Tenet Healthcare Corp (THC) 2007 Q3 法說會逐字稿

Good morning and welcome to the Tenet Healthcare's conference call for the third quarter ended September 30th, 2007. Tenet is pleased that you have accepted their invitation to participate on 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. A set of slides has been posted to the Tenet website to which Management intends to refer during this call. It is recommended that you download these slides for use in the following Management references.

Tenet's Management will be making forward-looking statements on this call. Those forward-looking statements are based on Management's current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Certain of those risks and uncertainties are discussed in Tenet's filings with the Securities and Exchange Commission, including the Company's Form 10K and its quarterly reports on Form 10Q, 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 adjusted EBITDA, which are calculated in accordance with generally accepted accounting principles or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance. But is providing these alternative measures as a supplement to aid in analysts' analysis of the Company.

Reconciliations between non-GAAP measures and related GAAP measures can be found in the press release issued this morning and on the Company's website. Detailed quarterly financial and operating data is available on First Call and on the following websites: tenethealth.com, businesswire.com and companyboardroom.com. During the question and answer portion of the call, callers are requested to limit themselves to one question and one follow-up question.

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

Great. Thank you, operator, and good morning. Well, our performance in the third quarter was the best in several years, and all of us at Tenet are very pleased with our progress. If you look at the charts of key performance indicators we posted on our website today, it's clear that the trends in volume, pricing and cost control are moving in the right direction. There are other metrics we watch in areas like physician activity in the revenue cycle and they are trending positively as well. I'll start with patient volumes. Same-hospital inpatient admissions declined by 0.8%. This is a significant improvement over the second quarter's year-over-year comparison of negative 2.2%. More importantly, same-hospital commercial managed care volumes declined by only 0.6% year-over-year which is the best performance in this statistic since we began reporting it two years ago.

Many of you like to know how our business is doing outside of Florida and USC University Hospital. In the rest of our Company, same-hospital admissions increased by 0.1% and commercial managed care admissions increased by 0.4%. The trend in outpatient visits also showed improvement, declining just 1.4% in the quarter compared to a decline of 3.1% in the second quarter. The improving trend in volumes continued in October. Same-hospital admissions increased 1.0% in the month. You may remember that on last year's third quarter call I mentioned that October 2006 admissions were up 1.2% versus October 2005. So I'm pleased that we're up in 2007 against this tough comparison and off to a good start for the fourth quarter. Of course, since we're dealing with such small percentages I should point out that there was an extra weekday in October 2007 compared to 2006.

Adjusted EBITDA was $177 million, well above analysts estimates for the quarter and up more than 50% from prior year. This performance is impressive even on a sequential basis with same-hospital adjusted EBITDA up 7.9% for the second quarter despite the seasonal softness which typically reduces earnings from the second to the third quarters in our industry. With an EBITDA margin of just 8% we still have plenty of room for improvement but we're making good progress and I believe that our strategies are working. Good trends in nearly every line item contributed to this stronger than expected EBITDA. Pricing increases made a solid contribution to earnings growth. Some of the adverse trends that we were seeing in patient mix within managed care not only were abated in the third quarter but actually reversed themselves. Same-hospital net revenue per adjusted admission was up by 6.8% and up 7.4% per adjusted patient day.

An additional round of cost reductions helped our same-hospital revenue growth of 7.0% translate into growth in the bottom line. Tenet's same-hospital growth in controllable operating expense per adjusted patient day of 4.2% in the third quarter continues to represent one of the best cost control metrics in the industry. Bad debt expense was flat year-over-year at 7.2% although we had expected to be able to reduce it. We described in our investor day all the actions that we're taking to contain bad debt. Also in the quarter we made continued progress in clinical quality. Our CMS hospital compare data for the four quarters ended Q2 '07 stands at a new high of 92.5% which is well above our peers and the national average. As you can see on slide six of the presentation that we posted to our website, this measure extends the positive trends that we've achieved since launching our commitment to quality in the first quarter of 2004.

The next trend in government reporting is in a standardized measure of patient satisfaction. Tenet was an early volunteer in this program called HCAP, and I'm pleased that our initial satisfaction scores and overall hospital rating and willingness to recommend our hospitals already exceed the national average by 3%. Like all of you, we remain keenly aware of the challenges facing the hospital industry and our Company most notably high levels of uncompensated care and soft volumes. I feel today that our strategies to deal with those challenges are increasingly effective. We've positioned Tenet to capitalize on future trends in population growth, aging, obesity and other disease states as well as the trend in consumerism going forward. Our strategies from commitment to quality to targeted growth to our emphasis on physician relations to the improvements we've made in clinical IT and the revenue cycle, have all been designed to put us back on a growth track.

We're feeling much more confident about our performance outlook for the balance of 2007, based on our strong EBITDA performance and the breadth of factors that contributed to those robust third quarter results. Dave will provide more detail on our outlook for the near and intermediate term in just a few moments, but at a summary level I want to say that we're confident we can achieve adjusted EBITDA in the range of $675 million to $725 million that we provided in our second quarter call in early August.

Before I turn over the floor, let me briefly comment on some upcoming IR events. As many of you know, we've limited our investor relations activities in the past few years to holding our annual investor day in June, appearing at only one or two investor conferences per year and hosting a limited number of meetings in our hospitals and headquarters. Due to a recent increase in requests for in-person meetings, next week Steve Newman, Biggs Porter, Tom Rice and I plan to meet with some of our larger shareholders in New York, Boston and a few other cities. We will also make a presentation at the Merrill Lynch conference in New York on November 27th, and we will present at one or two other investor conferences in early 2008. Tom will begin scheduling these meetings this afternoon. So please give him a call if you're interested in meeting with us and we'll see if we can find a way to get together. With that, let me introduce our COO, Dr. Steve Newman. Steve?

Thank you, Trevor, and good morning everyone. I want to focus my remarks this morning on five key elements of our turnaround strategy that are showing positive results and have contributed to our improved financial performance in the third quarter. They are first, the effectiveness of our cost management initiatives. Second, how our targeted growth initiative contributed to the improvement we achieved in commercial managed care business in the third quarter. Third, the significant progress we're making in adding new doctors to our medical staffs, primarily by recruiting them to private practices but also by selective direct hiring, redirecting more of the business of physicians already in our service areas and attracting more admissions from the doctors we already have on staff. Fourth, the results we're seeing so far from the extensive initiatives we've launched to turn around our key Florida operations. And fifth, a few examples of success stories where hospitals such as Houston Northwest and North Shore Medical Center in Miami which were deeply distressed as recently as 18 months ago, have demonstrated remarkable improvements after embracing our strategies, implementing TGI and executing effectively.

Let's begin with our Company-wide cost management efforts. We accelerated those efforts in the third quarter, and they have produced significant results. The resizing of our work force within the hospitals resulted in the elimination of 1,275 full-time positions over the course of the last year. That amounts to a 2.7% reduction. A significantly larger delta than the 0.8% decline in total admissions over the same time period. We have also cut 208 full-time positions in corporate, regional and other support areas so far this year, amounting to about 7.5% of the total overhead jobs above the hospital level. This was achieved through layoffs, retirements, attrition and restructuring. All these job eliminations made an important contribution to restrain the growth of same-hospital controllable costs per adjusted patient day to 4.2% versus a year ago. Since some of the most aggressive actions were taken toward the end of the third quarter, the full financial impact won't be visible until the fourth quarter.

