Tenet Healthcare Corp (THC) 2008 Q3 法說會逐字稿

Good morning, and welcome to Tenet Healthcare's conference call for the third quarter ended September 30, 2008. This call is being recorded by Tenet and will be available on replay. A set of slides has been posted to the Tenent web site, to which management will refer during this call. Tenet's management will be making forward-looking statements on this call. These statements are based on managements current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect.

Management cautions you not rely on and makes no promises to update any of the forward-looking statements. Management will be referring to certain financial measures including adjusted EBITDA which are not calculated in accordance with generally accepted accounting principals or GAAP. Management recommends that you focus on GAAP numbers as the best indicator of financial performance. (OPERATOR INSTRUCTIONS) At this time, I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter, please proceed.

Thank you, operator. And good morning. I'm pleased with our third quarter volume growth relative to what we're seeing in the industry. It's more evidence that our strategies are working effectively. But all of us were disappointed in the bottom line which did not meet our expectations. I'd like to begin by commenting on some key elements of the quarter. This is now the fourth consecutive quarter with positive same-hospital admissions growth.

More importantly, we produced another quarter of significant paying volume growth both in our inpatient and outpatient businesses. This included positive growth in same-hospital outpatient visits for the first time in five years. In October, our volumes were down slightly 0.4% against a very strong October 2007. I consider this to be a continued solid performance in light of all of the economic turmoil in October. Pricing was also strong in the quarter although an adverse change in our patient mix made this less visible than in prior quarters. And on costs, the salaries, wages, and benefits line rose only 2.5% on a per adjusted patient day basis. As this increase is well below the normal inflationary pressures that we've experienced, this is a significant indicator that we are capturing important operating leverage and gains in productivity on the labor front. By the time you get to the EBITDA line, the picture is mixed. On a same-hospital basis, we reported a decline in EBITDA of 2.5% or $4 million. But while we had positive cost reports settlements in both periods, this year, the benefit was $11 million less than in the last year.

So, for those of you who typically eliminate cost report settlements from the numbers, we did grow same-hospital EBITDA by $7 million or 4.9%. Either way, however, our performance on EBITDA was below our expectations. The basic reason that EBITDA failed to meet our expectations was due to an unexpected adverse change in patient mix driven by a decline in commercial managed care admissions. While we certainly had a number of success stories in the volume front, our successes were primarily in growing government volumes. The hugely successful turn around story in our Florida region is a perfect example of this. Admissions in our Florida region were up 2.7% in the quarter, extending the strong recovery which started towards the end of last year. But the volume growth in Florida is mostly government-related business which weakens our patient mix and also distorts our pricing statistics. While I want to emphasize that commercial is our highest margin business, the government related business does have a positive contribution margin. Positive contribution margins on our paying business are why we are so pleased with the 2.0% growth in paying admissions and the 2.3% growth in paying outpatient visits.

I'm sure you're wondering how the economic downturn is impacting our business. We're paying close attention and looking for trends. We didn't see any downward trends during the third quarter that were unmistakably linked to the macro-economic environment. But, here's what we're watching. For the first time this year, the growth in quarterly unemployment statistics in the county where's Tenet has hospitals, increased more than the national average everywhere except El Paso. California accounted for 27% of the national total of foreclosure filings in the third quarter, the most of any state while Florida had the second highest total. The point is that the economies in many of our local markets are showing stress. But don't forget that the downturns in the economy and the financial markets affect our competitors as well. I'm not talking about the companies that you follow but rather the not-for-profit hospitals who's only sources of capital are tax exempt debt, philanthropy, investment income and operating cash flow money. We also compete against physician-owned hospitals, independent surgery centers and diagnostic centers that rely primarily on private sources of equity and equipment leasing. All of these sources of capital are now constrained. We've already seen many of these competitors in our local markets engage in layoffs, abandon building plans and make other cuts. I think it's safe to say that some of the more extreme and costly forms of competition that we've seen in this decade will not continue.

Before I conclude, I'd like to speak to our revised expectations. Biggs will walk you through how we've actually performed so far this year compared to our outlook for 2008. The short version is that we're within the range on total volumes. But on EBITDA, it's clear now that we've closed Q3, that unless we have a very strong finish to the year, our adjusted EBITDA for 2008 is likely to be in the range of $700 to $750 million below our prior guidance of $750 to $825 million. Even the upper end of our revised range is well below the run-rate with which we expected to enter 2009. Based on this lower starting point, the $1billion of adjusted EBITDA now looked very difficult to achieve. In early August, at the time of our last quarterly call, we still thought it was an aggressive but achievable target. Now, in the midst of a weakening economy, it seems that too many trends would have to break in our favor. As we are in the midst of our 2009 planning process, we are not yet prepared to provide our 2009 outlook but will do so in late February when we release our fourth quarter results.

Finally, I hope you remember that at our investor day in June, we told you about a new strategy to leverage our expertise in revenue cycle and other services. Those activities have advanced to the point where we will soon be ready to make a broad announcement about them. We currently provide various services to non-Tenet hospitals and we are excited to begin offering them to an expanded customer base under a unified and distinct new brand. While it's difficult to project the contribution of a new venture, we believe this entity could contribute up to 10% of our EBITDA in five years. I'm very excited about this innovative new venture so please stay tuned. We will elaborate about our plans in a separate announcement within the next few days. Let me now turn things over to Steve Newman to review our performance against key growth objectives in the quarter. Steve?

Thank you, Trevor, and good morning, everyone. Trevor alluded to the central role, volume and pair mix ply in achieving our financial objectives. I'm going to take a deeper dive into these areas. While the challenges on the commercial front are significant, I want to reiterate the progress we've made in growing total paying volumes with admissions growing by 2.0% in the quarter. Growth in total paying volumes has been a fundamental goal and we met virtually all of our objectives in this regard. I commend our staff for achieving this growth and creating a firm foundation for further growth. Let's take a closer look at the components of paying volumes. Our total government programs admissions, including both traditional and managed Medicare and Medicaid, increased by 4.3% in the quarter. This is a huge increase. Let me emphasize that I'm referring to the growth of our aggregate government program admissions and not the migration from traditional to manage government programs. Given the soft volume growth reported by many of our competitors in the third quarter, it is increasingly clear that we are capturing significant market share on the government side, especially in Florida.

To take our performance to the next level, however it is imperative that we grow commercial volumes as well. Commercial volumes remain soft in the quarter with admissions down 3.4% and outpatient visits virtually flat with a decline of 0.6%. As we have mentioned in prior quarters, some of this volume loss is the result of a deliberate de-emphasis of certain service lines. You'll recall in the second quarter, that more than 90% of our decline in commercial managed care admissions, resulted from the reduction in OB admissions. In the third quarter, the decline in OB admissions remained an important factor and explained approximately half of our commercial admissions decline.

Let me take a moment to mention our surgeries group in the quarter. We achieved good growth in surgeries, especially on the inpatient side where our focused efforts produced growth of 2.6%. Our reported outpatient surgeries were unchanged from Q3, '07 but would have shown a 3.0% increase after normalization for the consolidation of a joint venture. We continue to see differentially stronger growth in our targeted growth initiative or TGI service lines. For those of you new to the Tenet story, our TGI service lines are those services we have targeted for growth, due to favorable demographic trends, attractive profitability, compelling (inaudible) need and an absence of strongly positioned competitors. Slide 13 provides a look at commercial admissions growth and the seven TGI service lines we typically emphasize in our hospitals. In prior quarters, we included 8 service lines on this slide. But now we're excluding CATH EP to reflect the implementation of a CMS directive, mandating that many of these procedures previously performed on an in-patient basis, be moved to an outpatient setting. While commercial admissions declined both in the aggregate and in seven TGI service lines, at least the loss of admissions in the TGI service lines, was less severe than the aggregate commercial decline. Unfortunately, the size of the favorable differential was not as large as in prior quarters.

Slide 14 is a new disclosure. This data is identical to slide 13 except it expands our analysis of TGI admissions to look beyond commercial payors and include all payors. In looking at total paying patients, both growth rates are positive but again, you can see the TGI service lines achieving faster growth. On slide 15, the focus shifts to TGI service lines in our outpatient business. Here we have graphed the TGI growth differentials for commercial (inaudible) outpatient visits. Again, the positive growth differential in TGI service lines is readily apparent. Taking just a moment for a deeper dive on one of our TGI outpatient service lines, commercial cancer outpatient visits increased by 2,568 visits or 16.4% and drove 25% of our growth in our total outpatient volume in the third quarter. This demonstrates the kind of impact we can have when we identify our service line for growth.

Despite the obvious threats from the recent economic climate, there are always potential opportunities embedded in every downturn. The current economic environment is no exception. The physicians in our markets report seeing the same declines and higher paying commercial managed care patients we are seeing. This provides us with the opportunity to engage them in a collaborative strategy designed to meet a community need and create a win-win-win situation for the physician, the community and for Tenet. In a number of recent cases, we have even built relationships with physicians who we've been unable to attract in the past. Many of these strategies are not new, but in the current economic environment, we are finding them to be more important than ever. These initiatives include working with the physicians to help them initiate affiliations with commercial health plans and their markets. This strategy helps steer commercial volumes to these physicians and ultimately to Tenet's services. As you know, we are focused on the expansion of our active medical staff as a leverage point for volume growth. In calendar year 2007, we added 1,744 new physicians to our medical staff. This growth includes 166 physicians, primarily in El Paso who had existing privileges at another Tenet hospital. After attrition of some 898 physicians this produced net growth of 846 physicians, an increase of 7.3% on a base of 11,603 active physicians at December 31, 2006.

