Tenet Healthcare Corp (THC) 2006 Q4 法說會逐字稿

Good morning, and welcome to Tenent Healthcare's conference call for the fourth quarter ended December 31, 2006. Tenet is pleased you have accepted their invitation to participate in this call. [OPERATOR INSTRUCTIONS] Please note, that this call is being recorded by Tenet and will be available on replay. The call is also available to all Investors on the web, both live and archived.

Tenet's Management will be making forward-looking statements on this call. Those forward-looking statements are based on Management's current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect.

Certain of those risks and uncertainties are discussed in Tenet's filings with the Securities and Exchange Commission including the Company's Form 10-K and its quarterly reports on Form 10-Q to which you are referred.

Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. Management will be referring to certain financial measures and statistics including measures such as EBITDA which are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance, but is providing these alternative measures as a supplement to aid in analysis of the Company.

Reconciliation between non-GAAP measures and related GAAP measures can be found in the press release issued this morning and on the Company's website. These sales quarterly financial and operation data is available on First Call and on the following website. Tenethealthcare.com.Com, Business wire.Com, and CompanyBoardroom.com. During the question and answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time, I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter, please proceed.

Thank you, Operator and good morning. I want to begin by offering my thoughts on the accomplishments of 2006, our performance in the fourth quarter, and an assessment of where we are in our turnaround. It's amazing to look back at what we covered in last year's fourth quarter call to realize how much we've accomplished in the last 12 months. A year ago, we still faced a number of daunting challenges.

For example, the second Alvarado jury was entering its fourth month of deliberations and it will be another two months before the second jury was declared deadlocks and the Medicare outlier and physician arrangements investigations were entering their fourth year and physicians were voicing their concerns that the ultimate settlement might leave the Company financially incapable of investing in our hospitals. And the IRS was examining Tenet for significant tax exposure dating back to 1993 through 1995. These matters threatened the Company, the continued existence of the Company, and in 2006, we resolved them all.

As a result, Tenet enters 2007 in the strongest position it has enjoyed in years. I believe our position allows us to move forward with a sense of growing strength and we are building the momentum we need to generate competitive financial returns for our shareholders. It's hard to believe that at the time of this call last year , we were also still reeling from the effects of Hurricane Katrina. The hurricanes had wiped out six of our hospitals and eliminated the jobs of more than 4,000 of our people. 12 months ago, we were still putting together our insurance claim and trying to determine the futures of these hospitals and the communities they served. Katrina was devastating to the Company, but in 2006, we essentially resolved the after effect. We settled the insurance claim and found an excellent buyer for the hospitals that were in a condition to continue operating.

Our financial results for 2006 present a mixed picture. We had a number of charges for settlements of investigations and litigation, as well as charges for impairments of assets whose value had eroded since Tenet acquired them. Adjusted EBITDA was $153 million for the fourth quarter of 2006. This translates to a margin of 7% and growth 24%, over adjusted EBITDA for Q4 2005. The adjustments are detailed in the press release that we issued this morning.

At mid year, with the announcement of our major settlement with the Department of Justice, we provided investors with the 2006 outlook for EBITDA in the range of of 675 million to 775 million. So, for the full year 2006, we were in the range but at the low end. Of course, it's important to place the full year results in context. Compared to to 572 million and adjusted EBITDA for 2005, this represents an increase of over 20% year-over-year which I think is evidence that we're making solid progress in rebuilding the Company.

None of you will be surprised to hear that the items hurting our performance in the second half of 2006 were slow patient volumes and high bad debt expense. Both volume and bad debt were particularly weak in the third quarter, but in the fourth quarter, we were able to improve both of these performance measures relative to recent trends. I'm not ready to declare that we've reached an inflection point on either volumes or bad debt expense but I was encouraged by the trend towards the end of the year and we're working hard on our innovative strategies to address these critical variables.

Our 2007 outlook for the 55 hospitals that we expect to have at year-end includes an EBITDA range of of 700 million to 800 million, the mid point of which represents EBITDA growth of approximately 7% and a margin of approximately 8.3%. This represents our very best thinking on the 2007 outlook and Biggs Porter will provide you with a more detailed review of the underlying line items it's driving.

Ordinarily I prefer to limit an earnings outlook to just the current year but at this point in Tenet's turnaround I believe it's helpful to share with you managements assessment of the earnings power of the Company both in the year ahead and looking out towards 2009. We are stopping at 2009 not because it's likely to represent the end point of our turnaround but because the uncertainties are far too great to make meaningful statements beyond that point. For example, within three years, Tenet and the entire industry could well be in a completely different environment for the financing of government healthcare programs and care for the uninsured.

One of the great things about the hospital business is that there is no end of opportunities for improvement, so I'm confident that we will continue to identify fresh initiatives to address the challenges and opportunities that present themselves over that time frame and beyond.

Regarding the future of healthcare finance, as you know, proposals on covering the uninsured are being put fourth virtually every week. President Bush, a number of governors, senators, industry trade groups, labor unions and Presidential hopefuls have all put fourth different plans. So far, every proposal leaves some details to be worked out, but they tend to fall into three categories. One is a tax code change to provide incentives for people to buy insurance under the current system. Another approach is to provide direct subsidies to people to purchase insurance in the private market.

The third approach is to have a universal coverage through a single payer system, and there are pros and cons to each approach but what I find most encouraging is that expanding health coverage to all Americans has become the most important domestic policy issue. Every Presidential candidate will have to take a position on it and I'm also encouraged because virtually every serious proposal has two elements in common. These elements are a requirement that every American has insurance and that those who can't afford the insurance receive assistance to make it more affordable. Beyond that, there are wide differences, but the main objective of hospitals is to receive some form of payment from those patients who currently do not pay us. Virtually ever serious plan addresses that issue.

Last week, our industry group, the Federation of American Hospitals unveiled the most comprehensive and well thought out plan to date. I encourage you to go to the Federation's website and take a look at the plan. It's sensible and it's actionable.

It may still be until 2009 before we see real relief for the uninsured problem on the legislative front but when you look back just a year, very few policy makers were even talking about how to address the problem.

In the meantime, at Tenet, we're not waiting for legislative solution. In previous calls and at our Investor Day we previewed the strategies we're using to improve collections and act more like a retail business in financial interactions with our customers. No matter what the national solution for the uninsured is, our early actions in this area will position us well.

Before introducing the other members of our management team here this morning, let me repeat that as we enter 2007, we do so on a stronger footing than at any time in the recent past. As 2006 unfolded we reaped some early benefits from our committment to quality program winning centers of excellence designations at five times the rate of the industry average and we saw the preliminary but potentially powerful impact that these designations could have on volumes.

Finally, we added some new energetic members to our management team in 2006, including Kathy Frazer, our new Senior VP of Human Resources who joined us from McKenzie & Company, Biggs Porter our new Chief Financial Officer who joined us mid year from Raytheon, and who has already had a significant impact on our operations and Dr. Steve Newman who stepped into Reynold Jennings shoes, January 1, as our new Chief Operating Officer. As most of you know, Dr. Newman has already built an outstanding track record at Tenet for engineering what appears to be a highly successful turnaround of California. It's my pleasure to introduce him to you now. Steve, the floor is yours.

Thank you, Trevor and good morning, everyone. Let me first say that I am honored to succeed Reynold Jennings as Tenet's Chief Operating Officer. Reynold did a lot of heavy lifting over the last three years and built a solid foundation for future growth at Tenet. He would be the first to tell you that I inherited a work in progress; however, it is now my job to make sure we continue to make sufficient progress while dealing with market forces that are anything but static. I am confident that the sum of my training and experiences along with an excellent management team at Tenet provides me with a solid chance of success.