Also, we recently completed multi-year wage agreements for our union represented employees at our hospitals in California and Florida. These agreements cover several classes of employees including registered nurses, technicians and clerical employees. They provide for wage increases for these workers ranging from 5% to 7% annually over the term of the agreements. These wage increases were already substantially embedded in our overall financial assumptions for next year and beyond. Supply cost management also played a major role in our overall cost management success in the quarter. For several quarters we have been accelerating our supply cost management efforts through an expansion of our performance management and innovation group. As a result, same-hospital supply costs were held to an increase of just 2.6% per adjusted patient day in the quarter. Supply costs represented 17.3% of net revenue in the quarter, and our overall cost management continues to be exemplary.

Now let's talk about our commercial business. As Trevor mentioned, we are gratified by the sequential improvement in commercial managed care business we saw in the third quarter. As you know, commercial managed care is our most profitable business line. Over the past two years, 52 Tenet hospitals have used the targeted growth initiative in a disciplined process to make future business planning decisions. Those hospitals have all completed Phase I of TGI which identified the product lines that are most needed by a hospitals' community and have the best profit potential. Many have now progressed through Phase II of TGI in which the decisions made in Phase I are implemented. This implementation process is being carefully monitored and will continue through 2008.

The third quarter results demonstrate the TGI is working as we intended. Here are a few examples. During the quarter, we saw a 12.7% increase in commercial neonatal services, a 5.5% increase in commercial oncological surgeries and a 5.4% increase in commercial open heart surgeries. Not all of our targeted service lines were up in the quarter-over-quarter. Commercial neurosurgery was down 2.4% for the quarter, but this decrease has improved sequentially. As you know, open heart surgery has been a challenge for Tenet, particularly as a result of new competitors in certain Florida markets, and an overall decline in open heart surgeries in the wake of clinical and technological advances. Because it's now been a year since the opening of some of these new Florida heart programs, with the largest adverse impacts on Tenet, the 5.4% increase in commercial open heart surgeries we've reported this quarter clearly demonstrates that we are succeeding in capturing and maintaining market share even in this tough competitive environment.

Having said that, we realize that another new heart program is opening in January in the Palm Beach market. Initially we expect to feel some negative effect from this new competitor, but I am confident that in the relatively short period we will absorb the impact just as we have all the others. In summary, we are very pleased with our volume improvement in commercial managed care in the third quarter, which outperformed overall volume improvement. I believe that this success is attributable to two factors. the elimination of out of network situations we have negotiated with our managed care partners in recent months, and the improved mix we've seen in the services we have provided. This improved mix, I believe, can be credited in large part to the precise business line targeting achieved by TGI.

Now let's talk about our success in adding more doctors to our medical staffs. We know that the real key to our sustained future growth will come from more doctors admitting more patients to our hospitals. Of course, we've continued our traditional efforts to attract more doctors by improving both the quality and service we deliver, and Trevor shared with you the great progress we've made in those areas. More recently, we've also launched targeted efforts to expand our medical staffs through increased recruitment, redirection, relocation and to a lesser extent employment. In the third quarter we added 726 new physicians with active staff privileges. After taking into account normal attrition, the net expansion of our active medical staff was 370 physicians in the quarter, that's an increase of 3.4%. For the nine months ended September 30th, we added 1,562 new active physicians to our staffs, or a net expansion of 845 after normal attrition, that's an increase of 7.7%.

You may recall that we use a conservative definition for active staff status that requires at least 10 inpatient admissions or at least 10 outpatient surgeries per year which makes these increases particularly impressive. In the third quarter we also hired 35 employed physicians, mainly in Texas and our Southern states region. This employment of physicians is consistent with the plans we shared with you on investor day, in which we envisioned hiring 270 physicians by the end of 2010. At that point we expect our total employed physicians to number about 590. Let me reiterate that physician employment a Tenet is limited to selected geographies and specific situations where the employment model is considered essential for competitive reasons. I want to assure you that most of our volume growth will continue to come from redirection of admissions by physicians already affiliated with our medical staffs as well as recruitment and succession planning for existing medical groups.

As our new physicians and our rerecruited physicians ramp up, we expect admission in outpatient growth. The addition of many of these new physicians to our medical staffs comes as a direct result of the expansion and retooling of our physician relationship program. Beginning early this year, we added an outreach program to local physicians that previously did not practice at our hospitals. We continue to expand and improve both techniques and tools for our hospital leaders and PRP representatives to use in their daily activities and physician offices. In the third quarter we visited more than 5,900 physicians, an increase of 60% from the more than 3,700 visits in the third quarter of 2006. Included in these totals were 930 first-time visits to existing active staff physicians. As part of our expanded outreach program, we also visited for the first time 419 physicians that were not members of our medical staff. Once physicians join our hospital staffs, after appropriate credentialing and are told about the services offered by our hospitals we expect to see incremental volume growth.

Now let's discuss the actions we're taking to help our Florida market. Nothing has been more difficult for us recently than dealing with our challenges in Florida. Florida has traditionally been a very good region for us with a strong market position in several areas and our most concentrated geographic footprint. We are confident that it will be again. During the third quarter we took a number of actions to accelerate our turnaround in Florida. First, we hired a new Executive to lead the region. Marsha Powers joined us from Triad with a proven track record of building successful relationships with physicians, payers and community leaders.

Second, we consolidated our two market structure in Palm Beach and Miami-Dade/Broward into a single region under Marsha's leadership. This will permit us to handle certain functions at the region level that currently are handled by the hospitals individually. Thus generating economies of scale and helping us focus on regional business development opportunities and cost management. Third, we made tangible progress in stemming patient out migration in neonatology, cardiovascular services such as electrophysiology and rehabilitation inpatient admissions. We expect these efforts to accelerate in the fourth quarter and contribute to admission retention and growth as we move forward.

Fourth, we are addressing the critical need to add more physicians to our Florida medical staffs, especially those with large commercial managed care practices or those with demonstrated experience in capitation and caring for the geriatric patients. I expect to have good results to tell you about in our future calls. Fifth, we've accelerated our cost cutting efforts in Florida to align our infrastructure expenses with the realities of our current volumes. This alignment included our decision announced last month to divest North Ridge Medical Center in Fort Lauderdale. Given our many competitive disadvantages at North Ridge, the decision to divest that hospital is consistent with our intention to remain active managers of our portfolio. A strategy which will include periodic acquisitions and divestitures.

Sixth, we are successfully negotiating new managed care contracts in Florida that achieve not only good pricing but also the elimination of out of network situations for all of our hospitals. Some of these new contracts have been structured to include volume guarantees. This approach should contribute to tangible growth in volumes, as well as our market share over time. Even if the economics and demographics in South Florida remain temporarily stagnant.

Let me conclude by sharing a few of the individual turnaround stories we have within Tenet. I bring this up because sometimes these successes are not readily apparent in the aggregate numbers we report. The simple truth is that we have a number of hospitals which have built or in some cases rebuilt, great market positions and whose performance has improved dramatically even as our aggregate performance has sometimes lagged. Here are some examples of how we have renewed or maintained our competitive strength in individual hospitals and markets.

