Tenet Healthcare Corp (THC) 2007 Q2 法說會逐字稿

Good morning and welcome to Tenet Healthcare's conference call for the second quarter ended June 30, 2007. Tenet is pleased that you have accepted their invitation to participate in this call. Please note that this call is being recorded by Tenet and will be available on replay. The call is also available to all investors on the web, both live and archived. Tenet's management will be making forward-looking statements on this call. Those forward-looking statements are based on the 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 the Tenet filing 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 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 it is providing these alternative measures as a supplement to aid in the analysis of the 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 web site. Detailed quarterly financial and operating data is available on First Call and on the following web sites: tenethealth.com, businesswire.com, and companyboardroom.com. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time, I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter, please proceed.

Thank you, operator and good morning. Like many other companies in the hospital sector, Tenet reported disappointing results of the second quarter, largely the result of weak volumes and rising levels of uncompensated care. At our Investor Day in June we disclosed that patient volumes were negative the first two months of the quarter. While we had reacted to the softer volumes by reducing our cost structure, unfortunately, our volumes declined further in June with admissions down 3.9% in the month, a result which was much weaker than the trend in April and May. Again we took action to protect earnings by flexing costs, but the decline in June was too sharp for these cost cuts to fully offset the impact from weak volumes. As a result, our second-quarter numbers are disappointing in almost every respect. We are pleased that the business bounced back in July which was essentially flat. To be precise, July same hospital inpatient admissions increased 1.1% over the prior year and outpatient visits increased 1.0%, excluding the two leased hospitals in Dallas. But I am more comfortable characterizing July as flat due to the extra weekday in July 2007 versus July 2006. This extra weekday disappears in September, so the quarters will be equal year to year. Though I would ask you to not place too much importance on just one month, and we do not yet have an income statement for July, at least from a volume perspective we're off to a better start in the third quarter than the second. While not yet reflected in current financial performance, we continue to make significant progress in what I believe will be the fundamental drivers of our long-term success, such as quality, outpatient services and implementation of our growth strategies. However, given our performance for the quarter, we have adjusted our financial outlook accordingly and Biggs Porter will provide details on those changes shortly. Before Biggs gets into the outlook, I want to share with you my personal assessment of the state of our progress to date. Let me begin with volumes. Nearly 60% our volume loss for the quarter came from the same areas we talked about in the first quarter call, USC University Hospital, Palm Beach and our two Dallas hospitals whose leases expire on August 31st. But notice instead of attributing particular weakness to all of Florida, for the quarter it was concentrated in Palm Beach. The rest of the hospitals across the country in the aggregate are performing better than the statistics for the whole company with an admissions decline of 1.1%. Looking deeper into the volume picture, I'm pleased to report that we continue to make significant, tangible progress with regards to managed care admissions. While we have seen a number of quarters with declines in commercial managed care admissions in the 3% to 6% area, the declines moderated markedly in the second quarter falling by only 2.1%, which was actually modestly better than our aggregate admission decline. This is the most valuable portion of our business and we are working hard to build our volumes with managed care companies and physician groups. At the other end of the spectrum, uncompensated care increased 13.5% to $302 million for the quarter. As we mentioned for several quarters, commercial managed care payers continue transferring to individual patients a larger portion of the financial obligation for the cost of their care. This is a concerning trend because these additional dollars which can we call "balance after" were previously paid by the managed care payers from whom we have very high collection rates. Conversely, we only collect about $0.60 on the dollar when the payment source comes from an individual patient. To give you some statistics on this, the number of patients with a balance after insurance increased by 2.4% over the second quarter of 2006. But the average dollar balance, as well as the total dollars these patients owe us increased by 50%. This difference between 2% and 50% illustrates the effect of this cost shifting by plan sponsors. We continue to build stronger relationships with physicians. Steve Newman will tell you how we have revamped the program to develop physician relationships. In addition to actively calling on physicians to make sure we are meeting their needs, we've increased our activities in the centralized recruitment of physicians and to a more limited extent employment of physicians. In markets where it makes sense, we are even opening free-standing physician clinics, the first of six new clinics in the Dallas area opened just a few weeks ago and other five will open over the next three months. These Dallas clinics are following the same strategy we have employed in Houston where we already have five clinics up and running. Also, a number of new construction projects have either recently come online or are nearing completion and should continue contributing to our growth, some as early as the last half 2007. Let me take a moment to provide examples of the dynamic changes we are making in our hospital portfolio to drive future growth. We completed construction and opened a new $46 million tower at Twin Cities Community Hospital in California. We are actively building and renovating at many of our hospitals including North Fulton Regional in Georgia where a $43 million expansion project will house new patient beds, two new operating rooms, and a critical care unit. At Houston Northwest, we are investing more than $17 million in the construction of a new cardiac care center and endoscopy suite. And at Delray Medical Center in Florida and St. Frances Hospital in Memphis, we are expanding and/or building new emergency departments. In addition to these projects, we are scheduled to spend approximately $83 million during this year on refurbishments and upgrades to patient floors and ancillary areas at our other hospitals. You should note, however, that we have spent less in the past 12 months than you might have expected. There are several principal reasons. First, as we have undertaken these projects, we have not relaxed our normal review and approval discipline. Second, many of the planned projects are in California, where we have encountered unusually long delays in seeking regulatory approval. For those of you who aren't aware of this, any hospital project in California that exceeds $50,000 in cost must be approved by the state health agency. And third, a significant portion of the planned capital infusion has been for major equipment. We aggregated the purchasing of this equipment in order to drive for greater discounts. Among the terms we negotiated were low deposits with the vast majority of the price due on first use of the equipment. Much of this equipment required physical changes to the hospitals, which triggered the regulatory approvals I just mentioned. So I would say upon having reviewed the capital plans for the last 12 months, that we proceeded deliberately and not as expeditiously as I expected. Our review indicates that 90% of the capital projects contained in the additional capital infusion program of 2006 are in progress. I certainly wish that we had moved faster to get the projects completed, but I believe we did benefit from the commitment and announcement of the projects, all of which should be completed by year end. On July 1, we announced the acquisition of Coastal Carolina Medical Center. This acquisition, our first in five years, fits our strategy to leverage the strength of our current hospitals to grow in key markets where we already operate. Coastal Carolina is adjacent not only to our Hilton Head Regional Medical Center but also to a free-standing surgery center that we own in the same market. The market we serve is growing rapidly and we now represent an unique healthcare resource in this market with our only principle competitors a 45 to 60-minute drive away. We expect this acquisition to accretive in the first year with a very attractive return on invested capital. I would like to point out that the investments I just mentioned including the purchase of Coastal Carolina demonstrate that even though we are in the midst of a turnaround situation we have both the capacity and the will to continue to actively invest in our hospitals to leverage our existing strengths. At our Investor Day 60 days ago we outlined at length all the strategies that we are employing to put this Company on a growth track. They fall into these five qualities. Number one, our commitment to quality through which we aspire to build a competitive advantage in quality and service leading to organic growth. Number two, optimizing the services that we offer at each hospital. We call this the Targeted Growth Initiative. Three, a focus on physicians, which encompasses our physician relationship program, physician employment, joint venturing and clinic development strategies. Fourth, enhancing operational effectiveness, which goes beyond our actions to increase pricing and reduce cost. We are deploying teams of people into the field from our performance management and innovation group, improving our performance in labor management, the supply chain and the revenue cycle. And fifth, building and improving our outpatient business. I believe that we are pursuing the right strategies. At the same time, I am disappointed in the pace of our recovery and the consistency of our results. In August 2006, I didn't anticipate that a year following our government settlement we would have a quarter with lower volumes and earnings like the quarter we just reported. Some of it is weakness in the industry. Some of it is due to specific situations in our markets like Florida, and some with our specific hospitals like USC. But regardless of the causes, we are working harder than ever, with better tools and information than ever, in order to turn this about. One postscript I would like to mention is that last week a federal judge in Florida dismissed the attempted class-action lawsuit regarding out payments that had been brought against Tenet by Boca Raton Community Hospital. That lawsuit constituted the last of the significant pre-2003 legacy legal issues that we faced. With that, I will now turn over to our COO, Dr. Steve Newman. Steve?

