necessary, but we are increasingly left to bear the costs on our own.

The 2004 hurricane season was one for the record books. Our hospitals in the Southeast were hit hard by waves of storms beginning in late August and continuing for more than a month. Some of our hospitals were hit by storms more than once in the quarter, and 2 of our hospitals were forced to close briefly. I'm very proud of how our employees continued to provide care in their communities when it was needed the most, but the financial impact was severe. Admissions in the hurricane affected hospitals were down. We don't know how many elective procedures were postponed, but the number is bound to be large. Some may be put off for a very long time as people get the rest of their lives back together. And September is the month that we typically count on to be the strongest in the third quarter. This year it was a tough month.

I don't want to leave the impression that hurricanes were the only reason for weak volumes in the quarter. There were other factors, many of which I already mentioned. Some of the decline in volumes resulted from our deliberate strategies to enhance operational effectiveness. Reynold will give you some more detail about these strategies, but I'll just emphasize that we're focusing a lot of attention on patient intake procedures to reduce payment denials by Medicare or managed care. These programs may reduce our inpatient admissions, but they also should reduce denials so that we can be paid appropriately for the care that we provide. We are also carefully analyzing service lines. And in fact, our hospital with this quarter's single largest decline in admissions is one in which we eliminated an unprofitable service line.

Consolidation among managed care payers is also affecting us. Employers are accelerating their shift to the payers who offer hospitals the lowest rates. That hurts Tenet because in the past, some of our hospitals benefited from contracts with some smaller managed care companies that paid higher prices than the large payers. I mentioned earlier that our relationships with physicians in a number of states are under investigation by the Federal Government. Unfortunately, the subpoenas and the publicity that they generate hurt our volumes in those markets. I believe this is temporary. It's hard to build business when you're under a cloud, but we will solve this problem in due course and when we have resolved these issues our business should benefit.

You may have read that our Alvarado Hospital in San Diego is currently on trial. From the day that I arrived at Tenet I've said that when a reasonable settlement of any issue is possible, we will prefer to settle. If a reasonable settlement is not possible, we will defend ourselves. In San Diego, a reasonable settlement was not available. We carefully reviewed the fact of that situation, and we are confident that the evidence will show that the Government's allegations are unfounded. As a practical matter, while the Government is trying to convict our hospital and its CEO in that case, it makes settlement discussions with them on other matters difficult. But I don't believe the fact that we were forced to go to trial in San Diego prevents us from ultimately resolving the remaining open matters. We will continue our discussions with the Government on other issues that they are investigating in other areas of the country. We are committed to keeping the dialogue open and transparent.

Let me conclude by reiterating something I've been saying for quite some time. Quality is the only sustainable strategy for Tenet. Quality is the key to enhancing the value that we deliver to our patients, our physicians, our communities, and our shareholders. Today, we have a new infrastructure to deliver on our commitment, and we're spending about $50 million this year on this effort. In the future it will be the key to our growth. It's more than clinical excellence, although that is essential. Our quality initiative also increases the efficiency of our hospitals, which expands our capacity and reduces our costs. We are investing in quality because it's the right thing to do, and over time we expect quality and the other initiatives we are undertaking to improve organizational effectiveness to translate into demonstrably better financial performance as well. To give you a more detailed review of all these efforts, let me turn the microphone over to Reynold Jennings. Reynold?

Thank you, Trevor, and good morning, everyone. I want to give you my perspective on the progress we're making to improve operational effectiveness at Tenet. With our management and balance sheet restructuring now essentially complete, operational effectiveness is where the rubber meets the road for Tenet's turnaround. We want to see, and we know you also want to see, significant improvement. Because things after October 2002 were much worse than originally thought, it took us more time to assess the true magnitude of our issues and design the right actions to take, but that's behind us now. My only focus since I took this job early this year has been to return a number of our hospitals to reasonable profitability as quickly as possible. We're going to do this the old fashioned way, one step at a time. Sometimes our internal accomplishments take us two steps forward, while external events take us one step back, but I am excited by what I see and I'm inspired by the heroic efforts being made by our hospitals.

Let's start first with volumes, which I believe were the most concerning aspect of the quarter. Trevor told you that we faced some real challenges to grow our admissions and outpatient visits. But there are good reasons why we can view some of the volume declines as positive indicators for the future. On the same-hospital basis we were down about 5,000 inpatient admissions from last year's third quarter. First, as we have previously discussed, it is our strategy to close underperforming units in some hospitals. These are smart business decisions, but they reduce our admissions, at least in the short term. For instance, at Lakewood Regional Medical Center in southern California, we closed an unprofitable obstetrics unit earlier in the year. This meant 400 fewer admissions this quarter, or about 8 percent of the Company's aggregate decline.

Secondly, as we've said before, we are also intentionally reducing our subacute capacity and converting the space to higher margin acute business. This accounted for another 8 percent or so of the decline in admissions. Third, as we have also previously indicated, that we will not renew managed care contracts at unfavorable rates. That prudent, but volume hurting stance, was about 5 percent of the decline. These 3 factors are among the largest identifiable big negatives to volume. Including these 3 specific items, about 14 hospitals were responsible for the majority of the decrease from last year's quarter. Trevor discussed the challenges of increasing the admissions while we face a general perception of high-price and multiple government investigations. I can assure you that our local competitors have used our disadvantages in their favor with physicians who admit patients to more than one facility, the physicians the industry calls splitters. Given the negative headlines Tenet has endured for the past 2 years, it would be much more surprising if we had not suffered a drop in admissions.

Of course, our goal is to grow admissions, so let me give you a sense of how we're attacking that challenge. As I've said before, overall there has been no mass defection of active staff physicians from Tenet hospitals and that is a testament to the dedication and hard work of our hospital leaders. In a few hospitals, we have seen defections in specific services such as orthopedics and cardiology. But most of this has resulted from changes in provider networks made by managed care companies. Our strategy for building volume is to focus on, first, establishing broader based doctor friendly environments at our hospitals, while secondly, enhancing all aspects of clinical quality value through our commitment to quality initiative which we refer to in shorthand at C2Q. For example, we have broadened physician input into the hospital decision making process by focusing our hospital CEOs on all core services. We send surveys to 100 percent of our active physicians every year to assess their satisfaction and identify issues which require our attention. These surveys have proven so useful that beginning next year they will be conduct twice a year. This mechanism has proven highly successful in giving all physicians a voice in hospital governance. For example, physician input led our Texas region to make meaningful changes in patient registration processes. We believe that resolving the logistical log jams and other issues that upset our physicians will do more than almost anything else to make our hospitals more desirable to them.

