Tenet Healthcare Corp (THC) 2005 Q3 法說會逐字稿

Good morning, and welcome to Tenet Healthcare's conference call for the quarter ending September 30, 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 archive.

Tenet's management will be making forward-looking statements on this call. Those forward-looking statements are based on management's current expectations, and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Certain of those risks and uncertainties are discussed in Tenet's filings with the Securities and Exchange Commission, including the Company's 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 which 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. These alternative measures are provided 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

During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time, I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter, please proceed.

Thank you, operator, and good morning, everyone. You've all had the opportunity to review our third-quarter results. And I think you'll agree that operationally, this was a very challenging quarter for Tenet independent of Hurricanes Katrina and Rita. Hurricane Katrina was devastating to our six hospitals in Louisiana and Mississippi, and the approximately 5,500 Tenet employees in the Gulf Coast region.

I recognize that this is an investor call, so I won't belabor the point. But it's important to mention that when you invest in Tenet, you are investing in a business people helping other people, and that's what our employees across the country did in response to this destructive storm. I'm very proud of how they rose to the incredible challenges they faced.

Less than a month later, Hurricane Rita arrived, and we were well-prepared for another storm. Fortunately, Rita did not severely disrupt our operations in Houston or East Texas for more than a few days.

Then, just last week, Hurricane Wilma knocked out the power to every one of our 14 South Florida hospitals -- in some cases, for as long as five days. We sustained wind and water damage in most of our hospitals, but certainly nowhere near the extent we did with Katrina.

Our regional business office and national Medicare billing center operations were shut down for a week. We have redundant systems that immediately switched hospital billing operations to our backup locations in Georgia and Texas, but the Florida collections operations were down for seven days. Our people worked very hard, and got these operations back up and running at 7 a.m. yesterday morning. Between collections and hospital operations, it's too early to have an assessment of the cost to Tenet from Hurricane Wilma, but it did affect an important market.

Turning back to Katrina, we recorded hurricane-related costs of $241 million pretax, or $0.32 a share, in Q3. Just be clear, 201 million of that impact is a non-cash impairment charge. We expect to incur additional costs and receive additional insurance recoveries related to Katrina in the months ahead, and we will record them as those amounts are known.

I would like to give you a brief summary of the quarter, excluding the impact of the hurricanes, and then get into greater detail on a few items. Our rate of volume losses seems to have stabilized. And like previous quarters, some of the volume loss has been intentional.

There are also some encouraging statistics. Both inpatient and outpatient surgeries grew, as did ER visits and inpatient admissions through the ER. When we adjust outpatient visits primarily to exclude service lines that we exited, total company visits dropped by 1.3%, which is much less than the drop in recent quarters. Obviously, our focus is on generating improvements and volumes through the many initiatives that we have in place. We believe we're taking the right actions to get results.

The efforts we have made to restore reasonable pricing are now being reflected in our financial results and statistics. Some of the first changes that I made as CEO were to centralize managed care contracting and improve the way that we manage our revenue cycle. Changing the Company's relationship with payers and the structure of the contract portfolio were enormous challenges. We've also invested heavily in systems to enable us to have better insights and control in this area.

Our performance in controlling the rate of unit cost increases has compared favorably with our peers every quarter for more than a year. This is no small feat when your volumes are declining. But our growth in supplies cost was out of line this quarter.

The drivers of this increase are specific and, unfortunately, not easily controlled. To a great extent, these are passed through to payers, but since the pass-through is not included in every contract, we must do better.

In the focus area of bad debt expense, our statistics are very poor in Q3 due to some specific and, we believe, nonrecurring factors. But the rate of growth in uninsured admissions and the absolute percentage of uninsured patients are lower than our peer companies. We are continually improving collections from the uninsured people who are actually able to pay, which we define based on their credit scores.

The bottom line, however, is that we are performing well below your expectations and our own budget in earnings and cash flow. At the end of the third quarter, we're at the bottom end of the range of expectations that we set for earnings and cash flow for the year. We have laid a foundation for earnings growth through our efforts on pricing and cost control, but it's absolutely necessary to get admissions to grow in order for this to work.

Now that's my abbreviated summary of the quarter. I would like to now get into a little bit more depth on these key topics. Before I go into more detail about the financial results for the quarter, I'd like to comment on two big picture issues that sometimes get lost. These are areas that are important to the long-term performance of the Company.

I'm referring first to the issue of corporate governance, and second to our focus on improving quality. We have recently received significant recognition of our progress in both areas.

According to institutional shareholder services' current corporate governance quotient, Tenet ranked number two in the S&P 500, and is number one among health-care equipment and service companies. Tenet is committed to the principles of good corporate governance, and we are convinced that this commitment can result in more stable, predictable, and sustainable performance over the long term.

Similarly, our efforts on the quality front are also earning recognition. As CMS expands the number of metrics used to assess hospital quality, Tenet has continued to rise in the hospital compare rankings. As Gary Lieberman pointed out in his September report on hospital compare, and I quote, "one of the more interesting findings was Tenet's comparatively high score relative to its for-profit peers given the turmoil the Company has experienced over the past several years." In the most recent data, Tenet ranked first among investor-owned hospitals in nine of CMS's 15 quality metrics.

Another positive recognition of our quality efforts came just last week when we learned that 16 Tenet hospitals were awarded premium status, local quality centers of excellence in cardiac services by UnitedHealthcare. Tenet hospitals across the country have received many quality designations by organizations like the American Heart Association, HealthGrades, J.D. Power, and others. As a Company, we have embraced a transparent and participatory attitude towards quality reporting.

We are convinced that demonstrating excellence on quality is central to the ability to compete successfully as a health-care service provider. And as patients become more familiar with consumer-driven health-care's quality measures and pay-for-performance (ph) initiatives, we're confident this recognition will ultimately lead to stronger volumes. But for the time being, volume growth remains our greatest challenge.

As our peer companies have already reported, it was a soft quarter for admissions. And Tenet saw continued declines again this quarter. Admissions, excluding the six hospitals impacted by Hurricane Katrina, were down 1.4% and outpatient visits were down 4.3%. As we have discussed on prior calls, we are also continuing to take a hard look at reducing service lines that are not valued by the local community. These actions contributed to our decline in third-quarter volumes by 90 basis points. But we expect the impact on profitability to be positive.

As in prior quarters, the impact on the bottom line from our volume decline was magnified by the 4.3% decline in same-hospital commercial managed care admissions. I am pleased that at least this rate of decline is stable compared to the commercial volume loss we saw in the second quarter.

Our primary objective is to reverse this deterioration. And while there is much that we can and are doing, our progress is somewhat constrained by pending government investigations and litigation. We're working hard to resolve these and all litigation matters in a fair and appropriate way. It is challenging, time-consuming, and not entirely in our control, but we continue to make good progress.

Until these issues are resolved, it will be difficult to impact the decision-making of certain physicians who are hedging their bets by redirecting a portion of their patient volumes away from Tenet. In part, this is a reaction to their concerns about our ability to invest in our hospitals and maintain a stable operating environment.