Thank you, Trevor. And good morning, everyone. Let me start with a deeper dive into the volume picture. Not surprisingly, we experienced our largest volume declines in Florida. I say not surprisingly because Florida has been our primary area of weakness since the third quarter of 2005, and as we have been telling you, it is simply going to take time for the recovery to take hold in that market. Overall, Florida admissions were down 5%. But the challenge this quarter was much more concentrated in our Palm Beach market than in the past. Admissions in our Miami-Dade Broward market were down 2.1%, which is in line with the company as a whole, but our six hospitals in Palm Beach saw admissions decline by 7.3%. That loss of 1,315 admissions versus a year ago represents 42% of Tenet's aggregate volume decline in the second quarter. As we highlighted during our Investor Day in June, we are redoubling our efforts in Florida to reduce patient outmigration and retain more tertiary care patients within our network. As we highlighted during our Investor Day in June, we are redoubling our efforts in Florida to reduce patient outmigration and retain more tertiary care patients within our network. For example, we have been successful in reducing outmigration in neonatology and cardiac services, by focusing on referring these patients to our regionally recognized neonatal intensive care unit at St. Mary's Medical Center in West Palm Beach and by adding electrophysiology services at Delray Medical Center. Both of these programs are ahead of budget year-to-date. We are also really ramping up our efforts in Florida to bring more physicians to our hospital medical staffs, especially primary care doctors. Turning to our other markets, results in California moderated a bit from the stronger trend we saw in the first quarter, with admissions down 1.9% or 0.6% if we exclude the results of USC University Hospital. The situation in California continues to be a series of situations unique to a number of our hospitals that, taken together, reduced our aggregate numbers in the second quarter. For example, Lakewood Regional Medical Center was hurt in the quarter by redirection of inpatient business from a major physician-owned IPA following a contract dispute. I am happy to report that late in the quarter, Lakewood reached agreement in principle with two physician-owned managed care intermediaries to begin using our hospital for their general inpatient and cardiac needs. We should see a positive impact from these new contracts in the third quarter and beyond. Our outpatient business in California saw a decline of 3.3% or a more moderate 2.4% if USC is excluded. By comparison, we had a 7.4% decline in the second quarter of 2006. Outpatient volume in California was impacted by new competitors such as the ambulatory surgery center associated with a new hospital being built in Modesto by Kaiser. That hospital isn't scheduled to open until mid-2008, but the surgery center on the campus has already opened for business. We had anticipated this and are addressing it with a major refurbishment of our own McHenry surgery center on the campus of our Doctors' Medical Center in Modesto and we have a new master plan for the hospital, designed to respond to the broader challenges represented by this new competition. You will recall that Texas had a very robust first quarter that came in well ahead of our expectations. Unfortunately, this growth was not sustained in the second quarter as Texas admissions fell by 2.6% and outpatient visits were off by 8.6%. About half of the decline in admissions occurred at one hospital in Houston, where strong comprehensive from a new physician-owned facility moved significant market share in the quarter. We knew that this new facility would affect us for a while, and that's why our hospital has invested significantly in new tertiary services and established five new primary care clinics with employed physicians in order to differentiate itself from the new competition. We expect our hospital to recover its lost volume and grow as our differentiation strategies take hold. In El Paso, admissions at our Sierra Providence Network of two acute hospitals were down 5.1% in the quarter, and we have taken aggressive actions to remedy the principal causes, namely staffing problems at our Emergency Departments and lack of participation in several new Medicare managed care programs. Longer term, we expect to see more volume in El Paso because of major shifts occurring in local health plans that will bring thousands more members to plans in which we fully participate. For example, with the recent dismantling of one managed care entity that had exclusive contracts with HCA, we will have access to an incremental 25,000 covered lives over the next six months. In addition, we are very excited about the opportunities we expect to have at our new East Side Hospital in El Paso, where construction is well along and occupancy is scheduled for some time next summer. Our outpatient business throughout Texas continues to be a challenge, because new, competing surgery and imaging centers are opening at an even faster pace than in the past. As we have told you in previous calls, there is a very troubling trend, but we have responded to it by aggressively managing and promoting our existing centers and by syndicating ownership stakes in some of our newly acquired centers. Overall, even though second-quarter admissions were a disappointment both in the aggregate and in several of our biggest markets, it is important to note that we are showing healthy growth in many of our geographies. In Atlanta, for instance, admissions were up 5.2% in the second quarter. And in Philadelphia, our admissions were up 2%. Those are very satisfying results given the tough environment being reported by most hospital operators. Going forward, we will continue to address our volume challenges for a number existing initiatives, as well as new approaches which we believe have significant incremental potential. In the past three months, accompanied by our regional leaders, I have met face-to-face with 27 of our hospital administrative teams to review their progress on specific initiatives. We reviewed their targeted growth plans, market assessments and staff and physician requirements to provide the services needed in their communities. I am pleased to report that we identified a number of opportunities to grow our volumes in a fashion consistent with the Targeted Growth Initiative. We are following up on those growth opportunities on an organized weekly basis with each region and hospital. In subsequent quarters, I will report to you on our success in capturing more of this preferred business. We have started weekly 90-minute volume growth calls with each region of the Company, as well as with the outpatient services group. This intense focus on growing volume is augmented by a deeper understanding of the cause of the volume shortfall by service line and payer. Each hospital is assigned a customized set of actions to mitigate these shortfalls with a timeline for execution and reporting of results. Best practices have been effectively shared throughout the Company using this new technique. Now let me update you on our specific initiatives to grow inpatient and outpatient volumes as well as better control our operating costs. First, we are accelerating our efforts to recruit, relocate, and employ more doctors. Our target is to add 1,000 positions to our medical staffs during the third and fourth quarters. For your reference, we added 483 physicians in the first quarter and 417 in the second quarter. To meet that goal, we have added resources at the corporate and regional level to support hospital-based recruitment and relocation efforts. We have created a centralized recruitment function in Dallas and we are working to create stronger practice management systems for our employed and recruited doctors. In this endeavor, our goal is not volume growth at any cost. Our goal is to grow the right volume. Second, we are pursuing and obtaining new managed care contracts that place all of our hospitals, freestanding outpatient centers and physician-owned practices into the networks of our most preferred managed care payers. During the second quarter we announced a new multi-year agreement with Aetna that include all of our hospitals nationwide. This breakthrough agreement added nine of our larger hospitals to Aetna's networks that were not previously included. We anticipate that the new Aetna agreement may generate 500 additional admissions a year. The Aetna contract reflects our approach that in every given market we want all of our facilities to participate in a managed care network. In many of our new agreements, we are also securing volume guarantees to assure that much of the growth we anticipate will be achieved. We estimate that, taken together, these actions will generate an estimated 1,000 incremental admissions annually going forward. Third, to help us fully leverage all of our managed care relationships, we have launched an effort to connect the dots with our physicians and managed care partners. For example, we want all the doctors that currently have privileges at our hospitals to accept the same health plans we do, and we want to attract more doctors to our hospital staffs that already participate in the plans we participate in. I characterize this as low-hanging fruit in the managed care arena. It is simply a matter of ensuring that both our doctors and hospitals are capturing the full value inherent in our relationships. Fourth, as I mentioned in the Florida discussion, we are plugging holes in our processes that cause us to lose patients who need services that a particular facility does not provide. We are stemming this patient outmigration by making sure that such referrals are made to nearby Tenet hospitals wherever possible. This effort may generate an incremental 3,500 positions company wide each other. That includes 1,100 admissions just in the Palm Beach market alone. Fifth, we continue to build on the success of what we initially called our Physician, Sales and Service Program. To recognize all the ancillary efforts we have added since PSSP was originally launched, you will now hear us refer to this broader initiative as the Physician Relationship Program or PRP. We continue to see admissions grow, as we visit more physicians and pay return visits to them. In the second quarter, we visited 717 physicians for the first time and saw a 46% increase in admissions from that group. As PRP has matured, we have learned that targeting and prioritizing our physician visits is the key to greater success. For example, we have exported across our system a best practice that was developed at our San Ramon Regional Medical Center in California. San Ramon has a very detailed method of classifying physicians as core members of their medical staff, physicians who also use our competitors, or those who are new or do not have active staff privileges at the hospitals. With those classifications, the hospital prioritized visits and tracks success. This system helps produce wasted efforts and strengthens the PRP program, appointing our hospital representatives to their best opportunities. We have hired 17 additional PRP representatives at the hospital level since the first of this year. All of our PRP reps visited more than 5,100 physicians in the second quarter and that group of doctors admitted more than 1,700 additional patients in the quarter than they admitted in the same quarter of 2006. That's a 2.5% year-over-year increase. Obviously, given the overall decline in admissions we saw in the quarter, we know we still have a lot of work to do across the variety of disciplines. It is important to keep in mind that our PRP is not a panacea for all our admissions challenges. By design, PRP affects only a physician's discretionary or elective admissions and outpatient orders. It does not directly affect emergency admissions which still represent more than half of our total admissions. But PRP is an effective method to imbed service to physicians into our hospital management cultures and to build physician loyalty. In the second quarter, we completed the first round of our PRP training designed to improve communication skills and share best practices across the Company. The second round of training begins month with training of hospital Chief Operating Officers, Chief Nursing Officers, and key department heads such as Operating Room and Emergency Department Directors. In September, we will deploy an improved tracking system for PRP that will give our hospital staffs a better tool to generate ad hoc reports and also commit our leadership teams at the regional and Corporate levels to have even more insight into trends that are affecting our business. PRP is more than a name change. We are adding significant leverage to all our physician relationship efforts. Sixth, we are continuing to shift the emphasis and increase the effectiveness of our outpatient services group, which we believe has significant growth potential. The group has now worked for several months with a number existing hospital and campus-based surgery centers and diagnostic imaging centers. We have begun to see the positive results of that effort. Let me give you a few examples. Diagnostic imaging services. Our existing, freestanding imaging operations with five centers in New Orleans showed a 4% increase in volume from the first quarter to the second quarter. Camp Creek is our relatively new stand-alone diagnostic imaging center affiliated with South Fulton Medical Center in Atlanta. It saw a 36% increase in exams from the first quarter to the second quarter. That amounted to 717 more scans in the second quarter. The Center is just now adding MRI and CT capabilities which should help drive additional referrals and profitability going forward. The Sierra Providence Health System diagnostic imaging centers in El Paso made significant progress in the second quarter. The East Side Center saw a 25% increase in scans which amount to 500 more MRIs, CTs and ultrasounds in the second quarter versus the first quarter. And the Total Care Center in El Paso had a 34% increase and higher modality exams in the quarter, translating to more than 200 additional scans, driven largely by MRI and CT orders. Finally, a great example of success on the ASC front is our Nacogdoches Ambulatory Center joint venture in Texas. This facility has exceeded its budgeted volume year-to-date by 10% and more than doubled its EBITDA projections during the same time period. Those are just some examples of the progress we are making in the outpatient arena. And we expect that as our outpatient services group continues to mature, this progress will be extended to all of our outpatient diagnostic imaging and ambulatory surgery centers company-wide. Seventh, let me briefly mention our efforts to more effectively manage our cost. Managing labor costs has been especially difficult as volumes continue to come in below our expectation. To mitigate the excess costs that result from volume shortfalls, we have developed new online productivity tools to assist our hospital leaders and department heads manage their full-time employee costs even more efficiently than we have in the past. Our labor cost management has been acceptable in the past, but some recent actions will result in faster improvement. These online tools and definitive intervention at the hospital level, coupled with new human resources management initiatives aimed at improving our employee retention rate, should make a meaningful improvement in our overall SWB costs. As you compare our rate of growth and controllable costs, like labor and supplies against other companies, once again this quarter you will find that our cost control compares very favorably. Eight, in the area of supply cost management where we have always been an industry leader, we added a new monthly support that identifies specific items to target. We call it the "left on the table report," and it is designed to give our managers an easy way to recognize savings opportunities in supply utilization. Finally I am delighted to mention during the second quarter, three of our hospitals made the prestigious list of best hospitals in America compiled by U.S. news and world report. This honor was given to only 173 of the more than 5,400 acute care hospitals in America. Tenet's honorees are Hahnemann University Hospital in Philadelphia, St. Louis University Hospital and USC University Hospital in Los Angeles. Congratulations to these outstanding hospitals. We are very proud of you. To summarize, I believe you can see that we have a lot of initiatives at work designed to take advantage of our opportunities with the highest potential. We are showing positive results from those initiatives that haven't yet rolled up into our aggregate numbers. We continue to have confidence in these strategies, and we believe that it is only a matter of time before we see tangible, much improved results. With that, let me turn over to Biggs Porter, our CFO, for a review of our financials. Biggs?

