Tenet Healthcare Corp (THC) 2005 Q1 法說會逐字稿

Good morning and welcome to Tenet Healthcare's first quarter earnings conference call for the period ending March 31, 2005. Tenet is pleased that you have accepted their invitation to participate in this call. Please note that this call is being recorded by Tenet and will be available on replay. The call is also available to all investors on the web, both live and archived.

Tenet's management will be making some forward-looking statements on this call. 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 to not rely and makes no promises to update any of the forward-looking statements. Management will be referring to certain final -- 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 measures 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. Detailed quarterly financial and operating data is available on First Call and on the following websites -- tenethealth.com, businesswire.com and companyboardroom.com

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

All right. Thank you, operator and good morning, everyone. I'm joined this morning by Reynold Jennings, our Chief Operating Officer, Bob Shapard, who joined us in March as Chief Financial Officer, and Peter Urbanowicz, our General Counsel, as well as other members of Tenet's senior management, who will participate in the Q&A.

You've now had the opportunity to review our first quarter results, and I hope that you agree with me that we continued to make solid progress in a number of areas this quarter. We made progress on our own issues and we also benefited from some of the positive industry trends this quarter.

As a whole the industry performed well on volumes. Our year-over-year performance was weaker than the other companies, but sequentially stronger than the fourth quarter of 2004. In pricing, I'm pleased that we continued a positive sequential trend. In the area of operating expenses, our cost control initiatives continued to be effective. And as for bad debt expense, we improved our performance as did the other companies. Finally, our liquidity remains excellent.

I'm encouraged by our recent performance. But we need another quarter or two of continued improvement before declaring a trend or changing our previously stated outlook for 2005.

Taking a closer look at admissions, we were down versus last year's quarter by 1.2% on a same-hospital basis. Adjusting for the leap year day in 2004, admissions were virtually flat with last year. In isolation this is not a spectacular result, but let me remind you that admissions were down 3.8% in the fourth quarter of 2004 versus 2003, following year-over-year decreases in both the second and third quarters of 2004.

Relative to the fourth quarter of 2004, first quarter 2005 admissions were actually up 5.3%. While this represents some seasonal strength, flu admissions only added 50 basis points to this growth rate. Volume growth is critical to our turnaround efforts. Our sequential improvement is a very welcome development. Now having said that I have to add that the preliminary admissions numbers in April were somewhat softer than we would have liked. We've said before that it's a mistake to read too much into one month of admissions numbers, but it does appear that we're off to a slow start on a year-over-year basis for Q2.

We were however, pleased to see a decline in same-hospital uninsured admissions in the first quarter. Uninsured admissions fell to 3.5% of total admissions from 3.9% that we experienced in the fourth quarter. Part of that reduction appears to be the result of improving employment in some of our key markets -- including Los Angeles and South Florida.

We are also collecting more cash at the point of service than ever before. We're getting deposits and collecting deductibles and co-payments prior to providing service. While we are committed to full compliance with EMTALA and all other regulations, we've placed a greater emphasis on getting paid for the services that we provide and we'vre been doing a lot of training in this area. We now collect approximately one-third of self-paid cash at the point of service.

Total self-pay collections increased to approximately $90 million in the first quarter from 80 million in the fourth quarter of 2004. The decline in uninsured admissions contributed to a further decline in bad debt expense. Bad debt expense, adjusted for the compact with the uninsured discounts, declined to 11.3% this quarter from 12.7% in the fourth quarter of 2004. This improvement compared to the fourth quarter is due to better collections and to resolving several managed care disputes.

Now let's look at our managed care pricing. One of the most effective decisions that we made last year was to centralize the contracting effort for managed care. As you know, we hired an industry veteran from the managed care field and established an analytical approach to managing our contract portfolio that matches the approach used by the payers. The results from this new team have exceeded our expectations.

Because of the effects of the pre-2003 pricing strategy we froze our gross charges for nearly two years. During this period of time Tenet had virtually no ability to achieve the price increases that are necessary to have sustainable profitable growth. Restoring industry levels of pricing growth is a critical component of our turnaround strategy and now we have the team, the tools and the quality hospital to do it.

In the first quarter, aggregate managed care pricing was up slightly more than 1% over last year. This further extended a trend of managed care pricing gains which returned to positive territory in the third quarter last year. Managed care pricing concessions had bottomed five quarters ago when managed care pricing was down roughly 8%.

I'm reasonably confident that we can sustain this managed care pricing trend because we made some great progress in our first quarter negotiations. The impact of these most recent contract negotiations should become increasingly evident as the year goes on.

We've told you before how we've been tougher in collecting disputed claims. We've also gotten a lot tougher in negotiations. Here's an interesting statistic for you. At the end of the first quarter, we had approximately $300 million worth of managed care contracts where termination notices had been served, either to our hospitals or to the payers. We were the party serving the termination notice in 87% of the cases, measured in dollar terms. Very few of these contracts have actually terminated. But when they do it's almost always because our hospitals are unwilling to accept the rates being offered. Terminating contracts is disruptive and we don't like to do it. But we are fully prepared to take decisive action when the rates are not appropriate.

I continue to be pleased with our progress on improving cost efficiency. This is an area that we've emphasized for two years. On a same-hospital basis, controllable costs were up just 2.2% versus the same quarter last year. And we had good performance in every category. In an industry experiencing continual expense inflation, this displays a significant discipline. We have more work to do here and Reynold will have more to say about cost initiatives in just a moment.

We did have some adverse trends in the quarter. Same-hospital outpatient visits, for example, were 10.1% below last year. About half of that decline or 5.1% out of the 10.1%, was due to our decision to divest our home health operations. Another part of this decline came from reductions in our commercial managed care volumes. We are breaking down this data for the first time this quarter.

There are actually three main components of our managed care business -- commercial managed care, managed Medicare, and managed Medicaid. We're giving you this breakdown so that you'll have better visibility into our pricing trends. At the same time it sheds light on the volume issues that we've had within our managed care business. Reynold will talk more about the link between these numbers and the splitter physician problem that he highlighted for you last year.

Shifting our focus to our longer term strategies, I was very pleased with how we performed in CMS's recent release of hospital quality data. While we have further room for improvement, we've received a strong report card in the hospital compare data that was released in early April. One analyst pointed out that Tenet performed the best of the companies in his coverage universe. A number of industry observers believe this is an early step in the long path toward aligning payment rates and quality of care.

We believe that CMS will continue to be a strong proponent of pay for performance, and it reinforces the wisdom of our commitment to quality strategy. We launched the commitment to quality more than two years ago as I saw quality as the right thing to do and the smartest and most sustainable way to differentiate our hospitals in their markets. At the time, I believed that the day of being paid directly for enhanced quality was a long way off. I may have been wrong about that and that day may be much closer than anyone initially thought.

Before I introduce Reynold, I'd like just to make an overall comment about where we are in our goal of transforming the Company from where it was at the end of 2002. I tend to divide this effort into three areas -- Structural change, operational recovery and litigation and investigation resolution.

We are essentially finished with the structural change. We've divested all but five of the hospitals that we planned to divest, and each of the remaining five has at least one potential buyer. We replaced 80% of the top 100 members of management. We've brought in great new talent from the outside and we've promoted great talent from the inside.

We restructured the balance sheet to provided us with maximum liquidity, even though this has a steep price in interest costs. I believe this decision reduced risk appropriately for our shareholders.

Our operational recovery is making great progress. 2003 we had severe shocks on pricing and bad debt expense. We've lost volume as a result of the damage to Tenet's reputation and litigation cloud that has hung over over the Company. In addition, we had some natural disasters that hit our hospital at 2004. Operationally, we've caught very few breaks but we're gaining momentum in volume and pricing and we're doing a good job in controlling costs.

