Tenet Healthcare Corp (THC) 2009 Q1 法說會逐字稿

Good morning and welcome to Tenet Healthcare's conference call for the first quarter ended March 31, 2009. 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 Generally Accepted Accounting Principals, or GAAP. Management recommends that you focus on the 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 and good morning, everyone. We are going to keep our opening remarks fairly brief this morning as I think our first quarter results speak for themselves. I'm very pleased with the 28% growth in adjusted EBITDA, and the very strong cash flow that we generated. Not only did we improve cash from operations, we also carefully controlled capital expenditures and succeeded in completing the sale of USC University Hospital. We also closed the bond exchange transaction in the quarter, so between operations, the sale of USC and the bond exchange, I feel our balance sheet is in far stronger shape than it was as we entered 2009.

Now, I would be the last person to declare victory as our volume growth turned negative after improving steadily during the course of 2008, and with the stock price where it is, I'm far from satisfied but I am pleased with many of the trends. Our first quarter demonstrates that employees at every level of the Company have embraced cost reduction in the face of a tough economy and mildly shrinking volumes. The evidence of this is quite apparent with the growth in same hospital controllable operating expense for adjusted patient day of only 1.2%. If you prefer to look at it per adjusted admission, controllable costs were actually down 0.7%. This is the result of a number of initiatives.

We talked about our efforts to remove costs from corporate overhead, but there are other initiatives as well throughout the organization and into very granular levels of detail. One aspect of this weak economy is that it enables everyone to appreciate and support cost reduction efforts. The quality initiative we launched in 2003 once again delivered results with a $19 million, or 48%, reduction in malpractice expense. This is in addition to all of the ancillary benefits to patient safety, to physician satisfaction and to our reputation that sustained increases in quality have brought.

One of the things we look forward to sharing with you during our June 2 investor day is our new Medicare profitability initiative. Steve will make a few comments on it this morning, but for a more detailed explanation, you will want to join us on the second. We launched this initiative because Medicare and managed Medicare represent our fastest growing patient segments and the demographic trends in the US will continue to drive growth in the eligible population. Beginning in just three years and lasting for the next decade, the over 65 population will grow at more than double the annual rate at which it grew in the last 10 years. Also, the significant changes in health care finance that are likely to be proposed by the Obama administration may drive even more growth in programs that look like Medicare.

I would imagine that the biggest question in your minds as to what extent the first quarter performance is sustainable. Biggs will address that question in his review of our 2009 outlook. At a very high level, the sustainability question comes down to a handful of fundamental issues, cost control, bad debt expense trends and patient volumes and mix. I think the operating savings that we captured are largely sustainable. For several years, leading up to the current economic downturn, we had excellent performance in controlling the rate of growth of costs. We stepped up our efforts and at all levels of the organization we are driving for new cost savings. The tough economy has a silver lining in that our labor force is more stable, more productive, and eager to work more hours. Due to our prior efforts and helped by the tough economy, in the first quarter turnover was down 22% year-over-year, contract labor costs were down 33%, and overtime was down 16%.

The issue of bad debt expense presents a greater level of uncertainty. While Tenet captured some solid benefits here by getting out in front of this problem very early, it's very hard to predict how much pressure we'll see on this line item if unemployment continues to rise. As you would expect, we have experienced pressure on our collection rates from patients, but we have significantly offset that slippage by collecting money sooner.

Finally, I'm pleased that volumes held up as well as they did in the first quarter. Adjusting for the impact of leap year, total admissions were relatively flat. In the midst of a severe economic downturn, I think this demonstrates that our services are largely non-discretionary. Since flu volumes were virtually nonexistent in this year's first quarter, our stable volumes were even more reassuring. I'm particularly pleased with the growth that we generated in paying outpatient volumes and surgeries which were up 2.3% and 2.6% respectively.

The volume picture in April was mixed. Total same hospital admissions, outpatient visits and paying admissions trended slightly better than in the first quarter, but commercial inpatient admissions trended lower declining by 6.8% in the month. A real bright spot is outpatient visits both in total and commercial which continue to show improving trends. We'll update you on Q2 volumes at our investor day when we'll be two months into the quarter. With that, I will now turn the call over to Steve Newman for some comments on our key operating initiatives. Steve.

Thank you, Trevor, and good morning, everyone. I want to focus my comments this morning on two of our key operating initiatives and then I want to describe our newest initiative, the Medicare profitability initiative, or MPI. This new initiative is focused on driving down variable costs at the point of care and improving clinical outcomes. I will start with our physician recruitment activities.

Net of attrition, we added 167 positions to our active medical staff in the first quarter. While this growth is a little less than one-quarter of our goal for 2009 of 1,000 net new physicians, let me remind you that the recruitment process is seasonally driven. The first quarter tends to be light while the third quarter is usually the most fruitful. This is because residents and fellows finish their training in the May/June time frame and have moved to establish new practices. I'm pleased with our first quarter progress in 2009 and want to reconfirm our target of net growth of 1,000 active staff physicians again this year. Of course, the expansion of our medical staff is not an end in itself. We see these relationships as a powerful mechanism to continue volume growth.

