Tenet Healthcare Corp (THC) 2004 Q4 法說會逐字稿

Good morning, and welcome to Tenet Healthcare's fourth quarter earnings conference call for the period ending December 31, 2004. Tenet is pleased that you have accepted their invitations to participate in this call. Please note that this call is being recorded by Tenet and will be available on replay. The call's also available to all investors on the web both live and archived.

Tenet's management will be making some forward-looking statements tonight this call. Those 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 discussed in Tenet's filings with the Securities and Exchange Commission including the company's transition report on Form 10-K and its quarterly reports on form 10-Q to which you are referred. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. Management will be referring to certain financial measures and statistics, including measures such as EBITDA that are not calculated in accordance with generally accepted accounting principles or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance but is providing these alternative measures as a supplement to aid in analysis of the company. Reconciliation between non-GAAP measures and related GAAP measures can be found in the press release issued this morning and on the company's website. Details, 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'll turn the call over to Trevor Fetter, President and CEO. Mr. Fetter, please proceed.

Thank you, operator and good morning, everybody.

We're conducting this call today from our Dallas headquarters where I am joined by Reynold Jennings, our Chief Operating Officer; Peter Urbanowicz, our general counsel; Stephen Farber who is making his last appearance on these conference calls as our CFO; and Bob Shapard who starting tomorrow will be Tenet's new Chief Financial Officer.

Bob's reputation as a hands-on CFO, together with his deep experience in highly regulated businesses, make him the ideal candidate for CFO here at Tenet. I urge you to ask your colleagues who follow the utility industry about Bob. His reputation is excellent, and we're very fortunate that he has joined us. Bob won't play much of a role in this morning's call since he's been only with us since last week, but you can expect to hear a lot more from him in the future.

Bob Shapard is not the only fresh talent that we've added to Tenet lately. Yesterday we announced another new member of our board of directors. Her name is Brenda Gaines; she's a director of CNA Financial and Office Depot and she was formerly the CEO of Diners Club North America. Brenda will be a strong and independent new addition to our board. As I've told you before, 75 percent of the company's top management is either new to their positions or new to the company in the past two years.

I'd like now to turn to the company's results for Q4 2004 and for the full year. We reported losses of over $2 billion for the quarter and $2.6 billion for the year. Large one-time charges drove nearly all of those reported results. We've laid the charges out explicitly in our earnings release and there's also plenty of detail about them in our 10-K. I don't want to gloss over these enormous losses, but what I would like to do during these prepared remarks is to cover the issues that investors and analysts consistently express the most interest in. Those issues are volumes, pricing, expense control, cash flow, liquidity and litigation. We want to make sure that you have sufficient facts to draw your own conclusions about the progress that we're making in turning around the company.

We previewed the expectation that we would have large accounting charges in a press release we put out just prior to the investor conference that we held here in Dallas last December. You need to remember that about 80 percent of the charges are accounting matters and do not represent cash outflows. In the December press release and at our December investor meeting, we also previewed our outlook for 2005. As we promised at that time, today we released more details on that outlook. Our outlook today for 2005 is consistent with the outlook that we previewed in December.

I'd like to start discussing the quarter by talking about the incredibly important subject of volumes. As we told you in December, volume growth is most significant driver in returning Tenet to profitability. This business has very high fixed costs which create negative operating leverage when volumes drop. We've certainly seen that impact over the past year. But that same operating leverage accelerates earnings growth when volumes grow even modestly. Everything that we're trying to do as a management team -- from resolving the uncertainties created by litigation, strengthening liquidity so the company's future is secure, investing in our hospitals and enhancing the quality of care that we provide -- is aimed at one goal. That goal is to make our company and its hospitals more appealing to payers, physicians, patients, employees, and investors. We're confident that we have the right initiatives to drive volume growth and the evidence in the first two months of this year is starting to show that.

I don't want to suggest that admissions were good in the fourth quarter. They were down 3.8 percent from the year before. But the first two months of this year look much better. In January and February, same hospital admissions were down less than 1 percent. And I would remind that last year was a leap year with an extra day in February in 2004 compared to 2005. When you're dealing with these small percentage changes that we see in this business, things like leap years matter. So when you back out the impact of that extra day our admissions for the first two months are actually up. These numbers are preliminary, but very encouraging. We don't expect a return to consistent volume growth immediately. Improving this critical aspect of performance will take time but the results for January and February give us a degree of confidence that we're on the right track.

We continue to make progress on managed care pricing by showing improvements in those contracts that we signed in the quarter. With virtually all of the rebasing behind us now, we are consistently achieving fully competitive increases and we now expect mid to high single digit growth in individual commercial contract pricing in 2005. It's important for everyone to understand that we are no longer in the business of offering pricing give-backs. Unfortunately, a good part of this growth in individual contract pricing is being offset by market share shifts among managed care payers and shifts within their covered populations to lower-paying products. As a result, our overall pricing increases from our entire managed care contract portfolio in 2005 are expected to be low single digit percentage growth from all payers. Once again, our operators and corporate staff did an excellent job of controlling expenses in the quarter. On a same hospital basis, controllable operating expenses were up only 4.2 percent which is a lot less than the rate of medical inflation and very good in relation to overall industry performance. Reynold will discuss this in more detail but his team is methodically working through a long list of opportunities to reduce costs and create efficiencies.

As you know, expense control has been a focus area of ours for two years now. I'm pleased that we have improved our performance on bad debt expense. We stabilized it during the fourth quarter after it ran up rapidly over the past year. Bad debt remains at historically high levels, about 13 percent of net revenues on an apples-to-apples basis. At this point we're cautiously optimistic that we've been able to stabilize bad debt expense. We would have greater optimism were it not for the fact the percentage of uninsured and charity patients rose again in the fourth quarter as a percentage of admissions. They now comprise 5.2 percent of total admissions, up meaningfully from a year ago. The fact that bad debt stabilized while these admissions grew is solid evidence that our efforts to improve collections are working.

I'd like now to turn to our legal issues. During the fourth quarter, we resolved virtually all of our significant patient litigation in a fair and honorable manner. These settlements eliminate major distractions for our management team and remove significant uncertainty about Tenet. In a few minutes Peter Urbanowicz will comment about our legal progress, as well as as on some recent matters.

In recent months we also made great progress on our hospital divestiture program. As of today, we have completed the disposition of 22 of the 27 hospitals we identified as non-core facilities in January 2004. We've already exceeded our original financial targets for these divestitures and we have not been forced to close any hospitals. By successfully completing these divestitures, we have cleared away another major distraction. The team that has been managing this process has done an exceptional job of running and selling these hospitals.

Now let me make a few comments about our outlook for 2005. This morning's press release simply affirmed the bottom line outlook for 2005 that we indicated in December, somewhere between our run rate performance for the past couple of quarters to break even. This expectation is based only on the operating performance of our core 69 hospitals and excludes the potential impact of any government settlement or unplanned or atypical items which could occur during the year. I want to be clear that we formed this outlook after a very lengthy and purposeful budgeting effort that was built from the bottom up. Each hospital and department prepared a budget, went through a series of reviews and ultimately settled on a goal that would take hard work but was achievable. While no outlook is ever perfect, we're committed to these goals and we'll do everything that we can to achieve them.

Before I turn it over to Reynold, let me summarize where I think we are as a company. I believe all of the elements of Tenet's restructuring with the exception of an overall legal resolution are now in place. We're now focused entirely on enhancing the quality of care we provide and improving the operating performance that we generate. In the 18 months that I've been CEO we've made tangible progress. Let me recap what we've accomplished. We streamlined our portfolio of hospitals, and we are successfully divesting those that we felt could not achieve competitive returns. We've made enormous changes in improvements to the organization structure, the management and the culture of the company. We methodically eliminated distractions and are now focused entirely on enhancing the quality of care and the operating performance of our core hospitals in resolving the remaining legal issues we face. We've built a liquid balance sheet that should help us withstand continued uncertainty and address our remaining legacy issues.

I'm very excited about the future of Tenet. The past 2.5 years have been challenging, but we've come a long way. I know full well that we still have a long way to go, but we're making very real and serious progress. We have the right people, we have quality hospitals and markets where they matter, and we have the financial resources to support the company while we drive the operational turn around. I'm proud of what this team is doing to make Tenet a stronger company and I'm proud to be its CEO.

And with that let me turn it over to Reynold Jennings. He's the principal person behind driving our operational improvement initiatives and he has a lot on his plate for 2005. Reynold?

