Tenet Healthcare Corp (THC) 2009 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2009 Tenet Healthcare earnings conference call. My name is Luisa and I will be your operator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. Thomas Rice, Senior Vice President of Investor Relations. Please proceed, sir.

Thank you, operator, and good morning, everyone.

Welcome to Tenet Healthcare's conference call for the third quarter ended September 30, 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.

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 it 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 principles. 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, Tenet's President and CEO. Trevor?

Thank you, Tom, and good morning, everyone.

I'd characterize Tenet's third quarter with two takeaways. First, despite the continued economic weakness, we generated solid growth in revenues. Second, we did an outstanding job managing costs. Together, these factors contributed to EBITDA growth of 50%, and this was the second consecutive quarter in which we posted EBITDA growth of this magnitude. And, as you read in this morning's press release, we increased the outlook range for adjusted EBITDA by $25 million to $925 million to $975 million.

Let me walk you through the major line items to give you some detail. Cost control is proceeding at or better than planned. Most of the impact on cost is a direct result of our initiative, although we believe the soft economy is contributing to a decline in employee turnover. These savings included a decline in malpractice expense, which was among the multiple objectives of our commitment to quality.

We also improved pricing in line with our objectives. This is due to a combination of our strong local market positions as well as recognition that we offer high standards of clinical quality. Keep in mind that the pricing improvement is not all that's fully apparent in our pricing stats because of the impact of an adverse mix shift, due to soft commercial inpatient volumes.

Turning to volumes, trends are clearly improving and aggregate admissions appear to be stabilizing. After three quarters of negative growth in total admissions, we returned to positive growth in the quarter. This stabilization is evident whether you look at total or paying admissions. And uninsured plus charity admissions only grew by a moderate 3.1% in the quarter.

In the context of current economic conditions, I think it's fair to say that a lot of companies across any number of industries would be delighted to show you the kind of volume trends that you see on slide six. Slide six also shows that last year's third quarter was actually quite a strong quarter for volumes across a variety of metrics. This strength included a 1.9% increase in same hospital admissions. Since this is a fairly challenging prior year comp, it makes our ability to generate even modest admissions growth in the economy all that more significant.

It's important here to note that we take a conservative view on our definition of same hospital data. Since our new El Paso Hospital was opened in May 2008, some companies in this industry and other industries might include that hospital's data in same hospital admissions.

Had we done so, same hospital admissions would have grown by 0.8% instead of 0.1% and paying admissions would have moved into positive territory with growth of 0.6%. Under our method, we will start including Sierra Providence East Hospital in our same hospital metrics in the first quarter of 2010.

Our success in stabilizing total admissions looks modest when we compare it to the robust growth that we are achieving on the outpatient side of our business. Again, the improvement is virtually identical, whether you look at the 4.8% growth in total outpatient visits, or 5.3% growth in paying outpatient visits.

Those of you who have followed the Tenet story for a couple of years know that our success in turning around our outpatient business is very dramatic, given the high single digit volume declines we were experiencing as recently as 2004 and 2005. All of this has been converted into a solid increase in same hospital revenue growth, which was a very respectable 5.2% in the third quarter.

As you can see on slide eight, this is the strongest increase in revenue growth that we have seen in the last four quarters. We have generated significant growth in profitability as a result of these factors, which also has had a positive impact on our cash position.

We generated $142 million in adjusted free cash flow in the quarter. Since we are essentially at breakeven cash flow at June 30th, after offsetting the seasonal cash consumption in our first quarter, our year-to-date positive adjusted free cash flow is $140 million which, as you can imagine, is a significant milestone for us.

Thus far in 2009, bad debt expense has come in much lower than we had forecasted at the beginning of the year. We were not alone in our concern regarding the risk of accelerating bad debt, but the results to date have been better than we expected.

Another area of potential risk relates to commercial volume. It's no secret that, to this audience, that the most powerful driver of profitability in our business is providing care for the commercial managed care patient.

As shown on slide 10, we may have stabilized commercial outpatient volumes. They were flat relative to a year ago. On the inpatient side, however, we experienced a 4.5% decline in commercial admissions in the quarter. This is relative to the 5.7% decline in the second quarter.

The first question to ask is whether we are losing market share in commercial admissions. As we've said in past quarters, the lack of current market data makes it difficult to know. Based on numerous discussions with our physicians, we believe that the lack of growth on the commercial side is largely consistent with what our physicians are seeing. In other words, we are seeing a decline because our physicians are seeing a decline.

There are at least two possible reasons for this drop in commercial admissions. First, many of the larger national commercial payors have reported membership decline and this erosion reduces the addressable commercial population for our physicians and ultimately for us.

Some of this erosion is significant; for example, in California which has one of the best reporting systems for tracking commercial managed care enrollment, the estimated year-over-year decline in commercial enrollment is nearly 800,000 wide, which represents a decrease of almost 6%. Since this approximates the drop in commercial admissions in our California region and is significantly weaker than our 2.9% decline in commercial managed care outpatient visits in California, it's probably fair to say that we are maintaining share in California.

In other words, our commercial inpatient admission losses in California were in line with enrollment losses, with outpatient being better. Unfortunately, the data sources in other states are not as good but we have no reason to believe that this pattern doesn't hold true elsewhere.

The second trend after commercial enrollment is the continuing softness in consumer confidence. As costs shifting has caused many of our patients to face raising financial responsibility for their health care, some of them are choosing to defer treatment as they wait for the economy to improve. Many of our most profitable services, including volumes in a number of our targeted growth initiative service lines, may have been impacted by this consumer behavior.

Total Company margin expanded in the quarter to 10.6% of net operating revenues, an increase of 310 basis points over last year. There are many reasons for this, including the shift in our business mix towards the outpatient side where margins inherently are wider.

With that as an overview of the quarter, let me now shift gears to review the progress that we have made in reducing the risk profile of our balance sheet. Over the past eight months, we have materially extended our near-term maturities. As a result of these actions, our first meaningful debt maturity is more than three years away in early 2013. We also had a successful $345 million public offering of mandatory convertible preferred stock from which we used the proceeds to repay a portion of our 2015 senior notes. These actions also enabled us to achieve one of our interim leverage targets.

At the beginning of the year, with $739 million in adjusted EBITDA, our ratio of net debt to adjusted trailing EBITDA was 5.8. By reducing debt and improving earnings in 2009, our leverage ratio now stands at 3.7, a full two turns lower than just nine months ago. The point is that we have significantly reduced the risk profile of the Company, both in terms of leverage and in terms of the average time to maturity of our debt.

There's not much to say about health care reform beyond what you've read in the press/ With a number of competing proposals coming out of Washington, it's still too early to make a definitive statement about the likely outcome. I can only remind you that by virtue of our geographic footprint, especially with our major exposures to California, Florida, and Texas, with their significant uninsured populations, Tenet has borne a disproportionate burden from the cost of providing health care to the uninsured.