Thank you, Steve, and good morning, everyone. To begin with EBITDA, adjusted EBITDA for the second quarter was $156 million for a margin of 7%. Excluding our two Dallas hospitals, RHD and Infinity which leases expire at the end of this month, adjusted EBITDA was $163 million. For the first six months of 2007, adjusted EBITDA was $345 million for continuing operations and $358 million if we exclude the two Dallas hospitals. At our year-end conference call in February, we gave an outlook for adjusted EBITDA for 2007 of $700 million to $800 million, based on admissions growth of 0.5% to 1.5% for the year. At our investor day in June, I cautioned that April and May volumes were negative, but we would wait until June's results in order to assess any revision to our outlook. I also cautioned that without a new-term shift in admissions, the upper term of the 2007 range was at risk and continuation of the volume losses for the first quarter could make the lower end of our range a challenge. Because June and the second-quarter's volumes did not progress but in fact worsened from the trend of April and May and there was a corresponding negative effect on income in the second quarter, we are refining our adjusted EBITDA outlook for 2007 to a range of $675 million to $725 million. There is a reconciliation of our adjusted EBITDA outlook to GAAP income from continuing operations included in our earnings release. This EBITDA outlook assumes our admissions for the second half of the year to be in the range from 0% to a positive 1% and visit growth to be a negative 0.5% to a positive 1.6%. If our assumption for second-half volume growth proves accurate, our admissions for full-year 2007 should be in a range of a decline of a negative 0.5% to a negative 1%. And business for the year to decline in a range of negative .5% to a negative 1.5% respectively. I will provide additional color on this in a moment. On volumes, Trevor and Steve discussed the volume softness we experienced in the quarter and our initiatives to respond to that challenge. As I said at our Investor Conference, our results during the recovery are likely to be bumpy. We certainly saw this in the second quarter exacerbated rather than offset by a weak June which was down year-over-year in admissions by a negative 3.9%. July is encouraging, but it is just one month. I will cover the refinements to our 2007 volume outlook in a few minutes. Moving to the income statement, net operating revenues grew by 1.5% in the second quarter, reflecting the soft volumes environment offset by pricing. Managed care revenues increased by $42 million or 3.8%. nd commercial managed care revenues grew by $23 million or 2.6% as continued pricing increases more than offset a 2.1% decline in commercial managed care admissions and a 4.7% decline in commercial outpatients visits. As noted in the release, we will continue to see a moderation and a rate of a decline of our commercial managed care admissions. Although it is difficult to celebrate a less negative number, it is nonetheless a positive indicator that we may be achieving stability in this most important element of our patient mix. Cost reported adjustments added $13 million to revenues in the quarter compared to $4 million in last year's second quarter. As you know, our recent history is for favorable adjustments from this source. Although not easily forecasted going forward, we believe the size of these favorable adjustments is likely to be lower. Turning to pricing, revenues for accrual admission increased by 3.1% in the second quarter 2007, relative to the second quarter of last year. The increase in revenue for equivalent patient day was a comparable 3.2%. Our pricing metrics continue to reflect the pattern of volume losses at specific hospitals. Of particular note, volume losses at USC had depressed our managed care pricing statistics by a full 160 basis points for inpatient revenue per admission and 20 basis points for outpatient revenue per visit. If we exclude USC from both last year's and this year's second-quarter revenues, the increase in managed care revenue per admission would have been 4.2% as opposed to the reported 2.6%. Correspondingly, the increase in managed care revenue per outpatient visit would have been 5% versus the 4.8% reported figure. We also have had some favorable recent managed care negotiations which will start showing up in pricing in the third quarter. This includes the Texas Blue Cross contract which was initially targeted to affect the first half of the year and our national Aetna contract. The terms of the recently negotiated contracts I just referred to are consistent with the pricing objectives we previously laid out for the next two years. Total controllable operating expense was up 3.4% and controllable operating expense per equivalent patient day increased by 4.5%, showing again the effective volumes on our fixed and semi-variable cost base. Like some of our competitors, we saw a $7 million or 15.1% increase in contract labor. Also physician medical fees including for ED coverage, physician guarantees and hospital lists increased by $12 million by 29.1%. These increases in medical fees reflect structural changes in our business model and probably need to be viewed as a more fixed piece of our cost structure going forward. Supply costs were virtually flat relative to last year's second quarter with a year-over-year increase constrained to 0.3%. Since supply costs are extremely sensitive to volumes, it is important to normalize for volume declines. On a per equivalent patient day basis supply costs increased by 1.3%. We continue to view this as excellent performance given the underlying trends in medical supply costs. Bad debt expense rose to $151 million or 6.8% of net operating revenues, an increase of $23 million or 18% from last year's second quarter and an increase of 100 basis points for the bad debt ratio a year ago. This is slightly above the high end of our previous expressed full-year outlook for 2007 of a range of 6 to 6.7%. On a year-to-date basis, we are still within that range at 6.5%. More importantly, if you exclude Trinity and RHD, bad debt for the first half of 2007 would have been 6.2% and therefore well within the range. The increase in the quarter compared to last year can most easily be explained as related to a growth in uninsured revenue offset by improvement in collections. While the growth in uninsured admissions was 7.3%, our uninsured revenue grew by $36 million or 27%. This higher level of revenue growth was fueled by higher intensity level of our uninsured ED cases, as well as price increases which have primarily affected our outpatient business. The primary offset to the increase in uninsured revenue was improved collection on aged managed care accounts, which had reduced bad debt expense by approximately $9 million. As Trevor mentioned earlier, we also saw an increase in self-pay balance after accounts, consistent with cost shifting by payers. For the quarter the effects of this were offset by an effort to improve cash collections as we discussed at our Investor Day. These efforts resulted in improvements in our collections of aged self-pay accounts. It is important to note that we have not changed our practice of reserving based on historical collections, but as we collect older accounts at levels better than that at which we have reserved, we do have improvements in bad debt expense. If these collection trends are sustained over time, we will reduce the amount we reserve at the time of discharge. Collections of self-pay receivables, which include both uninsured and balance after accounts, rose from 35% -- or to 35% from 33% in Q1 '07 and from 32% in Q4 '06. This includes both point-of-service cash collections and receivables collection. Collections on managed care receivables rose from 97% in the last two sequential quarters to 98% this quarter. It is also of interest to note that charity admissions moved in the opposite direction, declining by 10.1% from last year's second quarter. However, we saw a 44.7% increase in our charity visits. This is part of an anomaly in the quarter and part of a function of the closure of one local clinic that shifted charity outpatients to our hospitals. The effect of this is not significant but it does distort the statistics. Turning to cash flow and capital expenditures, capital expenditures in the quarter were $150 million of which $148 million was in continuing operations. This included $16 million for the construction of our new East Side Hospital in El Paso. Excluding this investment in new construction, our investments in our existing franchise were $132 million in the second quarter. Our year-to-date capital expenditures in our existing business for 2007 was $231 million through June 30. This compares to $213 million through June of last year, so slightly ahead of last year's pace, but low relative to the annual expectation for this year. We expect the usual trend to continue of significantly higher spending as we close out the year, but we may not reach the $700 million to $750 million level we previously anticipated. As a result, we are adjusting our CapEx outlook for 2007 to a range of $675 million to $725 million. I should note we are not