Tenet Healthcare Corp (THC) 2006 Q2 法說會逐字稿

Good morning and welcome to Tenet Healthcare's conference call for the quarter ending June 30, 2006. Tenet is pleased that you have accepted their invitation to participate in this call. [OPERATOR INSTRUCTIONS] 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 forward-looking statements to materially be 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 report on Form 10-Q, to which you are referred. Management cautions you not to rely on -- and makes no promises to updated any of the forward-looking statements. Management will be referring to certain financial measures and statistics, including measures such as EBITDA, and are not calculated in accordance with Generally Accepted Accounting Principles, or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance, but is providing these alternative measures as a supplement to aid in analysis of the Company. Reconciliation between non-GAAP and related GAAP measures can be found in the press release issued yesterday afternoon and 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. [OPERATOR INSTRUCTIONS]

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

Thank you, operator. Good morning, everyone. I enjoyed seeing so many of you here at our investor day last month. For those of you who didn't join us here in Dallas, I want to remind you that the transcript, slides and audio of all of the presentations and Q&A are on our website. Let me quickly reiterate a few points from the meeting. First, we demonstrated that when we set our minds on fixing something, we do it. We do it through innovation, great people, hard work, the application of technology, better fact-based decision making. This is the way that we addressed our challenges in pricing, quality, costs, compliance, and litigation. Reynold Jennings laid out our strategies for using these same skills to build volume, and Steve Newman unveiled for you our innovative targeted growth initiative. I'm confident that we will be successful at growing our business with differentiation and superior execution. That's what targeted growth is all about.

Speaking of execution, I also reiterated our strategy which emphasizes execution over transaction. We are seeking to differentiate Tenet Hospitals on quality and service. We believe that this is the most sustainable way to generate organic growth in the future. My colleagues explained how each of their activities contributes to our strategy of execution, including our new greater emphasis on the out-patient system. Because the seven hours of presentation are still available and fresh, my remarks this morning will be very brief, as I want Reynold Jennings to have ample time to discuss our initiative to grow our business and for Biggs Porter to provide a detailed review of our financial performance. At a very high level we continue to demonstrate strong gains in pricing and excellent cost control, in spite of weak volume and high bad debt expense. These were the same drivers of earnings in the last several quarters. Our earnings, margins and cash flow were a bit better than expected, and our volumes and bad debt expense were weaker. We'd rather achieve your expectations and ours through a combination of good results and volume pricing and cost, but in the absence of volume growth, the skills we've developed in the areas of pricing and cost control are essential.

At our investor day, I was asked whether we could achieve our outlook for earning absent volume growth. It may only be achievable in the short term, but this quarter demonstrates that it is possible. Soft admissions continue to be our biggest challenge. I'm encouraged by the fact that, after reporting five consecutive quarters of successively worst declines in admissions, Q2 was 0.1% better than we reported in Q1 and 25% of our admissions decline was deliberate. It's premature whether to say whether volume declines have stabilized, but I'm glad that we stopped the five quarter downward trend. It's fair to say that while we answered many of your questions at our investor day, the big question remains about whether we can restore volume growth. I've asked Reynolds to provide a concise summary of our strategy as parts of his comments this morning. He has some positive initial results to share, which I think you will find encouraging. But just so we're all clear, let me repeat four main themes of our operating strategy for growing volume. We tend to attract new volume first, by increasing our emphasis on certain high-margin and fast-growing service lines through our targeted growth initiative. Second, through carefully targeted capital spending on those highly visible items that are of greatest importance to [achieve] position. Third, through our centers of excellence strategy that gains recognition, price advantages, and directed volumes and payers. And fourth, making sure that our physicians understand that we have emerged from the settlement process confident in our hospitals and committed to keeping them competitive through a deliberate and systemic physician communications center.

Keep in mind, when we're talking about admissions growth, it is important to recognize that we already have a large number of hospitals doing very well. 21 of our hospitals are continuing operations and over one-third achieved positive growth in second-quarter patient admissions versus the prior-year quarter. Conversely, 11 of our hospitals were cumulatively responsible for 100% of our volume losses in the quarter. The point is that the negative admissions numbers that we're reporting this quarter are generated by about 1/5 of our hospitals. The weakness does not exist throughout the entire Company. Turning to pricing, once again we did very well. As you heard at investor day, our managed care team has been working diligently to bring up the lowest-priced contracts in our portfolio. Revenue per commercial managed care admission was up 15% in the quarter, which is evidence that our approach is working. We also continued the strong discipline in controlling costs. Total controllable costs for adjusted patient day were up only 4.4%, which is better than our peer company, and a notable achievement given the declines in volumes this quarter. The increase in bad debt expense was similar to the results reported by others in the industry. On a compact adjusted basis, bad debt was 14.2% in the quarter. The trend in the recorded number, however, was much better.

The primary driver of the increase in compact adjusted bad debt was the continuing pressure that we're getting from the growth in the uninsured. Uninsured admissions have now reached 4% of total admissions. Increases in the uninsured of this magnitude are disturbing, because they offset much of our progress on the collections front. Increases also make it increasingly difficult to predict future trends in bad debt. As you heard at our investor day, we are adding innovative approaches to improving performance in the revenue cycle for self-pay patients. Cash flow from operations strengthened on a sequential basis, and before the settlement payments we produced $86 million in free cash flow. Keep in mind that our capital expenditures should increase for the balance of the year, so we expect that free cash flow will decline from this level, and I'll let Diggs take you through the details. Finally, I'm very pleased to tell you that the latest U.S. News and World Report issue, America's Best Hospital, our USC University Hospital was among only 176 hospitals in the United States to make the cut.