Thank you, Trevor, and good morning.

My comments this morning will focus on the four main drivers of operating leverage in our business -- volumes, operating efficiencies, pricing and bad debt. Since we have included a lot of numbers in our news release, I will use my time this morning to give you additional flavor for some of the things that had the greatest impact on our operations. Although 2004 was a tough year financially, we made a lot of progress on many fronts.

Let's start with volumes. Our year-to-year decline occurred during the last three quarters. The good news is that the drop stabilized quickly and now seems to be turning around. Most of the items that affected volume were uniquely local in nature. But in our third-quarter call last November, we also highlighted for you 4 common influences that affected volumes. Those were 1) our decision to de-emphasize certain acute and subacute services; 2) some tough managed care negotiations in certain markets; 3) the use of InterCall standards to assign in-patient and out-patient status; and 4) fewer patients from physicians who split their admissions between our hospitals and our competitors. In the fourth quarter, the relative impact of these 4 factors was about the same as it was in the third quarter. Additionally, as you've heard from other companies, the fourth quarter saw a significantly weaker flu season. That alone was responsible for about 0.5 percent of the 3.8 percent drop in our same hospital admissions in the fourth quarter. 18 of our 69 core hospitals experienced the most discernible declines in volumes last year. About half of those are in California, a third are in Florida, and the rest are in the other 11 states where we do business. California and Florida are where the 4 common factors I mentioned had the most impact. These 2 states, more than others, also felt the greatest negative effect from the investigations and the media attention over the past 2 years. In my opinion, those are the most important factors influencing splitter physician behavior.

Despite the size of the problem I am optimistic about our approach to solving the splitter issue. Let me give you a few important numbers to show why I feel that way. During the third and fourth quarters of 2004, 3,132 physicians are about a quarter of our admitting doctors in those two quarters admitted 80 percent of our patients which is an average of 176 each on an annual basis. But 8,776 physicians or about 3/4s of our admitting physicians admitted just 20 percent of our patients or an average of 16 each on an annual basis. When you do the math this way, it's obvious that the splitter physicians represent our greatest opportunity to grow our volumes. In order to reach industry growth levels, we don't need to recruit thousands of new physicians to our medical staffs. Our hospitals just need to emphasize local value strategies that get each of the roughly 8,700 splitter physicians already on our staffs to admit a few more patients patients each year. Looked at it this way, the cup is definitely half full, not half empty empty. This is a great opportunity for us and a very achievable objective.

Trevor already told you that our preliminary January and February admission numbers have shown real improvement and that is gratifying. And keep in mind that growth in flu admissions made up less than .02 percent of the admissions growth in those months. At this point, we are optimistic, but we still have a lot of work to do to get back to consistent sustainable volume growth and as we have said for some time it will take resolution of our legacy litigation and investigation issues to provide the lift we really need, especially in California and Florida.

As this year progresses and we get more year-over-year data, I will be able to tell you more about the results of some important efforts that we initiated late last year to rebuild our volumes. These include 1) an ability to analyze a hospital's performance based on internal peer group analytics and 7 must-haves that our earnings improvement team provides to the hospital management; 2) a focused effort to improve strategies at our 5 academic medical centers; 3) a team dedicated to improve the performance of our smallest hospitals, including product line assessment and targeted capital investment based on local strengths or market opportunities; 4) an invigorated outpatient growth strategy; 5) improving physician loyalty. That involves such things as the personal visits and phone calls that Dr. Jennifer Daley, our Chief Medical Officer and IMA to more than 100 physician leaders in 2004. Dr. Daley and I have plans to expand that to more than 400 additional physician leaders this year. And 6) improving employee morale. Our senior corporate management team engaged in continuous and lively dialogue with our hospital operators throughout the year including a national leadership conference and regional fireside chats to hear the issues, provide rapid responses and knock down barriers.

Now let's turn to cost. All of you know that healthcare costs are running well ahead of inflation rates in other sectors of the economy. It simply may not be possible for anybody to achieve year-over-year declines in same hospital aggregate cost. Therefore, controlling the rate of unit inflation becomes the key benchmark. We are encouraged by initial results of our aggressive cost containment program which is essential to improving our margins over the next few years. The 4.2 percent increase in same hospital controllable cost we achieved in the fourth quarter was a very respectable performance, especially when you look at how others in our industry have performed. But I'm convinced that we can still do better. The majority of our fiscal 2004 turnaround initiatives focused on cost containment.

I'd like to review our progress and plans for 2005 on some of these items. These numbers are included in our 2005 outlook. Our total cost management initiative is expected to produce 2005 savings close to $100 million. TCMI, as we call it, focuses on numerous items in the supply and other controllable expense categories such as medication use management, transcription, reprocessing of sterile supplies, records management and all contract purchasing. I'm very encouraged by the 2004 results from TCMI and we have hit 2005 at full speed on this initiative. Next, our benefits redesign initiative is expected to produce labor cost savings of about $50 million. The primary focus here is standardization of our medical plan designs across all hospitals and improvements in the bidding and negotiation process with carriers. Next, we continued our outsourcing verification systems work in reducing 8 percent of our total IS development resources in 2004 and additional efficiencies are expected this year. And next we're identifying service lines that operate with volumes and financial performance that are below the standards we have set. We will de-emphasize those service lines. It's still too early for me to tell you the dimensions of this opportunity that we have but I think it's substantial. In addition to the supply and other controlled expense savings noted above, we set in motion in January a plan to improve our worker productivity by 2 percent year-over-year. That will produce another $80 million of annual savings.

To summarize, we expect aggregate cost savings from our initiatives to exceed $200 million in 2005. We also expect overall cost to continue rising because of general health care inflation, but we're making good progress in containing that rate of increase at Tenet.

Let me turn now to pricing. After making some rather complex adjustments that are detailed in the news release, our aggregate pricing improved by 1 to 2 percent in the fourth quarter. There's a lot of discussion of managed care pricing in our news release and our 10-K. Let me highlight a couple of key points. Managed care is the only piece of the pricing equation where we can exert an active and direct impact. Last year was challenging for negotiations as we sought to increase contract yields while reducing our exposure to stop loss. In the four quarter, stop loss payments made up about 13 percent of total managed care revenues. Less than 6 percent of our admissions received stop loss reimbursement. Because of this, we believe most, if not all, of our transition process with managed care was completed last year. Given that a number of our managed care partners are unwilling to rebalance their contracts away from stop loss, and towards other forms of reimbursement, we think our pricing structure will stabilize at about the current mix.

Something else to keep in mind as you analyze Tenet's progress on pricing, is the impact of our self-imposed policy of limiting increases in our charge masters. We did not raise our overall charge masters for almost 2 years. A number of our managed care contracts are still charge dependent and without charge master increases, that doesn't keep pace with medical inflation, we can't keep up with that part of it. By the end of the fourth quarter, most of our hospitals were in a position to include industry average, gross charge increases in their budget plans. We expect that normal industry average charge master increases will make an increasing contribution to pricing performance later in 2005 and into 2006.

We're also pleased that the last of our large legacy disputes with managed care payers was resolved recently with our settlement with HealthNet. The numbers regarding uninsured patients and bad debts are also in the news release. We have taken strong actions to control our bad debt challenge and now we have measurable evidence that they are working. Here's just one example -- We focused intensely on increasing the cash we collect at the point of service. As a result, we now collect just over 1/3 of our self-pay collections at the time of service. This is a significant improvement compared to the roughly 24 percent we were collecting a year ago. Also our regional business office strategy is now implemented, refined and ready to leverage its results.

To conclude, I would emphasize that we are attacking all of our challenges with equal vigor. Many of our initiatives are well along and are starting to produce real results. Others will be launched later this year. I believe the newer ones will gain significant momentum just as the more mature initiatives are already doing. That puts us in position toward the latter part of this year to see a potential recovery in our volumes and operating results.

With that, as I turn it over to our departing Chief Financial Officer, Stephen Farber, I want to personally thank Stephen for the assistance and support he gave our operations team this last year. Steven?

Thanks, Reynold, and good morning, everyone.

I'll start today by discussing the charges we took this quarter. During the fourth quarter, we took more than $2 billion of various charges recorded in both continuing and discontinued operations. As Trevor said, most of this was non-cash. The portions that were cash are related primarily to litigation settlements which we view as a clear indication that we are making progress, resolving issues of the past and moving Tenet forward. The largest charge in continuing operations was $1.2 billion for impairments. Nearly all of this was the impairment of goodwill. Only 10 percent of this charge was for the impairment of tangible assets. It's important to remind everybody that these impairment charges are non-cash. As required by the accounting rules we had to write down certain of our hospitals for their estimated fair values. As you know, the rules do not allow writing up assets that are worth more than currently reflected on the books.