From this perspective, if health care reform succeeds in providing coverage to a large segment of today's uninsured population, this could be very helpful to us.

To quickly summarize, I feel very good about the progress that we have made this year. We are heading into the final quarter of 2009 with significant positive momentum. The strong cost culture is solidly in place as our continued progress in pricing, more stable admissions and strong growth in our outpatient business. Continuing macro economic weakness could surprise us in any number of ways, but hopefully will not detract from the progress that we have made.

It's also important that you not lose sight of the fact that with any meaningful resurgence of volumes, particularly in our commercial business, the improved operating leverage that we have created could have a very powerful impact on our financial performance.

Let me now turn the floor over to Steve Newman, who will add some color on our cost efficiencies and volume growth. Steve?

Thank you, Trevor, and good morning, everyone.

As Trevor mentioned, our third quarter results were boosted by the cost disciplines we built into the system. You may recall, we began the year by launching a series of initiatives designed to capture $188 million in aggregate cost savings.

I am pleased to report that we have met and, in fact, exceeded that goal as a result of better than expected hospital operating cost controls. Clearly, the disciplines we have built into the organization, which include the ongoing deployment of new cost management systems at each of our hospitals, is having a sustained and visible impact on our overall cost performance.

We are making similar progress on virtually every line item, starting with same hospital salaries, wages, and benefits per adjusted patient day, which actually declined in the quarter. Granted, the decline was just 0.3%, but I think you will agree that anytime a unit cost metric declines, it is significant.

In addition to the cost reduction initiatives, we introduced in January a number of inter-related factors also contributed to this positive third quarter result. First, we implemented a number of programs aimed at improving the employee and particularly nurse retention. Second, the impact of the above mentioned programs has been amplified by the continuation of an uncertain economic environment, which has added nurses to the available workforce intended to keep employees with their present employers. And third, our hospital staffing and position control systems are proving to be effective and we monitor them daily.

These initiatives contributed to a 27% improvement in employee turnover and a 29% improvement in registered nurse turnover compared to Q3 2008. We also produced a 31% decline in overtime and contract labor expense, which represents a savings of $23 million. The net result of all these savings is the 0.3% decline in SWB per adjusted patient day I mentioned a few minutes ago.

Similarly, same hospital SWB as a percent of net revenue fell to 42.2% in the quarter. That's down from 44.1% in last year's third quarter.

At 17.2% of net revenue, supply expense was down from 17.6% in Q3 '08. This is remarkable when you consider the 2.2% increase in total surgeries, including a 4.4% increase in same hospital outpatient surgeries.

We are continuing to build on this strong foundation and cost management through the roll-out of our Medicare performance initiative. Since April, we have rolled out MPI to eight of our hospitals. We continue to be pleased with its acceptance by our physicians and nurses who also are embracing the need to improve quality, while simultaneously reducing variable costs.

While still early in the process, we are beginning to see small reductions in length of stay and variable cost for the DRGs we are targeting in phase one of MPI.

Now let's turn to malpractice results. We reduced malpractice expense by 13% or $4 million in the quarter, further extending our trend of year-over-year declines. We continue to refine our commitment to quality and patient safety program activities, which contribute significantly to the reduction in malpractice expense.

Again, while we are always cautious with regard to forward-looking statements, these savings were built on a foundation of clinical improvement we believe to be sustainable. Each of the items I just mentioned contributed to this great result -- a 0.6% decline in total same hospital controllable operating expenses on a per adjusted patient day compared to Q3 '08.

Turning now to volumes, you have seen the inpatient statistics in our release. I'd like to give you some more insights into our strong outpatient results.

Outpatient visits in aggregate were up 4.8%. It increased across all regions and in all segments of the outpatient business. The strongest segment of growth in our outpatient business were our emergency department visits which increased 9.3%. This strong showing is the result of all the work we have done to improve customer service, throughput, and turnaround time, as well as the changing of emergency medicine physician groups and many of our EDs over the last year.

Nearly 80% of the ED growth came from paying patients. Less than 10%, the incremental volume came from influenza-like illnesses and fewer than 7% of the flu cases we did see resulted in admissions.

Speaking of the flu, let me share some statistics which address investor concerns of a possible linkage between recent flu patient volume and bad debt. Those of you who are following along on our slide presentation will want to look at the pie charts on slide number 20.

The pie chart on the left provides a base line by showing the percentage of self-pay patients among all patients we served in our EDs in the first half of 2009. This percentage was 22%. I call this snapshot a base line, because there was minimal flu in this time period but the recession was clearly having an impact.

The pie chart on the right looks exclusively at the flu patients we treated in the third quarter. 22% of whom you can see were uninsured. In other words, we are not seeing any meaningful difference in the insurance status between our flu patients and our general ED population.

While we are discussing the flu, let me also briefly tell you about the expanded business intelligence and reporting tools we have put in place to help our hospital outpatient departments track the spread of H1N1 and seasonal flulike illnesses.

We now have daily reporting of individual hospital emergency department volume. This allows us to respond appropriately in the event of a surge in volume. We also have established an Internet site and system for hospitals to report the influenza-like illness patient numbers. Both of these tools complement our long-standing and well-developed pandemic management plan.

Quickly returning to our discussion on volumes, we also saw a significant growth in outpatient surgery and imaging, which were up 4.4% and 2.7%, respectively, compared to the third quarter of last year.

Now let me quickly bring you up to date on the growth of our medical staff in the quarter. Net of attrition, we added 266 physicians to our active medical staff in the third quarter, putting us at 61% of our previous target of 1,000 net expansion of our medical staff for 2009. We now believe we will finish the year with an increase of active medical staff net of attrition of between 800 and 900 new physicians.

The reason we are unlikely to meet our target is that existing physician practices have slowed their succession planning because of the general downturn in the economy. We have a number of loyal physician practices where the senior physicians have elected to postpone their retirements for one to two years.

I would remind you that we continue to expand our medical staff to meet community need, utilizing three tactics -- redirection, relocation and, when necessary, employment. The selection and distribution of these tactics is customized for our individual markets and hospitals. We are continuing to refine our physician recruitment targeting and our onboarding processes to improve the stickiness of our recruited and redirected physicians.

Bottom line, we remain confident in our strategy. And we believe our focus in this area will serve as the foundation of our volume growth tactics, supplemented by our increasingly effective physician relationship program.

With that, let me turn the floor over to Tenet's Chief Financial Officer, Biggs Porter. Biggs?

Thank you, Steve. Good morning, everyone.

Adjusted EBITDA was very strong in the quarter. Since Trevor and Steve have provided comprehensive overview of our volume growth and progress on cost-efficiencies, I'll move directly to the topic of pricing.

We achieved continued increases in net patient revenue per admission, up 3.7% and net outpatient revenue per visit, up 2.7%. The increases in both of these pricing metrics were restrained by our mix shift as commercial patients represent smaller percentages of our patient population in the third quarter.