Because I'm a physician by training, I like to diagnose things, and my diagnosis is that we simply must continue to improve our ability to execute consistently on all the growth strategies we have put into place over the past three years. If we do, our prognosis is good and we'll be on a path to sustained improvement in our financial performance. There are no shortcuts to achieving the success this management team envisions for our Company. I intend to contribute all of my energy to the path we have chosen and in which I believe strongly, creating a healthcare Company that differentiates itself from our competitors, by the excellence of its clinical quality and data enriched decision-making.

Changing outdated physician perceptions of Tenet hospitals will take more time than originally anticipated but we are pursuing this goal with a real sense of purpose and urgency. The targeted work we've already done to build volumes is central to that effort and I want to spend a few minutes this morning talking about our success to date and what we've learned so far. I really believe the early results demonstrate that we are on the right track. We are attacking the volume and profitability challenge in three interrelated ways.

First, through our targeted growth initiative, or TGI which consists of a deep analytical assessment of each hospital's strategic position to identify opportunities for growth in business lines that should be de-emphasized or eliminated.

Second, we're deploying financial muscle behind these findings with the significant $150 million increase in our aggregate capital expenditures we announced last June, and, third, we are effectively marketing our newly strengthened capabilities to our physician base through our physician sales and service program or PSSP.

Let me begin with our targeted growth initiative. As most of you know, Tenet's implementation of TGI began in California where I was the regional Senior Manager for the last four years. We selected California in late 2004 as the launch site for TGI because of the new management structure and the recently completed strategic divestitures. The reengineering of our business profile in California is now essentially complete. We do not expect to experience anything approaching the volume contraction we saw in California as we implement TGI in our other markets.

Also, I am pleased to tell you that in the last six weeks of 2006, and continuing into 2007, our California hospitals in the aggregate have shown volume increases over the prior year. That's a particularly gratifying achievement for me and our California management teams. Of course, our challenges cannot be overcome with TGI alone. There has to be a quality product to sell and a reality that makes our value proposition tangible to deliver the highest quality care our physicians and nurses need and deserve the best equipment available. To that end, we have significantly increased our capital expenditures targeting projects which will most immediately impact our existing physician relationships. We invested invested 133 million in Q3 and an additional additional 297 million in the fourth quarter. These capital allocation decisions along with those in the future must be based upon sound business decisions with acceptable returns on investment.

Let me share with with you one of the many examples of both clinical and business applications of our recent incremental capital in fusion. West Boca Medical Center acquired a DaVinci surgical robotic system at a cost of $1.7 million to our recent capital infusion. During the first month, the program was operational, seven robotic cases were performed with additional cases scheduled. Once all available physicians are fully trained and prudentialed and the marketing campaign is under way, we anticipate using the robotics system on approximately 20 cases per month, potentially resulting in incremental EBITDA of approximately $840,000 annually.

Interestingly enough, the three physicians currently performing robotics surgery at West Boca have increased their year-over-year admissions by nine, and that incremental volume is expected to continue. Because these initiatives are so inner related, it's impossible to say for sure how specific increases in volumes link to a specific strategy, but since I know this audience has been very interested tracking our progress on PSSP, let me share one prominent statistic with you that illustrates the success of this effort. The approximately 4,900 physicians we targeted in our physician sales & service program increased their admissions by 3.7% in the fourth quarter of 2006 compared to their same admissions in the fourth quarter of 2005. That's a strong number and although it's premature to claim that we've cracked the code on volume growth, we are very proud of this performance.

Without question, we have a lot more work to do. The biggest opportunity is with the remaining one half of our physician base or roughly 5500 physicians. This group represents about half of the physicians we've referred to as "Splitter Physicians" and whose continuing erosion of patient volumes is offsetting the growth we're seeing in the remainder of our business.

Let me spend just a moment to take a deeper look at some of of that volume erosion. There are a number of reasons why a particular hospital might struggle with volume growth. I mentioned that Florida as a region is lagging in volume growth. Heavy spending by our competitors, erosion of "Certificate of Need" protections we formally enjoyed in two years of severe hurricanes have eroded our inpatient and outpatient business. We are expanding the implementation of recommendations from our TGI initiative, reinvesting capital to raise technology level of our hospitals, and beginning to expand our physician alignment strategies in joint ventures as mechanisms to reignite growth in this market. We believe these tactics will reverse the drop in business over the intermediate time frame. We are applying lessons learned from our physician interactions in other ways too. We're expanding our physician alignment strategies to include selective employment of physicians in markets where we need to secure our primary care base.

Having developed measurement systems to assess our clinical quality in tailoring our service offerings through TGI, we're now able to deliver services that have real value to our customers. Just as we did in Managed Care, Centralized Patient Financial Services, Quality Improvement, and Cost Management , we are now designing an integrated coordinated Business Development and Marketing function to galvanize all of our strategies with one goal in mind. To grow our business in a targeted and selective fashion. This will help further position our hospitals as entities offering top quality, customer focused services at a competitive price.

Before I turn the microphone over to Biggs Porter for his financial review, I want to devote just a few minutes to bring you up-to-date on our strategy to accelerate the growth of our outpatient business. As most of you know in the spring of 2006, we formed a dedicated group under the leadership of Steve Corbeil to bring a targeted focus and additional resources to our very important outpatient business. A third of Tenet's revenues already come from outpatient services and we believe we are well positioned for future growth.

At this moment, the outpatient group is actively focusing on two separate aspects of our outpatient business. The first is existing hospital based or campus based outpatient departments, mainly, diagnostic imaging and ambulatory surgery. We have already identified a number of operational and customer service issues which can be enhanced by the direct customer service issues which can be enhanced by the direct intervention of this highly specialized team. This should lead to short-term volume growth, subsequent improvements and efficiency of operations, and ultimately, to earnings growth. We see signs that our physicians have been energized by these improvements.

Let me give you just a couple of examples. At Lake Point Medical Center in Ralet, Texas, we made significant investments in new equipment as well as marketing and scheduling improvements for their digital imaging center. In the last several months the average number of patients seen per day at Lake Point Digital Imaging Center has risen to 45 from 38, an increase of more than 18%. At St. Frances Hospital in Memphis, operational and scheduling improvements since September have increased the number of MRI's done from 14 to 19 per day. This volume increase on MRI's alone should equate to an incremental $234,000 of EBITDA annually from this one facility.

We are beginning to see examples such as these throughout our system and I am optimistic that over time our volumes and subsequent profitability will show real improvement. Second, the outpatient group is also bringing its expertise to bear on a development of a number of new outpatient centers. Many of these will be joint ventured with physicians as we expand our physician alignment programs so as you can hear, there's a lot going on and very much to do. After two months on the job, I am more excited than ever about our prospects and I eagerly a wait the positive results of all we are doing. With that, I'll turn it over to Tenet's Chief Financial Officer, Biggs Porter. Biggs?

Thank you, Steve, and good morning, everyone. I'll start by providing some additional color on our results for the fourth quarter and then review the 2007 outlook and intermediate term assessment of earnings potential as outlined in this mornings press release, First, with respect to volumes, admissions declined by 0.9% in the fourth quarter, although a decline this was nonetheless the best performance the Company has achieved since the first quarter 2004. It is important to note that the aggregate growth number obscures the fact that we had improvement in many markets.