To illustrate the extent to which the profitability challenge that we are facing is predominantly a volume issue, let me share with you this metric. The loss in volumes we experienced from the third quarter of '04 to the third quarter of '05, excluding the impact of New Orleans, resulted in an estimated loss in the quarter of approximately $50 million in net patient revenue. That translates to about 80 basis points of EBITDA margin, and probably more because the volume loss was greatest in the most profitable segment of our business.

There is no question that the most important problem confronting us is the need to grow volumes on a sustained basis. I believe we can grow volumes, and I've asked Reynold to tell you how we're going about it.

This quarter, we made outstanding progress in pricing. Less than two years ago, I articulated a strategy to you regarding the centralization of our managed care function. Since then, we brought new talent into our organization; we've developed much better data to support our contracting efforts; we've reported our progress to you using that data; and today, we have solid results to report.

Despite the loss in volumes that I discussed earlier, same-hospital managed care net revenues were up 3.4%. As you know, in prior quarters, we have seen some of our pricing progress offset by industry consolidation and adverse changes in our business mix. So we were very pleased to see that the aggregate portfolio managed care yield increase, including both managed Medicare and managed Medicaid was up 5.7%. As some of you will recall, going back to the first time that we reported this statistic, in the fourth quarter of 2003, the quarterly progression of this statistic has been negative 8%, negative 5%, zero, 1%, zero, 1%, zero again, and now up nearly 6%.

Digging deeper within the managed care portfolio, there are some very strong statistics. To start off, same-hospital net revenues per commercial admission were up 9.3%. Those of you who have followed us since late 2002 know that one of our biggest problems was to resolve Tenet's managed care -- restructure Tenet's managed care revenue away from the Company's prior dependence on stop-loss payments.

This is a problem that we now have solved. For example, if we look at just the commercial segment of our managed care business, same-hospital inpatient managed care base rates increased 12.9%. Stop-loss payments declined 28% to $97 million for the quarter, and at this point, only 4.2% of our managed care admissions draw a stop-loss payment. These are now numbers that are within industry norms, offer more predictable revenue streams, and are a more solid foundation for future sustainable pricing growth.

The Company's pre-2003 pricing strategy created tremendous obstacles to our turnaround, and although I hesitate to declare victory quite yet, I'm incredibly pleased with the job that our managed care team has done to restore pricing power in our business.

Now I wish I were as pleased with our performance on costs. In the third quarter, same-hospital controllable costs increased by 5.8% on a per adjusted patient day basis. This rate of growth is in line with industry peer companies, but insufficient to meet our turnaround objectives.

We have launched a fresh set of initiatives on the cost front which we expect will result in much better results going forward. Cost discipline requires constant vigilance to prevent the inevitable creep which can have a detrimental impact on performance. To that end, we have taken a very hard look at every cost item as we are preparing our budgets for 2006, and we're taking significant actions across the board.

We experienced a significant increase in bad debt expense, to 15.1% of net revenues on a Compact-adjusted basis. This increase adjusted from a number of onetime anomalies, including systems conversion, a systems outage, disruption in our business office operations due to the hurricanes. We believe that these were isolated occurrences in the quarter that should be corrected and result in a below-trend bad debt expense ratio in the fourth quarter.

October's early collections results were encouraging in this regard. Of course, that is prior to knowing what the impact of Hurricane Wilma will be on our collections operations in Florida.

Before I turn things over to Reynold, let me mention one last topic -- our announcement last week regarding our plan to restore and rebuild in New Orleans. We believe that over time, at least a majority of the city's population will return, along with many more people who will be drawn to the incredible reconstruction efforts. Tenet currently plans to rebuild and restore. We plan to construct new facilities where we need to, and we will offer in New Orleans a locally focused network.

Our insurance carriers are obligated to pay for the replacement of our facilities and the cost of operating and re-establishing an interrupted business, subject to deductibles and policy limits. We intend to make a claim for the full cost of replacing our facilities and for the costs that we have incurred and continue to incur in those operations. Unfortunately, it will be months before we know the precise amount that we will receive from our insurance carriers.

In summary, we continue to make tangible progress towards our turnaround objectives, and we remain confident that we have the financial and balance sheet strength to see the process through. And while I'm disappointed that our CFO, Bob Shapard, chose to return to TXU in a new role, I want to assure you that we have a strong bench in finance. Bob's departure will not interfere with our ability to implement our strategy.

As you read in our release announcing Bob's departure, our Chief Accounting Officer and interim CFO, Tim Pullen, has been with Tenet for more than 20 years, and has deep knowledge and experience in all of our financial matters. I expect the transition to be seamless.

Let me now turn the floor over to Reynold to review our progress on strategies to reverse the loss of patient volumes. He's got some preliminary data on how we are addressing the splitter physician issue in a number of our hospitals that began adopting these strategy several quarters back. And the results are really quite encouraging. Reynold?

Thank you, Trevor, and good morning. I have been a hospital manager for 34 years, and I've provided senior management oversight to about 94 hospitals in 16 states during that time. Within those years of experience, the third quarter produced some unfamiliar, strange results. As an example, about 42 of our hospitals, roughly 60%, had performance near internal budget expectations. However, four hospitals missed budget significantly all three months, six hospitals missed significantly two months, and 17 hospitals missed significantly one month. If one were to look at the weighted average impacts as to why 27 hospitals missed budget one month or more, about half was due to lower-than-expected volumes, about a third was due to higher than expected bad debt, and about a fifth was due to the inability to flex labor cost quickly or poor revenue mix issues.

Also, what makes the quarter strange is that we had previously reported for several quarters our efforts to improve the financial results of some 15 to 20 hospitals, most of which were small urban hospitals. In the third quarter, we had fewer hospitals significantly missing our expectations for most of the quarter, which is a sign of progress, but a higher number of hospitals that missed one month significantly and then resumed their expected internal budget goals.

There were a significant amount of individual, unique causative factors by hospital driving the four impact items noted above. The month of July alone accounted for almost 50% of the quarter's missed budgetary expectations.

In my first quarter comments, I noted that while we were pleased with our progress and we expect to gradually improve, we are guardedly optimistic about the pacing, and the improvements will still have some ups and downs. Given the third-quarter results, that statement still applies.

Now, let's move to some positive news on volume building. As reported in the second quarter, we were able to conduct a WebEx training of over 400 hospital-level managers on September 28 so as to initiate what we internally call the Reigniting Physician Relationships program. While this is our previously announced strategy to improve admissions by the approximately 8,700 splitter physicians, we expect that all medical staff members, about 14,000, will be visited by the service teams at some point within the coming months.

Even though this initiative is only into the first month of implementation, early reports are encouraging as follows -- first, physicians and their office staffs are overwhelmingly receptive to the visits, and thankful that hospital managers are coming to their offices to check on their service needs and expectations. Second, the stated needs are generally physician- or physician-group-specific, making our software service needs tracking system an important part of the ultimate success of the initiative.

Third, there is one overwhelming consistent trend in the feedback, which is advice on specific areas of the hospital where process and throughput improvement will drive physician satisfaction more than any other factor. The good news here is that our commitment to quality transformation teams can now move from the emergency department and surgery improvement project emphasis over the past year to these newly identified areas for improvement.