These statistics are slightly modified from those disclosed at our June investor day as they reflect our 50 go-forward hospitals. We referred to these 1,578 physicians who are totally new to Tenet, as the class of 2007. In the third quarter alone, we receive 9,440 admissions from these class of 2007 positions, for an average referral rate of six admissions per new physician. This is a stunning number and significantly exceeds our expectations. You will recall that we were hopeful we would average about ten admissions from each of these physicians in a full year and now we're getting six in a single quarter. If we were to annualize our Q3 experience, we'd be looking at 24 admissions per year or 2.5 times our preliminary expectations. And we got those admissions in what is seasonally our weakest quarter of the year. I'm also pleased to report that we received an average of 1.5 commercial admissions from each member of the class of 2007 or an annualized volume of six commercial admissions. At an annualized six commercial admission rate, our ramp up for commercial also is slower than total volumes but still running ahead of our expectations. And since physician relationships take about 18 months to reach maturity, our relationships with the class of 2007 may still show further growth.

We also received 60,405 outpatient visits from the class of 2007 in the third quarter. This represents an average of 38.3 outpatient referrals per physician. Of these 60,000 outpatient visits, 2,039 were for outpatient surgeries or an average of 1.3 per physician. While the volume data to date from this class is clearly impressive, I must caution you that volume data can be extremely volatile. It would be a mistake to attempt overly precise projections based on this data. But despite this disclaimer, we are very encouraged by these results. If you are looking for concrete evidence supporting Trevor's earlier statement that our strategies are working, you'll find it in these volume statistics. The class of 2008 is building as well. Through the end of September, we added 900 physicians to our active medical staff net of attrition. Putting us well on our way to surpassing our 2008 goal of 1,000 new physicians. As our physician relationship program, or PRP, and our physician recruitment initiatives evolve, we've improved our ability to identify physicians with larger and more profitability commercial books of business. As a result, the commercial referrals we are already seeing from the class of 2008 are exceeding those from the class of 2007.

As I mentioned earlier, we've launched a number of initiatives to resolve some of the bottlenecks which have inhibited portions of our commercial volume growth. First, we're continuing to work toward the goal of achieving full participation of all our hospitals and outpatient facilities and the networks of all our major commercial payors. For the largest national payors, we've already achieved our goal of 100% participation of all our facilities. While we achieved our preliminary goal, the realization of the related volume potential will take time. Physicians tend not to altar their referral patterns overnight, even if the barriers are removed. It may take a few more quarters before they take full advantage of their improved access to Tenet. With the barriers removed for our largest payors, we're now turning our efforts to our smaller commercial payors. Second, this elimination of barriers theme is driving our initiative to work with managed care payors to get all physicians on our medical staff into their networks.

Again, we're talking about a methodical effort to remove barriers to growth. And again, the link to the related volume growth requires behavioral changes. Our experience suggests that the required physician behaviors will emerge over time once the relevant impediments have been removed. Third, is getting our PRP initiative up to maximum potential. We're refining our techniques sequentially and sharing best practices across our 50 hospitals. In the third quarter, we called on 7,301 physicians as part of PRP and saw admissions from these physicians grow by 4.4%. This is a labor-intensive effort that requires both listening to and acting upon the needs of our physicians. To drive this effort, we continue to roll out our targeted education programs for staff. We recently launched a customized program for our imaging business and just last month, we introduced an innovative program to train nursing leadership in proven sales techniques.

So, in summary, we continue to make operational progress across a number of important strategies. We continue to grow our active medical staff and expect to exceed our goal of adding 1,000 new physicians net of attrition in 2008. As these new physicians join us, they are providing referral volumes which exceed our projections and we are methodically identifying and removing barriers to the growth in commercial volumes to our existing staff positions. I focused entirely on the volume issue in my comments this morning. But there has been exciting progress on the pricing and cost fronts as well. I'll now turn the floor over to Biggs Porter to discuss these and other issues. Biggs?

Thank you, Steve. And good morning, everyone. To start with in addition to aggregate paying volume growth, I want to say that we are pleased with respect to continued progress we've made on the operating of free cash flow front for the quarter as well as the cash generated from asset sales (inaudible) settlements. Although we're in a tough economic environment, we are continuing to drive on these initiatives. I will come back to this later.

On the P&A, there are a number of metrics and value drivers which offset each other. So, I will give a few overview comments intended to place our performance in context. To begin with, there were a few factors which should be highlighted as key considerations for the quarter. First, there is seasonality which negatively affects both volume and bad debts in the third quarter, typically the industry's weakest. Second, while Cox reports settlements remain positive in both the current and prior year quarters, we experienced an adverse wing in prior year cost settlements of $11 million. Third, we had an estimated $4 million negative effect of hurricane Ike. And fourth, we saw increased softness in commercial managed care volumes which compromised the visibility of some of our other progress. We estimate that this had an adverse effect of approximately $15 million on EBITDA. The hurricane costs, adverse mix shift and a portion of the bad debt expense for the quarter aggregating approximately $20 to $25 million were outside the range of our expectations for the quarter and for the year and are therefore significant contributors to our lower outlook for the year.

With that context in mind, I'll now turn to review of the major line items. With respect to revenues and pricing, our third quarter volumes were converted to the solid revenue growth of 5.2% on a same-hospital basis. Excluding cost report adjustments in both quarters, same-hospital revenues would have grown by 5.8%. Same-hospital commercial managed care revenues in the quarter were up 5.6% or $45 million, despite the 3.4% decline of same hospital commercial admissions, the 0.6% decline in commercial outpatient visits and a $6 million negative effect of pair mix shift from higher priced to lower priced commercial payors. We have just adjudicated the fist of our pay for performance payments with one of our largest commercial payors. These dollars will begin to be visible in early 2009 and in the three-year period, 2009-2011, we continue to expect these payments could be worth as much as $35 to $40 million. We are currently contracted for 79% of our commercial revenues for 2009, on a basis consistent with our prior lock (inaudible).

Turning to trends and expenses, same-hospital, total controllable operating expenses rose by 4.1% on a per adjusted patient day basis. Much of this increase is in supply costs related to the progress being made growing attractive service lines, including surgeries and is substantially offset by higher pricing. Irrespective of this, the control of supply cost remains a high priority item and our new outsourcing arrangement with Broadlane is designed to further improve supply chain performance. Continued improvements in operating efficiency were clearly evident on salaries wages and benefits. SW&B grew by just 2.5% on a same-hospital per adjusted patient day basis, demonstrated the benefits of our cost control efforts and a more powerful operating leverage we are capturing with volume growth. We continued to improve our discipline in this area as well. We have finished rolling out a new productivity tool which gives managers much more realtime staff planning capability than they have had previously making us more flexible, with much improved monitoring and reporting capability at all levels of the organization.

On bad debt, we have put slides on the web which give some trend and other information. I will point out that on collections, our experience shows little sign of a softening economic environment. Our collection rate on commercial payors remains at 98% and our self-pay moved less than 0.5% to 35.4% from 35.8%. Also, we continue to improve our point of service collections. We're now collecting just over 35% of our total self-pay collections at the time of service. This is up from 30% a year ago and we expect it to continue to improve as a result of our initiatives. So to summarize, although partially offset by adverse mix and an increase in bad debt expense, our earnings benefited from gains in paying volumes, commercial pricing and improved efficiencies and controllable costs. In the aggregate, we continue to see clear evidence that our strategies are working.

Turning to cash. As stated in the release, in the third quarter we had positive net cash provided by operating activities of $151 million and adjusted free cash flow from continuing operations of $30 million. This is an area where we have clearly been making progress. This is the second straight quart positive adjusted free cash flow. This helped our combined cash in investments balance to increase from June 30 this year by $208 million to $560 million, which was also helped by a receipt of $144 million in proceeds from the sale of our investment in Broadlane. You may have noticed on our balance sheet the $48 million in investments and reserve yield plus fund. Like others with these investments, we have reclassified this outside of cash because it is being liquidated over time. (Inaudible) of the $48 million will stretch into next year with the vast majority expected be received by the end of the fist quarter. Including the cash from broad lane, we have already collected $217 million this year with the 2008/2009 balance sheet efficiency and other cash initiatives we announced earlier this year.

We continue to pursue the sale of our medical office buildings and remains under the letter of intent to sell the USC hospital. (Inaudible) as you might have guesses, the [MOB] transaction has become more difficult for buyers to finance under the current market conditions. We have completed the bidding process prior to the meltdown of the credit markets but not yet have a binding transaction supported by buyer financing. We still have interested buyers and believe the transaction can be completed as soon as financing becomes available. On USC, the University has been completing its due diligence which has taken longer than anticipated and negotiations are continuing. Unfortunately at this time it is doubtful neither the MOB or USC transactions will close by the end of this year, under the current circumstances. We so still believe both will eventually close. We are tightening the ranges slightly on all our 2008-2009 cash opportunities to a range of $780 to $950 million as compared to a range of $750 to $950 million, we previously disclosed.

