Tenet Healthcare Corp (THC) 2007 Q4 法說會逐字稿

Good morning, and welcome to the Tenet Healthcare's conference call for the fourth quarter ended December 31st, 2007. Tenet is pleased that you have anticipated their invitation to participate in this call. Please note that this call is being recorded by Tenet and will be available on replay. This call is also available to all investors on the web both live and archived. A set of slides have 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 the Tenet's filings with the Securities and Exchange Commission, including the company's Form 10-K and its quarterly report on form 10-Q to which you are referred. Management cautions you not to rely on and makes no promises to 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 not calculated in accordance with the Generally Accepted Accounting Principles of GAAP. Management recommends that you focus on GAAP numbers as the best indicator of financial performance but is providing these alternative measures as a supplement to aid in the analysis of the company.

Reconciliation between non-GAAP measures and related GAAP measures can be found in the press release issued this morning, and on the company's website. Detailed quarterly financial and operating detail is available on the first call and on the following websites - tenethealth.com, businesswire.com and companyboardroom.com. During the question-and-answer portion of this 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, and good morning everyone.

This quarter we achieved a major milestone by generating positive growth in admissions. We also continued to demonstrate positive trends in several key areas, and certain leading indicators have never looked stronger. I feel that the health and trajectory of this company is better than at any time in the recent past. This was the first time in nearly four years that we had positive admissions in a quarter. And because it was just slightly positive, I want to add some color to the statistic.

First, we've had more consistent results among our regions than in past quarters, and we've continued to move more hospitals into positive admissions territory. Admissions in Florida stabilized significantly to just below breakeven, compared to the declines of more than 3% we had been reporting in recent quarters.

Second, the improving trend has accelerated into the first quarter of 2008, with same-hospital admissions up 2.3% through January. Florida admissions growth was positive for the first time since Q1' 04, with an increase of more than 2% for the month. This upward trend has continued into February in both Florida and across the company. Even the trend in outpatient visits has improved.

Same-hospital commercial managed care revenues increased almost 9% despite a nearly 2% decline in commercial admissions. This is the single largest quarterly revenue increase we've reported in five years. We are positioned for further pricing strength as a result of the numerous managed care contracts we announced recently. In fact, these contracts, with United, Cigna and Blue Cross of California represent a third of our total commercial managed care portfolio. And once again we kept the growth in controllable expenses on a unit of service basis at or below that reported by our peers. The innovations we've made in the revenue cycle continue to produce tangible results, despite the challenge represented by the continued double-digit increases in uninsured admissions. Because of these efforts, we were able to increase our collection rates from both insured and uninsured individuals.

We also improved sharply in the non-financial metrics which we believe are important to our longer-term performance. These metrics are part of our Balanced Scorecard and incentive plan, and we believe they are leading indicators of our continued progress. We break the Balanced Scorecard into five areas, or pillars, which include quality, service, people, cost and growth.

The first of our three non-financial metrics falls into our quality pillar. According to CMS' most recently published Hospital Compare data, Tenet scores higher than any other investor-owned hospital company in CMS' 24 core measures, and we have the third-highest score among the 10 largest hospital systems in the country. We continue to hit all-time highs in our quality statistics even as CMS adds challenging new metrics to the mix.

The next pillar is service. Our scores here improved as well, with physician satisfaction increasing 2 ½% over the prior year and patient satisfaction increasing nearly 1%. And in the people pillar, total employee turnover improved by more than 12%. Employee satisfaction improved nearly 4%. And although it's not a balanced scorecard metric, I know that you would find it interesting that our hospital CEO turnover in 2007 was just under 4%. This compares to a 20% turnover among our hospital CEOs in 2006.

While we didn't generate as much cash from working capital as we had planned, we did offset that at year-end with our other cash initiatives, which we expect will continue generating value going forward. Biggs will comment on those in a moment.

Near the end of 2007, we engaged in a thorough business planning effort that resulted in the outlook we stated in this morning's press release. This outlook envisions 2008 EBITDA in a range of $775 million to $850 million, and 2009 EBITDA of $1 billion or better. While I fully recognize the billion dollar objective represents a significant improvement from the EBITDA we generated in 2007, I believe we've set a clear path to achieving it. This will require strong and consistent performance on our part - capturing market share from competitors to meet our volume objectives, continuing to implement innovative techniques to offset the challenges on bad debt, and extending the progress that we've made in controlling costs and achieving enhanced pricing - but it is certainly within our reach.

With that as an overview, let me turn the call over to our Chief Operating Officer, Dr. Steve Newman, who will provide you with some commentary on what is driving our improvement in patient volumes. Steve?

Thanks Trevor. And good morning, everyone.

Thanks, Trevor. And good morning, everyone. We made very gratifying progress in the fourth quarter that is continuing in the first quarter. In my opinion, our turnaround is accelerating and is increasingly evident in a number of areas.

To show you why I believe this, I'll give you a flavor for our momentum in three key areas: volumes, pricing and its relationship to our quality initiatives, and our progress in expanding our medical staffs. I'll also touch on the improvements we're driving in Florida and the successes we've achieved in our new managed care contracts.

Let's start with volumes. Fourth-quarter same-hospital aggregate admissions increased a tenth of a percentage point over Q4 '06. That's the first positive quarter for admissions growth in almost four years. January's in-patient admission growth was 2.3% and February has continued that trend, so I think it's clear that our volumes are on an upward trajectory. The progress in the fourth quarter and in January is especially gratifying when you remember that we had a mild flu season until 4 weeks ago.

It's not our normal practice to disaggregate volume results - and we make no promise to do this on a regular basis - but I think some drill down this time will help you understand the underlying trends we're seeing. In our key Florida market, fourth-quarter in-patient admissions were down just three tenths of a point - our best performance there since Q4 '04. In Palm Beach County fourth-quarter admissions actually increased 80 basis points. Four of our five Palm Beach hospitals had positive year-over-year admissions growth. Additional evidence of our Florida recovery is demonstrated by January admissions being up more than 2% over January 2007.

Our new Florida regional leader, Marsha Powers, has accelerated our physician recruitment, redirection and employment activities. We're confident we're finally on the road to sustainable growth in that important market.

Now I can't resist saying a few words about the remarkable and continuing progress of our Philadelphia market. Both Hahnemann University Hospital and St. Christopher's Hospital for Children generated strong volume gains in the fourth quarter. As you know, we expected to gain volume at St. Chris because of the closure of Temple University Hospital for Children. But the gains at St. Chris have far exceeded what can be attributed just to that new affiliation. For the quarter, admissions at St. Chris were up 20%, which translates to an additional 498 admissions compared with the same quarter the year before. Also contributing to that success at St. Chris are our aggressive outreach activities beyond the five-county metro Philadelphia area as well as the addition of new high-end services like bone marrow transplantation.