Slides 12 and 13 relate the net expansion of our medical staff over the past two years to our recent volume growth. These two slides show our first quarter total and commercial admissions and outpatient visits from our classes of 2007 and 2008. In the first quarter, we averaged almost seven admissions from each member of the class of 2000 with 22% of these admissions being commercial patients and we average 46 outpatient visits from each of these physicians with 31% of these outpatient referrals being commercial. The referral patterns from the class of 2008 are only slightly lower reflecting the less mature status of these relationships; however, they remain ahead of the growth from the class of 2007 at the same stage of development.

These data demonstrate that our relationships with these new physicians are continuing to mature in a very positive fashion. We believe the successful expansion of our active medical staff was one factor in the very strong 2.6% increase we saw in surgeries in the first quarter. We continue to add staff, business intelligence, and refinement such as expanded educational offerings to our physician relationship program.

Next, I want to draw your attention to slides 14 and 15 which show our admission growth in total paying patients both inside and outside of TGI service lines. First, in comparison to Q1 2008, we generated stable volumes and total paying patients in the quarter after adjusting for leap year. Second, we saw a total paying patients in the TGI service lines growing faster than total paying patients in the non-TGI service lines. However, our commercial managed care volumes in the quarter were stronger in the non-TGI service lines than in the seven TGI service lines we have cited in previous calls.

After digging into this data on commercial volumes, we believe the reason for the lower commercial growth and our TGI service lines is because patients are deferring elective procedures in a weak economy. It is important to note that from a pricing perspective, although we did not get lift from the TGI service lines in the quarter, we benefited from an offsetting positive mix in commercial patients within the non-TGI service lines.

Now, I want to turn to my new topic for this morning's discussion, our new Medicare profitability initiative, or MPI. We have launched this initiative to address the profitability challenges resulting from the growing percentage of our volumes which received Medicare-style reimbursement. This reimbursement trend is likely to accelerate and must be addressed but, in fact, the effort we are focusing here will impact our profitability across all payer categories. The primary driver here is the identification of best practices in our highly efficient hospitals and introducing them to every facility in our Company. We will be focusing on a customized list of five DRGs for each hospital where we find a substantial opportunity to drive down variable costs.

I'm convinced that the experience we gained in implementing our performance management and innovation program gives us the skill set necessary to be successful in capturing these cost savings. A critical piece of this initiative is directed to working with our physicians to modify care delivery. Together, we will provide improved clinical outcomes and enhanced resource utilization efficiency. This is a data-driven exercise which we believe we are well positioned to address. We are very excited about the prospects for incremental EBITDA margin expansion from MPI. I have only scratched the surface this morning. If you want to learn more, please join us on June 2 for our investor day when we will be able to devote much more time to exploring this initiative. Now, let me turn the floor over to Biggs Porter, Tenet's CFO. Biggs.

Thank you, Steve, and good morning, everyone. I will touch on a few items worthy of reinforcement or explanation. Summarized briefly on volumes, we were very pleased with how the quarter progressed with stable trends especially after normalizing for the leap year effects. Commercial admissions declined by 2% after the leap year adjustment. You will recall that we disclosed in our fourth quarter call that commercial admissions had declined by 3.1% through roughly the first half of the quarter. Since the final decline was 2%, it should be apparent to you that commercial admissions strengthened in the second half of the quarter.

April commercial admission declined with Easter likely having an effect but commercial visits were stable in April. The variance between commercial inpatient admission and outpatient visit trends in April makes it difficult to correlate the statistics for a single month into any meaningful conclusion. Having said all of that, based on the first four months of the year, we are still comfortable with using an assumption of approximately 3% commercial volume loss for the year as a starting point for our EBITDA walk forward. Conversely, we still haven't seen growth in uninsured volumes but continue to hold on to the conservatism we stated in February of an assumed growth in uninsured for the year of approximately 5%.

Total revenues grew by 3.6% on a same hospital basis. This growth included $11 million in favorable cost report adjustments. For those of you who are tempted to back this $11 million out of first quarter earnings, I want to draw your attention to slide 19 which shows our history of quarterly cost report adjustments that makes it clear that $11 million in favorable adjustments are not a particularly unusual event and are reasonably consistent with our historical pattern.

The most powerful driver of margin expansion in the quarter was incremental cost efficiencies. To place this in the context or expectations for the full year, our 2009 outlook of $150 million in savings from our cost initiatives has been increased to approximately $180 million. The decline in malpractice expense made an important contribution to the first quarter's cost metrics and contributes to the increase in our projected cost savings for the year. I don't want to get in to providing line item guidance on the components of our operating expense, but while we don't believe the $21 million in first quarter malpractice expense is a level we can sustain, we do expect continuing favorable year-over-year variances in malpractice for the remainder of the year.