We've made progress in cleaning up litigation and investigation issues. All the issues that we face relate to events prior to late 2002. There are three categories of litigation or investigation issues -- Litigation from patients, investigations by government agencies and shareholder litigation. By the end of last year we had resolved all significant patient litigation. This was the most important category to resolve.

We're being helpful to government investigators as they conduct and hopefully conclude their investigations, though it's not made any easier while the U.S. Attorney tries to convict our hospital and its former CEO in San Diego. And, as for the shareholder litigation, it's in the early stages and a reasonable resolution may be a long way off.

Overall, I am pleased with our progress but there's a lot of work left to do. We have a solid and capable management team who is committed to getting the job done. Speaking of a solid management team, following our COO, Reynold Jennings, the newest member of our management team will make some brief comments.

Bob Shapard joined us in March as CFO. Bob was CFO of Exelon Corp. which is the nation's largest utility company. Exelon is known, among other things, as an outstanding operator of nuclear power plants. It's hard for us to believe but nuclear plants are even more tightly regulated than hospitals. Already Bob making a very positive contribution. He is fully engaged with Reynold and me in driving operational improvements and he has gotten up to speed on this new and complicated industry very quickly.

With that as an overview, let me now turn the floor over to Reynold Jennings for a deeper look at some of the efforts that we are deploying in our hospitals. Reynold?

Thank you, Trevor. And good morning.

At the aggregate hospital level, the first quarter of fiscal '05 was very encouraging in that our 2005 internal planning process estimated net revenue, volumes and costs more closely than any time in the past seven quarters. Needless to say we experienced a lot of moving parts since early 2003. As I indicated in the third and fourth quarters of last year, we improved our operations analytical systems throughout 2004 to the point that our confidence is increasing quarter by quarter in the correctness of our improvement strategies.

The question now is the speed with which we will return to geographically-adjusted peer margin performance. While we were pleased with this progress we are guardedly optimistic about the pacing and I want to remind you of one of Trevor's themes last year, which is we expect to gradually improve but the improvement will still have some ups and downs. I will give some examples of issues at the end of my operations comments that can slow our progress.

Let me now turn to volumes in the much-need splitter physician support. Our business development team just concluded two focus group sessions with splitter and core physicians in one of our urban markets. Dr. Jennifer Daley, our Chief Medical Officer and I just concluded this past weekend, the fifth regional meeting with about 20 core physicians at each session. We feel confident that the information gained at these meetings and focus groups support the key levers that we need execute to draw physician position support back to our hospitals.

Trevor and I have made reigniting growth the focus for our annual hospital CEO and CFO meeting coming up next week. For the first quarter, we had generally good news on inpatient volumes. We were up year-over-year in New Orleans, Texas, southern states, Philadelphia, Tennessee and Missouri. We were flat in Palm Beach, Florida and the state of California. We were down in Broward and Dade counties of South Florida. The net of these ups and downs was a small deterioration from first quarter of '04.

Since the first quarter of last year was a strong volume quarter, having California, Palm Beach, Florida and New Orleans bounce back was much-needed. As to south Florida, the conversion of short-stay admissions to observation days by the Interqual clinical classification system, which we discussed on pervious calls, was the reason for the majority of Florida's volume drop. We did have isolated independent issues with three of the 14 Florida hospitals and we are addressing those local individual issues.

Subacute inpatient volumes were down about 1,300 admissions. About one-third of this drop is due to closing skilled nursing units last year as we've previously reported. One-third due to the new CMS 75% rehab rule and its three year phase-in and lastly, reduced psychiatric admissions at one of our hospitals. Inpatient surgeries were within expectations in all cities and regions, except Florida.

In addition to the short-stay conversioned observation impact in Florida noted above, the other main driver of reduced inpatient volumes is the ongoing problems with physicians over emergency call rosters. Physicians at many hospitals in Florida are leaving hospital medical staffs if they are required to take emergency call. They believe taking emergency call increases their medical liability risk and results in providing uncompensated care to uninsured patients. Lastly, our Florida volumes continue to suffer from the government investigations and negative media overhang as discussed in the last two earnings calls.

Moving on to outpatient volumes, we have more work to do this year. Our emergency department visits had a strong rebound in the first quarter year-over-year and our outpatient surgery volume slide began to moderate. However, our referred volumes of diagnostic and therapy procedures continued their slide from previous periods. The outpatient volume deterioration ties directly to two things. First, the loss of commercial managed care volume, which ties directly to the loss of splitter physician support last year. And secondly, the numerous competing physician joint-ventures that were created over the past three years.

We continued a three quarter increase in managed Medicare and managed Medicaid volumes. The volumes from these two managed care categories do create a margin and assist in covering fixed cost. However, we have to get the overall percentage of commercial managed care volumes up to get unit net revenue growth in the aggregate at mid-to high-single digit increases.

The growth in managed Medicare comes 50% from fee-per-service conversion to managed care and 50% from the aging of the general population choosing managed Medicare over fee-per-service Medicare. The Medicaid growth appears to becoming directly from visits to the emergency department in general and state-covered prenatal programs for low income obstetric patients.

The internal analytics that we reported in the fourth quarter has energized our hospital leadership to refocus on the splitter physicians. We asked them to focus in the first quarter on about ten to 20 splitters for each hospital. Within that targeted group we experienced about a 200 admission increase year-over-year for the quarter. Given movement in the right direction, the strategy that we are now discussing is how to expand the dialogue for the larger segment of the splitter physician group.

Moving on to net revenues and managed care pricing . Our negotiated managed care base rates in the first quarter hit our expectations of mid- to high-single digit increases. But the three quarter trend of higher than anticipated managed Medicare and Medicaid days, and lower than anticipated commercial managed care days that I just discussed, gave us an approximate aggregate 1% average unit net revenue increase in managed care.

The internal business shift reduced expected stop loss by about $12 million. Payer shift within the managed care industry continued the same net revenue reduction of about $8 million in the quarter, another three quarter trend. We have negotiated about 1.5 billion of managed care revenues in the first quarter. We expect to negotiate about 400 to $500 million during the second quarter.

In the expense categories of salaries, wages, benefits, supplies and other operating expense, we met our expectations in the aggregate. Our total cost management initiatives produced about 16.5 million in savings in the first quarter with an annual run rate of $91 million in savings. The run rate of savings has more than doubled since the fourth quarter of 2004. Our work FTEs on an an equivalent patient day basis decreased by about 1,000 or 1.5%.

Let me now talk about some of the issues that could affect our growth pacing. First, if the cuts under discussion in the state of Tennessee Medicaid program are implemented, it could convert about $15 million of net revenue annually to bad debt at our two Memphis hospitals. Next, the state of Georgia made cuts to its indigent care trust fund reimbursement program after our expectations were set, eliminating about $15 million of net revenue to our two inner-city hospitals in Atlanta.

Finally, we are implementing this year, the last seven patient financial system conversions after completing about 60 over the past ten years. These installations cause a temporary delay in billing and collections that is corrected in 60 to 90 days post-conversion. Standardizing and improving the basic computer systems of three merged companies and over 25 acquired solo community hospitals, all of which happened in the mid-to late1990s has not been easy. Nonetheless, we have not allowed the events of late 2002 and its two year aftershock to deter us from getting this done.

While the governmental reimbursement environment and internal system improvement challenges are faced by all hospital companies, they are more concerning in a company still executing a cost realignment, following a drop in fundamental volumes in revenues. Every 10 to $15 million surprise is not easy for us to overcome quickly until such times as volumes start growing robustly.