In fact except for the admission losses in four of our California or excuse me, Florida hospitals, Tenet would have achieved positive admission growth in the quarter. Although there were improvements in several markets including California, as Steve discussed, there is no escaping the fact that volume losses had a serious effect on our financial performance of 2006 and this included the fourth quarter. Our reversal of this pattern and return to more normal volume gains will help had us to capture the [inaudible] operating leverage available in our industry.

With respect to cost, as you may recall, we implemented our salary and wage increases on October 1st. Accordingly the annual increases were fully in place for the entire fourth quarter and unlike earlier quarters, the 2.9% increase in salaries, wages and benefits is therefore a meaningful apples-to-apples comparison for the quarter. Comparing the 2.9% growth to the 0.9% decline in admissions, demonstrates a negative effects on operating leverage when volumes decline. Our expectation of improved volumes in the fourth quarter and first quarter of 2007 restrains us from taking more aggressive actions to reduce costs by contracting our infrastructure. This unfortunately was a theme throughout 2006 and we're going to monitor 2007 closely in this regard.

On the positive side, you'll note that supplies expense barely budge at all, rising by just 0.5%. This stability demonstrates the superb job accomplished by our supply chain team making aggressive use of both buys and working cooperatively with our key suppliers to identify opportunities to create additional savings. Other operating expense grew by 20 million or 4%. Although there are a lot of moving parts the biggest drivers of this increase are, a steady increase in medical fees over the last year primarily related to on call physician pay, and a steady reduction in the costs charged to discontinued operations which are credited to the other operating expense line on the income statement.

In the aggregate, our controllable operating expense rose by just 2.7% but on a per equivalent patient database grew by less impressive 5.9%. This metric illustrates once again the negative operating leverage impacting our business, when we experience volume declines. It is precisely this sort of leverage which we expect will have positive impact as volumes start to grow. Equally importantly, there are a number of areas we've identified as areas of cost and risk reduction which we will be pursuing in 2007 and beyond.

Let me now turn to the topic of bad debt and distinct contrast to many in the industry, Tenet reported a decline in our bad debt ratio in the fourth quarter to 5.7% compared to 7% last year. While this represents a positive development there were a couple of items favorably impacting the ratio and contributing about two thirds of the 130 basis point decline. About 37 basis points or $8 million of the decline resulted from an 18 month look back in our collection experience, which improved slightly during 2006 as a percentage of revenue.

As a result of this collection history, we reduced our reserves for uninsured accounts receivable from 92% to 88%. The biggest single driver here is the effect of our compact on revenues and there for, collection percentages. While it is impossible to measure all of the effects on human behavior of lower bills, as we reduce the value of revenue build under our compact, we have seen collections as a percentage of that revenue go up. This was mostly just the effect of a smaller denominator and does not mean that we are collecting more cash from the uninsured just an approved percentage of revenues. As you may recall, we have said that we reserve for bad debt at the point of discharge based on historical collection rates. By adjusting that rate to our post-compact experience and applying the new adjusted rate to our outstanding receivables, we see the improvement in bad debt expense we had in the quarter. We would expect these collection rates to be sustained if not improved going forward, but think are certainly still risks associated with the growth in uninsured and under insured.

Bad debt expense was also reduced by approximately $10 million or 46 basis points due to the settlement of several contracts. There was an offsetting effect of 3 million on contractual adjustments to revenue resulting in a net income benefit of 7 million. There was a 50 basis point increase in the uninsured percentage or total emissions relative to last year's fourth quarter; however, on a more positive note, it remains more stable at 4.4% relative to our third quarter.

Turning to pricing, we achieved an 8.6% increase in inpatient base rates and our commercial Managed Care portfolio. This increase was in line with our budgeted number and demonstrates a favorable trend in pricing momentum arrangement intact. Some of the other pricing metrics we provide were less robust in the quarter and demonstrate multiple factors impacting our business. The increase in net inpatient revenue per admission, a key measure in our Managed Care portfolio yield, came in at 0.2% or basically flat. Two factors had a significant impact on this result.

The main factor is that the mix shift in our Managed Care portfolio continues to evolve towards additional managed Medicare and managed Medicaid. This results not only from the declines in commercial Managed Care volumes but also the absolute growth in managed government programs, much of which is migration from traditional Medicare and Medicaid. The growth of this pricing metric was also adversely effected by the decline in average length of stay in the commercial segment of our business 4.1 to 4.0 days over the same time period. The decline in average length of stay was impacted by the case mix index for Managed Care commercial which declined by 1.6%.

Declines in cardiology volumes in Florida and volume declines in certain of Tenet's Academic Medical Centers contributed to this reduction in acuity and in a related manner also adversely effected pricing metrics in the fourth quarter. Touching on the topic of declining length of stay, let me offer the view that we do not see this as a serious concern with respect to our future financial performance. Clearly, Managed Care payers with per diem contracts have a clear interest in reducing length of stay; however, the average length of stay for commercial patients at Tenet hospitals is within the target range of medical management programs of our major commercial payers and so we don't expect it to be driven significantly lower due to immediate payer focus.

The contribution to our pricing from stop loss payments declined to 77 million in the quarter from 94 million last year. This reduction is consistent with our strategy of moving towards a stable pricing structure which is more dependent on base rates. Before I leave the subject of pricing, I should note that we have had only very minor increases in our gross charges over the last several years. We anticipate making modest adjustments to these in 2007 but the effect of this is limited because there's only limited pass through on our Managed Care and government program billings and through our contract with the uninsured.

Adjusted EBITDA came in at 153 million for a margin of 7%. Although within the range of outlook we have provided for the quarter it was below our own expectations as driven by the lower than expected volumes. There were a number of items effecting adjusted EBITDA. I should note, however, that in addition to the larger items noted in the release, there were several smaller charges in the quarter aggregating about $18 million related to vesting of benefits, risk pool adjustments in New Orleans for out of network utilization related to Katrina, severance and other items.

Turning to our cash position, we ended the year with 784 million in cash. This obviously is below the estimate we last shared with you in our third quarter conference call which we have said was approximately 1 billion. I'll take just a minute to give you the drivers of this variance. First, almost half of the variance is attributed to an incremental tax payment of 80 million resulting from the settlement of some disputed issues with the IRS for fiscal years 1995 to 1997. This settlement, which was announced in late November of last year, was an addition to the $110 million tax payment we made in the fourth quarter to settle the undisputed portion of the revenue agents report for the years 1998 to 2002. You may recall that the revenue agents report and the expected payment for it were discussed in our last earnings call in early November. These settlements substantially close out the audited issues related to the years 1997 and prior and significantly reduce the contingencies related to later years.

Secondly, capital spending for continuing operations came in at 297 million in the fourth quarter at the very high end of our November expectations of 250 to 300 million. And finally, earnings came lower than we expected and working capital variances and rounding contributed the remainder. As a result, we had a net cash use of 21 million in operating activities in the quarter where we had expected operations to be a net cash provider as we would normally see in the fourth quarter.

Before I leave cash, I will note that we did have a sale in the fourth quarter of very old fully reserved accounts receivable related to discontinued hospitals. These are receivables which have already gone through all of our internal and external collection efforts. We received approximately 15 million in proceeds from the sale which have been accounted for as deferred revenue under the accounting rules because we have retained some upside if the purchaser ultimately collects above a certain amount. You will see more details in our 10K if you're interested.