Bad debt came in with a favorable variance to our expectations based primarily on reduced uninsured revenues. We collected more point of service but, nonetheless, there was a decline in our combined balance after and self-pay collection rate. The lower uninsured admissions and revenues for the quarter continue a trend in which we experience results counter to what would be expected in a recession. This may be attributable to our right care right place and Medicare eligibility initiatives, but other factors are likely involved as well.

Despite this welcomed Q1 performance we intend to retain a collectionary stance relative to our bad debt outlook. We have held the belief for some time, that any rise in bad debt is likely to lag the economy and the deterioration in our self-pay collections we saw in the quarter could be early evidence of this. Pricing gains were in line with expectations so I won't repeat the stats. You can read them for yourselves in this morning's filings.

We had a very cash story in the quarter. Adjusted free cash flow was a negative $135 million and improvement of $151 million relative to negative adjusted free cash flow of $286 million in the first quarter of 2008. As most of you know, we have a large seasonal component of our cash usage in the first quarter which amounted to $123 million this year for our matching 401k contributions and our annual incentive compensation payments. Our interest payments are also tilted to the first quarter at $149 million compared to the scheduled payments after approximately $65 million in the second quarter.

On the subject of interest expense, we just completed a fixed to variable interest rate swap with a notional amount of $1 billion against our 2013 debt maturity. This should produce instant interest savings of approximately $9 million in 2009 if there's a stability in the one-month LIBOR. We also put an interest rate cap in place to protect this against a precipitous rise in LIBOR above 8% over the term of the swap.

After considering the swap, including our cash position, we still have net floating rate exposure well below the industry average. You will also note the capital expenditures were only $101 million in the quarter, a level of which we are comfortable given the financial retrenchment of much of our not-for-profit competition. This level of spending is also consistent with our CapEx outlook range of $400 million to $450 million for the full year. Along with the $251 million in proceeds from the sale of facilities, primarily USC, and some favorable timing of $47 million in cash receipts from our Medicare HMO insurance subsidiary in Louisiana which basically reverses the unfavorable timing of the same source of cash receipts in the fourth quarter, we ended the quarter with $652 million in cash and cash equivalents.

While on the subject of the Medicare HMO, I should note it's disclosed in our 10-Q the sale of that business which had increasing risk to us and volatile results was completed on May 1. Net income attributable to shareholders came in very strong at $178 million, or $0.37 per share. This was significantly aided by $134 million pretax gain, $84 million after tax on our debt exchange. This represents an item which will gradually be reversed through earnings as the original issue discount on the new bonds as amortized through the P&L. Net of this gain and a few other items detailed in our earnings release, EPS was $0.08 per share, well ahead of last year's first quarter as well as the street consensus which had us at about break even. As a result of this very strong start, we felt justified in raising our outlook for 2009 to adjusted EBITDA by $25 million to a new range of $760 million to $825 million.

As I alluded to earlier, after reviewing our initial assumptions for the year in light of our actual performance to date for 2009, we remain comfortable with our outlook on volumes. After the leap year adjustment, total emissions for the first quarter declined by 0.1%, just below our assumed rate of flat to up 1%. But this was offset by stronger than assumed performance in commercial admissions which came then with a decline of 2%, slightly ahead of our assumption of a decline of 3%.

As we have already mentioned, we had a weaker than expected mix in April which served to confirm our caution on the basis of a single strong quarter. This means we are reasonably consistent with our assumed revenue growth taking us to $9.0 billion to $9.2 billion in 2009 revenues. Although we have good visibility into our near-term pricing, there's some uncertainty with respect to IPPS rates for the fourth quarter. If the current proposal which just came out is accepted, it would have an estimated negative impact on our assumptions going into the year of approximately $10 million. We have reflected this change in our revised EBITDA walk forward.

Where we have already performed much better than our earlier assumptions is on controllable operating costs and bad debt. Although there will always be some variability in cost performance and volume fluctuations, we believe the tools we developed to help our hospital operators flex their costs in response to daily movements and patient volumes worked well in the quarter and gave us better cost efficiency than we assumed at the beginning of the year. Although we can't quantify it, we also believe we have benefited from the effects of the economy on our labor base.

The bottom line of all of this discussion is we are going to retain the conservatism we first established for the year in consideration we are only a quarter of the way through and there's still potential pressures from the economy on our payer mix and collectability of patient receivables; however, we remain confident in our strategies and believe they work to sustain paying volumes, constrain bad debt and drive cost reduction in the first quarter at a level better than what we anticipated. For that reason, we are raising our outlook modestly for EBITDA for the year. With that, we will move to questions.

(Operator instructions) Our first question comes from Ralph Giacobbe of Credit Suisse.

Thanks. Good morning. I just want to go back to the comments around slight deterioration of self-pay at the end of the quarter. Can you flush that out at all for us and then maybe just remind us what the -- if you have given bad debt assumptions for the year and/or maybe where you think unemployment sort of shakes out in your market based on your guidance?