Meantime, Hahnemann's admissions were up nearly 1%. We are continuing to work with Drexel University's School of Medicine to grow our faculty practices at Hahnemann and St. Chris to benefit the educational, research and patient care missions of both organizations.

We're in the process of expanding our facilities in Philadelphia in anticipation of future growth, but we have sufficient capacity there today to handle the projected increases in volume over the near term.

California was another bright spot in the quarter. Our California hospitals had an aggregate increase in admissions of 3.2% over the fourth quarter of 2006. We knew we'd see an improvement in the quarter because of our acquisition of the Stanislaus Behavioral Health Center in Modesto, but we also had noticeable increases in two of our other key California markets - the Palm Springs area and Orange County. For example, Fountain Valley was up 3.8% and Desert Regional increased admissions by 9% for the quarter. The Stanislaus facility added 263 admissions to the California aggregate total. But, even without that added volume, California admissions were up a solid 2.4%.

We encountered some volume weakness in our Texas and Southern States markets, but we believe that softening will be temporary. One weak spot in the quarter was El Paso but we have already seen improved admission volumes in early 2008. A major refurbishing project at another one of our Texas hospitals temporarily closed a number of our medical-surgical units there. In our Houston market, we're about to pass the first anniversary of an aggressive new physician-owned competitor that hurt another of our hospitals. We expect that situation to normalize in the new - in the near future.

The challenges in our Southern States region were very local in the fourth quarter. These resulted from slightly higher than expected physician attrition. We have taken swift action to accelerate our volume-building activities in both the Southern States and Texas markets.

I'll wrap up this discussion of volumes with brief comments on surgery and commercial managed care admissions. Our total surgeries rose three tenths of a point compared to Q4 '06. Out-patient surgeries were up eight tenths of a point while in-patient surgeries were down four tenths of a point. This represents a dramatic improvement over the losses we had absorbed in total surgeries during prior quarters. As recently as the first half of 2007, quarterly declines in surgeries were 5% or more.

Same-hospital commercial managed care admissions were down 1.8% in the fourth quarter. Our commercial managed care volume weakness was concentrated in Texas and the Southern States. Specifically, three hospitals located within our Texas market and Southern States region were responsible for 96% of this decrease companywide. As I just described a few moments ago, we expect that situation to stabilize in the near future.

We continued to generate growth in many of the TGI service lines I highlighted in the third quarter. Commercial urologic surgery admissions were up 8.2%, ENT surgery was up 19%, orthopedic surgery was up 0.3%, neurosurgery was up 3.7% and vascular surgery was up 16% for the fourth quarter. Meantime, obstetrics was down 2.7% and open heart surgery was down nearly 14% or 68 procedures.

Overall, I'd say the key takeaway about our latest admissions performance is that we are continuing to drive growth in the service lines we targeted as part of our Targeted Growth Initiative. As you recall, over the past three years through TGI we painstakingly identified the service lines with the best growth and profit potential at each of our hospitals.

Now let's talk about pricing. We successfully renegotiated several of our major managed care contracts in the fourth quarter and the first six weeks of 2008. With the completion of new, multi-year contracts with United, Aetna, CIGNA and Blue Cross of California, we now have secured full network participation with every one of our major commercial payers for all of our hospitals, freestanding ambulatory surgery centers, diagnostic imaging centers and physician practices. These new contracts will also automatically add any new facilities or practices we might acquire during the term of the agreements. As you know, making sure that all our facilities are network providers has been a top priority of our managed care strategy, and I am pleased to tell you that we have now achieved that goal with our recently completed contracts.

Our managed care pricing - including managed government programs - was up sharply with net inpatient revenue per admission increasing 9.4% and net outpatient revenue per visit up 9.0% in the fourth quarter. I believe that is a reflection of a number of focused efforts to align our Targeted Growth Initiative with our managed care strategy.

Another of our managed care goals has been to qualify for as many managed care Centers of Excellence programs as possible. Additionally, in the last 4 months we have executed two contracts that actually provide potential incremental reimbursement to our hospitals for meeting mutually agreed upon clinical quality goals.

Before I conclude, I want to share with you the latest results of our efforts to expand medical staffs at our hospitals. In the fourth quarter, net of normal attrition, we added 241 new active staff physicians to our hospitals. For all of 2007, we added a net total of 1,086 physicians. As you know, this has been a critical priority for us. The success of our efforts in this area is especially gratifying for me, and it bodes well for the future growth of our hospitals.

I truly believe that this progress in physician recruitment is a key indicator of our future volume growth. In the last year, we have increased the number of physicians with privileges to admit patients to our hospitals by almost 9%. It will take time for these new relationships to fully mature, but this growth represents a dramatic reversal of the erosion in our affiliated physician base that we experienced over the past several years. If I had to point to one item that gives me the most optimism about our future at Tenet, this would be it.

Through our Physician Relationship Program, we visited 4,720 physicians during the fourth quarter. Of those we visited, we saw an increase in admissions of 2.5% from physicians who already had staff privileges at our hospitals. We also visited 437 physicians who did not have privileges at our hospitals, and we expect many of them to apply for privileges as a result of our visits. This is an integral part of our strategy to gain market share in many of our fiercely competitive markets.

To assist in these and all our volume-building efforts, during the fourth quarter we hired Lloyd Mencinger to lead our business development, marketing, advertising, physician recruitment and the Physicians Relationship program. Lloyd has years of experience in the -business development, working at both Baxter and Boston Scientific.

So, to conclude, the bottom line from my perspective is this. In the fourth quarter, we made progress in all the major drivers of performance in our business. We grew in-patient volumes for the first time in almost four years. We've continued to do that in 2008. From a pricing, quality and physician recruitment perspective, we continue to grow our channels for new business. Overall, I am very pleased by the trends I am seeing, and I am confident we will continue to see improvements in 2008.

With that, I will turn things over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Steve, and good morning everyone.

In the interest of time, I'm not going to repeat a lot of the numbers in our earnings release or 10-K. I'll limit my comments to providing a relevant context for our disclosures.

In the fourth quarter, we benefited from pricing, cost control, bad debt mitigation and stabilized volume. We finished the year with adjusted EBITDA in the middle of our last outlook and just within the - just within the outlook range we started out with last March.

