Tenet Healthcare Corp (THC) 2008 Q4 法說會逐字稿

Good morning, and welcome to the Tenet Healthcare conference call fourth quarter ended December 31, 2008. This call is being recorded by Tenet and will be available on replay. A set of slides has been posted to the Tenet website 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 Management's current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect.

Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. Management will be referring to certain financial measures including adjusted EBITDA which are not calculated in accordance with generally accepted accounting principals or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question.

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

Thank you, operator, and good morning. Because our headline results for the fourth quarter were first made public more than a month ago, I would like direct my comments to broader trends and observations about the quarter that were not in the prerelease. Our operating results for the quarter were among the strongest that we've achieved in years. We improved same-hospital paying admissions, paying outpatient visits and surgeries, as well as same-hospital commercial managed care revenues, adjusted EBITDA and free cash flow. The full year 2008 was the first year of positive same-hospital admissions growth since 2003, and we had our best performance ever in many important nonfinancial metrics. Despite this strong operating performance our stock price plummeted in the fourth quarter.

As recently as September 26th, Tenet stock had closed about $6.00 per share, up roughly 20% for the year-to-date. But by mid November it was trading near $1.00 and since then we have taken important actions to turn this situation around. Despite all the uncertainty that is created by the economy I think our business is remarkably solid and I am actually quite optimistic because of the progress we've made in a number of critically important areas. First; our physician relationship and recruitment programs are proving to be highly effective and helped us build solid momentum on inpatient volume growth. Second; we stabilized the outpatient business which was quite negative as recently as 2007. Third; our Targeted Growth Initiative strategy has successfully directed volume growth to our most attractive and profitable service lines. And fourth; our achievements in quality have created stronger value proposition for the hospitals as well as widespread recognition. This includes our numerous Centers of Excellence designations and the bonus payments for quality that we're receiving from some of the largest commercial payors. And the significant reduction in our malpractice costs is one of the tangible returns on our quality investment.

In addition to the financial metrics we report every quarter, we carefully measure and assess our progress in several nonfinancial areas that also drive value in our business. The first of these three nonfinancial metrics focuses on measuring progress in clinical quality. In Q4 we hit all time highs in our quality statistics. For internal evaluation and incentive purposes, we measure our adherence to evidenced-based medicine protocols, infection rates, and compliance with standards for appropriateness of admissions. The next nonfinancial set of metrics is service. Our scores improved here as well with physician satisfaction increasing 2.9% over the prior-year and patient satisfaction increasing 1.1%. To give you an idea of the progress we've made in physician satisfaction since October, 2005, the average score went from 72% to 81%. And third, we measure our progress in satisfaction of our employees.

Total employee turnover improved by 20% in 2008, and voluntary CEO turnover was negligible demonstrating dramatic improvement from the 20% turnover among our hospital CEO's that we experienced a few years ago. These are just a few of the reasons that I am optimistic about our fundamentals. Let me now turn to the current economic environment and Tenet's strategic response to the challenges before us. The macroenvironment presents us with many challenges but I think three are worth highlighting. The first issue is the extent to which growing unemployment will cause commercially insured patients to lose their insurance or to put off treatment all together.

The second issue is the extent to which declining household incomes and wealth irrespective of employment status suppress consumption of medical care or put at further risk our collection rates from both insured and uninsured patients. And the third issue is the tremendous uncertainty in the capital markets and the effect it has on a company that is relatively dependent on access to credit and the cost of credit. On the first two issues, the growth of the uninsured and risk and collection rates, we are doing what we can to mitigate this using strategies that we have employed for sometime in the revenue cycle such as stepping up our capabilities and providing financial counseling to uninsured patients, improving customer billing generally, and point of service collections, specifically. We also have continued with our strategies to build commercial admissions by recruiting physicians with commercial patients and targeting service lines with the greatest prospects for growth and profitability.

And on the third issue relating to the unsettled capital markets, our most recent action to reduce the risk of our balance sheet is the note exchange set to close next week. We felt it was a good time to reduce the risk profile of our balance sheet by largely removing the debt maturities that were scheduled to occur in 2011 and 2012. We are undertaking this refinancing between one and two years earlier than we would have in a more stable market environment. With 1.4 billion of the current notes tendered as of the early tender date of February 18th and assuming stable rates for the next year or so, cash interest expense will increase by $43 million on an annual basis. While we have confidence in our strategies, the operating environment in the next two years is uncertain and access to the capital markets is even less predictable. We felt that a window had recently opened for this exchange and that it was prudent to take the opportunity to reduce balance sheet risk. Given the weakness in the economy, I am pleased how well our business performed in Q4.

Let me give you some additional highlights. Paying volumes were reasonably stable, with paying admissions eking out a 0.1% increase and paying outpatient visits up a more robust 0.9%. Managed care admissions were up 2.5% from last years fourth quarter. Although that metric is commonly used by this industry, it includes a shift from traditional government programs to managed government programs so we don't consider it to be terribly relevant. The relevant metric is for commercial managed care admissions and that metric was somewhat improved from the third quarter with a year-over-year decline of 3.0%. Commercial volumes in our targeted growth initiative service lines were up a very strong 2.3%. We had solid performance in pricing consistent with the strong growth that we have demonstrated for a number of quarters now. We expect continued pricing growth to remain a significant driver of earnings growth in 2009. Cost control was outstanding as well with unit controllable costs rising by less than 1% on a same-hospital basis. We expect a similar level of cost efficiency going forward as we anticipate capturing approximately $150 million from the cost cuts that we are already implementing.

Macroeconomic pressures presumably drove a modest softening of our collection ratios in the quarter and related increase in bad debt expense. But our multi year efforts to address the bad debt issue again generated results. Our same-hospital bad debt expense was 7.5% for the fourth quarter, actually a slight improvement relative to the third quarter and up only a 110 basis points versus the fourth quarter a year ago. Taken together these factors enabled us to generate an adjusted EBITDA margin of 9.1%, an increase of 160 basis points relative to the prior-year's fourth quarter. For the full year adjusted EBITDA was 732 million, a little below the range that we had expected a year ago but towards the upper end of the revised range that we laid out further into the year, and up 11.4% over 2007. Growth in same-hospital EBITDA was even stronger, up 14% year-over-year.