However, let me assure you that we have been in a rapid response mode to both opportunities and threats, and we have anticipated some of these threats so we will move to alternative plans or quicken our pace as these situations emerge. In closing my remarks let me emphasize that all the operational initiatives that I talked about all last year are still being implemented. Dr. Daley and I continue to meet both personally and have conference calls with the core physicians within the approximately 3,700 admitting group to answer their questions and respond to their needs.

Our business development team is completing a set of must-haves from the splitter physician focus groups to make sure we know how to best communicate with them and what service issues to address. The implementation of commitment to quality continues on schedule with both our employees and medical staff members being excited and impressed with Tenet's commitment to patient safety, physician practice needs, hospital department efficiency, evidence-based medicine and nursing department needs.

Our target 100 patient satisfaction culture is alive and well. Our national and regional leveraging of managed care negotiations, as well as our transparency and professionalism is now producing a stable and predictable negotiating template. Our local hospital management teams know their specific goal to drive the aggregate earning needs of this Company. They are also rededicating efforts to winning back the splitter physicians.

With the first phase of our operational strategies now meeting expectations, the operations team is aggressively increasing the pacing of our strategies over the next three quarters. I indicated in my fiscal third and fourth quarter comments that our operating results would not show signs of moving forward to geographically-adjusted industry peer levels until the second half of this fiscal year.

We have been careful to maintain our progress on improving the morale of our hospital management teams, employees and admitting physicians, which is essential to our longer term success. While our major goal is to still, and in future years follow in the current fiscal 2005, I am confident we are on the right road to success. No doubt though, we still have a lot of hard work to do.

With that as I turn the floor over to Bob Shapard. I want to let you know that Bob is an engaged CFO. He has dedicated time to be present in several of my operation strategy meetings. Bob has a quick mind and already has a very good understanding of the key drivers of our business.

Bob?

Thanks, Reynold and good morning, everyone. I am very pleased to be part of the team and to work with my colleagues to help Tenet build the value of this Company. I've been able to get out and meet a lot of the hospital management teams and some of their staffs. We have a team of talented and committed people that I'm proud to join.

I'd like to speak briefly today about results for the first quarter and expectations for the remainder of the year. I will then update you on our cash position and liquidity.

As you saw in our release, we reported a net loss of $3 million or $0.01 per share for the first quarter. In the first quarter of 2004, we reported a loss of 122 million or $0.26 per share. We've sold a number of hospitals and are in the process of selling the last five identified for sale. We incurred losses in the first quarter associated with these hospitals and the sale process.

Excluding these losses, our net income from continuing operations in the first quarter was $20 million or $0.04 a share. In the first quarter of 2004 net income from continuing operations was 26 million or $0.06 a share. As you are aware, Tenet initiated its compact with the uninsured in the second quarter of 2004 and it continues to roll out that program across our hospitals. Adjusted for the compact, revenues are up 3.1% for the quarter compared to last year.

The revenue variance was driven by slightly lower volumes and the positive pricing movement, as Trevor discussed. Operating expenses are up approximately $64 million or 2.2% on a same-hospital basis. This increase, while below the medical inflation rate, does reflect inflationary pressures and does not yet reflect the full impact of cost initiatives we're implementing during 2005.

Provision for doubtful accounts is down because of the compact, as I mentioned. Adjusted for the compact, the provision is up $24 million versus last year. But, as Trevor discussed, bad debts are trending down in Q1 for the second consecutive quarter.

Net interest expense in the first quarter of 2005 is up approximately $19 million due to the additional debt raised since last year, partially offset by the interest income earned on the undeployed cash. Remember, the Company did elect early adoption of FAS standards for expensing stock compensation. The Company has stock compensation expense of $13 million or $0.02 per share in the first quarter of 2005.

A number of items impacted results from continuing operations in the first quarter that are not recurring in nature. We incurred a $15 million charge for the early extinguishment of debt that was being refinanced. We recognized a gain of $6 million on the sale of home health agencies. We incurred 8 million of charges for litigation and investigation and we took a a positive adjustment to earnings of approximately $22 million as a result of an adjustment to the deferred tax valuation allowance.

The next impact of these items increased earnings by $0.03 a share during the period. With regard to the tax valuation adjustment, you will recall in the fourth quarter of 2004 we recorded a significant charge to establish a valuation allowance for our deferred tax assets. Simply put, if you can put this simply, because we reported losses for several consecutive years, an accumulative pre-tax loss at the end of the three year period ended December of '04 the accounting rules preclude us from relying upon our forecast of future income.

Thus, we could not assume any value would realized from the future use of accumulated tax benefits. As the balance of those accumulated benefits change each quarter, the offsetting allowance is adjusted and those adjustments flow through earnings. Remember, this is just an accounting adjustment and has no cash impact.

When we return to profitability, an assessment will be made and we expect to be able to eliminate the valuation allowance that currently offsets our accumulated deferred tax assets. Our accumulated tax benefits should allow us to reduce federal tax payments in the future.

We are pleased with the progress we made in the first quarter. And while the results were ahead of street consensus for the quarter, we don't believe the consensus fully reflected the seasonality of our business, as the first quarter is typically our strongest and we do expect weaker volumes in the second quarter. While we expect to see some benefits in 2005 from the cost pricing and volume initiatives, the more significant impact will begin to be seen in 2006.

No let me briefly address the steps toward our return to a reasonable and sustainable level of profitability in operating margins. We must first align our cost structure to our reduced level of volumes and revenues. We will continue taking steps to reduce operating costs this year and next year that, when the full effect is reflected in earnings will help return us to a margin level reflective of our sustainable margins for our volumes and revenues.

We are not prepared to quote a margin target but expect to perform in a manner comparable to our peers but with margins reflective of the specific markets in which we operate and recognizing the unique issues of academic medical centers. With regard to pricing, having spent 2003 and part of 2004 making concessions on pricing, we are now vigorously negotiating full and fair price increases with all of our mon -- with all of our managed care payers. Managed care contracts representing roughly 60% of our managed care revenue are up for renewal in 2005.

The third key component of our recovery is volumes. As mentioned earlier, volumes showed positive signs in the first quarter. We are taking initiatives to improve volumes, our goal is not only to achieve volume growth of our peers. But regaining the volumes lost in recent periods. Regaining lost volumes, if achieved, will take time and will first require us to resolve some of the litigation and uncertainties we 're currently dealing with.

While volume growth is the key to long-term earnings growth, cost structure and reasonable pricing increases are the keys to restoring our operating margins and profitability. We will provide more color on our recovery initiatives as the year progresses.

Now let me briefly address our cash position. In the first quarter of 2005 we completed a bond offering, raising $773 million. And purchased $400 million of debt. As a result, we now have no debt maturing before December of 2011. We also received a tax refund of $537 million in March.

Operationally, the first quarter depleted cash by approximately $160 million after capital expenditures. This was largely driven by the timing of certain working capital items. Excluding working capital changes, which should be largely [neutral] over time, operations generated sufficient cash flow to fund capital requirement.

The result of all this is an unrestricted cash balance of $1.5 billion at March 31. With an additional 260 million of cash restricted as support for an LT facility. Tenet has no bank lending facilities currently in place.

In summary, financially we are making progress but need to stay focused. From a liquidity perspective, we have balance sheet flexibility allowing us time to improve operations without inhibiting our ability to fund all needed operating and capital needs.

With that I'll turn it back to Trevor.

Operator, we are now ready for you to assemble the Q&A roster.

Thank you. [OPERATOR INSTRUCTIONS]

Our first question is coming from Ellen Wilson with Sanford Bernstein.

