Tenet Healthcare Corp (THC) 2005 Q4 法說會逐字稿

Good morning, and welcome to Tenet Healthcare's conference call for the quarter ending December 31st, 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 recall is available to all investors on the web, both live and archived. 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, [inaudible] the Company's Form 10-K and its quarterly reports of 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. 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. I assume you have had an opportunity to review the press release that we issued this morning with our fourth quarter results. I would like to start with an overview of some of the more notable issues in the quarter. Reynold will then provide an update on our initiatives to drive volume growth, before I review our outlook for 2006, and then proceed to Q&A.

The results for the quarter confirm some areas of real progress, and other areas where we still need to improve. Like virtually every business, we have 3 main economic drivers, volume, pricing, and cost. 3 years ago, would you have observed that Tenet's biggest economic challenges were pricing and cost, with additional challenges in the areas of clinical quality, governance and litigation. We have made enormous progress in each of those 5 areas. At that time, neither volume, nor bad debt expense were problems for Tenet, or for the industry. But since 2003, every company in our industry has seen greater challenges in volumes and bad debt expense. Unfortunately, Tenet has been hit harder by these trends than others in the industry, but we're fighting both trends with the same energy and creativity that we brought to the challenges that we have largely overcome.

Let's start with a look at pricing. Some of you will remember that this was our biggest economic challenge 3 years ago. Tenet had lost all of its pricing power as a result of the aggressive pricing strategy that was employed in the 3 years prior to 2003. We have now generated normal industry pricing growth for 2 consecutive quarters, and the progression of aggregate managed care contract portfolio yield over the past 2 years has gone from negative 8% year-over-year in Q4 of '03, to more than positive 9% in Q4 of '05. The continued consolidation of payers and the disappearance of some of the highest paying PPOs remained a challenge in 2005. But in the third quarter, our aggregate managed care portfolio yield finally provided visible evidence of the real increases that we've negotiated in our new contracts. And we extended this positive pricing trend in the fourth quarter.

This accomplishment results from a fundamental change in our approach to managed care contracting, which we began in late 2003. As part of this change, we completely reorganized our managed care function, and brought in new leadership from the managed care industry itself, in the form of Bob Yungk. We now have a centralized team here in Dallas, augmented by regional negotiators. Like many parts of our business, this group is now better informed, using new and highly effective information systems to drive a fact-based strategy for managed care contracting. I'm very pleased that we now have tangible results to demonstrate the effectiveness of our investment.

As we have said on these quarterly conference calls for quite sometime, we have worked diligently with our managed care customers to renegotiate our contracts, so that we have a more traditional mix of higher base rates, with less dependence on volatile stop-loss payments. We said it would take time to get this done, and it has. But I think that we can now say that the massive effort we needed to restructure our managed care portfolio is complete. From now on, our efforts are focused on the traditional ongoing challenges of improving our contracts in the areas of volume, pricing, terms, and collections.

There are a number of metrics which demonstrate our progress on managed care pricing, and they are described in detail in our press release. But I would like to call your attention to a couple of them. Adjusting for discounts under Tenet's Compact With Uninsured Patients, same hospital net inpatient revenue per admission rose 9.5% versus the fourth quarter of 2004. Focusing just on the commercial managed care piece of our business, same hospital net revenue per commercial managed care admission increased by more than 12%. To put this in perspective, note that we are coming off a prior year quarter, when the increase was 0. As a result, as we stated in our press release, we do not expect to sustain pricing increases at this double-digit level going forward.

Let me provide some additional color on the stop-loss issue. Stop-loss payments from our managed care payers were $98 million in the fourth quarter. After 2 years of declining stop-loss payments, it's important to note that this level of stop-loss is only slightly in excess of the $97 million in stop-loss payments that we received in the third quarter. The percentage of cases that generate a stop-loss payment is now down to 4.2% of aggregate managed care admissions, and 5.3% of commercial managed care admissions. These percentages are well within normal and expected ranges for the industry. Let me also point out that we realized an increase in our commercial managed care base rate of 12.2%. This is directly related to the point that I just made about stop-loss. We now have the traditional structure that we have been seeking, and the payers worked with us to get there.

We achieved a strong increase in same hospital aggregate managed care patient revenues of $37 million, or 3.4%, despite a decline of 4.7% in commercial managed care admissions. This is now our second consecutive quarter of positive revenue growth in commercial managed care in the face of declining volumes. In terms of aggregate managed care yield, a net in-patient revenue per admission, which we view as the gold-standard for assessing our pricing progress, the increase was 9.7%. This increase is in spite of the fact that only 80% of our managed care revenue is commercial, with the remainder coming from managed care government programs, where the pricing increases are significantly lower.

We also had another solid quarter on the cost front. Unit costs again stayed below the rate of medical inflation, with a 5% increase in same hospital, controllable expense per equivalent patient day. Achieving this level of cost control in an environment of declining volumes is a big challenge. I believe that we have done a very credible job of reducing costs across the board. Our accomplishments in pricing growth and cost control form a solid foundation for performance improvement when we can get volumes growing again.