I'll now ask Reynold Jennings, Tenet's Chief Operating Officer, to provide you with an update on our initiative to improve volume growth. Reynold?

Thank you, Trevor, and good morning, everyone. I'm going to focus my comments on a single topic this morning, Tenet's strategy for growing patient volumes. Given the questions at the investor conference, I want to make the pieces of this strategy very clear to everyone. I also want to talk about the preliminary results that we have achieved. I'm optimistic about our early results, and I hope you'll share my same enthusiasm. The foundation for our strategy is built on extensive market research. We have talked to physicians in every one of our markets, and last year we conducted two independent third-party physician focus groups. Through these actions we've refined and deepened our understanding of the decision process that our physicians use to direct their patient flow.

A leading concern among splitter physicians was the size of our ultimate settlement with the Department of justice. Physicians were worried that a large settlement could threaten our ability to sustain an appropriate level of investment in our hospitals. We also know that many of our competitors, largely not-for-profit competitors, exploited this fear, and that clearly harmed our volumes. As you know, this fear has now been eliminated. In the aftermath of our settlement, a review of our financial strength and our ability to sustain investments in our hospitals has been added to our sales presentations to physicians. Our recently announced strategy of accelerating investments in our hospitals dovetails perfectly with this sales message. Doctors like the promise of additional investments, but they're even more impressed by the tangible evidence of financial strength.

We refer to our sales outreach program as our Physician Sales and Service Program. or PSSP; not an acronym which rolls off the tongue easily but quite descriptive. Our preliminary results in this program are very encouraging. Our 57 hospitals and continuing operations have relationships with just over 10,000 practicing physicians. PSSP was launched in November of 2005, and by the end of May, 2006, we had visited with roughly 8,000 or 80% of those doctors. Our hospitals chose, based on information from the first visits, to concentrate in the second quarter on about 1,300 physicians. Those physicians increased their admissions by about 1,200 in the second quarter over the first quarter, or an approximate 3.5% increase. If those admissions hold for a full year, the increase would equates to about 4,800 admits per year improvement for these physicians and would add approximately 0.8% to the whole Company's current base of admissions. Also remember that our first quarter is seasonally about 8% to 9% higher in the first quarter in Florida, and about 4% to 5% higher in the other regions than the second quarter. The seasonality makes the approximate 3.5% increase in the admissions from these physicians all that more impressive.

Let me also point out that this was accomplished despite some temporary obstacles, which should no longer limit our ability to grow the business. First, recall that California was in the aggressive implementation phase of the margin purification part of the targeted growth initiative during the very time period when these admissions were generated, so we were fighting some self-imposed headwinds in those markets. Second, we had not yet settled with the government, so our sales presentation was somewhat handicapped. And third, we had not yet announced our $180 million enhanced CapEx program. So what are some of the key lessons that we've learned so far from our PSSP initiative? First, it takes about three to six months after the first visit to see increased admissions on the in-patient side. Secondly, it takes three or four visits to the same physician to close the sale and get the increased business. And third, out-patient business is easier and quicker to win than in-patient business.

And what are some issues that we've identified that need improvement? First, we need to pick the best practices and systematize them. We have too much variability in approach right now. Second, some of our managers need formal sales training. Third, some managers just don't have the skills for sales calls and need to be replaced. And fourth, our software tracking tool needs some refinement for ease of use. Obviously our problem is far from solved. However, for our new program, fighting some start-up issues as well as general industry headwinds, we are very pleased with these very early results. Our upcoming October, 2006, annual hospital leadership conference agenda is geared toward actively sharing best practices across our regions, with the goal of making PSSP even more effective going forward.

As we implement PSSP, we are tailoring it to leverage the unique strength and capabilities of each of our hospitals. The size of our sales team can vary from four to 20 local managers, depending on the size of the hospital. In addition to the four senior managers at each hospital, which is the chief executive, the chief operations officer, the chief financial officer, and the chief nursing officer, we also involve clinical managers and hospital-based physicians in the sales cause whenever possible, so we align the interest and needs of the admitting physician with the manager most able to solve a problem or improve a service. Our goal is to have at least 500 local managers actively and consistently working on bringing back volumes from splitter physicians.

Changing gears a bit, you should take note that our market research also helped us to work more effectively with our managed care payors. I'm referring to the Centers of Excellence programs being introduced to payers like United Health Care, Aetna, and CIGNA. The managed care companies see Centers of Excellence as a powerful strategy to control their costs through better clinical outcomes. We see it as an equally powerful strategy to capture incremental volumes. These numbers are preliminary, but nonetheless clear, that where Tenet has earned a Center of Excellence designation we have achieved highly attractive volume growth. Our first four hospitals to earn a Center of Excellence designation in cardiology from United Health Care have shown a 22% growth in cardiology volumes from the prior year. That is astonishing growth.

It's even more remarkable that this is in the cardiology service line, where our non-Center of Excellence designated hospitals saw volume declines by 3%. The fact that the redirection of volume can be this dramatic should not be surprising. Managed care payers are creating very attractive financial incentives for plan participants to make greater use of Centers of Excellence designated service lines. These incentives include the waiving of patient co-pays and sometimes cash deposits to the patient's personal HSA account. These incentives are clearly having the intended effect. This impact should only increase as plan participants become more familiar with these incentives to use them to reduce their out-of-pocket cost. This strategy of enhancing our value proposition as defined by the payers creates a win-win outcome, with clear advantages for Tenet's volume growth objectives.