Yes. I was wondering if you could give a little bit more color on the volume situation. Specifically, you mentioned three hospitals in south Florida, that you were still dealing with some issues. Could you highlight what those issues are and what you're doing?

Sure.

One of our hospitals is very close to what formerly was a specialty rehab hospital that was purchased by the Baptist health system and converted to a full service hospital. Therefore applying more competition to us. So, we're working right now on what I indicated the last time, which is our more focused based planning process for our smaller hospitals. This particular hospital is much smaller than the big not-for-profit down the street.

The second one was the psychiatric issue that was -- received some press coverage a couple months ago and that one we've received our Baker Act designation back from the state. We have a new medical director, the state's happy with all of our protocols and so we are back in that particular business but we went through a period of time in the first quarter where those volumes went down.

And then secondly, there is another not-for-profit hospital that opened up in the middle part of Broward County, a part of the South Broward hospital district and it is in a fringe territory of a couple of our hospitals.

Good news there is that our two, as well as this hospital, is within a huge rapidly growing population base. So we believe that's a short-term issue for us and at one of our hospitals which is one of the largest we have down there, we are just about to finish a $25 million major expansion of intensive care, surgery, and the emergency department.

Okay. And then kind of a second nuance on that, your commercial managed care volume's being down 7% year-over-year.

Could you break out, is that also primarily concentrated in Florida, the kind of where and why. I'm assuming it has to do with some of the splitter docs and what have you, but if you could elaborate?

I think in general last year we reported that the splitter problem was pretty much universal problem all over the Company and so therefor our efforts have been in all regions and all major geographic areas where we are located. In Florida, their volume decrease was predominantly on the Interqual admission criteria moving from short-stay to observation, as I mentioned earlier. But they, like other regions, have faced that commercial change.

We did see, as I indicated in the comments, some stronger results in our other three regions. But we continue to have, within each region, some three or four hospitals that have various independent issues going on that are somewhat tied to the splitter issue and so we are working in total in every region.

Okay. Thanks.

Thank you. Our next question is coming from Brendan Strong with Lehman Brothers.

Hi. Good morning. Actually, a follow-up question similar to the question just asked. Commercial managed care admissions were down 7%. while the Medicare managed care admissions were up 13.6%. What was the explanation for why those growth rates were so different in the quarter?

Well the -- Again, based on our information, the managed Medicare is growing for the two reasons that I stated. A lot of individuals now with the prescription drug benefit and the new benefits that managed Medicare companies are offering are pulling a certain segment of fee-for-service patients back into that. And then lot of our hospitals are in high population growth areas to where the normal Medicare population is growing in line with that particular part of the country. So it's those two issues that are driving that part of it.

As far as the Medicaid business, even though many states are concerned and continue to be concerned about their long-term Medicaid funding, they've always tried to support low-income females giving birth, and making sure they get good prenatal care and good follow-up care from that standpoint, so that part of it has been stable in most of the states that we do business in.

On the commercial side, in addition to the splitter business we also -- when we go into these contract negotiations that are tense, there is some movement by the managed care company to strengthen their negotiating position and so we do see some movement coming out of those tougher negotiations that we took last year. But as Trevor indicated we've had no long-term effects from that standpoint.

Okay. And then question on managed care pricing, I think you said 3% increase in commercial managed care and about 1 % increase all in. I was curious if those figures include stop loss -- changes in stop loss payments?

When we report aggregate numbers, the stop loss movement is included in that aggregate movement.

Great. Thanks.

Operator?

Thank you. Our next question is coming from Sheryl Skolnick with Fulcrum Global Partners.

Good morning. Thank you. I have a couple of questions, if I may. First of all, why was the tax refund so big? I was under the impression that the total value from the sale of the assets would be $600 million, we knew you were tracking ahead of that on the actual proceeds. But I don't quite remember it being in one year $500-plus million

Sheryl, this is Bob. That's the impact of actually carrying our tax losses back into prior periods and taking advantage of those losses going back. And I think roughly 540 is the number we proposed, or disclosed at the end of the year as the estimated value.

I thought it was going to be over a couple of years rather than one, maybe. That was something -- Okay. It's nice that you have it. That's terrific. It just seems like you've gotten an awful lot more in proceeds, which is great. It's terrific. I'll have to go back and double check what the commentary was way back when, when this was first announced.

And also if I remember correctly and I think we were all encouraged by this, commentary was made on the March 8 conference call about strength in volumes in January and February, in the sense that the comparisons were positive. But, on the -- for the quarter as a whole, same-store volumes were down. Now, the leap day occurs in February, I'll grant you there was one more day in the quarter last year than this year, but having said, that I'm a little bit concerned about what the trend was towards the end of the month.

By the end of the quarter, if January and February were up, March had to have been down by enough to bring the total down and with April down, I'm a little bit concerned about that being -- or a little bit of a hitch in what you're describing as a positive trend. So can you reconcile that for me?

Well, this is precisely why we don't like to disclose monthly admissions numbers.

Sure.

It gets to be very complicated. We had -- on March 8 when we had that conference call we had two months of data. Today we have one and although we felt that the sequential trend particularly from Q4 to Q1 was very good, we were relieved to see that. We just didn't want to suggest that that trend is necessarily continuing when we're off to a slow start in April. So, I don't think you should really read anything more into it than just that.

But is the conclusion that March clearly had to be weaker relative to last year than January and February, correct?

Yes.

Okay. And then the third question I have is, can you explain to me, forgive me for asking, what is the issue here with the conversion, the Interqual admission conversion from short-stay to observation? I'm sorry, Reynold, I really didn't understand that.

Before Reynold does that, let me just say one more thing on this tax issue --

Yes.

-- that was in your first question

Yes.

-- this is -- the number that we got is consistent with what we had suggested. I think as far back as December that we would be receiving.

I think where there may be a little confusion is, it's the result of three activities, one -- our operating losses, second one loss on sale of hospitals we divested. The third one was the big litigation settlements at the end of the year.

Okay. So it's not just simply from the sale of the assets?

No, it's from all of those activities and we were able to go back, as any company can, and offset those losses against profits the Company had made during its highly profitable years and essentially recover those taxes that had been paid during the period.

I've got it. That makes a lot of sense. Thank you for clarifying that. And the English translation of the Interqual admission conversion, whatever it is?

Sure, Sheryl. There are two types of ways of looking at approving an admission. One is, an average length of stay criteria that many insurance companies have always used and still use.

The second one is a clinical system that determines whether resources on an inpatient are needed or within a 23-hour observation you can make the proper determinations whether a patient can go home or then needs to be admitted. Dr. Daley and I talked about this last year and we became convinced that the right way to go is the clinical system, and also we recognized there would be some loss of net revenue as we made that transition, and we also are losing revenue that a managed care company would approve as a short stay on the ones that use the average length of stay criteria. But the reason we made the decision was two fold.

Number one, you should always be making decisions on the clinical need of the patient, first and foremost. And then secondly this 3 to 5% of managed care net revenue that the insurance companies try to slow down, delay or deny payment for all companies owned, we believe if we set a pattern of transparency,professionalism and clinical data we would strengthen our legal team's negotiations in getting that accounts receivable reduced down for that bucket of money.

So, we are operating in good faith that that's where we are going to land sometime as the year progresses. To the extent insurance companies do not recognize the value that the clinical decision-making makes, then we may have a tough decision on if they want to approve by length of stay, sub what we need to do. But we are pushing everybody to go clinical. That's the right way to do that and we hope that the interest companies see the value of that long-term.

And just one clarification. You said that the improvement in the splitter doc performance where you concentrated on ten to 20 of them would have been about 200 admissions. Was that for the Company as a whole or for each of the hospitals?