I will now take a moment to discuss our fourth quarter impairments. Under Generally Accepted Accounting Principles we evaluate every quarter if an event has occurred which would require testing for impairment. Sometimes, these are bright line events, but more often than not, it is a judgmental assessment of trends and future expectations. Irrespective of this, we always test at the end of the year. Like most companies this enables us to use our updated long range planning in the analysis.

In this case, we had three hospitals and one region which did not perform to expectation in the second half of the year perform to expectation in the second half of the year and for which we believe the recovery will either be delayed or less robust. We also have some medical office buildings we are selling and some reductions in the fair value of assets which have previously been impaired. In terms of new hospital impairments there was only one of significance, which was over half of of the 164 million and long lived asset impairments we recorded.

Unfortunately, even a very marginal change in future estimates of performance can affect impairment if the facility or region has been on the border previously. This becomes exacerbated by the fact that in the case of a hospital, once impairment is triggered, there is a cliff effect under the standards which takes it all the way from book value down to fair value. This means that you can have a gradual decline in value without any accounting recognition but then a substantial charge once impairment is required. In the case of the central Northeast region, it has a limited number of relatively large hospitals operating in only three markets, and there for, was logically at greater risk of impairment because of shift in the expectation, in the expected performance of just one or two hospitals or markets could drive the performance of the region. Said another way, there are fewer moving parts to offset each other as hospitals go through their cycles.

Please remember that this doesn't necessarily mean that the assets in question aren't contributing to the Company's performance, just that the future expectation doesn't line up with our carrying value. Also, most of our hospitals have recoverable or fair value well in excess of their carrying cost. Unfortunately, we can't adjust those upwards or for that matter, even reverse prior write downs in instances where there is subsequent improvement. It should be apparent to everyone that we have not performed in the aggregate up to the expectations we had going into last year. Likewise, certain facilities have struggled more than others and changed our view of the face of their recovery just as we have changed our view of the pace of the Company's recovery in the aggregate. If our facilities perform to our expectations from this point, then we would not expect further impairment resulting from operating performance.

Let me now turn to our outlook for 2007 and offer some general comments regarding our assessment of Tenet's earning potential out through 2009. We have framed our discussion of 2007 in terms of the 55 hospitals we expect to have at year-end as it is a cleaner presentation and more representative of the Company's ongoing earning power. As a preface to my later comments on volumes, I will note that the two hospitals being excluded from the same hospital numbers, Trinity and RHD in Dallas, had negative admission growth last year of 12.1% and outpatient declines of 11.7%. The effect on our consolidated emissions was 30 basis points and on outpatient visits 20 basis points. As we have discussed previously, these hospitals are under leases which expire in August of this year.

As we have stated on numerous occasions, the key variable in the outlook is volume growth, along with bad debt, volume growth is also the most difficult metric to project. Our 2007 outlook assumes we will achieve same hospital admission growth of approximately 0.5 to 1.5%, and growth of same hospital outpatient visits of approximately 2 to 3%. The mix between government and commercial payers is assumed to be unchanged.

We believe these volume increases are achievable and will be heavily influenced by the macro environment as well as the success of our own initiatives including capital investments, targeted growth and PSSP. Although Tenet remained behind industry growth rates in the fourth quarter, we are encouraged by a narrowing rate of admissions decline. In future quarters we may well look back at this as a true inflection point. First quarter volume results today are mixed and don't give us a strong indicator so it's too early to tell. Under the assumption that we achieved this volume growth, we would then expect same hospital net operating revenues to grow 4.5 to 5.5%.

In terms of pricing, we expect a continuation of existing trends which would expect a mix of government and commercial payers should remain in the mid single-digits. Controllable operating expense per equivalent patient day is assumed to grow at 4.5 to 5.5% which presumes we continue to have good cost control and slight reduction in average length of stay. In terms of bad debt expense we are assuming a level of 6 to 6.7% for 2007. Under these assumptions we would expect EBITDA To fall in the range of 700 to 800 million and produce margin in the range of 7.8 to 8.9% excluding restructuring impairments litigation, this would produce a pre-tax loss of 100 million breakeven and earnings per share of a negative of $0.13 to breakeven. We have left the range fairly broad due to risks associated with the macro environment, most specifically volumes and bad debts. I will emphasize that this is caution, not expectation, because we do expect our initiatives to provide significant offset to this risk if it becomes reality or to give us lift in the event the trends moderate.

You can find more detail in our press release which includes estimates for depreciation and interest expense as well as a reconciliation of the GAAP definition of net income. Net cash flows from operating activities are expected to be in the range of 300 to 400 million. After capital expenditures of approximately 750 to 800 million , free cash flow would be in the range of a negative 350 to 500 million.

This excludes approximately 200 million of net cash expected to be generated from announced asset sales, net tax refunds and other activities such as litigation and discontinued operations. After factoring these in, our net cash usage would likely be in the range of 150 to 300 million in 2007. This means our cash at year-end 2000 would be in the range of 475 to 625 million. It is important to understand that the 750 to 800 million expectation for capital expenditures in 2007 includes about 150 million carried over from the 2006 committment of 800 million.

With that discussion of 2007 as a base, let me offer some thoughts on Tenet's earning power out through 2009. We were discussing these numbers out to a three year time frame that is to say 2007 through 2009, significantly farther than most of our peers not because we believe we have a more accurate crystal ball than others but because we recognize that in a turnaround situation, investors have an unusually difficult task in trying to assess the longer term earning power of the Company.

Over time I would expect that we will stop going as far out in our comments. Last June, we shared a view with you that our 2 to 3 year outlook for earnings potential was for an EBITDA margin of 11% to 13%. We now believe that in the intermediate term it is more likely we will achieve results in the mid to lower end of that range. We also believe that we are more likely to achieve that level of financial performance in 2009 rather than 2008. The upper end of the range is not likely due to the fact that our volume assumptions are more modest, including the effects of a lower starting point coming out of 2006. We've also taken some additional caution on the bad debt front. While we expect to make continuing progress from our own initiatives, in mitigating bad debt, we're concerned that further deterioration in the macro environment could offset much of this progress. The net effect of these revised assumptions is that our recovery is likely moved about one year from what we have previously expected.

I've talked about inflection points earlier. If you look at this from a macro level, we are expecting for further shift, we are expecting a further shift in volume trends to occur during 2007 with steady improvement in volumes thereafter. The rate of increase in our volume, or excuse me, the rate of increase in our income will be more than linear with increasing volume as we benefit from the greater absorption of our fixed cost base and as we continue to improve efficiency over the course of our turnaround.

Let me close with one last summary thought. There is of course a risk both upwards and downwards in the estimates for both 2007 and the intermediate term; however, we believe that by aggressively pursuing costs and other initiatives we see as much opportunity to improve these results as we see in risks. To be prudent, however, we're going to stay balanced in our outlook. I know my comments have been lengthy and I appreciate your patience. With that, I'd like to have our operator assemble a queue of questions from our audience. Operator?

Thank you. [OPERATOR INSTRUCTIONS] Your first question comes from Adam Feinstein of Lehman first question comes from Adam Feinstein of Lehman Brothers.

Hi, good morning. It's actually Brendan Strong calling on Adam's behalf. Just had a few questions about pricing and dish payments. For 2007 it seems like you're guiding towards all in pricing growth of around 3 to 4%. I'm wondering if you could also provide some color on what you're thinking about for 2008 and also some details on the components there, components by payer.