Our early adoption of a quality strategy for our clinical services is beginning to produce material financial returns. Tenet has earned a Center of Excellence designation at 28% of its hospitals, a unique achievement in the industry. United has granted such designations to only 4.5% of the approximate 4,500 hospitals in its network. Tenet's quality accomplishments are also impressive with CIGNA. CIGNA identifies Centers of Excellence in 19 clinical lines of service. Tenet has received Center of Excellence status designations in 149 service lines, for a 6% rate relative to the number of lines of service where Tenet has approved eligibility. This rate is three times CIGNA's national rate of 2% of Centers of Excellence designations.

Next I would like to make a few comments about our evolving out-patient division. Steve Corbeil and Chris Bird have completed the hiring of five experienced front-line managers from ambulatory surgery, diagnostic imaging, urgent primary care and out-patient business development. Groundwork is anticipated to be done by the end of the third quarter on assessing the value of 37 high-priority, freestanding projects. This timing will allow us to choose the best, high-value projects for the 2007 budget. Early information is that we are losing out-patient imaging business due to service and convenience factors, compared to freestanding competitors, and we are losing ambulatory surgery business due physician syndication opportunities with competitors. The out-patient division will work with Dr. Daley to design and institute a Commitment to Quality approach on service and efficiency similar to our successful in-patient Commitment to Quality strategy. On the syndication front , we know we have to develop most, if not all, of the freestanding surgery centers as physician joint ventures. We are very pleased with the progress that Steve Corbeil has made in developing this division and laying the groundwork to start making a tangible impact in 2007 and forward.

So in summary, lets me summarize our strategy and our actions to date. First, we've identified physician needs through careful and exhaustive market research. Second, we have accelerated our capital expenditures, targeting immediate physician priorities which impact their business models. Third, we are fine-tuning our Physician Sales and Service Program, or PSSP, to effectively communicate our value proposition to our physicians. Included in those messages are four points. Tenet's commitment to their hospital, Tenet's sustainable financial strength to adequately invest in their hospital, describing in detail the specific incremental investments in that hospital, and assigning specific individuals to each physician and to the doctor's office staff to ensure that these messages are being delivered. And then fourthly, we are enhancing our value proposition as defined by the major managed care payers to help them improve their own profitability.

In conclusion, our ultimate success is tied to the success of the Physician Sales and Service Program, our Commitment to Quality, quality and efficiency initiatives, and our managed care Center of Excellence strategy. With the strength of our pricing and cost initiatives over the past several months, as well as the fact that only about 20% of our hospitals are causing the weaker volumes year-over- year, we have the balance of 2006 to continue to gain momentum on these two companion programs, PSSP and COE, Centers of Excellence, to our overall successful Commitment to Quality initiative. As we indicated at the recent investor conference, we need to be producing net volume growth starting in the first quarter of 2007 to balance the contributions of price and cost control toward our two to three-year outlook goals. So there it is, our strategy for growing volume. Simply stated, we will provide efficient, high-quality services, give every physician a means to have their voice heard on needs at the hospital, and provide new patient volume to our physicians by becoming managed care Centers of Excellence.

Now I'll turn the floor over to Biggs Porter, Tenet's Chief Financial Officer. Biggs?

Thank you, Reynold, and good morning, everyone. First, let me apologize for missing the opportunity to meet many of you at our investor day last month. The situation was unavoidable, but my wife is now recuperating and we appreciate the expressions of concern we have received. Let me start off by summarizing our results. To begin with earnings, EPS for the quarter came in at a negative $0.85, including a negative $0.95 for continuing operations. The loss at continuing operations included a number of items listed in our earnings release. We encourage you to reach your own decision as to which of these are unusual. The largest item in the list is, of course, the charge of $0.98 per share for the global settlement and other litigation and investigation costs. Excluding just the after-tax effect of the global settlement, EPS from continuing operations would have been a positive $0.03. Although we still clearly have a long road ahead of us in our recovery, adjusted EBITDA for continuing operations modestly exceeded our expectations for the quarter at $209 million, as soft pricing -- excuse me, strong pricing offset soft volumes.

For the first six months, adjusted EBITDA for continuing operations totaled $426 million, excluding settlement payments, restructuring charges, and insurance recoveries. As we have discussed before, there was an approximately $30 million favorable item related to cost reports in the first quarter, which we would expect not to repeat, so backing that out we are at $396 million of adjusted EBITDA at the mid-year point. Our adjusted EBITDA margin was 9.5% in the second quarter, an increase of 240-basis points from the second quarter of 2005 at 7.1%, and above the high-end of the range of 7.8% to 8.9% in our 2006 outlook as it was revised in our June 29 press release. Note, however, that our second half is typically the weakest for seasonal reasons, so we are not responding to strengthening in the second quarter by modifying our EBITDA outlook at this point. Although this certainly gives us basis to be more optimistic that we will be near the mid to upper-end of the range, and I don't see any degradation from prior expectations as to what is in front of us, it is premature to move the outlook upward.

Moving to admissions. Admissions declined by 2.7%, and commercial managed care admissions declined by 6%. 72% of the decline in commercial managed care admissions can be explained by declines in just three service lines; pulmonary, cardiovascular, and bariatrics. For the second half of the year we will need to achieve a volume decline no larger than 1.2% if we are to achieve the 2% volume decline we have previously given as our 2006 outlook. Because we are facing some easier comps in the third and fourth quarters, we believe this volume performance remains achievable. The implementation of our targeted growth initiative caused some of this volume loss. We estimate that TGI-induced losses totaled roughly 1,000 admissions or about a quarter of the admissions decline. Looking deeper into our admissions patterns, it's of interest to note that 21 of our hospitals or 37% of our hospitals in continuing operations, achieved positive growth in patient admissions, with aggregate growth of more than 2,400 admissions. When we rank order our hospitals by admission growth, we note that the top 46, or 81% of our hospitals taken in the aggregate, had flat admissions for the second quarter or, conversely, that just 11 hospitals had declines which, in total, were equal to our total admissions loss for the quarter.