Note, however, that we did achieve an increase of 4.2% in commercial managed care revenues. This was achieved despite a decline of 4.5% in commercial managed care admissions and flat commercial managed care outpatient visits. While we do not disclose our pricing increases for commercial managed care, the relationship of those metrics, with revenue growth meaningfully stronger than volume growth, provides visible evidence that we are continuing to see consistently strong increases in our commercial pricing. We also had favorable patient mix which contributed to the commercial pricing stats.

Looking forward at this point we have negotiated the pricing on 74% of our expected 2010 commercial revenues and 61% for 2011.

Let's now turn to the topic of bad debt. Bad debt expense was $193 million in the third quarter or 8.5% of net operating revenues. This represents a $28 million growth in bad debt expense for the quarter compared to last year on a same hospital basis.

Because the issue of bad debt has drawn so much attention in the context of a soft economy and rising unemployment, I'd like to take a few minutes to discuss the complex manner in which bad debt actually impacts our bottom line. As we have said before, because uninsured revenue and bad dad substantially offset each other, the real driver of the net P&L effect of caring for the uninsured is not reported bad debt expense but, rather, the cost of care, net of the small amount of collections we make.

Since uninsured volumes actually declined, relative to last year, the increase in bad debt expense in the quarter is primarily explained by pricing and mix and the year-over-year decline in our aggregate self-pay collection rates. The pricing and mix element is just a gross-up of bad debt expense against revenues.

To put this in context, we disclosed in our 10-Q that the estimated fully burdened cost of caring for the uninsured charity in the third quarter was approximately $130 million, excluding depreciation. Against this, we collected approximately $15 million for a net fully absorbed P&L effect of $115 million. The same number for the third quarter 2008 would have been $103 million. This growth of $12 million is far less than the $28 million growth in bad debt expense even after including the cost of caring for increased charity patients. Also this is fully burdened cost. On a contribution margin basis, this would be significantly less, in the neighborhood of 50% less.

I should note that this net cost for the uninsured and charity is not comparable to other payor classifications because of variations in acuity and length of stay between the payor classes.

So to summarize at this point, increasing uninsured and charity volumes are a concern, but far less than what would be suggested by looking at gross bad debt expense. Having said that, both uninsured admissions and uninsured outpatient visits declined in the quarter by 3.1% and 1.1%, respectively. There are a number of factors which may have contributed to declining uninsured volumes in the context of weak economy and rising unemployment rates.

Certainly a portion of these declines can be credited to the financial counselors we have placed in each of our hospitals. These counselors work with our uninsured patients to help determine whether they can qualify for various government programs. It is difficult to quantify the impact of this program with precision, but clearly this program has had an important favorable impact. Our Right Care, Right Place initiative also is believed to be contributing.

While we are experiencing a decline in our average collection rates for self-pay accounts including balance after, our investments in the revenue cycle process, including automated dialer technology which allows us to place approximately 2 million outbound calls a month, results in our receiving partial payments for a much larger number of accounts.

Our continuing enhancement to our revenue cycle have also contributed to the mitigation of collection pressures. Cash collections at the point of service were 37.3% of the quarter, an increase of almost 210 basis points from a year ago.

On the commercial managed care side, our collection rate has been fairly stable at approximately 98% and our aging of accounts has improved.

We had another very good quarter with respect to cash. Adjusted free cash flow from continuing operations was a positive $142 million. This number is particularly strong. considering the third quarter is one of our higher quarters for interest payments. In addition to improved earnings, our emphasis on working capital has continued to produce results.

With the mandatory convertible issuance and related activity and debt repurchases, there are numerous items impacting our cash position in the quarter, all of which are detailed in our earnings release and 10-Q. The net result of these items is that we ended the quarter with $731 million in cash and cash equivalents. We have made only a modest change to our 2009 outlook, raising both the lower and upper end of the range by $25 million. With year-to-date adjusted EBITDA at $764 million, this implies an outlook for the fourth quarter of $161 million to $211 million. This Q4 range is $29 million to $79 million below the $240 million we reported for Q3, which is often our seasonally weakest quarter.

In terms of our walk forward from Q3 earnings to Q4, let me share with you the broad outlines of our thinking. We had a few items which favorably impacted the third quarter by approximately $20 million, including $11 million in favorable cost reported adjustments and $6 million from a minority interest distribution.

Let me emphasize that the earnings from these sources are very real and should form a legitimate part of your assessment of Tenet's 2009 earnings power. But the simple fact remains that these items could have just as readily occurred in a different quarter of the year.

Similar to other items affecting results in the fourth quarter could occur as they have in the past, but generally we do not forecast them. So all other things equal, we would use a base line for the third quarter of $220 million as a point of comparison to our fourth quarter outlook.

We can readily identify three items which either will or could place earnings pressure on Q4, relative to our Q3 run rate. These are the effects of our annual non-officer October merit increases, the continuing effect of declines in our collection rates, and adverse mix shifts. Partially offsetting these are the effects of pricing increases and seasonal volume growth.

While the upper end of the range captures some risk in this area, the lower end of our range reflects additional uncertainties around the same or other incremental sources of risk. Other than that, we see no need to make macro level adjustments to our estimates on volume growth, pricing, or cost-efficiencies as our strategies are delivering results largely consistent with our plans.

We have put slides 26 through 29 on the Web, which give our EBITDA and cash walk forwards and related outlook information.

We have stated in the past we have not wanted to continue the practice of giving partial quarter volume stats. However, we have done it for each quarter this year and recently when we updated our outlook in September, saw, although we might discontinue the practice in the future, our inpatient stats for the period through October 28th are as follows.

Total admissions for the 28 days grew by 0.9%. Inpatient paying admissions grew by 0.3%. Inpatient commercial admissions declined by 5.9%. And, uninsured and charity admissions grew by 9.4%.

The uninsured and charity number needs to be put in perspective because this is off of a very small base and represents only 227 incremental admissions over last year. On the basis I already described, unless these patients are unusual in their demands in the hospitals, this represents estimated net incremental costs of less than $1 million.

One of the lessons learned from this is that the statistics we give on paying admits is a much more meaningful way to look at the business than looking at totals admits and then trying to adjust the model for the amount of bad debt expenses and better than our implied net number. There's far more positive leverage in paying admissions than there is negative leverage in charity and uninsured admissions.

Don't get me wrong. There is a big deal that almost 7% of our inpatient and 11% of our outpatient volumes are charity and uninsured for which we are inadequately compensated and which absorb capacity. But the percentage growth in these numbers over the short to near term does not have as significant an effect on our bottom line as well one would conclude from focusing on bad debt expense. The key is to focus on what is happening to total paying admits and the mixed within that.

Once again, the period through October 28th is a short period, so it is not necessarily indicative of the fourth quarter. As a reminder, outpatient stats are not available until we close our books for the month.

We are not going to provide a 2010 outlook until we release our fourth quarter results as has been our practice. While we expect to plan for earnings growth next year, it is too early to indicate the range. We believe that a more stable economy should provide benefits primarily in terms of para mix over the course of the next year.