That was for the Company as a whole, so 69 hospitals, ten to 20 being focused on at a period of time for the first quarter. Then you can see the relative relationship of the 200 coming out of that focus group and that number came out of the 8,700 group.

Yes sir. Got that. Thank you so much.

Thank you. Our next question is coming from Oksanna Butler with Smith Barney.

Thank you. Good morning.

On the managed care front, just trying to understand what you're assuming going forward. Purely on the commercial managed care I understand your pricing increased about 3% even though you indicated that you're getting mid-to high-single digit pricing increases on your actual contracts that you're renegotiating during the quarter.

So, what should we assume would be the trends later on in the year? Is there going to -- are you assuming that you're going to see any change in that pricing increase than just the commercial managed care or should we expect fluctuation, what is reasonable on that front, given you have so many pieces?

Well again, from our viewpoint over the last three quarters, we believe that the targeted negotiations in the mid-to high-single digits on the base rate has pretty well settled down into the ranges that the mass care companies want to negotiate with us on.

The dropping components in there, again, there's no way to tell exactly how fast we will solve part of the splitter issue, so the conversion of days between Medicare, Medicaid and commercial is something that's hard for us to predict at this point in time standing there. All we can do is report the things that we're doing to improve that ratio and we understand it's something we really have to work real hard on and stay focused on for the last half of this year. In the fourth quarter we did report that we had a three quarter sequential drop in the percentage of stop loss as we renegotiated or fixed payments from managed care companies.

However, we also did report at the end of the fourth quarter that there are many insurance companies who are happy with a certain amount of the payment being charge-sensitive and putting the risk on their shoulders for properly managing the case care -- the patient from that process. So -- so again, we believe that there will continue to be some movement towards more fixed based pricing and less charge-sensitive in that commercial care bucket, but it appears we made the greatest change between the second quarter and the fourth quarter of last year. And it started to slow down going into the fourth quarter and into the first quarter.

So, with respect to your guidance, are you assuming that you're going to continue to see a payer shift?

Well, I think right now given that there are benefits in the prescription drug benefit that makes moving into managed Medicare attractive to more fee-for-service patients, that's at least what the president and congress wants to accomplish and the trends seem to be moving in that direction, with those enhanced benefits that were created last year. Again, that's a longer term process to understand how the government is going to continue to approach that and fund that.

And again, as patients get in they -- we have a period of time over 18 months where they draw conclusions about what they like or don't like about fee-for-service versus managed Medicare. So, I think it's too early in that process for anybody in the hospital industry to know where that pacing or trend will settle out over the next couple years.

Okay. And can you give us additional detail on what you're seeing in terms of the other operating expenses, you seemed to see -- you saw some improvement in that line, and then what we can expect on the labor front -- the cost initiatives that you referred to previously that you were going to implement beginning in the first quarter Thanks.

Well, sure. Consistent with my comments at the end of the fourth quarter, we do believe as the moving parts start to settle down, we do have an opportunity of continuing to improve our worker productivity and it's hard, again to judge until certain things are settled and done and over that all the things that we've talked about do increase the need for manpower to get all the things done that we're working on. So, we do believe there's further opportunity as we move down this year. It's hard to guess or quantify what that is, but our goal is to do that.

We are having great success in our general supply category just as we did last year and finding opportunities to continue to drive down unit pricing and hold cost inflation down. One of the continuing challenges that we have this year, and I've talked to some other folks in the industry, is that big four group -- which is blood products and [platables], [platable] defibrillators, prosthetics and certain pharmacy products, is the whole industry is just struggling with how to attack that particular component of the total supply spin. But we're really happy that the pacing has picked up nicely in the all other category for us.

And until we find some other solutions for the big four, we're going to try and improve the pacing as fast as we can in the big part of the other bucket. As far as SW&B goes, it appears that, throughout the United States, there is a more discipline right now in competing hospitals on what salaries, wages and benefits need to be, and so we've not seen any need to alter our expectations of what the inflationary merit and market adjustments need to be within our expectations right now.

Thank you.

Thank you. Due to time restraint we ask that you please limit yourself to one question per turn.

Our next question is coming from Gary Lieberman with Morgan Stanley.

Thanks, Reynold. Just a question for you.

You said that in the first quarter you came pretty close to what your internal budgeting had been. Or, I guess the closest that you'd been in a while. As you look out over the remainder of the year, should we generally expect that the remaining quarters are kind of in line with first quarter, or is there any meaningful difference that -- between the first quarter and the rest of the year we should take into account?

We're trying our best to avoid any revision or outlook for the rest of the year. So, I think we're going to try to pass on that. We're not going give you any -- we're not give you specificity with regard to future quarters at this point. It's just too early in the year.

I guess just a little more broadly than that. You guys made the comment that in the second half of the year you would -- you're hopeful that you begin to approach or move in the direction of comparable margins to the market that you're in.

Can you tell us what specifically is different in the second half of the year that allows you to do that? Thanks.

Sure, Gary, I can answer that in line with answers to previous questions over the last two quarters. We noted for you, also at our industry -- I mean our investor conference in Dallas in December, that we have a certain segments within our improvement that need a lot of concentration. One of those that we highlighted was the smaller urban hospitals.

And on the last call I indicated that we had completed three focused reviews of clinical departments, and found that effort very exciting in directing the future efforts of those hospital into what product lines and services they should be putting most of their money for investment in for the future and again, that will be a big hot topic of conversation at our CEO CFO meeting next week.

The other issue that I've highlighted for you is the academic medical center component. There have been numerous studies published over the last ten years that indicate that academic medical centers have a total cost base of 33 to 34% more than the average community hospital. We have five academic medical center hospitals and another five hospitals that have large residency teaching programs, so while that number is only 12% of our total hospital base, it's over 20% of our cost base.

And, so again we have several task forces underway working through how those relationships are designed, how they are functioning and again we -- it's going to take longer on that but we see some great opportunities in helping universities stabilize their faculty plans, their ability to recruit faculty, when the faculty leaves, on a timely basis and those type of issues. So I want to make sure that everybody understood the words I would use, which is movement towards geographically-adjusted peer averages. Again, the pacing I made quite clear is still a question mark given all the moving parts we have.

And I think if you've listened to my comments all last year as we even highlight certain individual hospital issues, is that with all the moving parts that we've had, it's typical to have some three or four hospitals within each region that may have a unique thing that it has to deal over three or four months and you get that one solved and then three or four more will have a whole different unique situation that has nothing to do with national trends or national issues with Tenet.

So until we can get the predictability of that group of assets it makes it very hard to understand what the ultimate pacing can be. Having said that, again I've said that I'm very optimistic based on the data and analytics that we now have, where we need to drive the train to. It's just a matter of how fast we can get there as we settle these other things down.

Okay. Thanks a lot.

Thank you Our next question is coming from Todd Corsair with Bear Stearns.

Hi. Thanks. I wanted to just understand within working capital. Seems like there was about a $200 million contraction in accruals and payables and I just wanted to get an idea about how much of that would reverse and be a source of cash as we move forward into the balance of '05 here?

We -- there typically is some seasonality to the working capital and there was about 100 and -- I'd say 150 or $160 million probably, reduction in payables during the period, which would appear to be a use of capital And typically in the first quarter, we make a number of disbursements, for example, the funding of our 401(k) match and some of our benefit plans typically falls in the first quarter, that's going to ramp payables down in the first quarter, but there are going to be -- there is going to be a significant bounceback in payables.