Although still far from satisfactory, the picture improved somewhat in the quarter on the out-patient side. The loss of out-patient business in the first quarter was 7.5% and moderated somewhat to decline to 6% in the second quarter. To achieve our outlook for a decline of 4% in out-patient visits in 2006, the decline in the last half of the year will need to be no greater than 1.6%. This appears to be a stretch goal at this point, but we believe any shortfall here can be offset by pricing and other variables. Reynold discussed earlier our pro-active initiatives to generate stronger volume growth.

Moving to pricing, pricing was again a notable bright spot in the quarter and made a crucial contribution to the bottom line. Net revenues per equivalent patient day increased by 6.8%. This pricing strength was sufficiently robust to drive net revenues up by 2.5%, despite the volume declines. There was no material change in acuity, an increase of less than 1% in the quarter. Limiting our focus to just the vantage care piece of our business, net revenue per admission increased by 11.9%. This figure includes both commercial managed care, as well as managed government programs. Revenue per commercial managed care admission was up 15% in the quarter, clearly reflecting the positive efforts of our managed care team. Reflecting our recent pricing strategy, stop-loss revenue in the second quarter declined by 17% on a year-over-year basis to $83 million. On a sequential basis, the stop-loss decline from the first quarter was 3.5%. This flattening out of stop-loss is evidenced that the recent evolution in our pricing structure is reaching a point of stabilization. On cost efficiency, the cost discipline you have seen in the past quarters was also clearly evident in our second quarter results.

As Trevor mentioned, total controllable costs equivalent per patient day were up only 4.4%. Not surprisingly, the source of the largest increase was supply costs, which were up 6.4%. Salaries, wages, and benefits per equivalent patient day rose by only 1.4%, despite soft volumes. This low rate of growth is unlikely to be sustained in the fourth quarter, however, since our salary increases for the year are to be effective in the fourth quarter rather than in the second quarter, as in 2005. Other controllable expenses per equivalent patient day were up 8.8%. This increase was largely the result of the effects of lower volume on fixed or semi-variable costs, higher hospital provider taxes and increased IT expenditures for our clinical systems initiative. Partially offsetting these increases was a 16% decline in malpractice expense to $49 million in this year's second quarter, versus $58 million in the second quarter of 2005. With respect to bad debt, the sequential increase we experienced in bad debt was on a par with our peers. On a compact adjusted basis, bad debt was 14.2% in the quarter or 5.9% on a reported basis. On a year-to-date basis, compact adjusted bad debt was 13.5%, in line with our outlook for the full year. On a sequential basis, the compact adjusted bad debt ratio increased by 150-basis points from 12.7% in the first quarter. About 50-basis points, or one-third of the increase, resulted from a reclassification of some pending charity accounts to self-pay. Although this is a common process, the amount was more significant than usual, or than would be expected in the future.

One way to see past this discontinuity as balances move from charity to self-pay is to look at total uncompensated care, which is the sum of bad debt and charity care. Changes in total uncompensated care more accurately reflect the impact on the Company's underlying economics than looking at any one component in isolation. Our uncompensated care increased just 60-basis points, from 18.9% for the first quarter to 19.5% in the second quarter. While this reclassification explains one-third of the increase in bad debt, there is still a 100-basis point increase in compact adjusted bad debt which it does not explain. The main driver behind these 100-basis points is the continued growth in the uninsured. Total uninsured admissions rose by 2.3% relative to last year's second quarter. Uninsured admissions now comprise 4% of total admissions versus 3.8% of last year's second quarter. There was a significant geographic concentration in the growth in the uninsured. Florida saw an increase of 10% on uninsured admissions from the first quarter, Georgia increased by 27%, and Pennsylvania saw an increase of 28%. Our continued improvement in collections from managed care accounts has helped to offset some of this pressure from the uninsured. In the second quarter, we collected 98% of our AR for managed care, up from the 96% reported at year-end 2005.

Moving to cash flow, cash from operations strengthened on a sequential basis, and before the settlement payments, we were in positive territory for free cash flow. Net cash provided by operating activities before payments for discontinued operations and other charges was a positive $204 million, up from a negative $132 million in the first quarter. This swing reflects the reversal of seasonal consumption of cash and working capital, which typically occurs in our first quarter, and the timing of our 401K match and interest payments. As we have not yet initiated our accelerated capital spending program in the second quarter, our capital expenditures were $126 million in the quarter, or an annualized run rate of just over $500 million. This spin rate was well below the $700 million of cash we expect to use to fund a portion of our increased capital investments, expected to complete in this calendar year. If there is a variance at the end of the year to $700 million, I would, of course, expect it to be a short-term timing difference in nature. While settlement and other payments, including those any n discontinued operations of $524 million, had a significant impact on cash flow. Excluding these payments, we had positive free cash flow of $86 million in continuing operations. This is before receiving the Katrina insurance settlement of $240 million, which we received in early July. We still expect to have cash at year end of around $1 billion, consistent with our last outlook. We now expect net interest expense to improve to approximately $360 million.