We also continue to expect benefit from our volume pricing and cost control practices and initiatives in 2010. What we don't know yet and are not yet ready to estimate is any lagging effect on the economy if payor mix and collection rates entering next year. We will have a better feel for that starting point as we conclude the fourth quarter.

The other negative pressures we will watch are state funding in the amount of front end implementation expense on health care IT requirements as required by the stimulus bill. I should also note that with the recent provider tax legislation in California, there is both up side and downside on the state funding situation.

So my summary points are virtually identical to the last quarter. A strong quarter on outpatient, cost control and cash flow. Bad debt pressures from the economy have increased, but are not the burden we had expected earlier in the year. The negative effects of the economy on commercial volumes have been offset by the positive trend on outpatient, which may be a strong indicator of future growth. And we are confident in our strategies, but remain conservative in our outlook only for those factors outside of our direct control.

With that, let me turn it over to the operator for questions. Operator?

(Operator Instructions). We respectfully request in the interest of time that you limit your questions to one with one follow-up.

And your first question comes from the line of Ralph Giacobbe with Credit Suisse. Please proceed.

Thanks. Good morning.

I did want to go to bad debt expense. Is there -- I know on your last call you said bad debt for the back half of the year, 8.4% to 9.8%, clearly, 3Q at the lower end of that range. Is there something seasonal about bad debt? Specifically, 3Q seems to jump up historically and come down a little bit in the fourth quarter. Any comments around that?

Yes, there is a seasonal effect, and generally speaking the third quarter is the worst quarter for bad debt from a rate standpoint. Some of those numerator/denominator, lower volumes, lower commercial revenues typically in the third quarter as a result of people taking vacations, changes in the mix and then there's some -- there's a very slight aging component to bad debt expense, but it does affect us. And so, you have higher volume months early in the year in which there is some level of bad debt recorded in the third quarter.

So it is definitely a seasonal effect and you can look at it from both from a numerator and a denominator standpoint.

Okay. And then just by follow-up, did you say you have 61% of the managed care revenue locked in for 2011? Did I hear that right?

That's right.

Yes.

Is that -- is it normal for you to have that much locked in this early, any extension out of contracts and maybe any change to rates compared to what you've seen over the last couple of years?

It is not unusual for us and I think as we said before, we think that 2010 we expect rate increases consistent with what we had in 2009, so no pressure, no change there. We had said previously that we were going to hold 2011 to not more than 50%, given risk of inflation. We have gone over that but from the standpoint of total negotiated.

However, there are inflation rate adjustment clauses in there. So we have not gone beyond our express commitment to forward price on a fixed price basis more than the 50% number.

Okay. Great. Thank you.

Your next question comes from the line of Tom Gallucci with Lazard Capital Markets. Please proceed.

Good morning. Thanks for the color. You mentioned some of the TGI initiatives during the prepared remarks. I think in the past you have given us some color on some of the growth, relative to the total as we can monitor your progress there. So do you have any metrics that you can offer in terms of growth in those areas?

Sure, Tom. It's Steve Newman. As you noted in the slides we put on the Web, consistent with the long-term trend, the decrease in commercial managed care in the TGI priorities was actually less than the aggregate reduction in commercial managed care across all diagnoses.

But I think more importantly, we are still pushing on those particular priorities. And as we roll out the Medicare performance initiative and begin to look at all payors under the targeted growth initiative, we see stabilization compared to prior year. And as the activity advances, we move toward developing a positive margin on those cases, which had previously been negative margin when they are outside of the commercial payor category.

I guess I was wondering, can you talk about any of the more specific areas within TGI, some of the ones that were better growth versus a little slower growth?

Sure. For example, orthopedic surgery in the commercial line was up 0.2%. If you look at all payors, it was up more than that.

If you look at other areas, spinal fusion surgery was an area that we have focused on significantly. It was up 10.6 in the commercial managed care category. If you look across all payors' spinal fusion surgery, it was up about 11.5 %.

On the other hand, looking at obstetrics, it was down 3.3% in commercial managed care and even slightly more, as much as 9% across all payors, probably consistent with what is looking like nationally is a decreased birth rate, which you tend to see in this part of the economic cycle. Open hearts were down 2.3% in commercial and that's been pretty consistent with the trend over the last three quarters.

So all in all, I would say we have movement towards stabilization, but not on the right side of the zero line with respect to growth in those TGI priorities on the commercial side, but doing better in the all paying categories.

That's helpful. Just to follow up, you mentioned the 5.9% decrease in commercial managed care admissions in October but obviously that's a sub-period so it's hard necessarily to trend that out. Can you talk about the variability that you saw in that metric during the third quarter? Was there big fluctuations from month to month or fairly steady in the 4.5 % or so range?

No. There were fluctuations in the third quarter. And we reported them somewhat piecemeal as the case may be because we gave stats when we gave the second quarter results back in early August. And then we updated them when we updated our outlook in September. July was strong and then it fell off some from there.

So if you look at October, that's actually up from what September was, but September was down from what July and August were, so -- and the quarter as a whole, third quarter was better than the second quarter so there's variability. You can't really take any short period and extrapolate it and say that that represents a trend.

Okay. Thank you.

Your next question comes from the line of Sheryl Skolnick with Pali Capital Please proceed.

Good morning. I'm not used to saying this, but nice quarter, guys.

Thank you.

Thank you.

You're welcome. I'm surprised you didn't hear that yet.

Could we go back, Steve, to your comments about the physician recruitment and the reining in of your targets by about 200? If you're going to be -- first of all, you attributed that to the positions being driven by the physicians. Is there any impact you would forecast on volumes from having fewer of your senior physicians transition out to retirement?

I think that's a very good point and it's interesting that many of these senior physicians that were intending to retire were disproportionately productive, which certainly gives rise to both concern as well as positive feelings as they move toward retirement. It's our job to make sure that community need is met. And if practices have disproportionately productive physicians that retire abruptly or become ill or disabled, then it can cause patients to have to out-migrate from the service area to get service elsewhere. So we are very focused on making sure that most of our major practices have succession planning underway.

I would want to put into context the whole issue of the target being 1,000 and us coming in in the range of 800 to 900. When you think about how we grow our business, for example, in the quarter, we only added 15 employed physicians. So net of attrition to our active medical staff, we added 266 doctors, so that 15 employed physicians is around 6%, 6.5%, something like that.

That means the remainder of a huge bulk comes from redirection or relocation of physicians.

The second part of the perspective is that we have really worked hard to improve the on-boarding of physicians that we are bringing to our medical staff. I think in the past, as we attempted to move quantity to meet medical staffs over years that had shrunk to the point of not being able to meet community need, we may not have been as selective. And once we did select physicians, we may not have assimilated them into our medical staffs as well as we can do today.

So when I referred to the stickiness of those physicians, we want to make sure we are targeting the right physicians. And when we successfully bring them on our active medical staff, encourage them to participate in continuing medical activities within the hospital, introduce them to their referral sources and take them around and show them various departments they would interface with all the way from medical records to the emergency department physicians that will be seeing their patients nights and weekends.