You typically have a lot of accruals in the fourth quarter and payments in the first and you'll see that type of cycle. So it would not be surprising to see that payable balance move back up in the second and kind of reverse some of this trend. We saw big increase in payables the fourth quarter which would appear to be a source of capital and some of that [inaudible] turned around in the first.

Right. Okay. Thanks. And reasonable to expect you guys might be around neutral free cash flow for the balance of the year here?

Originally, we had set our plan for the year was to be somewhere between breakeven and $200 million use of cash. That was our original plan for the year, and at this point we're just not ready to revise that.

Right. Okay. Well that would be within that. And lastly, we didn't hear from Peter this quarter. We look forward to hearing that every quarter. Was wondering if there's any update on the litigation front you could provide, unless he's out in Alvarado with that retrial kicking off today.

He's right here and happy to provided an update. Fantastic. Thank you.

Always happy to be here. We mostly put the updates that we had -- the significant things in the Q that we put out this morning.

Yes.

Only -- the only other update or reconfirmation that I'd let you know, with respect to Alvarado, we are engaged in jury selection this morning and this week and anticipate having opening arguments in that trial next week. That's pretty much the major update there with respect to the Florida AG suit. We did file a motion to dismiss that case on April 8 and we're anticipating some oral arguments on that, probably late May early June.

Then finally, we announced last week the fact that we had received a Wells Notice from the Securities and Exchange Commission related to the investigation that they had commenced in April of 2003.

Okay. So, in terms of Alvarado, you guys expect at this point that'll -- that trial will go all the way through? Not really any settlement discussions there at this point?

We are prepared right now for opening arguments. And there -- the government will put on their case first and last time, as you recall, we rested without putting on a case. We have the opportunity to put on a case this time so we are preparing to move forward in that litigation.

Okay. And lastly, anything you can say in terms of coordination on the federal level in terms of discussions you've been holding with various U.S. attorney's offices that are looking into the issues there concerning physician relocation?

Well as you know, we -- there are U.S. attorneys in several districts, New Orleans, St. Louis and now Memphis who looking into some of these relocation issues, we have ongoing conversation with all of those offices continuing to provided them with documents.

Obviously the justice department coordinates them on some level. But there individual issues with each individual U.S. attorney's office and we respond to them accordingly and continue to have those conversations.

Right. Thanks very much.

[OPERATOR INSTRUCTIONS]

Our next question is coming from Gary Taylor with Banc of America.

Hi. Good morning. I was hoping for the case mix and I was also hoping that wouldn't count as my question since that's -- since that's such an easy one.

You have to choose wisely on your one question. So that was a good one.

Then I blew it. Maybe you could just disclose that.

Overall Gary, this is Reynold, our overall case mix is pretty well flat sequentially and year-over-year.

So, we -- I think we had it last at 148, is that about the right number?

That's Medicare.

Right. That's correct. Okay. Now if I could just -- I wanted to ask my question.

Just in terms of pricing, I guess Trevor had a few comments from the investor day where it sounded like you were a little more bearish and you'd described the insurance pricing cycle and how it's a little more difficult and also described kind of a shift from higher price products to lower price products and how that was hurting you. And now we're hearing something that sounds a little more bullish in terms of mid-to high-single digit increases that it sounds like you're expecting to show more evidence of as the year progresses.

Has anything changed there or is it just -- are you just doing better than you expected are you not seeing some of the pressure from the mix shift that you thought you might see through the year or what's changed there?

Nothing has changed in my outlook. In fact, it's playing out very -- in a way that's very consistent with what we've expected. And perhaps, just to put it all in context, there's a -- I think part of the problem here, by the way, is the way different participants in the industry talk about this.

So, we've been directing everyone to the aggregate result which is the product of negotiations, mix shift, consolidation of payers, all sorts of different factors. So, the -- just to start with the contract negotiations, what Reynold said is perfectly accurate. That -- We are achieving these rates of increase in negotiations. Whether they play out is a function of who actually shows up in the hospital that happens to be covered by those contracts. And all of those other factors we mentioned.

So, I don't think there's a -- maybe you interpreted my remarks in December as overly bearish and now maybe it sounds overly bullish. But, to us it's very consistent. We'd like to see more quarters of sequential improvement in the aggregate result before we -- before we would change our outlook around that.

Just to be clear then, there's a sentence you've been asked about it once and I guess I still didn't understand so maybe I'm running slow today. But you have a sentence in the release that says, solely from commercial managed care business category increased roughly 3% so that's reflective of mid- to high-single digit less the impact of some of the mix shift.

Yes.

It's what's netting you 203.

Yes.

And that's really sort of as you expected and expected to play out?

Yes.

Okay. Good enough. Thanks.

Thanks.

Thank you. Our next question is coming from Eli (ph) Radkinsky with Citigroup.

Yes, Hi. This is Elie.. The question that I have, in the Q you said you're collecting about 95% of your managed care bills. And this questions is, is there any room for improvement there? What was your historic average on that number and, again with all the managed care situations, negotiations behind you, will that number improve? And secondly on the investor day, I think one of the initiatives that you discussed was on salary wages and benefits as a percent of net revenue. I was expecting that number to come down on these for the full year.

Should I still expect that percentage to decline and to what level do you think would be normalized level for that? Thank you.

This is Reynold. I'm going to let Steve Mooney, our Senior Vice President of Patient Financial Services ask the first question -- answer it, and then I'll take the second.

Great.

Hi, how are you doing? This is Steve.

Hey, Steve.

On the one question, the 95%'s been holding pretty consistent. I think we reported that in last Q as well as this Q. Is there opportunity? Absolutely. What we're doing, and we mentioned this back in the investor conference, back in December, we're putting a lot more focus on dispute management which is on our managed care payers. We still are in the process of what we're doing -- a process we're calling TRAP.

It's our Track, Resolve And Prevent our disputed issues, which is two things. One is, flat out denials for various reasons -- clinical, technical. There's also the other things which are just underpayments, which we are still seeing a considerable amount of out there with the managed care payers. So, we are putting a major focus on that across our system. A lot of training going about in that. We are seeing some progress. We had some, as you now, we've announced a settlement we had on United HealthNet so we're starting to see progress in that area. So, we do expect to see some improvements. But the exact number where that's going to move to, we don't know at this time.

So you would expect this 95% to be somewhat of a floor with a potential upside in the future quarters?

You've got to realize to move that number up, I don't know -- on a percentage basis has to be pretty significant. To move that number from 95 is rather difficult.

Okay.

This is Reynold. On the second question, again we are shying away from discussion about percentages of net revenue.

Because if you take all the issues I told you, which are the surprises that pop up state by state, our federal government CMS rule changes, our own internal decisions to deemphasize certain product lines and improve other, is that with that number of moving parts, the final calculation of SW&B is all a by-product of that number of things.

So, again I indicated, at least from our merit wage market basket standpoint, we are moving along with what we'd expected. And so whatever that percentage turns out to be is what it is. And I will reiterate that we believe as we start to settle down some of the moving parts, there is further opportunity for enhanced worker productivity in the aggregate.

Okay. Thank you very much.

Thank you. Our next question is coming from Joseph Chiarelli, with Oppenheimer and Company.

Thanks. Reynold, kind of further to that question on the leverage of staff in your facilities including outpatient visits. It sounds like you'll get some leverage based upon incremental volume and that at some point there's going to be a question of do you have to add staff and would that be temp or contract labor? Would that then flatten out margin improvements in that period, or can you anticipate all this for a -- let's call it smooth growth line? Thanks.

Well, Joe that's an interesting question, one that's difficult to answer in that, inherently in the areas where volumes are going up, you more than likely have to turn to contract labor initially until you can bring full-time employees in.