Fourth, over 40 physicians in about 20 hospitals increased their use of our hospital following the first visitation. And lastly, we were encouraged that many physicians simply did not know we provided a particular service, and indicated they would use us now.

Each hospital staff member has with him a listing of all of the positive accomplishments that Tenet has done over the past two years, along with a list of honors and recognitions that many of our hospitals have achieved over the past two years in the area of quality care and service delivery.

Also on the volume front, we are pleased that the California region continues to have the best year-over-year volume growth following their application of the targeted growth initiative that we detailed last quarter. This initiative uses market data and updated cost accounting to first target volume demand in the primary service area, and then to select which services to grow and which services to deemphasize. The targeted growth initiative is just now starting in the Florida region, as well as two Texas-region hospitals and one Philadelphia hospital. We therefore hope to give you more details in the next earnings call on both the Reigniting Physician Relationships initiative and the targeted growth initiative.

Moving on to insurance managed care, Trevor reported the very positive uptick in unit revenue. Hopefully, once the physician visitation program gains traction and we get back more of the higher-margin managed care inpatients and outpatients, we're poised to get the upside leverage of both volume and pricing above fixed costs.

One more exciting piece of news that I told in the last earnings call was that our managed care and quality management teams are working on achieving certification with various insurance companies for center of excellence status. I'm happy to report that UnitedHealthcare has awarded 16 Tenet hospitals premium star status in cardiac services, with three more hospitals possibly to receive the certification soon. This designation can lead to volume growth, as insurance subscribers review the database for value to providers. The certification also validates the inherent quality of our commitment to quality program initiatives to incorporate national clinical standard protocols and best practices.

In the area of cost control, our total cost management initiative continues to meet our objectives. Since early 2004, the launch-to-date savings has been $105 million. 2005 year-to-date savings is 54.7 million, with 19.2 million in the third quarter.

The anchor program is our medication use management initiative. After the first 12 months, the savings have been 30.6 million with a 2005 year-to-date impact of 21.3 million. We continue to struggle this year as last with the cost increase of implantable devices, blood products, prosthetics, and pacemakers, skewing up the inflationary cost of an otherwise good control of all other supply costs. We have cost pass-through protection in most insurance contracts, but the margins are slim for this high-cost category. We are still working on solutions to these specific cost items, but as you know, the physicians are strongly detailed by the manufacturers on brand selection.

Next, a few comments about bad debt. Our bad debt budget challenges are centered mostly in Texas, where we previously reported the number of people without insurance grew from about 25% to about 30% over the past year. Outside of Texas, a few of our inner-city academic medical centers or large intercity hospitals with trauma emergency departments are the second challenge. Our plan in general is to start concentrating on any elective bad debt admissions or outpatient visits to see where those volumes are coming from and to see what positive effects can be accomplished through our previously discussed patients access initiative.

Lastly, let me give you the big picture on the New Orleans market. The five hospitals in New Orleans and the five diagnostic imaging centers comprised approximately $600 million in annual revenues. We also own 50% of a successful Medicare HMO with approximately 35,000 covered lives. These operations generated approximately 20 million in non-GAAP EBITDA through August, or an approximate $30 million annual run rate.

This market has always had ups and downs based on the unusual payer dynamics in New Orleans, the historic erosion of population and payer mix, and the intense competition with four large not-for-profit competitors. Prior to Katrina, we believe that this market had the potential to grow to roughly $50 million of annual non-GAAP EBITDA.

New Orleans was an overbedded market, but now more than half of the hospital beds in Orleans Parish and in the eastern parishes are out of commission. Many of these competitors will not rebuild. We believe that in the New Orleans area, our three suburban hospitals on the West Bank, in Kenner, and in Slidell, are well positioned to serve the areas that are going to be repopulated first. Our two in-town facilities are the ones that require the most rebuilding, but that timetable, including how many beds to build, will coincide with the slower redevelopment of the community they serve.

At this juncture, we estimate a cash outflow between 25 to $30 million for these operations for the fourth quarter, excluding any unusual cost, incremental hurricane cost, and normal capital replacement or rebuilding capital. I personally managed this market for Tenet for three years when I joined the company in 1997, and I know these hospitals and their communities well.

With that, I'll now turn the podium over to our Chief Financial Officer, Bob Shapard.

Thank you, Reynold, and good morning everyone. I want to begin my remarks by making sure everyone is clear on how we are presenting our financials in the 10-Q and the press release with regard to the hurricanes. We've carved out only the impact of Hurricane Katrina, because the impact of Hurricane Rita was considerably smaller. While Houston and East Texas have rebounded from Hurricane Rita, our operations in New Orleans and Biloxi remain severely depressed. As a result, for at least the next few quarters, we will continue to back out these hospitals from our prior-year quarters in order to give you meaningful year-over-year comparisons. When we refer to same-hospital financials, we're referring to the 63 hospitals that are currently up and fully functioning.

Let me start by focusing on earnings in the quarter before interest, taxes, depreciation, and amortization, a non-GAAP term of EBITDA. This figure for the quarter was $82 million. This figure is before the impairment charge of $201 million, and also excludes the $40 million hurricane losses. It also excludes litigation and investigation expenses of $28 million. EBITDA is a key metric we use to assess our progress.

Even though the third quarter is typically the year's lowest earnings quarter, this $82 million EBITDA figure is about half the run rate we would have expected given our objective for the year. Year to date, EBITDA from continuing operations is roughly 5 to 10% behind expectations.

You'll recall we thought the loss for the year would be about $100 million. That is a GAAP net income number -- about a $100 million lost. Adding back depreciation, amortization, and interest expense of about 800 million, this would translate to an EBITDA number of roughly $700 million for the year, plus or minus 100 million, as we stated when we gave our outlook.

To put this third-quarter result in context, I would like to draw your attention to some significant items that impacted of our results. Some are transitional in nature, and others are the focus of well-defined strategies where we are beginning to see progress, but still have a way to go.

First, volumes -- in looking at volumes, Trevor has already reviewed the impact of the weak volumes for the quarter. And since Reynold has discussed our strategy for reversing those declines, I don't think it's necessary to add my thoughts on that topic. So let's move on to pricing.

With regard to pricing, over the last few quarters, we have begun to report competitive price increases. That's been somewhat masked by payer mix shift and consolidation of payers. But this quarter you see the evidence of our improved pricing position.

Our progress in recent periods towards restoring a competitive pricing structure will serve us well as we stabilize and begin to improve volumes, especially in the commercial managed care segment. This pricing improvement can be linked to our returns in the quarter by taking the pickups we'd achieved in net operating revenue per admission and per visit and multiplying by the relevant volumes in the third quarter. This suggests an improvement in pricing, added approximately $60 million to EBITDA during the quarter.

Now, there is limited quarter-to-quarter volatility in pricing related to supply cost pass-throughs, as Trevor referred to. Since we saw same-hospital growth in surgeries of about 0.8% this quarter, we're estimating that about 70 basis points of our pricing growth represents the related growth in pass-through payments. These payments helped to offset a portion of the increase we experienced in the supply costs.