Bad debt was a clear disappointment for us in the quarter. After experiencing what we believed to be a temporary uptick in the third quarter, to 15.1% on a Compact-adjusted basis, we saw only a slight decline to 14.7% in the fourth quarter. For this cost item to decline is good, of course, but we had expected a greater decline. Let's go back to our third quarter number, when bad debt expense was 15.1% of Compact-adjusted net revenue. In our third quarter conference call, we identified $55 million, or 210 basis points, of various items that impacted Q3 bad debt expense. A substantial amount of that was the result of a system migration issue, and systems conversions, which created delays in submitting our managed care claims on a timely basis. By December 31, all but $5 million, or 20 basis points, of these items have been resolved. As a result, had the underlying factors and bad debt environment remained unchanged, you would have expected our bad debt provision to decline by 190 basis points in the fourth quarter, to 11.1% from 13%. Unfortunately that is not what happened. Our reported bad debt was 14.7%, again, on a Compact-adjusted basis, or 360 basis points higher than the 11.1% that you might otherwise have expected. Nearly a third of this 360 basis point difference was due to Tenet-specific issues. Roughly half of that was the result of Gulf Coast issues, and the remaining Tenet-specific piece comes from a variety of smaller items, including a change in the aging on a specific classification of our receivables.

Approximately two-thirds of the 360 basis points were not specific to Tenet, but rather more indicative of a general deterioration in the bad debt environment. Now this might be viewed as modestly higher than the bad debt deterioration that has been reported in the fourth quarter by other public companies. Let me point out 4 specific reasons why Tenet's sensitivity to industry deterioration can be somewhat biased on the high side. First, our hospitals are primarily urban, which results in patient demographics that are often characterized by higher levels of bad debt. Second, we have 15 to 20% higher gross charges than other public companies in some markets, which magnifies the Compact-adjusted metric but not the reported bad debt metric. From an accounting perspective, third, Tenet records managed care account aging as part of bad debt expense, not as a contractual allowance against revenue. And fourth, we have a significant concentration of our hospitals in 2 tough states for bad debt, Texas and Florida.

Moving on to some of these industry trends, I would like to draw your attention to coft shifting on the part of plan sponsors. In simple terms, cost shifting means increasing the portion of the bill that is the responsibility of the patient, through increasing deductibles and co-payments. While anecdotally we all know this to be the case, I will share some metrics with you, that demonstrate just how dramatic this shift has been. We track something called balance-after accounts. This term describes patients who have insurance, where the patient bears responsibility for a portion of the bill, after the insurance carrier has paid its portion. The patient's responsibility of that bill is called the balance-after. Despite the decrease in commercial managed care in-patient volume of 4.7% in the fourth quarter, there was no decline in the number of commercial managed care in-patients with a balance-after. This equates to an adverse mix change of approximately 1,700 additional end patient beings with a balance-after. Furthermore, during that same period, the total end patient balance-after dollars grew by approximately 17%. Because these additional balance-after dollars were previously paid by our commercial managed care payers at rates significantly greater than the recovery rates that we realized from our patients on their balance-after portion, this trend is concerning.

Unfortunately, as the government, insurers, and employers promote and design plans that shift health costs to employees, hospitals end up picking up a substantial portion of the tab. And we have every reason to believe that cost shifting will continue. This has led to some serious conversations with our managed care payers. They tend to view cost shifting as neutral, as a development which is solely between the plan sponsor and the plan member. But we take a very different point of view. Everyone needs to realize that cost shifting hits providers hard. The cost is being shifted from employer to employee, but it's also being shifted to the healthcare provider, which unfair and unacceptable. We are delivering this message to our payers and insisting that this cost shifting be reflected in our contracts, and that they work with us to find new ways for the employer, employee, and payer to improve our collection rates.

We're working on a number of innovative solutions to address this problem. For example, we are planning to launch a pilot program with UnitedHealth Group, in which they essentially extend credit to the patient for the self-pay portion of his or her bill. Plan participants would be issued a unique identification card, which we would accept as a payment vehicle at our hospitals. United would then pay us the full amount of the patient's bill, including the self-pay portion. In theory, this approach would eliminate the hospital's payment risk. And in exchange, we would accept a slightly lower rate.

Another positive indicator of progress is that we achieved excellent performance on the collections front. While in the third quarter, our collection rate on managed care receivables declined to 93% from 95% earlier in the year, this rebounded nicely to 96% in Q4. This percentage reflects a rolling 24 month average, which means we saw a significant improvement in the fourth quarter of 2005. With all that said, let's not lose sight of the fact that our reported bad debt expense in the quarter was just 7.5% of net operating revenue. And that's a number that compares favorably with the other large public companies.

Before I leave the topic of bad debt, let me share with you my own conclusions on the true cost of bad debt to healthcare providers. If you view the problem of one of an incremental patient presenting himself at our doors with no ability to pay for services rendered, you probably conclude that the cost to the provider is just the incremental variable cost of servicing that patient. And in part, you would be correct. However, what this approach misses is the revenue perspective. That incremental patient at the margin, is really the same patient that the hospital was treating 3 years ago, before the bad debt situation exploded in the summer of 2003. But in 2003, the patient was more likely to have insurance coverage, and that coverage was likely to have a smaller deductible and co-pay. It's not the incremental costs that are the issue, as much as it's the dramatic change in who is responsible for paying the bill.

There's a widespread misperception that the bad debt issue is all about providing medical services to the indigent who present themselves at hospital emergency rooms. This will always be an issue for the industry; however, there is a much more meaningful issue since 2003, and that is the growth of the uninsured and underinsured workers. These are people who make too much money to qualify for state or federal assistance, but do not earn enough to cover their basic living expenses plus the cost of their healthcare.