As we previously disclosed in December, during Q4 as part of discontinued operations we took a charge for the $395 million litigation settlement related to Redding Medical Center. This represents nearly all of the cash charges we had in the quarter. The other significant charge we recorded this had quarter was related to income tax, where we recorded a tax valuation allowance offsetting the company's deferred tax assets. This charge was also non-cash and totaled $744 million. $480 million of this was in continuing operations, $144 million was in discontinued operations and $120 million was run through the balance sheet as an adjustment to APEC for additional paid in capital.

I need to make it perfectly clear that this charge is separate and distinct from realizing our income tax receivable of $530 million which we recorded separately on the balance sheet. We expect to receive that $530 million in cash in April which is the direct result of carrying our 2004 net operating tax loss back against taxable income in 2002 and 2003. This deferred tax asset valuation allowance is fairly complicated and is described at length in note 15 to our consolidated financial statements on page 118 to 121 in our 10-K and is also described in earnings release. This tax treatment results in a reporting peculiarity that is going to be with the company for some time. It's very important for those of you on the call building financial models to understand these implications. With this tax treatment, until the company returns to positive earnings for a period of time, we are not likely to recognize on the income statement any tax benefit to offset pretax losses. In other words, if the company loses $100 million pretax, our after tax losses would also be roughly $100 million. That said, I want to make sure it is clear that this entire tax issue is simply a required accounting treatment that impacts the income statement and balance sheet, but it does not in any way impact our ability to accumulate tax benefits that are created in years when we generate losses and use them in years when we generate income. It's also important to note that because there will not be much difference between our pretax and after tax results, that will make it tough to look at the company on an earnings-per-share basis and have it make sense. However, when the company does return to profitability for a period of time, we should be able to return to reporting income taxes in the traditional fashion.

Let's move on now to the company's capital structure and liquidity. During the fourth quarter we had a few events that impacted our cash balances. In November we repurchased about $100 million of bonds that were due in 2006 and 2007. In December we paid the $395 million settlement for Redding Medical Center which I mentioned earlier and $31 million for the settlement for Palm Beach Gardens Medical Center. It was one other significant cash item in the quarter. At the end of December, we announced that we cancelled our bank credit facility and put in place a new facility for letters of credit. If you recall, we have previously discussed the approximately $220 million of letters of credit that the company had outstanding. They're required principally by our insurers in various states to collateralize worker's compensation programs in various professional and general liability insurance programs. At the time we cancelled the bank facility, it was costing about $1 million per month in fees and we weren't using it for borrowing. It had been over a year since we had any balance outstanding other than letters of credit. So when we decided to cancel in in December, it didn't have any net effect on our capitalization. The one thing cancelling it did require that is we establish a vehicle for issuing letters of credits. The least expensive way to do that was to simply post cash collateral with an agent bank and have them issue the letters of credit on our behalf. That is exactly what we did. So in December, we took $263 million of cash, placed it on deposit with Banc of America. They hold the cash as collateral and Tenet gets the interest income off the $263 million held on our behalf. The combination of the letter of credit facilities, the bond repurchase and legal settlement accounted for the reduction in unrestricted cash during the quarter.

Since January 1st we've completed another bond offering of $800 million. We've repurchased the last $400 million of debt we had due until late 2011 and once we get the $530 million tax refund in April, we will have something like $1.3 billion in cash. This is a very substantial amount of liquidity and will support the company during the operational turnaround and as the legal team works to resolve the remaining legacy issues.

With that I'd like to take a moment to make a personal comment, since today is effectively my last day as Tenet CFO. The past 2.5 years have been quite an experience. I've been fortunate to work with Trevor, Reynolds, Peter and the rest of the team here at Tenet. I feel very comfortable leaving the company with its asset sale program nearing completion, its balance sheet and capital structure in substantial improved condition and a strong new CFO. I'm proud to have played a role in the restructuring of Tenet and wish the team and company the best as they work on the operational turnaround.

With that let me turn it over to Peter Urbanowicz, our General Counsel. Peter?

Thank you, Stephen, and good morning.

I know many of you follow our legal issues very closely. You read our disclosures as well as the court filings and other public records. One of you even went to court to watch some trial proceedings. So knowing that we have that level of expertise listening today, I'll balance my comments between giving a detailed update about some of our high-profile litigation and offering a higher level view of how we continue to approach the legal resolution of our legal issues. With the exception of the two lawsuits filed last week in Florida, which I will address later, and the recent and well publicized regulatory review of our psychiatric patient intake procedures at Florida Medical Center in Fort Lauderdale. We've not disclosed any new government investigations in the 10-K that we put out this morning. We've again organized a legal proceedings by subject matter rather than just by lawsuits and investigations. And I would direct you to the detailed descriptions in the 10-K to understand these matters. We have continued to categorize the lawsuits and investigations the company is facing into 5 main areas -- physician relationships with our hospitals, pricing and billing issues, Medicare coding issues, securities and shareholder matters, and patient litigation.

I'm pleased to say that in the past 12 months we've made great progress on the patient litigation. In December we announced the settlement of the patient litigation involving our former hospital in Redding, California and the patient litigation solving our Palm Beach Gardens Medical Center in Florida. These two settlements resolve more than 800 claims and lawsuits, representing a major legacy for the company. With the resolution of the patient lawsuits, our remaining issues basically involve physician relationships, Medicare outlier payments, DRG coding, security matters and the private class action, price and billing.

On that last issue, private class action pricing litigation, we face such litigation in 9 states in which we operate including now Missouri and Alabama. As I told you before, and as you will see in our 10-K, although we have a number of investigations involving physician arrangements and Medicare payments, we currently have only two active lawsuits brought by the Federal Government. One which was filed in January of 2003 alleges up coding of certain DRGs primarily related to pneumonia. That suit is currently in the discovery phase and is not scheduled for trial until March 2007. Our other active litigation with the Federal Government is the physician relocation case in San Diego involving our Alvarado Hospital Medical Center, a Tenet ownership subsidiary and the hospital's former CEO. The parent corporation itself is not a defendant in this case.

As you know, the federal prosecutor in San Diego has pursued a case involving one count of conspiracy to violate the anti-kickback statute and 19 counts violating the anti-kickback statute. We had a jury trial that started in mid-October and lasted over 4 months with the government calling over 40 witnesses. At the conclusion of the government's case in late January we filed a motion for a judgment of acquittal. We then rested our case immediately after the conclusion of the government's case. We did not call any witnesses. Some have asked us why we did this. The answer is simple. Despite 4 years of investigation involving dozens of federal agents and despite 4 months of testimony and over 40 witnesses, the prosecutors failed to meet their burden of proof on any of the counts. The jury deliberated for more than a week and was unable to come to a unanimous verdict on any of the counts. The jurors told the judge that further deliberations would not change that result and the judge declared a mistrial.

It's unfortunate that the jury was unable to reach a verdict. The fact that it struggled with this case demonstrates just how much confusion there is regarding the laws that govern physician relocation agreements. The judge set a date for a second trial on March 29 but he has since advised us that he is unable to begin another trial until early May. In the meantime, we still have before him our motion for judgment of acquittal. Although he indicated that he intended deny our motion to dismiss the conspiracy count, he is continuing to review our request to grant our motion for judgment of acquittal on all other counts. Because we have no reason to believe that any other jury would produce a different result, we hope the prosecutors will decide there is no point in retrying this case. But if the prosecutors do go forward we will be prepared to defend ourselves. I said at the time the mistrial was announced that instead of relitigating this case, it's time for all of us to devote our full energies to resolving the broader issues. We have always been interested in reaching a reasonable resolution of the broader issues and continue to believe that it is in everyone's best interests to do so.