Slide 28 compares our current and prior estimates. Of course in the current market, nothing is considered done until the deal is closed and cash is in the bank. Although we settled the insurance claims we had outstanding and collected $46 million in the quarter with another $9 million to be received this month, we also have reached a tentative settlement agreement on a California waging hour case, for an amount which will range from $62 million to $85 million which is expected to be paid next year. On working capital, our cash management discipline produced visibility results in the third quarter as accounts receivable days declined to 51 days at September 30 down a day from 52 days at December 31 and showing a marked improvement from 53 days at the end of the second quarter. We've accomplished through collections of overdue accounts, by reducing the number of day sales residing at discharge but not billed. We continue to work both those areas as a part of fully achieving our objective of an additional one day decline in air days by year end. As you may recall, our normal trend on cash is to have negative cash flow in the first quarter, resulting from the pay down of year end payables and annual payment of our 401k match and incentive compensation. We then stabilize in the second and third quarter with the most significant cash generation from operations occurring in the fourth quarter due to the year end buildup of accounts payable. We expect that general trend to continue this year.

Before I go to the outlook, I would like to comment on our progress on the volume front relative to the expectations we set earlier in the year. In terms of total volumes for the quarter, we are now achieving growth rates on admissions for the top of our outlook range for the year. On the outpatient side, where we got off to a slow start in 2008, the 1.1% growth we generated in the third quarter, was well above the outlook range we had most recently established for the year. Although we didn't provide outlook ranges for paying volumes, our performance on that metric is even stronger. If we succeed in stabilizing or improving mix, this kind of volume growth will translate into significant earnings growth.

Let me now turn to our outlook refinements. I can't recall a more difficult time in which to be predicting future results. We know as well as anyone else that there are a variety of negative pressures which are resulting in conservative consumer behavior and increasing unemployment. What we don't know how severe these conditions will become and what the corresponding effect will be on our business. Acute care facilities should not be as sensitive as those which rely solely on elective procedures. Also to the extent the hardship hits the uninsured, its effect on us is muted because our collections on that group were relatively low anyway. Primary risk to tenant is the potential for a broad deferral of procedures, which could result as individuals lose commercial insurance as employers drop coverage, increase deductibles or reduce employment levels. Or individuals simply tighten their purse strings in an uncertain environment.

Based on nine-month results and concerns about the economy and commercial admissions in the fourth quarter, we are reducing our 2008 outlook for adjusted EBITDA do to a range of $700 to $750 million from our prior range of $750 to $825 million. About half the reduction is due to results of the third quarter as I discussed earlier and have (inaudible) concerns about volume and mix for the fourth quarter. Slide 30 on the web details the line item revisions per outlook. You may recall this, since 2007 contains $60 million of Medicaid funding, which did not repeat in 2008 and included $40 million of (inaudible) cost (inaudible) adjustments. We've also started our earnings walk-forward from the adjusted 2007 starting point of $600 million. Accordingly, a 2008 result in the new range of $700 to $750 million, is still a substantial (inaudible) performance on the critical value drivers of paying volumes, pricing growth and diligent cost control. We have also updated our cash flow welk-forward, to reflect the revised earnings outlook and the timing of our cash initiatives. Being without the sales of [MOB] and USC, we project hitting the year with $375 to $475 million in cash and $24 million in investments. Which puts us in a position that we do not expect to near the credit line of 2009. Slide 31 provides details on this walk-forward.

In terms of 2009, our prior walk-forward is demonstrating a path to $1 billion of adjusted EBITDA at 2009, had relied on an $825 million, 2008 result, as a required starting point. Since such a strong starting point is now unlikely, the roll-forward will need to be adjusted. We're still in our planning process for next year. As this process normally culminates in December. At this point, the $1 billion target for 2009 adjusted EBITDA appears to be a considerable stretch. But until we complete our planning and have a better view of the economy going into the first quarter, we do not have a clear refinement to make. The only thing I could carefully say at this point is that the target should probably go down by the $75 million reduction we have made to the upper end of our 2008 range. With respect to adjusted free cash flow, I would not expect to make the same magnitude of adjustment to our 2009 expectation because there are other drivers we could positively effect beyond EBITDA. Regardless, we still expect significant improvement in 2009 earnings cash performance. As Steve mentioned, irrespective of last quarter's decline in commercial volumes, we have a number of initiatives to either increase commercial volumes and improve payer mix or to mitigate the effects of the economy. In addition, we still expect to benefit from improved managed care pricing, improved cost management and cost reductions initiatives, improved performance from our new hospitals, the continued benefits of investments made over the last three years and our working capital and other cash initiatives.

Turning back to highlights and comments on the quarter, we are making great strides in demonstrating the success of our strategies on both inpatient admissions and outpatient visits and achieving that growth with paying patients. We have a broad set of actions to increase commercial and other targeted volumes. We're achieving significant pricing and revenue improvement as a result of our managed care negotiations. We continue to control costs effectively. We have significantly improved cash flow year-over-year and including the $129 million we collected in 2007 and the [$272] million in 2008 to date. We have generated $401 million of cash from our initiatives and continue to drive on the remaining $510 to $680 million of opportunities. With that, I will turn it over to questions. Operator?

(OPERATOR INSTRUCTIONS) Our first question comes from Adam Feinstein of Barkley's Capital.

Good morning, everyone.

Good morning, Adam.

Good morning.

Just, I guess the key issue here today is really with the commercial mix and just the volume issues there. Just curious, I mean what was your expectation? You know because if you look back over the last several quarters, you know, the decline wasn't that much different. I mean it was 3.7 in Q1 and 2.2 in the second quarter. So, just curious as you think about your own expectations on the commercial managed care. And then I'm just curious to know what's embedded in the guidance for the remainder of the year are you assuming things get worse there? Stay the same? So, just wanted to better understand how different the quarter was from what you guys were looking for?

Okay, this is the Biggs. I'll answer first and if Steve has anything he wants to add, he can do that. In terms of the trends that we'd experienced, if you go back to 2007, we have been closing the gap on commercial volume losses and just about hit the break-even point on it in the third quarter and then at the end of the year it retreated some and first quarter retreated some. But then the second quarter got better. And we projected a continuing -- improving trend on it. That trend would have been drive by PRP initiatives, TGI, physician recruitment, (inaudible) par strategies, everything that we are doing to drive commercial trends. So, our expectation was that we had declining commercial losses fist quarter to second quarter. We had made improvement last year, (inaudible) some, but we had improved trends going into the second quarter and all of the things that we were doing would drive us to further moderation and to growth as we went through the rest of this year.

So, in terms of expectation, generally speaking, it was that as we had volume growth in the second half of the year, it would be on a relatively even mix compared to last year which would mean that is we had volume growth, overall, we would have volume growth in commercial. Once again it's based upon all the individual value drivers that we look at as opposed to just looking at the aggregate trends. But the aggregate trends also showed that maybe we were headed in the right direction in the second quarter. In terms of the fourth quarter, the range that we have out there certainly at the low end would provide for further, you know, decline along the lines, possibly even at a lower level or worse, if you will, than what we experienced in the third quarter and the upper end of the range would assume some level of moderation but not necessarily constant mix or significant growth.

Okay, and then earlier in some of the prepared comments, you guys were talking about overall commercial managed care volumes in your markets. I don't know if I heard the comment right but just something to the extent that commercial managed care volumes weren't growing in some of your markets, which would imply that you guys aren't necessarily losing market share. But just, we're seeing a decline within that patient group. Just curious if you can just provide some commentary there.

Yes, Adam, first of all, I'd like to say you're right to say that this is the key issue out there. And it unfortunately is one where there is very little information available. Competitors do not disclose these numbers. Some times when they do, they mix in managed (inaudible), so, it gets to be very hard to get to what we're really talking about through the managed commercial patients. We hear anecdotes from some of our, not-for-profit competitors, in markets where they talk about it being down more significantly but it's not reliable. I think you have to look at the enrollment statistics for the top national payors. They do disclose those numbers. That suggests that the pie is certainly not growing.

It may be shrinking a little bit. And we -- unfortunately, though, to really know what's going on, you'd have to get that down to you know, virtually every payor out there -- that information just doesn't exist. So, point back to our strategies to, you know, target these types of patients both in physician recruitment and the other strategies. Unfortunately, we just can't say are we doing a fantastic job, a terrible job or in between, because of that lack of context. So, we would have put the statistics into the release if we had confidence in them, we just don't have confidence in anything about the overall environment for commercial managed care in our markets.

Sure. That makes sense. Okay, thank you.

Our next question comes from Ralph Giacobbe of Credit Suisse.

Great, thanks. So, yes, just going back to the admission question and just looking at the different buckets, just to clarify, you said about half, I guess, of the 3.4% decline in admissions was due to de-emphasis of OB, is that right?

That's correct.

Okay, and then I guess in looking at that 13.5% increase in that government managed care admission, I guess obviously playing some role in the decline in Medicare. Can you maybe just give us a sense of pricing within those two buckets? Are they comparable?

Ralph this is Steve Newman. There's very little difference in terms of our net revenue on a case mix index suggested basis between Medicare and managed care and Medicare fee for service. So, we don't really discriminate from that perspective.

Okay, and going forward, is there any, you know, leverage that you all may have, sort of, on managed care to get those rates above Medicare rates similar to commercial or is that sort of off the table at this point?

In some of our locations, we really receive 102% to 103% of traditional managed care. Sort of gets washed out as we look at it over time, but based on legislative activity in Washington, there's been a lot of talk potentially about taking away some of the funding of Medicare advantage plans. So, over the next few years, we may, in fact, see a bigger move back into Medicare or fee for service. We tend to have higher utilization of our services with patients that are under Medicare or fee for service. So, that would be a good thing for us over time.

I think Steve meant 102% to 103% of traditional Medicare.

Okay. And then just my one follow-up. Can you remind us of the size of your physician base?