Let's shift the discussion now to volume. Once again, our most immediate challenge is the continuing erosion of patient volumes. Same hospital admissions declined by 2.5%, and commercial managed care admissions again showed a greater decline of 4.7%. We also experienced a decline of 1.4% in surgeries, which is more than a point better than the decline we saw in admissions, but it's still down. We hope to return to positive growth in surgeries as we saw in Q2 and Q3 of '05. Finally, same hospital outpatient visits declined 7.3%. It's important to understand that some of the reductions were deliberate, as we exited service lines that were either unprofitable or not needed by the community. These actions accounted for approximately 40% of the admissions declined in the fourth quarter, and approximately 30% of the decline in outpatient visits.

Reynold will talk to you about volumes in a moment, but while I'm on the subject of volume, let me reiterate the importance that we attach to earning Centers of Excellence designations from our leading managed care payers. We believe this is one of the long-term keys to driving profitable commercial managed care volume growth, and it fits perfectly with strategic thrust on quality which Tenet launched 3 years ago. To this end, UnitedHealth Care has awarded 18 Tenet hospitals its coveted Premium Status for cardiovascular care. And CIGNA has designated 41 Tenet hospitals as Centers of Excellence in one or more of 19 clinical service lines. Given that United has awarded just 5% of its contracted hospitals with premium status, Tenet's designation rate of nearly 5 times that level is an outstanding accomplishment.

In addition, on CMS's most recent hospital compare rankings, Tenet ranks first in 9 out of 15 metrics among investor-owned hospital companies, and our trajectory has continued to improve since the time that that data was collected. Little of this progress in earning recognition for our achievements and clinical quality is visible in our fourth quarter volume numbers. One reason is that all but 4 of our UnitedHealth Care designations only became effective on January 1st, 2006. I'm happy to report, however, that we've had an outstanding experience at those 4 hospitals. Admissions growth in the designated specialty areas is averaging 700 basis points higher than our growth in these same specialty areas in our non-designated hospitals.

Turning to capital expenditures, we made investments totaling $218 million in the fourth quarter, and $578 million for the full year. These investments are larger than the outlook that we provided a year ago, because we decided in the fourth quarter to accelerate our CapEx for future growth. A number of have you expressed concern that our levels of capital expenditures are too low. But it's hard to compare 1 company to another, and even harder to compare Tenet in 2005, to Tenet in prior years. The reason is that we have changed the nature of what we spend our capital dollars on. Leading up to 2003, it used to be concentrated on large, multiyear construction projects, including new hospitals, new wings, and new towers. Now, we target our spending to support our quality and growth initiatives in our core hospitals. In 2004, we completed a number of large projects that were initiated prior to 2003, including 2 new hospitals. In 2003, 23% of our CapEx dollars went into those types of projects. By 2005, this was down to 16% of CapEx, and in the fourth quarter of 2005, we spent only 8% in this area.

Here's where we spent our money in 2005. 27% of our CapEx went to clinical equipment, such as CT scanners, MRIs, chemistry and hematology analyzers, anesthesia machines, and neonatal incubators. Another 21% went towards smaller capacity expansion projects, such as emergency department expansions, OR expansions and renovations, and the addition of patient beds. 12% went to information systems. 18% went to what we called base capital, which is used at the discretion of our local hospital CEOs for miscellaneous improvements at their facilities. These improvements are typically under $250,000, and are important to physicians and patients. Another 5% went towards the regional business office consolidation project that we launched nearly 3 years ago and will complete this year. And finally we spent less than 0.5% on our discontinued operations. In this business, there's an unlimited thirst for capital. I believe that we are spending prudently, and we are putting the money where it can have the most immediate impact on our patients and physicians. Equipment and technology will be the focus of our investments in 2006.

Turning now to liquidity and cash flow, net cash provided by operations was $78 million in the fourth quarter, a figure which excludes the $218 million of capital expenditures that I just mentioned, as well as $4 million in proceeds from facility sales. For the year, net cash provided by operating activities was $226 million, after excluding the tax refund of $537 million early in the year, and a negative $352 million after capital expenditures. Unrestricted cash was $1.18 billion at February 28, down roughly $190 million from December 31, which included $120 million in interest payments and $30 million in CapEx beyond that funded by cash flow from operations. We have received no incremental cash from our insurance carriers since December 31, and the cash for settlements in the securities litigation that we announced in January is still in the February 28th balance.

We received $64 million in cash insurance payments in 2005, as initial payments for physical damage to our buildings in New Orleans. The hurricanes make projections of 2006 cash flow difficult, as we expect a substantial, but hard to quantify, cash payment from our insurance carriers later in the year. As you know, we are not accruing any expected insurance recoveries, as our policy is to record amounts only at the time the cash is received. To bring you up to date on the status of our hospitals in the Gulf Coast, with the exception of Lindy Boggs and Memorial, all other operations are open, including our 3 suburban hospitals, and our diagnostic imaging facilities. Unfortunately, our for-profit status precludes us from receiving FEMA funds, and we have yet to recoup significant dollars from our insurers, so we are proceeding cautiously beyond our current activities.

And with that as an overview, let me now turn the floor over to Reynold Jennings for a deeper look at some of the volume building efforts that are underway in our hospital.