Okay. Well, in terms of collection rate, we actually disclosed the collection rates in the earnings release. You can see them there. They did move downward over the course of last year, and then slightly more in the first quarter. The effects aren't too dramatic on the quarter but, nonetheless, they represent a trend which we're watching carefully. The -- let's see, the second part of your question was --

Just implied maybe unemployment in the markets.

On the unemployment rates they vary significantly market by market. Some markets like Modesto, California, have very high unemployment, others are lower than the national average. However, having said that, we don't see a strong correlation between unemployment and uninsured volumes or bad debt expense. There are many markets where unemployment is rising higher than the national average but we actually have an increase in commercial paying patients and paying patients and don't have increases in uninsured and there are other markets which operate more like what you would anticipate. So, unfortunately, I know it would be nice to be able to model it. You just can't draw an absolute correlation.

Okay. And then sort of as a follow-up, can you maybe talk about what you are seeing in your markets? I think you mentioned during your prepared remarks a little about the not-for-profit peers. Can you talk about your ability to maybe take share just given their struggles a little bit more and just their dynamics around that and at which point maybe we can more meaningfully potentially see it?

Sure. It's very similar to what we said on the last call, the not-for-profits, it's hard to generalize. Some are doing well, but many of them are in distress and cutting their capital expenditures and it's a great time to be competing.

And then if I could just squeeze in one more, just in terms of the outpatient trends, obviously a little bit better than expected. Somewhat counterintuitive, I guess, just given the weak economy and the expected pressure or elective or discretionary volume. Can you maybe just drill down a little bit what are your thoughts around the trends there and maybe sustainability of those trends?

Well, I think that we have been very pleased with our outpatient results over the last three quarters. Our outpatient surgery, as you saw in the release, was up 4.7%, compared to the same quarter of last year and that was divided between our hospital-based outpatient surgeries and our free standing. Our hospital-based surgery really contributed a lot to that outpatient work and I think all the efforts of our outpatient group to improve the access throughput customer service efficiency of those facilities has made a big difference. Additionally, on the imaging side, we have seen significant growth in imaging and we have opened several new free-standing imaging centers that have helped us take market share in the relevant market. So we're very pleased with our outpatient growth. We are upscaling our focus in that area, resources, and we think we can continue to grow that business and take market share.

Okay. Great. Thank you.

Our next question comes from Adam Feinstein of Barclays Capital.

Okay. Thank you. Good morning, everyone. Just, I guess, a couple of questions here. Just -- you had said a $10 million impact from the recent IPPS rule. I just wanted to see if you could walk us through in terms of what your pricing assumption was previously and what your pricing -- well, I'm just trying to back in to what you were assuming before for pricing for the fourth quarter Medicare, and then additionally my main question is just with the deflationary trend we've seen in terms of lower operating costs throughout the sector, what are you guys thinking about managed care pricing going forward? Do you think we will see a moderation in managed care pricing? Have you seen more push back from payers? I'm just curious to get your updated thoughts around managed care pricing. Thank you.

Okay. On the first question, -- actually would you restate it for me briefly.

Sure. You made a comment before, if I heard --

$10 million IPPS rates, yes, thanks. Yes. I think our prior assumptions were laid out in some detail in the 10-K. I won't go into all the granularity of it, but it was a low single digit assumption. It wasn't a substantial increase by any means. So the $10 million only makes it fairly moderate change to what we originally assumed going into the year. What we are looking at now in that $10 million adjustment is about a negative 0.5% effective in the fourth quarter. So if you are looking at it from the standpoint of going from 2009 to 2010, it would be about a $6 million effect in the fourth quarter.

Okay. And in terms of managed care pricing, just are you guys anticipating a moderation of managed care pricing just with the decline in the healthcare cost inflations and what you have seen recently?

Adam, this is Steve. We are pretty much totally contracted for all of 2009 and part, probably half of 2010. We are certainly working with our managed care partners and continuing to focus on getting paid appropriately for both our -- the acuity of our services. What we are finding is more willingness on the part of our managed care payers to do firm steerage to us and to also pay us for performance where we have more upside for our hospitals hitting agreed upon clinical outcomes. So we're a positive about the direction of our pricing with our managed care partners.

Okay. Thank you.

Our next question comes from Sheryl Skolnick of CRT.

Thank you very much. I don't know that anyone said it and I don't usually, but nice job. Not that it was a surprise, also thank you for that. A couple of questions if I can. I have to go to Medicare initiative because that's, I think, the most interesting and unique thing that you all have said today, and something that's been concerning me sort of the starvation of the land of plenty notion that has people like me, agent to Medicare, you guys won't be able to afford to take care of me. So I'm curious as to a couple of items on that. I don't want to steal your thunder from investor day, but a couple of items. First of all, what has been the reception to those physicians and other parties with whom you've worked to roll this out and that's number one? Two, how are you going to roll it out? Is it specific regions? Is it hospital by hospital but across regions? So just give me a sense of that. And, three, how quickly can you expect to see changes in the way people think about treating patients and, therefore, in the whole process within the hospital to make sure that you are profitable on every single Medicare patient who rolls in and walks out? Then I have a followup.