consciously restricting investment but rather the spin rate is a function of timing. Having said that we will expect any spinning shortfall to our original expectations for this year not to result in an equivalent increase in targeted spending for next year but rather to be managed over time. On cash flow, net cash provided by operating activities was $285 million in the second quarter. In accordance with GAAP, this figure excludes capital expenditures, proceeds of asset sales and certain other items. Adding back the $8 million of cash consumed by discontinued ops and the $21 million in payments against restructuring serves and then backing out the tax refund of $170 million received in the quarter, our cash provided by continuing operating activities would have been $144 million in the second quarter. Working capital was almost flat in the quarter with a net use of $15 million after backing out the $170 million tax refund received in April. Subtracting the $148 million in capital expenditures I spoke of a few minutes ago, gets to you to adjusted free cash flow, a non-GAAP term we use internally to asses cash flow, of a negative $4 million in the second quarter. We provide a reconciliation of adjusted free cash flow to the relevant GAAP terms our press release. Net of all these items and including $9 million from the sale of a New Orleans hospital and the $36 million purchase of Coastal Carolina at the end of the quarter, cash at June 30, 2007 was $675 million, an increase of $91 million over our cash position at the end of March. The impact of our Coastal Carolina acquisition which became a part of continuing operations as of July 1, does not materially impact these refinements for 2007 outlook, as with 41 beds it is still relatively small since it is only two-and-a-half years old it is still ramping up to its longer-term potential. Let me now cover some additional insights on our earnings outlook both for the current year and 2009. As I said earlier, in terms of 2007, the outlook we issued earlier in the year anticipated admission increases of 50 to 150 business basis points on same hospital basis. However, excluding Trinity and RHD, our admissions were down 1.4% in Q1 and 2.2% in Q2 for a total decline of 1.8% through June 30, relative to 2006. Accordingly, we have a fair amount of ground to make up just to get back to zero in comparison to 2006. Outpatient visits were down 3.1% in Q2 and 2.8% year-to-date, also putting incremental distance between our first-half results and earlier outlook for outpatient visits in 2007. Also as mentioned a moment ago, our projected range for the second half of 2007 versus 2006 was admissions growth of a 0% to a positive 1% and visit growth of a negative 0.5% to a positive 1.6%. Since I am always asked for an earnings and cash walk forward from actual results to full-year outlook, I will save someone the question and lay it out now. For this purpose, I will walk forward to the upper end of the $675 million to $725 million adjusted EBITDA range. What I am giving you in this walk forward is not intended to be spot estimates of all of the variables, but is intended to give you an insight into how the walk forward will work even if you choose different values for any of the variables. On EBITDA I would first adjust the first-half results by adding back the $13 million in losses in our two Dallas hospitals, which will be in discontinued ops beginning the third quarter. This adjustment brings us to $358 million as a starting point for the first half of the year. Taking the $358 million as a baseline, I would normalize it by eliminating $13 million for second-quarter cost reports and $15 million of normalization adjustments I made in the first-quarter call. This will give us normalized first-half results of $330 million. Using that as a starting estimate for the second half would give us an annual EBITDA number $688 million, $358 million first-half actual plus $330 million for the second half. If we assume growth and admission volumes in the second half of 1% and visits of 1.6%, using constant pricing and mix, this would give us second half revenues lower than the first half by approximately $10 million and would reduce EBITDA by $4 million assuming we hit 40% incremental margin objective. Revenues are lower in the second half due to seasonality, with the third quarter being the low point. For simplicity, I will assume the second-half pricing and cost increases, primarily annual merit increases in October, offset. Then we need to consider the effect of our cost and other initiatives which should have a benefit in excess of $50 million in the second half relative to the first. The initiatives here include the second-half expected yield of the $80 million initiatives I discussed in May at the first-quarter conference call. This will take us slightly above the upper end of the range of $725 million of EBITDA, leaving a little room for risk or rounding imbedded new assumptions. This also assumes that bad debt for the second half of the year is consistent as a percentage of revenue with bad debt in the first half, excluding the two Dallas hospitals. The lower end of our outlook range would then be primarily driven by volume variation and if we have less success on either flexing our costs, achieving yield on our initiatives in bad debt or some of the other variables. This by no means captures all the risks and opportunities that are out there but at the halfway point, I think it is reasonable to tighten the range down to this level. I can assure you that we are also continuing work additional mitigation plans to enhance our year-end performance as well. On cash, starting with our earnings second-quarter cash of approximately $675 million, I would subtract $30 million in income tax payments, the principal amount of our DOG settlement payment of $24 million, and remaining interest payments net of investment interest of $200 million. I will then take the middle of the CapEx -- the middle of the range on CapEx of $440 million for the second half. I would add $26 million associated with Philadelphia sale proceeds and net proceeds from the transfer of the two Dallas hospitals coming off lease. I would add the middle of the range on EBITDA of $342 million and add back $20 million of non-cash stock compensation expense in the middle of the range of accounts receivable and accounts payable change for the second half of $165 million. The result is approximately $535 million of year-end cash. We will put the range of cash at year end in the range of $450 million to $620 million. Correspondingly, we would put the range of cash generated by continuing operations, excluding the tax refund, at $300 million to $420 million for the full year. If our current forecasted volume losses relative to our prior expectation in fact do occur, they will absorb much of the risk position we have built into our immediate term outlook and walk-forward I showed at Investor Day. Looking out beyond this year, all other things equal, we will need to make up our current year volume shortfalls or have no other net negative pressures in order to achieve the $1.1 billion of EBITDA we previously discussed as the lower end of our outlook for 2009. This is achievable but risk of its achievement is also increased. As I said in June, looking out 18 to 30 months remains very subjective, particularly with respect to volumes, with the real range of outcomes bigger than what one normally conveys in an outlook. Accordingly, my view is that it is paradoxical to update two to three-year view every quarter. For that reason I've tried to lay out the variables clearly so that everyone can evaluate the volume and non-volume assumptions. There are, of course, other risks and opportunities in both revenues and cost, some of which are excepted to be realized, but the general parameters of moving from 2007 to 2009 in terms of managed care pricing and cost management are otherwise still as I laid them out in June at our Investor Conference. We have always said achieving that level of earnings was conditional upon volume and we are now two more quarters into the year without aggregate improvement. I will say again that we believe we are doing the right things and will achieve results, it's just a matter of pace and timing, which I also understand is important. If we were to quantify the risk at this point, we would say it is that our recovery could slide by one-half to full year if we do not have a shift in our admission trends at a level which puts us on a trajectory to make up what we fell behind our estimates in the first half. That would put our 2009 EBITDA more in the range of $1 billion to $1.1 billion. This is a statement of risk and not, however, a prediction. It is too subjective. I should also say that $1.1 billion of EBITDA or in the 11 to 13% EBITDA margin rate we have talked to previously, does not represent a ceiling on our results by any means and that we believe we should be able to get yield from volume growth beyond those numbers over time on a basis similar to what I laid out at Investor Day given our excess capacity and relatively high level of fixed costs. With that, I would like to ask the operator to poll our callers for any questions you may have. Operator?