There were two unusual items in the quarter which largely offset each other. The first was a net charge of $12 million related to year-end accruals for compensation and benefits. This included adjustments to a predecessor company's pension plan, union settlement costs in Florida, workers compensation adjustments and year-end incentive plan accruals. The other item is a favorable adjustment to our bad debt reserve of $19 million. This reserve is set through the use of an 18 month "look-back" on our collection history. As you know, our collection rates continue to show modest improvement across most customer segments. In recent quarters our results have often included cost report settlements, generally with a favorable impact. The impact this quarter was effectively a net zero.

With that brief analysis in mind, let me offer a few thoughts on the drivers that got us to those results. Steve has already covered volumes, so without detail, I will just reiterate how pleased we are to see aggregate positive growth, particularly considering the well advertised strong headwinds in the industry. I also want to note that our uninsured and charity volumes actually declined in January - so the positive 2.3% in admission growth Trevor referred to earlier will contribute to our bottom line.

Now on to revenues. Fourth quarter same hospital revenues rose to $2.2 billion, an increase of 6.0%. Because of the essentially break-even volume growth, this 6.0% revenue increase was principally due to pricing. Slide 18 on the web shows that we experienced solid progress in all of our key pricing metrics. As a summary metric, normalized for cost report adjustments in 2006, net patient revenues per adjusted admission were up 4.9%. As a number of important contracts including Blue Cross of California and CIGNA were not effective until the first quarter of 2008, we anticipate additional pricing increases to contribute to our 2008 earnings. Substantially all of our existing contracts, including those negotiated in 2007, also have 2008 and 2009 escalators built in.We have good visibility into our managed care pricing for the next two years, because approximately 80% of our commercial rates for 2008 and over 60% for 2009 are already covered in signed contracts.

Turning to costs. Same hospital controllable operating expense per adjusted patient day increased by 5.1%. As I mentioned a moment ago, this included a $12 million expense accrual for compensation and benefits expense. If we normalize for that accrual and the higher supplies expense on greater implant utilization, our expenses would have been in line with the expectations we had going into the quarter, with a number of lesser puts and takes among the other elements of our controllable costs.

It is also important to note that we had a $13 million reduction in malpractice expense in the quarter. Based on the investment we have made in clinical quality, we are pleased to see this reduction. Unfortunately, we also had some poorer than expected cost performance in a few of our hospitals that lost volume in the quarter. We believe, as Steve mentioned, that both the volume and cost effects of that will reverse themselves.

On bad debt, same hospital uninsured admissions rose by 10% in the fourth quarter and revenues from the uninsured rose by 17.5%. Let me remind you, that this increase in uninsured revenue has been influenced by our recent efforts to improve the accuracy of acuity capture in our emergency departments.

Any change in uninsured billings creates a parallel effect on bad debt expense. We estimate that $19 million of the $24 million in the uninsured revenue increase year-over-year is attributable to our efforts to improve the accuracy of acuity capture in our emergency departments and, to a much lesser degree, charge master increases. The corresponding $17 million bad debt increase has no effect on the bottom line since it is offset by revenue increases. Also, since we modified our ED charge capture process in the second quarter of 2007, we do not expect similar year-over-year increases in bad debt from ED charge capture in 2008.

Growth in bad debt expense from higher uninsured admissions was approximately $5 million. Accordingly, the combined effect on bad debt of uninsured admission growth and pricing compared to last year is approximately $22 million.

Offsetting the adverse impact on bad debt expense from the growth in the uninsured has been continued progress on improving collections. Through focused effort, we have been successful in raising self-pay collection rates to 36% in the fourth quarter from 32% a year ago.

Managed care collection rates also moved up to 98% in the fourth quarter, from 97% a year ago due to lower denials attributable to our previously-discussed efforts to improve this area. These include greater Interqual screening, clearer contracting arrangements and better front end processes.

This improvement in collection experience led to the recording of the $19 million favorable adjustment to our bad debt reserves I mentioned at the beginning of my remarks. This compared to an $8 million favorable adjustment last year.

In addition to the overall collection performance improvements, we also resolved older managed care accounts which had been heavily reserved. The favorable effect of this on bad debt expense was offset by what we see primarily as the seasonal aging of self pay accounts. Like others in the industry, we typically experience a slowing of payments in the fourth quarter as our patients deal with year-end and holiday pressures on their household budgets. This is typically reversed by the end of the first quarter.

So to summarize, same hospital bad debt expense grew over the prior year fourth quarter by $15 million. Uninsured volumes contributed $5 million to this increase, pricing contributed $17 million, and the net year-over-year reserve adjustment due to improved collections experience was a favorable offset of $10 million. Other variances, including the effects of the settlement of managed care disputes, netted to $3 million.

While same hospital uninsured admissions and revenues were up over prior year fourth quarter, charity was down, making this another quarter in which there are opposing trends. Although not easily traced, we are optimistic that our strategies to emphasize favorable product lines and manage elective admissions and visits by uninsured are mitigations to what is a key risk in the industry. I emphasize the word "elective" in this regard. We also continue to drive on best practices in our billing and collections activities.

I just did a fourth quarter year-over-year comparison on bad debts, but if you compare sequentially, it is important to note that uninsured revenues were actually down the third quarter of this year - or from the third quarter of this year.

Turning to cash flow and capital expenditures. We ended the year with our cash balance within our expected range. In accomplishing that we didn't do as well on cash from operations as we expected and spent slightly more capital, which should just be a matter of timing, but we continued to find other positive sources of cash on our balance sheet which are more permanent in nature. As I will discuss in a moment, the variances to our expectations in the fourth quarter will turn to expectations of improved free cash flow and cash generated from operations in 2008.

Cash from operations and free cash flow become sequentially more important metrics as we proceed through the next few years and approach the refinancing of our debt. In this respect you should consider 2007 as the year of heaviest investment for the company, with volumes starting to show the benefits, and with us well positioned to show improved earnings, cash flow and return on invest - return on investment going forward.

Capital expenditures in continuing operations were $300 million in the quarter. This figure was slightly above the higher end of our range we shared with you in our third quarter call and is roughly equivalent to the amount we spent last year. One of the influences on the higher spending in this year's fourth quarter was that we wanted to make sure 2007 was our "catch up" year as we have previously projected. This leaves us with a manageable amount of carryover projects.

On the web we have included on Slide 23 a listing of the major capital projects of 2007. At this point I expect capital spending in 2008 to be little more front-end loaded into the first and second quarters

Also contributing to the higher level of CapEx in the fourth quarter, favorable weather has allowed us to accelerate the construction of our Sierra Providence East Medical Center in El Paso, which will now open a month earlier than we had expected. This generated $22 million in CapEx in the fourth quarter. We have also started the construction of a replacement hospital for our East Cooper facility outside of Charleston, South Carolina, on which we spent $2 million in the fourth quarter.