I'll start with our Philadelphia market. Not too long ago some of you on this call were questioning why we even still owned hospitals there. We certainly know that Philly is a tough competitive market, but the fact is we have made substantial progress in growing our market share, reaching more competitive reimbursement with our managed care payers and dealing with structural challenges in our two faculty practice plants. In the third quarter Philadelphia's admissions were up 3.3%, and year-to-date they're up 3.0%. Margin expansion at Hahnemann University Hospital under our CEO, Mike Halter and his team, and St. Christopher's Hospital for Children under our CEO, Bernadette Mangan and her team, has been dramatic. This reflects the powerful operating leverage inherent in our business model. In addition, the affiliation between Temple University and St. Chris that we announced last month should add more momentum to our progress in Philadelphia.

Our North Shore Medical Center in Miami had an increase in inpatient admissions of almost 6% in the third quarter. That is remarkable but not unusual for North Shore. Under our CEO, Manny Linares and his team, the hospital has seen consistent growth of 2% or more for the past 18 months. By contrast, however, from 2004 to 2005, admissions at North Shore fell 3.3%. Our Atlanta Medical Center under CEO, Bill Moore and his team, saw a jump of 8.5% in admissions in the third quarter, but its admissions have been growing by an annual rate of more than 5% for almost two years. This effectively doubled the rate of annual admission growth from 2003 to 2005.

Perhaps most dramatically, our Houston Northwest Medical Center under CEO, Drew Kahn and his team, saw admissions rise by 8.4% in the third quarter, which is entirely consistent with the more than 9% increase they've had over the past year. By contrast, from 2004 to 2006, admissions were down a cumulative 17.4%. Those are just a few examples of dramatically improving performance we are seeing in our portfolio. Obviously our goal is to have every single Tenet hospital growing consistently quarter-after-quarter. But I think the Philadelphia market, North Shore, Atlanta Medical Center and Houston Northwest examples should demonstrate not only that our hospitals are capable of producing consistent results but also that many of them already are.

So to sum it up, I'm gratified by what I am seeing in our cost management initiatives, our targeted growth and commercial managed care business, our efforts to add more doctors, the signs of progress in Florida and some dramatic turnarounds in a number of our hospitals. I believe the progress we saw in the third quarter in adjusted EBITDA, commercial admissions and net revenue for both inpatients and outpatients provide compelling, tangible evidence of the progress we have made and intend to continue to make in our turnaround. With that I'll turn it over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Steve, and good morning, everyone. Let me start by echoing the assessments you've just heard from Trevor and Steve. The third quarter demonstrated progress on a number of fronts. Adjusted EBITDA came in at $177 million for the quarter, an increase of 55% over last year, and an increase over the second quarter of 8%. Given that the third quarter is typically our weakest quarter given soft seasonal volumes in July and August this $177 million in adjusted EBITDA is a particularly notable achievement and positions us well for the full year. I'll return to this topic in a few minutes. Before I go further, I should note that the appropriate reconciliations to GAAP related to my comments are included in our release and the slides on our website.

Trevor and Steve have already discussed the favorable developments we saw on the volume front, so I want to go to revenues pretty quickly. The only thing I will say about volumes is that we have always said improvement would have its bumps. But if you look at the last two years, as shown on slides 17 through 19 on our website, and plot a statistical regression line against year-over-year comparisons of admissions, particularly commercial admissions and outpatients visits, you will see significant momentum developing. To me the critical message at this time is not about this quarter or any perfect view of the next quarter but rather that there is a trend developing and a series of actions underneath that trend which are taking hold. Progress has been and will be bumpy due to all the externalities and variables, but we believe the actions we are taking are the right actions to improve our results and that the trends are beginning to show this.

Now on revenues, mix between payer categories improved in the quarter with commercial managed care admissions trending more favorably than the trend in total admissions. Revenue was also supported by continued progress in commercial pricing, these combined to produce a 7% increase in same-hospital net operating revenues to $2.2 billion in the quarter. This top-line -- this strong top-line growth was a key to our performance and very gratifying given that volumes despite evidence of an improving growth trend came in weaker than we had anticipated earlier in the year. Cost reported adjustments contributed $22 million to the quarter compared to an adverse $10 million impact in the third quarter last year. The favorable impact of the current quarter is fairly typical of recent trends.

Turning to pricing, we experienced solid progress in all our key pricing metrics. Notable among these impressive stats were a 7.8% increase in net inpatient revenue per admission and a 9.7% growth in net outpatient revenue per visit. This consistent strengthening in pricing is clearly benefited from some of the favorable new contracts we announced in recent months. You should be aware that two contracts we signed and announced late in the second quarter with Aetna and Blue Cross of Texas were fully effective July 1 so the full impact of these contracts was visible in the third quarter metrics I just reviewed. Pricing was also favorably influenced by the approximately $32 million year-over-year variance in cost point adjustments and the effects of emergency department scoring and charge increases. We have some additional contracts we expect to sign in the fourth quarter which will further improve pricing next year. Combined with those already negotiated these additional contracts provide a credible basis for expecting continued robust commercial managed care pricing growth going into next year.

In summary we are very pleased with our continued progress with regard to pricing and are achieving results fully consistent if not stronger than the levels we had previously discussed as our objective for commercial pricing. Not everything in pricing that happened in the last few months is positive, however. Unfortunately the states of Georgia and Florida will reduce Medicaid funding to our hospitals by approximately $60 million in the aggregate on an annual basis beginning next year. This will absorb some of the benefit otherwise produced by favorable managed care negotiations and other price increases. We are not counting on it in any forecast but we continue to watch with interest California's attempt to address the issue of the uninsured. Although estimates have varied significantly based on the various structures proposed, the last iteration or estimate by us was that this would improve our end results by approximately $60 million if the reform was enacted.

We also have steady progress to report on the cost front. The summary level indication is on Slide 22 on our web. Same-hospital controllable operating expenses per adjusted patient day were restrained to an increase of 4.2%, this reflects overhead and supply cost reductions partially offset by the effects of volume loss and higher medical fees. Medical fees were up $15 million year-over-year but have been relatively flat over the course of this year. The Corporate overhead is down $27 million year-over-year for the third quarter reflecting our initiatives to control costs in line with a reduction of our business space.

We also have addressed the effects of a lower business space at the hospital level. As Steve Newman just reviewed we have recently implemented initiatives which are intended to reduce our hospital level, primarily nonpatient care, staffing costs by approximately $60 million on an annualized basis. As many of these actions were implemented only late in the third quarter savings and severance costs offset in that quarter with nothing falling to the bottom line. However, the impact on our fourth quarter is expected to be approximately $15 million. There are other cost initiatives as I have spoken about previously and other pressures which I will comment on in a moment.

Let me now update you on our costs and other initiatives. The benefits of these initiatives were all previewed as part of the list of detailed profitability enhancements we provided at our June investor day and subsequently updated on our second quarter call in August. Slide 23 shows how we laid these initiatives out at that time but more importantly Slide 24 shows the current estimates. The initiatives discussed at that point came in two pieces. An approximately $50 million commitment to cost reductions involving specific actions which we had fully identified as far back as April. When fully implemented by year end 2007, we estimated the continuing impact of these actions would yield $65 million to $85 million in calendar year 2008. Through the end of the third quarter approximately $43 million of these have been captured year-to-date with $19 million in Q3 and approximately $11 million of savings expected in Q4. We now believe the annualized effect of these will be in the $95 million territory. Meaning that 2008 and 2009 will benefit by an estimated $41 million of annual cost improvements relative to 2007 and related to these initiatives.