(OPERATOR INSTRUCTIONS). We will pause for just a moment to compile the Q&A roster. Your first question is coming from Gary Lieberman of Sanford Group.

Good morning, thank you. Trevor, question for you from more of a strategic perspective. Can you bring us up to date -- or maybe give us some insight in terms of what conversations management and the board have had in terms of potential strategic alternatives that you have discussed from (inaudible) going forward.

It is not a question that is really prudent to comment on. Your board is obviously very focused to make sure that we execute on our plan and that we drive long-term sustainable growth and value, but beyond that, I wouldn't -- wouldn't care to comment.

Okay. But I guess from the perspective of maximization of shareholder value at some point, are there -- can you just comment on -- are there alternatives that you might consider?

I don't think these are things that companies typically talk about. Obviously if they were anything worthy of disclosure, we would disclose it. But we have been very transparent about what our approach is strategically, what we are doing to generate growth and our strategy and we have been regular and routine on giving updates on how we are doing towards that.

And then, Porter, just a quick follow-up, it looks like you kept the guidance for cash from ops pretty constant at 300 to 400, is that right?

Yes, the cash from ops for this year is still 300 to 400 -- 300 to 420.

Okay, great. Thanks a lot.

Thank you. Your next question is coming from Adam Feinstein of Lehman Brothers.

Okay. Thank you. Thank you for all of the detail there. Just a few questions here. I guess with the volumes, it has been an ongoing struggle for you guys, as well as for others in the industry. It just seems like there's only so much you can do there. So it really gets back to -- to your costs. And clearly you are doing a good job of managing those costs, but I guess the question is, do you need to be more aggressive in dramatically reducing cost with the expectations that volumes are not going to get back to a more normalized level in 2007. I guess just thoughts there in terms of -- particularly on the salaries and benefits line which continue to be higher than your peers. And I know you have a different mix of business in terms of some of the states, but certainly just longer term opportunities there. I know you talked about cost-savings initiatives but is there -- is now a time to get more aggressive there. And also wanted to know in terms of -- just your-- I guess bad debt expense improving relative to the first quarter, as we look at the uncompensated care ratio, I know you said before that you didn't change any of your assumptions there, but I was just curious if you can give more feedback in terms of your collection rates for self-pay. Thank you.

Adam, this is Steve. I will start with the first half of the question and let Biggs answer your second part of your question. With respect to our cost structure, I think your comments are right on target, and we are upscaling our efforts to manage costs even better than we have in the past. We obviously flex when our volumes don't hit our short-term targets. But adjusting our cost structure, whether SWB or other controllable expenses, need to be upscaled. I mentioned in my comments that we are developing new tools to give our managers at the hospital level even more real-time data to allow them to manage their FTEs more effectively. The other issues with respect to our SWB, which I think we don't talk about much, have to do with our vacancy rates, our turnover rates, and the use of contract labor, especially that premium contract labor, which pushes up our overall SWB and SWB per adjusted patient. We have a number of human resources initiatives that are getting deeply within the individual hospitals, even down to the unit level, to understand what this turnover issue is, why we are seeing individuals we are successful in recruiting, leaving within the first year. We believe as a result of our pilot projects, we are going to have success in improving our retention aspects which then will fill our vacancies which had really remained flat over the last two years, about 1,800 RNs across the country, that sort of thing, which will dramatically decrease our need for contract labor, drive our SWB down and drive our total costs down. Biggs, do you want to comment on the bad debt?

Sure, before I do that, I want to add on -- since you mentioned the initiatives, I talked about, going back to the first quarter and then at Investor Day, I want to assure you, we are not stopping at those in terms of trying to add value to those or also generating new ones to offset the pressures. But those are not just cost initiatives, they also may be pricing initiatives and the bad debt initiatives we talked about previously as well, which does lead to the second part of your question. And on bad debt, I did give a few statistics in my prepared comments, which I gave a lot of statistics so I can understand maybe you didn't get those down the first pass, but we do have certainly an increase in the uninsured. We also have an increase in balance after experience in the second quarter. We also had some effects due of ED intensity and of pricing otherwise affecting the revenues on the uninsured. The offsets were improvements, really driven by improvements in collections. What I first noted was that on the managed care side, we had improved our aging of older managed care accounts by about $9 million, and so there was a benefit there. In the aggregate on managed care accounts, our collection rates in the quarter were 98%, compared to 97% for the last couple of quarters. On self-pay, including both uninsured and balance after, our collections rose to 35% from 33% in the first quarter and 32% last year in the fourth quarter. So clearly improvements in collections both on managed care and on the self-pay side. So those -- those did benefit because in substance, we were either sending less receivables into the system to be reserved but also due to more up-front point-of-cash collection -- or point-of-service collections but more importantly on some of the older accounts on which reserves have been established, by collecting them, we have bad debt expense because those reserves are no longer necessary. Now we haven't changed the rate at which we reserve up-front. If you recall, we reserved up-front based upon historical collection percentages at the point of discharge and we have not yet adjusted that. We will wait until we have demonstrated more of a history of these improved collection points -- collection rates before we start to adjust our up-front reserving practice.

Okay. Thank you.

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

Okay. Good afternoon. A bunch of questions, but I guess I will go for this. First of all, you didn't comment in your comments, which were lengthy and detailed, about the lease situation that has gotten some headlines today with HCP. I guess stemming it at Encino, Tarzana. That will be issue number one and then I have some follow-up questions, please.

Okay, Cheryl, good morning. Peter will take the lease question. It's related to a matter of litigation.

Okay.

Good morning, Sheryl. Thanks. As you know, seven of our hospital buildings are leased from HCP which is a publicly traded REIT. We've had a tenant and our predecessor companies have been customers of HCP for over 25 years. We think that these reported lease termination notices for the four hospitals that we disclose in our Q are without merit. It was issued by HCP we believe in response to litigation that we filed against HCP for their bad-faith actions. You will recall that we have sued HCP in May of this year for damages for improperly blocking the sale of our hospital in Tarzana, California to a qualified buyer who would maintain the hospital as an acute care hospital that is needed in that community. These reported lease termination notices on four of our hospitals, [Pry], Palm Beach Gardens, North Fulton and Irvine -- do not maintain -- do not allege any deferred maintenance issues at these four hospitals. They were issued as alleged cross defaults based on the alleged deferred maintenance issues that HCP had raised at Tarzana. We don't believe that these lease termination notices based on cross defaults at these four hospitals are valid because there is no valid underlying default on any of the other leases. We have properly maintained all of our hospitals, including Tarzana, during the lease terms according to the obligations under the leases. We believe that one of HCP motives in issuing these alleged default notices is to force the closure of Tarzana Hospital in order to convert it to a higher revenue use, such as condos and shopping centers, which is clearly not in the best interest of the community. As you know, we spend hundreds of millions of dollars each year to properly maintain and enhance all the the hospitals, whether they are owned or leased according to industry standards and we do not believe we are in default on any of our leases on any grounds including because of deferred maintenance issues. Our position is going to be to continue to vigorously pursue our suit for damages against HCP, and we are going to obviously fight these alleged default notices which we believe are meritless and are using in litigation.

Okay. If I can follow up while we are on litigation and arbitration and then I actually have another question. I apologize, but you still have that $250 million arbitration pending against the insurance company and the Redding Medical Center $395 million settlement, do you not? And did that go to arbitration yet?

It is actually $200 million, which is at issue here because we settled one of the excess policies so we have two arbitrations going on right now. One we are kind of in the middle of. I don't anticipate a decision in that one. That's for $100 million worth of coverage both on a lower layer and a higher layer. I don't anticipate a decision on that until the end of this year, if not until early next year. The other arbitration for the other amount is not scheduled to commence until the spring of next year.

Okay. Great. I guess my concern is with the California and Texas volumes not maintaining any kind of traction relative to the first quarter, so maybe we got a little bit too excited there. With the Florida situation sort of uncertain with the Company, you know a year later after the settlement as you noted, Trevor, not having made the kind of progress that clearly you all would have liked them -- liked the Company to have made. And with this renewed focus on accountability and responsibility for the performance, what does the Board say about this? How patient can the Board be. We understand how impatient investors can be because the stock is down 9%. But how patient can the Board be before significant changes happen? Before there is some reevaluation of -- of the -- maybe not even the strategies but maybe compensation and other incentives and maybe other things that the Board can do.