Well, I think we said mid single-digits for 2007 in the aggregate. You can't take a number from all of the stats but the mid single-digits area. As to going out beyond 2007 and looking at 2008/2009, we haven't given any further detail beyond what we have given back in the middle of the year. I think our assumptions for the out years are probably still fairly consistent with what we use to that point in time.

Okay and in terms of dish payments, they seem to be up a lot year-over-year and I'm just wondering, should those levels continue for the next three quarters?

There were some small amount of incremental dish this year which might not repeat itself but for the most part, we expect dish to continue.

Okay, thanks.

Thank you. Your next question comes from Ken Weakley of UBS.

Thanks and good morning everyone. I wanted to ask you about the cardiovascular side of the business. There's been a lot of concern and maybe opportunity for the hospitals I guess about safety profile of drug elude stent and the switch back to open heart and [CABG]. Can you maybe give us a sense of what's happening on that specific side? I notice the surgery volume was pretty soft but there's at least some expectation that could turn. Any visibility there would be helpful.

Ken, it's a great question, obviously something that's been in the news recently and our Chief Medical Officer, Jennifer Daley is here to address that.

Hi, Ken.

Hi.

It's a national trend softening in the volumes for cardiovascular surgery and we haven't seen that mitigated at all but there's been in the surgical literature some discussion for some time that open heart surgery in the long run in relieving angina and reducing mortality is as effective or perhaps more effective than stenting multiple vessels. This is a decision that's made between the patient and the surgeon or the cardiologist. I wouldn't be surprised if we saw a little moderating of the downward trend in the volumes of cardiovascular surgery. There are also a whole host of newer technologies coming on board over the next 5 to 10 years that may change the whole picture here. In the short run, we may see a little moderation of the downward trend but I don't think we'll see a complete reversal.

Have you noticed or are you able to discuss perhaps in terms of of total stent procedures, there is a DES conversion that the clinicians or the practitioners refer to a lot about the percentage of procedures used in a drug eluding stent and that dropped dramatically where you are using a lot more bare metal or not anything you have access to right now?

Well we've been trying to inquire into the differential use of bare stents versus drug eluding stents, and what we've seen is clinicians who have been using one continuing to use one and clinicians who are used to using the other continuing to use them. The data is quite fuzzy between bare stents and drug alluding stents because the opportunity for early closure is in different time frames depending on which stent you use, so we haven't seen a dramatic change as far as we can tell in our data, given all the conflicting data that's been coming out of the various studies.

And let me ask one follow-up. Trevor, it would be helpful maybe to discuss relative market share in terms of your admissions because it's sometimes difficult to see how you're doing versus your not for profit peers and specifically where you are either losing share or gaining share and how that reflects either your strategy to rebuild business or maybe where your losing some business because of competitive changes.

You are cutting out, in and out for that, but I think what I heard you ask is whether I could comment on our relative market share in relation to the not for profit competitors.

Yes, that's it.

And just, let me make a an overall comment and then I think at some subsequent time we can discuss whether we want to get into market by market data. There's a lot of public data out there obviously and it tends to lag real-time. It's not something we've gotten into before. Just as a general statement I would say that today, compared to 1995 when I entered this business, there are not for profit competitors in most markets in which we operate who are dramatically stronger than they were at any time in the past. They have enjoyed historic low rates of interest on debt that they borrow. They have and obviously I'm making a very wide generalization here. They have adopted pricing and collections practices that are more aggressive than they had had in previous decades, and they've enjoyed greater extent of philanthropy then had been available and also greater returned on their endowment assets so all of that taken as a whole means that there are some competitors out there. Not all, but some who are very formidable and very strong. Now in addition in certain markets, South Florida would be an example of this, there are not for profit systems that enjoy very substantial subsidies by tax payers, direct subsidies, not just the tax exemptions but also add velarium taxes or other forms of taxation that strengthens their bottom line so these have become difficult competitors in markets but this is nothing new to 2006. And I think this is a trend at least I've noticed substantial difference from 2003 through 2006 as compared to say 1995 through 1999 or 2000. And it's obviously something that we work very hard to address.

I believe that, again, it's hard to generalize but if you look at the declines in admissions not only at Tenet, but also in some of our publicly traded peers, that probably to some extent represents over recent years some decline in market share relative to certain not for profit competitors but again it's a very different situation, locality by locality, and I think it would be incorrect to assume that there has been some fundamental weakening of the competitiveness of the investor owned companies and I would say in certain markets there's been a substantial strengthening of the not for profit competitors.

Okay, thanks so much.

Thank you. Your next question comes from Glen Santangelo of Credit Suisse.

Hi, it's actually Ralph Giacobbe in for Glen. Can you maybe expand on your comments a little bit in Florida and the Texas markets, where you think you are in terms of turning those markets around, maybe using California as a bogey given the improvement you've seen there and then secondly, Steve, I think you mentioned that changing physician perception is taking longer than you expected. What's the stumbling block I guess in terms of now that the legal overhang is removed and your increasing CapEx. What's the feedback you're getting from physicians and maybe why the hesitation at this point?

Let me, this is Trevor. Let me begin with a couple of comments and then hand it over to Steve. First, in fairness to Steve, he's been Chief Operating Officer for all of about six weeks, so he knows California very well, having parachuted into California at a particularly difficult time and having done a great job in turning around the performance of our California operations under difficult circumstances, to say the least. So, he knows quite a lot about California and is getting up to speed at some of these other markets, but why don't you, Steve, share some of your initial impressions about the other markets and some of the opportunities and challenges they face as well as some of the progress, substantial progress I think that we've had in certain of the markets that he asked about in last year.

Well, I think that specifically with Florida, a number of challenges that I described in my previous remarks, whether it had to do with the hurricanes, whether it had to do with the retirement of a number of physicians, clearly we lost medical staff at those hospitals over the last three years and have had some challenges in terms of rebuilding those medical staffs. We also have competitors which have expanded their physician employment strategies and we've now embarked on that physician employment strategy, especially in the primary care arena in South Florida. My sense is that the business development function in Florida has been a little less aggressive, assertive than it has been in other parts of our Company and we are in the process of recruiting additional hospital based directors of business development to extend the work of those A-teams in reaching out to business opportunities and recapturing market share that may have been lost over the last several years. With respect to Texas, my impressions are a little bit more preliminary. We certainly have large not for profit competitors as was mentioned by the last speaker, in both Houston and in Dallas , and those have been exceptionally aggressive in the marketplace. We have begun what's called a 501 A model in Texas to employ physicians, mainly primary care physicians and these are located in the Houston and Dallas markets in multiple locations. So we are redoubling our efforts to secure the primary care base that will then attract a specialty work to support our inpatient and outpatient services at the Texas hospitals.

Great. And then just in terms of do you have the number of percentage or percentage I should say of physicians that are employed at this point? And do you guys disclose physician recruiting targets or anything along those lines? Just trying to get a sense of the trend maybe in terms of net physicians that you've lost versus gained, maybe over the last couple years?

Well let me try to answer your question about employed physicians. We employ a total of 437 physicians that equate to 343 full- time physicians in our markets around the country, mainly in the Eastern half of the country, specifically in the Philadelphia and in the Carolinas. As I mentioned before, we're starting to employ physicians both in California and Texas where this option is available. With respect to recruitment and redirection of physicians, each of our hospitals and regions has plans for doing that but I don't think we would disclose that on any sort of disaggregate basis.

Okay, thank you.

Thank you. Your next question comes from Gary Lieberman of Sanford Group.

Thanks, good morning.

Good morning, Gary.