So I don't think this materially in a negative way impacts our growth plans moving forward, but it does change some of the numbers that we have classically looked at.

Okay. That's helpful. Thank you.

And then this is so much to ask, but I guess I'll focus on this. For the first time in, well, I don't know, years since the bad old days, Tenet actually has had an absolute reduction in the amount of debt that it's carrying, which is very nice to see and of course net of the cash which is, higher than at one point we thought it was going to be for the year, your net -- your net leverage statistics look very, very nice. So you're to be congratulated on both counts of -- much improved operations coupled with a very modest decrease in the amount of debt outstanding.

But you're still in absolute matter of fact, a highly leveraged company, you're still in a situation where you've got debt three years out, which not that long ago we said three years wasn't that long, and then all of a sudden it became short. So I guess where I'm going with this is you've turned around the business to a very great extent.

Clearly, you're not done on the operations yet, but so a couple of things. One, where are you in the turnaround? Let's put it there. Two, at what point do we see much more significant deleveraging as part of this turnaround? And three, how do -- and this is the biggy that I think everybody is worried about, you've cut so much cost out of the system already. How do you sustain this next year? How does that become yet another year of the turnaround?

Well, Sheryl, those are hard questions to answer as you probably knew when you were asking them. And just to try and take them in order, so first of all, in the lead-in, I think I would agree obviously with your statements about the importance of having reduced leverage through improving operating performance, reduce the absolute amount of debt outstanding. And it's good to continue to draw attention to the cash balance we have, which has become significant in relation to the balance sheet and operations, all of which has been intended to reduce the risk profile of the Company.

So if you look back at all those capital markets transactions we did in the course of the year, and even prior to that, it has all been designed to reduce the risk profile which was painfully evident as being too high when we were in the financial crisis, just a year ago.

Also we have slides on the Web that show that, although the first debt maturity is -- and it's funny to hear you say only three years away -- some people would say three whole years away. That's quite a long time from now. It all depends on one's perspective, but if you look at that bar chart of the maturities, yes, there is a significant maturity three years -- three and a half years from now, but we have also pushed way out the other maturities so that I think that the average maturity has been delayed quite a bit. So all of that contributes to a far lower risk profile, which I think is good in the business.

Actually, as to your comment about we are still a highly leveraged company, I think that's a fair comment as it relates to many industries of course in the context of this industry, we have moved from being at the very high end of leverage to being towards the low end of leverage, so it's a highly leveraged industry, as you well know, just to put that in context. As for how we would continue to de-lever, we had said in our SEC filings and public comments that we had this interim target of four times. We are now in a slightly below that target. And I would expect that, without making any specific comments about it or projections, that we would continue to seek to reduce the leverage, but perhaps not as dramatically as what we have done this year.

And then as to your last comment about, which is essentially saying, can you continue this type of growth or what sort of growth should we expect in the future, we -- as you know, this is the season where we engage in business planning. And we will make our first comments about 2010 in our outlook for 2010 when we report the fourth quarter of '09 results.

So it would be premature today, although I'm sure everyone would like to know, exactly what is our outlook for 2010. But it's just too early to discuss it.

Well, obviously, we would like to hear about that, but I don't really want a number before you know what the number is. I guess what I'm asking, though, is with things like Medicare performance initiative, you've got great buzz words which make it easy to talk about these things, but they are more than that and I understand they are more than just buzz words.

But with things like that, do you -- you're not going to answer the question but I'm going to ask it anyway -- are there so many negative trends that we on Wall Street are worried about that perhaps you all don't see or are we looking at the right negative trends that things like Medicare performance initiatives and other strategies the Company is pursuing could offset?

Well, maybe it was the Halloween season, but I did think that Wall Street investors seemed to be looking for ghosts or seeing ghosts in this industry in the last few weeks. We have called attention since the beginning of the year to the risks -- and in fact, we did it today again in our prepared remarks -- the risks that we see out there. So they relate to the economy and job losses and a reduction in personal credit quality in an environment where our patients are responsible today for a greater portion of the financial responsibility than they ever have been before, so whether it's bad debt or uninsured or charity or commercial managed care, addressable population, those are the things that I think people have rightly focused on. Perhaps in recent weeks, my personal opinion would be they got too micro in the worrying about it.

But we have taken it seriously, so you go back to a year ago where our stock was -- I don't know where it was exactly, but probably headed towards $1 or around $1. And that was, a serious financial crisis, a capital markets crisis and clearly evident that we were in a serious recession with job losses.

And so we responded to that and by building that foundation of a lower cost base and a stronger cost control discipline and also greater operating leverages I pointed out, I think we are well-positioned for any rebound. We are also well-positioned if it continues to be tough for a period of time. And there have been some -- to some degree, certain elements of the economic weakness have helped us, it has contributed to the gains and turnover that we have had.

So I'm not sure whether I directly answered your question, but the things we have worried about from the beginning of the year to the things we still worry about, we see some opportunities, obviously in health reform if there's a meaningful increase in the number of people who are covered into the future, that helps us, the aging of the population helps us. All those demographic things that have been out there for a long time help us. And when you think about something like the Medicare performance initiative, it's directly oriented to address those kinds of risks and opportunities that are out there and we didn't talk much about the improvements we have made in the revenue cycle.

But Steve Mooney, who runs our Conifer Revenue Cycle solutions, had a prospective client say to him the other day, after touring our facility, "You are the Mayo clinic of the revenue cycle," which I take as an enormous compliment in this industry.

But that's a very powerful skill and compentency that we have that will help us, regardless of what happens in the economy or the trends in our business.

Fair enough. Thanks so much for the time.

Your next question comes from the line of Shelley Gnall with Goldman Sachs. Please proceed.

Hi, thank you. I have a specific question on the supplies cost that we have seen so far this year. Can I -- can we clarify? Was the Medicare performance initiative the key driver of the improvement we saw in supplies in the third quarter? And if not, can you talk a little bit about -- or even if it was, can you talk about the specific developments that have been benefiting the supply costs?

Thanks for the question, Shelley.

I think that the supply chain initiatives that we have had for a number of years were actually responsible for the improved performance in Q3 '09 compared to Q3 '08. The Medicare performance initiative is overlaid on the existing supply chain initiative. More recently, we have had very focused supply chain activities and cardiac rhythm management devices and orthopedic implants.

Those have been successful in all regions of the Company now and should drive down, over time, our unit cost as well as the appropriateness of the units selected by our physicians utilizing better demand matching algorithms. So, I would not say that the Medicare performance initiative largely was responsible for driving down supply costs in the quarter, but going forward, certainly, that umbrella of MPI over supply costs as well as case management, length of stay management, and that sort of thing will help us to coordinate those efforts.

And it might be early for this question, but would you be willing to put out a long-term objective as far as where you think supplies costs could go to as a percent of revenue?