Before I conclude I want to spend a few minutes on some of the topics I had intended to cover at the investor day. These comments focus on the setting of our financial objectives and how those financial objectives will contribute to guiding our strategies going forward. I'm going to be brief, but will be happy to allow Q&A, if desired. First, a few comments on our capital spending. The level of ongoing investment in the business is of crucial concern to all investors. This is particularly true at Tenet following our recently announcement strategy of higher capital spending and the implications the spending could have for the timing of our sustained return to positive free cash flow. As we announced in our June 29 press release, our plans call for raising our capital commitment budget for 2006 to $800 million. Although we believe we will be able to afford this kind of level going forward, whether this is the right level of investment for 2007 and subsequent years has yet to be determined. The annual retermination of our capital budget will be sensitive to the impact we are able to create with this year's investments. In support of this, Reynold and I are tightening the assignment of accountability to achieving returns on these investments, and assuring that where we are spending discretionary money, there is a well-based commitment to achieving improved results. I've heard the question asked in prior conference calls about hurdle rates. We do use hurdle rates, although I consider the rate to u -- the rate used to be proprietary. I can assure you, however, that it is above our weighted average cost of capital.

I might talk for a moment on EBITDA and return on invested capital. Following our settlement, we stated our return objectives in terms of EBITDA over the intermediate term. This was done largely to provide a measure frequently used and which could easily be compared to our peers. While we believe EBITDA growth is a primary driver of our recovery, it is just that, a value driver. A system with the accountability for returns I spoke to earlier, when I talked about our capital spending, we are also focused on the end result of increasing return on invested capital and achieving sustained free cash flow. Our focus on cash flow is also consistent with a desire to improve our credit ratings over the recovery period. We believe this is important to achieving financial efficiency.

At this point let me step back and briefly summarize my comments in three points. First of all, going back to my discussion of the quarter, although we continue to feel pressure on volumes and bad debts, we are successfully mitigating this through our pricing and cost control efforts. Secondly, our investment program is focused and measured. And then, finally, at a more strategic level, our commitment is not just to grow from EBITDA, but also to return on invested capital and sustain free cash flow.

Edwardo, our operator, we are now prepared to start our Q&A session.

[OPERATOR INSTRUCTIONS] Our first question is coming from Adam Feinstein of Lehman brother. Please go ahead.

Great, Thank you. Good morning, everyone, and let me bet the first to say it sounds like you guys are being very proactive here relative to prior conference calls. Just a couple of -- of questions. Let me throw them out. Maybe you can just answer them all. I guess first would just be, with respect to the Medicaid dish in on the quarter, just wanted to get more clarity there just in terms about the sustainability of that. Should we see similar types of increases going forward? And I guess second, you were talking about the 11 hospitals or 20% causing the volume weakness. I know you spoke about it. Just wanted you to elaborate a little more in terms of where these hospitals are located and any other common traits amongst the underperforming hospitals. Thank you.

Let me do the dish question first then Reynold can do the question on 11 hospitals. This is Biggs speaking, Adam. The -- with respect to the dish income in the second quarter, we did receive higher dish income. Approximately $30 million in the quarter than what might be -- have been a normal run rate for us. We do expect that to recur in the future on an annual basis, let's say, but not necessarily by quarter, so you'd have to normalize that. But also point out that there was higher hospital provider taxes in the quarter of about $8 million, which created a little bit of a blip going the other way. So you'd have to normalize the revenue and look at the expense normalized, as well. The -- so I'll leave it at that and if they answer that question --

I'm sorry, before we move on. Was there one particular state where you saw a big change in dish, or was it in -- in a few states?

There was a few states involved on the revenue side. On the tax side it was primarily South Carolina.

Okay.

Adam, on the volume side the hospitals were identical to the same group in the first quarter. And those issues break down just as they did in the first quarter to -- first of all in Florida, all health care providers are having really strong downward volume headwinds there, not just us. And that's primarily because of some remnant of the hurricane after effect in southern Palm Beach and northern Broward counties. It's obvious that the insurance companies have really tightened up on their in-patient admission criteria for all providers, so those are the general trends down there. In Texas, it is the maturing of the four new hospitals that came on line over the past couple of years, and our need to enhance our targeted growth initiative to handle that new competition. And in California, it was the two hospitals that had the negotiation on an independent practice group with a full-risk contract in which the pricing was such that we would lose money to have the contract, so we were more than happy to lose that business down the street to the competitor.

Okay. And -- and then just my last question there. So I guess for those 11 hospitals, I guess could you just clarify, so how much were -- were the volumes down there relative to the overall portfolio?

They were down enough to offset all --

Yes, they the whole -- they in the aggregate added up to the entire downfall. I mean, again, we should be clear on that. They actually aggregated that part of it, you know, to create the numbers that do that. Now we did have a few hospitals that were a little bit, you know, south of last year. But the 20-something hospitals that were greatly north of there, so you know the aggregate group that we look at is how a normal performing company operates, that you've got a whole lot more positives and people doing really well at hanging in and not going further south on their performance. And so again, these 11 were the problems.

Okay. Great. Thank you.

Thank you. Our next question is coming from Oksanna Butler of Citigroup. Please go ahead.

Thank you. Good morning. Just coming back to the guidance that you mentioned. Adjusting for the dish, you're looking at about 396 in EBITDA in the first six months. And granted you have some seasonality that's coming up, but is there any reason to expect a particularly weaker second half this year, especially as you mentioned you have somewhat easier comps coming up ahead of you?