We presently have a little over 13,000 active medical staff.

Okay. And then, can you talk about maybe the ramp of the new Docs how long, you know it takes to get to some sort of normalized level? And then anything you can do in terms of getting them focused on commercial. It sounds like some of the new recruits have been doing well which means sort of the existing base is sort of slumping relative. So, any trends there that we sort of pick up on and why that is? I know in the past, we've talked about sort of splitter physicians. Any commentary there will be helpful.

Well, I would say that our experience is that the ramp-up in our newly recruited physicians varies anywhere between 12 and 24 months in terms of their utilization of in-patient and out-patient facilities and referrals to our existing specialists or primary care, if in fact, they're specialty recruits. So, you can expect those volumes to ramp up over that time. That's why we're so encouraged that the class of 2007 had annualized 24 admissions based on their Q3 '08 performance. With respect to commercial managed care, when we relocate physicians from out of state, we get certification for them to participate in Medicare and Medicaid sooner in many instances than we do in commercial managed care. So, that ramp up would actually occur later in that 24-month time period than Medicare and Medicaid participation. Our sense is that we're continuing to work with our payors but the national payors and the large regional payors to get these newly recruited or relocated physicians into their networks even sooner than we've been able to do in the past. We've had good cooperation from the payors and we've used a number of techniques to facilitate that affiliation.

Okay. Thank you.

Our next question comes from Matthew Borsch of Goldman Sachs,

Hello thanks, this is Shelly on for Matt. I am wondering if you can update us, I am not sure when your latest data set is available on out-migration in your markets. Interested from both an inpatient and outpatient perspective.

Out-migration to what?

Out migration of what, Shelly, to what?

Well, as we think about the opportunity to take share if there is a shrinking pool of total admissions in the market. The market share opportunities sounds like it could be pretty compelling. So, is there a market share opportunity in your key markets?

Well we certainly believe there's market share opportunity in all of our markets. We know there are patients that are out-migrating from our individual networks. I think earlier in our earnings discussions, we've talked about the consolidated market in south Florida where previously we had patients both high risk newborns, cancer cases and some higher acutely cardiac cases that were migrating out of our network to our competitors both in market as well as all the way down to areas like Miami. So, we know we have opportunities there. We've seen it in South Carolina where there's been out-migration from some of the cities in which we operate. Especially those in rural and suburban locations.

So, we believe we have substantial opportunity to capture market share both of existing patients that are receiving service within the market but also those that are out-migrating for services based on perception of what service offered. Recently, I was at Hilton head in South Carolina visiting our Hilton head hospital and our new coastal community hospital. And we identified some out-migration to cities like Savannah and Buford. And we have put into place specific tactics to communicate to our referring physicians, primary care base, the existence of some services that they didn't even realize were being offered at Hilton head and coastal. Therefore, patients don't have to travel to Buford or Savannah in terms of receiving those services. So, out-migration is an issue for us. And we believe we can capture significant market share with tactical rollout customized for each market.

Okay. That's very helpful color. Just, for those of us that track the market share opportunity, as of the last cost report filings it looks like in your dominant zip codes overall, not just for key markets, but overall you had about -- you had over 60% out-migration in your markets. So -- and I'm happy to follow up with you offline on this one. But, because there is a lack of data especially for the commercial managed care issue, if you could talk about, to the extent you have data, on changes in the total out-migration or market share opportunity, I think that would be helpful for to us get a sense of more broadly what's going on in the industry. And then I guess just a couple of quick follow-ups if I could. For the USC -- for the University hospital transaction, is it -- was that a prefunded transaction? And is all we're waiting for the due diligence?

I don't know what you mean by prefunded.

Do they have committed financing for that purchase?

No, they have a substantial endowment and they have a AA rating and the ability to issue tax exempt financing, but they had not, you know, specifically prefunded this transaction.

Okay. And then just one follow-up. I missed this -- the comment. When -- had you commented on perhaps tapping the revolver? Was that '09?

Yes, I commented we didn't anticipate needing the resolver in '09.

You did not anticipate needing it in '09?

Correct.

Okay, great, thanks very much.

Our next question comes from Tom Gallucci of Merrill Lynch.

Thanks, good morning everybody. Just on the commercial managed care volume, not to beat a dead horse here, but last quarter you'd said 90% of the decline was OB and this quarter 50%. And I think last quarter you also cited four or five specific hospitals that were a disproportionate drag. So, can you give us a little bit more color in that context? What else are you losing besides the OB at this point? And were there any particular facilities or does it seem more widespread maybe than it was last quarter?

Tom it's Steve Newman again. Certainly in this quarter, it would appear that the commercial volume loss was more broad based than we had seen in the prior quarter even though 50% could be explained by OB alone. We certainly had some decreases in areas that we expected to grow for example, orthopedic surgery in the commercial managed care area that we had targeted along with other payors in orthopedic surgery, was down 0.6%. Compared to Q3 of '07. But a full 0.75 of our hospital, between 0.6 and 0.75 of our hospitals had decreased commercial managed care in the quarter compared to a much narrower scope of hospitals in Q2. So, sequentially, we saw more of a national or broad based impact than we had seen before.

So, is there -- is it possible that you're just focusing so much on the certain lines there that you're targeting that some of the other is falling off or -- and also, can you remind us why OB is such an undesirable claim for you I guess that you're losing so much of it?

Well we're not losing it as much as we're de-emphasizing it. De-emphasized it for any number of reasons. One is in markets that are highly competitive, there are a lot of our competitors that offer OB services and are putting significant capital investments into OB, when our demographic assessments suggests that the birth rate will fall in the relevant market over the next five and ten-year time periods. Therefore it would not be a wise investment for us to upgrade those OB facilities.

In fact, we can convert them into facilities serving service lines that will grow over time whether that be gastroenterology or oncology services, diabetes care, neurologic care. So, that's true. The second issue is except in a rare instance, OB is not a profitable service line for us. And therefore, those are the two major reasons why we de-emphasized OB. With respect to the targeted growth initiative, its interesting.. Many of our markets have predicted significant use of orthopedic surgery, neurosurgery and spinal surgery over the coming years. Our concern, quite frankly, is that because of the economic circumstances nationally, many insured patients who really need this surgery done, are putting that off so that we may see a balloon of utilization coming up in the next year or two as those situations actually deteriorate and they may actually have more serious illness and consume more resources over time. But in this economic climate, where we have deductibles or co-pays or co-insurance, they may (inaudible) to not have that sort of, fairly serious surgery considering it not an emergent case but one that they can put off to next year, or the second half of next year.

Okay, and then just relative to your comment there that OB is typically not that profitable. I think in your slides you mentioned that decrease in commercial managed care costs about $15 million in EBITDA. So, it's safe to assume that the 50% of the decline that was not OB is the primary driver of that?

That's correct.

Okay, thank you.

Our next question comes from Gary Lieberman of Stanford Group.

Thanks. Good morning.

Good morning, Gary.

At the risk of staying on a topic that's been beat pretty dead here. I guess with respect to the managed care volumes, it's been going on for a while. It's been going on for three or four years that you've lost commercial share. So, I guess, in your thoughts about it, is there something systemic either about the hospitals or the reputation or the physicians that you're recruiting that just is unable to get that going in a positive way?

Well, Gary, let me start off with that by saying that number one we have no confirmed data that we're losing market share. We're losing volume compared to prior year. The second issue is we're doing pretty well in terms of outpatient services at our same hospital. So, I wouldn't think it would be a reasonable conclusion to suggest there's something systemic about our facilities that is repelling commercial managed care. I do think that we have a lot of tactics underway to eliminate road blocks to those patients getting to our inpatient and outpatient facilities over time. If we look at the payor mixes of our free standing facilities, our ambulatory surgery centers, our diagnostic imaging centers, those have very healthy commercial managed care business that are growing and we're seeing that in our hospital based outpatient surgery area also. So, we don't think it's anything systemic within the hospitals themselves or our facilities. We think they're externalities that are affecting those volumes in sequential fashion.

Okay, and then I guess you've had a couple of announcements where you've become the preferred providers for -- in a number of markets, is there any data that indicates that that has materially helped in terms of increasing the commercial admissions or taking share?

We have some early data as you'll recall from some of our previous earnings discussion. We have become in-network with a number of our larger hospitals over the last six months. And that is beginning to translate into commercial managed care from those particular payors to our in patient and outpatient facilities. That takes some time to ramp up because you have office managers that work for doctors who are very used to five or ten years of -- almost as a default referring those patients to other facilities not knowing that the new contracts allow those patients to be referred to the Tenet inpatient and outpatient facilities. So, we anticipate that will be a significant contributor over the coming quarters.

Okay. Thanks a lot.

Our next question comes from AJ Rice of Soleil Securities.

Thanks, hello everybody. Just maybe, could you guys comment on where you're at in terms of your commercial and managed care contracting going into '09 at this point, what percentage is done? Can you comment on the relative rate increases between commercial managed care and your government managed care? Is that governmental managed care seeing similar rate increases to the commercial?

Okay. The amount that we negotiated commercial managed care next year is about 79% of our 2009 commercial managed care revenue base, so, substantially negotiated for next year. In terms of increases, I believe we disclosed in the 10Q, we're expecting 3.5% increase in Medicare inpatient and we would expect a -- certainly a bigger number than that on the commercial. We haven't given a specific outlook for commercial. We'll give that our indicators of that at least to the context of the overall in-patient pricing expected for next year. And we get the 2009 guidance in February. Having said that, in the prior walk-forwards that we had in 2009, although we haven't updated them for this purpose until we complete the planning, there's still some value to those walk-forwards on the elements other than the starting point. And so they get some indicator what expectation might be for next year although (inaudible) the line items will change by some degree.