Physician want the operating rooms running on schedule and so do we. They don't want patients sitting in the emergency department for hours, or worse, having the emergency departments go on diversion status, and neither do we. And they want the patient's length of stay to match what is clinically necessary and so do we. This is not rocket science, it involves focusing on fundamental metrics and aligning our strategies better so that our physicians will choose to access Tenet hospitals more often. And I'm delighted that as we've I implemented C2Q in our hospitals, we have quickly been able to demonstrate positive results. For example, our operating room cancellation rate has been cut in half and our patients leaving the emergency department before being seen has gone down five-fold. We started C2Q in just one hospital in last year's fourth quarter and as of the end of the third quarter the total is up to 32. By the middle of next year phase 1 of C2Q will be implemented in all our hospitals. As this program is implemented and fine-tuned, we believe physicians will see the changes they want to see in our hospitals, and we believe that will lead to meaningful incremental growth in admissions.

Beyond C2Q, we've taken a number of actions to translate our physician friendly growth strategy into a concrete reality. For instance, we have given our hospital CEOs greater authority to approve capital investments in their hospitals. Our hospital CEOs know the best threats and opportunities in their local markets. By allowing our CEOs to move quickly to make capital improvements in order to attract and retain business, we expect a real improvement in how physicians view our hospitals. This program just began last month, after we successfully stabilized the cash position of the Company. We expect it to have a positive impact on volumes in 2005.

In summary it's no surprise that physician confidence in Tenet and in some of our hospitals has eroded over the past 2 years. As a result, we have lost significant market share in some places. Approximately 20 percent of our hospitals had concerning declines. However, over 30 percent of our core hospitals had meaningful admission gains quarter over quarter. The balance were within 1 to 2 admissions per day of last year. I really believe we're starting to overcome this caution among physicians. We have news to tell about changes being made in our hospitals, and we are developing an effective communications plan to tell this news to our physicians. But it is going to take time to win back many of the splitter physicians.

Now let's turn to managed care pricing. There seems to be confusion on this issue, mostly because of the difficulty in distinguishing between rate and yield. Tenet uses rate to refer to base rates, such as per diems and case rates. Our managed care negotiating team has done a great job in obtaining rate increases that are fully comparable to those achieved by our competitors. This steady growth on the rate side of our pricing structure is different from our managed care portfolio yield. The portfolio yield is a blend of 3 things. First, the increases we are achieving in the per diem rate increases. Secondly, less the concessions we've made in contract negotiations on the stop-loss portion of our pricing. And thirdly, the severity mix of patients. Remember that stop-loss payments, like Medicare outlier payments, had risen dramatically with the Company's previous gross charge strategy. We publicly announced a strategy in December 2002 to reduce our dependence on stop-loss payments by seeking better and more competitive per diem rates from the managed care companies. We have been largely successful in doing that.

We broke even in yield during the second quarter, having been down by about 8 percent in last year's December quarter, and down by 5 percent in this year's March quarter. The -- in the September quarter, yield was up a little over 1 percent. This extends our three-quarter trend of pricing improvements. I view this as very good news. It demonstrates that our strategy to reduce stop-loss and the distortions it causes is working just as we said it would. Our current run rate of stop-loss revenue has been about $600 million annually on 4.9 billion of annual managed care net revenue.

About a quarter of our pricing with managed care payers remains linked to gross charges. Since gross charges at Tenet have been virtually frozen since early 2003, we have seen little pricing improvement on this significant piece of our business. As the market has caught up, a few of our hospitals have begun to introduce selected increases in some gross charges. This should provide an additional source of revenue going forward. But as with so much of what we're doing, progress will be gradual.

I also want to expand on something Trevor mentioned earlier, and that is evolutionary shift in managed care among managed care payers. This phenomena is impacting both our volumes and our pricing. The continued growth in the cost of provide insurance to their employees has caused many employers to protect their own profitability by pushing back hard on rising premiums. This push-back has taken a variety of forms. One of the factors that is starting to impact Tenet is a shift in market share as the market consolidates around the larger national players who tend to pay less to doctors and hospitals. This consolidation has been driven both by employer switching and recent mergers in the managed care business. The adverse impact is further compounded by the reintroduction of medical management tools by payers aiming to reduce admissions and length of stays. This means that even if we negotiate favorable pricing terms on every managed care contract, we could still lose ground on yield if the better paying companies continue to lose market share. Fortunately, as Trevor noted, we have much more sophisticated real-time measurements available to us today in order to monitor these developments. As of the end of September we have a much improved central database of our managed care activities and we are able to respond to these types of developments faster than before. The third quarter impact of the payer shift discussed above was small to Tenet. The biggest factors in our admission decline for managed care was the result of difficult renewal negotiation on 2 contracts in Florida and 1 in California, and contracts we elected not to renew in previous periods due to unfavorable pricing.

Moving on now to some high-level company aggregate metrics in our press release, net inpatient unit pricing in the quarter was relatively flat, but this measure is skewed by our compact with uninsured patients. Making the appropriate adjustments for the compact as described in detail in the release, inpatient unit pricing was up 3.8 percent over prior year. This increase is partially driven by the increase in self-pay patients. Unit pricing on the outpatient side was even stronger, up 3.2 percent over prior year, or 10.4 percent after adjusting for the compact skew. This metric also benefited from the sale of our home health agencies, which typically generated lower revenues per visit.

Cost containment remains an important strategy for earnings growth going forward. In its simplest terms, we must achieve market expansion by restraining cost growth to a level hundreds of basis points below the mid-single digit growth in our pricing. We're making good progress. We continue to perform well in terms of controllable cost, which totaled 2.06 billion in the third quarter, a decline of 2.6 compared with the sequential quarter. Salaries, wages, and benefits were down 1.7 percent from the second quarter, contract labor was up just over 1 percent on a sequential basis with only four markets experiencing the increase. Supplies expense were down 1 percent relative to the sequential quarter. Other operating expense was down 5.8 percent from the sequential quarter. That last category includes 55 million of malpractice expense, down significantly from the 100 million in the sequential quarter. A figure we said in last quarter's conference call was well off the historical trend.

Now let's end up with a quick review of a few of our cost control initiatives that will give you a sense of the specific sources of our cost discipline. Three of these initiatives will reduce our annual expense run rate by $40 million by the end of next month. First, is our supplies reprocessing initiative which was completed in August. Second, is our transcription services initiative, which will convert 38 hospitals to one of nine preferred vendors, while getting better terms with our largest vendor. And third, is our pharmacy medication use management initiative which we launched in Texas in June and will be fully implemented by year end. The savings produced by just these 3 programs demonstrates the power of attention to detail and the value of sharing ideals quickly within a leaner, flatter organization. Other initiatives focus on smaller contributions to margin expansion, but can also add up to real savings. For instance, in the below 10 million in annual savings category, we are pursuing initiatives such as therapy bed initiative where better negotiated pricing and updated protocols for use are expected to produce savings of more than 3 million a year. We're also conducting a site by site review of IV sets and supplies. By managing IV sets to more closely track the requirements of the product mix of each hospital, we expect to save $8 million annually. We are now using a state-of-the-art tool to track all device purchases with our top 15 vendors. This program is aimed at reducing off-contract purchasing with anticipated savings of as much as $12 million.