Let me talk for a moment about cost. Cost is a mixed picture during the quarter. I'll focus on controllable operating expenses, which we define as all expenses with the exception of bad debt. Same-hospital controllable operating expenses per equivalent patient day were $1,783, an increase of 5.8% relative to last year's third quarter. This is well above our target for the quarter.

The increase here was across the board, but same-hospital supply costs were up 8.8% on a nominal basis and up 10.4% on a per equivalent patient day basis. As I just mentioned, this is partially explained by the increase in surgeries.

Fundamentally, however, the real driver of the increase in controllable operating expenses was an inability on our part to reduce our cost as rapidly as our volumes declined. In response to this, we're pursuing strategies of deliberate and methodical cost reductions to drive down our cost and bring them into alignment with the realities of our volume picture. We have begun a rigorous process to reduce cost that includes -- one, a downsizing or elimination of unprofitable service lines; two, each hospital is rightsizing its staff to its own local volume outlook, and is benchmarking against standardized productivity metrics; and thirdly, we're realigning and reducing corporate overhead costs.

Since we are in the midst of our budgeting process for 2006, it's premature to quantify the impact of these cost efficiency actions at this point. But we expect to be able to provide meaningful commentary on our cost objectives when we have a broader discussion of our financial outlook going forward.

Now, let's talk about bad debts for a moment. The spike in Compact-adjusted bad debt ratio to 15.1%, also had a significant adverse impact on results for the third quarter. You will recall when we had our second-quarter call, we reported a number of 11.3% in the second-quarter that we normalized to roughly 12% due to some positive settlement adjustments we had during the quarter.

Now relative to our expectations for a number this quarter in the range of 12 to 13%, the spike to 15.1% had a negative EBITDA impact of roughly $65 million. This is a significant component of our variance from expected results for the quarter.

We had some transitional items which contributed to this pressure. Some major system conversions and system migrations delayed collection activities and reduced cash collections during the quarter. This softness has already been meaningfully reversed as evidenced by strong collection operations in the month of October.

We believe these onetime factors adversely impacted our bad debt ratio by approximately $55 million or 210 basis points in the third quarter. As a result, we estimate that a bad debt ratio of 13% would be more meaningful -- more meaningfully reflect the underlying business environment. We'll give more details on our bad debts in just a moment.

Turning to cash flows, we have a modest consumption of cash in the third quarter from operating activities which used $15 million. Discontinued operations used $24 million, which means continuing operations was slightly positive. These figures are before capital expenditures of 136 million and the proceeds of asset sales of 24 million and a few other minor items.

As a result, unrestricted cash declined by $114 million during the quarter to a balance of $1.48 billion at September 30th. Now this figure excludes 263 million of cash restricted as serving (ph) as flat (ph) or for standby letters of credit.

On a year-to-date basis at September 30, excluding the $537 million tax refund earlier this year, we've consumed $212 million of cash after CapEx. This is a measurement most analysts refer to as free cash flow. This puts us slightly behind our guidance for cash consumption of 100 to $200 million for the year. We hope to make of a good part of this and get back to the guidance range if our bad debt collections improve in the fourth quarter as we expect and were able to work down our accounts receivable.

Before we move on to Q&A, let me offer a few thoughts on my decision to leave Tenet after a rather short tenure and return to TXU, a Company I worked for many years. My decision to leave the Company was driven by an opportunity for me. It was not motivated in any way by concerns about Tenet. My view of Tenet today is essentially the same as I held when I arrived. This is a good Company with good assets, a dedicated and talented management team. The Company clearly faces some sizable challenges, but there's every reason to believe that the strategies being implemented will produce positive results within a reasonable time frame.

Before we move to Q&A, I want to ask Steve Mooney to give a little more color on the bad debt spike in the quarter and the drivers because it was so significant. Steve is a vice president of the Company and heads up our patients financial services. Steve?

Thank you, Bob. Good morning, everybody. There were two primary system issues that occurred during the third quarter that disrupted our collection flow and caused what we believe to be a nonrecurring impact of bad debt expense. The first was a result of a system conversion in our Philadelphia hospitals.

As you may or may not know, since the announcement of our business office consolidation project in the summer of 2003, we've completed 20 conversions to our standard patient accounting platform, PBAR, which makes the total hospitals on PBAR 68. We had 68 conversions to our standard proprietary collections system, ACE (ph). We've had 69 conversions to our standard Medicare billing system, 57 conversions to our standard commercial billing system, and 66 conversions to our standard form and (ph) bar-coded armband system.

During this time, everything had gone very well with minimal disruption. Our normal practice was to convert all systems simultaneously. Due to this success and all of the efficiency gains we realized from our billing system conversions, a decision was made to do the billing system conversion in advance of the other patient accounting conversions within the Philadelphia hospitals.

That decision proved to be a miscalculation. The interim interface had a defect that resulted in a significant portion of commercial claims not being sent to the payer -- 15,000 claims, to be exact. Although we had reporting to verify the bills were being dropped, as we call it, to the clearing house, we did not have a report that verified a receipt by the clearing house. The report has since been built, tested, and is being monitored on a daily basis.

All unbilled claims were identified in the quarter, and were billed by quarter end. It should be noted that although there are 12 commercial billing system conversions remaining, they were all be interfaced to our standard patient accounting system which had been completed in the past without incident. As a result, we believe this to be a onetime event.

The second was a result of our collection system migration. In our continuous stride to consolidate our operations and improve efficiency, we moved our collection and billing system hardware from Southern California to Plano, Texas. Despite all of the best planning by both internal and external resources, due to several conversion issues, the most significant being system configuration as related to both storage and system processor, the system experienced significant degradation.

For a period of approximately six weeks during the quarter, the system response time was significantly impacted. As an example, a peak processing function that would normally take a third of a second was taking upwards of 20 minutes. After significant diagnosis and changes to the system identified, the system was taken down on September 23 to make the appropriate changes, and was restored on Monday, September 26 without incident.

Described in a little more detail, the system processed several hundred thousand transactions per day, 25% of which was added in the third quarter while these issues were occurring. Prior to the change, we were running at approximately 90% capacity, and after the change, we were approximately 20%. The problem has not reoccurred.

To add a little flavor to Trevor's comments on the collections, preliminary cash collections for October were at 103.6% target, or $33 million greater than our average in the third quarter. Thank you. I'll turn it back over to Bob.

Thanks, Steve. For the benefit of the broader (ph) group, we're going to try to limit the Q&A to 30 to 45 minutes here. And now, operator, would like to turn it back over to you.

(OPERATOR INSTRUCTIONS). Oksanna Butler, Citigroup Investment.

On the bad debt front, just a bit of additional clarification, please. You are -- it appears that your uninsured admissions trends are basically pretty steady, but you did see an increase in charity care. So I'm hoping you can explain to what extent that you also see as a temporary issue?

And then with respect to the onetime issues you mentioned in Philadelphia, what was the amount of the claims, and is it accurate to assume that all of that will be collected in the fourth quarter? Thanks.

Oksanna, this is Reynold. I'll take the charity part first and then turn it back over to Steve for more color on the bad debt question.