Are the price increases on the commercial managed care so much of the government managed care?

No, no, much much, higher -- much higher.

Okay, is it higher on the government managed care than the fee for service managed care?

No, I think we'd expect those to be pretty much in line.

Okay. Then real quick on the 2.7% increase in Florida and you're attributing that to heavy government increase volume, is that market or is that a function of your patient -- of your position recruitment or just give us some color around what's happening in Florida from your perspective.

Well, AJ, I think we're making progress on all fronts in Florida. Our A-teams in (inaudible) leadership are really geared up in terms of not only the physician relationship program and redirecting business to our in patient and outpatient facilities already from positions already practicing there. But we have expanded the employment model there and we've relocated a number of physicians from out-of-state to Florida. Obviously, the concentration of senior business in the three counties in which we operate is way above the corporate average, so, that we would expect as we grew business we would disproportionally grow Medicare and managed Medicare. By the same token, we are able to get these newly recruited and relocated positions into commercial and managed care networks faster than we had in the past. And we're seeing commercial volumes still down year-over-year but less than they were last year in Florida. So, I think we're making progress on all fronts in Florida. Obviously, to some extent, its countered by the head winds of unemployment and the financial issues that are affecting south Florida.

Is the -- just the final nuance on that, is the increase in positions in Florida disproportionate to the increase over all that you're talking about?

Are you talking about increase in positions across the company?

Right.

No, pretty proportional. Florida is carrying its own weight but so are the other regions. We do obviously have some differences in the percentage of those employed versus redirected versus relocation agreements. For example in California where we have an anti-corporate practice of medicine environment we don't employ physicians in Florida so, 100% of the growth in the medical staff -- in California, I'm sorry, in California is related to redirection and relocation.

Okay. All right. Thanks a lot.

Our next question comes from Cheryl Skolnick of CRT Capital Group.

Okay. I'm going go after this commercial managed care in a completely different way and I'm going ask a question that I think needs to be asked. You've clearly had overcome tremendous of course obstacles. You've built volumes, you've done that, you're driving them through better relationships with physicians through better facilities that are clearly better managed and better represented with higher quality scores. So, all of that's in place. You've done a tremendous amount. I'm going to make an extreme statement I'd like your reaction to this. It doesn't matter if you don't put EBITDA on the bottom line. So, why aren't -- isn't the company driving the EBITDA higher?

Is it that you only can drive -- get EBITDA leverage, meaning incremental EBITDA from incremental volumes, if you have your highest margin patients in the bed? It seems to be that one could interpret the trends numbers that way. Or is it -- so, then would I ask the question, if it's not labor productivity, although I'd wonder because your labor expense ratios appear higher than everyone else's and you've got some uptick in supply costs and your bad debts are lower than everybody else's by, I don't know, 400 or 500 basis points, then it's other operating costs. But there's something there that's preventing the company from generating the kinds of EBITDA growth off these margin numbers that I worry is in addition to mix. And if it's the mix then it says you can only make money if you have high margin patients in your beds. And that's troubling because you have competitors who appear to be getting similar pricing and similar margins on Medicare advantage patients in the beds as they get to commercial or so they say. They don't necessarily document it, but so they say. So, I'm very concerned about whether it's the pricing or it's the cost structure or it's the way the hospitals and the corporate melt together and operate it, that you can't drive this EBITDA to the bottom line. Do you have an answer for what it is?

Well, aggregate utilization is still low and we said we have a lot of excess capacity. So, cost structure standpoint clearly there's excess capacity there to (inaudible) additional volumes. And the rate at which those volumes, you know, create incremental earnings to the bottom line, will be significantly affected by mix. We will continuously look at cost structure and improve which we've been doing and we'll continue to do. But comparing ours to others as we know is problematic when you look at the educational institutions we have and the -- California where we have higher labor costs because of the greatest requirements of California and (inaudible) traits. So, it is hard to do the (inaudible) comparisons to others, you're trying to do, although I respect it's a reasonable place to go to try and understand us versus them. In terms of commercial versus the other payor categories, it really is not just a matter of measuring that.

It's also a matter of measuring the mix within commercial. And if you go back earlier this year, the fist quarter we had commercial losses. Our volume loss is relative to the prior year. And they spike for that matter but still we had a good year -- or a good quarter from a pricing standpoint because otherwise mix was favorable within the quarter on the patients that we did have. And on the TGI volumes that we had targeted, we had greater separation in that trend versus the overall commercial trend. So, not just commercial but what kind of patience you had within the commercial category. And its not all price, it's a matter of what do operate most efficiently on from the standpoint of volumes.

So, clearly continuing to drive TGI is very important, even if the overall commercial metric was diminished. The examples earlier in the year show that we could still have a good performance and improved (inaudible) EBITDA without aggregate commercial growth. It's just one of many variables. The company, I think has targeted the right strategies. We can become more profitable through Medicare patients, the positive contribution from Medicare patients as well as stabilizing commercial.

I guess -- okay, I hear you. So, the answer is it depends on your patient mix and sometimes you can generate it but it seems more often than not as goes commercial managed care, so goes EBITDA. And I guess I would -- as I said, I would be concerned that there's some other thing going on in either the cost structure or the way the hospitals are being managed or in the nature of the mix that you're getting that's preventing the company from getting incremental profit purely from the volume as opposed to being so dependent on the mix.

I'd be curious about that, especially since, you know, I mean, I understand that your utilization is still only 51% of debt and that you have more room to grow and that we may not be having this discussion at 60% utilization, so I get that part. Okay, moving on from here. Are there specific steps or events that the company is looking toward to help it to become more profitable on the volumes that it's getting? And specifically, I'd like to understand Broadlane and what that can do for supply costs, how that contract will work to help you, presumably, to reduce costs over the life of the contract.

Okay, from a -- a couple of things on Broadlane, we -- through the outsourcing there's a couple of benefits. Reduced costs from the standpoint of the actual cost of operating our supply chain, meaning the internal costs would be reduced at just a result of outsourcing. Then we also expect the costs of what we purchase to go down because we'll have better capability to consolidate, avoid one-off circumstance where's things are purchased. And it will stay in less than optimal fashion because you had multiple players making independent decisions as opposed to it being a more coordinated effort. So, it reduced costs on both fronts.

In terms of a large supply cost being attributed to implants and much, much more challenging circumstance to deal with but that is not something that we give up on we are working with our physicians we will work with the distributors to also try and create better standards and negotiate better prices so that we can reduce those costs as well. In terms of other aspects of Broadlane arrangement, Broadlane has assisted us for several years with respect to initiatives to improve our costs. Think of it more in a consulting fashion as opposed to an absolute execution of the procurement process standpoint. And as a part of this arrangement, we will continue that with them on a -- what we think are very economically satisfactory terms without being more specific. So, that we'll be able to continue to drive costs down utilizing their resources to analyze, consult, and improve utilization to go forward. But they're also going help us with inventory management which just gets to cash flow, so we expect to be able to reduce inventory as a result of the outsourcing as well.

Okay, are there any plans to improve the pricing on Medicare advantage or the government managed care to get the rate increases up to a level more consistent with commercial managed care, since you're using the same network of physicians?

I don't think that we should expect to be able to accomplish that.

Okay. Thank you.

Our next question comes from Darren Lehrich from Deutsche Bank.

Thanks, I have just a question about the Medicaid environment and really with the risk assumptions that you built into your prior '09 guidance. And I guess, can you just remind us what was there in terms of accounting for risks whether it be higher bad debt or Medicaid cuts you didn't know about and today what you know about Medicaid going into '09. And I guess specifically do you have any expectations relating to South Carolina, Alabama or any other states you might be monitoring?

At this point, the states on which we have identified and had identified previously that there would be reductions going into next year were California and Florida. And California we sized it at approximately $8 million of full year affect next year, with a couple million affecting the fourth quarter of this year on their medical reductions. And thats primarily at one hospital. You may recall that those reductions really only affect hospital providers, which are not under contract with medical and we only had one hospital that was this that category. So, that's at about $8 million. And then in Florida, on an annual basis, the reductions that they have put in place for $10 million with some affect this year so not a full year-over-year affect of $10 million. That's what we identified. And those are the two states certainly which had seen the greatest amount of budgetary challenges that they we're having to work through. Certainly, there are a lot of states which have budgetary challenges and we monitor those. But at this point in time, we hadn't factored anything else into the 2009 out look that we had out there before. And we don't see any imminent reductions on the way.

And then -- that's helpful. I guess just as far as the risk associated with higher bad debt clearly, you know that's an expectation we all have now given the unemployment trends. You guys have some pretty sophisticated revenue cycle data you've presented at some of your investor conferences before. I'm just wondering if you might comment for us without necessarily commenting on bad debt for '09. But what you're thinking is in building up a bad debt forecast and tieing it to unemployment or some of the key indicators you mentioned, like foreclosures. Can you just help us, you know, give us a sense for how you're thinking about that?