Sheryl, we appreciate the questions and the focus on the Medicare profitability initiative. I'm not going to give a lot of details because I want everyone to come to investor day on June 2 to hear our comprehensive presentation, but as a prelude, we've been impressed with the positive receptivity of our operators and staff in the hospitals as we have introduced them to the Medicare profitability initiative. We rolled it out recently at our strategy conference for our Company leaders, and they were very engaged, asked a number of questions and had really enforced the process. We are involved our regional chief medical officers in the process and they are also very much on board.

The early indications in discussions our doctors have also been very positive as they realize that their particular professional fees tiering from the managed care perspective, potential changes in their access to Medicare funds with some of the initiatives in Washington, including the bundling of professional fees potentially to hospital-based DRG payments are encouraging them to participate as active parts of redoing our cost structure. I think all in all we are very positive, understanding there are some roads ahead of us in terms of changing the practice patterns and delivery of care. We are very positive about it and certainly plan to give a lot of those details that you ask about on investor day.

Okay. I don't like getting a sort of non-asked answer, but at least I got part of an answer. So, let me turn to something then that's a little bit maybe also non-answerable but, nevertheless, crucial to the Company. You have done a good job in terms of pushing out your near-term maturities. You generated more cash in the first quarter than we thought you had, in large part due to the timing of the USC transaction but also just generating more cash from operations than you did a year ago, certainly. And while it's great to push out maturities, it's not great enough. You are still a highly levered company. When are you going to use your cash to reduce your debt and what's your thought process about that?

Well, certainly if you go back six, nine months ago when we first announced that we were entering into a traction with USC, we answered that question by saying our default assumption on the use of any excess liquidity was to retire debt. Since that point in time, obviously a lot has changed and it does introduce the question of what is excess liquidity in the current economic environment. So we have to certainly be careful in any consideration of the use of cash at this point in time. So I don't have a clear indication to give you as to what we will do in we will do anything near term, but certainly it's something that we will monitor. Over the long term, obviously the objective is to continue to produce additional cash through our cash initiatives, drive to positive free cash flow so that we can delever through increasing strength on the balance sheet.

Okay. Do you still have room on the balance sheet to generate, as you said before, cash from the assets that are there?

Yes. The broad range of cash initiatives we have talked about previously are still in place.

Okay.

You didn't ask me specifically about the MOBs but I will talk about them since they are one of the biggest remaining pieces. We, at this point, are not under an active letter of intent on MOBs, so we are going to have to consider what whether we will start to sell them individually or whether we will hold them for longer than we had originally planned and look to dispose of them in 2010 or thereafter. Really the market has improved. Financing has become available; however, it's expensive and so it's not been helpful to achieving full value for the MOBs. We are not going to sell them on a fire sale basis. We don't feel like we are in a position which would require us to do that. We have adequate liquidity otherwise, as you just noted, so we are going to do what's smart with respect to the MOBs but, as of right now, there's nothing active for 2009. I will go back to refresh you, we had taken them out of 2009 anyway previously -

Yes.

-because of the uncertainty.

You had taken the proceeds and the asset from the sale of them out of 2009 cash balances, but the income from them is still in the EBITDA, correct?

The income we had taken out of our outlook for 2009; however, it's not a big number.

Okay.

So it doesn't change it much.

Okay. And then if you will indulge me final question, I think it's an important one. You are making great strides across the organization. Clearly, management there must be better than people give the Company credit for. I think I would like to have more understanding of that, but -- a deeper bench. One of the key things you can't control is Washington. Trevor, can you talk a little bit in your role as sort of chief lobbyist for the industry or leader of the pack there about what the key initiatives are that the federation intends to pursue given that now you have seen the IPPS and the coding creep adjustments and the conversation about, gee, how much coding creep there is, I won't motion the "u" word, as well as some of the initiatives that have been discussed in the Senate and the House?

Sure, thanks, Sheryl.

And include in that readmissions if you would.

I wouldn't call myself chief lobbyist for the industry. We have an excellent portion. I'm just chairman of the federation for this year. But the member companies are very much aligned on the big strategy of increasing access and coverage. And I think it shouldn't come as a surprise that as we pursue that and as the likelihood of increased access grows, the government will look for ways to reduce their costs and these tweaks that you see that are material tweaks are exactly that. They are more technical in nature and the more fundamental debate is around access. These other concepts that are out there that tend to, I guess, be most frequently mentioned, whether it's through a senate white paper or just in the press, so things like bundling, readmission, even the Dartmouth atlas and the disparities in spending from one market to another, are all things that the policy makers and the government are looking at as ways to improve basically the value of what they are buying in healthcare services.