The second bucket of profitability enhancements include specific revenue initiatives as well as additional cost reductions. We've stated that these additional contributions to profitability could be quite significant, but since some of these initiatives are still in the planning stages we limited our commitment to a minimum of $30 million favorable impact in 2007 with an estimated annualized impact of at least $60 million to be contributed to EBITDA in subsequent periods. Let me emphasize again that these enhancements were independent of our volume outlook, meaning that these cost savings and revenue pickups are above and beyond what we expect to capture in scale economies from volume growth. Through the end of the third quarter approximately $36 million of these have been captured year-to-date, with $20 million in Q3 and approximately $37 million in benefits expected in Q4. We now believe the annualized effect of these will be in the $150 million territory meaning that 2008 and 2009 will benefit by an estimated $77 million of annual improvement relative to 2007 related to these initiatives.

The initiatives in this bucket include the recently implemented staff reductions Steve and I have discussed which comprise approximately $45 million in the incremental 2008 savings. They also include the benefits of ED scoring and the other revenue related initiatives we have previously discussed in this bucket. These are all estimated net of any related bad debt expense. Admittedly some of these initiatives are harder to trace through the revenue line to the bottom line effect but we believe these are reasonable estimates. Combining the two buckets of initiatives together, we are at $79 million estimated benefit year-to-date, with $39 million having benefit to the third quarter, and approximately $48 million estimated to be beneficial to the fourth quarter. The incremental benefit to 2008 and 2009 beyond what we expect to have captured in 2007 is estimated to be approximately $118 million.

Unfortunately not all this value has flowed to the bottom line in 2007 due to the offsetting increases in medical fees, bad debts and effects of lower volumes compared to last year. With volumes and medical fees beginning to stabilize these should be more traceable to the bottom line in 2008. We are, however, as I will state in a moment, in the process of our 2008 and three year plan, so there may be other costs or investor considerations which will influence the final result. Not included in the results above are the elements of our initiatives related to bad debts. Although we have had some success in these actions they have been overcome by growth in uninsured admissions. If uninsured admissions stabilize we would expect to also have debt yield from our bad debt initiatives.

Our bad debt experience for the third quarter has favorable and unfavorable trends. We continue to see rising numbers of uninsured patients and associated revenue. Uninsured admissions rose by 7% in the third quarter, and revenues from the uninsured rose by 22% or $30 million. As a reminder this increase in uninsured revenue is after the discounts applied under our compact. Beyond the effects of uninsured admissions growth, uninsured revenue was impacted by price increases and by increases in the emergency department acuity related to our ED scoring initiative. Fundamentally to the extent price increases or ED scoring effects uninsured revenues, when it becomes offset by bad debt expense so only about $0.12 of the dollar falls to the bottom line. So to that extent bad debt related to these initiatives is just an offset to an increase elsewhere on the P&L. The value of these is however in it's effect on insured revenues where there is a much greater bottom line effect.

The favorable experience this quarter comes with respect to balance after. As you know we have seen an increase for several sequential quarters of balance after which is directly related to cost shifting which moves increasing amounts of financial burden of healthcare off the commercial plan sponsors and transfer the payments responsibility to plan members themselves. We saw a stabilization of this trend during the quarter although keep in mind one quarter does not a trend make. We also continue to see one variable of bad debt expense over which we have some control, evidence continued and material improvement. I'm referring to our collection rates, where the multiple initiatives you heard about at investor day continue to produce tangible results. Through focused effort, we've been successful in raising self-pay collection rates to 36% from 30% a year ago and commercial managed care collection rates to 98% in the third quarter from 97% a year ago. You may have also noticed that charity care outpatient visits rose by 58.4% in the quarter, this was due to a new assembly bill that went into effect in California this year outlining new charity requirements and one of our Georgia hospitals that is experiencing an increase due to market needs.

Turning to cash flow and capital expenditures I would refer to you Slide 29 on the web. Capital expenditures were $179 million in the quarter, of which $175 million were in continuing operation, including $16 million in construction expenditures for our East Side Hospital in El Paso. Adjusted operating cash flow year-to-date is $82 million and for the quarter came in at $93 million. There are a few things to consider in evaluating cash flow for the quarter relative to our expectation for the year. First, the $22 million in cost reported adjustments in the quarter had the effect of increasing receivables. Secondly, in terms of activity which does not recur in the fourth quarter we have the insurance premiums which are paid in the third quarter of $14 million, and we had a receipt related to the sale of the Philadelphia HMO of $12 million for a net $2 million outflow. Finally, interest payments are high in the quarter at $123 million compared to approximately $82 million of gross interest payments in the fourth quarter, including $15 million of interest related to last year's global settlement.

If you take these into consideration third quarter cash flows within the range which is reasonable for the income generated in the quarter. Relative to the third quarter then the fourth quarter should be approximately $43 million better than the third just for the $2 million in effects of the nonrecurring items and the $41 million difference in interest payments. In addition, the third quarter does not yet reflect the working capital initiatives currently in place. The two key elements of this which are targeting for the fourth quarter are the reduction of accounts receivable days by one as driven by our bad debt collection initiatives, and an increase in accounts payable. The payables growth is expected to be driven in part by normal fourth quarter buildup and also by restoring our payables processing parameters to be more in line with our standard procurement terms, which would expect to increase days in accounts payable by as much as four. We expect these net of other variables to favorably affect the fourth quarter relative to the third by more than $62 million with $102 million being in the middle of the range.

The normal increases in accruals for incentive and stock compensation in our 401K match benefit, benefit both the third and the fourth quarter, so are neutral to a quarter-to-quarter comparison. They are however reflected in the cash walk forward included on Slide 30 on our website so that you can see a more full view on a more full projection of the fourth quarter cash flow statement. You can read the press release and the 10Q to get more of the details but we ended the quarter with $655 million in cash and cash equivalents. You may recall that I have talked about Tenet being increasingly focused on improving return on invested capital. We also said on our second quarter call that we will be making a thorough review of our balance sheet to ensure that it was efficiently structured. That process is making good progress although I am not yet in a position to provide details on our findings beyond what I would just described about our near term working capital targets. We intend to provide a detailed analysis when we share our 2008 outlook with you in mid-to-late February but I do believe there is significant opportunity.

It is important, however, for me to reiterate that irrespective of this effort we do not believe we are capital constrained. To the extent we are constrained it is self-imposed. It is first to insure that our investments are sound ones which enhance shareholder value through improving our services and capabilities. And secondly to maintain a focus on achieving positive free cash flow. To the extent this is constraining is just reflective of being a good steward and it has a greater effect of long-term new development and new markets than on maintaining a sound level investment in our existing facilities and markets. Also as I have said before, and as is reflected in Slide 31 on our website, we believe with the higher level of spending we are making this year we are caught up with the level of spending of our peers over the last three years.

Before concluding let me offer a few thoughts on the outlook for the remainder of 2007, the implications of the progress demonstrated in our third quarter performance for our longer term outlook. Slide 32 on the web presents the figures I will be referring to. At the end of our second quarter we refined our 2007 outlook to a range of $675 million to $725 million for adjusted EBITDA. With adjusted EBITDA of $535 million for the nine months ended September 30, 2007 this would require to us achieve $140 million to $190 million in adjusted EBITDA in the fourth quarter to produce results within that range. With the $177 million of adjusted EBITDA and the seasonally weak third quarter and with the support of recently implemented hospital level cost reductions we remain comfortable with our prior EBITDA outlook for 2007. We might have been tempted to move higher within that range but we are choosing to remain conservative primarily due to the fourth quarter effects of wage increases, the unpredictability of mix and admissions levels which are modest relative to our prior expectations.