With respect to cash flow, adjusted cash flow provided from continuing operations came in at $127 million for the fourth quarter and was lower than anticipated. The primary deviation was in working capital. We typically expect to see a more significant build-up in accounts payable and accrued liabilities at year-end than we saw this year. On the pure accounts payable side, we saw the increase we anticipated in the payment terms we set up in the system. However, there was a $63 million decline in book overdrafts at December 2007 compared to 2006, which occurred due to the timing of our year-end check processing. This book overdraft should return to more normal levels in 2008, thus creating a source of cash flow in 2008.

We also experienced a $31 million build up in accounts receivable. This is attributable to the effects of higher revenues and lower reserving for bad debts. This therefore doesn't reflect bad performance. It in fact reflects improved collectability. However, we did not generate the net improvement we targeted in accounts receivable. In the fourth quarter of this year we did resolve a number of our older managed care receivables, but this was offset by the seasonal aging of self pay accounts I referred to earlier. Other than that, we were overly optimistic in our ability to reduce accounts receivable over the course of one quarter. We believe it is going to take a few quarters into 2008 to accomplish this reduction.

Just to summarize the influences on 2007 in total, we had a net reduction in our book overdraft of $63 million, a reduction in accounts receivable credit balances of $54 million, and non-cash income related to prior year cost report adjustments of approximately $35 million. Not all of these affect cash from continuing operations dollar for dollar, but they did have a significant impact. We do not expect similar aggregate impact from these items in 2008.

Accordingly, in 2008, as we indicated in the release, we anticipate having adjusted cash provided from operating activities of $400 million to $500 million. This compares to $209 million in 2007 for an improvement in the range of $190 million to $290 million. Higher EBITDA is expected to contribute $75 to $150 million of this improvement. The remainder of the improvement includes a restoration of a more normal book overdraft position at year end 2008, the two-day reduction in accounts receivable we previously stated as an objective for the fourth quarter of 2007, and a reduction in the rate of pay down of credit balances.

As I have said previously, we have engaged in a review to increase the efficiency of our balance sheet and correspondingly free up cash and increase return on invested capital. Let me now turn to the progress we achieved towards this end in the fourth quarter. We added $129 million in cash from these initiatives in 2007, of which $97 million was in the fourth quarter. At the corporate level, we monetized certain investments previously residing in our services - in our insurance subsidiaries and liquidated the cash surrender value of life insurance policies. We anticipate that continuing efforts to execute on this initiative can generate incremental cash ranging from $400 million to $600 million over the next 24 months. These include: the sale of our medical office buildings, the recapitalization of Broadlane, in which we hold a 48% interest, and the sale or monetization of other excess land, buildings and other under-utilized or inefficient assets. Since some of these items require marketing and price negotiation, I am not going to break them down into separate component values. Because the timing and value is within a broad range, at this time this additional cash is not in our 2008 year-end outlook.

Before I turn to the outlook for 2008, I want to comment on the impairments we recorded in the quarter. They were much reduced over the prior year and included no impairments of goodwill. This is a sign that our turnaround is progressing and that our forecasts at the hospital level are for a broad based recovery. The single biggest reason for the impairments we recorded was the prospective reduction of Medicaid funding in Georgia and not attributable to our execution of our turn around strategies.

With respect to capital spending, for 2008 we expect capital expenditures to be in the range of 600 to $650 million. This includes $82 million for new hospital construction, $32 million for seismic and American Disabilities Act requirements, and $25 million for outpatient growth.

Investors have often asked us to identify the portion of our capital expenditures which can be thought of as "maintenance" CapEx. Because of the many judgment calls necessary to distinguish maintenance CapEx from capital expenditures intended to grow the business, we have been reluctant to specify a number. By example, if we replace an old 4 slice CT scanner with a 64 slice scanner, is that replacement or expansion? Intuitively, I would call that maintenance capital, although it may expand our capabilities. Our answer to date to the question of maintenance capital has been to point investors to the sum of depreciation, amortization and lease expense, net of implicit interest, which was approximately $500 million in 2007. Another way to look at this might be how much did we spend on our current core hospitals over the period 2003 to 2005 excluding physical expansion and new hospital construction? This was approximately $400 million per year over that period. If you look at the same statistic for the last five years, it was approximately $450 million. If you put all this together, then it would suggest an estimate of "maintenance capital" at approximately 400 to $500 million.

Having said that, the lower end of the range, or $400 million, would likely not sustain our competitive position over a long term. Also, this excludes seismic and American Disability Act requirements as well as capital for expansion of the enterprise or in certain cases the construction or technology spending necessary to protect market share based on the action of our competitors. If you include those it takes us up to the 600 to $650 million level we have spoken to as a reasonable level of average annual spend to meet regulatory requirements, and sustain and grow the enterprise.

Moving to the outlook, we have provided extensive detail with regard to our 2008 Outlook in this morning's press release, so I won't repeat all the line item detail here.

The 2008 outlook includes an expectation of adjusted EBITDA in the range of 775 to $850 million - or growth of 10 to 20% over the $701 million of adjusted EBITDA for 2007. Much of the "heavy lifting" necessary to achieve performance at this level has already been accomplished. I'm referring here to the contracts we recently signed with our major managed care payers, and the other pricing initiatives and cost efficiencies we implemented last year that will achieve full run rate in 2008. Having said that, there clearly were also some set backs, most notably the $60 million revenue loss from the Medicaid reductions in Georgia and Florida.

We haven't given a 2008 look outlook previously - 2008 outlook previously, and over the course of last year, we maintained a 2009 outlook which, while having a lot of subjectivity, was between 1 and $1.1 billion of adjusted EBITDA. In the fourth quarter we updated the analysis indicating that of the $100 million of risk inherent in that range, $60 million had now been consumed by the Medicaid reductions I just referred to in Georgia and Florida. This still left us with a 2009 outlook of $1 billion or higher going into the detailed 2008 planning process. We have completed that process and continue to believe that the $1 billion or more of EBITDA in 2009 is achievable, although projecting two years out is by its nature very subjective.

As I said, we have given a range of 775 to $850 million for EBITDA in 2008. Clearly, if we do not perform in the upper half of that range in 2008, reaching $1 billion or more in 2009 becomes a very significant challenge. As I said though, we continue to believe this objective is achievable, based on our progress in pricing, cost control and positive progress toward our volume objectives.

If you ask me where the greatest areas of risk are that lead to the 2008 range or would cause us not to make the 2009 target, I would say the following two things stand out.