Thank you, Trevor, and good morning. I will begin by updating you on our various volume building initiatives. First, let me start with a report on our physician sales call initiative. We launched this initiative companywide in the last half of 2005, with the purpose of having our hospital management teams reach out to our physicians, listen to the physicians' needs, and follow-up by improving upon our facilities and operations, as appropriate. The technique, process, and goals of this initiative have been piloted by several of our hospitals in 2004 and 2005, and I will give you some information shortly about the results of these early adopters. As previously reported, about 12,000 physicians were active admitters in calendar 2003. We use 2003 as the base of comparison, because 2003 was the last year of positive admissions growth. Of the 12,000 physicians, about 3,200 core physicians accounted for 74% of the admissions over the past 2 years, with the remaining approximate 8,800 splitter physicians, accounting for the remainder. Over the past 2 years we experienced a small positive growth of new physicians, net of physicians who resigned from the medical staff for various reasons. So the 12,000 base is still the correct number to compare to. Our sales effort is first aimed at the 8,800 splitter admitters who, by only increasing their annual admissions by 2 to 4, would have much needed positive impact. Naturally, we also visit core physicians to make sure that their individual value equation continues to be met.

The companywide effort commenced the first of October in 2005, and to date, our local management teams have visited about 6,800 physicians. This equates to about 57% of our core and splitter admitters. Our local managers record their observations and findings in our tracking system, divided into 3 categories. First, opportunities that were easy to understand and quick to resolve. Second, obstacles that are not easy to solve, but we have a solution in progress. And third, barriers that have no immediate solution. Let me give you some of the more common issues that our management teams are hearing in each of these categories. First, under opportunities easy to understand and resolve: Getting diagnostic reports to the physician's office in a timely manner, creating parking spaces more convenient to physicians and patients, supplying campus-based medical office building space, systems to assist physicians with completing their hospital work requirements, outpatient scheduling, fast track emergency department services for non-trauma patients, new equipment for specialty diagnostics or procedures, and more access to hospital administration.

Under the second category, obstacles solvable, but takes more time: Speculation by our constituents on Tenet's financial strength after the government issues are resolved, some of Tenet's many new information systems require more training with the physician and his office staff to achieve optimal functionality, efficiency of locating and engaging specialty consulting physicians, finding and recruiting quality hospital-based physicians with a service attitude to the private physicians, teaching the new hospitalist and the private physicians how to interface with each other for efficiency, hospital CEO and management team tenure too short for relationship building, and lastly, hurricane damaged buildings of both residence and businesses in both Palm Beach county, Florida, and in New Orleans.

And then thirdly, barriers with no immediate solution: Regulatory community need formulas that complicate the recruitment of specialty physicians to urban areas, downtown locations losing primary care physicians to the suburbs, creating enough early operating start times in surgery to market to splitter surgeons, retaining physicians where emergency department coverage, malpractice exposure is high, diminishing negative community perception of gross retail charges versus billed actual charges, and lastly, number of physicians now owning equity in competing businesses. Action plans are being developed for each specific issue identified at the local, regional or corporate level as appropriate. We will discuss the progress in future quarters of identified solutions to these volume growth issues.

As I indicated earlier, now let me give you some facts from our best practice hospitals that were early adopter hospitals and pioneered this initiative. For the past 2 years in equivalent admissions, Piedmont in South Carolina up 6.6%, Brookwood in Birmingham up 5.9%. For the past year in equivalent admissions, Lakewood in California up 6.5%, Atlanta Medical Center in Atlanta up 7.6%, North Fulton in Atlanta, up 2.7%, Palm Beach Gardens in Florida up 3.5%, and Cypress Fairbanks in North Houston up 3.5%.

Now let me turn to our Targeted Growth Initiative that was pioneered by our California region in calendar '05. This initiative combines updated cost accounting with market demand analysis, to determine which services the community values more. As a result of this in-depth analytical project, a hospital's highly-valued clinical services are marketed, and low-value services are either deemphasized or eliminated. On an adjusted-admission basis, the California region outperformed all other regions, with a positive 1.4% growth in calendar '05. This volume growth also translated to a strong positive operating margin growth year-over-year. This initiative is being implemented in the other 3 regions during calendar '06. Due to the intensity of resources required to complete this effort in each hospital, we are able to implement it in only about 3 to 4 hospitals a quarter, per regions. Decisions based on the analysis have been reflected in each hospital's business plan. One important benefit of the Targeted Growth Initiative, is the confidence it gives us, along with our commitment to quality strategy, in deciding where to spend our capital dollars. TGI also improves our confidence in the growth prospects of each hospital.

In closing, the new senior operations team has worked tirelessly over the past 2 years to create a data enriched decision-making process that is coupled with both new financial decision-making software and clinical applications systems. We've also had to recruit and train new hospital management team members at the rate of about 20% per year over the past 2 years. I remain convinced that we are choosing the right strategies for sustainable long-term growth. The road to success with our quality and data and risk decision making strategies, will still take a while long to accomplish. Our goals have required a lot of sweat equity on the part of our managers, employees and physicians. All along, we are creating individual success stories, at both the hospital and Company level. However, I am acutely aware that we have to get the aggregate performance indicators moving in the right direction within a reasonable period of time.

I would like to give special recognition to the Florida region, and our regional manager, Don Steigman, and his local management teams, for also having a significant growth in margin performance, year-over-year. Their achievement came in spite of a significant hit from Hurricane Wilma to both revenue and cost in latter 2005, not to mention the effects of the 4 hurricanes they fought back from in 2004. With that, I will turn the podium back over to Trevor.