On volumes, at the end of the second quarter we expected to have second half admissions growth of 0% to 1%, and outpatient visits of a minus 0.5% to positive 1.6%. Although there was a market improvement in the third quarter there was not enough pace to maintain that expected level of growth in the second half absent a significant swing in the fourth quarter. At this point we would expect the fourth quarter to have admissions growth from a negative 0.5% to a positive 0.5%, and business growth of 0% to a positive 1% over the prior year fourth quarter. Because of the additional cash realized in the third quarter from life insurance and other sources we now also believe we can achieve a year end cash position within the range of $530 million to $670 million. We now project cash from operations of $280 million to $360 million for the full year. To be in this range we will need to improve our performance with regard to working capital from what it was at the end of the third quarter. As I said, in addition to normal seasonality of interest payments, accruals and account payable growth we are targeting improvements of both days in receivables and days in payables for the fourth quarter.

Outside of expected improvements of working capital, year end outlook for cash is without dependence on the balance sheet improvements I mentioned a few minutes ago. We have also factored a significant pickup in capital expenditures in our year end cash forecast. While certain delays reduced our CapEx in recent quarters we expect CapEx to rise to the range of $235 million to $285 million in the fourth quarter. On the longer term, our intermediate outlook is still much as I described it in the last conference call. Slide 35 on our website shows the walk for 2007 to 2009 as I last presented it. You may recall that in last quarter's call I put the range of risk at 0 to 100 million. Since that point in time we've had one significant risk or negative event materialize. That is the Georgia and Florida Medicaid reductions of almost $60 million I referred to earlier. To much lesser extent we also have had an unexpected increase in employee benefit costs in California projected for 2008 which is more than offset by increasing yield on our other initiatives. Volume enhancements from transactions such as the Temple Children's Affiliation also create lift for the longer term.

We're currently in our detailed annual planning process. We will want to complete that as usual with our final Board approval in December before we give more specifics as to 2008 and 2009. While we are giving guidance on 2008 at this time, I would ask you to remember that we expect to be making significant progress for 2008 toward the 2009 objective. This is supported by the annualized effects of our core and upside initiatives including the $60 million in reductions in force we mentioned earlier. As I've said on an annual on basis -- on an annual basis, we expect to generate $100 million or more incrementally from these efforts annually in 2008 and 2009, over the estimated $127 million amount we're on a path to achieving in 2007.

Also, comparing 2008 to the fourth quarter of 2007, you will need to remember that merit increases are substantially given in the fourth quarter, so the first three quarters of 2008 will see price increases without corresponding growth in labor costs compared to the fourth quarter of this year. I will also repeat what I have said in the past that 2009 is not an endpoint and that we continue to lift earnings and return on invested capital in the future by additional efficiency, but more importantly by the benefits of the estimated 40% effective margin from volume growth expected to continue beyond 2009.

So to summarize briefly, our results, particularly on volumes, have been and will likely continue to be bumpy but we do believe there's a positive trajectory developing. We showed real progress on volume and pricing and took significant cost actions in the quarter. We remain focused on mitigating the demographic and external pressures on bad debt expense through positive action, and we are driving on cash from return on invested capital as a key indicator of shareholder value growth. Let me now turn back to the operator for questions.

Thank you. (OPERATOR INSTRUCTIONS) Callers are requested to limit themselves to one question and one follow-up question. We'll pause for just a moment to compile the q-and-a roster. Thank you. Our first question is coming from Adam Feinstein with Lehman Brothers.

Okay, thank you. Good morning everyone.

Good morning, Adam.

Thank you for all of the details there. The slides were very helpful. I guess I just want to go through the pricing. Obviously a big number there. Sounds like you guys have made a lot of progress, but just trying to reconcile bunch of things I guess you guys talk about your aggregate managed care portfolio being 3.4%. I know there's significant difference between the managed care government and the nongovernment piece but certainly just trying to reconcile as we get back to a 7.8%, at the same time as we think about more self-pay patients coming through, where the revenue dollars are much higher, that would also skew the numbers. And then just at the same time just from backing into some of the numbers from your 10Q filing just looks like the Medicare/Medicaid revenue per admit were up pretty significantly.

I know you have the dish payments and the prior period cost report settlements, but once again just trying to reconcile all that. And we saw some improvement in pricing at the end of 2005 and the beginning of 2006 and it slowed down some. So I just wonder whether there was some temporary issues that may have brought pricing down in 2006 and early 2007 that maybe you improved, maybe that was some of the contracts you were talking about? But a long question there but certainly just wanted to get all of the details. Thank you.

Well I think I'll give you -- this is Biggs, Adam. I'll give you a brief sort of response to a fairly complicated question, set of questions. I think that the primary influences you're looking for to explain this year third quarter over last year are that in the aggregate there is about a 2% positive effect from the ED scoring and charge increases, and then the cost reports are about a 2% influence year-over-year. So that would, if you will explain, if you will the size of the overall increase. Now having said that, since you asked about nonrecurring, the cost report was a negative number last year, positive this year. So that that degree of swing was certainly influenced by that and might not recur at that magnitude, but the ED scoring and charge increases are more recurring in nature.

Okay. So just if I can follow-up, so how do we think about pricing going forward then? I guess with-- there're a lot of different variables that we outlined there. What are your thoughts in terms of some of the different components of the pricing? I guess I'm just trying to get a sense in terms of managed care versus nonmanaged care in terms of an outlook there? Thank you.

Well I think that on overall pricing it's more or less -- I don't want to get too far into projecting 2008. We've said overall we expected to have managed care pricing lift on the commercial side of $70 million in excess of average or normal inflationary trends on the cost side going forward, so we expect $70 million lift over the next two years on the government side, we disclosed in the Q that we expect 3.5% of price increase for fiscal '08 or $69 million, and that's on the inpatient side. And on the outpatient side, we said about $15 million of lift. So I think that's about as much as I can give you in terms of breaking down detail at this point in time. We'll do more when we give our outlook for 2008 in February.

Sure. I understand. But for the fourth quarter guidance I just want to make sure was following you. Because you said about flat volume growth and overall revenue growth of 3% to 4% so that would imply about a 3% to 4% pricing number for the fourth quarter which is a little bit lower than what you had here in the third quarter?

I think that the pricing growth would not be the same in the fourth quarter. We will get pricing growth on the government side on the commercial side it would be more moderate.

Okay. Okay, thank you very much.

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

Thanks and good morning. I just want to follow up a little bit on the pricing one more time maybe in another way. Commercial -- and maybe you could break down commercial, Medicare and Medicaid revenue per inpatient admission? If you have that data that would be very helpful.

Well we used to disclose commercial pricing. We stopped doing it, Ken. Not because it wasn't interesting information, but because it effectively was getting played back to us in our negotiations with the commercial payers, so we don't do that breakout any more. You can, from the release and from the statistics, drive some of your own detail, but we don't break it out any more for the reasons I just said.

Okay. Understood. And I guess my follow-up question, in terms of the applied EBITDA range in 2009 I'm not sure if you provided an implied capital spending range in 2009 but I guess the question really is do you think you'll be free cash flow positive by that point in time or do you think your CapEx is going to continue to ramp up relative to your EBITDA trend?