Well, Cheryl, I appreciate the question. You know -- and for being so direct about it. The fact is that, you know, we -- when the stock drops like this, and when we fail to meet our own expectations and as part of our approach of transparency, our own expectations translate into the outlooks that we have provided, there will be dramatic effect on compensation of the executive level. Of course for people working in our hospitals and providing care to our patients, we base their compensation entirely on market forces and the performance on other metrics. The -- you know the -- I think the real question that you have to ask yourself when looking at this is, is this second quarter, which we are reporting indicative of a worsening trend or is it somehow an anomaly. One of the reasons we mentioned the July performance, which I always hesitate to do with one month, is that with that trend of April, May and June, being one where June was worse than April and May, it would have been important for you to know whether July continued June's trend or whether July improved substantially as it did. As we look at the seven hospital companies including HCA and Triad who now reported, four out of the seven have negative admissions. Three out of the seven have negative trends in EBITDA. And five out out of the seven have negative trends in EBITDA margin. So the performance we reported in the second quarter directionally is not all that much out of line with these other companies. It certainly is disappointing to us in terms of the expectations we had set. We have -- we view volume as our most important challenge. We have been very clear about what we are doing to improve volumes, and the fact is that it did not end up in the results in the second quarter. We still have confidence that we are doing the right things.

Okay. I -- I understand that. I guess it has got to be difficult when the quarters keep going on and the challenges either change or shift or continue and don't really seem to mitigate that much. And I guess the one place I would point out as being a positive this quarter was the balance sheet. That your DSOs were flat sequentially, down year-over-year. Clearly you are making progress there, so we give you an A+ on that score with collections going up not down like some of the others. But I am wondering how many of that is -- the strengthening and the increase in cash balance obviously has got to be a little temporary because part of the reason your cash is up is because you haven't spent as much Cap Ex.

In addition to the revenue cycle you can also look at our cost control. You can look at how we had previously reported that the entire market of Florida is weak and the weakness now is confined to Palm Beach. There are a number of indicators that the strategies we are pursuing are working, but we continue to face these kind of overall challenges like I said in addition to specific issues and specific geographic markets and even specific hospitals, in the case of USC. But some of the underlying operations within the Company in the areas like revenue cycle and cost control are actually doing quite well.

We do intend -- this is Biggs, Cheryl. We do intend to continue to drive on the days in receivables and think there is more opportunity there. We also think there is opportunity on the payable side. I think that we anticipate working at going forward as well.

Well --

Working capital. We will focus on other elements of the balance sheet that can generate cash and making sure it is as efficient as we can make it.

You did a great job of it this quarter. Is pleasantly surprised by that. Thanks so much for the answers.

Thank you.

Thank you. Your next question is coming from Ken Weakley of Credit Suisse.

Thanks and good morning, everyone. I was curious if you could spend a little time discussing the compensation of volume in terms of -- in the past at least, you used to break out admissions for cardiovascular and ortho and I did miss some of the call. I don't know if you discussed that. Could you talk about how that is changing at the Company and specifically perhaps what either doctor or capital spending strategies are being put in place to address it?

Sure can. It is Steve Newman. Certainly as part of the Targeted Growth Initiative, we are focusing on a customized list of services for each hospital in the Company. That doesn't necessarily lend itself to saying we have three product lines across the Company that we are focusing on. But for example, there is one product line that we have focused on pretty much in every region and every market in the company and that one is neonatology, because it is a major driver of our tertiary care business. And in the second quarter of 2007 as compared to the second quarter of 2006, we had a 2.7% increase in neonatology admissions. If we look across certain parts of the Company, we can begin to break it down by regions and service lines. For example, in the California region where -- in a couple of our major markets in Orange county, we focused on neurosurgery through both in investments in capital as well as recruitment or relocation of neurosurgeons. We saw a significant increase in neurosurgery business. So I guess I would summarize by saying that we are focusing our physician redirection, recruitment, relocation efforts along those service lines, and by the same token, our capital investments where that makes a difference in providing the technology to grow our business, especially tertiary care levels. So I hope that is responsive to your question.

Can you give me cardiovascular admissions year-over-year?

Our cardiovascular admissions were down. Interestingly -- let me see if I can find that specific number. Our cardiovascular medicine admissions were down 4.5% quarter-over-quarter and this is pretty consistent with what we have seen across the industry. It was certainly associated with a decrease in the purchase of stents as you've heard reported by other industry sources. Our open-heart surgery business was also down quarter-over-quarter. So I think that, overall as we are developing new drugs to alleviate and prevent coronary artery disease, we are seeing a drop in cardiovascular medicine and also cardiovascular surgery.

And on orthopedic if you don't mind. What I am trying to get at the numbers feel -- it feels like you are losing a little bit of market share in your hospital environment, and I know that data is not easy to come by but I am curious A, if that's your sense. I know you recruited looks like 900 doctors this year. And -- with the volume down 3,000. I mean one could -- you have to surmise that you are still losing share. And I am just curious -- maybe that real question I am getting at is what is happening to the market share position of the Tenet hospitals.

Orthopedic medicine surgery was up 0.6%.

Okay. But generally speaking in those cases that are typically been defined as the high profit centers of the hospitals, do you have a sense as to what is happening to your market share?

I think the -- the issue is market share versus total volume.

Okay.

And I think we need to do a better job focusing on those high-margin service lines and that's why our recruitment and capital deployment efforts are focused on those that are customized for each hospital. For example, oncologic surgeon is up and that is a result of some focus both in California as well as the southern states region. So it is very different across the Company, and it is really based, Ken, on what demands we are seeing over the next five and ten years in the communities that those individual hospitals serve.

Okay. Thanks so much.

Thank you. Your next question is coming from Matt Ripperger of Citigroup.

Hi. Thanks very much. I just wanted to follow-up on that line of questioning. Seems like the soft admissions clearly is not a company-specific issues and I know historically people have attributed it to a number things, competition, self-pay, cost shifting, et cetera. Do you have any further intel or insight into what is going on on a broader basis that really contributes to this industry-wide secular weakness in volume?

I mean, well, this is a subject of a lot of discussion and unfortunately a tremendous amount of speculation. Steve already mentioned one of the key trends, which has been the development of drugs which has to some extent been substitutes for some of the traditional service lines within hospitals like heart surgery. There has also been a fairly meaningful shift towards consumer directed health plans or plan design that places more of the cost burden on consumers. Now, I mentioned that in connection with the remarks on the balance after insurance, but there is some evidence and there have been studies in the past, very thoughtful study our of [Rant] 20 years ago that indicated that when -- shouldn't be any surprise, sounds like I'm not stating the obvious -- that when people are responsible for a greater portion of their health cost, they will find ways to consume less. This trend is fairly marked when you look at admissions trends for different stable companies in the industry going back to about 2002. You just see a drop-off to flat to negative beginning in 2004 and it has continued in that way. At the same time, they -- the competition within the industry both within it from acute care hospitals, particularly in the not-for-profit sector as well as physician-owned enterprises has become far more intense. And so to look back and find the -- the causes of weakness and volumes -- again, I know I am not speak being particularly -- particular geographic issues, but just sort of very broad brush strokes, there seems to be a consumer effect of cost shifting. There is a technology effect of substitution of alternative therapies out of hospitals, and then there is a competition effect. And there is plenty of speculation in addition to those three effects that the consolidation of managed care among a few very large national payers have played a substantial role. That's really had two effects on the hospital industry. One is that the highest-paying, most loosely care managing organizations have gone out of business. They have been acquired by the lowest paying, most tightly managing the care organizations. And so that, of course, has had effect on price and volume. We have been seeing that in this industry since early 2003 and much, much more pronounced in 2004 and 2005.

Great. Thanks for the update. I have two financial questions. One is at your Investor Day you mentioned that CapEx spending for this year was going to reflect a bulbous amount and it would trend down to a more normalized level going forward. Can you just update us on whether that is the case, and secondly you attributed about $165 million -- I believe of a source of cash of this year to changes in AR and accounts payable. I just wanted to see what gives you conviction on that.

Okay. On the first question we still believe that this year's capital spend is going to be higher than what we would expect going forward. I think that a more normal level of spending for us would be in the $600 million, $650 million range on an annual basis. The -- but we haven't given an explicit projection for next year yet. The -- as to accounts receivable and accounts payable, if you looked at last year's change in the balance sheet in the second half, would you also see cash generated those accounts. As we go through the end of the year, two things will happen. One is there should be an increase in accounts payable balances, traditional not just for this industry but a lot of industries, that would contribute to this. And then secondly, on the receivables side, we are still working aggressively on our collection practices. It is a part of our bad debt initiative, but as you -- as you work that, two things happen. You improve cash collections and you improve bad debt expense or you otherwise mitigate bad debt expense risk. So we would hope that we -- not "hope" but we expect that we will able to also generate cash from accounts receivable over the second half.

Great. Thanks very much.

Thank you. Your next question is coming from Matthew Borsch of Goldman Sachs.