Coming back to Tenet for a second, we feel we are very well positioned for this because we have made all of these investments in clinical quality where a multi-hospital system say whether you throw a concept like bundling at us, we should be well prepared to assess the risks of bundling, negotiate the contracts that would be necessary to do that and so forth. On readmission, there are many different definitions. It's a term that's being thrown around and nobody can pin down exactly what anyone means by it.

Sure.

As we have looked -- taken a sneak peek of what our own readmission rates are in the most commonly accepted definitions, they are substantially lower than what is being thrown around in Washington as sort of the problem. So I feel that -- and then finally on the -- clinical quality and value-based purchasing types of initiatives, those are very similar to what we have sought with payers and we performed well in those -- we performed well in those quality incentives. So I feel like we are well positioned for the future costs that might come along as part of a broader gain for this industry in greater access and coverage for the uninsured.

Will there be specific effort made to address the issue of coding creep given than your Medicare initiative issue of code increase give than your Medicare initiative basically says we don't make money on Medicare to begin with and now you want to cut it some more?

Specifically, Biggs gave an estimate as to what this would mean if it were enacted into law. The advisors that we have in Washington and industry groups would say this is far from final.

Their comment period, it seems unreasonable. Why now? I think particularly why when there's an industry in distress? And, remember, that although the universe of companies that this audience follows tends to have EBITDA margins that exceed 10% every company for this quarter. That would represent sort of a top 10 percentile type of margin for the universe that's represented, say, by the American Hospital Association. So as an industry, it's not perceived as an industry that's doing particularly well right now.

Excellent. Thanks so much.

Thank you.

Our next question comes from Shelley Gnall of Goldman Sachs.

Hi. Great. Thank you. My questions are going to be around accruing for bad debts or doubtful accounts. I guess my first question, when you see a fundamental change in your markets, like unemployment rates rising 4%, is that adequate basis for increasing your accruals for doubtful accounts and is that, in fact, what have you done?

No. We do not base our bad debt accrual on any macroeconomic indicator. Instead, we do it based upon what our collection experience is. We look back on our 18-month period. We also look at current experience in applying that standard. So it's based more empirically on what we are experiencing as opposed to what's going on on the outside. We think that that keeps us fairly current. There's not a lag in terms of what we're reserving for, but there may be a lag ultimately in terms of how people behave going forward. What volumes -- what happened to the volume standpoint. Will uninsured volumes go up in the future because of rising unemployment, they might, but that wouldn't necessarily effect what we record for bad debt expense for today that's just our future risk, and then future payment trends might vary, but we wouldn't go and project, once again, into the future on that basis as opposed to looking at what current experience is.

Well, can you tell us what was your allowance for doubtful accounts in the quarter and also the allowance as a percent of self-pay receivables?

Well, the allowance is disclosed in the 10-Q. I would have to go back to find the exact number. I'm sorry, what was the second part of your question?

You also indicated you will give the self-pay -- you'll give the allowance as a percent of self-pay. I guess I can wait for that.

It's in the 10-Q and we have already filed it. So I would refer you to the document so that you can get the right number and all the detail.

So it doesn't sound like we should be expecting a big uptick in either of those numbers as a percent of receivables?

No. No. In fact, the bad debt rate we recorded in the first quarter was below what we recorded in the first quarter -- I'm sorry, the fourth quarter last year because uninsured revenues went down.

Right.

So collection rates have softened but uninsured revenues have declined and that's more important driver.

Got it. Then just a quick question on your correlation where you are seeing some markets that have the higher unemployment rates are seeing better commercial admissions. Can you just talk to us a little bit about what you are doing in those markets? Talk a little bit about routing care. Is there a better opportunity in your large urban marks to route care to county hospitals or community hospitals? And also we have heard some of your peers in the not-for-profit industry at least talking about being able to pay a portion -- the patient's portion of Cobra. Is that something that Tenet hospitals are able to do which may be offsetting some of these pressures?

Let me start, Shelley, talking about what we are doing in those markets in terms of capturing more of the commercial and managed care business. We've got a series of tactics we have rolled out to the hospitals that they're implementing including really expanded business-to-business initiatives. Some work with payers in the area to create exclusive provider organizations and just a whole host of things at the very local level working on relationships. We've done some things like health fairs for school systems all focused on capturing a higher percentage of the available covered commercial lives in the relevant markets. So I think we are continuing to upscale those and, once again, as the commercial covered lives shrink across the country, as the national payers have reported, we are after and focused on getting a bigger piece of the pie.

And an opportunity to pay the patients' portion of Cobra, is that something that you are looking into?

We haven't certainly been doing anything along those lines and aren't looking to do it. Cobra has been expanded -- our coverage has been expanded or subsidized through recent legislation and we certainly think that has a positive influence but we can't track that one either to determine whether that's having any kind of an effect right now or not.

But what about Tenet, actual Tenet hospitals able to pay the patient's portion of that Cobra? Is that an initiative that --

No, that's not an initiative that we considered at this point.

Okay. Thank you.

Our next question comes from Darren Lehrich of Deutsche Bank.