No, I do not expect CapEx to continue to ramp up. What we said previously was that after 2007, we would go down to what we'd consider to be more normal levels and have said that's in the $600 million to $650 million level annually. We could flex it down below that level if we needed to, but that would also be on a par with our three year -- last three year average which as we said would be on a par with what others have spent over the last three years. So having given specific guidance for 2008 or '09 but have said that we would expect it to go down to nominal levels and put that at $600 million, $650 million level. Obviously we'll update that more specifically when we give 2008 guidance. And if -- we haven't said when we'd be free cash flow or what to expect but if you generating $1 billion to $1.1 billion of positive EBITDA and you have $400 million or less of interest, then that covers $600 million or so of capital.

Sure. And Biggs did you talk about the impact within this forecast of the severity adjusted DRG system and the gain? I mean that should be a positive for you, but I'm not sure if you've already broken that out for --.

It was somewhat implicit in my response to Adam a second ago, and it is reflected in the 10Q that our estimate currently for fiscal '08 on inpatient Medicare is 3.5%. Now that's an estimate. We don't know for a fact what ultimate DRG classifications are going to be in terms of how they're actually applied and how that's going to affect mix from a revenue standpoint. So if the government is right, in their expectations of what this was going to do, then the number may in fact be higher. At this point in time we're just having to make estimates.

Okay thank you.

So 3.5% is what we have disclosed in the 10Q.

Thanks.

Sure, thank you, Ken.

Thank you. Our next question is coming from Sheryl Skolnick with CRT Capital Group.

Good morning, Sheryl.

Good morning. And thank you for the detail and the hard work that obviously went into this and I promise not to nag you anymore about cash flow -- about the cost reductions. You've obviously put a period at the end of that sentence and I know it's going to continue. My question, however, gets to the heart of what's probably on people's minds which is what -- why should we think that the gains that you showed this quarter are sustainable? What momentum, and I know your presentation is geared towards that, but what specific momentum points or catalysts can we look towards to say, okay, we can maybe string together two or three quarters of, this quarter's flat, you go through flat to get up saying Tenant and up in admission in the same sentence is novel? But what makes that a regular occurrence? What makes the positive EBITDA comps excluding one-time items like the prior period cost reports of uncertain size, what makes that all sustainable? What's the catalyst, what's the momentum here? Is it the new capacity that's opening? Is it the doctors who you've just hired get traction this quarter, next quarter? What is it?

Sheryl this is Trevor. Why don't I start with that and then I'll ask Steve and Biggs if they have anything to add. I guess I would just make two points. One, and it's one of the reasons that we thought it would be helpful to provide these slides to accompany the call, is that our performance in the third quarter was fairly broad based, and if you look at trends going back a few quarters it's just -- many of these drivers are part of a -- an ongoing trend. It's been a little difficult to see that sometimes on some of these quarters it was not apparent, and when you look at just the statistics, sometimes it's not apparent that there are improving trends but I would emphasize looking at trends, number one.

Number two is that many of these trends we believe are driven by fundamental activities that we're engaging in. So we've been talking for some time about the efforts to first improve our relations with physicians, the improvement in physician satisfaction we've measured the degree to which we've targeted certain physicians, ones that have a disproportionate amount of managed care business to add them to our medical staff, how we've been very purposeful in the specialist and the portfolios of business of physicians that we attract. The degree to which we've emphasized service lines through the target growth initiative, and how the service lines, as Steve mentioned, are showing growth. Sort of every initiative you go through, whether it's the managed care or whether it's in the revenue cycle or it's clinical quality driving consumer choice towards our hospitals, the degree to which we've obtained these centers of excellence recognition that we've talked about on many calls, all of those things were designed to drive these trends and we believe that that is what is behind the improvements.

I would say that there are fundamental factors at work that we've worked very hard to drive, and we are seeing continued improvement one quarter to the next, and this quarter is evidence of that. And Steve and Biggs, would you like to add anything?

Let me just follow up a couple of points, Trevor made from the quality and from the physician perspective. It's very interesting that as we are involved in more managed care renegotiations that we're able to embed in those contractual agreements a pay for performance, where conceivably we get a bonus based on specific criteria that we satisfy in subsequent periods of the contract. So, in fact, all the investment we've been making is now coming to fruition from that perspective.

Second, with respect to the attitudes of physicians, as we're going out and our PRP representatives are meeting with physicians who have not previously had membership on our medical staffs, we're finding them really embracing the service improvements, the values and our clinical quality initiatives, and therefore, an interest to join our medical staff and to begin to refer outpatients and inpatients. So I think a number of those particular initiatives are beginning to bear fruit. Finally, as we've improved our targeted marketing, both in terms of the patients as well as physicians, we're seeing service line call to actions that is resulting in tangible business, especially in the commercial payer line to our hospitals.

Yes I-- as Biggs-- I think that covered most of it. I would add though that certainly the initiatives on which we've had considerable progress I think demonstrated they're working to date are going to continue to benefit us, and as I said, there's 100-- over $100 million of incremental benefit on those in 2008 relative to 2007, so the continued execution there I think is going to yield improved results. You asked about capital, and certainly if we didn't think that capital was going to generate additional returns we wouldn't invest it, and so we do expect to get yield from the investments we're making. And then I don't know if I mentioned, but arrangements like the Temple program, which haven't shown up yet, are also going to provide lift going forward. So it's a lot of fronts, a lot of actions, as we've just discussed, and certainly to us looking at the trends underneath we believe that the trajectory is there to sustain improvement. There may be some ups and downs in the process, but the trend is there, and we're completely lined up on making this get better and better.

So what do you say, as a follow-up, what do you say to criticism that I know is out there and that I'm surprised you weren't asked about already this morning, that you spent $2.4 billion on capital spending in your facilities over the last I'm not sure how many years, I guess three or four, and the best you can do is flat? So when do you start seeing these returns?

Look, we've only taken three questions so far, so there's still plenty of opportunity for people to ask those kinds of questions. But we have, if you look at the graph showing the capital expenditures per bed, it reveals a story that I think those who've have watched this turnaround for a long time have observed, which is that we did constrain capital in the years leading up to the global settlement. I think it's important to remember that the global settlement with the D.O.J. was only in Q3 of '06. And since that time, we have increased spending to a level that is competitive as measured against the capital expenditures per bed over the previous two years by Triad and HCH, pretty much the best benchmark that we have available. So we think it's the competitive level.

When do we see the return from those? As you know we've talked about on previous calls much of that recent spending was in equipment and services that are part of the targeted growth and that have recently been installed. They're big physician satisfiers. So we've seen it turn up in leading indicators like physician satisfaction, I think we're seeing the benefit in some of these improved admission statistics that we have but we take the returns very seriously. We monitor them both before the fact and after the fact, and we believe that they will materialize.

Great. And I would argue, I don't think you'd get your Aetna contracts, your pay for performance contracts, your Temple agreements, your improvement in operating results if you hadn't spent that money. So maybe that's the answer, too.

I think our physicians would agree with that statement.

Thanks so much.

Thank you. Our next question comes from Tom Gallucci with Merrill Lynch.

Thank you very much. I guess first question was just about the physician side of things. You talked-- you showed a little-- you showed some improvement on the admission side. You talked about net new physicians and your targeting efforts. You used to talk a lot about splitter physicians and sort of the trends you were seeing there in winning some of those back or more of their business back? Do you have any update or metrics that we can point to there to show progress?