We probably wouldn't give that sort of guidance, Shelley, on that line item or any of the other cost line items.

Okay. I had to ask. Thank you.

Your next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.

Thanks. So I wanted to ask about the outpatient trends. I think there were probably 10 straight quarters where I needled you about negative same-store outpatient visit growth and it's clearly turned into positive territory.

Two things I want to ask here. One, are your operators -- is there any feedback that the outpatient activity that you're seeing right now could be COBRA-driven, such that we do get some fall-off in future periods? Any way that you can look into your volumes to give us some indication there.

And then the second question is really more of a longer-term one and I'm really trying to understand what the right base line of your outpatient business could get to. You took a lot of outpatient services out over a period of years and I think that contributed somewhat. But, is the right way to look at it the number of outpatient visits to inpatient admissions, in which case you're probably 15% to 20% below where you were in the early part of this decade. How are you just thinking about the base line of your outpatient business? Thanks.

Those are complicated questions. First, let me answer the simple one and that is, we don't have any good methodology to give you an answer on COBRA. We don't identify patients that come with commercial managed care whether they have continuous employment or whether they are on COBRA, so there's no way for us to answer that.

With respect to the outpatient business, I would say over the last two and a half or three years, we have really accelerated our focus in the outpatient arena across all of the segments of the outpatient business. I think there has been an understanding on the part of all of our operations leaders out in our hospitals, as well as freestanding facilities, that we have strong competitors, and we have to win that business from doctors and patients each and every day.

We focused on our emergency department and we have been focusing on the ER for some period of time. We haven't talked about it in great detail, because it's not the glitziest thing we do, but we have improved throughput systems, turnaround time, our "left without being seen" is down dramatically as we have developed better systems to get patients triaged and examined rapidly, returning their lab tests or imaging tests if necessary before a final disposition. The ER has driven about two thirds of our growth in outpatient and the rest has been divided between surgery and imaging, which are very profitable parts of our business.

I think over time the answer to your last question would be we believe we have opportunity to continue to grow our outpatient business; while we grow our inpatient business, our outpatient business will become a larger percentage of the total business over the next five to 10 years. So we are still accelerating that up. There are a couple of milestones along the way in terms of where our net revenue is, inpatient versus outpatient, and we are headed toward moving those gradually toward that 50% level.

That's great. And then, Biggs, if I could just ask a couple of cost-related questions.

First, just were there any one-time costs associated with the headquarter move in the period to call out or to think about and any in the fourth quarter that we should be thinking about?

And then you did mention the merit increases. Can you just quantify the annualization or the annual impact of that so we can plug that in the model? And then just a housekeeping one, what was the ending fully diluted share count? Thanks.

Okay. On the move, nothing significant that you would point out in terms of third quarter or fourth quarter on the move. In terms of the -- let's see, the second part of your question was what --? Give it to me again.

The merit increases.

Merit increases. I'm sorry. On the merit increases, the effect on -- typically, I put this in context.

Normally in the past the effect of inpatient price increases on Medicare and the salary, wage, and benefit effective merits in the fourth quarter roughly offset this year because Medicare price increases are a little lower, There's not the net wash between those two.

However, as we go through time, outpatient pricing comes in the first quarter of next year and we have commercial price increases, which come in over the course of next year, so pricing does improve at a rate better than the cost growth associated with salaries, wages, and benefits as you look out over an entire 12-month period. It's just in the fourth quarter we will have a mismatch this year.

The sizing of the effect on the quarter is probably in the neighborhood -- it's between $10 million and $15 million on merit increases for the fourth quarter.

Okay. And then the share count?

As I said, it moderates over the course -- over the year, relative to price increases. Shares, 498 million shares.

That's the end of period count?

Yes.

Great. Thank you very much.

Your next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch. Please proceed.

Okay. Thank you.

I wanted to go back to the physician recruiting, because what you guys have done over the last couple of years is pretty impressive. I guess with the 7% growth in 2007 and the 9% growth in 2009, is it fair to say that we are seeing the impact of that today, those two years of recruiting? And I wanted to understand the differential between those pretty big numbers and then what we are seeing as far as volumes. I think in the past you've given how certain class of physicians are ramping up. Just want to get a sense of what the thought process is about - is 7% growth equal 2% volume growth or is there a way you think about that going forward?

Well, Kevin, I would not say there is a formulaic-driven way to assess physicians recruited net of attrition that converts to incremental admissions and incremental outpatient visits or surgery. Nonetheless, we continue to track those through our physician contact management system, and we are seeing those prior classes tend to ramp up over time once again, proving our earliest postulate that it takes 18 to 24 months for a physician who is new to staff to ramp up both their inpatient and outpatient activities at our facilities to a steady state. And the outpatient tends to be the first activity that physicians involve themselves in until their comfort level raises and they begin to use it for inpatient activities.

We are continuing that physician relationship program and we have added in the last couple of quarters a significant number of those PRP reps that focus on the outpatient business and so predominantly imaging as well as ambulatory surgery. So I think with the overall program, we are seeing the yield from that. It continues unabated, and it will be the basis along with our physician recruitment program for powering the growth long term.

Okay. And then I guess maybe take the opposite end of a question that was earlier about leverage, because leverage is now, I think Trevor said earlier, below average in a highly levered space. Is there a point where you start to look at it and say, we are done and things like acquisitions start to make sense again? What's your view there?

I think that it's a very good question to ask about acquisitions. I think we -- but it's impossible to answer. A good question to ask, impossible to answer. We will obviously look for opportunities that would make sense with our portfolio and our footprint and we would have some desire to diversify geographic risk that we have today, but I don't feel that we are under-levered at this point.

So we will probably make more specific comments about our outlook on that when we talk about 2010 at the time that we release fourth quarter earnings. But for now just continue to rely on what we have said recently in the SEC filings and public comments.

Okay. Great. Thanks.

Your next question comes from the line of Kemp Dolliver with Avondale Partners. Please proceed.

Hi. Thanks. Steve, your earlier comment about the ED and the declines in left without being seen is interesting in that, given presumed upticks in patients without insurance, you would have some countervailing trends with regard to more uninsured showing up and potentially being triaged to a different setting versus just attempts to improve ER turnover. Could you talk in a little more detail regarding what you're seeing with regard to patients left without being seen?

The left without being seen metric, Kemp, is one each of our hospitals follows each month. They work on getting that down significantly. There are customized targets for each hospital in that particular area and they have activities that are both corporate-driven as well as local hospital-driven to try to improve the length of time from presentation, registration to triage and then to definitive diagnosis, care, either admission or discharge.

Once again, as we have grown our emergency departments, we have closely monitored the number of uninsured charity cases that are there. And obviously when we have patients that present with emergency medical conditions, we don't even look at their financial status. We take care of the patients and ask questions later.

But for those that have non-emergency medical conditions, we certainly work with our financial counselors in the emergency department and make sure that they have a mechanism to pay or are triaged to community resources that can handle them.