This is [Shirley Knowles] for Matt Borsch. Thank you very much for the comments on the trends. I was wondering if I could just follow up briefly. Is there anything broadly that you are seeing on the outpatient side, maybe where the opportunities are, perhaps at the service line levels, given that the outpatient visits were down 3% this quarter and it's such a focus of your business going forward?

Well, thank you for the question. We -- we do feel that we have opportunities both on the diagnostic imaging side as well as the ambulatory surgery side. First as I pointed out on investor day, we have 55 hospital-based or campus-based diagnostic imaging centers that are wholly owned by our company and we have been dedicating a lot of effort on providing systems such as easy scheduling, one-stop shopping for physicians offices and their office staff. We have significant upside potential in the area imaging, specifically MRI and CT. Second, with respect to the ambulatory surgery business, we have improved our operations, and we are making selective acquisitions in our markets in which we find the strategy offensive, not defensive. And we believe we are gaining market share and we will be able to grow those volumes, especially in areas such as gastrointestinal endoscopy, urologic procedures, general surgery and orthopedic outpatient procedures. So those are the areas that we have been focused on with respect to the outpatient services group.

Okay. Great, thank you. And if I may, the IPPS regs for next year, looks like there could be some upside from the severity adjusted DRGs. Just wonder if you have made any preparations perhaps to train your staff around coding because of that behavioral adjustment was built into the regs.

Yes we do have training planned. It is really a part of our initiative to train employees annually in all areas of compliance. We will include in there the training necessary to ensure we are complying appropriately with these regulations. The -- it is a little early to say exactly what to expect of the regulations. But certainly right now, the market basket increase and the effects of the additional DRG codes net of the holdback seems to be at least in line with what we have previously expected over time in terms of pricing.

Okay. Thank you very much.

Let me add on one answer to not your question but the very last question on the build-up over the second half. I should have been a little more specific. A lot of the accounts payable and accrued liability build-up is related to our 401(k) accrual which isn't paid until the first quarter of next year and any incentive comps that -- that gets paid out. So there is -- there is always as we through the year, second, third and fourth quarter a build-up of liabilities in that regard, and for that reason, it is fairly easy to understand why you would have an increase above and beyond just a normal build-up of accounts payable. Okay. We can take the next question, operator.

Thank you. Your next question is coming from Rob Hawkins of Stifel Nicolaus.

Good morning.

Good morning.

Just back to the HCP piece. In your arbitration, your discussion of the matter, I realize this is related to Tarzana, et cetera, but are they asking you for any dollar figure for maintenance CapEx to bring it within compliance? Or is anything of this related also to the earthquake -- the California earthquake issues?

This is Peter Urbanowicz. Regarding the deferred maintenance issues, they are largely at Tarzana, and one of the -- the allegations they are making is on the seismic repair. You recall that California has certain seismic repair responsibilities. Our position under the lease is that is the responsibility of the -- of HCP, of the REIT and not Tenet.

Okay. Is there a dollar figure though that has been discussed? Is there any way we can put a number on it?

Well, when the lease expires for this hospital in February of 2009, which is well before the requirements are in place to make the seismic repairs.

Is this a master lease that includes these other facilities as well?

We do not have any master leases. Each of the hospitals have an individual lease. What we do have in the leases however are certain cross default provisions where an allegation could be made if one lease is found to be in default, the cross defaults for other hospitals can trigger.

But they all have different expiration dates.

That's correct. They all have different expiration dates and also elections by Tenet as to whether to continue or to extend -- extend the leases.

But you can't be in default?

Excuse me?

But you can't be in default. In other words, they can say --

Well they have to -- it is one thing to allege default. It is another thing to find a default. It is really up for a judge to define whether or not the lessee is in default under the lease.

Thanks, Peter, appreciate it.

Sure

The other question I have is -- you know you mentioned in the press release 12 hospitals. I just want to confirm those are USC plus the Florida 11, is that correct? That are the ones that are underperforming, causing the problems?

Are you talking about from a volume standpoint?

Yeah. Are are those 12 encompassing some problems in Texas and a variety of other places.

You would you not take USC and the Florida hospitals and actually assume there's 12. I think there are some others in the statistics, but certainly our bigger problems are USC and several of the Florida hospitals.

You have talked a fair amount about physician recruiting. You guys had a great reputation, particularly on the cardiac procedures and you lost some of the cardiac -- cardiology groups down in Florida. What kind of progress have you made there in terms of recruiting other docs?

We are making significant progress in terms of recruiting, redirecting and relocating physicians in Florida, as well across the country. I mentioned first of all with respect to employed physicians. While we are being careful about establishing this, nonetheless we are aggressive, but we need to do two things. Number one, expand the primary care base and we don't have practices that will accept new physicians. Second, we are using employment where we need specialty coverage for our hospitals because of ER on-call responsibilities. And we have recruited a number of cardiologists and cardiovascular surgeons to do that. I think we are being successful in securing our cardiovascular physician base in Florida. There was a lot of, let's say, publication regarding the movement of one surgeon at Delray medical center to a competing hospital in Palm Beach County. While that physician was an outstanding physician, he was only the third most active in terms of procedures done at the particular hospital. So not to minimize the impact, but we are working hard in Florida. But in Texas and all of our regions to secure and expand the physician base to serve increasing community need and to maintain appropriate market share.

Can you give me kind of an empirical number behind that? Is it down still in Florida or did it improve this quarter from a cardiac procedures volume?

In Florida for the second quarter, we still had a 10% decrease in cardiovascular medicine year-over-year. We saw that trends seem to mitigate a small amount in July. That is, once again, mainly in Palm Beach County. We have expanded our cardiovascular business in Miami-Dade with the opening of a new open-heart surgery program at Palmetto Hospital which is over budget in terms of its ramping up to volume. So it is still a trend. It is still a challenge. And we are working hard to turn that around.

And Rob, since you haven't been following us for that long, it is important to remember that the declines in cardiology volume you just cited -- in fact I have actually been surprised it was not greater than that, has been triggered by a dramatic change in the CON status, Certificate of Need status in Florida two or three years ago that prompted a number of competitors to open competing open-heart programs in situations where we had enjoyed these regulatory protections. So we gained competitors I think in four open-heart programs and we gained the ability to compete in two in Florida. And that was an increase in competition that you would have expected for our business and market share there to decline. But as Steve mentioned we are actually very pleased with the new open-heart programs.

And I guess stabilization timing. Is it going to take a year? Do you think where -- you have hit the competition phase. It stabilizes out -- when in '08?

Well, the ones that we have opened are growing now. The ones that we -- where we gained competitors, the competitors are growing, and, you know, you probably have more time left before that whole situation stabilizes in the market.

Thanks. I'll jump back in the queue.

Thank you. This next question is coming from Kemp Dolliver of Cowen and Company.

Hi. Thanks and good day. First question relates to the couple of situations where volumes were impacted by competition and you had indicated that had you anticipated the competition. I think what wasn't clear to me from the comments and the context is whether the impact of -- from those new competitors was largely as expected or worse than expected.

Kemp, this is Steve. I think it varies from geography to geography. We were not surprised with the emergence of any new competitors. I think our reconnaissance is good. Sometimes, the timing of the escalation of the competition may not meet our specific predictions. For example, I think we -- in Houston I mentioned our hospital that is adjacent to a physician-owned hospital that we knew that hospital was opening. We knew that hospital would come online. The timing for getting access to some managed care contracts seemed to differ from our particular projections. But we started our capital planning and expenditure to create tertiary care services to differentiate that hospital from the competition down the street well over a year ago. So this is a phase two or three-year ramp up plan with respect to the competition. It is not as if one can flip a switch and instantly add tertiary care services when a new competitor arises. In other parts of the Company, there are things we can do faster. Such as I mentioned in Modesto, where we have competition from the Stanislaus Surgical Center as well as the new Kaiser ASC. We are able to do the sort of renovations, improvements of service at McHenry much faster than it takes to add tertiary care services at a large general hospital in Houston. So I wouldn't say we are surprised at all with any of the new competition. Our ability to respond is a spectrum of timing from overnight response where we will change out an ER physician group as we did recently, six hospitals in Florida, to taking longer to build those services in other parts of the Company.

Thank you. My other question is, with margins down year-over-year, what is the margin complexion at the hospital level now? How many hospitals are say at target and how many are falling below targets?

Well, I suppose that depends upon what your target is, which we don't give our budgetary numbers for all of our hospitals out. The -- the mix quite frankly changes, and we see quarter-to-quarter differences between performance at different hospitals. So I don't think it is a real meaningful number. Obviously overall the average is not satisfactory to us, because the overall result is not satisfactory yet, and we have a lot of efforts under way to increase the value of each and every hospital that arguably is a little more focused on those where there are some underperformance, but we also look at our good performing hospitals and try determine what kind of lift we can get out of those as well. Steve talked about the PMI team and that's all part of it. I am not trying to avoid your question, but in the end, I think that we are trying to get lift out of everything.