But a good side of that equation is, in the markets, particularly California where we have a majority of union contracts, the contract labor price is not an incremental cost above the total SW&B for that particular type of labor so that's not a disadvantage to us.

It is a disadvantage to us in the short-term in the southeast, until such time as we can bring the number of nursing staff and other staff up and pull the contract labor down to the normal -- the norms that we look at.

Any sense as to percentage-wise how much more volume before you get to -- on the aggregate before you get to these levels in general terms?

We can take a look to see if there's some aggregate number that makes sense on that. The issue hospital by hospital is it depends on which floor the patient goes on and what the current ratio is, as to whether you have to add or don't add anything. And then again, as you change various product lines, by the way, I'll give you a good success story.

Last year we reported one of our hospitals in California closed its entire OB department, which was a significant part of the loss of volume that we were talking about in the second, third and fourth quarters. And that hospital has already replaced, through other med-surg business, its entire lost OB volume. So it's nice to have at least one good example I can give you where we proactively set out to do something last year and it worked and came through from that standpoint. So -- So again I -- we'll take a look to see if in the aggregate there's some way that our data shows some type of movement. I don't have it for you this morning.

Okay. Thank you.

Thank you. Our next question is coming from Kemp Dolliver with SG Cowen.

Thanks. My question relates to the academic medical centers and what steps you've taken to essentially reinforce the relationships with the university partners, given all the turmoil of the last two years. Pretty much all on board with you? Are there any lingering issues you need to address whether they relate to capital needs, et cetera? Thanks.

Kemp, very good question What . we did over the last three to four months was we pulled a focus group team together of our five hospital CEOs who managed the five free-standing academic medical centers and we assigned some resources to them to look at their individual contract relationships.

We then sent an independent third party out to interview the dean and the president of the medical school, because many of these came in under different parts of Tenet, some [NEMI's], some AMI, some as free-standing hospitals and we wanted to make sure that the original interpretation of the partnership in the intent was either in sync, or to the extent it's not in sync, where are the tensions within the school. And that information is already done.

We are now preparing a set of focused visits with the president and the dean to move out on the information that we have as well as the comments that they talked to us about. And find areas of mutual opportunity to improve the working relationship and especially as it pertains to the seemingly delays that these hospitals are encountering now and replacing faculty when they lose faculty.

I would say to to that within the group that we have, there are two issues simply because the deans in those are new to their job within less than one year. And given the complexity of what a dean has to deal with, everything at the university, sometimes talking to Tenet is not top on their list but we're getting to the point now, where they are more understanding of the relationship. So we are very optimistic that as this year progresses we'll find some great opportunities to really work together and enhance efficiency and look for opportunities to give good quality care but control costs to do that.

There are not any divorce discussions are there?

No. None whatsoever. They're in our core 69 group and it's our commitment to be seen as one of the leading owners and managers of academic medical centers because we have more than any other hospital company.

That's great. Thank you.

Thank you. Your next question is coming from Christopher McFadden with Goldman Sachs.

Thank you and good afternoon. I was wondering if you could comment in -- some specifics then about both the Philadelphia and California markets both in terms of margin trends at least directionally in those two markets and to the extent you gave some interesting quantification about some of your managed care renewal trends including the percentage by which you had actually reached out and tried to force some negotiations? Are those disproportionately located in those markets or any detail around geographic distribution of some of the managed care renegotiations would be helpful. Thank you.

Well, sure. Generally speaking, the margins have improved in both of those particular geographic areas, from the time we set out on our mission last year to make improvement in the whole Company.

Let's start with Philadelphia. Actually, we're having some of our strongest volume growth in the Company there as four or five other hospitals have gone out of business or changed their structure. And we've been the recipient of being at the right place and doing the right things to benefit from that.

As some of you may know, Independence Blue Cross is also a large insurance company and we reported at the end of December that we had successfully renewed a five-year agreement with that insurance company, we also successfully renewed a large Medicaid contract that's part of [Merichulis] which United owns, so those were two big contracts that were essential to our stability in Philadelphia and they're all done and moving in a very positive direction. So, we're happy with the volume growth, we're happy with the margin improvement, up there.

And I think there was a report that just came out recently, indicating that hospitals in Phil -- Pennsylvania and Philadelphia were in general, faring better as well as us so that's a good sign. If you're in Philadelphia you naturally have to watch the government's funding of its Medicaid program and the timing of that. And I think last year we did report to you some timing issues on that the government finally made their decisions and moved that out to all hospitals. So from time to time that's one thing we just all have to keep an eye onto.

Moving to California, California is a tremendous success story in our mind, given the trauma that they went through in late 2002 and early 2003. They actually, I can say this now, they actually had at least one month in which they had no margin last year, and they really got on the stick and moved this thing up.

As far as our internal expectations, they are actually doing a great job of meeting our benchmarks and volumes are in general improving in all the hospitals. Again, like every region I've said, we may have three or four hospitals where we have some specific issue but the progress of the whole is helping to offset these individual issues. So, we are real excited, at least where we sit today in that relationship out there.

And just as a follow-up, any geographic detail relative to some of the managed care negotiations you highlighted in your prepared comments?

We don't go geographically, because it tips off our negotiator on the other side of the table. So, we are pretty quiet about those type of issues. Other than saying we were -- we met our expectations in the first quarter and we hope to do that in the second quarter.

Thank you.

Thank you. Our next question is coming from A.J. Rice with Merrill Lynch.

Hello everybody. Two quick things. First of all with your 1.5 billion in cash on the balance sheet.

Is that -- can you -- what you have to be thinking about that -- are you going to be able to proactively do anything with that or are you basically going to sit tight to get these government issues resolved? And then second, Reynold mentioned that he spoke of some of the must-haves, that splitter physicians have -- [inaudible] they've identified the special splitter positions, can you tell us or give us a flavor for what some [inaudible] are?

A.J. Thanks.

On the -- this is Trevor -- on the cash topic first. I think it's -- it's been clear to everyone the -- one of our reasons for building that liquidity was to weather any storm that might happen both in operations but more importantly the resolution of our legal issues.

And I think, we can't really accurately talk without speculating about it -- about what we would do. What's the appropriate level of cash for us to have, an appropriate level of debt until we have a better sense of what the ultimate liabilities may be as a result of that process.

Suffice to say it does not -- it doesn't make economic sense to have this degree of cash sitting on the balance sheet in the way that it does. But as we pointed out before, we're also pleased that we don't have debt maturities until late 2011.

Regarding the splitter physician issue, here's Reynold.

A.J. on that question. I got a question the last call about the value equation that we were doing for doctors and there were some six or seven things that I indicated, such as commitment to quality, stable A teams, et cetera. The three central themes that came out of our focus group meeting, all were within those six or seven items that I mentioned before and the three big ones is, number one is a stable A team. As I indicated the last time and I'll bring you up to date on that, we did have about 77 managers within our roughly 300 A team members who turned over within the last 12 months.

I had consistently indicated on my comments, or answers to questions, that it takes anywhere from six to 18 months for a new CEO to establish a relationship with the medical staff, especially the splitter doctors. And coming out of that focus group they all pegged it at about two years to really feel comfortable with what the leadership decision-making and direction was from that standpoint. So that gives us a great opportunity to really help train and educate our newer managers into what they need to be doing to bring that timeline down and we've got some good ideas on that one.

The second one was, they wanted to be treated the same. The work seems to indicate that from an attitude standpoint the doctors fall into three groups -- 50% of them would be copers; 40% aspirers, and 10% entrepreneurs. And in the coper/aspirer group, which is 95% of your doctors, they're not interested in joint-ventures or a lot of high-fangled technology, those type of things. They just want to be treated like a doctor, open door communication with the CEO. When they've got a problem, somebody listening and take care of it. So that's really great to hear that support. What we talked about last year, which was a movement on our part to do things that affect all members of the medical staff. And then the last one that came out should not have been a surprise.