As you can hear, we're focused on multiple levers to expand margins. We are achieving solid progress on these items that we can control, and our goal is to leave no opportunity or challenge unattended. Unfortunately, on the cost side, a few industry-wide items are masking our cost control gains. In the supplies category, prostheses, implants, cardiac stents, pacemakers, blood products, and certain pharmaceuticals were up 13 percent, mostly on consumption and new products, not price. In other controlled expense, we continue to absorb inflation trends for securing emergency department call coverage and certain hospital-based services. We are devising actions to counter these forces, but solutions here will take longer. If we look beyond the obvious disappointments in the third quarter, we can see real improvements in operational effectiveness. That concludes my remarks, and I'll now turn the call over to Stephen Farber, our Chief Financial Officer. Stephen?

Thanks, Reynold, and good morning, everyone. It's been my practice in previous quarters to start with a laundry list, typically a pretty lengthy list, of special items in the quarter. This quarter there are only 4 items that I'm going to highlight that had a negative 3 cent impact on our net loss from continuing operations of 11 cents per share. The first special item it was the hurricanes. From a financial point of view, all of the hurricanes and severe weather in the Southeast collectively had an operating impact of roughly 12 million pretax, or a little less than 2 cents per share. This is consistent with the press release issued in September. A little more than half of this was lost business, impacting the net revenue line. The remainder was incremental costs, including extra salaries and expenses for storm preparation and repairs. We expect the revenue hits to continue in Q4 and Q1 as we anticipate lower than usual volumes this winter season as fewer people travel to Florida. In addition, we estimate it will cost about $25 million to repair property damage from the hurricanes. Some of which should be covered by insurance. Some of this 25 million will be recognized in future quarters as repairs and maintenance expense, with the remainder being booked as CapEx.

The next item is special litigation and investigation costs, which were about 10 million pretax, or a little more than a penny per share this quarter. We've had these every quarter for awhile, and this quarter's level is consistent with the 3 to 4 million per month that we've seen. Going forward, we expect our legal costs to be meaningfully higher during the Alvarado trial, so don't be surprised if this adds a penny or so to the cost in Q4.

The last penny of special loss this quarter resulted from 2 items. First, start-up losses from the two hospitals we opened late in the second quarter. These costs totaled about 6 million pretax and were expected. Typically, it takes a year or so for a newly opened hospital to reach break even. In addition, we lost about 3 million pretax from Suburban Medical Center in south -- in southern California, which we returned to its landlord yesterday when the lease expired. There was one positive item that partially offset these negative items. We had 1-cent gain on the sale of various assets. Putting all these items together the net reduction of earnings per share from continuing operations was approximately 3 cents.

Let's turn now to bad debt expense. Bad debt has been perhaps the greatest industry challenge we've faced, and this quarter was no exception. After adjusting for the discounts under the compact, bad debt expense was 13.8 percent of adjusted net operating revenue, up from 12.4 percent on the same basis in Q2. This is the highest level we have ever experienced as a company. As Trevor mentioned, some of the increase is due to the relentless growth in uninsured patients. However, more than half the growth resulted from writing down a handful of specific managed care accounts, particularly accounts associated with payers with whom we are in dispute. Let me explain. During the quarter, we had a significant number of managed care account balances that aged to over 180 days. At Tenet, when managed care accounts crossed the 180-day mark, our policies require a significant increase in reserves. In particular, there were 4 payers in California and 5 payers in Florida which accounted for over $20 million of the total $37 million increase in bad debt. One payer in particular with whom we have significant disputes accounted for approximately $7 million of this amount, or about 20 percent of the total bad debt increase. We are continuing a full court press to resolve the disputes with these payers, and hope to report meaningful progress in the coming quarters.

Let me shift back for a moment to the growth in bad debt coming from the uninsured. We've spoken at length on prior quarterly calls about the aggressive efforts we are applying against this problem. We've reengineered many aspects of our intake and collections processes to tighten procedures and improve performance. Unfortunately, the impact of these efforts are overshadowed by the sheer volume of uninsured patients visiting our emergency rooms. We are making clear progress from a structural perspective that will improve our ability to manage this issue going forward. As we announced in the summer of 2003, we have been actively working to consolidate our business office operations as well as rollout standardized collection systems, business processes, and technology platforms. At the end of the third quarter, 47 of the 50 hospitals that will be part of the regional business offices have completed their transitions. Typically, these sorts of transitions have a temporary negative impact on collections. We are particularly pleased that we were able to avoid cash flow disruptions throughout this challenging implementation process that literally affected thousands of employees.

Once the business office consolidation is complete, it should begin to improve our billing and collection results. In particular, making it easier to monitor compliance with company policies and making it much simpler to implement process changes faster and with less disruption than we could accomplish previously. Bad debt is going to continue to be an extreme challenge for the foreseeable future. But we are doing everything we can to proactively address the issues, and it is only a matter of time before these efforts translate into improved results.

Let's now turn to cash flow. As Trevor mentioned, we are essentially cash flow break even for the quarter, which is quite an achievement given all the other issues impacting the Company. Just to be clear, we were cash flow break even even before taking into account proceeds from asset sales. At the end of the quarter, we had roughly $1.3 billion of cash on the balance sheet, which is up 130 million from the end of Q2. During the quarter, we received about $106 million from asset sales, so even before asset sale proceeds, cash was up roughly $24 million. Operating cash flow was 123 million for the quarter, which is defined by GAAP as before capital expenditures. We had 115 million of CapEx in the quarter, a good bit below our run rate, and as a result net free cash flow was positive 7 million, or basically break even. Accounts receivable days from continuing operations were essentially flat for the quarter, increasing one tenth of a day to 56.2 days. We were very pleased that even with all the pressure on bad debt expense, we were able to keep accounts receivable days in check.

We had cash outflows relating to restructuring reserves, litigation, and investigation costs of approximately 18 million in the quarter which had a negative effect on cash flow. We had less than a million dollars of cash tax payments, and frankly, don't expect to be a material taxpayer for sometime. Cash interest payments in the quarter were about 46 million. The most remarkable thing about our cash flow performance is that it has been so stable. We began the year expecting to have negative cash flow of 5 to 600 million, and so far this forecast has proven to be vastly overconservative. In particular, we had anticipated serious deterioration in accounts receivable, both in continuing operations and from hospitals held for sale. Our business office professionals simply have not allowed that to happen. And in fact, quite the contrary. We've made progress overall with our accounts. We also expected that the operating challenges faced by the Company combined with continued earnings pressure, would inevitably translate into weaker cash flows. Our intense focus on cash has kept these challenges relegated to the P & L, and we've maintained cash flow at levels we didn't think were possible to achieve.