Sounds like from some of the comments that you made earlier that on the physicians that have been part of the targeted growth initiative you've had at least some success in incremental admits from those but it sounds like there's still a big pool of physicians out there that you guys refer to as "Splitters". Can you talk about I guess the plan over the next year and if you can quantify it to any extent, how many of those 5500 Splitter physicians would you expect to target as part of the growth initiative?

Well, that's a really good question, and we're certainly tying together our PSSP program, our physician recruitment and redirection efforts with the targeted growth initiative. Obviously, it requires our hospital base PSSP team, to redirect its local efforts in that marketplace. We expect that to be very successful. Early indications are that by narrowing the scope of their work and concentrating on those physicians that bring the high quality care to the hospital, to bring the patients by the payers that support our hospitals, we can dramatically affect both volume as well as earnings on a hospital basis.

It sounds like the selective employment is targeted I guess primarily towards primary care physicians. Is the targeted growth initiative also targeted towards the primary care physicians or does that skew more towards specialists and if it does, can you just sort of talk about what you do through the program to try to get some of the specialists?

Well, first of all, I think you're correct. The employment strategy is mainly focused on primary care physicians. There are instances where it's difficult to provide specialty coverage at certain hospitals and certain locations and there for, we would employ a specialty physician in those instances to provide that hospital based coverage, but with respect to the targeted growth initiative , we identify services where the community will need those particular procedures and care by that diagnosis rendered over the next five and ten year horizons. We then go after those particular services by making sure our physical plant is top rate from a technological point of view that our nursing staff and support staff are number one in their markets with respect to the specialty service, and then we actually go out and talk to the existing specialists regarding our capital and people investments to attract more of their business. Secondly, sometimes those physicians don't already have privileges at our hospital and we encourage them to join the medical staff because of the improvements in service and clinical outcomes to their patients, they will be attracted to bring their discretionary patients to our hospital.

Fair and then just one quick follow-up. You mentioned that I guess weakness at the Academic Medical Centers was at least part of the reason for the decrease in the case mix index. Can you comment on what the status is of USC and have the operations been negatively impacted by the lawsuit that's going on there?

I think it's fair to say that the lawsuit filed by the University against USC University Hospital has affected performance at the hospital. It has had a chilling effect on the faculty and has in some ways diminished the number of patients coming to their office practices and subsequently available for inpatient and outpatient care at the hospital. Through the other academic Medical Centers we've seen in general a slight erosion in volume but it is not dramatic.

And Gary this is Trevor. I would just add that our position on the USC lawsuit is that we would like to remain in the partnership and restore the relationship so our strategy to date has been simply to let the litigation play out which will take some period of years.

Okay, great. Thanks a lot.

Thank you. Your next question comes from Sheryl Skolnick of CRT Capital Group.

Thank you very much and welcome to Wall Street, Dr. Steven Newman. I hope you're enjoying yourself and I do have a couple questions for you and then a question for you and a question also couple's them actually for Biggs. It's more of a general rather than a specific question. You've cast fresh eyes on the operations of the Company, Steve, as you've moved into the COO role. I know that you've put in place some swat teams to really take hard looks at the under performing facilities we'll call them as a group. I sense that that was something that was an initiative that might have been ongoing before you got there, but what I'm curious about from you is what did you find that worries you? What did you find that surprised you and what are you finding that comforts you? And then I have some questions about the bad debt estimates change that you've made and how appropriate that is so then I'll get to Biggs.

Sheryl, what a great set of questions. Let me start from the last item forward. What gives me comfort and optimism. First of all, the quality of the staff that work in our hospitals, that work in our regional offices, that work in headquarters is truly outstanding and exceeded my expectations when I came to this position a little over six weeks ago. Secondarily, with that staff is a committment to the values of this Company which have been espoused very aggressively by Trevor and Senior Management over the first or the last four years, including the committment to provide quality care in the communities we serve, to provide an environment where our employees want to come and work and stay, and finally, providing value to the purchasers of healthcare that we interact with each and every day. So that has given me great optimism having met with most of our CEO's, their A-Teams and also with those in the regional and headquarters offices. With respect to surprise, I think I was surprised by the opportunities to improve collaboration, communication, and coordination at each level of the organization. We have a lot of great people as I mentioned doing great things. That great work is not always communicated internally as efficiently and effectively as it could. For example, we have best practices in a number of different procedures and areas, yet we have not yet sort of cracked the code on the mechanism to replicate those best practices which could dramatically improve our clinical quality as well as improve our earnings dramatically. I think that surprised me a bit.

Finally, what worries me? I think what worries me the most is making sure that we execute along those great strategies that have been developed over the last three years. I would suggest that we have some of the best strategies in the healthcare industry. We have to translate that with a discipline into execution. To that end, we've actually doubled the number of monthly operating reviews that we're having with our hospitals and regional and market leaders. We've instituted weekly video conferences and we've done a number of things to speed decision-making and to move toward a greater bias to action. What worries me is the fact we can't get everything done every day. I'm a relatively impatient person. I know that no matter how well we do today, we can do things tomorrow that should benefit our patients and our shareholders so those are the things that give me great optimism, make me feel good and the sort of things that sort of result in my sleeping only two or three hours a night.

Join the club on that and thank you for that. I guess what I'm relieved at is that it is so tough for you all to turn the business around because in the past, it's been easy for you to show spectacular results and they haven't been sustainable, so in a perverse way, I am comforted by the challenges you have in getting traction although would argue that two quarters after a settlement you're not doing that badly. But I am worried and that's what I'm going to come to Biggs with, which is you're making an adjustment if I understand you right, from assuming that you collect only $0.08 on the dollar off the discounted amount at discharge for self-pay, and now you're going to $0.12. With everyone else taking charges and increasing their estimates, why should I be comfortable that you should be decreasing your estimates?

Well, I think it's a reflection of how conservative we've been to this point in practice. In terms of trying to describe what's happened here, just trying to put it in the script, maybe it's not totally clear yet.

Well you said an 18 month look back, which also makes me a little bit nervous that it might be too long a period of time, so I'm looking for that comfort.

Actually if you are looking from a percentage standpoint as we go through time, it should improve and going back 18 months actually makes it more conservative because what we're doing is we're looking, how much did we collect as a percentage of what we build?

Uh-huh.

Okay? However the Bill was created and whatever time it was created.

Uh-huh.

And so to the extent that that comparison is using bills that didn't have the compact reflected in them yet, then that Bill is a bigger number. So if you say historically, we collect $1 from a patient and Bill before was worth $12 and now the Bill is worth $10, that the $1 is a higher percentage.

Got it.

And so it's just reflecting over time that we're seeing that improvement in the percentage and we're using it in the bad debt calculation.

So another way of saying is that you now have more of an apples-to-apples base on the bill itself, that more of the bills and the look back are actually discounted bills.

Yes, well the denominator is just shrinking.

Right.

As we go through time.

Okay.

And there's still some non-compact adjusted bills in the 18 months look back period so arguably we're still being a little bit conservative.

Okay. Because I would hate for there to have been this positive prior period impact or positive impact on the look back and then see you guys having to take charge next quarter. That would not be like real cool.

You wouldn't hate that as much as we would.

That's true. Never mind. Okay, very good. Thanks very much.

Sure.

Thank you. Your next question comes from Tom Gallucci of Merrill Lynch.