We do, Tom. This is Steve Newman. On those physicians that we visited in the quarter, their total admissions were up 2.1% compared to the same physicians in Q3 '06. We've sort of deemphasized that element a bit, not only in our reporting, but we're still continuing to visit those doctors as we extend the outreach to physicians who we haven't visited before, who have staff privileges, and physicians we haven't visited before who don't have privileges. But we are continuing to work the splitter approach, and we believe that along with expanding our medical staff, consistent with our TGI initiatives is the key to getting positive admission and outpatient growth going forward.

Okay. Thanks. And then maybe just as a follow-up, a macro question, you mentioned active managers of the portfolio. I guess as we sit here today, do we sort of see the same portfolio in place, six to 12 months from now, or should we expect that there maybe could be some tweaks along the way to try and maybe whittle down some of the underperformers and maximize your energies elsewhere?

Well, Tom, you have to remember today's underperformers could be tomorrow's outperformers. I think Steve's example of Philadelphia is a perfect example of that. We had -- I think the conventional wisdom about the Company over the past several years is included in taking whole geographic regions and carving them off and pushing them into the sea. And that has-- that would have proven to be a bad strategy so I think you should expect the portfolio to look very similar except for the divestitures we've previously announced, six to 12 months from now.

Okay, well thanks a lot.

Thank you. The next question is coming from Darren Lehrich of Deutsche Bank.

Thanks, good morning, everyone. My questions' regarding Florida, you clearly have taken some pretty definitive steps down there. I guess my question really is just at this point what kind of visibility do you think you have on volume growth in Florida and I did hear you mention that you've struck some contracts with volume guarantees. So would like to just get your thoughts on how you're-- you are structuring contracts and what kind of visibility you think you have? Thanks.

Well, this is Steve. I would say that we're being conservative in terms of our communication regarding the recovery of Florida. I think that our Management changes and our infrastructural cost realignment as well as the structural changes of how we organize our business down there are beginning to take hold. I think that the first thing we'll obviously have to do is to make sure that we stem the out migration, as I mentioned in my prepared remarks. That was a significant drain on our business in a number of different service lines. So those activities should yield fruit very early on.

With respect to expanding our medical staffs, not that we'll always update this, but we added 48 active staff physicians to the medical staffs in Florida in the third quarter. That's net of attrition, and that also does not include the hospital-based doctors. Of note, we changed out six emergency department contracts to improve throughput in customer service in our Florida hospitals in the third quarter. And obviously with those changes in contract services, there's coming and going of physicians. But expanding the medical staff as was done in that quarter will in subsequent quarters result in new admissions. I think you'll see us gradually improve from a year-over-year comparison perspective in many of the service lines as we mentioned we will probably take a dip open heart in the first quarter of '08 because of a new program opening in Palm Beach County. But I'm confident over the next three to four quarters we'll begin to see a decrement in the volume losses, culminating eventually with a positive year-over-year growth.

Thanks for that. Then my follow-up here is just related to the quality date that you've been talking about and then published today in your presentation. And I guess just the bigger question is how are purchasers responding at this point to that quality data? I know you mentioned this before as an important part of the strategy. I just want to understand how employers or managed care payers are directing volume based on these statistics.

Well the-- Steve and I and others have made an effort to get closer to our largest customers in the managed care arena and all of them take this type of data very seriously. They are spending, whether it's [Ednet's] United, Cigna, whomever, they're spending tens of millions on their own quality programs. They understand that ultimately one of the best tools for reducing costs is to direct their own customers, their patients to high quality physicians and hospitals. So when you talk to them, I think it's one of the biggest areas of discussion, and it's something that's incredibly important to them, and these distinctions that we have built are real. The government measurement is the one that is consistent across all hospitals in the United States, so that's the one we put in the slides, but there are others that are unique to the payers in which we perform equally well.

Great. Thanks very much.

Thank you. Our next question is coming from Jason Gurda from Bear Stearns.

Thank you. I had a question on, or at least starting with the Medicaid cuts that you expect, $60 million reduction in Medicaid cuts in 2008. How-- could you explain what's happening there and how certain that those cuts will go into effect?

They are certain. It's not the easiest thing to explain in the world. In the case of Georgia, which is the bulk of them, they did an update to their cost to charge ratio, purposely calculating out [liar] payments. They've been using ratios which go back to 2000 and updating them to 2006. There's an update to the Medicaid grouper which designates payment by case. That's the larger piece of this, which reduces it by about $36 million. And then they had to change to the State's indigent care trust fund, so a dish program which affects about $7 million. So that's the three pieces. As I said, it's not simple to explain.

And you said which State was the biggest impact?

Is the cost of charge ratio combined with the grouper.

Okay. And looking at I think this year you've had a pretty good year with the cost report adjustments with about $50 million so far. Do you have any visibility into those gains into next year, or are we going to be facing more than $100 million pricing headwind?

Well, the-- we have not projected that they would continue. As we have gone through time, our cost reports have become increasingly accurate. We settle them favorably, and as a result of that, we adjust to the provisions on the reports settled and on the outstanding reports based upon historical settlements. On that basis the provision, if you will, for cost report adjustments has been declining over time. We may well see additional cost report positive adjustments in the future. It's possible to have negative ones as well as we noted third quarter last year it was net negative, but would not expect it to be in the magnitude that we have experienced this year.

Okay. Thank you. And congratulations with the improvements in the volume so far.

Thank you.

Thank you. Our next question is coming from Matt Ripperger from Citigroup.

Hi, thanks very much. Just in your '09 guidance it looks like you're assuming that inpatient admissions will improve to about 1.5% growth annually, contribute about $105 million of the incremental EBITDA pickup. Can you just comment is that -- is the relative improvement versus current trend solely a result of what you're doing strategically and therefore within your control? Or is it assuming a broader return to a more normalized growth trends for the broader industry?

Well we will, I guess first kind of-- we'll have to update on our volume expectation for 2008, 2009, once we get out to February, but certainly you're right, as we laid it out last, it was 1.5% per year but that was not based upon any real shift in macro level trends. That was based upon our actions to go and increase volumes based upon sort of normal demographics and features in all of our markets. Certainly there is opportunity as you go out further in time for demographics to have a bigger effect but that's not always assumed that in time period.

So we shouldn't assume that the inclusion of that slide in your presentation today is a reiteration of that? You're going to revisit it again in February?

Correct. It was a restatement of what we had described before. The only thing which represents a substantive kind of update was the Georgia and Florida Medicaid change. However, there's lots of other updating that will ultimately have to occur. What is the roll forward effect of the initiatives? What are all the other variables, how do they play out, and how does the, by example the Temple affiliation agreement affect volumes? How does the Stanislaus acquisition in California affect volumes, so there will be a number of moving parts at the end of the day relative to the pieces that were described above on that particular slide. But it's still provided, I think a meaningful reference point in terms of what we're targeting for 2009.

Great. And my follow-up question is if you could provide a little update on where you stand with the U.S.D dispute, right now?

Yes, since that is a matter under litigation I'm going to ask our, General Counsel, Peter Urbanowicz to answer that question. Peter?

Thanks. Just to refamilarize the other callers, as you know the land that we-- the hospital sits on is leased from the University of Southern California and last August, August of 2006 they filed a lawsuit to terminate that ground lease and an operating agreement that we have with them and compel us to sell the hospital to the University. We obviously strongly dispute the University's claim to a default and their right to buy the hospital from us. We tried to move to swiftly resolve the matter by compelling arbitration which we think was called for under the lease. It's in State Court right now.