First, although it seems we are turning the corner on volumes, this is, of course, a very subjective estimate. Equally important, mix between patients and payer categories can have a significant influence. To obtain $850 million in 2008 or $1 billion in 2009, we either need to have relatively stable mix overall and a limited increase in the percentage of uninsured and charity volumes combined, or we need to get offsetting yield from our bad debt initiatives.

Second, we need to have broad based volume growth. If we achieve our aggregate volume objectives, but volumes remain volatile at the hospital level, it will remain difficult to capture the operating lever - leverage of fixed cost absorption. Although we have seen a reduction in the variability of performance at the hospital level overall, if we have a significant number of hospitals that suffer volume decline in 2008, that will make the achievement of an aggregate 40% yield on volume growth more challenging.

In slide 26 on the web, we have included a sample walk forward from 2007 actual results to 2008 at $850 million and 2009 at $1 billion of EBITDA. This is a sample walk forward, illustrating one path to our objective of $1 billion, or more, of adjusted EBITDA in 2009. It is not intended to give a series of spot estimates or line item guidance. There are certainly other combinations of line item performance which would produce the same, or higher or lower results. Having said that, this walk forward shows how the cost and price actions drive value relative to the more subjective estimates of volume and mix. In a nutshell, volumes drive approximately 33% of the necessary improvement in the walk forward from an adjusted 2007 starting point, with our cost and price actions providing the rest. You may recall that initiatives in place by the end of 2007 were estimated to achieve $118 million of improvement in 2008 and 2009 compared to that achieved in 2007. In the walk forward, the combined EBITDA effect of the initiatives now amount to $162 million, with $33 million related to revenue and $129 million related to cost. We have not assigned any value into the walk forward for our bad debt initiatives. We have thus implicitly assumed that the financial contribution of our bad debt initiatives will act to mitigate any potential increase in the uninsured or under-insured.

The walk forward shows the effect of our cost and price actions and their effect on 2008 relative to 2007 in order to bridge to our prior disclosures of these initiatives. Since these are now embedded in our recent actual results and in our budgets, subject primarily to just full run rate benefits, I will probably not keep isolating them going forward as they have become integral to our operations and are no longer discrete. This does not mean that we are not tracking execution of those plans and budgets. We are.

In terms of the incremental lift from rate parity adjustments in managed care pricing we reflected in the walk forward, I can report that we are now negotiated on 100% of this in 2008 and 80% in 2009. There is still some potential additional pricing upside beyond those numbers. So, as I said before, we feel very confident about our pricing estimates, subject to any unforeseen regulatory change or mix changes.

You will note that the walk forward starts by backing out two amounts out of the $701 million 2007 adjusted EBITDA starting point. First, the effect of the 2008 Georgia and Florida Medicaid reductions, and second, conservatively, $40 million of the 2007 prior year cost report income.

We may, in fact, have some effect of prior - of cost report adjustments in 2008 or 2009, but for now, we have taken $40 million of cost report adjustments out of the walk forward. By eliminating these two items at the start, our 2007 starting point for the walk-forward is a conservative $601 million.

This conservative starting point of $601 million does make us more reliant upon volumes than in our prior walk forward. It now takes growth in volume-related revenues over the two year period in this sample walk forward of approximately 2.2% in 2008 and 1.7% in 2009. Please remember that approximately 1% of this volume growth in 2008 is expected from the recent additions of Stanislaus and the closing of Temple Children's Hospital.

Last year after we gave our 2006 results and 2007 outlook, some analysts tried to annualize our fourth quarter as a means of estimating what the next year should look like. I caution against this as it does not consider the effect of projected volume growth and the full run rate benefit of our 2007 initiatives. It also would not reflect that we have negotiated price increases on contracts beginning as early as January 1 of this year and that our annual wage increases are phased in later and are primarily in October, creating timing advantage between price and cost escalation.

I know that was a lot to digest, so before we go to Q&A, I'd like to summarize briefly. We showed real progress on volumes and pricing and took significant cost actions in the quarter. We believe this progress is sustainable and that we can continue to leverage those actions to produce much improved results in 2008 and 2009. And, we are driving on cash and return on invested capital as a key indicator of shareholder value growth.

Let me now ask our operator to assemble the queue for questions.

(OPERATOR INSTRUCTIONS)

Your first question is coming from Darren Lehrich with Deutsche Bank. Please go ahead.

Thanks, and good morning everyone. With regard to the walk forward that you've provided, I guess a couple of clarifying questions I would like to ask. In terms of the 40% incremental margin that you are suggesting on incremental volume growth, I guess can you give us some color there as to what the actual results have been in hospitals that have turned positive and how comfortable that 40% margin feels? It seems a little high still. And then you do reference adverse mix changes in the walk forward, and I am just wondering if you can comment specifically what those are.

Okay. With respect to our actual experience, certainly on those hospitals if you look at them broadly where we've had volume growth and it has been consistent, I think we've been able to capture those kind of benefits. On the flip side, in areas where in hospitals where we have volume decline, particularly where they haven't been anticipated or where we were expecting growth and instead there were declines, we had difficulty managing the 40% relationship. So in 2007, if you look back, we weren't able to achieve what we would have targeted on this basis because of the declines that we experienced in some of our hospitals offsetting the efficiency of those where we had gains. But certainly going forward we think it's achievable but as I've said, if it's not a broad based volume growth across our hospital base, then it is more of a challenge.

In terms of your question on mix, basically that line for volume and the baseline price increases are all encompassing, so embedded in there by definition it will be everything except for the effect of managed care pricing increases on the rate parity adjustment or the other initiatives. So we put the definition in there saying it included everything. In terms of payer mix and mix in business, there isn't a substantial amount assumed in the sample walk forward that would be a risk. If we have it, as I pointed out, then that could affect it. But for the sake of this particular analysis, we are not assuming to have any significant change in mix.

Okay. And then - my thanks for that. My follow-up here just relates to the collection rates going up. I'm curious to know how long and sustained that uptrend has been in place, and I guess the real question would be why mix favorable adjustment at this point in the cycle, certainly after seeing some pretty large uninsured growth in the fourth quarter?

Well, we have been experiencing improved collection rates over the last couple of years. We made an adjustment at the end of last year. We reported during the course of this year that we had improved collection rates. ,We didn't adjust the reserving percentages on that basis, although it was mitigating bad debt expense as we went through the course of the year, and then at the end of this year as we do annually, we look at our experience on our 18-month look back and say, based upon that historical experience should we adjust our reserving percentages, and based on that we do. So it is based on historical performance, which includes an 18-month period. So there isn't a lot of subjectivity to it.