But regarding charity, most of our charity uptick was in the two inner city hospitals of Atlanta, and two solo community hospitals, one outside of Atlanta and one in South Carolina. The good news on this is that we reported at the end of December that the state of Georgia was severely going to cut its energy (ph) care trust for (ph) funds, but they came back in January and restored that to a level that we appreciate. And so three of these four hospitals are actually very strong financial performers for us. So that particular one has not caused us any problems.

Around the country, outside of Atlanta, and then again, the inner city of Atlanta and the two solo hospitals were 50% of the charity uptick. And then outside of that, three of our four hospitals in Dallas have charity care -- and two hospitals in Palm Beach, our two trauma centers, St. Mary's and Delray.

This is Steve. I'll give the question back on the bad debt and Philadelphia. Those claims represented about $77 million in gross charges, balancing roughly in our 25, $30 million range net. We've already seen a decrease in our AR in the Philadelphia market since the end of September by $36 million.

Okay. And just a quick follow-up then. If we're trying to compare apples to apples here -- so your total uncompensated care, including the bad debt and the charity care and your Compact is about 15% this quarter. But that includes the about 55 million that you said you -- being onetime, and that compares to over 20% in the third quarter of '04. Is that right?

Yes, we agree with that.

Adam Feinstein, Lehman Brothers.

Just a couple of questions here. I guess first, just back to your uninsured volume growth -- what was interesting is your uninsured volumes were down on the inpatient side, but they grew on the outpatient side. I wanted to get some more clarity there.

And then just a second question here is just in your 10-Q filing, you made reference to your fiscal intermediary looking at your claims for outlier payments -- I guess just going through some sort of analysis, I guess. Just wanted to get some more clarity there and see whether that's going to factor in that all to your settlement discussions with the government.

So why don't we take that last part first? Peter Urbanowicz will address that.

Adam, as you may recall, back in 2002, in December of 2002, CMS administrator directed all fiscal intermediaries to review outlier charges at hospitals that received large outlier payments in 2002 and in prior years. And he directed that the FIs do special audits. Those audits were to be conducted in 2003. There was some time for them to take place. They are only now being concluded, and the FIs are then closing the cost reports. So what they did is -- the cost reports were reopened for the purposes of reviewing the charge masters and reviewing the outlier charges that occurred. In some cases, there were recommendations by the fiscal intermediary, in fact, to increase the amount of outlier payments to some facilities.

So your question was where does this fit in with the rest of the outlier investigation? As we said, the federal government continues to review all outlier payments made prior to 2002. This may get factored into their viewpoint, but that is still ongoing, even notwithstanding the FI doing these audits.

Okay, and just so -- the other part of the question in terms of the outpatient uninsured volume growth?

Again, both on the inpatient and outpatient side in Texas, that growth has been tied to the growth, as I said, from 20 to 30% of the population being uninsured -- pretty much general throughout the Texas hospitals. And then the only other focused point was in St. Louis, we had a conversion -- part of the issue that Steve was explaining. So we think that part will clear up later on from that side of it. And other than that, those are the key focus areas.

AJ Rice, Merrill Lynch.

Just a couple of aspects of some of your comments to get some clarification on. I think the way Trevor worded it -- I may not have had it exactly right -- he said that the ongoing issues with the federal government were holding the Company back from making progress in rebuilding volumes. I guess as you are hinting that you've made some progress in discussing -- discussions with the government, I'd be interested to know what specifically will change in your mind once you get a settlement with the government -- how quickly will it take you -- will you be able to realize those changes?

And then sort of related to that, you're out in front, I'd say, relative to your peers in what you're talking about doing with New Orleans -- going back proactively and trying to rebuild your operations there. Given all of the pressures that the Company is under, I'd like to hear a little bit more about your rationale for taking such an aggressive stand to go back in New Orleans. And is there anything about what you are doing that you think will have side benefits in terms of your discussions with the government?

Let me start with the comment I made with respect to the impact on volumes by the continued overhang of investigations and litigation. There are -- this is obviously a topic with many facets -- but just to highlight a couple of them. Due to the litigation investigations that we have faced, we have taken certain deliberate actions that have not been helpful to volume growth. For example, we have constrained capital spending at levels that existed in the mid-1990s -- not that those are bad levels, but in some of our markets, they have been levels that are uncompetitive in the market. We've done that in order to amass an amount of cash and resources that would prevent us from experiencing any sort of liquidity prices, but also would be sufficient to satisfy some or all of the exposure that we might have as litigation is resolved. Second, so that is -- constraining capital is one answer to your question.

The second one is among this -- of physicians who direct business to more than one hospital, there is some elements of business out there where the physicians are concerned as to whether the hospital and the Company has a future. And the only thing that causes our future to be in question is really the impact of the litigation and investigation matters.

So as we continue to make progress -- and I would remind you that last year, we resolved all of the major patient litigation the Company faced -- that adds clarity about the fact that the Company will have a future and the hospitals will have a future. And as we able to reach greater certainty about that exposure from litigation investigations, we should prudently increase our capital spending to levels that are more competitive and appropriate in our markets.

As for some statement of making progress or not, just the passage of time helps clarify what may or may not have occurred in these various matters. As Peter mentioned, the resolution of these audits by fiscal intermediaries is some form of progress. The government on the many investigations that they have continued to investigate certain matters. And as time goes on, they reach greater clarity about what might have occurred and what the relevant resolution might be for those. And as we have said now for more than two years, we have carried on a very transparent and cooperative tone to all of these investigations, providing them with whatever they need in order to move forward. And we have urged these investigations along to proceed faster than they might otherwise.

But it is clearly a cloud that hangs over the Company. When it is ultimately removed, I can't say. I don't want to speculate what the effect will be. It will certainly increase confidence by people within the Company and outside the Company about our hospitals. It will enable us to make decisions with greater certainty. And those decisions will foster growth. But it's very hard to be more specific than that.

If I can turn to New Orleans, you're right about comparing what we have stated (ph) in New Orleans to the other operators down there. But there are a few things are important to understand about New Orleans. One is that we operated more hospitals down there than anyone else. Second is that of the five New Orleans hospitals that we operate, three are in actually pretty good to very good shape, and can be remediated relatively quickly. That's one in Slidell, one in Kenner, and then one in Jefferson Parish on the West Bank. Those hospitals form a very solid network on the periphery of downtown New Orleans that can be very effective in serving the population that is likely first to return to the area.

As for the downtown New Orleans hospitals, it's been thoroughly reported by us and by the media that there was extensive damage to our Memorial and Lindy Boggs hospitals. But what was less extensively reported is that more than half of the bed capacity in Orleans Parish and the eastern part of New Orleans has been put out of commission. And some of that capacity will not return to the market ever, in our opinion. Other operators in that market will, by definition, rebuild or repair what they have, which may be suboptimal capacity.

And what we have an opportunity to do is to create a hub in the center of town that can be also augmented by these hospitals that we have in relatively good condition on the periphery of town. And we believe that there is a viable network that can be created there that can actually be more competitive than it was before in an environment that will have reduced capacity overall, admittedly with a reduced population.

The other thing is that I think that many people have assumed that our two New Orleans hospitals that had the most extensive damage were somehow destroyed. And that is not the case. There are elements of those campuses that are -- that we can remediate within a matter of months.