With respect to the payor mix in the ER, we are actually seeing some improvement over time, so one of the postulated consequences of the H1N1 and the real, at least in some areas, panic is that patients with commercial insurance that develop symptoms, instead of waiting until the next day to go to their primary care physician are ending up in ERs because they want to be screened, they want to be evaluated and, if necessary, get prescriptions, get those filled and get on antiviral medication as soon as possible. Because the education programs and the mass media are saying the sooner you treat patients with H1N1, the less likely they are to develop serious cases and consequences.

So all in all, we are continuing to focus on making our ERs more friendly to patients and more efficient with higher quality care.

If I could just zero in on one aspect of this. Are you seeing increases in the number of self-pay cases that are showing up and leaving without being seen?

No, we are not.

Great. Thank you.

Your next question comes from the line of John Ransom with Raymond James. Please proceed.

Hi. I had to pick myself up, before I saw the words free cash flow. I wanted to make sure that wasn't a typo.

No. That's real.

Not a typo and there was a lot of effort that went into it, but thank you for recognizing the shock value of that.

Yes. I like negative free cash flows. It's kind of an oxymoron. I know you're not giving 2010 guidance, but just two quick things, CapEx and med mal, what should we be thinking about as we model this for next year? Any significant changes from the trend we saw this year?

Well, med mal is getting pretty precise to get into a line item there for next year over this year. Certainly, we think that our long-term initiatives to improve quality and reduce the occurrence of incidents which trigger any kind of a claim, we expect to continue to pay off for us over the longer term as we have continuously improved quality that we would expect to see continuous improvement in the underlying drivers of malpractice expense. Also, it's a discounted liability, so if interest rates go up next year, there's a potential positive from that.

Okay.

Having said that, we obviously have had some significant reductions this year and I can't say those kinds of reductions are going to recur next year.

So, we just got a ways to go here before we will have a prediction internally on what we think med mal will be next year. And from a line item guidance standpoint I wouldn't expect to ever give it at that level of detail but give you some indication when we give our 2010 outlook, what directionally we are thinking of in terms of med mal. The -- .

CapEx.

CapEx. The -- we have said previously that the $400 million, $450 million we are running this year was something we thought we could sustain. That's short of giving it as an outlook for next year. We -- as we complete our planning and look at our priorities and what our opportunities are, we will come up with something more definitive for next year. The -- there is never a hard number because you always have to look at what do you think the right amount of spending is for any given year, but as I said, we saw it as a sustainable number.

We have a new hospital which is in east Cooper, which -- replacement hospital which is completing early next year so spending on that we will wind out. We will have some increased spending on health care IT next year going in the opposite direction, and then it's -- after that, it's a matter of what are all the other priority items and whatever makes sense to make investment for the long term.

And my other quick question is sequentially your guidance implies a flat 4Q on EBITDA. Normally last year for example it was up $40 million, over a lower base admittedly, but is there a reason, is there a reason to think about it while it would be flat this year, anything unusual versus prior years where it's usually up a little bit?

Well, we have tried to remain -- retain a conservative posture with respect to potential effects of the economy, so I think that our fourth quarter estimates still contain some degree of conservatism with respect to what could happen with respect to mix, commercial declines, slightly lower potential for outpatient, although it's not necessarily the expectation. It remains something that we will see how we close out the year. Bad debt expense, it's -- it's possible; we have had a slope of deteriorating collections over the last year and we could have some further degradation into the fourth quarter.

Okay.

And then the mismatch as I said between merit increases in the fourth quarter relative to government price increases, which for this year has a net negative effect where it wouldn't have in the past.

But as I said, I think that you're right, typically you expect the fourth quarter to go up over the third quarter based upon higher volumes. I think we are just being a little conservative because of still the uncertainties around the economy.

Okay. Great. Thanks a lot.

Your next question comes from the line of Gary Lieberman with Wells Fargo. Please proceed.

Good morning. Thanks for taking all the questions.

Could you break out the $20 million that you guys noted was a one time on the expense side. Could you just break out which expense line items that impacted?

It wasn't expense items and I didn't characterize it as one time, to be clear. The -- there was $11 million of cost report adjustments; there was $10 million of cost reported adjustments in the third quarter of last year, so by definition you wouldn't say those were one time. If you look at our track record, there's lots of quarters where we have cost report adjustments, so it's definitely not something I call one time, but on the other hand I wouldn't necessarily forecast a like amount for the fourth quarter.

The other item, there's $6 million associated with Philadelphia HMO in which we own a minority interest and we received a distribution on -- or were notified the distribution on in the third quarter. Last year there was a similar amount, but it occurred in the first quarter of 2008, so once again, I wouldn't call it a one-time item. However, it is something that may occur in different quarters of the year,depending upon the timing of events with the HMO. And, then, the third item is a pension related item of about $3 million.

They are all actually disclosed in the release and they are disclosed in the queue, but they aggregate the $20 million but the bulk of it's up in revenues.

Okay. Great. And then looking at slide five and looking at the controllable expenses they have obviously declined and been very low this year. How should we think about that going forward, I mean in 2010 can you maybe not keep it where they are now, but do they not go back to where they had been in years' past or just in terms of how you're thinking about it when you forecast what -- what are you thinking about?

Well, this plays back to Sheryl's question earlier about what do we expect for 2010 in terms of cost control and our various initiatives and we are not prepared to get an outlook yet on that line item. Certainly, though, we see cost improvement as a continuous process. We will never stop trying to drive on costs and come increasingly efficient as a discrete initiative -- our discrete initiatives. Supply cost initiative will continue. The MPI initiative where we are systematically attacking the DRGs, which are the most problematic ones in each of our hospitals, will continue well in the next year, and the benefits of that are still out in front of us, but, those aren't the only things and won't be the only events from a positive or a pressure standpoint that will occur.

So we are not sitting on our hands. You shouldn't conclude that everything that -- that we can do is done, but on the other hand we are not prepared to say what the net result is going to be.

But just looking at four years of data there and obviously, this year has been very good, without forecasting specifically 2010 but just, very big pictures, is there a reason to think that we can continue closer to the '09 levels versus where you had been in '06, '07, and '08?

You're trying to get me back in into an outlook number and I don't think you're going to get me there.

Okay. Thanks a lot.

Sure.

Your next question comes from the line of A.J. Rice with Soleil Securities. Please proceed.

Hello, everyone. Thanks for the information about the contracting with the managed care and the fact that you have so much of it it locked up, even out into 2011. With health care reform swirling around and not only managed care but also on the aside of the the equation, the vendors medical device companies being under potential pressure and I know a lot of those contracts are long-term as well, I'm curious whether there's any contingencies in those contracts that as what's on the table now plays out, in either the managed care side of the equation or the medical device side of the equation come back to you and say let's re-look at some of these contracts that have been locked up?