But, at least I'm glad it focused to us, which was the medical staff knowing that the local hospital is a part of Tenet, is anxious to know whether Tenet has any long-term plans for their hospital that would alter their ability to practice medicine in a particular service line or adding technology or those kind of things. So that does play into what I told you last year, which was my effort to do for the first time, a five-year CapEx plan identifying all core needs as well as new programmatic business development needs over a five-year period of time.

So, I think again, that one keys into that particular part of it. So the good news from this is that the 10% entrepreneur group, the mindset of those doctors are, they'll go from hospital to hospital based on who gives them the best technology and the things that they are looking for and they don't really have a lot of loyalty on that side of it. But 90% of those doctors do have loyalty to the hospital if you just do some simple things with them.

I guess I was just curious on that last comment. Are you getting any pressure from the field about capital budgets that say, hey we need to let them stick it out a little more to keep these doctors happy that are on the fence?

Well, the hospital operators were very excited when we gave them total control over their base capital amount going back to last November, because that helps them to attend to a lot of the day-to-day needs that the doctors and the nurses and others belive that the hospital needs. And we made it quite clear as a Company when you get up to the larger dollar purchases, we just have to make sure that we go through a proper review process to make sure that we put the money where it's needed the most and the fastest and in line with that particular five-year plan.

So the -- we don't have a lot of questions or comments that we're greatly behind in any of our major cities.

The question is more when they read reports about Tenet in a negative vein is, that questions Tenet's long-term commitment to a city or to a hospital, in their particular mind, they're reading between the lines and that's why I keep talking about the negative media overhang as an issue that we need to solve that and get that behind us so that the doctors are confident as we address our fundamentals that that's exactly what we are doing.

Okay. I understand. Thanks a lot.

Thank you. Our next question is coming from Ken Weakley with UBS.

Thank you. What were your commercial stop loss revenues in the quarter and what were they in the year ago quarter?

They were about 120 million for the quarter.

Okay.

They had settled down to roughly, if I remember correctly -- I'm looking at some of my staff here -- about 140 in the fourth quarter? Bob, you got the number there? 141 the fourth quarter.

Okay. And versus the year ago quarter?

How much? 152.

Okay. Thank you.

Thanks Ken.

Yes.

Thank you. Our next question is coming from Miles Highsmith with Wachovia.

Hi, guys. Can you give us a sense of the 29 hospitals that were identified as underperforming. How they fared year-to-date or first quarter -- better, the same, worse relative to what was communicated back in December in Dallas? Thanks.

In the general in the aggregate they had a movement upward and a movement that was very pleasing to us. It is a movement, it's not where we need to wind up, but they're moving in the right direction.

Thanks. Quick follow-up.

Anything out of the ordinary in this bad debt number that would lead us to believe that this would not be normalized going forward?

That's a good question. On a compact-adjusted basis, bad debts went down from12.7% to 11.3%, fourth quarter to first, I would say we had some fairly significant settlements with managed care payers during the period, which probably accounted for roughly half of that. So, absent some of those settlements, it would have gone to about 12, so I would say 11.3 is potentially a little aggressive and you might see it trend slightly back up.

Thanks.

You bet.

Thank you. Our next question is coming from Rachel Golder with Goldman Sachs.

Yes. I wonder if you can tell me, as you're looking at the contract negotiations you've encountered so far this year, the trend of your needing to rattle your saber and use termination notices to get them back to the table. Is there any significant number of contracts that either you or the other side are walking away from and what sort of trend you might ascribe to that?

Again, as we've discussed on other calls, unfortunately getting to that stage is a by-product of some number of negotiations that you undergo.

But, as Trevor indicated we've not had to follow through with that in any significant national or regional managed care players. To the extent we've had to do that, it's been more local city-wide plans, so we feel very comfortable that our national, large regional reputations are positive and professional.

Great. If I could follow up with one other. You mentioned the current issues in Tennessee Medicaid situation, with Georgia, the trust funding. How certain is it that those revenue streams are going to be going away from you and how certain is the size of it and the time frame?

Well the Georgia one is certain. It happened at the end of December and so, that is a monthly amount of revenue that we expected to get that was not there as we set our expectations. The one in Tennessee has been under vivid debate at the state level for many, many weeks now and again, the number that I threw out is a number that seems to be one that they've been talking about.

But again, I think I've answered the question previously that many states go down to the wire and then decrease the amount of cuts or restore the full funding to their Medicaid budgets and so, you just can't project or understand what they may do or when they may do it.

But, typically, the state legislative process is coming to an end at this time of the year, so I would say within the next four weeks or something they'll probably make a final decision.

Thank you. A last quickie, if I may. Any idea about engaging in a new bank -- a revolving bank facility or are you content with your LC backed up by cash?

It's not something that's on our agenda right now.

Okay. Thank you.

Thank you. Our next question is coming from Joseph Chiarelli with Oppenheimer and Company.

A follow-up question.

There are, I believe two hospitals where you have long-term leases that are coming off of lease, somewhere I believe, this year. Can you give us some sense of what the status is f those negotiations and where do you see those proceeding? Thanks.

Joe, I'm not sure which ones you're talking about. If you're talking about two here in Dallas, it's not this year. It's something like '07 and there's a process -- it's actually very complicated. But there's a -- an RFP process that the district is going through and we intend to put our absolutely full energy into being selected to continue as the operator of those hospitals. There's actually a lot more complexity behind it but that's something that would better to follow up separately, offline with us.

Thank you.

Thank you. Our next question is a follow-up coming from Sheryl Skolnick with Fulcrum Global Partners.

Thank you.

-- back.

Excuse Me?

Welcome Back.

Oh, thank you.

I am curious as to why it is appropriate to look at the Company on a sequential basis, because it's a lot of comparisons and so it's somewhat confusing and it's not the usual sort of thing. So, rather than assume, I thought I would ask for the explanation.

The reason that we do it, is because as so many changes have happened to this Company, in the last two years, we feel that making progress on a sequential basis is an important thing to look at. No -- no less important than looking at the year-over-year trends and that's why we also disclosed them.

So, it's -- we're not intending to try and lead you one direction or the another but just to provide more information to people. Particularly in the area of admissions where the year-over-year numbers had been so negative, but in fact the admissions had stabilized and began to grow. And grew significantly from the fourth to the first quarters. Not very much of which could be ascribed to flu.

That's it. No more complicated than that.

Okay. Because, I'm just trying to see from the fourth -- so essentially what we're -- what you're saying is that if we go back and we're going to go look at the decline in admissions from fourth quarter '03 to first quarter '04, I don't think we have those statistics on a -- without the -- eliminating the discontinued ops. So it's virtually impossible for us to see whether or not we actually got an increase sequentially seasonally as we would have thought, or a decline. And given the shift in the flu, doesn't it make more sense if we're going to look sequentially, look at a six-month period December and March versus a six-month period of August and December -- of June and not September. Only because -- that way you eliminate the shift in the flu. I don't know. Consider it.

It's just that it's very, very confusing reading the press release and trying to understand what would be seasonal and what would -- and what's -- and what really is the underlying core progress that you're making, and trying to ascribe value to both.

Okay. It was meant to be helpful not -- not confusing. But, maybe with -- they're additional statistics you want we can take this out.

Great. Thanks a lot.

Thank you. At this time there appear to be no further questions.

All right. Operator, thank you. If anybody is still listening to the call, thank you for having participated today. And we'll see you in another few months.

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