With regard to the securities litigation, we are nearing completion of the deposition interviews with the SEC and are continuing to work with the agency to resolve its investigation. In the private class action securities cases, we are progressing with discovery and are currently set for a trial in May 2006. At our investors conference in December, I told that you that as a practical matter while the government is trying to convict our San Diego hospital and its former CEO, that makes settlement discussions with them on other matters difficult. Some took that to mean that we could not reach a comprehensive resolution of our issues with the Federal Government during this time. I do not believe that is the case. We are continuing our dialogue with United States attorneys offices in many jurisdictions, such as Los Angeles, New Orleans, St. Louis and El Paso. In all of those places we're continuing to help them understand our documents and our business practices. I think the fact that we went to trial in San Diego or the fact that we may have to retry that case does not limit our ability ultimately to resolve all our other matters. The dialogue remains open and where reasonable resolutions can be reached as we did, for example, in the Redding cases, we will work hard to make them happen.

Let me conclude with a few words about the two cases filed in Florida last week. Both of these civil lawsuits make some strong allegations that are unwarranted and we will defend ourselves vigorously against them. You can expect us to file a legal response very soon.

In the first case, the Attorney General for the state of Florida filed a civil action in Miami on behalf of 13 Florida county hospital districts, systems and non-profit corporations. In that civil lawsuit, he alleges that Tenet's past pricing policies and the company's past receipt of Medicare outlier payments violated the federal and state RICO laws and the Florida Deceptive and Unfair Trade Practices Act. The second parallel civil action was also filed in federal district court in Miami by Boca Raton Community Hospital, a large and financially successful hospital that competes vigorously with several Tenet hospitals in South Florida. This suit is a purported class action suit brought by Boca Raton Hospital ostensibly on behalf of most of the other private acute care hospitals in the United States. The Boca Raton Hospital suit also alleges that Tenet's past pricing policies and it's receipt of large amounts of Medicare outlier payments between 1999 and 2002 violated the federal RICO act. I'm not yet aware that any other hospitals have yet joined this suit with Boca Raton Hospital.

The illogical theory of both of these suits as we understand it, is that because several Tenet hospitals and other nonTenet hospitals around the country receive significant Medicare outlier payments between 1999 and 2002, hospitals such as the plaintiffs in these cases did not receive the Medicare outlier payments that they believe they were entitled to. None of the factual assertions in either complaint except the allegation of an undefined conspiracy, appear to be new. The two complaints for the most part consist of information from public securities filings , previously publicized congressional letters and testimonies, and newspaper and magazine articles. In fact, both complaints admit that Medicare outlier payments, Medicare outlier payment targets and the Medicare outlier threshold are set by HHF and CMS in their discretion and not by hospitals who receive Medicare outlier payments. The lawsuits do not name as defendant the many private hospitals in the country not associated with Tenet who also receive significant Medicare outlier payments from 1999 to 2002. Both lawsuits seek unspecified money damages, restitution and disgorgement of revenues. It's very important to note that neither of these lawsuits make claims that any of Tenet's Florida hospitals engaged in any behavior that harmed other Florida hospitals. Our hospitals in Florida have been an important part of the healthcare system in Florida for more than 30 years. They treat more than one million patients annually and employ more than 13,000 Floridians.

Let me close by noting again that we made good progress last year in resolving several significant legal legacy issues. We're working methodically and carefully to resolve our remaining issues on the best terms available to the company and our shareholders.

With that, I'll turn it back over to Trevor.

Okay. Thanks, Peter.

Before we start the Q&A I'd like to make just a brief closing comment about Stephen Farber, our out-going CFO. Stephen has made a lot of positive contributions to Tenet over the years, but probably none as great as recapitalizing our balance sheet in a way that allows us to approach the resolution of our remaining issues from a position of strength. He's leaving us with no debt maturing for nearly 7 years, a very healthy amount of cash and a reputation with our lenders for transparency. Thanks to these contributions our new CFO, Bob Shapard, won't have to worry right away by raising capital, arranging bank credit or dealing with debt covenants. Bob can focus on the operational aspects of his job; he'll be able to help us improve our performance. Ultimately, there's no more important role for the CFO. I really enjoyed working with Stephen, and I'm very excited to have Bob with his extensive experience and fresh perspective join our team.

Operator, at this point we're ready to begin the Q&A.

Thank you, the floor is now open for questions. [OPERATOR INSTRUCTIONS] Our first call comes from Oksanna Butler of Smith Barney. Please go ahead.

Thank you, good morning. My first question is on the managed care pricing; I understand there are many moving pieces, but can you just tell us in comparison to what you've disclosed in previous quarters about your managed care yield being up 1 percent in the third quarter, and I believe flat in the second quarter. What was it in this latest quarter?

Oksanna, this is Reynold. In the latest latest quarter as we said it was basically flat. We previously have indicated that the largest majority of our portfolio that's up for negotiation is done in the first and second quarter of each year. And so, therefore, you would expect to see those kind of relationships build through each quarter.

All right. And so when you take into account the shift that you've identified towards the smaller plans, is that included in the overall yield or would that be an incremental?

The overall yield is an aggregate of those several buckets that we all talk about and on the one that you just mentioned, what is called the white space companies losing business to the lower paid larger companies. That movement that we talked about in the third quarter seemed to parallel that same type of number we were talking about roughly $7 to $9 million in each quarter.

Okay. Thank you. And on the volume front, to what do you attribute the stabilization that you've seen in the first two months of this year? Is it -- has it been a gradual improvement over the last five months or is there some quantifiable impact of the changes that you're making in terms of CapEx authority to other CEO's or other operating improvement?

My perspective on that is if you go back to October of 2002 and move through to the summer of 2003, there was a lot of debate and discussion going on inside and outside the company starting in the summer of 2003. The insurance companies who felt like they wanted to restructure the model of the contract we had with them started those aggressive discussions, but in all reality the height of the negative media and other type of issues questioning Tenet's financial stability going forward and those kind of things, you know, started hitting the press in January of 2004. So from our perspective, it just seemed natural that the aggregate blunt of all the things that were happening would run their course in the second, third and fourth quarters of last year. And as I said earlier, it does appear that the aggregate impact of that was quick, but when you look at the aggregate numbers of volumes in all three quarters, second, third and fourth, they're relatively close to each other. Therefore, believing that we stabilized and then again as Trevor said, at least based on the first couple of months here, there's some degree of optimism, but the quarter's not over. We need to wait and see how it goes.

Then finally, if we look at the impact that you've identified in prior quarters from your refusal to renew managed care contracts at unfavorable rates -- again, if we assume that much of that impact is behind us, then that could also presumably continue to have a positive impact on your volume in 2005?

That assumption would tie to the fact that those decisions were made in the first and second quarter so there was not that many carry over into the third and fourth quarter and if there is good news it's that we're back at the table again with an opportunity to renegotiate and we do have a opportunity to see if we can find the right balance that works both us and those particular managed care companies.

All right. Thank you very much.

Thank you. Our next question is coming from Adam Feinstein of Lehman Brothers. Please go ahead.

Great, thank you. Good morning, everyone. I have a couple questions. Number one, just on the guidance here it would imply that you're looking for margins of about 8 percent. Just curious how you're getting there off of the run rate from the quarter. Seems like a big ramp-up. I know there's some benefit from the change in the uninsured discount. I certainly wanted to get some more clarity there and secondly I wanted to see if you had more specific details about what your pricing and volume assumptions were in the 2005 earnings guidance? Thank you.

Adam, it's Stephen.

Hey, Stephen.

You know, I'll take those two questions backwards. The one on more specific pricing and volumes. We ran a whole bunch of different scenarios and came up with the range of outcomes for net revenue growth of 3 to 6 percent that we indicated in the release this morning. So rather than provide a bunch of different scenarios, we thought that was a more useful sort of general way to communicate the net impact of those various pricing and volume scenarios.

In terms of margin expectation, we typically do not mention specific margins because of the SEC and some rules that limit our ability to do that. But you can get there essentially by establishing a range between our current run rate and break even. For instance, if you took break even, as the best case and we provided in our release the expectation for depreciation of about $410 million and for interest expense before $420 million we're totaling $830 million and then you look in the release, and you see that we expect 3 to 6 percent net growth effectively off of our revenue base of $9.9 billion in 2004, you can pretty easily compute what a range of outcomes is.

And just to follow up and I was able to back into it just by since you did give the D&A and interest cost but it seems like a big ramp-up there. I know the numbers get a little bit complicated just with some of the divestitures and restatements, but it just seems like a big increase in margins. Is there any other things embedded in there that we should know about it in terms of labor supply costs, any other details that would help us get there?