Turning to capital expenditures, we spent less than expected in the fourth quarter with CapEx and continuing operations of $130 million. We will continue to take a cautious approach to capital expenditures in 2009, which should contribute to our progress in moving towards positive free cash flow. That said, we will honor the promises for capital improvements that we've made to our physicians. We've worked too hard to rebuild our relationships with physicians to jeopardize that progress in 2009. Fortunately, the competitive arms race for CapEx in the hospital industry has subsided for the time being. In turning to 2009, we are looking at more than the usual set of challenges with significant uncertainties in terms of volume growth, payer and patient mix, and bad debt expense. It is hard to offer a precise outlook for 2009. But our outlook for 2009 adjusted EBITDA is a range of $735 million to $800 million which is between flat to a 9% increase over 2008 performance.

And with that as an overview, let me turn the call over to Tenet's Chief Operating Officer, Dr. Steve Newman. Steve?

Thank you, Trevor, and good morning, everyone. I want to begin by reviewing the relationship between our fourth quarter volumes and our growth strategies by service line. While total paying inpatient and outpatient volumes held up quite well in the fourth quarter, our commercial managed care admissions declined by 3.0%. This is a slight improvement relative to the 3.4% decline in the third quarter, but clearly not where we want to be. As we have discussed in prior quarters, our de emphasis of the OB service line accounts for the majority of the decline in commercial admissions.

In fact, 58% of our fourth quarter decline can be attributed to OB. And since OB typically is not a TGI service line at most of our hospitals, a significant portion of this lost commercial volume should be viewed primarily as part of our operating strategy and not as a critical short fall relative to our growth objectives. Rather than illustrating our commercial admission declines in non-TGI service lines like OB, slides 14 and 15 compare commercial and total paying admissions growth in our seven TGI service lines. These graphs show the delta between growth and TGI versus non-TGI service lines. The difference is real and it is growing. Slide 14 provides an isolated look at only commercial admissions while slide 15 illustrates all paying admissions. You can see on slide 14 that in Q4, commercial admissions in our seven TGI service lines grew 690 basis points faster than our commercial admissions in non-TGI service lines.

On slide 15, the focus shifts to total paying admissions where there is a 300 basis point difference separating the growth rates in our TGI service lines compared to growth rates in our non-TGI service lines. The key take away here is that we have consistently demonstrated an ability to grow commercial and aggregate paying volumes in our TGI service lines. Precisely where we've concentrated the focus of our growth strategy. As we've selected our TGI service lines based on profitability, local market needs and attractive projected demand growth, our success in achieving disproportionately strong growth in these services should prove to be quite powerful in driving future financial performance.

Before leaving the discussion on volume growth, let me bring you up to speed on our first quarter volumes. As you know we don't always give this sort of interim update because short-term volume trends can be volatile. But since we are already close to two full months into the quarter, I will give you an early look. Through last Wednesday, February 18th, a period representing the same number of week days and weekend days as last year, our total admissions were down 0.8%, total paying admissions were down 0.7%, outpatient visits were up 0.5% and commercial managed care admissions were down 3.1%. While these results are softer than we'd like, we are encouraged by the fact that they are not radically different from the trends we saw in the fourth quarter.

I believe our success in sustaining reasonable volume performance in the face of a weakening economy is due in large part to our success expanding our active physician staff. Let me briefly review the methodology we used to track our progress. A total medical staff at our 50 hospitals at the end of Q4 was slightly less than 23,000 physicians. Because many of these physicians make only a small number of referrals to our hospitals, we focus our analysis on a subset of this aggregate number which we refer to as our active medical staff. To qualify as an active medical staff member, a physician must either admit 10 patients or perform an equal number of outpatient procedures annually.

You will recall that last year at this time we established a growth target of 1,000 net new physicians for 2008. This target indicated our intent to repeat the strong growth we had achieved in 2007. I am excited to tell you that we actually exceeded our 2008 objective with net growth of 1,122 physicians for the year are an increase of 9.0%. This brought our total active medical staff at the end of 2008 to 13,571 physicians, and representative growth of 17% since January 1, 2007. The details of this growth are shown on slide 16. To demonstrate the significance of this growth, let's look at the 2008 performance of the physicians who joined the staff of Tenet hospitals in 2007. These physicians whom we refer to as the class of 2007, were responsible for more than 45,000 admissions and 275,000 outpatient visits in 2008. On average, this translates to 26 admissions and 158 outpatient visits per member of the class and represents a more rapid ramp up than we had anticipated.

These inquiries volumes were partially offset by volumes lost as a result of attrition within our existing physician base. Early indications from the class of 2008 are very encouraging. In fact, this class appears to be ramping up even faster than the class of 2007 during their first few months with Tenet. As our physician relationship program has matured, we've refined our linkage between targeted physicians, their books of commercial business and our TGI service lines. We believe the early superior growth from the class of 2008 reflects these refinements.

Switching gears to incremental pay-for-performance revenue, you may recall that we mentioned it at last summers Investment Day that we had negotiated the potential to receive up to $35 million to $45 million in pay-for-performance revenues from several of our commercial managed care payors for the period between 2009 and 2011. We have just completed our first adjudication of these payments reflecting our performance against the relative quality measures in 2008. And I am pleased to tell you that we will be receiving quality incentive payments of approximately $7 million, or 70% of the 2009 opportunity. While the current level of these premium payments is attractive, the truly important point is the precedent we're setting with these commercial payors who have decided that rewarding our hospitals for superior clinical quality is an important part of their business proposition.

Turning to cost, the fourth quarter provided powerful evidence of the improving cost discipline by our hospital managers. In the quarter, we were able to limit SWB for adjusted patient day to an increase of only 0.8%, compared to the fourth quarter of 2007. The effectiveness of our labor and management has been enhanced by the on line tools we have developed under our PMI, or performance management and innovation group. These productivity tools address a critical challenge in our industry. Namely the efficient management of staffing in the context of rapidly fluctuating demands. Getting this right can often be the difference between attractive profitability and unacceptable performance. One of the most important metrics we used to track staffing productivity is paid FDE's for adjusted average daily census. We saw an improvement of 0.7% in performance of this metric in Q4 '08. These kinds of savings are the result of our investments to provide real time actionable information to front line management

Our PMI team has developed an internet-based staffing grid which matches staffing levels by skill mix to the immediate requirements of our current patient census. These staffing tools are also forward looking, assisting us in the management of open positions and driving our hiring objectives and staff flexing. These tools also assist us by minimizing the use of contract labor which we were able to decrease by $6 million compared to Q4 '07. All of these tools are linked to daily reporting systems providing real time productivity monitoring and assuring that our performance targets are being met. Managing our staffing on this hour-by-hour basis has helped us to avoid disruptive personnel actions, including unplanned reductions in force. This improves our bottom line and supports our objective of improving employee satisfaction.