The State Court trial judge and the Appeals Court thought that their narrow issue of a default allegation could be heard in State Court so to move this matter along more quickly we decided to drop the arbitration request and have this case heard in State Court. This week we will file a motion to dismiss the lawsuit and a counterclaim for money damages against the University. We've obviously said since the suit was filed that the litigation is really not in the best interest of the University, and certainly not their doctors. We've been committed to restoring an amicable relationship with the University which we've had for 25 years but it does take two sides to build on that relationship. So at this point we're just going to continue to pursue a dismissal of this lawsuit but ultimately we're committed to having an effective partnership with the University.

Great. Thanks very much.

Thank you. Our next question is coming from Matthew Borsch with Goldman Sachs.

Hi, thanks for taking our questions. This is Shelley Nall in for Matt Borsch. Our question is regarding two of your markets, Southern California where we've seen some of your competitors either having to close hospitals or filing for bankruptcy protection recently, and then Georgia with the regulatory changes you've mentioned leading to the increased charity care for example and the tougher Medicaid outlook, I was wondering if could you speak to the challenges you see in these two markets? And as a follow-up how addressable are these challenges?

Well thank you for the question. With respect to Southern California as you know there are a number of pressures on hospital operators in Southern California. And some of the hospitals in the Los Angeles area specifically have undergone a dramatic expansion, having to serve the uninsured and indigent patients especially in the emergency room setting with the closure of some of the County hospitals, therefore those pressures have really constrained the bottom line for many of those hospitals. And therefore you're seeing some file for bankruptcy protection or some actually changing ownership. We continue to pursue our own strategies in Southern California with three hospitals in Los Angeles, five in Orange County and two out in the desert in the Coachella Valley. We are executing along all of our initiatives including the targeted growth initiative which began in Southern California, as well as the physician relationship program minus one significant issue, and that is because of state law in California, we're not allowed to employ a physician directly. So it's more of a recruitment, redirection and expansion of our existing medical staffs from that perspective.

We're continuing to invest capital to improve technology to roll out our clinical systems to add things like centralized scheduling to make it easier for our doctors to order those things, and additionally, we're making some small acquisitions in the Southern California market in a very selective way, in areas such as imaging as well as ambulatory surgery centers. I think that's going to both align ourselves with our existing physicians, create bridges to new physicians, as well as improve our revenue stream, and in a couple of instances actually create much needed capacity within our hospital operating rooms. By shifting some of that patient to freestanding outpatient centers. So we're very active in California in terms of expanding our reach, not only to doctors but alternative settings. Biggs, you want to comment on Georgia?

Well, I -- as far as the challenges in the markets, I think that we have plenty of opportunity still to succeed in Georgia. I think that these changes in the Medicaid situation may not be completely evenly distributed. We don't have full insight, but we think that we're still well positioned there. We're still investing in facilities and expect continued growth. So certainly don't like to see the loss of revenue, but it doesn't severely affect our view of those facilities, and their ability to contribute to our success over time.

I'm sorry, just to clarify, it looked like the outpatient surgeries or the outpatient volumes specifically in Georgia that were provided via charity care have really increased during the quarter. I'm just wondering if that's something that's going to be ongoing or is there's anything--?

Okay on the charity care in Georgia there was a change in a market dynamic there in one of our facilities that had to pick up quite a few patients that were no longer covered by a -- another facility in the area. That may change over time as the overall services provided by others in the area change. So I don't know that I would project it as saying it's continuing, but certainly it's going to continue for awhile.

Thank you.

Thank you. Our next question is coming from John Ransom with Raymond James.

Hi, good morning. At this point, how would you slice up your portfolio in terms of hospitals that are cash flow and stand alone in terms of hospitals that may or still be cash flow negative and represent somewhat of a drain? What are the rough percentages there?

Well, I don't have the percentages on what's cash flow negative versus what's positive. I think that there's -- I will say there's only a very small number of facilities which don't have positive EBITDA at least excluding Corporate overhead. So by and large our facilities are contributing at least an absorption at that level.

Okay.

Then the question becomes whether or not exactly where they are now but where do we expect them to be. Obviously we're investing heavily in 2007 so there's more facilities that are negative cash flow based upon that investment today than we could expect in the future years where I've said that investment will go down. So kind of consistent with Trevor's comment we think the facilities we have are ones which, whether or not they are providing incremental value today on a specific return basis will overtime, and that's why we have them in our portfolio.

Sure. And I have to say you guys have done a terrific job this quarter and the progress is evident. My other question is, you guys have kind of snuck out a little bit of cash in some of these bizarre little ways including life insurance proceeds. Over the next 12 months are there going to be any little cash kitties that come to bear that will help your cash balance? I know you're rolling out big assets off this point, but other little things you're doing to bring cash back into the till?

Well as I said in the call we're looking at exactly that. We are focused on driving -- increasing return on invested capital, have a leaning-- a leaner balance sheet, and that does result in having a greater cash balance. It's just a little early to say exactly what those actions are going to be. We're rolling those up as a part of our 2008 planning process and would expect to then communicate exactly what that looks like when we get to the fourth quarter call in February. But I think I said in my comments I do expect it to be significant. I think that there's opportunity there. And yeah, you saw some small indications of it, in terms of the actions we took this quarter and the things we're doing from a working capital standpoint, projected for the fourth quarter.

Okay thank you.

I'm sorry, but we only have time for one more question. Our final question will be coming from John Ransom.

No, operator. We just --

Sorry, Rob Hawkins from Stifel Nicolaus.

Thank you for including me. I had a question about California. There's some legislation obviously with the uninsured but also with the earthquake changes. Have you guys been able to look at the legislation as it's been proposed and how might that change your CapEx spending that you had earmarked for the earthquake CapEx fix-up in 2009?

Well, certainly we have been watching it. I can't say we have priced out or estimated exactly what the latest iteration or discussions might have in terms of an effect on our seismic expenditures. At investor day we did lay out what the anticipated timetable was at that point in time for our spending. That certainly ad some flexibility to it even based upon the existing law, but as they modify it certainly there's an opportunity to extend some of that out.

We've often wondered or questioned whether the law would stay in place exactly as it's written because it does present a tremendous burden on many of the hospitals in California, not ours solely that there may not be the best use of capital from a state perspective. There's also the constraints on the number of firms there are available to do that work and there's high inflation being experienced. So for all those reasons I think we're not surprised to see further discussion of deferral or relaxation of the requirements. But as to the various latest iteration we haven't priced it out, but, yes it would have some positive effect.

And then you've mentioned Aetna and Blue Cross as being contracts you guys have been able to participate in. United Health has talked about just wrapping up negotiations with something like 1500 hospitals for kind of longer term three year type of commitments. Were you guys participants in that, and what might that mean for you, pricing wise?

We are concluding our negotiations with United Healthcare, not part of any 1500 hospital consortium or anything like that, but we're pleased with the tenor and the direction of those negotiations and they have been very, very positive about our quality initiatives, and are embedding some of those issues in our next multi-year contract. And we'll look forward to bringing those to conclusion and executing them in the fourth quarter.

Okay, so that might be an announcement in 4Q. And when you say quality initiatives is this like an add-on type of payment you might be able to get on a base rate?

Yes.

Okay thanks. I'll jump off. Appreciate you including me.

Okay thank you.

All right well thanks to all of you. We had hoped to conclude this in 90 minutes. We went a few minutes over. Appreciate your patience. And we'll look forward to seeing some of you in the next few weeks.

Thank you. That does conclude today's Tenet conference call. You may now disconnect, and have a wonderful day.