And so this is an incredibly complicated thing. It's still evolving. We still have engineers who are probing -- as you can imagine, in a hospital environment, you have to look inside the walls and inside the pipes that carry the medical gases to the rooms, and the level of technology and infrastructure and so forth is staggering. So that's why there's still questions to be resolved.

But the bottom line is that we think that we have a good opportunity there to have a solid business. And of course, I'm not even speaking about the diagnostic imaging business we had their, which is very successful, and the Medicare HMO which we had which has been quite successful as well.

Sheryl Skolnick, Fulcrum Partners.

Questions -- first, a clarification. When we look at the chart that you were kind enough to give us in the filing -- the 8-K and the press release, what's the right number to look at for total uncompensated care and the growth? Is that -- do you want us to be focusing on total uncompensated care, and the fact that on a same-store operation, it grew by 13.6%? Should we be looking at -- because as I look this, I say, okay, you've got charity care admissions growing at 20%, uninsured admissions declining by 2.6 -- tell me why I don't net one against the other on a same-store basis?

And then I have other questions that might be related to some of these volume issues as well.

Let me go to the other question, since we have (multiple speakers) --

Okay. I noticed in your disclosures in the Q, that you've got 30% of your rehab units -- so two hospitals and 20 units -- that are not in compliance with the 75% rule. Is that performance acceptable? Is it contributing to your volume declines? And what do you do about that? Obviously, that's potentially hurtful if you don't meet those targets in a timely fashion.

And then the next question, while you're looking for things, are the collection rates for managed care -- the disclosure in the Q (ph) seems to indicate that you are yet again having trouble collecting for managed care. It dropped to 93% of revenues in AR for that category versus 95% a year ago, if I read it right. Was that related to the issues that you discussed as being onetime, or is there something else going on where you have a payer balking at paying you?

Okay, why don't we start with the rehab one, because I actually happen to have that. (multiple speakers) we have (ph) other people who have busily been taking notes on all of your other questions who will come up with answers, hopefully within a matter of a few minutes.

On the rehab rule, as you point out, we have 22 units. Two of those units are likely never to be able to meet the rule. And we expect that we will ultimately close them. We think 20 can meet the rule. But embedded within the 90 basis points that I had mentioned as an adjustment to admissions was a portion of those that were related to admissions we've lost in order to become compliant with the rule. We think that ultimately, the impact to us is likely to be about a deterioration of 9 million in revenue over the next six months in order to become compliant with the rule. I hope that puts it in context for you.

Because it's bigger for some -- (multiple speakers) right, good. Okay, that's helpful. And I guess the uninsured question that I'm asking is what is the real metric we should look at for the growth in the numbers of uninsured heads in the beds? Because it seems to me you need to have a metric of both charity cases and uninsured, and you can't just look at one versus the other because charity is kind of a decision you make as opposed to the fact of whether or not a patient can pay.

Let me make sure we understand -- and clarify that we've got the right numbers here. (multiple speakers) bad debt expense component that we are quoting 15.1% this year.

I'm not looking at that.

That compares to 13 80 a year ago. Charity care, which is the other 5.3% a year ago, is now 5.7. So total uncompensated care of 19.3 last year is now 21%.

Total uncompensated care -- now 21%, so it did go up?

It did.

Okay, because I think you answered it opposite for the first question.

And then on the metrics in terms of the unit volumes, you gave us the admissions and surgeries table in the press release. I don't have the page -- I think it's your page four, where it says uninsured admissions, same-hospital, down 2.6. And then it says charity care admissions, up 20.3%. So we should net -- we should add those two together to come up with up 17.7, right? So look at the number of no pay, or nonpaying heads in the beds -- for (ph) the change therein?

We think that's a true statement.

Yes, I think that's a true statement too. All right, because that's somewhat sort of kind of consistent with the high teens growth we've seen in other urban hospital companies, so it would be the right ballpark. Okay.

And then my final question on the collections disclosure of managed care collection rate dropping to 93% from 95 --?

This is Steve. I'll take that one. It went from 95, as you said, to 93. It primarily relates back to the same two issues I talked about -- Philadelphia that was all managed care related, and also our system degradation -- there was significant productivity losses during the third-quarter results. We were fully expecting both of those to come back up. We know that corrections were already made to the systems, and we're expecting the collection rates to go back to normal levels. We're not seeing any additional managed care collection issues.

Okay. So why does it make it sound like in the Q when your disclosure doesn't really say anything about your systems issues causing that softness in the collection rates for them or for the uninsured, where it also -- the collection rate deteriorated a little bit? I guess I'm a little bit confused, because the disclosure in the Q is talking more in terms of still having trouble having managed care payers pay you.

But on the other hand, it sounds like we've seen a number of very significant settlements. Your relationships have improved. United has given you their blessing in a number of hospitals as a high-quality location, which ain't easy to get, guys. So I'm confused why the disclosure would be that way.

I think you are potentially parsing the disclosure and what we're saying. But it's always a challenge to get paid by anybody. So I wouldn't -- I think you're making a distinction out of something that is probably less important perhaps we --

Okay, but I don't want to -- what I'm worried about is are we getting back into a situation where they're giving you good contracts, but on the other hand, they're refusing to pay you on those contracts. I think it's a more serious issue than that. But if you're telling if it's not, then that's my question -- is it a more serious issue, or is it not?

No, we've made great progress. That was a very serious issue three years ago, both having a proper degree of visibility over what we should get paid by managed care, and preventing excessive denials, and then ultimately collecting -- we have largely overcome those issues by virtue of investing, as I said in systems and people to make sure that we really understood what we're doing in managed care contracting. And I think, in fact, if you compare -- I haven't done this myself, but if you were to compare the level of disclosure and the statistics we were able to derive from (multiple speakers)

Much better.

-- portfolio today to two years ago, it's night and day.

Million times better -- absolutely correct, and I do thank you for all those level of details. You give us enough information to hang you if we need to. Thanks very much.

That's what I was thinking when you started your question.

Naturally! Thank you very much.

Darren Lehrich, Deutsche Bank.

I just wanted to key into some of the comments you made with regard to the targeted growth initiatives. And Reynold, I know you've been through some of the California markets with that. I don't think you gave us what the year-over-year growth was, although you alluded to -- I think in your comments that it was pretty good in California. And as I think about some of the other markets where you're rolling this out into, I'm still trying to reconcile Trevor, what you've said about the budgeting process for next year, and downsizing of services. Obviously, there may be some self-inflicted damage on the volume side, even as you go through this process where you're trying to improve volumes. And so can you help me just reconcile those things, please?

Hey, Darren, this is Reynold. I'll take both of those questions. First of all, on the volume front, remember what I talked about last time was that a couple of things -- we had a 40% turnover in hospital senior management leaders over a two-year period of time. And so the thing that targeted growth initiative helps them do is to get into their back door of those six or seven ZIP codes, because every one of our hospitals with the exception of two have other competitors who's always competing in the fringes of that.

So what in California we successfully did was find demand that was out there. And too many times, our business planning session was looking at going several miles out more in the back door of a competitor. So you first want to come to your own back door and make sure you get everything that you can possibly provide services to.