You know, Adam, there is a range, but the range ends up being kind of a couple percent of revenue range if you look at it in terms of impact on the bottom line, when you look at the difference between run rate performance and the break even level that we indicated. And again there are a number of scenarios that both are -- that have a lot of volume dependencies and different cost assumptions. I think Reynold highlighted a lot of his specific cost initiatives during his prepared remarks today and the most useful way that we've found to communicate is the way that we put it in there because there are far too many specifics and then different scenarios for each of those specifics so we tried to give the most likely range of outcomes resulting from all of that.

Okay. Thank you, Stephen.

Thanks.

Thank you. Due to time constraints please limit yourself to just one question. Our next question will be coming from Sheryl Skolnic from Fulcrum Partners.

Thank you. I'm sorry but there are a number of things that need to be clarified here. I'm very confused so please forgive me. First of all, if we can go back to something you just mentioned. Your revenue guidance if I understand it. Maybe I'm adding wrong here is that if you would non-GAAP measure of adjusted apples to apples revenue, that's the only way you're telling us you're likely to see 3 to 6 percent revenue growth; is that correct?

Yes, because otherwise the compact has an enormous skew effect, Sheryl.

You're adding back, so in adding back the compact from last year and the compact from 2005 that's how you would get it. I guess what that says to me is you're getting very, very minor revenue growth from your profit producing portions of your business. Is that correct?

We're expecting 3 to 6 percent revenue growth, fully neutralized for any compact impact. So I don't know if you would characterize that as minor.

Okay. So it is 3 to 6 percent from the profit producing parts of your business. The non self-pay part of the business.

And clearly, you know, there's a part of the business where we make money and part of the business where we don't.

Okay. And then the second thing I want to clear up in my mind please is on the volumes. You said that you were experiencing slightly less than 1 percent decline in volumes so essentially flat in the first 2 months of the year. But that flu was responsible for a 0.02 percent increase. So should I, therefore, conclude from that that the non flu related volumes were actually down?

No, Sheryl. It's Stephen. I mean -- let me think about the best way to communicate this. Volumes were -- overall in January and February, volumes were down very slightly. But part of that is simply the fact that there was an extra day last year because it was a leap year. If you adjust out the impact of that extra day, and to do that we took 1/29th of February, we didn't pick some specific day. We took 1/29th of the past year and then volumes end up being up a little bit.

I think the point that we're trying to make is that volumes are up a little bit. 2/10ths of that is related to the difference in flu between last year and this year. So the volume, the volume improvement relative to Q4 -- Q4 was down 3.8 percent. We wanted to be clear that 3.8 percent to go a little bit positive was real, it wasn't all flu driven or some other anomaly. But even excluding out those 2/10th, it would still be up.

Okay. So maybe another way to think about this is that your volumes have settled to a level, a number level. And that it looks like you sort of kind of -- on a sequential basis is difficult to do because of the seasonality of the business, but on sequential basis it sounds like what you're saying is that level of volume might be stabilized volume. It might represent sort of a stabilization of the volumes.

Yes, in fact,, Sheryl, this is sort of interesting. I've got the actual number of admissions.

Yeah.

For -- same store admissions for the last four quarters. So in Q1 of last year, which was before the volume fall-off really began, last year we had 167.9 admissions and Q2 is 158.5, Q3 was 157.9 and Q4 was 158.4. On can a comparable basis the quarters were down. You're exactly right but the volumes themselves have stabilized.

Okay. And then I guess the next question that I need to ask, I know you limited us to one but you didn't say that at the beginning so sorry, I've been nice before but ended up being sorry.

I guess what I would ask about, the expense control initiatives which are clearly very important. We understand that you need he to grow the volumes, you need to get the splitters to come back although I think as you go forward more clarity on exactly what programs you're introducing and how successful they are would be welcome. But at this point I'm concerned about the cost reductions because you did take very clear large-scale initiatives to strip cost out early on in Trevor's tenure at the company. You established reserves for that. You took out a lot of costs and I guess what I'm getting at here is the results for 2004 and 2003 clearly would have been worse had you not done that. I wonder how much of the results were benefited by having established said reserves, and then the second thing is going forward, aren't you now at the point where you're done with the low hanging fruit and it's really much tougher to cut costs?

Sheryl, I'll ask Stephen to comments on this reserve point. I don't think this has anything to do with --

Let me take the first part of the question while Stephen does the reserves. This is Reynold. On the first part of your question, even though we're quite proud of a lot of what we accomplished last year and what we believe we'll be able to do this year, it should go out saying when you're under intense observation that the cost of doing business also for joint commission surveys, state surveys and those type of things require a certain degree of man power and costs associated with those types of activities. So we were not able last year to really get the efficiencies out of those pieces and again, when we talk about the investigations quieting down then that is another opportunity for us in the future to continue to fine tuning some other cost elements later on. As far as --

As far as the reserve question, Sheryl, you know I'm sure that you aren't able to take reserves for restructuring the way that you did 5 or 7 years ago. And so the cost results that we're reporting are the actual costs that we're incurring. And our performance on cost, as you points out, has been a focus area for the company. As you take these results today and compare them and do the analysis and look at performance relative to the industry I think you'll find it's quite good. That really isn't as much with restructuring type moves as much as it is just ongoing attention to cost control that is necessary as we first of all, have reduced the size of the company and the portfolio that we operate but second, just operating in this environment where we've had a limited ability to influence pricing, we've focused much more on costs.

So what you're telling me is that the low hanging fruit's been done but there's still -- we haven't gotten to the really hard part of cutting the costs yet? Is that right?

No, not at all.

Okay.

I'm telling you the cost control is ongoing. You had made a statement --

I wanted to make sure that there wasn't any benefit. I didn't expect there to be, let me make that clear.

I wanted to disconnect your thinking about reserves and cost performance that we're reporting. Those two things are just not connected.

We've exhausted Sheryl's questions. Can we move on to the next questioner?

Certainly. Your next question is coming from Tim Lehigh of Goldman Sachs.

At the investor day in December, you outlined I think what you defined as 29 of your 69 hospitals that were under performing their potential. You highlighted specific markets including Philadelphia. Could you update us on that bucket generally and then is there any impetus if they continue to lag that you'd relook at, the 69 core hospitals and divest some of the under performers?

Sure, this is Reynold. A lot of things that we hoped to be able to explain to you on subsequent calls would be the results of those particular focus areas but if you go back to the ones I talked about, two of the central ones in there is improving the partnership and efficiencies with our five academic medical centers, and then secondly is what we classify as 24 smaller metropolitan hospitals and in those as I indicated that's where the product line analysis and looking at deemphasizing certain services and emphasizing others is what we need to do to get our aggregate margins up.

In response to a question about timing, it's our viewpoint that as well as we're making steady progress for each of our 69 core hospitals and generating the cash that it needs to provide its technology and enhancements and facility upgrades, then we need to do everything we can to keep moving that hospital up to legitimate market aggregate averages. So right now we don't have any fixed deadlines for any part of this process. We're watching each hospital's performance and will do everything we can do to assist them as the year progresses.

And this is Trevor. I'd just like to add something on that. When we made the announcement a little bit more than a year ago that were divesting nearly a third of the company's hospitals, we were quite deliberate in going very deep and looking at a long-term view of those hospitals. At the same time, we did the same type of analysis on the core hospitals, and we're committed to turning these hospitals around. Our strategy is to operate them and turn them around. Our strategy is not to continue divesting hospitals until we achieve some sort of target market and I think it's important, margin, and I think it's important for people to understand that.

Okay. Thank you.

Thank you. Your next question is coming from Gary Lieberman of Morgan Stanley. Please go ahead.

Thanks. Good morning. I was hoping you would more detail on the type of value offering that you had mentioned, you were hoping to offer the docs to incrementally get some additional admissions your way.

Sure, Gary. First and foremost is our commitment to quality programs. As we talked about before doctors like their patients to be safe. They like nursing staff to be happy and accessible and they like efficiency of surgery starting on time.

The second most important one is the stability of A teams. We've done a lot of management changes over the last quarter not only at headquarters but at the hospital level. It takes about six months for that management team to get to know their medical staffs and so we're at that point of enhancing that value. The third is to treat all doctors the same. We're giving equal opportunities for doctors to participate on governing boards and medical staff leadership positions. The next would be to provide stable managed care contracts. Doctors have to hedge their bet with the hospital down the street if they're hearing rumors that you're going to cancel a contract or one is not going to be renewed. Next would be an active business development program. We are re-engineering our focus local marketing and advertising and business development teams. Next would be the strategy on emergency department coverage. That's real big issue for the urban areas and the industry is trying to come to grips with that but that does cause some doctors to gravitate to other hospitals where they don't have to cover ED calls. And last not but least, giving the CEO's the flexibility to approve local based capital for technology and building needs that they need to do which we indicated. We released that to the CEO's last October and saw that problem. So those are the top ones that would be top of mind for me.