Thanks for all of the color and good morning. Just a few follow-ups on the bad debt. Maybe just coming off of that conversation with Sheryl, can you talk about maybe just in dollars where do you think you're coming out these days so you're collecting a higher percentage on a smaller bill, it sounds like what you're describing. Do you think you're coming out ahead by sending out smaller bills and getting a bigger percent of those or can you put that in some context for us, please?

It's obviously very difficult to say because you can't predict what behavior would be today if you were still sending out larger bills.

Right.

Would you still collect or not? I think that we have likely walked away from some cash by implementing the compact and sending out lower bills because some people would have paid the higher bills in the past, but having said that for a lot of other good reasons it was still the right thing to do.

Uh-huh. Selling the bad debt that you mentioned, my understanding is that it was fairly old receivables. Do you think that this is a strategy that you could employ more broadly on the bad debt going forward?

Well, I think this is an experiment. We've done it on this one. We'll watch. I indicated that we retained the ability to get some upside here, should they ultimately collect above a certain amount and so we'll have some visibility. We'll watch and we'll see how this works out for us and for the purchaser, and we'll see from there. I can't say we will or will not in the future, but if it ends up that it's the best approach to improving our cash position, then we'll use it.

Right, okay. And then my final one is I think you all mentioned on the formal remarks some of the proposals that have been out there to try and expand insurance healthcare insurance for individuals. With your exposure in California, can you talk about how you view the governor's plan out there? Obviously, it could expand the number of insured but then it comes with a cost on the flip side for hospitals, so maybe talk about that one specifically if you can? Thank you.

Well, I would just say that based on our early reading of Governor Schwarzenegger's proposal and the reaction of the State Legislature that we are pretty good jump away from having a final program. There have already been changes in that and I know you were referring specifically to the proposed provider tax and the base upon which that's provided would be attached has already changed from gross revenue to net revenue as discussion has taken place in Sacramento. I think it's probably too early to say how that would net against us, but obviously, we would very much favor care for the uninsured in California and throughout the country. So I think we have to wait and see how the specifics of that plan develop but it's too early to really predict the effect on earnings and the overall impact on bad debt and uncompensated care in our hospitals all the way from Modesto down to Orange County.

Thanks for all of the color.

Thank you. Your next question comes from Shelly Nall of Goldman Sachs.

Hi. Thank you for taking my call. My question is on seismic safety today. Basically, I guess, Rand Study put out an article in January. Nearly half of California hospitals are prepared to meet the deadlines for seismic safety. I guess there's initial deadlines coming up in 2008. I'm wondering if you could talk about Tenet's preparations?

Sure. We have for some time been monitoring the law doing what we're required to do in terms of the planning and analysis engineering studies and the like. We have some disclosures in the 10K regarding the cost. We also, I don't know how much history you have with the Company but we divested nearly half the hospitals we owned in California as of three years ago and in part, that was done with a very closed view of what the seismic obligations would be.

So our position is that we will have all of our hospitals in compliance with the regulations. We believe it's something that we can finance within our operating plan. I would also just tell you that the deadlines and specifics on seismic have changed constantly, and to the extent that it is true that half the hospitals in California can't meet the seismic requirements or was probably more accurate statement is that more than half the hospitals can't make it on any economic basis. You will not see those hospitals close, in my opinion.

Some will close, some will be converted to other types of activities that do not require that they meet seismic. Probably a large number of small hospitals in California that have higher value as other types of real estate operations, but I would not predict either a wholesale closure of hospitals in California nor would I predict that all of the seismic regulations are implement the as currently scheduled.

Okay, thank you and if I could ask a quick follow-up on your outpatient visits. Talking about increasing scheduling efficiencies, understand more outpatient visit are coming through some facilities in a given day. Is there an offset in customer satisfaction or physician satisfaction, is it the case that outpatient visits are being cut back to 15 minutes one patient in the door out the door? What's the balance to make sure that it's just not so efficient that it's actually impacting customer satisfaction ?

Well that's an excellent question, and we have with the hospice of the Outpatient Group, retained the services and employed a number of ambulatory surgery and diagnostic Imaging center specialists who are very comfortable balancing the issues of throughput with the issues of quality and customer service. For example, in some of our early interventions, we found that the turnaround time between patients was excessively long and by working with the local staff to shorten that turnaround time, we were able to improve the throughput and still maintain a good customer service from the patient's perspective. What's more important is that this efficiency is very attractive to the physicians office staff.

Probably the most important decision maker and whether or not a physicians office refers a patient to an ambulatory surgery center or a diagnostic imaging center is the office scheduler and when we are able to take patients on short notice, work them in the afternoon in which the physician would like them scheduled, this provides great customer satisfaction, not only for the patient but for the office staff, and having practiced medicine for 15 years, I always knew that if my office staff was happy, I was happy. And that really translates to the sort of physician satisfaction that we need and it should subsequently improve our volumes.

Great. Thank you very much.

Thank you. Your next question comes from Jason Gurda of Bear Stearns.

Good morning. I had a couple of quick questions. Earlier you mentioned that you or there would be a small piece of your dish medicated dish payments that would not continue into 2007. Could you quantify that?

To be honest I don't remember the number. It's not material. It's not a big number.

And I know you haven't given '08 guidance but I'm just trying to think of your CapEx outlook. Would you, is 2007 a good proxy or is that sort of a higher than normal year?

Well I think it should be considered higher than normal because it has the carryover from the 800 million of last year, so I would look for 2008 or 2009 based upon the other assumptions we have to be lower. What I said historically so I think that base level or capital for us would be in the 500/600 million range including expenditures for seismic and anything above that is really for growth. So it's obviously variable. We're not going to give specific estimates for the out years.

No, that's helpful. And then just a final question, has there been any changes in where you're seeing most of your uninsured growth recently? If you could just give a little color on that?

I don't think there's been any change in the fourth quarter versus the patterns previously.

And so the markets that are generating the most bad debt are?

Florida and Texas.

Okay. Thank you.

Thank you. Your next question comes from Mike Scarangella of Merrill Lynch.

Good morning. Biggs, I'm trying to think about your cash balance through the '09 forecast period and ultimately trying to understand if the Company can maintain a comfortable cash cushion because it's always been one of the hallmarks. You start off 784, which as you mention is below the billing you hoped for and you also said by the end of '07 you'd be at 475 to 625, cash balance. If I make some assumptions about '08 I'd kind of get you to maybe 100 to 200 million of cash, and potentially the same or lower in '09. Does that sound right and if so, it sounds a little skinny to me for a Company your size. Are you comfortable with that kind of cash balance sf

The 100 to 200 you're referring to is the cash balance or cash flow?

No, the cash balance, so that's net of your free cash flow burn and your settlement payments.

And I would think you're low.

Okay. So does that mean you're comfortable with where your cash should be and we shouldn't expect any incremental borrowing over the forecast period?

Correct. We do not plan ongoing into the line of credit. I think we'll be a fair distance away from that.

Okay, good. Appreciate it. Thank you.

Thank you. Your next question comes from Kemp Dolliver of Cowen & Co.

Good morning. Just one question and that relates to the impairment charges in the quarter. Could you tell us what exactly changed in the markets that led to the impairments?

Well, if you will, on the hospital charge, the one hospital that as I said made it more than half of the charge had less favorable Managed Care contracts to begin with, so they had margins that were thinner to start with. The competition in that particular environment was increasing over the course of the year. The evidence that was increasing over the course of the year , and it also experienced higher than average growth in uninsured during 2006, and so once again, it's not a bright line, but deterioration was occurring over the course of the year. We monitored it. We looked at the long-term forecast and decided that the appropriate thing to do was to impair it.