Okay. Thanks, Reynold. Finally, let me offer a few thoughts and highlight several key items regarding our financial outlook for 2006. I think you know that the strategies and initiatives that we have been implementing since the beginning of 2003 are going to take time to come to full fruition. We have made great progress on a number of important fronts, including quality, pricing, cost control and litigation. And I believe that we will continue to make progress in 2006, in the remaining areas that I have talked about this morning. On a same hospital basis, we expect to see positive volume growth of approximately 1% in admissions, and growth in outpatient visits of approximately 0.5%, excluding our Gulf Coast operations. We expect our progress on the managed care pricing front to continue. A sizable portion of this progress is already baked into our contracts with our key payers. While our ultimate pricing gains will be dependent on the actual mix of business that we receive from each payer, our expectation for 2006 includes negotiated increases in the mid to high single-digits. On a Compact-adjusted basis, we have budgeted bad debt at approximately 14%. This is lower than the fourth quarter, but higher than 2005 on a full year basis.

With those assumptions, we expect pretax results from continuing operations to be in the range of break even, to a loss of $100 million. We have projected positive net cash flow from operating activities in the range of 300 to $400 million. And anticipate making capital expenditures in the range of 550 million to $650 million, resulting in negative net cash flow from operating activities after capital expenditures, in the range of negative $200 million to negative $300 million for 2006. Note that our entire outlook discussion excludes any impact from potential payments to resolve litigation or investigations, or any impairment, restructuring, special charges, operating results of discontinued operations, or receipt for recoveries for outstanding claims from our insurance carriers.

At this time, I'm going to ask the operator to prepare for our Q&A. For the benefit of the broader group, we will try to limit this portion of the call to 30 minutes. Callers can help us by limiting themselves to a single question, and then rejoining the queue. Follow-up questions will be allowed if we have failed to provide you with a clear answer. If your question has to do with specific numbers, like rent expense, which incidentally was $44 million for continuing operations, please call Tom Rice after the call, and he will be happy to track down those figures for you. Operator, we are ready to begin the Q&A.

[OPERATOR INSTRUCTIONS] Adam Feinstein, Lehman Brothers.

Great. Thank you, good morning, everyone. I will try to keep it to 1 question here. I have so many though.

I know it's a difficult thing.

My question is just on the volume front. What you guys highlighted, and it's very helpful getting so much detail, so, thank you. But the managed care volumes being so much weaker than the overall volumes, it's just -- don't understand why the managed care volumes would be weaker. Clearly you are talking about the issues there that are driving the weakness in overall volumes, but don't know why you would see a differential in your managed care, relative to your Medicare and Medicaid. So just curious if you have any more anecdotes or any other feedback, or any other thoughts there. That would be helpful. Thank you.

Hi, Adam, this is Reynold. The fourth quarter, we believe, was very consistent with the other quarters in which we made a direct linkage to the fact that the loss of splitter doctors over the last 2 years, that the more well managed care commercial patients are able to move over distance, whereas Medicare and Medicaid patients, for a variety of reasons, are not. And so again, all of our information seems to indicate that those 2 go hand in hand.

Okay. So your affiliated doctors, you would guess -- or excuse me, your non-affiliated doctors, you are guessing drive more managed care volume, relative to the non-managed care -- ?

I think what we are saying, of the 8,800 physicians, to the extent they elect to be more active at competing hospitals, they carry the commercial managed care patients with them, more so than carrying Medicare and Medicaid. And, again, Medicare and Medicaid patients are less mobile, they are sicker patients, they depend sometimes on public transportation, and a variety of issues. So, again, we think it's an issue of -- I use the word ability to be mobile, that allows those private doctors to select which patients they carry. It also probably goes without saying, that for the doctors who have joined Equity Membership and Outpatient Venturers, it's the commercial insurance patients that they like to carry to those entities that they have an ownership interest with, because the margins are higher.

Okay. Thank you.

Oksanna Butler, Citigroup.

Thank you, good morning. Just following up on the volume questions. Specifically, on the commercial front, can you just tell us if you are assuming that you are going to see a similar trend going forward, or a stabilization in the commercial volumes. And to what extend do you anticipate that the Centers of Excellence designations, for example, that you have recently received will help change that trend in any way?

Oksanna, that question, again, we have been pretty consistent in all of our comments today and previous earnings calls, that we believe that the government overhang and the eventual settlement of that, is necessary to help us jump start our ability to get a number of these lost managed care commercial admissions to come back. And, again, given the length of time it's taken to get to that point, whenever we get to it, I would say it will take us a while, once that happens, even though we'll be real excited to be armed with that information with our sales calls.

So the 1% growth that you are assuming overall for '06, incorporates a continued 5% decline in commercial volumes, or so?

The net effect of the 1% includes where we already have a positive movement underway, with the Targeted Growth Initiative of certain programs and services that we're marketing, as well as our continued effort to eliminate or deemphasize certain other services. So it's the aggregate of all of that.

I would also caution you, Oksanna, we are not making a specific forecast about admissions volume in any particular payment or patient category. We have built this from a hospital level up, and it's based on unique initiatives that exist at each hospital.

All right. Thank you.

Al Rice, Merrill Lynch.

It's actually A.J. But, anyway, hello, everybody. I wanted to just thank you for the forecast. And ask about the cash flow and sort of your view on that at this point. If you are potentially negative 200 to 300 million, and hopefully are going to have a settlement with most of the issues with the government over the course of this year at some point, and you look at your cash balances, do you need to put in place, for example, a bank line again, to give yourself a little bit more liquidity, or -- also on the tax side, have you run through all the tax loss carry backs that you can get? Or can you give us some sense about what the situation with that is, as well, as it relates to cash flow?