Okay.

In terms of why now, it's just simply that. I think I would point out that we would expect to continue to drive on collections. It would be our anticipation that we'll continue to find mitigation of bad expense going forward.

Thanks very much.

Sure.

Thank you. Your next question is coming from Adam Feinstein with Lehman Brothers. Please go ahead.

Great. Thank you. Good morning, everyone.

Good morning, Adam.

A few questions here. I guess I was very pleased to see the improvement in the volume trend here, so a big change there, but I just wanted to get more clarity around the components of volumes. Clearly the commercial managed care and MediCare piece did not grow. It looks like more of the growth was more in some of the other categories. I wanted to get more color in terms of how you view that, in terms of some the newly recruited doctors, do they kind of bring in some of those other patients first? So just clearly - I just wanted to get a better sense in terms of the components. Secondly, on the pricing side you continue to show progress there also, but - and I know there was a one-time benefit in the third quarter, just as the prior period cost reports, but in terms of the peer-managed care piece if you just can refresh our memory in terms of the trend in the third quarter relative to just the fourth quarter, I just want to get a better sense there in terms of what the underlying pricing difference was between the quarters. Thank you.

Adam, this is Steve. Let me deal with the first part of your question. We are very much focused, as we expand our medical staffs, in making sure that they are high-performing physicians that have a good book of commercial managed care business, and we are preferentially targeting those physicians to add them to our medical staffs. I think that the decrease in commercial managed care admissions in the fourth quarter was really isolated to three of our hospitals, where we had special situations. In the absence of those three hospitals' negative effects, we would have basically been even year-over-year in terms of commercial managed care admissions.

We have seen an increase in MediCare admissions, and we've seen a bigger increase in MediCare managed care admissions because of the distribution of our hospitals in Florida and California, where that payor is continuing to grow. We feel very positive about the expansion in MediCare and managed MediCare because we focus our cost structure to make sure that we have margins on those particular lines of business. Additionally, focusing on the targeted growth initiative, where we have that excess demand in the micro markets we are serving, we also identify those with exceptional margin opportunity, and the combination of those being both in MediCare, managed MediCare and commercial managed care, should contribute to our margin expansion over time.

The second part of your question on the pricing -- this is Biggs, Adam. There weren't any managed care contracts, any new negotiations kicking in in the fourth quarter relative to the third, so the effects of our negotiations were relatively constant in the two quarters. We do have a number of pricing increases, as I commented in my script, that will kick in on January 1, or did kick in on January 1, on contracts we've renegotiated.

Okay. But that 9.4% managed care growth number you gave out somewhere in the presentation so that number would have been the same for the third quarter?

It's close. Both quarters had the effect of the ED charging effects and to a lesser effect any flow through on charge master changes. But they would have been roughly the same.

Okay. Great. Thank you very much for all the details.

Thank you. Your next question is coming from Sheryl Skolnick with CRT Capital Group. Please go ahead.

Nice job, Biggs. Thank you. I actually understood what you said. I appreciate it very much. It was very clear. A couple of little things, though. I am going to ask you a couple of things on the walk forward as sort of one question if I can, and then I have another follow-up. In the guidance you footnoted, if I'm leading that correctly, a 1.5% increase in admissions, yet I think in the text it says a 2 to 3% increase. Is that on an adjusted admissions basis? Is that just the difference, that one talks about inpatient and the adjusted?

The aggregate number I gave of 2008 -

Is 1 to 2%, okay it's the same thing.

It's really a weighted - if you get to the aggregate number that I used in my prepared comments, you get to it by taking the $193 million of revenue from volume in 2008 by example and dividing that by the 2007 starting point to get to effectively the revenue generated from volume growth presumed in the 193. It is close to adjusted admission kind of basis, but it's using the math that I just described.

And it is based on same store admissions of 1.5% in the middle of the admission range as opposed to the top end of the admissions range. So you are using the middle of the volume range to get to the top end of the EBITDA range?

I would say - I would have to look again at note 1 one the explanation to see whether we have been as clear as we need to be. But in general for 2008 and 2009, I would say the volume assumption here would be more towards the top end of our volume assumptions.

Because you are at the top end of your EBITDA range?

Correct.

Okay, so that's consistent. And also as part of your walk forward in your discussion of the cash, I think if there's a point of concern it's clearly the cash flow, so - and also the fact that you'd be somewhere around 2 to $300 million at the end of '08 in the absence of any of the cash-freeing initiatives from the balance sheet. I guess what -- is the company's thought that you would need to or want to or be likely to use the asset backed revolver during the year as part of this, or is - does that not a factor into it?

Well, it's certainly not our desire to use it. It's not our anticipation to use it. We will have negative cash flow in the first quarter, which is typically the case, but we still don't believe that will put us into the revolver. So I think that it's still there as an an insurance policy, a safety net. But we expect to work very hard on our cash performance in 2008, get the improvement back in working capital that we expected in the fourth quarter but didn't achieve. And as I pointed out in the script, there's been some other drivers of cash flow that were negative in 2007 that we don't expect to repeat themselves in 2008.

So stop people to - stop writing checks.

We expect to go execute.

And also related to the walk forward, I'd like to understand whether -- what your targets implicit there for additional physician recruitment might be and then if you could, if the final thing would be an update on the health care properties lawsuit. I think I saw something that I'd like some explanation on.

Sheryl, let me deal with the physician recruitment issue and then let Peter give an update on the HCPI litigation. We are in the process of completing a fairly sophisticated medical staff development plan for each of our hospitals. We did what I would call a more elementary plan as part of the October through December budget process. We had that as a baseline, but we're actually digging deeper into that and doing some extensive modeling on attrition relating to aging of existing medical staff. I guess in summary, we are probably looking to add a thousand incremental active medical staff physicians to our medical staff in both 2008 and 2009. That will be our target for those years, and I think that will both handle the attrition as well as meet the needs in those communities where demand continues to grow.

I'm sorry, Steve. The targets for '08 and ' 09, I know you just said it, but I couldn't write it down fast enough.

1,000 incremental active staff physicians, each year.

In each, okay.

Cheryl, we have Peter if you have a detailed question on HCP but we disclosed in our 10-K that we are in settlement discussions. If there is a sensible settlement to make, we would prefer to settle it. But I think that's all we're going to say on the matter.

Then I guess I don't need to hear from Peter. So the summary is no flow in January but you had volume increases, [full] in February, getting some volume increases, pricing is better than it was and you are targeting the physician growth in areas where it is going to help you in the way you targeted your capacity in areas, it's going to help you, and your cash is still an issue. Is that fair?