Another bit of news here -- again, we're always talking about our aggregate performance. And again, until the aggregate gets up to something we're all pleased with, we're not pleased with it. But within the third quarter, we actually had 31 hospitals who improved their admissions quarter over quarter. And so again, many of the things that we have been talking about -- we have been working on splitters even before we put in the physician relationship program. So we have (ph) not have been asleep at the switch. We have been doing a lot of things and we think these other initiatives actually then formulize our approach much better.

So again, with the 31 hospitals that actually have improved volumes, the ones that we kind of struggled with in the quarter are the ones in which competing hospitals have been built over the past two years out, again, in the outer parts of the ZIP code competition area.

We had one -- brand new hospitals over the last two years -- one in South Carolina, two in Dallas, two in Houston, and two in Florida. And so again, here is where the targeted growth initiative also comes into play very strongly for those, which is there are going to be pieces of your marketshare you're losing to four or five hospitals. And so therefore, let's concentrate very heavily on the doctors' strength and skills, the technology and things that we need to do to get the right combination of services in there.

What was the second question?

Yes, I'm just trying to reconcile what you're saying about downsizing services. And I guess as I think about next year -- should I even expect any volume growth out of you guys if you are downsizing services to the extent that that would diminish your volumes?

Well, let me give one answer to that. Remember, every quarter what I have been saying is that when our volumes started to drop six or seven quarters ago, on the average, it's 0.5 admissions per day per hospital. Now, that range can go from nothing to 8% drop over previous year volumes. But the problem is that when you have that kind of an impact to many of your hospitals, you can't cut back on certain critical services that you're giving.

Now, when you've got three or four quarters under your belt in which those magnitudes have gotten to a certain point, then the main thing to do is to make sure that our staffing and productivity standards are being adhered to. Now simultaneously, on top of that, it should come as a surprise to no one that the magnitude of all of the quality improvement, operational improvement, safeguarding initiatives that we have enacted require a lot of time and effort at the local hospital bases to get that done. So again, now that many of those are on automatic pilot, we can come back and concentrate on the task at hand of day-to-day care delivery and what normal local staffing productivity standards should be.

So it would be a big mistake to interpret that we're just going to be cutting staff for the sake of cutting staff. We're going to be applying local productivity standards that we think are the right ones for that hospital that they represent to us. And it is the right time to do it now, now that we have the magnitude of what's happened over about six quarters. Trevor, is there anything else you want to add on the budget?

Thanks, Darren.

Elie Radinsky, Citigroup.

Most of my questions have been asked already. I just want to confirm one thing. The free operating cash flow expectation that you had at the beginning of the year was negative 100 to 200 million, and you are reiterating that today?

Actually, what I said is we're slightly behind that. We've actually had a negative cash burn of $211 million through three quarters.

Right, but for the entire year, is your expectation to continue to be behind that? I thought you said that your expectation is to catch up and to be within that range.

It is our goal. We still think it's achievable to get back within that range if we can see the turnaround in collections that we expect here in the fourth quarter.

So are you reiterating that guidance today or not?

We're not changing that guidance, nor are we -- we're not confirming or changing, I think is what the lawyers would tell me to say. But I think we believe it's credible that we can get back into that range if we have the kind of fourth quarter we think we'll have on the collections.

Okay. And lastly, can you just put some color around some of the expenses that you are incurring in the New Orleans area? For example, do you continue to pay your employees there? Are you receiving any rent from life care and things that?

Sure. We paid our employees 100% during the month of September and 50% through the month of October. We have let the number of employees that we need to reopen Kenner and Meadowcrest know that they have jobs, and they're working on that. We've provided an incentive for employees to find jobs in other Tenet hospitals as fast as they possibly could, with an in-hire bonus that was segregated over 30 days, 60 days, and 90-day periods of time to provide those particular incentives. So again, we tried to be compassionate -- at the same time, be as prudent as we could with what we were about there.

So the answer to that -- the employees at Memorial and at Lindy Boggs, for example, since it's November, they're no longer getting paid? Is that an accurate statement?

Things I've (ph) said it -- most of the employees at those two institutions are no longer getting paid in November. We do have teams working on cleanup and reconstruction and opening MOBs and other type of things that Trevor mentioned.

Mike Scarangella, Merrill Lynch.

Just a clarification on the outlook question. Bob, if you think for free cash flow you're going to do a negative 1 to 200 million this year, I think at one point the expectation was for you to be positive free cash next year. Do you think you can still make that?

And on EBITDA, I heard you say that you were 5 to 10% behind your budget number of 700 million, but I don't think I heard you say if you thought you could make up the difference on EBITDA and still hit that 700 for the year. I'd be interested in your thoughts.

If you consider 5 to 10% off that 7, that means we're 35 to 70 off of that year to date, which means we're slightly ahead of it going into the third quarter, where we were substantially behind it.

We're not changing that outlook for the year. And were not particularly ready to give guidance for next year, unfortunately. I think the initial plan was -- you're correct -- 1 to 200 million of losses this year, so you get to breakeven by next year. I think we're still assessing what we can do next year in terms of plan. I'm afraid we just can't give any guidance yet.

Okay. And just to follow-up, on the 40-some-odd million of Katrina cost in the quarter, can you say how much of that was cash?

Essentially all of that was cash. Most of it was salary continuation -- probably 27 million of it, and the balance was under miscellaneous payments.

Kemp Dolliver, SG Cowen.

On the subject of volumes -- beside the 75% rule, is there any broad pattern of service reductions that you're seeing in terms of nature of service categories?

In the third quarter, we did close one psych unit, two snip (ph) units and one OB/NICU unit independently at four different hospitals. And that was a decrease of about 444 admissions off of the same quarter of last year run rate. And then we did make other modifications in other programs at a variety of places. And that was about 780 admissions off of last year's run rate.

And as you look back over the last few quarters where you've taken these actions, is there any common theme popping out? There seems -- potentially post-acute, given some of the reimbursement changes that are out there for psychiatric and sniffs (ph), or are there other factors?

Well, in our particular case, we had several locations in which we felt like it was better to use the beds for acute care services and be proactive in our targeted growth initiative on which services to emphasize, and which ones to deemphasize. And that was what was guiding our decision.

That's great. And question regarding New Orleans. How do your plans take into account what the state may or may not do with the University and Charity hospitals, since those really do look like train wrecks, and it could be years before that system is back in place?

Yes, our viewpoint now is that at least -- we know what you read in the paper, which is officials of LSU are trying to get a new 450-bed hospital in downtown New Orleans, and a new 450-bed hospital in Baton Rouge, and somewhat split up that particular part of that business. But we agree with you -- given the revenue situation of the state, it may be a long time before that gets settled.

So the thing that's of interest to Tenet is that we have a major clinical teaching affiliation agreement with LSU. And so again, we're in constant communication with them as to what elements of that former teaching program can immediately go to our three suburban hospitals, and then what would be their more long-term plans that if they don't have the teaching opportunity in their University hospital -- which is not part of Charity; it was a separate facility -- whether we can play a role in that particular support or not.

But it's going to take several more weeks, if not months, to understand what commitments the state is going to make to LSU before we know where that's headed. So all we can say is we're fully prepared to work with LSU in our three suburban hospitals for the way we've done in the past to support their teaching programs to the extent they have faculty and residents, and we have both services available.