Okay. So -- A.J., thanks for asking that question, because I omitted to talk in detail about that in the prepared remarks. There are a number of moving pieces here. So as we mentioned, we have a large claim that we are trying to work through with -- in relation to Hurricane Katrina. We also have pre-existing claims that we have made in malpractice litigations, specifically, Redding, that may or may not be a factor in 2006. We do have the flexibility to arrange a bank line if we need one. And we have been in discussion with banks about whether that's a prudent use of expense. As you may recall, we had cancelled our earlier bank line, either a year or 2 years ago. I don't recall which, because we were paying fees to maintain a line that we weren't using. We didn't think that was good use of cash. So we have obviously taken into account in this -- in our plans, what we think all of these moving pieces may be. And, of course, the most difficult thing to forecast is actually the outflows that might be related to settlements that we might undertake, on any of the litigation that we face.

How about just the tax element of it? Do you have tax loss carry backs that you could still realize, or are you now dependent upon earnings before you can -- ?

We need to become profitable. Once we are profitable, there will be additional tax carry backs, and we have loss carry forwards and so forth. But we have utilized everything that we can utilize until the Company becomes profitable again.

Okay. All right. Thanks a lot.

Sheryl Skolnick, CRT Capital.

It's awfully difficult to pick among the questions. Thank you very much for all of that overview. I guess I have to ask about the legal update. In particular, Alvarado. We all wondering just how much that jury loves seeing each other every day, because they seem to be enjoying it for a very long time. And also I'm curious about how -- any color you can give us on how you managed to settle what could have been potentially troubling in Florida, for $7 million?

Okay. I will introduce Peter Urbanowicz, our General Counsel, to take those 2 questions.

Sheryl, thank you for giving me a question. On Alvarado, all I can say at this point is obviously, that the jury is still out. The reconstituted jury, as you recall, a juror was dismissed in late December, an alternate was brought on. So the reconstituted jury has been deliberating for about 30 days now, which is obviously a long time. But they are still deliberating and -- or they are still out, rather. And because they are still out, it would be inappropriate for me to make any comments on the case at this point.

On Florida, we're very pleased with the settlement that we reached there. As you know, we had a number of issues with the State of Florida and with the Attorney General, some Medicaid investigations going back several years. And then an issue at one of our hospitals in Florida from last year. In addition to the outlier, the Medicare Outlier lawsuit that he brought last March. We have been in discussions with the Attorney General. I think he wanted to do something positive for the public hospitals in Florida. We obviously have a significant presence in South Florida. Hope to continue to have a presence in South Florida, which is very positive for the healthcare system there. And so we wanted to do something with the Attorney General that made sense for both of us. I think it was a positive settlement in the creation of a fund for uninsured patients. That has been something we have been focused on for the last few years here. And so I think it was a win for both sides, and a very positive for both parts.

Now in terms of the number, and what had been out there, in the last couple of months and last year, I can't comment on that. That's the assessments that the analysts, or the price tag that they put on the case. I will say that the private litigation, we are -- which the class has not been certified, we are continuing to contest that vigorously. We have a motion for summary judgment in. We hope to get that case dismissed on the merits. We looked at settling with the Attorney General on a different level or a different light, simply because we had other issues there. It's very important to have a positive relationship with the Attorney General in the State of Florida.

Is there any impact of the Florida settlement on your federal negotiations [inaudible]? Does it make it easier given that Florida went away? You don't have -- [inaudible]?

I don't -- I don't believe there is a direct linkage with federal discussions or settlement.

Great, thank you.

Henry Ruka, Deutsche Bank.

Yes, good morning. Just a question on your guidance. It looks to me that with about a 1% volume growth, and then in turn probably a 5, 6%, if I'm just guessing at that, pricing growth, overall flat, that a lot of your growth this year, or a lot of the improvement in profitability that you seem to be projecting, is going to be from sort of holding the line on expenses, mainly operating expenses and supplies. Can you comment if that's correct, 1?And then 2, what are the initiatives that are going to allow to you do that?

Okay. First of all, yes, you are correct. We have major initiatives that are underway in -- and expected to have impact in 2006, in the areas of labor costs and supplies costs. We also, as I mentioned in my prepared remarks, have essentially negotiated the vast majority of the managed care contracts which will be in place in 2006, and we have good visibility into what the pricing will be from those contract. Obviously we don't know exactly how many patients, or what type of patients will show up. So as we have put together our own budgets, which are consistent with the outlook that we have provided today, that it's essentially labor costs, pricing increases and supply cost initiatives that make up the bulk of the projected improvement.

But, I guess, in terms of the -- how do you continue to save on -- you did a relatively good job this year. You spiked a little bit this quarter. But how do you save on the overall expenses in light of the inflation that's going on? I mean, are there any specific initiatives?

Yes, I can give -- we can give you all sorts of specifics.

That would generally generate this sort of savings that seem to be suggested in the projection.

Let me just give you a couple of examples. As we went into this turnaround, I mentioned in my prepared remarks, that 3 years ago, had you looked at the Company, would you have said we have a very substantial pricing problem, a very substantial cost problem, and a very substantial quality problem. Well, there were plenty of opportunities to remove cost out of the business. We obviously here and now in 2006, are down to the very difficult ones, having taken advantage of the easy ones in 2003, 2004 and 2005. So, for example, in the -- I mentioned labor costs as one of the areas. We have taken the very difficult decision to reduce the Company's match of the 401k. We had previously, in a prior year, made some technical changes to the match of the 401k, which had the effect of saving money at the expense of employees who departed during the course of the year. What we have done now is to literally reduce the match.