Where do you think you are if you give a percentage-wise of implementing this strategy?

Well, I think the commitment to quality is going extremely well, and as we reported to you, we'll finish the entire first phase of all 69 hospitals by the summer with a 2 week follow up being done by December of this year, checking on sustainability and traction. Within the a team group, I believe we probably have maybe two hospitals right now that we're still doing interviewing for a couple of positions under the "treat all the doctors the same" we also have established board meetings in which the physicians and lay board members will come to a centralized location to discuss their role in governing the hospital and what tools that we've created to assist them in doing that part of it and also emphasizing the opening up that leadership opportunity. As we've indicated, we think we've indicated all the stable managed care contracts.

We believe we have a lot of work to do to get back to an active business development standpoint at the local hospitals. We think the effects of the last two years has caused a lot of confusion on that so I think that's the one we've got a lot more work to do on this year. And the ED one is going to be very complex for the whole hospital industry to figure out the right solution.

Can you clarify what you would view as an industry average charge master increase?

From the information that we see and from what we hear from managed care companies, we believe that to be in the 5 to 9 percent range.

Great, thank you.

That would be gross charge increase.

Terrific.

Thank you. Our next question is coming from Ken Weakley of UBS. Please go ahead.

Thank you. I was wondering if you could touch upon the fact in the press release you mentioned that about 54 percent of your in-patient admissions are coming through the ER. Number one, where was that historically; and I would think a major part of the recovery is going to be a function of getting that number much lower. Obviously, there's a clinical and a payer next shift as that happens. Can you talk a little bit about that?

Sure. From Tenet's standpoint, we historically have seen numbers above 50 percent of patients coming through the emergency department and I think over the last two or three years we referred to that as being the front door of the hospital now. And I think many other hospitals in the up states have seeing that same type of percentage. As we've indicated for the fourth quarter and throughout last year, we do continue to see a growth in the number of uninsured, but we believe that we're not alone in that based on what other people report and what other people say including the American Hospital Association. So we don't think that we have any difference in that particular impact but naturally it is a geographically influenced area. If your hospital is in an area with more uninsured, you're going to see more than someone who's not.

Okay. I thought some of the other hospitals were more like well below 50, maybe 45-ish or so, and obviously to the effect you can drive your inpatient admissions from specialty and primary care doctors there would be a better clinical and better payer mix with that. Is that the not the case with the Tenet hospitals, given the geographic footprint or is it not that simple?

When you look at our footprint, bear in mind that we have 5 downtown academic medical centers, 15 large downtown metro hospitals with trauma centers, 10 medium sized metro hospitals and 24 that would be more in the suburban areas, but in many of those we are in cities like Atlantic, Georgia, New Orleans, St. Louis where even in certain parts of the suburb has a higher mixture of uninsured than does other city locations. So you have to take that and look at that very carefully and of course within Tenet as we've indicated that's going to vary by hot and by region to get to those roll up aggregate numbers.

Okay. Thank you.

Thank you. Our next question is coming from Kemp Dolliver of SG Cowan and Company. Please go ahead.

This is actually Leslie Lenso in for Kemp. Our question is relating to the vacancy in leadership positions at your hospitals. We were hoping you could give us an update on how many of those positions you have left to fill, and specifically, we would be interested in the CEO and CFO positions and any other key leadership positions that you've identified?

First of all to answer that question we do not have any vacant positions. If we lose a key, what we call an A team manager, which is a CEO, a COO, a CFO or CNO, then we move people around the company and provide interim leadership. I believe on the CEO level we have four or less right now and I use that term because there's offers being made so I'm not sure I have the right -- but it's less than five openings right now. I'm looking at Mike Tyson who says we have two CFO permanent positions that we're interviewing for out of 69.

Great, thank you.

Thank you. Our next question is coming from Michael Scarangella of Merrill Lynch. Go ahead.

Hi. Good morning, guys. In your press release you discuss a $29 million favorable adjustment from employee benefits. It sounds like a one time item we should probably back out of the job. But I wonder if you can elaborate on that number a little bit.

That was in a prior period, Mike, that adjustment was just to give you a base line.

Perfect. Then I had a follow-up for Bob Shapard. Bob, I know you're in the job a week, but I'd be curious to know what some of your key objectives are as you jump into the job and if one of those might be establishing a new credit facility in the short term?

Yeah, thanks. I won't talk long because I haven't been on the ground very long. From my standpoint, Stephen has done a great job of giving us the flexibility on the balance sheet to give us the time to make some of the changes we need to make to clean up the business. So my focus is going to be operational. It's on quality and improving operations. Cost initiatives and initiatives to try to improve volumes. That's how we're going to make this thing profitable again. That's how we're going to use that volume leverage. There is no near term need as I see it for a credit facility. We've got a facility in place that gives us the LCs we need to operate. We think we have adequate cash on the balance sheet to give us the liquidity we need and don't need the expense of a traditional credit facility at this time.

All right, Bob, thank you.

Yeah.

Thank you. Our next question is coming from Gary Taylor of Banc of America Securities. Please go ahead.

Hi, good morning. I just wanted to check one thing. Steve, on the interest expense forecast, is that purely being driven by the higher rates on the refinanced debt?

We don't have any more debt outstanding. We took debt up to about $4.8 billion because remember we issued $800 million bonds in January but only repurchased $400 million bonds. We have no debt due until December of 2011, but our total debt went from $4.4 to about $4.8 although the excess remember is just parked on the balance sheet. So our net debt has stayed the same at around $3.5 billion.

Sure. But it's not assuming higher debt levels in 2005.

It is assuming a static capital structure which is what we have today.

Right. And the just one follow up on the taxes. I haven't had the chance to read the 10-K and you gave us the three or four pages there to take a look at. I guess what I'm trying to understand is on a forward basis, will there be an opportunity to use NOL's to a limited extent on any losses you create in 2005, but how should we view this $500 million tax refund as a sort of recurring element that grows into deferred tax liabilities as a source of cash flow in the future, or is this just sort of a nonrecurring element?

Yeah, I think there's, the tax thing is really complicated. You mixed apples and oranges a little bit so let me try and separate it.

The $530 million of cash that we expect to receive this April is completely separate from the different treatment that we're using under FAS 109 for accounting for deferred tax assets -- the evaluation allowance I spoke of on the call. So we'll receive the $530 million in April, that 's booked separately on the balance sheet, that's already been addressed in the P&L. So that is part's done. So that $530 million will come in.

The separate issue is simply the accounting for deferred taxes and let me make another really clear distinction here. The accounting for deferred taxes relates only to the reporting books. It has nothing to do with the actual tax books. So to the extent that we incur losses and we create NOL's, there's absolutely no difference than everything you're already used to with our ability to harvest those NOL's in the future at a point where we generate profits. So this whole thing is just a hyper complicated FAS 109 situation where we will until the point in time where we become profitable again, we'll simply treat it as though we essentially don't have any tax benefit until then.

Let me ask it this way if I can. Let's assume, if you assume your break even in '05 and profitable in '06, as you head out into '06 and '07, should the cash flow from operations be boosted by growth and deferred tax liabilities which is usually driven by accelerated depreciation and over the last few years your cash flow has not reflected the benefit of growing deferred tax liabilities.

Right, because there hasn't been a way to harvest them. I mean, the answer is to the extent that we have income that we can offset the NOL's we're building again, we'll generate the additional cash tax refunds similar to what's happening this April to the $530 million. So the answer is yes. It will be attributed to cash flow in the future.

Okay. Thank you.

Thank you. Our next question comes from David Common of J.P. Morgan. Please go ahead.

Yes, I was hoping that you might just give us the explanation of the accounting treatment for the HealthNet. What period is it in, these recoveries? Thank you.

Sure. They're actually -- there was on a very small pickup in Q4 related to HealthNet. I don't have that specific number here but was like single digit millions. It was -- the HealthNet accounts had been reserved but not completely reserved. They were reserved to somewhere fairly close to ultimate settlement amount.

The balance falls into the income statement for March quarter; is that right?

No, it actually was booked in the December quarter.

Oh, I beg your pardon. I see what you're trying to say. Okay. Thanks very much.

Sure.

Thank you. Our next question is coming from Charles Lynch of CIBC World Markets. Please go ahead.