I guess the heart of my question is the risk that you end up potentially for a period of time as the default indigent care hospitals if you open up well ahead of anything the state does. Have you had any conversations with the state regarding filling that role if need be?

Again, that's a good question. But again, most of the reports, particularly in newspapers and so forth indicate that a large majority of the uninsured patients are living in other states right now, and a large portion of that population were in the parts of eastern downtown and going east, which is incapable of being lived in for a long period of time.

So again, where our hospitals sat, we were more into the community suburb area. And again, most of those patients we believe will be coming back. And so therefore, that's why we were more optimistic in the comments that we made about our role. It's something that does bear watching. But it appears to be positive from all indicators that a huge amount of the uncompensated care is in other states right now.

Ellen Wilson, Sanford Bernstein.

I was wondering if you could hit on the volume topic a little bit more -- specifically by geography. Could you give us a greater sense in Florida and Texas and some of your key market -- California -- what your year-over-year same-store admission growth was?

Yes, what we try to do is be directional on those comments, because I made a comment at the last earnings call that I had been real specific for about six quarters, and my competitors were using to the disadvantage of my hospital. So under the context of being geographically directional, volume growth in Palm Beach in the right direction, struggling in Broward and Dade Counties, consistent in Central Northeast, moving the right direction in Philadelphia, moving in the right direction in the Southern states, moving in the right direction in California, and struggling in about two of our cities in Texas.

All right, and specifically within Florida -- obviously, this has kind of been a recurring theme. Could you sort of hit on again why you think that continues to be weak and why it is more so than some of your other markets? And specifically, to what extent is it because of some of the capital constraint that you had talked about earlier in the past couple years?

The issues we talked about before are still there, which is two brand-new hospitals that compete with three of our hospitals down there. A major war over how and how much to pay for doctors to be on ER call, especially at the trauma centers -- and as I mentioned last time, that one is beginning to develop a consistency. And we're beginning to develop an approach that we feel like is right and fair in that category. But it had been a pretty contentious negotiation with doctors for well over a year and half.

One hospital who continues to employ hundreds of doctors who is down the street from one of our hospitals, and we got out of that strategy several years ago -- and so I think those would be the general trends of specific things that we've got to deal with in our targeted growth initiative and our physician value equation as we build back down in Florida.

Gary Lieberman, Morgan Stanley.

Glad to see someone is actually reading the research. Quick question on the controllable expenses -- I was wondering if there was a dollar amount that you could break out? I guess bad debt was probably most impacted, but that was due to the hurricane.

You mean in the -- what you're looking for is like specific hurricane-related costs in the --

Exactly. I see you broke out the 40 million, but in terms of what would be in doubtful accounts or any other line item -- could you break out a number?

We broke out everything out of the line item to put it into the bucket of the 40 million of cash costs. And the only line item that contains any amounts relating to the hurricane is the bad debt line, which contains an amount of, like, 3.5 million relating to accounts from Katrina that may prove to be uncollectible.

Okay, so that's in the 2 06?

Yes, it's in the 2 06.

Great. And I was hoping maybe you could give a little bit more color in terms of where you are on any negotiations with the government. In the past, you have said that you are aiming towards a universal settlement and wanted to know if this is still the goal, and maybe just broadly, you could say whether or not your negotiations are continuing at the same pace with the government, or have they picked up, or have they slowed down?

Well, I have studiously avoided answering that type of question as it has been asked. But I can state the same thing that I've been stating for some time, which is that we continue to seek a comprehensive settlement. So we're not seeking a piecemeal approach. We are seeking something that is fair and reasonable that we can live with that reflects appropriately what issues there are out there, most of which I think at this point or all of which we have a very high degree of knowledge about, as does the government.

And I would like to ultimately resolve these things in a manner which puts us on a good footing with the government, since it is our largest customer and our most important regulator. And I would like some recognition of the fact that in the last -- at least -- certainly the time that I've been CEO of the Company, the Company has I think behaved in exemplary fashion in compliance and ethics and its business practices. And certainly, we have made enormous strides in compliance.

So I think if this were a commercial relationship we were talking about, I would say we have been a very good business partner since late 2002. And we do have areas of disagreement, which we ought to resolve and move on.

You noted the restraint on the CapEx due to the ongoing legal issues. Is that -- are you feeling more pain from that, or has that been fairly consistent over the past period of time?

I think it's been fairly consistent. But I think there is something else that has happened in the industry that -- certainly in the last -- I've now been in this industry on and off really ten years. And the nonprofit sector today is much more profitable than it ever was in the past. And the rates at which the nonprofit sector can access capital are lower than they ever have been. And so this is a sector comprising 85% of hospitals in the U.S. that is far more competitive than it has been at any time in the past. And that is a difference. And that's why capital spending levels of the mid-90s may not be sufficient in the early part of this decade.

Miles Highsmith, Wachovia Securities.

I just had a couple years. You gave us an EBITDA number for the quarter of 82. I assume that excludes 13 of Scott (ph) base (ph), which if you added that back, it gets you to roughly 95. Could you give us that number for the same hospitals, excluding New Orleans?

Okay, much turning of pages is now ensuing here in the room. What's the next part of your question?

Just two more. In terms of Alvarado, I think we're just through the closing arguments. Anything you can tell us there or give us a sense in terms of timing on that?

Yes, I have the number 87 being flashed at me on a piece of paper in relation to your first question. (multiple speakers) a noncomplete answer. So here's a more complete one.

We quoted you 82 for EBITDA through the third quarter. I think someone earlier in the discussion said we made about 20 million EBITDA in the New Orleans market year-to-date as a component of that. And something (ph) about the stock compensation expense -- that 82 is net of our stock compensation expense or option expense.

That's right -- I guess I was trying to get a sense of kind of what the non-New Orleans cash flow was looking like --

Roughly speaking, the New Orleans market contributed about $20 million of EBITDA year-to-date.

Can you give us that for the quarter?

For the quarter? It's hard to figure in the quarter. It's -- there was not -- it would not be pro rata. Third quarter is a weak quarter for us anyway. I would say it's not a material number. We'll try to get you an exact number. It's not a significant amount of money.

Meanwhile, we'll tell you about Alvarado.

Miles, on Alvarado, we started closing arguments last week. We are continuing again today. The court usually takes off on Mondays to hear motions in other cases. We will likely go through the balance of this week, perhaps even into next week before the case goes to the jury.

Okay. That's very helpful. And then just one last question. Just a couple of numbers I haven't looked at in a while -- I was hoping you could kind of refresh my memory. Balance sheet for the Q, we've got about 751 million of professional and general liability reserves. In addition to that, about 130 have accrued legal settlements. Can you just kind of differentiate those two and just give us a little bit more color about what's behind those?

(multiple speakers) The lion's share of the difference is going to be malpractice reserves.

Okay, and what's in the 130 again?

(multiple speakers) We're looking for your (ph) pieces (ph).

We may have to get you back an answer on that.

Thank you. At this time, I would like to turn the floor for back over to the presenters for any closing remarks.

Operator, we have no closing remarks except to thank everybody for their participation on the call. And we'll see you next quarter.

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