The match had been at a competitive level at 3% in 2002. But the Company in 2002 had made a decision to raise it to 5% in 2003. We have now removed -- rolled it back to 3%. But these kinds of changes are very material to costs. Obviously it's very difficult to do, and obviously there are -- you know, there are consequences to these types of changes in the form of higher turnover. We measure employee satisfaction rigorously, as well as physician satisfaction and patient satisfaction. Our employee satisfaction has not changed materially. But I don't expect that anybody is happier as a result of a lower 401k match.

We have also engaged in a number of productivity initiatives, that has had the effect in 2005 of causing reductions in force. We have also made technical changes to the way that we handle merit increases in our -- throughout the Company, actually, the hospitals and the corporate office. And in the supplies initiative -- supplies area, I think we have commented on previous calls about our efforts to reduce the utilization of supplies, and impose a more restrictive formulary in areas outside of pharmacy, throughout the Company. So I mean, it's literally dozens of initiatives. But the big ones are the ones I just mentioned.

Would it be fair to say that 2006, it's going to be more difficult than 2005 to control the growth of expenses below the inflation rate?

Our goal is to continue to do that, and we have very specific ways that we are approaching it, that we're able to quantify. I mean, we -- if you look back for the last 3 years and compare our cost growth on a per unit of service basis, to the best benchmarks that are out there, we have done quite well. And I think we have become very good at that, and continued to control costs. One thing about our industry, is it has sort of no end to the opportunities for productivity and cost improvements.

Thanks very much.

David Common, JPMorgan.

Hi, this is actually Yilmat for David. When you look at expansion CapEx, how do you look at the returns on invested capital? What kind of rates do you usually look for? And secondly, over what time period would you expect those returns? Thanks.

Okay, well, we don't have a specific hurdle rate, if that's what you are talking about.

Yes.

That is -- I think that is more applicable to situations where you are building new hospitals, acquiring hospitals, building new wings and undertaking the kind of very substantial CapEx project that we had -- that this Company had engaged in up until a couple of years ago. As I rattled off all of those percentages about how we spend our capital today, you can see it is a lot of technology, new equipment, and base capital expenditures on our hospitals. That you can do that kind of analysis, but in my personal opinion, to a certain degree, you are kidding yourself if you try to assess the IRR on a -- an improved CT scanner. I mean, you are going to get potentially new business. There's going to be productivity enhancements. There's going to be lower downtime. There are going to be improvements in patient safety, which should lead to reduction in malpractice, potentially a better chance of qualifying for Centers of Excellence designations. So we don't spend a lot of time on that kind of analysis on the smaller capital expenditures. We certainly do engage in that rigorous analysis, if we were talking about a large capital expenditure, or even an acquisition of some type of facility.

Okay. Great. Thank you.

Kemp Dolliver, Cowen & Co.

Thanks. Speaking more broadly, back at the investor day in December '04, you talked about -- I think it was a significant percentage, maybe 30% or so, of your hospitals at that time, were underperforming. Now that you have had a year, what progress have you made with regard to improving those facilities? And, number 2, how much longer can you go in some of these cases, to the extent they have not turned around, before having to make a decision to get out of some of these situations?

Kemp, hi, this is Reynold. The Targeted Growth Initiative actually came out of the comments that you just described that we made, in that we indicated that our attention back at that point in time, was the smaller urban hospitals. And after we started this pilot project in California, then we learned that the effort had application to all of our hospitals, and so we went ahead and expanded it. But, again, in just general terms, the number of hospitals that were struggling over this past year has decreased. And, again, within each region, the number is down to a smaller percentage in each region that we are focusing on. And, again, we currently know what are the tension points that we need to be working on going forward for those particular hospitals. In regard to the last part of your question, again, Trevor and I have been pretty clear over the last 2 years, is that we want to give each hospital a proper time, once they have identified their solutions, to make those improvements, and see how their earnings improvement goes. And we continue to monitor that on a hospital-by-hospital basis. And currently we are hopeful that we can continue to move the bar up on the current 69 core group.

Do you have a number in terms of how many of those have improved?

It's -- the number that we were struggling with back last year, is down about 50%.

Okay. Thank you.

Joseph Shiarelli, Shiarelli and Company.

Thank you. I was very curious if you could expand upon the IT spend you indicated about 12% of your budget in '05. How much do you expect to be spending in '06, and how it relates to your targeted initiatives, and in either wooing or keeping the splitters using your facility? Thanks.

Hey, Joe. There was some sound quality with your question, and it was hard to hear, but I believe that you asked a 2-part question. 1 was how much are we planning to spend on IT in 2006, and the other part of the question was about, what are some of these IT initiatives that we have taking place. Let me make an opening comment on it, and then I am going to ask Steve Brown, who is our Chief Information Officer, to describe some examples of the types of systems that we are implementing, including the description of the very substantial multiyear project that we're doing to implement clinical systems. We didn't -- we deliberately did not give any specific guidance on CapEx components for 2006, and I would rather not expand upon any element of the outlook section of our press release on the call. So I'm sorry about that.