Let's now turn to liquidity. Trevor already covered the basics, but I want to give a prospective view. At the end of the quarter, we had over 1.3 billion in cash. Over the next several months, we will receive significant proceeds from our asset sales, and next summer we'll get a sizable tax refund from these sales as well. On top of that, as hospitals were sold, we will collect their accounts receivable. So net-net, our cash position is already very strong and is expected to get even stronger. If we can just maintain our operating cash flow performance, this significant liquidity position will give Tenet considerable financial flexibility to support its operational turn around.

With that, I want to add a few comments on the divestiture program that Trevor referenced earlier. We couldn't be more pleased with our progress on divestitures during the third quarter. With great regularity, transactions have been announced, agreements have been reached, and deals are beginning to close. Just yesterday we closed the sale of 4 hospitals in east Los Angeles, and last week we announced the sale of 2 hospitals in St. Louis. Of the 27 hospitals in our original announcement, 20 are either under contract or already sold. We expect to sign up more transactions before the end of the year, and by the end of the year capture the majority of the anticipated cash proceeds from these sales. There are a handful of individual hospital transactions that may not get completed by year end. And there may also be a few transaction closings that require additional time to get regulatory approval. But the vast majority will be complete by year end, including the facilities with the highest concentrations of financial value. As for proceeds, we originally estimated 600 million of aggregate value, about half in cash and half in tax deductions. We are on track for the 600 million, and will probably have about two-thirds in cash and one-third in tax benefits. We were very pleased with these financial results. Even more important than the financial terms, what we are most pleased about was our progress in selling these hospitals is that we have succeeded in finding good buyers who are committed to the ongoing delivery of care to these communities.

With that I'll turn to my final topic. I want to do a quick recap of the key financial themes, where we are, and where we're going from here. As Trevor said, there are 3 main levers in this business: Volume, price, and cost. It's clear that this is a tough environment for volumes and more tough for us than our competitors because of the litigation overhang, the range of legacy issues, and the competitive disadvantage that results. But it isn't quite as bad as it looks, since at Reynold described, a good portion of the volume short fall results from proactive steps we're taking to improve the profit potential of our facilities and improve the quality of care that we provide. It is likely that volume challenges will persist, and in fact, October was another very tough month, but over time as issues get resolved, the Tenet-specific challenges should abate, and at some point we should return to industry levels of volume performance. As for price, we are making progress. Managed care is getting better with each passing quarter as we heal more relationships and improve the quality of our contracting and administrative efforts. We still have a ways to go, but before the end of 2005, we should return to more normalized levels of managed care performance.

That said, there is a very disturbing new trend that is impacting both us and our competitors. As Reynold described, the managed care plans that pay us higher rates are losing market share to plans with lower cost, also known as the plans that don't pay hospitals very well. Unfortunately, there isn't much that we can do to combat this, and it is likely that much of the progress we make on managed care pricing will be offset by this shift in mix from higher paying to lower paying health plans. As for controllable costs, we have been extremely aggressive in cost management and have kept our increases in unit costs well below normal rates of cost inflation. We've made significant reductions in overhead and hospital costs, and have further progress to make in a variety of areas. The most challenging cost is bad debt, and I already spent quite a while discussing the trends, so I'll simply summarize my view. Bad debt is incredibly hard to control. We're doing everything we can and believe we can make progress. The open question is whether our efforts will be enough to counterbalance the unbridled growth in the uninsured.

That leaves us with cash flow and the balance sheet. We've done very well in both these areas. We have made progress on accounts receivable, we've kept our CapEx in check, and we've engineered a very liquid balance sheet with an average debt maturity of 9.5 years. We have no cash borrowings on our credit line, and are in compliance with our covenants. Our balance sheet and cash flow have the strength to support the Company as we work on turning around hospital operations. This quarter was a very tough quarter. Volumes and bad debt are terribly difficult challenges to address, but even with these challenges we have made a lot of progress in preparing this company for the future, healing this company from the past, and building a foundation for future performance. It won't happen overnight, and it will be won step by step with bumps in the road along the way. So the 70 thousand employees at Tenet are committed to the effort. With that I'll ask the operator to open it up for questions. Operator?

[Operator Instructions]. Oksanna Butler, Smith Barney.

Hello. My first question is about your cash flows. Given that as you point out you are now seeing cash flows improving ahead of your expectations, are you revising your guidance for the year, or are there some changes that are likely to occur in the fourth quarter that we should expect?

Sure, it's Stephen, Oksanna. We are not changing our guidance at this point, but we are also not reaffirming it. So we are not updating it, we are not changing it, and we are not reaffirming it. It frankly is -- it's pretty late in the year to be modifying guidance and we probably will not be giving any form of guidance until we get into next year.

Okay. And in terms of your capital expenditures for the fourth quarter, what should we expect in terms of the run rate versus the -- this last quarter?

The third quarter was unusually low. We've been making every effort to conserve cash outflows, but we have not changed our overall expectations for the full year. We are running a bit ahead of -- or I guess behind those expectations, or we have been spending less than you would think for a run rate, so I would assume Q4 will be higher. The part where it gets tricky to forecast specifically, Oksanna, even though we may authorize capital expenditures, the money may not actually be spent in the fourth quarter. Items may be ordered, but may not get booked until next year. So I would expect higher than what -- than what you saw in the recent quarter, but the full 600 may not actually get out the door this year.

With respect to pricing, can you just explain in terms of the shift that you are highlighting now towards the national plans, how much of an acceleration is there, or is this something -- really a continuation of what you've seen over a longer period of time, and would do you expect over the -- in '05?

This is something that is not entirely new, although we certainly saw it more in the third quarter than we had before, but it's consistent with what you're seeing nationally in a lot of the press reports about the experience that large employers are having in their initiatives to cut their own cost. So as employers are seeking to reign in healthcare costs, one of the first places they'll go is their managed care plans that they select and they are, in some of our markets, being more rigorous about employing medical management models or tougher HMO-type product. Those tend to have lower reimbursement than the PPO products or the loosely managed types of products that people were more comfortable with in the past. This is something that is not unique to Tenet but it's, you know, it's a trend we're going to watch very carefully. It's also something we're taking advantage of ourselves, as we procure our own employee health benefits for 2005 as part of our overall cost reduction efforts.

So, is it something that you're seeing in particular markets?

Yes. Operator?

Lori Price, J.P. Morgan.

Thank you. I think it was in Reynold's comments you spoke about the fact that you're starting to very selectively implement growth charge increases now, and you talked about it after speaking of the stop-loss payments that you've been getting from your managed care arrangements. I'm wondering, in the context of those stop-loss provisions, do they allow for you to get the benefit of charge increases manifested in higher stop-loss payments, or do they now contain charge neutrality language so that if your charges go up your payments don't go up, in general?

Well, as we've indicated on the last several quarters we're now 2 years into the renegotiation of any tention that any large particularly insurance carrier has with us, and so the best way to describe that -- I'm going to be Bob Yungk, who heads up our managed care department give a little bit more details here, but I'll make a general opening statement. From Bob's standpoint which is, in a large number of cases we did give rate neutralization to insurance companies. Many insurance companies are happy with certain increases of a certain percentage each year that they know that you need do for inflationary costs so where we're able to negotiate that, we do that. And I'll turn it over to Bob for more specifics on how it's all rolled up.