Well we keep watching for any trends in our collections associated with the economics of the markets that we're operating in. And I think that maybe, as mentioned earlier, in some of the markets where there have been the greatest challenges from an economic standpoint, the more foreclosures, the most amount of unemployment we really hadn't seen significant effect on the hospitals or on collections. And the collections have remained very stable. So, we -- through all of the economic noise to this point, we have not observed any trend negatively affecting our collections or our bad debts. Uninsured volumes and charity volumes combined have been going down. We have been very successful at taking patients who might have previously been uninsured or charity and qualifying them for Medicaid. We've put additional people into the emergency rooms of our hospitals to help in that regard -- they're the MEP program, if you will. We have the right care right place initiative, which may have resulted in people receiving care more appropriate environments and high cost emergency rooms. And has also had -- maybe had some impact here but all those things, number one have been mitigators and would continue to be mitigators and the outcome of that and other factors is we have not seen any real negative trends.

So, as we go into next year, once again, we wouldn't necessarily expect to see negative trends expect for the fact that it is possible that we'll have a big increase in uninsured, it is possible there will be an increase in deductibles. But we'll also keep driving on all our initiatives, getting more up-front cash, more card swipes, more effort to qualify people, better information gathering on the front end. I think I may have talked before about -- with respect to elective procedures, in order for an uninsured patient to receive an elective procedure, it goes up through the CFO level of the hospital to sign off on. Because we think certainly (inaudible) electively wants to come in through the hospital, there should be some reasonable expectation on their part to pay for the service. So, that action as well has helped us and would likely continue to help us. So, there's a long list of activities. The ones we talked about at investor day certainly included, that will help us mitigate. Is it a risk? Absolutely. We'll monitor it but it's hard to say exactly what to expect. That's one of the things we'll size up as we watch what happens to the economy in the next few months.

Okay. And then my follow-up, is just -- I know you mentioned your expectation about the asset sales falling next year. Is there any change in evaluation that you'd put out into the marketplace on USC and if not, I guess I would just observe that there's a pretty wide range implicitly here on the [MOB] sale. Is that the right observation to make? And is that just because of the financing conditions?

Well, I think that we've left the range out there reasonably broad giving some room for give and take on a number of the items. So, I wouldn't associate any -- ascribe any change to any particular line item as much as saying that there's still just a range of outcomes. Certainly we've tightened it some indicating that net-net or increasingly confident in being able to operate within the range we put out there before without talking about the individual line items.

And do you have of a closing date yet for USC?

No. There's not a definitive agreement. There's not a closing date at this point in time.

Okay, thank you.

Our next question comes from Rob Hawkins of Stifel Nicolaus.

Thank you, good morning.

Good morning, Rob.

You guys have been getting traction in (inaudible) the TGI areas. It seems the game plan is shifting a little bit. Can you kind of flush that out for me a little for me a little bit? It seems like you might be, you had some other services and what that might mean for the outlook?

Well, Rob, I wouldn't say that we're changing the game plan at all. I think we're working to expand the tactics we use to execute the game plan. Our sense is that overtime, the sustaining and successful strategy, will be building services that people will need for the next five and ten year, and we believe that those services will be paid for at a price that will allow us to have a significant margin and to generate free cash for reinvestment into our facilities and people longer term. So, we're only adjusting the mechanism by which we roll out tactics to our hospitals to capture incremental managed care patients in the services that they have targeted since each of the hospitals has a customized targeted growth initiative service list based on factors in their own market.

Obviously, some of those could change over time individually in a local market if a competitor closes down, closes down a service, decides to not build a major facility or things of that nature, all of which could occur as a consequence of the changing economic environment and some of the capital structure effects it will have on our competitors. But I wouldn't say at all that we're changing our game plan and our hospitals who are now going through the business planning and budget process have reaffirmed for the 2009 year their targeted growth services as well as the medical staff development plan which interfaces with that as well as their capital plan, which supports they're targeted growth priorities. So, we're not changing the plan. We're adding tactics to execute it more successfully.

Is it fair to say those tactics, you know, might have an impact, I mean -- there's pretty good results that you've gotten in terms of the referrals, the six or whatever on average from the folks that you've just been contacting in this quarter, but only about 25% of that was commercial mix. So, does some of that have to do with as you mentioned earlier maybe contacting the office manager to let you know they're in network or is there something more that you guys are doing to kind of change that shift to (inaudible)?

Well, I think we've really continued to refine our techniques for identifying physicians that have larger books of commercial business. I think over time, that will add to the percentage of commercial managed care referrals we're getting out of that newly redirected or newly established practice when we move a physician from out of state. As I mentioned earlier, while we have the specific numbers in our text regarding the class of 2007, based on our improvements in targeting the very, very preliminary information out of the class of 2008, those -- and we looked at the physicians that were active staff, status began in Q1 '08. Their proportion of commercial managed care is even higher than the class of 2007. So, while we don't have a statistically significant sample that we want to give you the specifics on as we did the class of 2007, we're very encouraged that these techniques will bear fruit with higher percentages of commercial managed care coming from those that we're adding now and in the future.

Alright. Thanks. I'll jump back in the queue.

Our next question comes from Justin Lake of UBS.

Just a couple questions on the bad debt side. Specifically, you know, it looked like your collection rates declined in the quarter. I'm just wondering if you can kind of give us an idea of where those specifically changed, whether it was balanced after the one insured?

It was balanced -- that 40 bases points would have been associated with the balance after. That has a relatively small effect on a quarter bad debt, a couple billion dollars. I think that -- also affecting bad debt in the quarter were are about $7 million of charges related to just very specific accounts managed care and some Medicare accounts on which we had to place specific reserves not related to the economy and (inaudible) factor but just the circumstances of a particular account. So, that would, if you will, would have been more of an unusual category (inaudible) represented what was outside the boundaries of what was seasonal or might have otherwise been expected.

Got it, so, if you think about the blended self care rates and the improvement over the last few years going from 32 to 36 and then I guess, down to 35, at least in this quarter. Is there potential? Or, what do you have think keeps that rate from declining further given the, given what's going on in the economy? Maybe you could just explain to us how you reserve for that.

Well, we reserve based upon an 18-months look back, we look at the history of what we collected by category of receivable and we reserve based upon that historical collection rate. We reserve for that up front at the point of discharge basically. So, we continue on that process. That keeps us relative current. There's obviously a little bit of a tail there, but it takes that kind of period in order to fully capture a full cycle of activity with respect to discharges. Beyond that, in terms of further mitigation, we've talked about more cash collection up front that has not just improved the timing of cash flow but should improve the total overall collection because you're taking some of it away from the risk category of having to collect it later. We also have upgraded the self-pay operation otherwise. We've got to predictive (inaudible) technology allowing us to contact more patients, we can refine our segmentation model. We gain incremental visibility in the payment patterns, the populations.

So, we can really do a much better job of identifying targeting cash collections as we go along. A lot of these things Steve Moony's team has talked about at investor day, said also we're free to go back there to understand the things that we're doing to drive improvements in revenue cycle. I think that that 40% change, although it rounds to a 1% change, 36 to 35, it's 40 basis points is less than a 0.5. I wouldn't think of it as a serious trend or indicator. And we do watch this, I said the 18 month tail on the process is there, however, we look at it on each quarter and each month, how do we do that month as well to make sure that there's no distortion or nothing indicating that there's a near term trend which looks significantly different that we should be thinking about or adjusting to. We just -- we haven't experienced that, so whether you look at 18 month or -- which is literally the was we do bad debt, or you look at it the way we also do from an age perspective in anything happening recently. We have not seen a negative trend.

Okay. And then just quickly, the charity care admissions were down significantly year-over-year. And it looked like it mitigated a lot of the increase in the uninsured. Anything you're doing differently there as far as classification of volumes?

We aren't doing anything differently in terms of classification. We are, however, as I may have referred to earlier, have our MEP program where we -- the Medicaid eligibility program. We have basically people in the hospitals and the emergency rooms working with patients to identify whether or not they are eligible for Medicaid. As a result of that, we're being much more successful at getting patients qualified for Medicaid. And that would reduce charity and increase Medicaid from an admissions standpoint.

Okay, thats helpful thank you very much.

Thank you.

Our next question comes from Mr. Kemp Dolliver of Cowen and Company.

Hello, thanks.

Good morning, Kemp.

Good morning, the first question is the spike in supply costs, you know, I think your comments in the queue showed the change in mix and the increased surgeries et cetera, et cetera. But at least this quarter and the year-to-date numbers don't look so bad. It's a pretty significant increase given that in most of these specialties the reimbursement tends to compensate you for the higher supply costs. Is there just something that went on in your process that didn't work that well this quarter or is there another explanation for that?

We think that we were reimbursed for supply costs. Sometimes it's directly traceable sometimes its not directly traceable. But you can look at the revenue categories or DRGs or otherwise -- say is it -- are you getting reimbursed at a reasonable level for what you're incurring in expenses. And we believe that's the case. One thing that does fit outside of that if you're looking at it on a year-over-year basis, is that last year we had some rebates in the quarter of about $3 million that didn't repeat this quarter. So, as a matter of timing or otherwise there was a favorable adjustment in last year which didn't occur this year. But outside of the $3 million swing, year-over-year, we would say we recovered it. About 35% of the growth in supply costs we had this year was attributable to the high priced implants. Once again we can trace that more readily than other things.

Okay good. And I am going to slip back to the commercial managed care discussion. Earlier in the year, you all talked about physician, you know, essentially physician rate by competitors and I think as the southern state's region and has -- based on your earlier comments, am I correct in assuming you haven't had any other significant situations like that and that what we're seeing may be just more reflection of broad based weakness in managed care utilization?