I think that, you know -- this is Biggs, Oksanna, and good morning. The outlook for the year, as I said, we left the same, but feel better about being the mid to the upper end of it. I think if you to be the first half performance and presumed it repeated itself using our 1.2% projected volume decline and taking bad debts at 13.5%, you would end up probably above that upper end of the range. The things that cause us to not, if you will, take it up is there is the $30 million of cost reports in the first half. You have to normalized for that. You do some normal situation for the dish. But beyond that, as I mentioned, salaries, wages, and benefits will go up in the fourth quarter, and there may be some traditional tail-up expenses in the fourth quarter. So if you kind of factor all those thing together, it would say that, you know, if we hit the volumes that we expect in that 1.2% and the bad debts, that there's reason to be optimistic. Now the big risk, of course, is just that, it's volumes and bad debts. So we'll have to watch it carefully as we go through the second half.

Okay. Thanks. And just on the out-patient front -- that's an area, obviously, you're now focusing more aggressively on -- can you just give us a sense in terms of timing there, when do you expect that you're going to start seeing some substantial improvements? Thanks.

Yes. Sure, Oksanna. This is Reynold. Again, we had done a lot of homework over the past two years over potential out-patient opportunity, so when we created this new division, we actually could deliver to them specific sites to start doing their homework on. But again, in our budgeting process, again given our need to carefully balance the out-patient and the in-patient commitments, we really haven't drawn a target and will not draw a target until we get to the budget discussions in the fourth quarter as to how many projects we want to bring on line. Typically in the out-patient arena, once you decide to do a project, it is at least nine months from conception to doctor syndication discussions to construction and design and opening up. And so again, it will -- whatever number we choose to concentrate on for 2007 would not be able to bring any impact in until late third quarter and into the fourth quarter.

Okay. Thanks very much.

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

Thanks, and good morning, everyone. I guess one question relates to your pricing. I mean, 15% pricing, obviously managed care and, I guess, 10% was for in-patient. I mean, you could maybe generalize the quarter. I mean the story now is being a pricing story, which given the history, I don't think you want to. But talk to me about, you know, pricing, and is it just because pricing was so low, you're coming up? You wouldn't think an industry with 50% occupancy and down admissions could actually have such strong pricing, so maybe you can spend just a little more time walking through the pricing story in the hospital industry?

Thanks, Ken. This is Trevor. A particularly apt question coming from you about pricing strategy. And I think it's an important thing for us to discuss. You know, at our investor day, Bob Yungk made a presentation about -- it was very detailed. I would encourage people to refer to it on the web -- showing a breakdown of our hospitals and how we believe they [rank to] market pricing. And we also pointed out that these types of pricing increases that we've been demonstrating now for several quarters, we did not believe would be sustainable into the future, as the high rates of increase have been anniversaried. But to make it an important distinction to other historical pricing strategies, first of all, all the pricing that we are doing today is being driven by negotiations with payers. These are not imposed through some other means. Second, the strength that we've been showing in the last several quarters has been due to a very concerted effort to bring up the lowest pricing in our portfolio. As you know, for several years we and others in the industry -- in fact the entire industry -- has been facing this erosion at the upper end of pricing, as the independent companies, managed care companies, or more loosely managed plans have been consolidated into more tightly managed plans and larger national payers. So I -- I'm, you know, obviously very sensitive to our pricing strategy. All of us are.

We also do -- as I said in my opening comments, we intend to generate growth through a balanced combination of growth and volumes, pricing and cost control. And the types of pricing increases that you've been seeing lately are really the result of a very concerted effort to bring up prices that have been at the bottom end of our range, and also where we have market intelligence that say that our hospitals are being underpaid. We have -- just as a contrast versus, you know, even three years ago, we have so much greater intelligence now and system tools and data bases that we have been subscribing to that help us make much more informed decisions about where our hospitals are in the market. So that -- that is -- that's a combination of skill, technology, innovative approach I spoke about that has enabled us to achieve the pricing gains that we have. But just to be clear, we do not expect to continue to demonstrate these types of results going forward.

Trevor, can you tell me, I guess simply, is this a simple average price increase or is it patient weighted? Is there -- I would think the algorhythem necessary to compute average pricing given the complexity of the contracts, the [carve] outs, and you have per deems, you have case rates. How do you summarize quickly what your average price is?

Obviously the statistical reporting is averaged across all of our managed care portfolio. But the way in which it is being achieved is very much targeted contract by contract and varies widely within the Company, based on the particular managed care payer, the mix of business. Also just -- I like to keep plugging the investor day because it was so comprehensive; seven hours of presentations and they're still available. But for example, Bob Yungk as part of his presentation presented on the impact of the Centers of Excellence strategy, showing that when we were able to achieve these Centers of Excellence designations in the past, that has led to improved pricing and also improved volume.

I guess one last quick question, quick question. What do you consider your weighted average cost of capital to be? There was a comment earlier about comparing returns versus lags.

Yes, I've seen a number of different computations, and we've done a few different ones. As I said, I wasn't going to give the hurdle rate. I'd just as soon not give the lag as we see it either. But I think there's a range out there you could refer to on what's published and I just suggest you do that.

Thank you.

Thank you. Our next question is coming from Darren Lehrich of Deutsche Bank. Please go ahead.

Thanks. Good morning, everyone. I wanted to just follow up a little bit more on the volume subject. And Reynold, if I heard you correctly, with the physician marketing that you're doing, you'd expect to see a little bit more out-patient business first. So with that I guess I'm thinking about out-patient volume being an important leading indicator and we obviously have not seen good out-patient results from you. So wondering if you can just talk a little bit more about some of the specific metrics on the out-patient side; out-patient surgeries, imaging, I don't think they were in the release. And give us a sense for why, you know, we shouldn't be worried about the trend that we're seeing here? And then I guess my second question would really be just -- at the investor day, you mentioned that the targeted growth initiative would lower admissions by about 6,000 this year. I just want to make sure that that's still the right range and how many quarters do you think we'll see dilution of volume growth from the TGI? Thanks.