Thanks, just a question on line item expenses, either for you, Stephen, or you, Reynold. Just looking at particularly on the supply side. I assume that the dollar amount increase and greater percentage increase in supply expense and some other expense lines, third for the fourth, is partly due to the revenue recognition around the discounts policy, but also may be due to the relative trends in inpatient versus outpatient volumes. Is the fourth quarter number a good dollar amount and/or percent amount into looking into 2005 on the supply expense line?

Let me answer that, Stephen. It's really important I think when you are looking at any of our expense line items to adjust to compact the adjust the denominator, the revenue and so we provided some supplemental tables at the back of the earnings release this morning that do make those adjustments. So you can see all the percentages on the adjusted basis. I think in the body of the release I show it some ways. I would strongly suggest that that is the most relevant way of looking at it, although it is non-GAAP is to look at it that way.

In terms of the specific line item, we have seen the drivers of the growth and supplies expense has not been so much volume related as it has been certain high cost items which have high levels of utilization. I think we identified a few of them in the release. But it's largely orthopedic items. Certain cardiology and cardiac items. There is a major growth in the cost of blood products and continued growth in pharmaceuticals. So those really have been a lot of the impact there.

In terms of the expectations for 2005, we are not providing line item guidance for 2005 for the three controllable cost lines. But, you know, I would on that front suggest that you look towards Q4 performance as the basis for doing any trending that you're going to do as opposed of looking at overall 2004.

Just one point of clarification. When you discuss your broader 2005 expectations of somewhere between your current run rate and break-even, are we to look at that on an EPS basis recognizing that your tax recognition will be different or is pretax or EBITDA or another profit metric a better one to use as one of the book ends of that range?

Far be it from me to comment on how you the experts should attempt to evaluate the company, but it certainly will be given a tax treatment. It's extraordinarily difficult and not very realistic to try and evaluate the company on a net earnings basis. So some of those other metrics that you mentioned which I'm limited from specifically mentioning given the SEC rules for Reg G would be a good place to look.

Okay. Thanks.

Thank you. Our next question is coming from Todd Corsair of Bear Stearns, please go ahead.

Hi. Thanks. What part of the $80 million in proceeds from the four hospitals you just sold to IHHI represent working capital proceeds and could you indicate when you might receive proceeds from any settlement with your insurers over the amounts you guys paid in the Redding Medical Center matter and what that potentially could amount to?

Hi, it's Stephen. I'll handle the hospital question and i will pass it on to Peter Urbanowicz, our General Counsel. I don't have the specific working capital number with me but I do know that we received roughly $50 odd million in cash today of the total anticipated $80 million of proceeds. So not -- and some of that was tax related so I do not anticipate the -- that there's a large amount from working capital. But let me turn it over to Peter to answer the insurance question.

You did say though $50 million in cash you did get for that?

We got $60 something.

$60 something in cash today.

I don't have the specific worksheet with me.

That's perfect.

We already did receive the vast majority of the proceeds.

That's great. And Peter?

We sought recovery under the professional and general liability excess policies that we have. They have limits of $275 million, and we're seeking the limits. The way that you go at these things are through arbitrations. A number of them are in London and the time period I would estimate, just seeing how those arbitrations are run, is certainly at least a year or more.

And a separate question not sure who this would be for, but I understand regarding the California market there was apparently a decision last Friday in which a California court ruled that the State Department of health lacked authority to issue emergency regulations to suspend the 1 to 5, the patient to nurse staffing ratio that would have taken effect this past January 1st and I think that's being appealed, but I was wondering if you guys had a sense of what an appellate court would rule on that issue and what potential downside that might have to your expectations for 2005.

This is Reynold. Again, the best information we have last week, this is a very heated did debate on both sides of the fence we have out there and no one's willing to handicap exactly what the final decision will be or what the timing of that decision. So unfortunately I can't give you any more information in that regard.

And lastly with regard to the RICO litigation in Florida, do you guys not anticipate that other hospitals or other attorneys general in other states would be likely to join that litigation against the company?

On the class action in the one hospital in Florida, it is certainly set up so other hospitals could join that litigation if other hospitals filed similar litigation elsewhere, they would obviously be consolidated in terms of other attorney generals, we are not aware of any. It's always a possibility and something like that would likely have to be consolidated as well in these cases.

Okay. Thanks for your clarifications on those.

Thank you. Our next question is coming from Joseph Chiarelli from Oppenheimer and Company. Please go ahead.

Thanks. Reynolds, I was wondering if you could clarify on those 25 smaller hospitals. You indicated that there would be some product line adjustments. Is there any consideration being given to converting those hospitals to either specialty types of programs or non-acute care operations? Thanks.

Thanks, Joe. Just a little bit of color on the evaluation. We've developed what we call a model fact pack for the smaller hospitals and some early things that we've seen and that is the importance of out-patient volume being a polar of in-patient volume into the smaller hospitals. We definitely also, as you can well imagine the comments I've made, it's been really revealing to look into what clinical services are lost leaders and those vary by each small hospital. So our effort is really in trying to do the service line assessment and then to take advantage of what strengths that particular hospital has.

Right now our thoughts are within the de-emphasize and emphasis of the normal full service hospital. We like everybody else are watching carefully the following decisions that are going to be made on the solo specialty hospitals and whether that door is going to be totally closed or open back up because Congress does not enact a law to keep the moratorium on it. If that opportunity were to present itself, we would include that type of an analysis in each and every small hospital, but we're not spending our time there given the complexity and not knowing exactly where that may be making in the future.

Thanks. One more question if I may. Both California and Florida are considering changes to either Medicaid or the uninsured in so far as creating some kind of more universal healthcare coverage. How would that affect the compact with the uninsured if either one of those are passed and/or it gets extended to Texas and applied more universally?

Joe, this is Peter. I guess without the financial impact, obviously to the degree individuals are covered by a state Medicaid program or some type of state payment program, those are individuals then who wouldn't need to take advantage of our compact and the reduced pricing there. So I mean, it would be good in the sense that you would have a defined mechanism for payment of those individuals. I don't know, you know, I don't think that we've thought about quantifying how that would play out at any of our hospitals.

Yeah, one other follow up on that. Of course, if Medicaid expands their coverage then a person goes from being uninsured to covered by Medicaid so contractual discount for Medicaid payments would go up in the top line off gross revenues. Again, there are numerous debates going on as you understand with block grants going to states or more managed care, but those debates at a point in time right now that we're just tracking them state-by-state, and we're not aware of any decisions yet that would warrant us to say anything about them. Stephen?

The only point I would add to Reynold, is that obviously if people get covered that are not currently covered it would be a net positive for the company. The compact largely effects the accounting disparity between the way that self pay patients are booked the way other patients get booked for financial accounting purposes. But we still for the most part don't get paid very much from compact patients because they're still uninsured. To the extent that they can be put into insurance programs that will be a net positive for the company.

So generally Medicaid would pay you more, just generally on average, then the average payment from the compact?

Yeah, we generally get paid about $0.50 on the dollar or so by or sometimes a little bit more from a Medicaid patient relative to what we get from a commercial patient. For an uninsured patient it is a very small fraction of that.

Okay. Thank you.

Thank you. Our next question is coming from Greg Crawford of Litchfield Capital. Please go ahead.

Good morning. In your press release you seem to imply that resolution of some of the outstanding legacy legal issues might give you a bit more confidence in some of the initial signs of the turn around that we're seeing. I'm wondering and Oksanna's question you seem to hit the physician issues pretty well. I'm wondering what distraction the legal legacy issues have created for the management level at your level and on the individual hospital level and what sort of resources at least in theory could be deployed to some of the operational improvement programs you have underway?

Hi, this is Trevor Fetter. You know, the remaining issues, all of these various investigations, litigations cast a cloud over the company and its reputation and then in certain markets certain of the investigations have even involved investigators questioning doctors who practice at our hospital or visiting medical office buildings and seeking to interview people or people inside the hospital. So it has a very substantial negative effect. It's impossible to quantify on the company's operations. Sometimes in these investigations, they go dormant. But it's not as though you ever get a letter from the investigator saying that they apologize for having bothered you and the investigation has been concluded. So that's a bit of a period in which we live here.