Okay.

Good morning. Consistent with that statement, with our managed care contracts we have about 56 percent of our contracts have neutralization provisions that either protect them from gross charge increases or have provisions that have allowances built into those contracts.

Okay. And just a real quick follow-up, if I could. When Steve was speaking about the status of the 27 hospitals for sale, you talked about how so far all of those hospitals that, you know, have either been sold or agreed to be sold, have buyers that have maintained that they will keep them open as hospitals. With regard to the remaining 7 in California -- and I don't expect you to comment on the status of those discussions, but if it turns out that no buyer emerges that's willing to keep, you know, some of those facilities still open as hospitals, would you be prepared at some point to either close down and/or sell some of those hospitals to someone who would not maintain them as a hospital?

Yeah, I mean, if we get to that point it's obviously a last resort. It has not been our intention or our preference, but we fully intend to ultimately dispose of all of these hospitals, and if we're unable to buyers, we will take appropriate action.

Okay. Thank you.

Sheryl Skolnick, Fulcrum Global.

Thank you very much for making it explicit that there is a difference between the rate and the yield in managed care and also for your clarification of what's happening to the mix of plans from higher cost to low, that's very helpful. I actually have -- well, my question really is getting to the heart of, there's been some new news on these kind of trends both in terms of managed care and marketplace trends with respect to moving to more affordable health insurance benefits and the impact it's having on hospitals, but you also mentioned something else new, and that's the physician retention situation. My sense is -- my sense is that up until this point in time, we have not heard a lot from you about the difficulty in keeping physicians at your facilities. It's sounding like either you're digging down more into the operations and learning more about what's happening there, or this is new news. So that's one question, is what exactly has been the physician, in quotes, turnover rate, or the loss rate, and what really can you do to get them back? Is this happening in specialty areas? Is it as a result, do you think, of physicians taking more of the services in house to offset their income losses in other areas as we've heard from other providers? Then there'll probably be a follow-up to that.

Sheryl, this is Reynold. First of all, I think in answering the question I've been real consistent over the last three-quarters. The questions started coming as, Are you seeing mass defections of doctors? and I've been consistent in clearly saying it, even today, No, we have no evidence of mass defections. Now, what we did make clear, and which we've always been clear on, is that with the overhang that we're facing, particularly in urban areas, there are a large number of doctors who have medical staff memberships at 2 or 3 hospitals. That's historically always been the case, and everyone knows that. So during the time that you're facing any type of political or national issues, your competitors take advantage of trying to convince those doctors that they should, you know, come over and use their services more during that period of time. But as I indicated, that outside of these specific issues, then where we've seen just a little bit of downturn in volumes, it's only 1 or 2 admissions per day, which is not a mass defection of doctors away from us. But in the hospital business, I've been in it 32 years, you're always competing day by day for the doctors' interest and loyalty and technology needs and those types of things, with the competitor down the street.

So what you're telling me, then, Reynold, is that this isn't new news, you're just talking about it in a more detailed way?

Yeah, I think that's correct.

Okay. I'm glad we cleared that up, because, I mean, I guess it is of concern. It's something that I'm actually surprised we didn't hear more about before, because does it seem more reasonable that we should have seen this happening, and we have been hearing about, you mentioned competition in the press release, and so one wanders if that's all tied in. And I guess the follow-up question that I have, if I may, is, your -- what I'm trying to get at here is more of a question of, what do you think the right -- the effective margin is with all of these changes in the business, where does the industry average margin get to, and where does Tenet think it can get to ultimately, if things start going reasonably correctly for the business, because managed care sounds like the margin on managed care has got to be did he declining. The supply costs, generally, because of the change in technology, are rising. There's not a lot the company can do about it; it's the nature of the business that you're in, and then Medicaid in Texas can't be helping, all of these things. So, where is the target margin now?

Sheryl, this is Reynold. I want to finish the one part of question you asked which is we've been real consistent in acknowledging on the outpatient side of the business that the surgery centers that have been opening up have been pulling a lot of outpatient surgery business to us, and so again, I think we've covered all those points very well before, and I wanted to make sure we're clear on that. To your latter question, I'm going to turn it over to Stephen Farber.

Hey, Sheryl, it's Stephen. You know, you make a lot of very good points in your question. There are a lot of moving pieces, and I think those moving pieces make it very difficult for any industry participant or industry observer at this point to opine on what future margins may, in fact, be for the industry or for Tenet, so I think -- I think given that, we really can't give you a specific answer at this time.

This is your last conference call, Stephen?

[ LAUGHTER ] Is that a form of asking about how the CFO search is going?

Oh, thank you, Trevor. Yes.

We retained a search firm, Peter Chris [ph] and Associates, and the search is going well. And I don't know whether it will be Stephen Farber's last conference call, maybe for us, but we'll save the farewells for later.

A.J. Rice, Merrill Lynch.

Thanks. Hello, everybody. Maybe just 2 parts here. First on the charity care policy introduction, you said revenues were impact to the tune of 108 million, and bad debts to the tune of 99 million. I'd be curious to see, has the roll out of that charity care policy basically gone as expected, or have there been any sort of secondary impacts that weren't anticipated? And then just a follow-up on a couple of other questions that have been asked, if you think about a year, 2 years out into the future, while I know you don't want to give guidance and I know the right thing has been to focus on quality and streamlining operations and government, can you give us -- it seems like we have to have some benchmarks whereby we can judge the performance of the Company and the management in the future, and is there any -- I mean, any way to describe the right objectives would be for you looking a year or 2 years out, in terms of the types of financial progress that you guys would hope to make from where you sit right now?

Hi, A.J., it's Stephen. Let me take those in order. The implementation of the compact has pretty much gone as we've expected, and we really haven't seen any secondary impact. That being said we're still probably only about half-way through the roll-out. California is going live in the end of the year, so, you know that will account for meaningful addition. We also had some markets that went live in September, so there wasn't a full impact for those in the program. So we are -- we will -- it's a little bit early to really see whether there are any secondary impacts. We probably would start to see those as we get into Q1 and Q2 of '05, but so far it's been pretty straightforward. As for your question on when in the future will we be able to set some parameters or give a little better sense of what are reasonable benchmarks for us, I really think it is very tough until we get through the legacy issues and the litigation overhang for there to be a more clear ability to forecast the Company's performance. So I think it's up to anybody's guess at when it is that we get through the litigation and the legacy issues, but clearly, you know, those continue to march along. And I would suggest that we revisit that topic at that time.

If I could just ask maybe, not belabor this, but in terms of just sitting down with the field level people and developing budgets and so forth, you know, if it's impossible to forecast, how do you hold people accountable, I guess would be a question I would have.