Okay, Darren, I hope I can remember all those, but let me take a crack at it. First of all, on the out-patient side, we want to be real careful -- and we've always done this -- that, you know, we have multiple ways of looking at numbers and data and feeling comfortable that we can give you numbers that we understand the trend line on. And the difficulty with out-patient is that at the individual doctor level, there can be wildly seasonal numbers within those referral bases, based on things that happen in that particular state or city, or the way doctors cover practice for each other. So in giving a number of our physician sales and service calls on the out-patient, you know, I really want more time to develop that data base and be sure I understand what the underlying baseline is. Now having said that, I think I can comfortably tell you today that it appears that we had an incremental 7,000 out-patient visits from our physician sales and service calls. And I would use that as a conservative number in that, again, once we clarify some of the other things, I'll have a better feel. But I feel really good that, at a minimum that is a good number for the second quarter's growth over the previous quarter a year ago. On the -- what of the other question, Darren?

You know, just the dilution of volume from the targeted growth initiative and how long we should expect to see those levels?

Sure. We've complete 33 hospitals, all in California. We only had a couple left in this calendar year. So the remaining hospitals to get from 17 in California to the 33 is six or seven each in Florida and Texas and one in central northeast. Once we complete the initial roughly eight to ten-week process, it takes about at least three months to weigh in to any immediate opportunities because, again, one of the things you want to do is, even if a service shows up to be negative margin or -- or not good margin, you may have a doctor who's very important in servicing another cadre of patients and things, so you surely don't want to influence that relationship with that doctor. You want to talk these things through about community need and backup services in the community. So we take our mission very seriously not to jump into these things quickly, and we spend at least three to six months for each hospital taking a look at that.

So once we've done -- and again that's why California, who started the process in late '04, we were beginning to tell you what was happening there by the -- this period last year and more so into the third and fourth quarter. It's going to take us all the way through this time next year to really complete all 57 continuing operation hospitals. So, you know, we will have a moving target for you that we're trying to tie down as we make sense out of that for you before we get to a baseline, much like with the compact with the uninsured. For them we have a clean line going forward into '08 and '09. So I hope that helps out a little bit. So it's not an easy process. It's going to still take a while. But again, we're very excited about the pace and continue to be excited about the early results.

On the in-patient side, let me also indicate that when we find a service that we believe has an opportunity for growth, as I've said before, it can take anywhere from six months to 36 months to execute that plan, to turn that service into a Center of Excellence, depending on whether you have the doctors currently on hand, the technology, the building space, and those kind of issues.

Thanks. And if I could, one follow up for Biggs real quickly. Can you parse out for us the difference between acuity and rate in the pricing statistic? Thanks.

Well, acuity is so close to zero that it's really rate driven.

Okay, thank you.

Thank you. Our next question is coming from Sheryl Skolnick of CRT Capital. Please go ahead.

Good morning, everybody, and thank you so much for giving us the information, that really terrific information on the pilot. You finally answered my question. I hope it didn't hurt too much.

Thanks, Sheryl.

Now, to my qu -- an observation, by the way, Bloomberg, Biggs, has your weighted average cost of capital as 5.39% as a couple of minutes ago, so you want to comment on whether some of the assumptions there at some point in time accurately reflect the real cost of your capital. They --

Okay. Thanks, Sheryl. I have to go look at Bloomberg. I'm not sure I would refer tha --

Not at this point in time, but I would hesitate to believe that your hurdle rate is close to 5%.

I think that's safe to say.

Right. Now if I may, I'm going to ask you, since you didn't comment on it as one part of this -- an update on the sale process, but my real question goes to the pilot. You talked about across the 57 hospitals, 1,300 doctors giving you 1,200 additional admissions sequentially. That data's correct, right? That's the right numbers, Reynold?

Yes. Of the initial 8,000 visited, the -- they concentrated their efforts on about 1,300 for the second quarter, producing an incremental 1,200 by those doctors.

Right. So they gave you 1,200 from 1,300 docs, right?

Yes.

So that's not even one per doc. So have you looked at the roughly 100 doctors who didn't give admissions and what might the issues there might be? Is it just simply they need more time? Second question is, as you follow this up, recognizing that this is all new, do you have any sense at all that -- you know, if it wasn't 1,200 out of the 13 who each gave you one patient, what the pattern actually was and whether they gave you after the first patient multiple patients, and did it accelerate? Will it accelerate, and can you give us some additional color on that? Because that -- that will give me, and I think investors some insight into all of the kind of dynamics that you're dealing with. It's complicated, but that's the kind of traction that we'd obviously like to see. Then finally, Biggs, if you might want to comment on the bank debt and whether or not we can contemplate any changes in your capital structure?

Sheryl, I'll go first on the splitter doctor question. If you remember last year when we identified those numbers, at that point in time we were talking about roughly 8,700 splitter doctors. But that aggregate bucket of doctors average admitting 14 to 15 patients per year to a hospital. And we were seeing over the last two years about two patients per year drop, which is less than one per quarter in that aggregate bucket. So again the results that we just gave you are for one quarter. So again, as I said, if that were to hold, you would see that increased admissions over a year to be about 4,800 admissions for that group of 1,300 physicians. There is an interesting statistic here for you in that, you know, if you take 8,700 doctors, which now with the lower platform is down around the 6,800 range, is to get to an average of 14 to 15 per year when we started the data base, that could be anywhere from zero to 130 admissions a year by those splitter doctors. And so within this 1,300 category, if you play those numbers out and do the math on the percentages, you'll come out to the fact that they accounted for close to 33,000 admissions, historically. So therefore they were averaging somewhere near about 100 admissions per year.