With that I will turn the floor over to Biggs Porter, our CFO. Biggs?

Thank you, Steve, and good morning, everyone.

Before I talk to the quarter, let me make a couple broad comments on 2008. Our improvement embedded in our 2008 results may have at times become obscured by changes in state funding and in our hospital portfolio. As you can see from our earnings release, after all (inaudible), reclassifications of last year, our adjusted EBITDA grew from $650 million in 2007 to $732 million in 2008, an increase of 11%. However, this is despite having lost approximately [$34] million in Georgia, Florida and North Carolina Medicaid funding. If you normalized for the Medicaid funding loss, there would have been an underlining operating improvement of $129 million, or 20%. Some analysts were concerned that we weren't growing margin on volume growth in 2008 due to adverse mix shift.

This in fact is not the case. Even in the third quarter, which became such a focal point, if you consider the Medicaid reductions we had to offset. Mixed shift certainly hurt our result and remains a significant risk going into 2009, but it did not eliminate all the benefits of volume and our other efforts. Since I have touched on the subject of Medicaid, I will comment that we will see the [Steamless] Bill as a risk mitigator and the budget pressures being experienced by several of the states in which we operate. The effects of enhanced S chip and COBRA coverage should be beneficial but the effects cannot be reasonably estimated.

As both Steve and Trevor have discussed, despite the dramatic collapse in the discretionary consumer spending experienced in most sectors of the economy, Tenet's volumes held up well in the fourth quarter. As our pricing remains strong these volumes resulted in solid revenue growth of 4.9%. This growth included a 6.6% increase in net patient revenue from commercial managed care. As a minor footnote to this increase and one of the items which drew investor attention in our prerelease, our fourth quarter revenues included $8 million from what is effectively the partial reversal of a $17 million charge taken in the second quarter of 2008. This charge related to the graduate medical education reimbursement at one of our California hospitals. This $8 million reversal does not a successful protest of the issue at this point, but rather a confirmation of the arrangement we had with the county to be reimbursed 50% of any losses we incurred related to the residency program.

And in terms of normalizing its impact, the $8 million clearly made a one-time contribution to our fourth quarter results that should be netted against the earlier $17 million charge when assessing the full year. You should also note that the $8 million was reported in other revenue and so it had no impact on our pricing statistics in the fourth quarter. Controllable costs we had a very strong quarter in terms of operating efficiency and the increase in total controllable costs per adjusted patient day was held to just 0.8%. The bulk of this accomplishment was achieved in a restraint of salaries, wages and benefits line where the increase was also held to just 0.8%.

This SW&B result was aided by a 16.7% decline in contract labor expense. On the other operating expense line, we saw a 50% decline in malpractice expense in the fourth quarter falling from 36 million in the fourth quarter of 2007 to 18 million in the fourth quarter of 2008. A few of the analysts viewed this $18 million decline as a unique event which needed to be backed out of our results in their assessment of our fourth quarter earnings power. I would argue that backing this out is far too harsh an action. By backing this out analysts are failing to ascribe proper value to what Tenet had acknowledged through our investments in clinical quality. It is our belief that one of the many ways theses investments have generated returns and serious declines in malpractice expense.

Let me offer some perspectives on how our malpractice expense in the fourth quarter could be viewed. Stepping back to look at the full year decline, malpractice expense in 2008 was 128 million, down 35 million, by 22% from 163 million in 2007. However, even this is net of $15 million in charges related to declines in the discount rate used in the calculation. Without that, the year-over-year decline would have been $50 million. So while the fourth quarters decline was somewhat larger, the decline through 2008 was also significant. This suggests that the fourth quarter's decline is highly consistent with recent performance and forms a legitimate part of our sustainable earnings power.

Before leaving the topic of cost efficiency, I will comment on the very strong performance achieved in the fouth quarter - - our debt to fourth quarter - - sets as a stage for (inaudible) as highly credible assumptions in the (inaudible) to cost efficiency in our 2009 outlook. With unevenness of volumes between hospitals and periods remain the greatest potential variable. Turning to bad debt expense, the high level story is mixed. We reported the same-hospital bad debt expense ratio of 7.5% in the fourth quarter, slightly better than 7.6% reported in our third quarter, but up 110 basis points over the prior-year. The good news on the bad debt front was a continuing decline in uninsured volumes, with uninsured admissions falling by 5.9% in the quarter, and uninsured outpatient visits falling by even greater 10.8%. We also made progress on our front end collections which increased to 37% of total patient collections, up markedly from 29% in the fourth quarter of 2007.

The offset to these sources of good news was the deterioration in our collection rates on a year-over-year basis, most from the uninsured and balance-after. As disclosed in the 10-K, we have updated our collection rates for the last few quarters to reflect the affect of discontinued operations, or [altruly] stated, to exclude collections on those hospitals which we have moved to disc ops in the last year. On that basis our estimated weighted average collection rate from the uninsured and balance-after was 33% in the fourth quarter of 2008, compared to 35% in the fourth quarter of 2007. There was an 80 basis point decline between the third and fourth quarter, or about half of the decline experienced over the last year. Bad debt expense was also adversely affected by pricing increases and improved charge captured in our emergency departments. It is important to remember that our investors understand these pricing strategies have a net positive impact on our profitability.

We also find in our 10-K some new disclosure on estimated costs for providing care from the uninsured and charity. I will emphasize that these estimates - - these are estimates and are fully burdened. For 2008, these are 362 million, or 6,935 per adjusted admission for uninsured, and $113 million, or 10,298 per adjusted admission for charity. Since these were fully burdened numbers, you would need to reduce them by about 40% to get to variable or incremental cash cost of providing care before fixed cost absorption. To get the net effect of an uninsured admit, you would reduce the cost by approximately $0.10 to $0.12 on the dollar we collect on average from the uninsured. This brings a rough estimate of net pretax P&L effect down to approximately $2,500 per uninsured adjusted admission. As there is so much focus on the risk in 2009 of increasing uninsured we think these disclosures helps put that risk into perspective.