We do, A.J., what we're trying -- Stephen was trying to be polite and essentially say we're just not going to be in the guidance business. And within the of course, that's a very different story. We engage in an extensive annual budgeting process, we have made substantial changes to that process, we've been making changes to the measurement, accountability and reward systems within the Company, but if there's anything I've learned in the last 2 years, it's that it is exceedingly hard to make public predictions about the Company's performance, exactly when he will achieve different benchmarks. That's why we're taking the approach here on this call and on other calls of telling you what we're doing, being very transparent about it, and releasing a more detailed 10-Q and earnings release, a lot more statistics in it than is customary in this industry, so that you can hear what we're doing, what actions we're taking. We've delivered on the actions we said we would take, and then you're able to draw your own conclusions from the results, but I think there are going to be several more quarters where you're going to have to look at it quarter by quarter.

Okay. Thanks.

Thanks, A.J.

Adam Feinstein, Lehman Brothers.

Thank you. Good morning, everyone. I have a couple of questions, and I guess just first, just one item I've had a hard time reconciling, and just wanted to see if maybe you could provide a little bit of color is just by looking at revenue per admission growth end of the quarter, and then compare it to the decline in revenue per patient day, just wanted to see what was driving the difference there. And then just my second question, Reynold was talking before about managed care pricing being up 1 percent in the quarter. Just wanted to see whether that would imply revenue per admission for managed care was up 1 percent, or was that not the right way to look at? Thank you .

Hold on one second, Adam, we're grabbing those numbers.

Adam, this is Reynold, let me address the last question first, which is in the third quarter, we had a lower amount of volume under negotiation, which historically, the managed care companies like to resolve as many go-forward negotiations as they can in the second quarter so that they know what they're out bidding on with companies during the third quarter for contracts that start in January. So we fully expected to see a lower volume of negotiation and a smaller movement in those rate pieces within that particular column in the third quarter versus the second quarter. So then I'll turn it over to Stephen for the first question.

You know, Adam, I'm not exactly following your first question. --

Sure.

-- In looking at our numbers. Can we follow up afterwards on that?

Sure. Or maybe I can just phrase it differently. I guess if we look at the same-store revenue per admission, it was up about 0.2 percent, but revenue per patient day was down 1.5 percent, so I was just trying to figure out why there would be a difference in terms of -- it didn't seem like there was any major shift in length of stay, so I was just trying to figure out --

You know what the problem is there, is a rounding issue, Adam. Because length of stay is reflected in tenths of a day, so you can have movement within average length of stay that because of rounding can give you that sort of small 1.5 percent-type shift without it actually changing the reported length of stay. So it's just an arithmetic rounding issue.

Okay. And then just back to -- I guess the other part of my question, I guess just what I was trying to get at was just, if -- should we look at managed care revenues were slightly in other quarter then that would imply Medicare revenues were down slightly? It seems somewhat counter to how I would think about it, but just wanted to just once again get some more color on how to interpret that 1 percent increase in managed care pricing. Thank you

Well, the managed care pricing, yeah, it's definitely different to talk about pricing than it is to talk about aggregate revenue. We have done fairly consistently with others in the industry on the Medicare side. The industry as a whole is seeing kind of 3 to 4 points on the Medicare side. We are seeing -- now, some of that shifts, obviously, according to your particular mix within Medicare.

Okay.

And you also get into the issues that Reynold talked about with rate verse yield, so it gets fairly complicated, especially with adjustments for the compact, because remember, compact adjusted we had pricing growth of 3.8 percent which is ahead of the 2.4 percent that we saw on the same basis in Q2, so pricing clearly got better, and we didn't really see a material shift in mix during the quarter on a sequential basis, so I think that would indicate the primary mover was the managed care pricing.

Okay. Thank you.

Joseph Chiarelli, Oppenheimer & Company.

Thank you. Trevor, in the beginning of the call you talked about how you were doing better credentialing on your physicians, and then also having tougher admission standards. Is that having any impact on your physician attrition and on the change in mix? And then also, if maybe you could relate all of that to what the change in acuity was in the quarter and how you expect that prospectively, it would be helpful.

Okay. I wouldn't necessarily link that [inaudible -- background noise] part of your question to the last part of the question, so let's just talk about the impact on physician turnover. As I mentioned, it is -- these are the kinds of moves that we believe in the short-term have the effect of reducing physicians, reducing admissions, reducing the -- number of physicians that are practicing in our hospitals, but in the long-term have an effect of having better quality admissions, a higher degree of certainty that we get paid for what we do, and our fundamental belief is that the best physicians prefer to practice in this kind of environment. Now, how to quantify all of that? We don't have the ability to quantify all of that. You don't -- you often don't know when somebody doesn't show up at your door or when an admission goes to another hospital instead of your hospital you don't necessarily know that. And so I was trying to give some color on some of the steps we're taking as part of our commitment to quality inside the Company that have a negative effect on admissions, we may not be able to, and in most cases are not able to, quantify exactly what that means.

Could you give us some sense of what the number of physicians that either you have denied privileges to or how you've turned that over, you know, either specialties or whatever, that would be helpful.

No, no. Those kinds of questions we won't be answering. Operator?

Ellen Wilson, Sanford Bernstein.

Was wondering if you could elaborate a little bit more on this managed care payer shift or mix shift. Specifically, why do you think you saw it tick up in the third quarter? Because what I'm seeing out of the -- what I consider national managed care plans, most of their market share gains and renewals happen on January 1, not in the third quarter, so I guess I'm seeing a disconnect there.

Here's Bob Yungk.

The first part of that, we've been out in the market with the national managed care companies getting some insight as far as their strategies and understanding where they started going after certain elements of the white space markets. Because of that, we started looking more at our own data. As we were drilling into the data, we saw the shift, as been illustrated by both Reynold and Trevor, moving to the national payers inclusive of the blue plans. So we've been tracking this over the last 2 quarters and it's become more of a pertinent issue from that standpoint.

So should I take that to mean it obviously was there for awhile, it's more just you've really started to drill down and focus on it, as opposed to maybe something changed dramatically in the third quarter?

This is Reynold. When Bob and I indicated in the second quarter that we were out visiting all the companies, when we visited the smaller -- we would call it, higher priced companies, they expressed great concern as to, you know, where this might be leading to, and so, therefore, we're reporting, you know, that we're starting to see that movement to us within the third quarter. We don't know what other people were seeing.

I've got one thing to add, Ellen. It's Stephen. I also think it's probably incorrect to characterize it as dramatic in the third quarter. In my comments I spoke about it being a very significant concern moving forward, but the reality is our managed care pricing still improved. It's the fourth quarter of sequential improvement for us. We went from negative 8, to negative 5, to about flat, to a little over positive 1. So we are continuing to see improvement. However this is a factor that is starting to rear its ugly head and we are concerned that the impact of it could be much more significant going forward, particularly as companies choose which health plans they're going do in 2005 and 2006. So I think, you know, it clearly was not a devastating or dramatic impact on Q3, but it is an issue that I think we need to be very, very focused on going forward. It's an issue that is, to a certain extent, beyond Tenet's control and unfortunately will likely mask a good bit of the progress we make on individual contracts, where even if we get back to a market rate of improvement on individual contracts, if we are -- if the market as a whole is shifting from high reimbursement payers to lower reimbursement payers, that is going to be a significant counterbalance.