Now what we've done internally in order to minimize the distraction and the effect is that we have essentially separate people, teams of people wherever possible working on the investigations and cooperating with them and helping the investigators move along versus people who are concentrating on go forward operations. It's impossible not for the top management of the company to be involved in both matters and so it does take a significant amount of time. The cost is enormous. The cost of litigating a case as we have done in San Diego represents a diverse of millions of dollars that we could otherwise have invested in that hospital to better enable it to serve the patients of San Diego. But instead we're devoting those resources in San Diego to unfortunately litigating a case against the Federal Government. That is not what we wish to be doing.

We've said for two years that whenever a fair and reasonable settlement is possible we would prefer to settle and move on. That's in the best interest of our business and shareholders. We just haven't been presented with those opportunities. So I'm afraid I can't quantify an answer to your question precisely. It would be too speculative. But I think you get the gist of what I'm saying. This has been a major issue and continues to be for the company.

That's very good. I've seen other companies in similar situations. Thanks.

Thank you. Our next question is coming from Darren Lehrich from Piper Jaffray. Please go ahead.

Thanks. I just wanted to ask Reynold, you know, you listed a number of things that you're focused on operationally, and you did mention academic medical centers. I'm wondering if you can just elaborate a little bit and just give us a sense for what are the opportunities there in terms of, you know, margin performance, and if you can just put some brackets around revenue and margins in that segment of the business for us. Thanks.

Thanks, Darren. Good question. On the academic medical centers, what has happened not only to the ones Tenet has a relationship with, but probably over the last 18 or 24 months, is that the sum total of industry forces out there have caused the faculty plans to have a little bit of indecision on what their strategies are; and without being overly complex, in some faculty plants, those doctors do research and direct patient care. In others, the university fabricates the researchers out from the direct patient care ones. But the bottom line is that because of some of the discussions going on within their ranks, they are slower to be able to move to replace faculty members when they lose one to a competing academic medical center.

And so naturally, because we have the tight relationship with the faculty, if it produces a hold in a clinical service, we can't provide that treatment, that service, until the faculty replaces it. So we're bringing to bear experts that we've see out there in best case practices, where universities have rallied their faculty plans, got a clear mission, and they're very clear and succinct on how they build that moving forward. The second issue is that on a broader, more longer term basis, each of our five relationships was created in a one-off manner. And so therefore, as we've looked at that this last year, there is a lot of efficiencies to bring to bear in taking the best practice components in each of the relationships. But as you can well imagine, that takes active dialogue with the dean and president of the school, and you have to work your way through the logic of why that is the best practice. But we've identified some great opportunities, and if we start now, you know, those opportunities are there for us to capture, you know, over the next 2 or 3 years. And as far as the margins, we usually try to stay away from specific margin numbers. There are several debt public databases out there that report on a lot of academic medical centers, so you can draw your own conclusions on that.

Sure, okay. Thanks very much.

Thank you. Our next question comes from Miles [INAUDIBLE] of Wachovia Securities. Please go ahead.

Hey guys. Just looking at the med mal expense for the quarter, it looks about 55. If memory serves me correctly, I believe we had been guided towards kind of a normalized run rate in the 65 to 75 range. Is that correct, and how should we look at that going forward? Thanks.

You know, the range that you mentioned going forward is probably a little high, because that's not a same -- on a same store basis. I think that was before we had some of these divestitures. So I'd probably use something just a little bit north of what we reported, but not that far north.

Okay. Thank you.

Thank you. Once again, to ask a question please press star then one on your touchtone telephone at this time. Thank you. Our next question is coming from Sheryl Skolnick of Fulcrum Partners. Please go ahead.

Okay, and one more point of confusion for me, if you wouldn't mind.

We're going to charge you a fee.

Okay. Thank you. You're entitled. Your guidance, you said that you're not going to be recording for GAAP purposes a tax benefit against losses that might be incurred if you do incur a loss this year, but your guidance is consistent with the December quarter. So the question is, the guidance for the bottom line is somewhere between the loss reported for the year on a continuing operations basis and break-even, but is that apples-to-apples? In other words, is one a pretax number and one an inclusive of tax benefit number, or not?

You know, Sheryl, I would just -- I would look at the pretax number from the, you know, from the -- from the -- the run rate performance.

Uh-huh.

Yes, I would just do that, because otherwise you have exactly the problem that you've highlighted. It just becomes impossible to do it on a net income basis.

Okay. So your guidance is consistent at the pretax level, as well, then, because otherwise we would have been assuming the same tax rate?

Yes, exactly.

Okay. And on the splitter doctors, is every one of those -- how difficult would it be to get every one of those 8700 doctors to admit one more patient a quarter? [LAUGHTER] Well, I mean, if you look at a base of 160,000 admits, is a 5 1/2 percent increase.

Well, Sheryl, let me handle it this way, and maybe it's also a follow-up to the other question that Trevor answered on the larger impact of the investigations. When a doctor receives a license to practice medicine, the first thing they're interested in is access to patients, and they don't really care whether they're Medicare, Medicaid, commercial, and in some cases, self-pay. Once they have the access to patients, they're interested in access to a hospital where they can get good care and the technology they need to take care of the patient. So the whole splitter group is then intertwined with a group of doctors, very large in every major city, in which for a litany of reasons of which maser contracts they're in or not in, their relationship with referring doctors and those type of things, that they need to keep a base of operation in more than one particular hospital.

But within the category of patients that they provide services to, history has shown that they have a wide degree of discretion in where they think they can get the best value added services for their patient. And so within that category, I mean, you can say, to answer your question, to get all 8,000 to admit two more patients is probably not where the world is, but in the sphere of large numbers, you know, to get 2,000 doctors to admit 20 or 30 more patients is not out of the norm because it's been done year after year for decades by our company and others doing the right things.

Uh-huh.

Sheryl, those were good questions, so I'll wave the fee under the compact.

Yes, I thought you'd appreciate it. Thank you very much.

Thank you. Our next question is coming from Pearl Chang of Credit Suisse. Please go ahead.

Hi, good morning. I just had a quick follow-up on a previous question. Just with respect to the bank facility, I think you had previously described the $250 million letter of credit facility as an interim step and that you were working on working negotiating a new long-term revolver on a permanent basis. And I'm wondering -- I mean, I assume that you're no longer, you know, working on negotiating a long-term revolver, that you're just going to rely solely on your cash balance?

Well, Pearl, since we made that comments we've paid $800 million bonds [SPEAKERS OVERLAPPING], yes, so the circumstances have change 1.3 billion of unrestricted cash sitting on the balance sheet and no significant impending liabilities and no debt due for seven years, we can't quite figure out what the use would be of having a $30 million-plus monthly carry cost of having an untapped credit facility.

So to make sure I understand that, you did the new bond deal, but you know, obviously, there are other companies with significant cash balances; and even if they're in a net cash position, some of them do have, you know, sort of the back up as -- the credit facilities as additional source of liquidity.

Our feeling is that we can access the bank market at any point that we need to, so there's not a lot of utility in spending that money uselessly.

Okay. Thank you.

Thank you. Our next question is coming from Greg Marks of UBS. Please go ahead.

Actually it's Ken Weakley. Just a couple of questions following up.

You used a disguise to get in a second time?

No, I somehow dropped and I had to get in through my associate. I apologize. You mentioned the charge-based contracts, Reynold, and did you disclose what percentage of the revenues are now coming in from charge-based contracts on managed care?

Well, no, I didn't, because it's a very difficult number to give because even in a contract that is predominantly in-patient per diem based with fee schedules for outpatient services, there would be a litany of hundreds if not thousands of items that have individual discount off charges. And each managed care company, when you see a contract, I don't know how they choose to do this, but the discount off liable will vary greatly by companies -- discount on pharmacy and those type of things. So again, all we can indicate is that, you know, there is a significant degree of sensitivity, and many insurance companies allow you in their multiyear contracts to go ahead and put in a gross price increase, of somewhere maybe in the two to four percent range. And so you're automatically leaving revenue on the table if you don't take advantage of that opportunity that the insurance companies gave you in inflation. Again, right now, we can't tell you exactly, you know, what percentage of our 5,000 contracts have that degree of latitude in it, but we can promise you as the year progresses, we're continuing to research data and be able to provide any answers we can. Thanks.

Okay. One last question, there was a time when Tenet used to report in-patient admissions by a couple of major categories like cardiovascular and orthopedic and neuro. I don't know if you have data available, but if you do, it would be interesting to see what's happening on volume in those three main disease categories.

You know what, Ken, it's a good suggestion, and we'll look back and see if we can start reporting that in the future.

Thank you.

Thank you. At this time, there are no further questions. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.