What this points out is that although there may be a risk of increasing bad debt expense from the uninsured, the real bottom line effect is much less. The real economic risk is the loss of a commercial managed care patient, although that effect is exacerbated when the formally commercial patient receives care as an uninsured. Turning to cash and cash flow. We entered the year with $507 million of cash, somewhat higher than the $375 million to $475 million we had projected in our 2008 outlook. Our cash position benefited from and all other anticipated capital expenditures which came in at 130 million. The receipt of 34 million from the reserve yield plus fund and $10 million from our cash initiatives.

I also want it make a few comments on our recent note exchange which is expected to close next week. As you know, the exchange addressed the $1.6 billion maturing in late 2011 and mid 2012. Our strategy was to eliminate as much of the near-term maturities as we could on an acceptable price while maintaining long-term flexibility. This is not out of concern for our performance but rather as a mitigator of capital market risk, particularly in view of the volume of refinancing which we placed in the market by others over the next couple of years. Although the exchange remains open, the results of the early tender period are the $915 million of the 11's and $484 million of the 12's have elected to participate.

The notes offered in the exchange have maturities in 2015 and 2018 and coupons of 9% and 10%, respectively. They also allow us to issue secured debt at the greater of $3.2 billion, or four times EBITDA exclusive of our credit agreement, but have no performance test. This is not a solicitation but is necessary to explain the financial statement and future financial implications. Based on this we anticipate a gain in the retirement of the existing notes of approximately $170 million to $190 million although this will fluctuate with the market up to the time we close. There will be a corresponding discount reported on the new notes which will be amortized to interest expense over the term of the notes. We currently estimate [2,000] interest payments to increase by $22 million as a result of the exchange. And total interest expense to increase by 50 million to 60 million when accrued interest and the discount amortization is included.

To the extent we retire additional debt in the future or engage in interest rate swaps, we may mitigate some of this increase. While we are on the topic of liquidity. Let me anticipate a popular question regarding our proposed medical office building sales. We still have interested buyers that at this time have broken the portfolio into at lease two pieces. A 21MOB group for which a buyer is seeking financing and a 10 MOB group which we are discussing with potential buyers for sale as a group or individually.

Slide 24 on the web updates the status for various balance sheet initiatives. The remainder of 2009, these include the USC sale, the effects of a sale of PHN, our Medicare HMO subsidiary, and a number of other items we have been working on. For conservatism at this time, we are not projecting MOB sales in our cash estimates for this year. Although as I said about it - - it's still a work in process.

Let me now turn to our outlook for 2009. We provided a fair amount of detail on our 2009 outlook in both the press release and slides we posted to the website this morning. The headline is that we expect EBITDA to be in the range of $735 million to $800 million. The fact is there are a number of variables related primarily to commercial and uninsured volumes, collectibility and state funding which create a potentially set of outcomes. You can see from the line item standpoint, we have figured a fairly broad set of ranges. We have presumed that neither everything bad nor everything good happens in saying that EBITDA range. We have considered a fair amount of adverse mix shift away from commercial and higher bad debt expense in even the upper end of the range. This outlook is based on projected admissions growth, a flat to 1%, we were considerably more cautious on commercial volume growth.

While we will still drive for commercial volume growth due to the economic environment, the upper end of the EBITDA range assumes commercial year-over-year declines consistent with 2008. The upper end of the range also assumes growth in the bad debt rate from Q4 2008 of almost 90 basis points, or $110 million, which would be a rate of approximate 8.5%. This would accommodate lower collection rates increasing balance-after percentages and /or less mitigation from the collection of older accounts. The lower end of the range, all other things equal, could accommodate greater commercial volume declines, increases in the uninsured and/or additional declines in the collectability of self-pay and balanced-after accounts. Offsetting the pressure on commercial volume and bad debt, we have budgeted cost reduction initiatives of $150 million in 2009 at the corporate, administrative and hospital level. We also continue to work additional initiatives in the areas of cost, charge capture and pricing which were beyond those included in the range of outcomes.

Slide 23 shows as current walk forward of our adjusted EBITDA from 2008 actual to the range we have given for 2009. The biggest change on this chart is the starting point. With 2008 now known, we enter 2009 building our base of $732 million in prior-year adjusted EBITDA. At the upward end of the range we expect the effects of volume and mix to offset because the pressures we expect will continue on commercial managed care volumes. Having said that, we continue to expect lift from managed care pricing including rate parity adjustments and pay-for-performance as shown on line five of the slide. The primary driver of the cost increase on line six, the slide is inflation or other cost increases we expect before consideration of our cost reduction efforts.

Our expected 2009 cost efficiencies are evident in line seven which shows the expected impact of our latest round of cost initiatives launched in late 2008. This figure of $150 million indicates our expectation for a markedly larger contribution and significantly exceeds last summers projection of 29 million. (Inaudible) of line nine with an estimate of 27 million and contributed EBITDA growth from year-over-year performance to spade in our newest hospitals, Sierra Providence East in El Paso, and Coastal Carolina. The [rockfords] subtotals on line 10 to the upper middle range of 800 million, we then showed a $65 million for risk on line 11 which brings us to the 735 million bottom end of the range for adjusted EBITDA.

Slide 25 summarized the range on cash flow and our projected year end cash balance. It is important remind everyone that their are two cash uses in 2009 which will not recur over the longer term. First, there is the estimated $75 million use of cash for the settlement of two California wage and hour cases. Second, there is a $24 million quarterly use of cash for the DOJ settlement which is fully retired in the third quarter of 2010. By now hopefully we have communicated how we have applied some of our conservatism in our outlook ranges for 2009 to accommodate the uncertainties in the current economy and the corresponding effects on commercially insured volumes, collectibles, and uncompensated care.

This along with the lower starting point alone explains our 2009 outlook today compared to what we expressed a year ago. Underneath that conservatism however, remains the same set of aggressive actions to drive paying volumes, including commercial, achieving continuing and increasing yield from our managed care negotiations, and reduce cost on a continuous improvement basis. Although 2009 at this point remains a difficult year in which to establish firm expectations. Regardless of the variations we may experience, we believe our actions will enable us to do well in a difficult environment.

As one final note, we would like to announce June second as the date of our 2009 Investor Day.