Thanks. Good morning, everyone. I just wanted to go back to the sustainability question regarding your cost trends and maybe ask it in a slightly different way. Looking at controllable cost trends, in the growth and the trend you have averaged about 2% for the last four quarters and about 3% over the last two years. So I guess I just wanted to revisit, in that context what's the right level of growth in controllable costs over the next year based on what you are seeing today and remind us what is in your guidance. Thanks.

Yes. On the -- on an adjusted patient day basis, we had put the range at 2 to 3% previously. As we looked at all of the metrics that we gave the outlook for for 2009, that's probably one where we would be most tempted to say maybe we'll do better than that 2% to 3%, although we didn't specifically update it for the purposes of this call. It may end up more in the range of 1% to 2% for this year. It's going -- somewhat lost maybe in the rounding, but certainly that's an area where we had an opportunity to beat the outlook that we had published back at the fourth quarter call.

Okay. That's helpful.

That would be consistent with the fact that we increased our cost initiatives by $30 million, the savings from them as I mentioned in my script.

Right. Right. Okay. And then my follow-up is just going back to the pricing question that I think someone asked before and I just wanted to follow up in a couple of other payer classes. How much of your Medicare Advantage business now is of your total Medicare business and will you have the opportunity to reprice some of that business in 2010? And, also, can you just comment a little bit more on Medicaid pricing that you are seeing in both -- at the state level and also at Medicare HMOs? Thanks.

Let me do the last part first. On Medicaid, generally, we presume zero change year-to-year on Medicaid pricing and the aggregate and that still would be our assumption be it main store or otherwise and the relief that's been given by the government of additional state funding has been made available through the stimulus bill has buttressed up state's capability to fund Medicaid. So as we might have gone into the year worried about the funding at this point in time, we think the states should be able to sustain themselves in the Medicaid funding and the growth assumption is a reasonable assumption. In terms of the classification between payers -- this is another thing where between the release and the 10-Q, I believe the stats and the information is there. So I can take a minute to go dig it up --

No. No. Well, I guess the mix, we'll calculate that from the Q. Just talk about pricing in your M&A business as you look out to 2010, and while we are on the subject of pricing, because Dr. Newman mentioned it, you are seeing more pay for performance opportunities. Our understanding is that that has been closer to a 1% benefit if you can achieve that. Is that still consistent? Is that the right level of bonus that you are receiving and do you think you can get more over time?

Let me address the Medicare Advantage and just sort of refer you to the 10-Q for the exact proportion, but about three-quarters of our Medicare business is traditional, and about one-quarter is Medicare Advantage business. You can get those exact figures in the 10-Q, but with respect to pricing in the Medicare Advantage contracts, generally speaking, they track pretty well with what happens to traditional Medicare. So when an MSDRG payment goes up, you can expect us to get that sort of payment increase relatively from the commercial Medicare Advantage plans. Recently, the government announced significant increase in orthopedic procedures for those particular MSDRGs. We anticipate that we will see those also in the Medicare Advantage plans as we redo them for 2010.

Okay. Great and then on the pay for performance, Dr. Newman?

We are adding pay for performance to more commercial contracts. We started this about 18 to 20 months ago and as we are renewing contracts with our existing managed care payers, more of them are willing to work with us on both the steerage through high performance networks as well as potential incremental payments for hitting the agreed upon clinical outcomes. So we're pushing that pretty hard and, you are right, it was probably about 1%, but I think that particular amount at risk is probably growing at or slightly higher than our overall increases on a percentage basis.

Great. Thanks very much.

Our next question comes from Whit Mayo of Robert Baird.

Thanks. Just wanted to follow up on the question about the cost items and the sustainability of those trends. I got just first just maybe looking at medical malpractice in the quarter, I think it was $21 million and you had $18 million in December, and I think you mentioned that that may not be somewhat sustainable going forward. So have we bottomed on the large swings there and is sort of a $20 million number pretty reasonable to think about going forward? Just how should we think about that?

I think that -- and I tried to put it in my comments and granted, it's not the simplest of subjects. The $20 million as a run rate, we think, is probably too low and not sustainable. What I did comment on, though, was through the remainder of the year we still felt like we could be below last year. So we can have a favorable trend for the rest of this year. So I think that the fourth quarter adjustment implicitly there, the under run -- or decline in the fourth quarter, the decline in the first quarter represent larger decreases than what we would think would be expected going forward, but we still expect to have good performance from this point. We put an awful lot into the quality initiatives and otherwise controlling malpractice expense. We think those are paying off. We have very little in the way of large claims systematically over time. So we think we will continue to get the benefit from that even at the very low discount rates that we are having to use in the calculations today. So we're pretty comfortable that we are going to get the continuing benefit, but that it won't be quite at that $20 million run rate.