Kemp, I think that's exactly right. You know you are referencing the issues in the Carolinas'. And correctly we've taken steps to begin to mitigate and reverse that in our South Carolina hospital that received an assault from the competitors that was effective and certainly diminished their commercial managed care business. But as you stated this was a much more widespread broad-based loss in the quarter than we had seen previously. And certainly suggests external influence influence in terms of the business coming to our doctor's offices that ultimately ends up being referred to our in-patient facilities.

That's great. Thank you.

Our next question comes from Kevin Fishbeck of Banc of America.

Alright, thank you. I just wanted to get a little bit of color on the CapEx budget for 2008. It looks like you're bringing this down a little bit. What is driving that and then I guess my understanding was that the CapEx spending was a big part of [beneficiary] recruiting, et cetera. How does that enter play?

Well, we reduced the CapEx outlook for the year by $25 million. But I would say that's primarily related to the fact if we have fewer hospitals. We disposed of San Dimas and Garden Grove earlier in the year. We have Los Gatos and Irvine in discontinued operations at this point. And so, it's just appropriate to lower the outlook for that reason alone. There's always going to be a certain amount of variability with respect to capital. As we'll try to maintain some flexibility, and you know, invest as appropriate based upon opportunity and also based upon what our performance is.

Is there a target that you guys look for as far as a percent of revenue?

'm sorry. As a percent of revenue? No, I think we'll look at it based more upon what we think the projects are and the opportunities. What the various commitments we have from a hospital construction, a seismic standpoint and otherwise. And since I mentioned seismic, I'll point out that our seismic requirement, now, has been reduced down to 147 million from what was 400 million a year ago. So, we have been very successful in getting so-called hazardous release and that is also helping us manage our capital spending as we go forward.

Okay. And then earlier, you mentioned you mentioned that going in 2009, there were a number of items on the cost side that you think you can manage. And I think we covered the supply cost pretty well. But, any other initiatives that you would point to as kind of bigger areas of costs saves and any thoughts on timing for when you might start to see them roll through these results?

Well, I don't want to get ahead of myself too much here with respect to 2009 guidance. But if you just went back and looked at the roll forward of earnings that we had out there before, you would have seen we forecasted $29 million. It was a variety of initiatives from transcription and other process changes. We talked a little about Broadlane earlier -- Broadlane is a benefit next year over this year from the standpoint of benefit from the outsourcing arrangement. The -- we'll constantly look at every element of cost -- try to get better. Talked about the fact that we have new tools in place which will enable us to manage on a much more realtime basis, all of our staffing, do the planning better and monitoring and continue to execute better on that front.

So, without getting more specific, we will just continue to drive on any number of fronts. I did have that reference point out there on the prior walk-forward. Also, you know we haven't -- I missed it briefly from -- you could call this cost manual or you can call us otherwise, but -- a revenue (inaudible) but certainly on the newer hospitals coastal Carolina and Sierra Providence, where the relationship between cost and revenue was not what we wanted it to be in 2008, because they were still more in -- or absolutely in start-up mode. In the case this year in Providence, we expect very significant improvement on those in 2009, so, that's another one of the value drivers next year over this year.

Okay. Great. Thanks.

Our next question comes from John Ransom of Raymond James.

Hi. This is for Biggs and one for Trevor. If we look at the adjusted free cash flow from continuing ops, you provide a reconciliation at the end that has you a range of 185 to 210. I guess that's inclusive of the $75 million of the receivable collection you have done. Is there anything else that we need to think about that would adjust out that would not be part of a run rate for 2009?

We'll I guess first of all, I wouldn't presume that in 2009 we aren't going to continue to improve receivables. We'll talk more about that when we get to 2000 -- in outlook.

Okay.

But I think that we're not to the point of total excellence yet on discharge but not billed by example, and that's something you just don't ever stop on. You continuously try to find ways to get better.

Okay.

And so, I wouldn't just say that's a one-time event and we can't make any more improvement. Otherwise, in, you know, looking forward to 2009 if that was your question --

Yes.

You know, we -- we'll have to finalize where we are in terms of CapEx for next year. I think I had -- back at investor day, had said we thought that would be lower than 2008. I would still expect that to be the case. And we do expect improved earnings so we expect to be able to improve next year and sustain some level of working capital improvement and also improve earnings and improve -- and have some reduction in CapEx, help us with out cash generation next year.

Sure, and is that $100 million payment against reserves for restructuring charges, is that going to, what kid of number should we look for for next year?

Well next year -- that is the department of justice settlement which next year would also be $100 million.

Okay.

About $25 million a quarter. That then diminishes in 2010. It's about $75 million and then it goes away. So, we start to -- from a cash flow standpoint, get improvement in 2010 and significant improvement in 2011 associated with that.

Okay, and then two quick one's for Trevor, I know it's been a long call. Is there a cap rate, at which the [MOB] deal you'll just put on hold? I know the market has been around a 7 cap rate, but is there a number you have in mind that you say well, we'll just wait for a better day in the capital markets?

Yes, we've got to wait and see as that transaction gets to the final point. John, we haven't had one in mind.

Okay, and then just secondly, maybe on a happier topic, your revenue cycle, IT initiative, could you just describe what that looks like? Are you going to set up a separately reported, you know, software company and you're going to -- you go out there and sell your revenue cycle software against some of the public companies? Just describe that effort a little bit more, if you would.

Okay, now I don't want to take away from the exciting announcement that I alluded to in my prepares remarks.

Which one was that? No, I'm kidding. I'm kidding.

I was trying to put in something exciting, but the -- a couple points of clarification. One, is it's not really a software business although there is a lot of propriety intellectual property that we use in our revenue cycle process. This is really a service business as we have learned more about our abilities and revenue cycle, we believe that we perform relatively better than many competitors out there and certainly many of the services that are available to other hospitals. So, think of it more as a service than software, certainly, although there's a heavy software element of it. By the way, as a -- an aside, a footnote to our operations, we have begun licensing some of the software that we have developed on a proprietary basis. We actually make a little bit of money, a few million dollars every year, by being in the software licensing business. So, we're recouping some of the investment we've made in software and we're avoiding some future investment based on the deal we have. And we'll wait until later to address the issues of separate reporting or so forth, but think of this as a business line that serves other hospitals. By the way, we are already doing some of it.

So, it would kind of be a consulting and proprietary intelectual property business not just selling software? And so, I mean just -- so if it got to -- .

John, more of an out sourcing business.

Oh, outsourcing, okay. So, just for the record Biggs, if it did get to the happy 10% of EBITDA, would you then separately report it if it did cross that threshold?

I am sorry, would we separately report it?

Yes, if it crossed 10% of EBITDA like Trevor mentioned?

I'll have to look at what the rules are what the rules are at that point in time -- what makes sense.

I think that's the threshold if I remember, but accounting class was a long time ago.

Well, yes, I understand. And it gets down to is this a segment or not. And also, all those rules may be about to change.

Okay, alright. Thank you.

Thanks.

Our next question is from Gary Taylor of Citigroup.

Hello, good morning -- Gary Taylor. First, I want to commend your stamina for sticking with us here through 1 hour and 43 minutes. I appreciate it.

We thought we'd just do it until the operator says we have no more questions.

So, I hope you packed your lunch because you might have a few more in the queue. Just -- I'll be quick, on the new initiative you had mentioned getting to 10% of EBITDA, and I missed the comment. That was kind of a, ultimately a "could be" 10% of EBITDA or was there something a little bit more near term hopeful than that?

If was not more definitive than that. We're starting off with a business that has ex-number and we'll have that in the announcement we make of other hospitals. It's a space and a business opportunity we feel very positive about. The other providers of these similar services have -- you know, its a fragmented business. It's not one where the other competitors have direct experience running this type of a function for hospitals. So, that's why we're deliberately vague. We're really starting something that we think has enormous potential but we don't want to -- it would be ridiculous to enter into a forecast of it at this point when you are literally going out and hanging up a shingle.

Understood. Just wanted to clarify as you had said. On the -- this question is for Steven, on the 900 new doctors year-to-date, that have been added to the medical staff, that's a net number, correct?

That is correct. Net of attrition.

And how many of those are either employed, acquired, or have a guarantee in some way?

100 are employed. About 50 are guaranteed. And the rest are either additions to existing practices or redirections from in-market that have joined the staff for the first time. So, you can see the bulk is not employed or income guarantees.

Okay, and on your 13,000 total active staff, what's a rough percentage of the employed percentage?

I would say -- well, we have about 360 employed doctors, so, we can figure out that's about -- what, 3%.

3%.

Right. A little less.

Okay. And then, Biggs, maybe I may have missed this, but you guys had started a year ago there was a slide with your (inaudible) disclosure and more detailed gross AR by payor and I went through them pretty quickly. I didn't see that this morning. Did I miss that or is that no longer being provided?

Its in the 10Q.

Oh, it will be in the Q.

Yes, which is already out there, so, you should be able to go retreive it.

Okay, how rolled out is TGI?

We have completed phase one of all of our hospitals across the company, Gary, and so, that means that every hospital now has a customized list of priorities that they're going focus on in they're own micro-markets. Many of the hospitals are in to phase II. Southern states region is not deeply into phase II yet. They were the last one to receive phase one. So, phase two is beginning to execute the plans with respect to changes in physical plan services offered, potentially CapEx improvements and recruiting both nursing staff and physicians to round out that service that we're expanding to meet community need.

Okay. Last question, I just want to make sure I understand -- there were a couple of comments about USC and there were a couple comments in response to a question. But, Trevor, did you say there's no definitive agreement for the sale there?