With that, I will ask the operator to open the floor for questions. Operator?

Thank you. (Operator Instructions).

Our first question comes from Adam Feinstein of Barclays Capital. Please go ahead.

Okay. Thank you. Good morning, everyone. Thank you for all of the details in the presentation. I just have I guess a couple of follow-up questions here. I guess first, you provided some disclosure in the press release about the Florida and Central Region reported strong growth whereas the California and Southern State regions reported weaker growth. Just curious if you can comment a little bit more just so we have a better understanding what's going on in the different geographies. And if there are any extraordinary factors that would have driven to the difference in those markets?

And then secondly. Just wanted to ask about working capital improvements at your Investor Day. You had outlined some opportunities and certainly a lot of things have been changed since then. But was just curious in terms of your thoughts in terms of additional working capital improvements in the future. Thank you.

Adam. This is Steve. I'll go first then let Biggs deal with the second part of your question. With respect to volume variation. I think this is probably the fourth quarter that we have mentioned some weakness in our Southern States region performance. We've taken a number of actions to begin to turn that around and those are somewhat mitigated by the activities of our new leadership in the hospital. We have also expanded our physician recruitment activities in the Southern States region and added physician relationship program representatives there. I think that we are seeing significant spikes in unemployment in some of those micromarkets in the Southern States region.

For example in the Carolinas, we are seeing isolated unemployment rates that are approaching 10%. Remember, we operate in very small markets in the Carolinas where this can be a significant deterrent to overall volume as well as commercial managed care volume. We've also seen some softening in our Atlanta market recently as the economic downturn has begun to hit that metropolitan area. California is a different story and as you know, it has been the epicenter of the real estate foreclosure issue. And in some of those markets where the foreclosure rate is up along with unemployment, we have seen a decrease in elective utilization of hospital services. So I would say that nothing was radically different in the fourth quarter with respect to our volume distributions. And we continue to believe that we will make progress in all of those regions and we will aggregate toward increasing volumes quarter-over-quarter this year with respect to admissions as well as outpatient procedures.

This is Biggs, Adam. Good morning. With your question on working capital, as you know, we have focused on collecting more cash up front on patient collections. We have focused on driving down the discharge not final bills metrics. So bills go out faster and we have also focused on our collection processes after billing. All those things did enable us to achieve a two day reduction in accounts receivable that we were targeting in 2008.

So we are clearly pleased that we were able to accomplish that even when - - what seems to be a difficult or more challenging environment economically. For 2009, we will continue all those areas of focus. However, at this point in time given the potential pressures that may be there on collectability or on getting patients to pay as timely or in the amounts they did before. We have not forecasted an additional improvement in accounts receivable in the ranges that we gave this morning for 2009 working capital. Once again, it's not to say we are not going to go target all those same areas, but the outlook does not incorporate them at this point in time.

There are couple of other things happening with respect to working capital in 2009 which caused the projected use on the web slide for the cash walk forward to be slightly higher than it would be otherwise in the operating assets and liabilities caption. And that is some of the cost reductions that is we have made, the cash reduction of that won't show up in 2009 but would show up in 2010. And that's because by example, we have reduced the 401-K match for our employees. That does not effect the payment that we make in the first quarter in 2009. It effects the payment we make in the first quarter of 2010. So if you hold the noncash accrual declines in 2009 but the actual cash benefit doesn't show up until 2010. So there is effectively a paydown of that liability occurring this year. And then there are some other items like that that are benefit related. So that number of $170 million to $175 million use of cash on operating assets in 2009 and the walk forward is higher as a result of those items.

Okay. Thank you very much.

Sure.

Thank you. Our next question comes from Darren Lehrich of Deutsche Bank. Please go ahead.

Thanks. Good morning, everyone. A few things here. I guess I wanted to start on the cost side. You have done a very good job of expense management. And I wanted to get a little bit of color from you as to the cost cutting actions you have taken at year end And - - maybe if you could just talk a little bit more about some of the expense reductions that roll into 2009. As I understand it you've reduced your 401-K match. That is part of the cost cutting action. So if you could just comment a little bit on those kinds of things. And if it is true about the 401-K, how you expect turnover to trend in '09.

Sure. The cost reductions of $150 million were 50 million at the hospital level and about 100 million in overhead, benefit, and other expense categories. If you look at it separately from a P&L standpoint, there is about $75 million in salaries, wages and benefits. About $25 million in - - well term is overhead, non (inaudible) related. And then OCE and supplies reduction is about $50 million. So it is very much across the board. Some of it is benefit related, some of it is headcount related both at the corporate administrative and the hospital level. And then some of it is in the expense side for purchase services, as well as expenses related to malpractice, by example relative to what we would have expected otherwise. So it is pretty broad based, it will come in over the course of the year. In the first quarter we would expect not to be at the full run rate but have it grow over time. But the150 is the full year effect.

Okay. And I guess just as it relates to the bad debt commentary you are giving us and what you've built into the guidance. I wanted to revisit - - this is probably a discussion from a few years ago you had at an Investor Day. But I think you noted that California bad debt was among the lowest in your portfolio at that time. And I just want to revisit where you are with regard to California bad debt. And if you could just give us some comments specific to that given the housing issues in that state.

California has been increasing - - there has been of course increased unemployment in California. The - - although it is a mixed bag, we do have some areas where there is very high unemployment rate driving up bad debt expense. But also, at lease in one of those areas, commercial volumes are going up at the same time. So it is very difficult to say that there is real, absolutely correlation between the economy and our results. But if you are looking at California bad debt, it has been increasing.

Okay. My last question here relating to your guidance and and the line item in walk forward with regard to adverse mix shift. I think you are assigning a $43 million or so impact there relative to mix shift. Can you just - - in broad terms maybe describe what is embedded in your thinking there. And if your mix was X and in terms of self-pay and Medicaid at year end. What do you expect it to be embedded in that guidance at the end of '09.

Sure. The two big drivers in there are as I said, we assume commercial volumes decline in 2009. And determining that adverse mix shift and that is about a negative 3% year-over-year decline in commercial volumes. And then on the uninsured, we assumed that went up by about 6%. Now we haven't been experiencing that. We have been experiencing uninsured declines. But none the less with all the pressures out there we thought it was prudent to forecast some amount of increase in uninsured volumes.