A perfect summary.

Great. Thanks a million. Good job.

Thank you. Your next question is coming from Henry [Rulkoff] from Deutsche Bank. Please go ahead.

A question on the EBITDA for the quarter. On the normalized or the favorable bad debt adjustment that you were able to take in the quarter of $19 million, how much of that related to the fourth quarter and how much of that related to all of 2007?

Well, I would say that it all relates - or substantially all of it relates to 2007. So if you are trying normalization, I wouldn't normalize it out of the year. In which case then I'd say it probably is equally spread over the course of the year. But as I said, there were other cost effects in quarter that would also normalize out. The compensation and benefits accruals that I referred to would be attributable primarily to the year. In the case of the [pitch-in] component of that, which is a relatively small portion of it, but that component is something that we wouldn't expect to recur at all.

And then just on the pricing for the managed care contracts, I know you had the - I think it was the 9% growth and you have a couple of contracts that are being renewed or were renewed after the end of the year. Should we be thinking about managed care pricing increase along the lines of that 9% in 2008?

Well, I think that the walk forward should give you a reasonable view of what we expect in terms of incremental lift from the negotiations. We've put $36 million into 2008 and $34 million in 2009, reflecting the price increases associated with achieving market parity on our contracts in those specific hospitals, markets - contracts and markets where we need it to get ourselves back up to market level. Beyond that, we really don't make disclosure on managed care pricing or commercial managed care pricing separately. So I wouldn't -- I wouldn't want to give you an exact number, but I think a reasonable continuation of what we've experienced in the fourth quarter, the second half, is an acceptable approach.

Thanks very much.

Thank you. Your next question is coming from Justin Lake with UBS.

Good morning. A couple of quick questions from the numbers here. The bad debt, it looks like the uninsured admits were up, the charity cares down. Can you remind me if there's been any change in charity care recognition versus uninsured over the last several quarters?

The only real change that occurred was a regulatory change in California, but it would have actually gone in the opposite direction and would not have declined or reduced the charity number. That was relatively minor. So all in all, it's apples to apples, but it does move back and forth as we go through time. In the aggregate, the trend seems to be narrowing and the rate of increase that we experienced in the past seems to have diminished and stabilized somewhat on the two combined.

Okay. That's helpful. As you look at your volumes, I know you said there wasn't much benefit from flu in January and February, but how is the pair mix looking?

In the fourth quarter?

No. I'm sorry. January and February.

January and February. At this point, I wouldn't want to comment on that level of detail on the first couple of months or first month and a half in which we have the information.

Okay.

We give volume information. We started that practice and recognized that - we set that precedent, but I think drilling down into a greater level of detail on an interim basis wouldn't make a lot of sense.

Yeah, we'll just wait for the first quarter call.

Is there a reason [then] that it's meaningfully different than what you've seen the last couple of quarters?

That would be the equivalent of giving a comment on a greater level of detail.

Just on the managed care pricing, just a couple of quick questions there and I'll jump back in the queue. You have a pricing at 9%, the admits down, too, because of those couple of hospitals. Given that you mentioned the contracts are bringing some your hospitals in network versus without of network, I would think the opposite effect would be happening, where your pricing would come down a little bit just because [having a] network, normally on the efficient side, there's obviously a higher revenue, but that your admits would be going up because you are going in network. Is there a reason that is not happening?

Well, what you described Justin is actually true, but because it takes time for those factors to work in, it would take maybe two quarters before you actually see the effect of that dilution of bringing those out of network providers in.

As I talked to some of the managed care [funds] and they talk about, you know, the pressure from hospitals out there as far as contract negotiations, and - some of them talked about giving - in a multi-year contract giving a large increase up front in the first year, so you might get to a 7% blended number but you're giving 12 in the first year and 4 in the next two. Can you tell us - or are any of your contracts structured - I notice you mentioned most of your contracts have an inflationary update kind of a factor in them but --

Without giving you specifics, Justin, we are very sensitive to that particular issue, and we need to make sure that we stay at rate parity if we are doing multi-year agreements. So our contracts range in duration from two to four years, and certainly there may be some variation over the course but one of our major contracts we recently did, which will remain unnamed, is higher in the outer years than it is in the first year. So that's very much to be individualized with each contract renewal, and it's also based on where we see that hospital in relationship to the competitors in the marketplace, so that we get parity for our acuity adjusted reimbursement.

Oh, so you are expect to see rates that you are getting right now?

That is correct.

Very helpful. Thanks a lot.

Your next question is coming from Ken Weakley with Credit Suisse. Please go ahead.

Good morning, everyone. I guess to follow-up on Justin's question on the flow of the market, if you look back at the fourth quarter I think you said the admissions were down .3. Can you tell us historically at least what that admission trend would have been in you take out charity and uninsured? In other words, clearly Florida has been a problem because of charity and the uninsured. So I'm just trying to get a sense of how the composition of admissions in Florida is changing.

We would have to get back with you on that, Ken. Maybe we'll have Tom Rice give you a call back. We wouldn't have that subtracted and ready to give you today.

Okay. Is it your sense, generally speaking, that Florida is improving in a qualitative way on the [pay amex] side? Clearly over time the uninsureds have been a big issue, but I'm just wondering if there's a tourism is coming back in a strong way and that's really helping out in the marketplace, or are you taking market share more aggressively than you have in the past?

I think the answer to your question is yes, yes, and yes. Tourism has increased slightly in this winter season compared to prior years. It's not back to the pre-hurricane levels by any stretch of the imagination. Secondly, we are growing the preferred payers there, and we are taking market share from the competition in a number of key payer lines.

Okay. And as one follow up for your medical staff development plan, adding a thousand doctors could bring in some sort of financial risk, if you will, on the supply side. Can you give us some sense of where your safeguards are in that respect? Clearly, doctors want to practice medicine the way they want to and that can really drive your margin the wrong way?

Clearly, whenever we do a relocation agreement with a physician, or an employment agreement, we make sure there is a defined community need, and we have extensive methodologies with third parties that make that assessment before we do that. Whether a given private practice decides to expand because of the aging of the senior members of that group is a totally different story, but we are very careful and we look at it from a financial point of view, as well as what is that community need that we are expanding to meet with our active recruitment relocation, redirection programs.

I meant supply cost ,managing supply cost; in light of bringing in lots of doctors, sometimes that can be a challenge for hospitals. I'm sorry.

You are talking about, like, medical supply cost?

Yes, yes, yes.