Okay. That's helpful. And maybe just thinking about the 401(k) match, I think you froze that for all of 2009 and you paid, I think, $120 million, $123 million this quarter. I just want to try to get a sense for how to think about that you deal with that from a P&L perspectives. Does that mean in the first quarter of 2008 you would have accrued $30 million for the quarter? I don't know how to think about it.

The $120 million was a combination of incentive compensation and 401(k). I think that the -- from a -- the effect of the 401(k), it's in the neighborhood of $20 million for the full year of what that reduction amounts to. From a cash benefit standpoint, that benefit shows in the -- won't show up until the first quarter of next year. Yes.

Yes, okay. Okay. And then have you said any -- are there any promises or any set dates that you have to readdress, reinstating some of these cost reductions? I just want to kind of get an idea as to when to think some of these reverse themselves, if at all?

No, we haven't.

Okay. And maybe just one last final question. Just on the cost report settlements, I presume you factored some benefit in going forward. Can we get maybe a spot number to think about what you are contemplating for the remainder of the year just so there's no disagreement about this?

Well, we really -- we really don't project them. They obviously happen with some frequency, but it's not built into our forecasts on any kind of a line item or discrete basis.

Okay. Fair enough. Thanks, guys.

Our next question comes from Gary Taylor of CitiGroup.

Hey, good morning. Just a couple detailed questions and then one conceptual question. Still working through some of these cost numbers, which I will agree were quite impressive, particularly coming in light of some reductions you had already put in place in 2008. You fleshed out a few of these in that SW & B. Can we talk about a couple others? For example, the head count reduction. Can you lay out year-over-year FTE decline or dollar amount that came out of the head count reduction?

I don't have the FTE numbers from an aggregate standpoint -- (inaudible) benefits you may recall from the first quarter call we said it was worth about $75 million of our cost reduction initiatives. However, most of that was in benefit-related areas. The risk component or reduction in force component of that was under $20 million.

I'm sorry, the reduction in the work force was under $20 million?

Correct.

That's an annualized number or -- ?

That's annual. Well, that's -- the effect on the full year of the initiative.

Got it. So from a head count basis, would the expectation be if volumes continue around these levels with not a lot of movement up or down that there would be additional FTE reductions or this is the place you will run?

Gary, let me just add that we've had improved productivity and improved average hourly rate, and we're continuing to drive on those every day and every week. And we respond to volumes on an every eight-hour basis so that you can expect us to continue to focus on those areas as we move forward.

Okay. The one other place in terms of overtime costs, you gave us kind of the year-over-year contract labor changes and where that's running. Can you give us a sense of overtime, like what that runs in a quarter and where that was a year ago?

We are going to have to dig that out.

Yes, I don't think we have the overtime statistic for you, Gary.

Conceptually, is it larger than the contract labor number or just -- ?

It's a smaller number than the contract labor number.

Okay. And then my last question just for Trevor, you gave us the 2009 guidance just a couple months ago. You raised it a few weeks ago when you preannounced. Just kind of conceptually help us think about in the last couple of months what's turned out better? Thanks.

Okay. Well, going back to the opening comments I made, what turns out better, volumes certainly were more stable than we had anticipated and I think given the economic environment certainly more stable than anyone anticipated. We did relatively well on volumes in comparison to many of the peer companies that have reported. I think that's as a result of the initiatives we had under way for a long time in building volume growth and recruiting and so forth, as Steve mentioned. I think we have also exceeded the expectations that we set out as we put our plans to go for the year in terms of cost reductions.

At the risk of restating what I said at the outset of the call, the negative impacts on us from the economy have been milder than we had anticipated, and our own ability to have basically everybody in the Company embrace the challenge of driving cost reductions has exceeded our expectations. Meanwhile, the other variables like pricing have remained relatively strong. We also had been very concerned about bad debt but we also had taken a series of very strong steps, including investments in better capabilities and technology and also people right at the point of service in our hospitals in order to mitigate some of the pressures that we have seen for years on bad debt. So we got, I think, much more creative and much more effective in using technology to address bad debt.

So if you go through all of those things, volume, pricing, costs and particular bad debt, the ones where we expected negative pressure, we had -- we ended up doing better against the pressure than we might have anticipated, and the ones that represented opportunities within our control, like cost control, we did exceptionally well, and then with -- it's important to measure and mention cash flow and on the cash side both from operations and from the successful completion of the USC transaction we did very well. And, in addition, we did that bond exchange, which although it was perceived by many as being defensive at the time, I think it was well timed and it has made a material positive impact on the risk profile of the Company.

So sitting here today, I think we're pretty confident about our ability to navigate through this confident about our ability to navigate through this difficult economic environment, and we have put the Company in stronger shape than certainly it was at the end of December or even when we held the fourth quarter call in which we expressed our outlook for the year.

Okay. Thanks for running through that again.

Since we have no more questions, I would like to turn the call back over to Mr. Fetter for any closing remarks.

Operator, thank you. I have no closing remarks except to remind people of our June 2 investor day. Thank you all for participating.

That does conclude today's teleconference. Thank you for participating. You may now disconnect.