And then how does growth and Medicaid factor into that? I would assume that's a lower margin source as well.

Well from a volume standpoint. And I think that the government programs broadly speaking are increasing.

Okay. Very good. Thank you.

Thank you. Our next question comes from Sherry Schoolnick of CRT Capital Group. Please go ahead.

Thank you very much. Okay, I just have one sort of broader question about the guidance. And then maybe a couple of details underneath that if I could. If I understand the top of your guidance range, because assuming that everyone will do the same thing we have done before and that is focus on the 800 million. I assume you focus on the 800 million and what that says. That says that your [vanished] care volumes go down 3%, your bad debt goes up 110 basis points - - 100 basis points, or $110 million, and your volumes are up 1%, overall? Is that what it says?

The inpatient, if you look at the detail on the slide. Inpatient is up 0.8% and visits are up 0.5%. And in that volume line item on the walk forward.

Okay. All right. And then, that assumes that you do get not the full $150 million of the cost savings, but the run rate equivalent of it.

No. It is the full $150 million. By the time you (inaudible - two speakers) for the run rates, it would be higher.

Run rate is higher than that. Okay. All right. That's helpful. Thank you very much. And then I do have a couple of other - - I have a lot more other questions. But I need to understand a couple of things about your volumes and your mix. In particular whether we are seeing the impact of the economy in El Paso and on Coastal Carolina. Whether you have considered the fact that you had flu last year in fourth quarter and first quarter. You don't this year. And give us a sense of what the impact of the respiratory volumes might have been. If I remember correctly your January volumes were up 2% year-over-year last year. But that was before you took out USC and a couple of other things.

Three, I would like to understand whether or not your guidance going forward on the cash assumes further debt reductions as in additional repurchases. And I guess my fourth question, if you will be kind enough to answer all this is - - can you elaborate on the DOJ probe of the self-reported admissions issues you found in South Fulton.

I may have not counted all your questions adequately. So let's see if I skipped one in the front. You asked about flu and how that might be effecting our volumes and - - we don't believe we have the same level of flu activity this year as last year. Although putting a precise number on it is not possible through a 49 day period that Steve mentioned earlier because we don't have 49 day flu stats year-over-year at our finger tips. But it is down. At least it appears to be down at this point in time. In terms of debt reduction in the guidance, we have not forecasted any debt reduction in the outlook for cash or interest expense for either element. As I said on my script, to the extent we engage in interest rate swaps or retired debt, meaning taking cash and retiring debt. And that number could be mitigated downward either this year or next year.

Can I just follow-up on that. And so, when that when you looked at the use of proceeds say from USC and I am assuming that is still on track to close. At one point you thought you were going to use that to buy back some bonds in the open market potentially to reduce debt in that way. As if now that you might need it to have a cash cushion to fund working capital because the economy is more difficult.

Well I think that we will make that decision as we go through time. We obviously need to get the transaction closed. We want to see how other cash initiatives are doing. As I said, we don't have the MOB proceeds in this year but we are still working it. So I think it is too early to conclude as to what we will do with the proceeds of any or all of those things until we get it closed and get a little more into the year.

Okay. And then the next series of questions which related to volumes was the impact of the economy in particular on either El Paso or Coastal which contribute over and above the same-store performance and guidance and also presumably to the fourth quarter.

Cheryl, this is Steve. With respect to El Paso. We have not seen a significantly negative impact on our inpatient and outpatient volumes in El Paso related to the employment level. On the contrary, with the base realignment program and expansion of Fort Bliss, we have seen a significant growth, especially in the northeast quadrant of the city with the civilians there to the support the activities at Fort Bliss. That has really helped us ramp up the east side new hospital in terms of it's volume. We've completed the specialty medical staff there although we are continuing to recruit primary care. And we are pleased with that performance as well as the overall performance of the market.

We've made some leadership changes in the market, not at the CEO level but in the A-teams and expanded our physician recruitment and physician relationship programs staff. So we're feeling very positive momentum now with our El Paso market. With respect to Coastal, Coastal as you know, is a small hospital that has a very concentrated small active medical staff. And we have had some physicians move out of the area and out of state. And we are in the process of recruiting to back fill that.

But clearly, it's collaboration with our Hilton Head hospital is increasing. We have Hilton Head physicians covering the Coastal Carolina - - significant services like general surgery and orthopedic surgery now. And we have signed some letters of intent with specialists in those two areas for them to relocate to the Coastal Carolina/Hardeeville area shortly. With respect to unemployment around the country, as Biggs said, we've got a mixed picture, and some of our markets with the highest unemployment rate we are continuing to grow volume and grow commercial volume in comparison to Q4 '07. And others we have seen more significant delay in elective surgical procedures.

Sort of interesting as you look around the country. Our ER visits in the quarter were down compared to Q4 '07. On the other hand, our admissions, that come through the ER actually increasing. So what we are seeing is that less seriously ill patients are not coming to the emergency room. Now, we can speculate on why that is happening. But one thing is those that were previously commercially insured may elect to find care when they need the sort of less serious care at other clinics or even at private doctor's offices rather than coming into the ER.

And so as Biggs said, we are following the situation closely, we are ramping up our efforts to take market share in all of the markets, especially in our TGI priorities as well as our commercial managed care area. We are expanding our business-to-business activities in terms of growing that commercial business. And we are optimistic we are going to make progress in 2009.

Cheryl, this is Trevor. I think on the last of your five-part question was the inpatient rehab issue. There is really not much to say other than what is in the 10-K but essentially we identified an issue through our own compliance programs. We reported it to the OIG under a program that they set up for self-disclosure of these kind of issues. And the question really is whether Medicare would pay for patients to be cared for in a rehab facility, a skilled nursing facility, or home health, or expect them to have been kept in the hospital longer. I think as you well know, those rules changed over time and so the questions really - - how closely our inpatient rehab facility adhered to the rules as they were changing.

Okay. Great. Well terrific job in the fourth quarter and the year. And congratulations on all those docs and all the improvements. Really great job on that.

Thank you very much.

Thank you. Our next question comes from Henry Ruekoff of Deutsche Bank. Please go ahead.

Hi, guys. Just two questions for me. I guess just the first circling back on the 150 million cost saves. I think you guys mentioned that 75 million would come from SW&B. Is - - and you also mentioned that part, you weren't going to continue to match on the 401-K. Is the 401-K most of the savings in the SW&B or is it just a sizeable head count? Because 75 million is a fairly large number. A little more detail or refinement on that 75 million.