Oh, well clearly our hope, and as we saw in the fourth quarter, that our revenue grows as we do more procedures that include higher intensity of supplies For example in the fourth quarter we had a 3.5% increase in the number of surgical procedures that required an implant. So there should be a compensatory offset of that in revenue. Most of our managed care contracts have carve outs for those specific procedures, so we are very cautious about expanding the implant surgical business such that we can offset those extraordinary supply costs. Additionally, we are always working on new supply contracts that will lower our cost of providing those particular prostheses.

Do you have a case mix in the quarter?

Case mix in the quarter? It was up just slightly.

Thanks so much.

Thank you. Your next question is coming from Matthew Borsch with Goldman Sachs. Please go ahead.

This is Shelley Gnall for Matthew Borsch. A question on the volume update. I think you mentioned that you were seeing some deterioration in Texas and that you were expecting it to be resolved. Can you give us more detail on the situation there?

Well, we don't disclose the names of the individual hospitals, but we do have one situation in Houston where our physician-owned competing hospital opened early in 2007. So we are passing the anniversary date on that, and additionally we are adding tertiary care services that will help to differentiate that hospital from the competitor about a mile, a mile and a half away. Other situations, we have seen in at least one of our other markets some erosion of the physician base, and we are working aggressively on a particular service line renovation and expansion which should reattract those particular physician and the volume with those doctors.

Can I ask for a clarification? Is that because those physicians are retiring, or are they perhaps leaving for - you know, going to competitors in those markets?

In the second case, it was going to a competitor that had made a very substantial capital investment in a similar physical plant, and we are moving forward to extinguish that advantage.

Great. Thanks. One quick follow-up, if I could, on the asset sale issue. I'm just wondering if you can tell us where broadly the contribution is on the income statement, and how much it impacted earnings in '07?

We don't disclose separately Broadlane's contribution earnings, but it is in the equity earnings element of the financials. So if you look at the disclosure in our 10-K, you will see a disclosure of our equity earnings of unconsolidated subsidiaries or [investees]. But it's just a component of that.

Okay. Thank you.

Thank you. Your next question is coming from Erik Chiprich with BMO Capital Markets. Please go ahead.

Good morning. Just a question. I know you talked about the good volume increases in January, and I know the first quarter last year was a bit weak but can you talk about the monthly progression last year and kind of what the comps are that you are seeing in that month?

Eric, this is Steve. You are correct. Last January we had weakness. February comp was fairly strong in '07. We are continuing to see strength in February, as Trevor pointed out in his remarks, a fairly gratifying month to date. We have four more midnights to go through before we finish the month of February, so I'm reluctant to make more predictions about that, but I think it's fair to say that the strength we saw in January is continuing through February and it's extraordinarily broad based across all regions.

Finally, can you just talk about what is embedded in your 2008 guidance for the health of the underlying economy and what those macro pressures might have on your volumes and bad debt?

In terms of the outlook, the 775 to 850 EBITDA, we said that one of the variable assumptions was bad debt expense. I think we gave a range on the year of 6.5 to 7%, which would be an increase off of this year. So there's a combination in the range, should we have an increase in uninsured or a decline in ability to pay, above and beyond our ability to mitigate. At this point in time in we don't see evidence of that. We've looked at our collection experience over the last several months, and at this point do not see, once again, any evidence, so it remains subjective, highly subjective as to whether or not that is going to occur.

Thank you and good luck with your initiatives.

Thank you. Your next question is coming from Gary Lieberman with the Stanford Group. Please go ahead.

[audio dropout] a little bit more. I appreciate the comment in the press release about the three hospitals accounting for the majority of the decrease in the managed care commercial volumes, but it's not like this is the first quarter that you've had that trend. It's been going on for some time and it's actually accelerated in the fourth quarter from the third quarter. So I was hoping you can talk more about what you are doing broader to get that trend going in your favor, because I would think it is an important one in terms of hitting the guidance that you put out here.

Gary, you are correct. It is an important issue for us. But if you go back and look sequentially, the fourth quarter was actually the second best quarter that we've had in the last three years. So we are making progress. The third quarter was extraordinary, down 0.6%; so this continues our trend line of moving toward zero year-over-year. So I would suggest the third quarter was more of an aberration than the fourth quarter. But we are redoubling our efforts through the physician relationship program -- [audio dropout]

Ladies and gentlemen, this is the operator. I apologize but there will be a slight delay in today's conference. Please hold on and the conference will resume momentarily. Thank you for your patience.

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Sorry about that. We had a line disconnect. We only have time for one more question. Operator, I'm not sure if you lost the queue but why don't you take the next caller.

Certainly, sir. (OPERATOR INSTRUCTIONS) Your next question is coming from Tom with Merrill Lynch.

Good morning. This is Colleen [Lang] for Tom. Just a question on the physician relationships. How quickly are your new doctors ramping up in their markets? I guess as a follow-up on that, where are you guys attracting the doctors from primarily?

Two good questions. The first, it really depends on the specialty of the physician. We see that surgical specialists tend to ramp up their business over 12 to 18 months as opposed to primary care, which is an 18 to 24-month uptick to a plateau. So it does take a period of time, depending on the overall need and what the specialty is of the physicians. With respect to the greatest number of physicians we are adding to our medical staff, they clearly come from redirection of physicians who have practices in our combined service areas. That way they are able to translate more discretionary admissions and outpatient utilization in a shorter period of time. That redirection activity really dwarfs the total number of patients we see as a result of both active relocation as well as our employment strategies.

Okay. Great. And do you have a breakdown of doctors that are specialists, kind of the ratio?

Yes. In terms of overall redirection strategy, about 60% of the redirection is in specialty, about 40% is in primary care. In terms of the employment strategy and relocation, it's virtually the reverse, where we are needing to expand our primary care base to meet community need.

Okay. Great. And I have just one last one on the guidance. For EPS, the front page of your press release says negative $.03 and a positive $0.06, and it looks like reconciliation in the back of the text has, I believe, negative $0.10 to positive $0.05. Is there something going on with like taxes or a one-time item?

The difference is one on the front page is normalized the way we understand the street traditionally does it, so it uses a normalized tax rate of 37.5%. The one in the back, you'll see in the tables, is reconciled to GAAP and uses a $20 million actual tax expense, even at the low end.

Okay.

Which drives to a lower number. It also includes the $5 million of litigation expense, which is not included in the front page. The front page is just very clean and normalized.

Okay. Thank you.

Operator, we have been going for an hour and a half. We plan to end the call at this time. So if there are any of you who are still listening who are in the queue for questions, please follow up by phone with Tom, and thank you all very much. We'll see you on the next call for the next quarter's results.

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