USC, that's correct. There's not a definitive -- we're still operating under the letter of intent, there is not a definitive agreement at this point in time.

Okay. Thanks.

Our next question is from Miles Highsmith of Credit Suisse.

Good morning, guys.

Good morning, Miles.

Just a couple of questions on the asset sales, I guess, more at [MOB] and not and not USC. Was the pushing back of the timing on that to Q1, pretty much solely results of the financing environment? And if so, I guess I'm just trying to get a sense of -- if that's the case,it right to think of the current financing environment continues for multiple quarters that that could take some time to close?

I think that would be fair. It was a -- the delay was as a result of the financing environment. e were very close otherwise, and even as the the credit market started to deteriorate in the September time period -- still felt pretty good about it. Then it became a -- ultimately such a deteriorated position out there that obviously we couldn't, you know, -- or the buyers couldn't get the financing finalized. So, it was sometime deep into September, I think, or well into September before we determined that is was not likely to happen on as timely a basis. The -- as so delay, you know, I think that the credit markets are already starting to stabilize some. And there are some buyers out there potentially that will have the cash resources. So, that may shift in time. So, I wouldn't tie it entirely to the financing market, but if it was linked solely to the financing market, then it's going to -- you know, it'll stretch as long as the credit condition restrains financing ability.

Okay. That's helpful. And just one follow on to that. We know the USC is an LOI. But I guess on the [MOBs], can you just remind us a little about the nature structure of the transactions. Can the buyers just walk away? Are there, like, break out fees or like any drop dead dates, for example this current environment went on for a year.

On those as well, we don't have anything that would be a definitive agreement that would would be in any way restrictive. So, I think that at this point in time, although the bidding process got completed but we didn't get to the point of any kind of binding arrangement.

Okay, thanks a lot.

Our next question comes from Whit Mayo of Robert Baird.

Thanks. Just one question. You've covered a lot this morning. But I've never had a great answer for this, but Biggs in the past you said that we should assume that some of the cash proceeds that are raised should be used to pay down debt. Just, can you help us understand how we should think about the properties there? Do pay down debt that's due first or more expensive tranches, just trying to understand a better idea of how you balance that?

Okay, well what I said -- you know the Baseline assumption would be to pay down debt, the absence of any other or greater opportunity for the cash, but in terms of how we would utilize it, what maturities we'd go after we haven't said and I wouldn't prognosticate at this point in time. I think we'd have to make that judgement at the time.

Okay, so just, safe to assume you're going to build cash?

Well, I would think -- the baseline would be if we had the cash available, we're going do something at least as attractive as paying down the debt paying down the debt being the Baseline but which tranch we would pay down, is what I would say, I can't give an assumption to make on 2011 versus some other year.

Okay, no thats fine, alright, thanks, guys.

Sure. Thank you.

Our next question comes from Jeff Englander of Standard and Poors.

Yes, good morning, guys. Thanks for the endurance. Just a quick questions, on the 2009 EBITDA, you took the '08 range down by 75, this is just maybe taking -- the starting point would be taking the '09 range down by $75 million. And I'm wondering what kind of confidence can you give us that in February we're not just going to be delaying the inevitable and taking that down further? You know what are you seeing out there? What have you used in your assumptions that, you know, may give you some confidence that you think it would just be that amount for '09?

Well, if I could give you an absolute range with absolute confidence, we'd do it today. We have to complete the planning process before we can do that. I think that the great uncertainty is that the economy, and any effects of it, aren't really as transparent so us as we'd like them to be. So, the next few months will give us, presumable, greater insight into that. Otherwise, with respect for 2009, is that we would still expect that we would have volume growth and that we could stabilize the mix. Obviously the economy has a bearing on that and so what we ultimately express as a range we'd like to consider what the possible range of outcome is. Therefore in terms of the mix, what we had previously projected was $60 million based upon 2% growth. And in isolation we would expect -- you know, we could still have that kind of growth or better. But we'll have to measure the economy against that. The commercial pricing, 79% negotiated. And in 2009, gives us good visibility on that front. And we rank confident in the rate parity gains we've put out there as what we're going to be able to achieve this year and next year from a standpoint of those contracts which were under market.

The cost initiatives and the new hospitals -- I already talked about that. We still believe we can achieve cost reductions and get benefit from maturing of our new hospitals next year. So, there's -- you know, certainly positive value drivers out there on a basis -- on a line item, may not be absolutely, specifically in line with what we had the prior roll forward, but directionally the prior roll-forward is something that still has some value here in terms of saying here's the things we're working on to drive value in 2009 or 2008 and the range on those in the aggregate was $175 million, year-over-year, so we'll still keep driving on all that. You know, how it lands exactly from a guidance standpoint -- we've got to complete the process.

Alright great, thank you very much.

And our next question comes from David Bachman of Longbow Research.

Hi, good morning or good afternoon, I'm not sure what time it is now. Just a couple of real quick questions here, if you can clarity. Remind me how many [ASEs] you now are operating and just, sort of, any color on -- when you look at surgery visits, how much of your business is being done in those centers versus hospitals?

Well, David, today we operate 34 ambulatory surgery centers across the country. And we have acquired a couple in the recent past, which I think we've talked about on some of these calls. We're very pleased at the way these are operating, some of these are small centers that were owned solely by physicians others were larger centers that were under performing, where we've improved operations, we've improved the revenue cycle, we've brought out managed care contracting to the [ASEs]. Some of them had previously had out of network strategy that we didn't think was a sustainable model over time. So, we're pretty pleased with that, it still is a relatively small part of our overall outpatient surgery done on the hospital and campus based surgical facilities, but we intend to grow that over time selectively. We see a consolidation going on in many of the markets in which we operate as Trevor mentioned earlier. Many of these [ASEs] owned by physicians are undergoing significant distress related to payment changes from the payors, both federal as well as commercial and their costs of leasing equipment has escalated because many of them have variable rate financing. So, we see that as an opportunity we like to do those acquisitions where they strategically benefit our markets and we're very pleased with how this segment of the business is growing.

Okay, great. Thats helpful, and then just one other question on the outpatient side. I think in the release, and maybe you mentioned it earlier, I just forgot by now. In your release, that a significant cause of the reduction in outpatient charity care visits, was a government clinic that opened near one of your hospitals. I mean, how -- how key was that to the reduction?

We've had a number of hospitals in which we have both either federally qualified health centers or even volunteers in medicine clinics, that have opened near some of our hospitals, and therefore are ERs. It is certainly a small part of the decrease in charity, uninsured, cases seen in our ER. But we seen that growing and evolving in several of our markets. So, over time, I think that along with our MEP, Medicaid Eligibility Program, where we have those charity patients qualify for Medicaid, that along with right care right place, which includes their being seen in these off site clinics when they don't have an emergency medical condition. Should, over time, relieve both crowding in our ERs as well as any of the bad debt that ends up there.

Okay, great, thank you very much.

Our next question comes from Cheryl Skolnick of CRT Capital Group.

Thank you for taking the follow-up, I appreciate it, and I will try to make this quick. As we look at the business today, and as obviously -- at least on my part, a lot of concern about not making an estimate, although you weren't as far away from it as maybe I thought you were to begin with, but -- on the EBITDA line. But, as we look at the business today, it seems to me that with the volume growth being driven by doctors, that the doctors that you are recruiting now are capable of at least or better than the kind of volume growth as the doctors that you recruited in the first year of the program. A lot of things going right, in terms of the fundamentals of operating the hospitals, but you're not where you'd like to be and then you get an economic whack. So, I guess, one, is that the right characterization of the company?

Two, if that's correct, then as we think about the business going forward, do we think about it being able to do -- I guess what I want to say, and -- better than flat for next year? In other words if you take the trends from the third quarter, is is appropriate to annualize 6% revenue growth and 6% supply growth? Or is is more appropriate to think of maybe 6% to 7% -- you know 6% revenue growth -- 5% to 6% revenue growth and improving trends on the costs lines from a variety of sources? Because I think what we have to do, is kind of look at where you'll be in another transition year before you can get the turn around leverage maybe in the year after. So, thats one question I would ask you to address. The second question is, given where your stock is, which is down 23%, at $3.15, would management and the board consider buying stock again?

Okay, Cheryl, the good news is you are the last question. The bad news is half the audience has now dropped from the line. But those are very big questions, so lets take them one at a time.

Alright, well we could do it afterwards, thats okay, you can answer the stock purchase question.

Thats alright. We wanted to let this go until there were no more questions. So, I think on the first question, back to your, you know, assessment, I think it is correct. I'd point as -- there were a lot of questions in there that related to, I think got close to line item guidance for '09, so lets just back up. And I think Biggs earlier response to a question, said, if you go back to our earlier walk-forwards and assessments, differences between '08 and '09, a lot of those relationships we see as still being valid. You know, clearly as we sit here today, we are in a very uncertain economic environment, we also -- it happens to be election day.

In much of '09, there could be an entirely different agenda for legislation that affects, very directly, our industry, both in a positive way or in a negative way. Looking forward, we kind of see more positives than negatives. But, its hard at this point, to be very specific, its really more appropriate at the end of February, to talk about that. We'll have an idea of how thats lining up. As for your question on stock buy backs, really kind of a personal issue and one that is obviously always available to management and the board. And I just wouldn't want to speak for anybody at this point.

Okay, well you know what signal that sends, I don't have to tell you. But that was my thought -- my question. Thanks so much for all the time.

Okay. Thanks and I think, operator, that was the last question. For those few of you who are still on the line, thank you for persevering and we'll see you at the end of February.