So the -- my viewpoint on this is that the hospital successfully peered into doctors who are splitters, but who are doctors who are more closely aligned with the hospital than ones who admit one patient a year or two patients a year. And that in sales terminology would be exactly the right place to go to first to get the most immediate growth in your volume to do that. So again, what will be interesting is that as they've extinguished what they believe to be the maximum impact of this 1,300, as they move to sequential buckets as to what the average admission rate was for those groups and how much we can add on to do that. And so I know why you're asking the question and it would be a great question for all of us to ultimately know, but I think given the time this is going to take, we've got another 12 months of sequentially working through these buckets before we'll understand the weighted average of each target group of doctors, and then how we can parlay that into an aggregate number for years going forward.

Did the 11 hospitals that were particularly negative in volumes this quarter, have any of these 1,300 docs?

Let me look at my list here real quick.

Or said otherwise, that the 20-odd that did real well have all of the 1,300 docs?

I believe it would be a safe assumption that either zero or only one or two of the 11 created any of the additional value.

So you've got tougher docs that aren't as closely aligned --

Well, we've got tougher other issues going on in those categories that we mentioned. For example in Florida and the competing hospital issues and those type of things. So there's where we believe, in many cases, the targeted growth initiative will bring more value than the physician sales and service initiative.

Okay. All right. And on the bank debt and update on sale profits. Thank you.

Okay. On the -- on the bank debt, the -- I understand the question with respect to capital structure, but it's -- my first reaction that our focus right now is very much on the turnaround. It's on improving margins, on improving cash flow. We want to obviously monitor that, and then as we go on through time, of course, we'll watch the markets, as well and we'll make some determination in the future as to what the optimal capital structure for the Company is. But I'm not going to lay out some -- point. With respect to the sale process, Peter Urbanowicz, I think, will answer the question.

Hi, Sheryl, it's Peter Urbanowicz. The sales process is going quite well. You remember in July we announced a transaction with the Oxford Clinic Foundation in New Orleans, which will account for three of the hospitals in New Orleans. The remaining hospital in New Orleans that we are divesting we have several interests on a real estate basis there, so we feel confident that we'll close that one, as well. In Alvarado, our process is down to the serious bidders right now. We've been through a very detailed and careful bidding process. We started with over 20 bidders. We're down to a core group of very serious ones, so we expect that that will close by the deadline that we have early next year. In Florida the two hospitals that we have there, Parkway and Hollywood, obviously one of them had been previously publicly announced that we were in discussions with the county hospital authority and we're going to continue along this line. The other one, Hollywood, we have serious expressions of interest in that one, too. Our Cleveland Clinic hospital is with our partnership where our partner at, the Cleveland Clinic, has announced an intention to buy us out, and that's -- that's moving along, as well. And in Philadelphia, with the three hospitals there, serious expressions of interest, as well. So on all of them, I think they're moving along. Our hope is that we close them out by mid next year. Some of them moving faster than others, which we're very pleased with. New Orleans is one example. So I think we're on target, both for our anticipated proceeds and closing the sales of these hospitals.

Thank you. We only have time for one more question from Myles Highsmith of Wachovia Securities. Please go ahead.

Hey, guys. A balance sheet question first and then a follow up. On the income tax receivable, the 172, is it right, I guess from the Q, that its coming from tax affects from the global settlement? Is that correct? Is that what turned the cash over to near term and, kind of, what's the timing on that and any more to come there?

Yes, it is associated with the global settlement. And it would become receivable or -- or be collectible effectively in the second quarter of next year after we file the 2006 tax return.

Okay. That's helpful. And then a comment was made about looking to improve the credit rating at some point down the road. Can you talk a little bit about that? Is that via kind of deleveraging through this EBITDA growth or should we start to look at some debt reduction over the next couple of years?

Well, I think going back to the prior question with Sheryl, we're really looking at getting there by performance and think performance alone should be able to drive an improvement in the credit ratings. Beyond that, like everybody, we'll watch to see what happens in the markets and to see what otherwise is available to us, but at this point in time there is no view as to what the optimal structure will be going forward.

Okay. Helpful, and then just one last one. In terms of, you know, we're ramping CapEx 700 cash this year, maybe something similar next year, are we pretty well caught up at this point? Can we pull it back or is incremental CapEx in kind of '08 and going forward going to come from out-patient initiatives and other things like that? Thanks.

Well, I think that -- you know, we expect a high level of investment through 2007. As I said earlier, we're making these investments to grow the business to really get increased value. We're going to monitor them to make sure we're doing that. It's a little premature to look beyond 2007. And I would say that you have to remember that this incremental, because it's associated with value-accreting investments as opposed to just some base level, there is a discretionary element there. The real replacement and seismic-related level of spending is more in the $500 to $600 million range over the next few years, and then what's above that is what we're spending to grow volumes and develop the business.

Thank, guys.

Thank you. I'll now turn the floor back to management.

Operator, thank you for making that announcement. We've come in just a little bit over an hour, which was our objective. Thanks, everybody, for participating and we'll see you next quarter.

Thank you. This concludes today's Tenet Healthcare conference call for the quarter ending June 30, 2006. You may now disconnect your lines and have a wonderful day.