Okay. The 401-K would be about a third of it. And there are other benefit changes which, maybe take it up to about half, if you will. Being related to benefits and then the other half, being related to levels of staffing at the various levels of the Company. And just one note on the 401-K. Because I think it was asked earlier. The 401-K five years ago, or six years ago, had a match of 5%. We took that down to 3% in about 2004, or so. And it remained at 3%. We have taken it to 1.5%. We've described to our employees that it is temporary while we navigate through these sort of uncertain periods, but we have not eliminated the program. So we still believe that we offer a competitive benefits package. And it's important to us to continue to drive to reduce turnover and increase retention which are things we did in 2008.

Okay. And then the last one as a kind of an industry question. Just with the Medicare Advantage. Some of the productions and the question. For a patient who shows up, a Medicare patient who shows up, either as a fee for service Medicare patient or a Medicare Advantage patient. To you, is there a difference in profitability or payment from those two different patients on Medicare, generally?

Well, the pricing on a managed Medicare patient is slightly less but not significantly different.

Okay. So if that was reduced a lot it would almost be a positive for you guys. Since fee for service is a little bit more.

Well there is really - - there is also a utilization impact. So the managed Medicare patient tend to stay in the hospital less that the fee for service. So it actually sort of helps us to the extent that Medicare Advantage is less attractive to the providers of that.

Okay. Thanks so much.

Thank you. Our next question comes from Rob Hawkins from Stifel Nicolaus. Please go ahead.

Thanks. Can you guys, just give a couple of details on where the MOB sale stands and kind of some of the pricing. Is this the entire group of MOB's or are you doing it in parcels.

Well there were 31 MOB's that we put up for sale. Not every MOB that we own, some of which we occupy significantly so we did not put those up for sale or to have some strategic purpose causing us to retain them. But of the 31 that we put up for sale, we have broken them into two buckets as I said, which there is a buyer trying to find financing for. And then 10 - - which there are buyers interested in all or just individually elements of those 10. From a pricing standpoint, the 21 are probably more valuable than the other 10. And that's one reason for breaking them up. But all of our MOB's, not all of them but broadly speaking, there is some amount of capital that needs to be deployed. And so as a part of this arrangement, when we sell the MOB's, we are also requiring the buyer to put in capital. So that of course improves the facilities and improves them for our physicians, but it also diminishes the proceeds somewhat.

So the guidance has I guess full sale in anticipation.

No. The guidance in 2009 does not have the MOB sale in it at all.

No, but I mean, I guess on slide 24, the estimate. I am sorry. The cash initiatives and divestitures page. Sorry, I misspoke on guidance.

Yes. The cash initiative - - that is all 31.

How do you break up your bad debt guidance. Between what is charge master and what is unemployment and are there other components that we should be thinking about. Because it seems like it is a pretty significant jump.

Yes. It is, this will not be completely precise. But I will give you a little bit of break down in this way. On the slide. We had $110 million bad debt increase year-over-year. About 30 million of that would be just taking Q3, excuse me, the full year 2008 up to the Q4 run rate. Also the Q4 bad debt rate being higher than the average. So the starting point, you would raise it $30 million just to take it to the fourth quarter run rate. And then, of the remaining $80 million, break it down into collection rate, deterioration, potential $20 million to $30 million on pricing, an additional $10 million to $20 million increasing balance-after due to cost shifting, $15 million to $30 million and less mitigation for the collection of older accounts as aging has improved. As you know, we've done a good job of approving the aging. So that would be $10 million to $15 million. So those ranges if you will work their way into that $80 million.

Okay. So I guess the unemployment rate side of that would be the cost shifting.

Right. The unemployment effective, or the uninsured effect is up on a different line of the walk forward up there in the mix shift.

Okay. Now, thank you. I under it better.

There are some bad debt pieces on the chart, not solely in that bad debt line but also in the pricing line and in the mix shift line and then in the volume line.

All right. Thanks, I will jump back into queue. I appreciate the color.

Thank you. Our next call comes from Miles Highstreet of Credit Suisse. Please go ahead.

Hi, guys. I think you said this but I just want to be clear. Just on the Med-Mal again is where kind of looking forward and modeling this. Does that run out going forward looking more like an 18 per quarter or more like a 36 per quarter type number?

You are referring to the expense of what the reporting gross expense will be? I am not going to give a line item estimate for malpractice expense for 2009. But clearly, we think that the kind of reduction we experienced in 2008 was real. And - - in the 4th quarter of course it grew some. We think that those reductions are sustainable. We think that in 2009, we can continue to benefit from our initiatives and if you will, have malpractice expense at a rate which is lower than what inflation would take it to, or normal cost increases would take it to. But I don't want to get to the point of giving specific line item guidance.

That's what I was looking for, thank you.

Thank you. Our next question comes from Gary Taylor of Citigroup. Please go ahead.

Hi. Good morning. I am glad I got the P in there. Well congrats on how the tender offer is going. It sounds like that is proceeding very well. Can you remind us of what security you are giving in that exchange.

It is secured by the stock of subsidiaries and so, it gives them security basically to those subsidiaries which hold our hospital assets.

So you don't have any first mortgages anywhere on your debt, right?

No.

And am I correct that the revolver is the piece of debt that has the security provision protecting what is defined as the principal property.

No. That is in the unsecured debt covenants.

Okay. That applies to the bulk of the unsecured bonds that are out there.

Yes.

Okay. And then, I guess I wanted to just - - I wanted to make sure I understood - - I had a question on the Med- Mal as well. I want to make sure I understand what you are saying. So the full year '08 is $128 million, it is down 35 million. And you think that reduction is sustainable. And then the last comment you had made was you had thought the expense grows less than at a rate of the inflation in '09.

Yes, and the 35 million is net of the $15 million of charges associated with reducing the discount rate over 2000 - - course of 2009. So gross if you will of the change in discount rate, the reductions that we have experienced were $50 million.

Did you take the 15 for the discount rate. Was that in the four Q of the investment performance or was that earlier in the year.

There was a slight change in the fourth quarter but there were changes earlier in the year as well.