Okay. Thank you.

Thank you. Your next question is coming from Elie Radinsky of Brigade Capital Management.

Yes. Thank you for taking my call. Just have three quick questions for you. One is on a global basis. There is going to be a significant change in ambulatory surgery reimbursement coming on board and just want to find out how many ambulatory surgery centers you have and what your expectations are. Are we going to see a meaningful amount of surgeries leave the inpatient side and actually go toward the outpatient side. Second thing is are we going to see -- I was expecting a little bit better on the supply side due to -- I guess the drop in the use of drug-eluting stents, can you talk about that or any other changes you are seeing from a physician practice area. Are you able to get better pricing now on drug-eluting stents? And are you still seeing a drop in those. And lastly on salary, wages and benefits. Did you mention that you employ a significant amount of temporary help at a more expensive level. I just want to find out is there any light at the end of this tunnel? Are there any -- are there going to be a significant amount of nurses that will help alleviate the nursing shortage or is this just going to be an intractable problem that you are going to face that's going to be occurring throughout. Thank you very much.

I will try to get all three of those points. Thank you for the comments. First of all, today we own 100% of 21 ASCs on the campus and adjacent to 16 of our hospitals. Then we own the majority of seven joint venture ASCs near our campuses. We have in the pipeline some acquisitions of ASCs that are adjacent to our campuses. We have a couple of these selected, one going on in Orange County, as we speak, as well as one in Houston. We are very sensitive to the changes in reimbursement on the ASC point with the proposed law calling for that reimbursement to average about 65% of what a hospital outpatient surgeries are averaging. We understand what the cost structure needs to be there. We understand what the EBITDA margins can be of theirs going forward. So we are very sensitive to that issue. And as you'll notice, we have been very selective in terms of the which of these we have approached. I have had about -- in the last two months about 15 potential acquisitions of ASCs brought to me. So far we have approved two. So we'll being very selective and we understand how that reimburse impacts it.

Second, with respect to your about stents, we saw a significant drop in our stint expense year-over-year. In fact, it's very interesting when you peer into the stent, even though our stent spend in total was down about 38% year-over-year, if you look at the bare metal stents, they were actually down less than the drug-eluting stents. So while you can't generalize across the country or even for our Company, it would appear that there is some shift within the stent market to using more bare metal stents. With respect to price of those stents, we saw a drop year-over-year in the term -- in the average cost of stents about $150 per stent. And I don't want to get in to any more details about the manufacturer's price or which we got that from, but all in all, I would say that our stent usage is down, and our cost of doing stents is actually dropping over time. I guess the last point you made had to do with the overall use of pharmaceuticals, Elie, and we have as part of our performance management and innovation group, we have --

It was a use of labor --

-- management initiatives, and we're now about to launch what we call MUM 4. Medication Use Management Phase 4, which is certainly will be into, not only pricing of individual drugs, but usage of drugs and substitution where generic drugs appear to be bioequivalent. With respect to the contract labor issue, that continues to be a very vexing issue. We have our own -- in some parts of the country -- our own nurse registry. Nurses comprise about 85% of our total contract labor spent. We're using those nurse registries both in Florida and Southern California to try to decrease the premium cost of that. But the real issues have to do with stopping turnover, filling those vacancies and thereby being able to take care of our own patients with our own full-time labor. That's the best care and it's also the most efficient and effective way to control costs.

Thank you very much.

Thank you.

Thank you. Our next question is coming from Mike Scarangella of Merrill Lynch.

Hi, good afternoon. And thanks for hanging on the call this long. I had a quick follow-up on the lease question. I appreciate that you guys feel like you are in the right, and I'm sure you think you'll ultimately prevail, but there is a disclosure here in your Q that says the lessor has demanded that you turn over possession of four hospitals by year end. Given that year end is only four months away and these legal battles seem to be quite protracted, what means are at your disposal to keep that from happening?

There's several -- This is Peter Urbanowicz. There are several things at our disposal. One is that we have a suit pending against the REIT in Los Angeles on all of these issues. So I think it would be fairly impossible for them to exercise their -- first of all, say there is a default before the end of the year, because I don't think we're going to get through the litigation before the end of the year. They -- they put a fairly arbitrary date on the -- on termination. They could have said it was next month or in 30 days or something like that. They have merely put a date in there so they could have something there. But in terms of our ending the leases on those hospitals, even if they were to prevail, and again, we don't agree with any of their default notices, it would certainly be well beyond the end of the year. It would be a long time away. The other thing I should let you know, on a lot of these leases, we have the right to buy the underlying land and facility from the REIT, and have that election and at renewals at other times can elect to do that. We have decided not to, but we can certainly do that.

So in your view it there is a very low likelihood you'll have to turn these hospitals over.

That's correct.

Glad to hear it. And just one follow-up for Biggs. I appreciate you walking us through the cash bridge. I think you are looking for 450 to 620 of cash at year end '07. I know you don't have a number out there for '08, but I would appreciate if you could just share your overall view for liquidity in '08. I would expect that cash balance number to trend lower, as I think you will still be burning cash and I think you still have settlement payments to make. So is there -- I mean, is '08 -- is there some capital raise event that you view at some point in '08, is there some level of cash that you get to in '08 that makes you uncomfortable and if I could go a step further, if you were to raise cash, is that more likely to be in the form of an asset sale or a debt or an equity raise? Thank you.

Well, I guess to start with, I don't want to give a specific forecast or outlook for '08. But I would expect that we would end the year this year with sufficient cash to where we have the cash to operate in '08 without having to go into our credit line, but the credit line that's out there is as an insurance policy. At this point in time I wouldn't expect having to use it. The low point in '08 would likely be the first quarter because that is when we pay down the liabilities that build up over the rest of this year, and it would be a similar kind of trend to what we had in the first quarter of this year. The -- as far as your broader question on capital structure, we're -- like I said we're satisfied with the liquidity that we have now with cash. We have the credit line there as an insurance policy should it in the future it be needed, although as I said in '08 at this point in time, I wouldn't anticipate that. We therefore, are comfortable with our liquidity position over the next few years. We don't have any debt maturities until 2011.

So there isn't any need to go and evaluate on any kind of a near-term basis where other sources of cash might come from. We are looking at efficiency of the balance sheet. We are look at whether there are things that we hold, land in excess of our requirements, etc. to generate additional cash, but beyond that, no plans. If the stars all align and it makes sense to do something sooner than 2011, so be it, but that is not where we're focusing our time. So --

Thank you.

best I can answer.

Thank you. Your final question is coming from Gary Taylor of Banc of America Securities.

Just before the bell. Thanks for staying on for so long. I did miss the first 20 minutes, so just move me along if you have answered this. But did you give an explanation or did you say what the uninsured discounts were this quarter?

No. We don't -- we stopped disclosing the discounts and the effective discounts because all of the corners that we're presenting now are on an apples-to-apples basis. The compact was implemented back in 2005 so once you got to the first quarter last year, everything on a comparative basis was after the effect of the compact.

So on a forward-base, then, we should expect to hear something about those only if they're materially different on a year-over-year basis in terms of dollars?

Well it's just at that point the pricing is all net of the compact, and so any changes in pricing would be on that kind of a net basis. Talk to and it will show up in our revenue numbers, and on revenue per patient day, et cetera, all on a constant basis. So any changes in our pricing will just be reflected fairly clearly and cleanly.

So the compact is derived on a percent of gross charge basis, right? It will flex with the gross revenue.

It varies and in some cases it is pegged to -- by example, the specific per diem or other rates that we receive from managed care providers, and other cases that -- as is the case of managed care providers, they may be pegging the gross charges. So as gross charges go up, there can be an effect on managed care pricing and on compact pricing. It just depends upon the specifics of each hospital, the market, et cetera, and how it operates.

Okay just a little difficult. We have been tracking the total write-off percentages. We'd like to be able to have that apples-to-apples. The only thing I guess I might suggest -- I think you guys have kind of -- have lead the industry in terms of becoming more conservative with respect to the revenue recognition, but not disclosing this and not disclosing the gross AR by payer really limits comparability of the bad debt to some of the other hospital companies. So I just offer that. You might consider it. But otherwise, thanks.

Well we'll look at the gross -- or the receivables by payer or by other category and whether we can add something there. As far as the compact goes, I think we have been consistent. There haven't been any big changes to go and talk to in any event. So I don't think you are missing anything. But we'll look at whether we can -- at least on one or two of these points you're making make some incremental disclosure going forward.

Thank you.

Thank you. Okay. Operator, I think that concludes the call?

I'll turn the floor back over to Trevor Fetter for any closing remarks.

There are no closing remarks. Thank you for participating in a long call, and we'll talk to you again next quarter.

Thank you this concludes today's Tenet second quarter earnings result conference call. You may now disconnect.