Just to clarify, your definition of national does include local blue plans, then?

Yes.

I may be putting words in your mouth, where I'm seeing share shifts on the managed care side is to those local blue plans. I would assume there may be a meaningful part of that?

You know, it's too early to tease out that level of detailed data on this sort of a call, Ellen.

Okay. Thanks.

Jim Lane, Argus Partners.

I just wanted to follow up on the managed care receivables, bad debt provisioning that did you in the quarter, I believe you had this same sort of instance come up last year, where you had to provision more and then you had favorable resolution. And I was just wondering if you could -- could you equate the two, the instance you're dealing with now, with these -- I think it was 3 or 5 contracts or something along those lines, to those. Is it the same issues, or are these new issues that are causing you to not be paid by the managed care payers?

This is actually a completely different issue than would we did in the third quarter of last year. What we did in the third quarter of last year was we changed to the slope to accelerate the write-off of our receivables, but that was for all payers, where we went to a straight-line approach, whereas this was very specific, related to a handful of payers being affected by that slope. So they are very distinctly different issues, they're not comparable.

Okay. And is the -- is that provisioning that you did in the quarter related to these 4 or 5 payers, is that a mechanical decision -- is that a mechanical process that you're bound to do because of your internal accounting processes, or was this a decision that it really looks like you're not going to collect this money?

No, there is no discretion in this process. This is purely formulaic, when these things hit 180 days, they must, by virtue of our policies and protocols, be -- they have a significant additional write-down that occurs.

And if you were to be successful in collecting these, they would come straight into earnings, then, and would you disclose that separately?

For an individual account, the answer would be yes, but remember, the reserve percentages that we use at 180 days are based on our historical average collection experience for accounts that are at that age, so it already takes into account the reality that some will be collected and some will not be collected, and those should be taken -- those should be baked into the reserve percentage that we use at that time. Now, of course, you know, you can have individual quarters where you do a little better or a little worse than your overall historical trend, so you are correct that it can have little bits of noise every quarter, but we frankly have that across all fronts on the collection side.

Gary Lieberman, Morgan Stanley.

Just a follow-up on that question a little bit. Do you have the dollar amount of claims that are currently in dispute with the managed care companies?

That's not a figure that we disclose.

Okay. And then I guess can you elaborate more in terms of is it the same group of managed care companies that seem to have this problem ongoing, or is it a -- or have you settled some of the issues and it's other managed care companies you're having issues with?

There are some usual suspects on the list. There are also some who pop on and off the list depending on specific circumstances, but there are a handful of payers and historically those payers have been largely concentrated in California, and occasionally elsewhere, where we have -- where we have continuous -- where we have continuous issues, and we're endeavoring -- there are some who have been -- who were usual suspects for many years who we have successfully healed our relationships with them and they are now off the list and we're going about business as usual. There are some who are -- who are very much stuck on the list with it super glue.

I would also just add, we have stepped up dramatically our efforts in the legal litigation arbitration area for collecting amounts that we are owed, and we are collecting a lot more through that method this year than we have been -- than we were last year.

Is there any kind of time frame you can give us or that you think that, you know, at some point this will all be resolved, and so the revenue at that point you book from the managed care companies you'll end up collecting and this won't be an ongoing issue?

It should have been resolved by now. It's now 2 years after all of the issues surfaced with Tenet. We've been through, in some of these cases, more than one renewal cycle. I think this behavior on the part of the managed care companies is largely opportunistic. So, we ought to be through it fairly quickly.

Okay. Thanks.

Ken Weakley, UBS.

Thank you and good afternoon. I wanted to talk about stop-loss for a little bit. In your press release you disclose $146 million for the quarter. Now, your managed care revenue is about 1.2 billion if my math is right, which means your stop-loss is still about 12 percent in managed care. Now, your largest competitor is only 3 percent, so if that ratio comes down, that's kind of a material hit, maybe $400 million in annualized pretax. And I was wondering, you had mentioned earlier the erosion of -- I guess, the smaller cap managed care business. What percentage of your stop-loss revenues are coming from large national players versus small players? And secondly, would you comment on the math just to confirm that, that ratio is what I think it is? That still seems relatively high.

Sure, Ken, it's Stephen. Let me start with your question on percentage of stop-loss that comes from small payer versus large payer. It's really all over the place. There is no -- there is no particular concentration. There are some large players with whom we have fairly broad stop-loss arrangements, where we have tried to reduce the stop-loss in return for increase in per diems, and they just, for one reason or another, have not been willing to accommodate, but there's no -- there's certainly no rhyme or reason. There have been other large players and small players alike who have been perfectly happy to reduce the percentage of the contract allocated to stop-loss and increase the per diem, so it's a fair trade.

In terms -- going back to your first question, I can't -- the 3 percent versus 12 percent number that you raised is very different from what we've heard and what we're aware of others having. We are aware that 12 percent is still high for the industry. It absolutely is high, but we don't think it's quite as much of a ratio as you're suggesting it may be --

Can you tell me --?

-- particularly in the markets that we serve. There are markets, particularly California, where our largest public company competitor who we frankly don't really compete against very much in the actual market, they don't have any real exposure in California. So I think that may tend to skew that number, but I'm just -- your number is very different from what we are aware of. In terms of your concept that, you know, you made the comment, $400 million is an awful lot to lose, I really wouldn't look at that it way. We did have some contracts that were very imbalanced back in -- you know, at the end of 2002, when these issues were first raised, and it's -- and the contracts that were the most out of line were addressed shortly after that time. The -- and they were generally addressed by shifting stop-loss for base rate. Where we are at this point with stop-loss is, you know, with our counter parties the payers, from whom we're receiving the stop-loss, they are fully aware of what they're paying us in stop-loss and what the balance is in their -- of their aggregate payments between stop-loss and base payments, and we have approached every single one of them and attempted to encourage them to rebalance the contracts and for one reason or another a number of them just have been unwilling to do it. So I would not view -- that revenue would only be at risk if you reached the conclusion that we were somehow being inappropriately paid, I think 2 years after the fact, I think it's pretty clear that whatever we're getting paid now, someone would have to have been asleep at the switch for a very long time for there to still be some unbalance in our aggregate payments.

It wouldn't be the first time in healthcare we've seen that, but that's another issue. Can you tell me what percentage of cases are qualifying for stop-loss? Well, what percentage -- to be specific, what percentage of your managed care discharges are qualifying for stop-loss?

We don't have that number, Ken.

Okay .

And just one last thing, on that 3 percent, that's the first time I've heard the 3 percent number.

I've checked that with others and it seems to be number. 3 to 4 percent generally, but --

The managed care companies tell us that they target between 8 and 10 percent.