Okay. And then my last question. I seem to recall there were some tax changes a couple of years back related to either executive pension or just executive retirement plans and so forth. Is there anything - - is there still anything in place that we have got that risk of that discount rate change that you still may have to take a mark on, looking forward?

There is a, there is still a relatively small - - retirement plan. But it's - - there is some - - limited risk from a discount rate change on it. It's not anything that has been substantial in the past.

There is no explicit tax concern but, yes, there is always from a present value that goes on.

But not very material, sounds like, not large enough to be.

No.

Okay. Thank you.

Sure.

Thank you. Our next question comes from David Bachman from Longbow Research. Please go ahead.

Great. Thank you and good morning. Just a couple of points of clarification. On the expense side, did the formation of Conifer have any impact on expenses in the quarter?

As far as formation from a structural standpoint, no. We have been investing in our service capabilities over the last - - several quarters. But not significant enough to require us to point them out and one-time items.

Okay. And just kind of the existence in the quarter didn't change anything from a reporting.

No.

It is all a wholly owned subsidiary, correct?

Correct.

Can you remind me kind of clarify on just the nonpatient revenue. What the compensation of that is now. What is in there. And just so we can better think about that moving forward.

Nonpatient revenue would include all the ancillary income at the hospitals, It would also include rent on office buildings. And in the case of the equity earnings and subsidiaries, physician revenues, it also included I think the $8 million Medesco credit in the fourth quarter.

No one item in there really overwhelms the category. I mean just really overwhelms the category.

I don't think so.

Okay. Then just the broader question. You talked about stimulus S chip and COBRA sort of against the backdrop of sort of deteriorating or challenging fundamental. Am I reading you correctly that you sort of look at the puts and takes there that those sort of net out. Is that just how you are thinking about the impact of those for 2009 at this point.

Well, I think that S chip expansion and the COBRA, to the extent that they occur should be all things equal, upsides. We should have more covered lives as a result of both of them. However, trying to forecast exactly what that is - - is really problematic. You go probably beyond what we are actually capable of doing with any kind of fidelity. So we have said that - - we don't know what to incorporate for. It may be a small amount, it may be significant. So they seem to be net positive though one way or the other. On the stimulus bill we think that that just continues to support what the states otherwise would have planned or otherwise were funded last year. And so we think that that neutralizes, if you will. With respect to state funding. Although there is some - - there still could be risk out there. (Inaudible) should neutralize it.

Okay. That's helpful color. Thanks.

Sure.

Thank you. Our next question comes from Whit Mayo with Robert W. Baird. Please go ahead.

Yes. Thanks. Can we get a spot number for what you think your seismic call store will be in 2009. I know you've benefited a little bit along the way from small reprieve. Any additional changes to think about there?

I don't believe the spot number for 2009 and among other things, it is still under evaluation. We gave the $147 million in the 10-K for the total requirement. But we still have some appeal processes, some discussions underway to reduce that number and that could have an effect. Not just on the total number but on what we would spend in 2009. So I don't think it makes sense to give a spot estimate at this point.

Okay. That's all I've got. Thanks.

Sure.

Thank you. Our next question comes from Shelly Knoll of Goldman Sachs. Please go ahead.

Hi. Thanks. I've got a question on the more conservative CapEx strategy. Just trying to understand the motivations there. Understanding that I'm certainly part of it is to minimize cash burn, or as Cheryl was mentioning - - to build up the cash balance. But what about the opportunity here to more aggressively go after market share in some of your more challenging, more competitive markets? I guess what I would love to hear is an update maybe on changes in your capital strategy? What kind of projects are going to get priority in this environment?

Shelly, thanks. And I believe you're our last question because we wanted to finish in time that people could then take a break and tune into the HMA conference call coming up in 10 minutes. So just briefly, part of It is we're being cautious because of a cautious or an uncertain economic environment. That's a big motivator. We also, as you know, have spent heavily in the last two and a half years including the Tenet's capital stimulus that we put in place following the government settlement in the mid 2006. So we feel that though our hospitals are competitive and we're able to do this and remain competitive. As I mentioned the arms race has diminished competitively and so we are really focusing much more on execution in 2009.

Okay. Thanks for the color.

I believe operator, that's the last. There is one more question?

We have time for one more.

Our next question is from Ralph Giacobbe of Credit Suisse. Please go ahead.

Great. Thank you. Just want to go back to the uninsured volume. I think in 3Q, uninsured volume was up 4.9% and this quarter it looks like down 5.9, obviously a huge swing there. Anything specific that drove that?

Well generally speaking our uninsured volumes have been - - trimming - - lower as we have gone through the last couple of years. There are a couple of reasons. One is our Medicaid, the valuation program where we really assist the individuals in the emergency room. We have people on staff to counsel, if you will, to determine eligibility with patients as they come in. So we are getting more people qualified from Medicaid. And secondly, the right care/right place initiative which has tried to get people to more efficient forms of care as opposed to emergency room when they don't have a critical need.

Okay, and just to be clear, next year, the assumption is for the insured to be up about 6%, is that right?

Yes, that's what I said was in the upper end number. The one other thing that we are doing back to the uninsured is on the elective side, before we take an elective uninsured patient, it gets signed off on/by the CEO of the hospital, or equivalent level individual. And so we reduce the risk of nonpaying, uninsured elective procedures.

Okay. And then just one quick one here. Not sure if I missed it. Did you give a recruiting goal for 2009. And then maybe if you could talk about strategy around employing docs and any trends there.

Once again for 2009, we are setting an ambitious target of 1,000 active medical staff net of attrition. That would be our third consecutive year of setting those I think lofty goals, having hit them in '07 and '08. We are continuing to ramp up our physician recruitment and redirection activities. Again, as we have said before, over 70% of the new physicians joining staff are those that are in the contiguous market area that previously didn't use our inpatient and outpatient facilities. The smaller parts being the employed positions and smaller being relocation agreements where we bring physicians from geographically distant areas. So we're happy about what we're doing, we're expanding it, we're improving our knowledge of targeting and I think it will provide us good results going forward.

In terms of employing though?

We continue to gradually expand that in a very strategic and selective way. Where generally speaking, we can't have an adequate primary care base to serve the community needs that we have. And occasionally, for example in Florida where we can't get emergency department coverage from subspecialist, we employ subspecialist.

Okay. Great. Thank you.

Thank you. This concludes today's conference call. At this time, you may now disconnect your lines.