On the Northeast region, which had the goodwill impairment, it has and will be a contributor to the Company. Mid-year last year, we had expectations of performance and growth which were supported by the first half of 2006 performance, and the second half performance was disappointing. We put in mitigation plans and still expected to grow volumes and margins just not the level we've anticipated before.

Any sense as to that was competition in those particular cases or some other factor?

In the case of the individual hospital impairment I referred to, clearly competition was a factor. And of course we're taking actions to mitigate or counteract that, but once again, we're going to be prudent and conservative and our expectations and not presume we have 100% success when we do our accounting.

Okay, thank you.

Sure.

Your next question comes from Matt Ripperger of Citigroup.

Thanks very much. Just a couple questions. We've heard a lot about the imaging market and some of the part B cuts that have happened in the imaging space. Dr. Newman, if you could just comment on whether you think that those cuts could help rationalize the imaging market and drive volume back to hospitals and then secondly, are there any other regulatory or reimbursement changes that could help you in bringing some of the physician business back in house?

Well, certainly, the imaging issue is a significant one, and we expect federal legislation to be submitted that will affect the Deficit Reduction Act and the cuts that were placed on freestanding imaging centers with respect to adjacent slices being done on certain procedures like CT scans. Whether or not those will be passed in the house and the Senate and signed by the President is certainly unclear at this time. They face a lot of opposition because they've put between $1.5 and $2 billion back into the federal budget beginning the next Fiscal Year. So it's a little hard to know whether or not federal changes will make a difference, but certainly, it would appear as if the supply of imaging centers has grown significantly and appears to be growing at a good pace in many markets where they've not yet penetrated the area. Our sense is that we intend to improve the customer service and efficiency of our hospital based imaging centers, our campus based imaging centers and then do selective free- standing centers. Many times as joint ventures with some of our physicians, in order to recapture a greater percentage of the existing market, so we think that we can do that. We can have a sizeable margin on the business and grow our earnings at the same time providing great one stop shopping convenience for many of our patients.

Great. Thanks very much and second question is just as you look at JV opportunities with physicians, can you just give us some color as to whether those would be primarily confined to outpatient relationships or would you mimick some of the other hospitals and look at doing broader sort of whole hospital JV's going forward?

Matt, this is Trevor. I think that let me just add one thing actually before answering that question and on the federal front, I think this year we have a real chance of seeing some action on the so-called specialty hospitals. Of course the issue isn't hospitals that specialize in something. The issue is physician self-referral into hospitals that have limited services, but this, the stars appear to be aligning in favor of the acute general acute care hospitals position that this type of competition has been inappropriate, so I think that's something that you'd have to add to your list to watch in a positive way for federal action this year. As to our own approach to joint ventures, we would prefer to own and control the operations that we have. There are certain circumstances in which we will be willing to joint venture more likely on the outpatient side than on the inpatient side, although there are a couple of unique circumstances in which for competitive reasons and market norms, we may engage in a joint venture or two but don't look for that to become a strategy of the Company.

Great. Thanks very much.

Thank you. Your next question comes from Gary Taylor of Banc of America.

Hi. This is Millan [inaudible] actually sitting in for Gary Taylor.

Hi.

Had a few quick questions on the items that you mentioned in the press release. Could you provide a bit more detail on the $19 million cost report adjustment pension expense adjustment and the litigation and investigation costs and I ask it from the point of view of how we should incorporate this in our view of EBITDA for this quarter and what portion, if any of it, is considered in your '07 guidance?

Well, okay. On the, I'll start with the easier one first which is the pension. The pension is clearly an unusual item. It was an old pension plan. No active participants. The Company had been taking actions for some period of time to terminate it, to settle the obligations and had to go through a bunch of auditing-type procedures and regulatory procedures to get to this point, but it was completed. Those actions were completed in the fourth quarter, such that it triggered that particular gain. We would not expect something like that in the future. On the cost report adjustments, we have had cost report adjustment through out the course of this year, net-net they have been favorable. I think they represent combination of consevatisam historically plus continued improved processes in terms of resolving the issues, included in there was one circumstance where we had an issue on an a repeal that we were able to go and pursue successfully and have recovery. We would expect that we would still have cost report adjustments in the future and certainly would hope that they are positive but I can't really prognosticate as to will they be at the same level as they were in 2006 or will they start to moderate as we go through time.

Sure.

We did not forecast in the next year, if you will, what kind of settlement we might achieve, they are somewhat explicit in the business but it is not a discreet estimate. Lets see, what was the third item?

The litigation and investigation.

If you note on the 10-K we did record a $10 million charge of for presumed cost or ultimate cost of SCC investigation settling it.

My second quick question, actually I have two quick question my second one is, and I may have misheard this earlier but did you mention or talk about any other smaller nonrecurring items, roughy in the order of 18 million.

I did, it was only in my prepared remarks. They were all to small to warrant individual mention in the earnings release but there were about $18 million of charges, so that would be part of your [inaudible] to try to evaluate what happened positive or negatively in the quarter that you might want to consider going forward. Some of those is certainly wouldn't be things that we would expect to repeat.

Last, to happened to have the lease and rental expense number for the quarter handy?

I don't have it for the, it's on it way, 41 million.

Okay. 41 is for the---

The quarter.

The quarter. Okay.

It runs roughly $150 to $160 million for the year. So in the way of explanation when I talk about base capital when I say 500 to 600 million you can get there somewhat by taking annual depreciation around 150 plus annual rent--- actually I mean annual depreciation around 350 plus the annual rent around 150 to get you to 500.

Okay.

For a notional replacement capital number.

Sound good. Thank you.

Operator, we have been going an hour and a half. We will take one more question.

Thank you, your final question comes from Miles Highsmith of Wachovia.

Hi, guys. Just first quickly tailing on the last question on the 18 million trying to assume that all that is separate incremental from the 16 million stock base count; is that correct?

Yes, there is some of the stock base compensation changes in the 18 million. There is a, what I consider to be one time adjustment in there relating to vesting in retirement age, eligibility which we would not expect to repeat itself.

How much of the 16 was of the stock base was in that 18?

About a third of it.

And just a you mentioned volumes the first part of this year were kind of a mixed bag just given the Q1 is a pretty important quarter for you guys you got a couple months can you make a comment to whether were better or worse then say the negative 0.9% on the in patient side so far?

I think that we are just not going to make it a practice of getting just limited information on partial quarters. Don't think that it necessarily is going to enable anybody to properly populate a model because it just won't be full information for the quarter.

Okay. Very fair and just one last one you guys mentioned a couple of years ago that an investor day I believe that back when you had 69 core hospitals that you had about 40 that were running well, and maybe 29 that were kind of the low single-digit margin context anyway gone a couple years and had some initiatives in place and still to put into place can you give a sense of a breakdown between kind of the have and have not for the 55?

I don't think we have the same break down and do be honest we-- I think we gave that information at that point and time to try and create some kind of contextural picture of what the Company looked like coming out of the settlement but at this point and time we are focused on improving everyone of them as discussed a little bit earlier when did have a team which is oreniented toward lifting the level of those which are under performing and have greater potential but their focus is just that that can be a high performing hospital that has greater potential as much as another performing one. So, to talk about in terms of the way they are performing doesn't really give you insight of how we are managing the business at this point.

Okay. Fair enough thanks guys.

Thank you.

Okay, thank you, operator. This brings the call to a close.

This concludes today's conference call. You may now disconnect.