As far as a blanket statement on IT, something that's very important for people to understand, and I don't think we have done a thorough job of communicating this, is that Tenet's emphasis in IT over the last 10 years was in essentially back office systems and financially oriented systems, in order to integrate what had been a company that was created by virtue of 3 corporate mergers and numerous hospital acquisitions. We are nearly finished with that process. It was a 10-year process. It was very expensive. It was disruptive. But today, on those types of systems, we operate essentially on a common platform. Where we are making our IT expenditures going forward, are in areas that we think will enhance clinical quality, productivity in our hospitals, and the attractiveness of the hospitals to physicians and payers. And I would like Steve just to comment briefly about what those systems are. And we plan to hold an investor day later this year, in which we would go into this in more detail. So keep it brief, Steve, but just a couple of comments.

Thanks, Trevor. We are actively in the process of rolling out over the next 7 years, a replacement of our clinical platforms in all of our hospitals. We are primarily working with laboratory, pharmacy, radiology, and order management systems, heading toward electronic bedside medication administration as our primary focus. Physician portal and electronic communications are also part of that initiative. We are through our initial pilot phases, and are currently implementing 7 hospitals this year. And we will continue that over the next 6 years.

Great. Thanks, Steve. Operator, next question.

Charles Lynch, CIBC World Markets.

Hi, thanks. Just wanted to dive in a little bit on your capital spending in the quarter, and looking into '06. You have had a number of initiatives that in selected markets have been successful on physician relations improvements and, kind of priming the pump there. Can you talk, Reynold, on what the linkage is between the timing of specific CapEx projects, and the physician initiatives. Which is to say, is the CapEx a bit of a carrot for physicians, following some improved performance? Or is it a leading initiative, or something along those lines?

Sure, again our process is when we do our budget preparation, October through December of each year, is to look at the 5-year plan that we created 2 years ago, which we continue to refine each year, and add another year on to it. And then we look at the sum total of the business plan efforts and the other impacts of things, like the Targeted Growth Initiative, as well as now the feedback that we are getting from the physician visitation. And real quickly, into January, the senior management team then looks at all the requests by hospital, by region, and we take a look at those issues. And so far, because we want all 69 hospitals to progress, we have not used a carrot approach. They have all been given the same allocation of base capital, which they have the freedom to use at a local level, to show doctors and nurses they can be responsive to those local needs. And the IS allotment has been fairly distributed, so that each hospital is being touched over the period of time that Steve indicated. So, we just feel like we needed to show support to all 69, that they are getting as much as we can give them, to be viable and to be competitive and in the local arena.

Okay. And that applies to the fourth quarter spending, as well? That accelerated program?

Yes. Again, the advantage of these programs, as we indicated, is as we get a comfort level, sometimes programs take a few months or so to either order the equipment or get up running, or add something to the building or those types of things. So we wanted to make sure we had a head of steam with some of those good ideas going into calendar '06.

Great. Thanks a lot.

Mike Scarangella, Merrill Lynch.

I was wondering if you could tell us how the CFO search is going, and when you thought you might have somebody in the job? Thank you.

Thanks, Mike. We have had the search underway here for several months. Obviously the holiday period is difficult. And I'm not going to make any specific comment, except to say that we have been pleased by the progress we have made. And this is not something that I expect that we will drag out for another several months.

Do you think you necessarily need to get a settlement behind you, before you can get somebody to sign up, or is that not a factor?

I don't think it is a barrier.

Okay. Thank you.

Oksanna Butler, CitiGroup.

Operator, I think she already asked a question earlier.

Darren Lehrich, Deutsche Banc.

Thanks. Good morning, everyone. I guess as I look at your volume outlook for 2006, and your historical volume indicators, I guess the biggest disconnect to me is really on the outpatient side, where you've had a multiyear erosion. And I understand that much of this has been self-inflicted, and a lot of it has also been in non-core areas. But Reynold, I'm just wondering if you could maybe help me understand what it is that you guys are doing that you think you can rebuild market share in the outpatient arena? Thanks.

Well, sure. It's a great question. And, again, in the fourth quarter, it's important for me to point out to you that three-quarters of the year-over-year deterioration was in Florida, due to the mixture of all the hurricanes, closing some clinics and services. And then we had about another 10% in Texas, with some of the same issues. So, again, we do not have a major issue with our outpatient services throughout the whole Company. And, again, we are working on the handful of areas that we think need to be stabilized and move forward. So my positive to you, is that it's not a universal problem. It's a handful of problems. We think we are beginning to sort those things out. Even though, again, in part of our Targeted Growth Initiative, there will be some continued cleaning out this year, of less valued services.

Thanks a lot.

Way Dea, Legg Mason.

Yes, maybe I missed this, but in your footnote, the gain of 31 million, relating to retirement, where is that embedded in the numbers?

That is embedded in salaries, wages and benefits, and that gain was caused by the resolution of a long-standing issue that was the subject of litigation.

Okay. So I assume that's one time, right?

Yes.

One-time gain?

Yes.

Okay. Which benefited -- which the effect was to reduce the salaries, then?

Yes.

Okay. Just want to make sure. And then the 10 million relating to -- let's see, how is it worded? Unconsolidated equity, it was some type of gain related to unconsolidated -- that was in the unconsolidated, where is that page?

Yes. That's -- there are 2 companies in which we own a minority interest, and so that's what -- their earnings or losses are what flow through into that line.

So where is that 10 million embedded in?

Within revenue.

That's in revenue. Okay. All right. Thank you.

Thank you. I would like to hand the floor back to Trevor Fetter for any closing comments.

My only closing comment is good-bye. We'll see you on the next earnings call. Thank you all for participating.

Thank you. This does conclude today's teleconference. You may now disconnect your line, and have a wonderful day.