Okay.

So now, that probably leads to yet another thing you've seen before in healthcare, is probably people are counting this differently, --

Exactly.

-- depending on the case. But we -- the bottom line of what Stephen is saying is we're pretty comfortable with where we are. That's a big change from where we were 2 years ago, and it's still something where we are -- where we're working on it, but I would not -- I would urge you to not draw the conclusion that you seem to draw in the phrasing of your question about an impending disaster in stop-loss.

What was it 2 years ago, Trevor? The stop-loss annualized?

It was about 50 percent higher on a same-store basis, Ken. So there's been quite a reduction.

Mike Scarengella [ph], Merrill Lynch.

You mentioned earlier in the call that the fact that Alvarado has gone to trial has made discussions on a global settlement more difficult. Could you step back for a second and just kind of tell us how discussions on a global settlement are going, maybe how the tone this quarter contrasts to maybe earlier in the year? Will this possibly be an '05 event for you? Then lastly, how important of is the outcome of Alvarado to the other ongoing discussions?

I'm going to turn this microphone over to Peter Urbanowicz, our General Counsel. Peter?

Obviously since we're in trial right now in San Diego, can't talk too much about the details there, but I can tell you that it doesn't mean that we have stopped communications with other U.S. attorneys and other individuals at the Justice Department regarding other matters that they are investigating. Indeed, we continue to have conversations and are voluntarily producing documents in a number of other regions and areas where we have issues with the Federal Government, so it has not -- it has not ceased conversations in those areas. A lot of those are undertaken by different U.S. attorneys in different areas, and they have their own -- their own agenda and their own time line for discussing things. So it has not necessarily changed the tone with that.

Overall, obviously, whenever, you know, as Trevor said, we would prefer to be able to resolve more of these things with some resolution, some settlement, rather than going to trial, but in those cases where we can't find a mutually acceptable resolution, we will to have go to trial. And that's what we had to do in San Diego. In so far as what San Diego might mean, we've indicated -- we've been disclosing since day one that obviously the -- a negative outcome in the Alvarado case could mean exclusion for that hospital in the subsidiary, which is a bad thing. On the other hand, this is a -- this trial, this case, I think is very significant for not just Tenet but for hospitals all over the country that use physician relocation agreements. And so I think there's a great amount of importance not just for us, but for other hospitals and for the government as well.

Do you feel like you're making progress on a settlement? Are talks much different this quarter than they were several quarters ago, or is it kind of just moving along at a modest pace?

It continues just to move along where again we're -- we've taken the position since, you know, first of this year, earlier than that, that we would try to be as transparent as possible, provide as many documents on a voluntary basis, have meetings with them to try to discuss and let them understand our business practices, and we're still doing that.

Okay. Do you think we'll see this in '05 play out?

I can't speculate as to the timing on when these things -- on when anything might be resolved.

Okay. And I just had a last question for Stephen on bank covenants. Stephen, I know from the Q that you are in compliance, but leverage has been ticking up here the last couple of quarters. Can you tell us where you are versus your leverage and fixed charge covenants at quarter end?

I typically don't disclose those specific numbers on this call, but the reality is that we are completely undrawn on our bank line so being in compliance with those covenants is frankly not a material matter, because we have now draw under the facility and we're sitting on a billion three in cash. Operator, let's go to the next question.

David Common, J.P. Morgan.

I've got a tough one for you but I thought I'd just try it anyway, and that is your thoughts on self pay as a percent of admissions, I'm glad you now disclose that. Where might that -- where do you think that could go, and maybe some historical context or some commentary on how that might vary market to market would be helpful. Thank you.

You know, I will take a crack at that although I think you'll find my answer fairly unsatisfying. I think it is impossible to speculate on where that number may go. I think we've seen that number tick up every quarter since early or mid '03. I think the industry has as well. And, you know, I think the only way we're going to know that it's slowed down or that it's stopped is when it actually slows down or stops. In terms of the geography of that, I think -- I think there clearly is, you know, some relationship with the macro factors in the individual markets. Clearly the higher the unemployment in an individual market, the more likely there is to be people who are unemployed, but I think what we've also seen is that more than half the people, more than half of the 44 million Americans who every year don't have insurance are employed, and they simply work at a place that doesn't provide insurance, they don't make enough money to buy insurance, so it's clearly a societal problem and the burden falls -- the burden falls squarely upon the hospitals by virtue of the intolerables that we take care of them with an unfunded mandate from the government and we are hopeful as an industry that that somehow changes.

With the regional variation, do you think it would be sort of plus or minus 1 percent from your company average?

You know, I don't think the regional -- I'm not sure where you're going with the regional variation question, but I don't think it's enough of a skew to really have much of an impact on what we are seeing as a company versus others.

That's okay. That's exactly what I was looking for, thank you.

Robert Mains, Advest.

Wow, just under the gun. One easy question, rent expense in the quarter?

Give me a second to pull it out of my book.

You see? It wasn't as easy as it sounded.

Sorry. Let me ask another one while you're looking it up. This might be easy as well. The compact you said that you kind of half-way through. Would that imply, then, that everything being equal, and by "everything being equal," I guess we're talking about kind of economic conditions being equal, because I assume that's the biggest driver of that, that the compact percentage of revenues would kind of double both sort of track revenues as they go up or down seasonally? Is that the right way to look at?

You're talking about size of the compact adjustments?

Yes.

I don't really think there's going to be that much of a seasonal factor with the compact adjustment. Once it's -- you have to realize we're sort of in the middle of the rollout of the compact. The adjustment this quarter was 108 million. By the time we're done with California being implemented and also remember there were some markets that were only rolled in in September so there's not a full quarter impact from it. I would suspect by the time that we're done, the overall adjustment for the compact would be more in the $200 million type range. And I would think once it's in place, it should stay fairly stable as a percentage of net revenue and go up or down a bit based upon the individual quarter, but be -- be fairly stable, so we are looking forward to the day when it gets baked into the baseline and we no longer have to provide numbers on an adjusted -- on an adjusted and unadjusted basis.

I have got your rent number for you. For the quarter, rent was a touch under 46 million which is just up very slightly from the prior year quarter.

Okay. Then just fast follow-up on that compact question then. When that amount -- what -- what's going to drive that amount larger or smaller, vis-a-vis whatever the baseline is do I assume that that's sort of the same thing that's going to be driving the uninsured as well, kind of general economic conditions?

Yes. The compact discounts are almost exclusively related to uninsured patients, so whatever effect the volume and services being provided on uninsured patients would absolutely mirror itself in the discounts under the compact.

Okay. Thanks a lot.

Thank you. Operator?

At this time, I'd like to turn the floor back over to Mr. Fetter for any closing remarks.

Well, I don't have any closing remarks, except to say thank you all for participating in our call. We'd be happy to take follow-ups to Tom Rice, Stephen Farber, myself, and we'll see you on the next quarter's call. Thanks.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.