The only thing that's -- that's in the contracts from the -- an unusual flexibility standpoint that we haven't typically had in the past that inflation hedging or adjustment clause that we have started to work in some of the contracts to protect ourselves against hyper inflation as we go out into the longer term or the midterm, 2011 and beyond, the -- I think that health care reform isn't likely to affect these contracts from any kind of a direct standpoint.

It could be changing the environment and if it does, both parties will have to consider what kind of effects that has, although it does not seem like that's something that we are worried about affecting ten or eleven.

Okay. I'm thinking the device companies may be subject to this excise tax, there's been some discussion will they turn around and push that through to you, but it sounds like in your contracting right now, you're not really -- nobody is coming to you saying I've got to build a contingency in here in case this goes through or something like that.

No, we do try to get carve-outs on implants and devices as a means of making it more neutral to us, what happens in that area.

Right. I'm thinking more from them getting hit coming to you and asking for potential concessions than you getting concessions from them. Okay.

Yeah. If it's an excise tax that's paid at the point of sale, I'm not sure that will last then obviously that would be something that would be a cost increase to the purchaser just like sales tax is, but that's not the intent of the congress to tax the providers. They want to ask the device manufacturers, at least recover some of the excess economic surplus that's in that segment of the industry so I think that A.J., just as an opinion, I think that would probably trigger a lot closer scrutiny and maybe some recontracting of purchasing area.

Okay. That makes sense. My other question to ask about was if you think about the areas that have been impacted by the economy, the level of inpatient and outpatient activity, generally, in the facilities, the collection rate on yourself today, the mix of patients skewing away from commercial to more self-pay, have you guys -- do you have a view as to -- as the economy stabilizes and turns, which of those metrics might be the first indicator to turn and which ones would likely be more of a lagging factor?

I think, it's a guess, right, because we -- none of us have lived through this type of recession, but if you start having job creation, then clearly there's a greater addressable population in terms of commercially insured patients, to the extent that converts people from uninsured to commercially insured, that's a good thing, even if we are having difficulty collecting the patient portion of it, at least the vast majority of it then is covered by their insurance.

So, I'm not an economist but you might look at job creation which leads to enrollment changes and we probably would get some early indications on that from looking at the managed care companies. The -- we watch on an instant collectibility of accounts and the experience we are having with individuals, whether they are insured or uninsured and how they pay us. We probably start to see some improvement there as an early indicator, which ultimately gets reflected one way or another in bad debt expense.

Sure. Okay. All right. Thanks a lot.

Your next question comes from the line of Justin Lake with UBS. Please proceed.

Thanks. Good morning.

Good morning.

Good morning.

Sorry about that. The first question I had was just on your commercial managed care, the government managed care side of the commercial book. Seems to be growing very nicely. I'm just curious with all the Medicare advantage plans out there trying to create a network, are you able to negotiate prices that are better than traditional Medicare from a GOP standpoint?

I think first we have to pause for a little definitional moment. So you've actually raised an issue that I think there's a fair amount of confusion about. When we talk about commercial managed care, we are not talking about anything having to do with a government program run by a managed care company. So we are just talking about people who have jobs who get insurance and those are commercial managed care. And the statistics that we give about commercial managed care admissions are by definition lower than if we gave some statistic that was a hybrid of commercial and government managed care programs, which would be dramatically better, but it's a meaningful statistic, so I think you probably just misspoke, but I just wanted for the audience to clarify that point. So you're just talking about the government programs piece?

Correct.

Of it. And the question is whether we are able to negotiate prices with them that are better than what we get on traditional Medicare?

Right.

And the answer is, typically, yes.

Any order of magnitude you can share with us?

We really haven't quoted it. It's kind of a key pricing statistic, but it's small.

It's a small improvement and there's also a difference; when you introduce that intermediary, they impose constraints on on utilization. They -- that suppress the utilization versus the unconstrained Medicare fee for service patients. That's an important thing to remember. So there's a slight pricing uptick and there's a slight downtick in terms of utilization.

Got it. And then just on the typical commercial managed care book, we have been -- I'm just curious if you have any metrics you could share with us as far as market share; the one I think might be interesting is just thinking about your local market share from a bed standpoint versus your -- what you think your market share is from a commercial managed care admission standpoint.

Yes. So we -- if you go back to the very beginning of the call, that in my prepared remarks it's really hard to come by good statistics, but I gave that example of California where you can match up the enrollment losses versus our declines in commercial managed care admissions and they are almost identical. I think that's a very good proxy for market share and probably the only reliable one and only in those states where you can really get that data.

So you would say that your market share hasn't declined? I'm just curious.

So we have used -- in the opening comments I used facts to demonstrate that in California it had remained stable but -- and then our inference was that there's no reason to believe it's not like the same experience in other states and we watch it pretty carefully. We just don't have the fact set to go through and prove it.

Okay. Thank you.

Your next question comes from the line of Whit Mayo with Robert Baird. Please proceed.

Hey, thanks. Good morning. Thanks for squeezing me in. Just looking through the Q, it looks like, in the third quarter CMS has suspended settling cost reports based on the '07 SSI percentages, but still using that percentage for dish.

Can you just remind us first I guess what's going on there and refresh us for what the fiscal intermediaries are doing now and then secondly, just expectations for dish and UPL over the next year and how that compares year-to-date.

Well, the -- on the SSI, the -- the prior year cost reports are the ones on which there is some relative suspense as they sort out what it is they are going to do in terms of adjusting the prior year. On the current year the intermediaries are applying the new rates and we had said that the annual impact was about $8 million to us of the SSI changes that took place. We recorded $23 million in Q2 that was for the full effect through that date and then in the second half just been recording based upon that $8 million annual run rate. So that's roughly speaking the status with respect to that.

On dish and all of the state funding areas, we watch it carefully. I don't think that there's -- outside of what I just mentioned on $8 million -- anything else beyond what's in the 10-K with respect to looking forward on dish relative to the past, there's no other big changes in the work on the state funding side. There isn't anything large pending in terms of any budgetary adjustments by the state to -- states to flow through to us. There is the big upside potentially in California associated with provider tax that I've talked about earlier, which we disclose in the 10-Q and could have an annual effect of $61 million.

Can you explain the $8 million again? I don't know if I fully understood exactly what that represents.

Well, it's the effect of applying the SSI adjustment to our reimbursement levels on a full-year basis would lower our reimbursement rate by $8 million relative to what it was before.

That's helpful. And mean Trevor just one other question with regards to Medicaid, lots of discussion about the increase match going away at the end of the year, you're obviously pretty close to the federation. Just do you have any thoughts about whether you think that match, could be extended just any comments you have would be appreciated.

Good. And you know what? Instead of answering that myself, we had our Vice President of Government Relations, Dan Waldman fly all the way here from Washington. He's sitting next to me. I'm going to ask him to answer that one. Dan?

Specifically, obviously, there's a lot of attention being given to that F map expiring at the end of next year. There's a provision in the house bill that was just released that would provide for an extension for states with high unemployment rates, but haven't identified which those are. And I think that as this moves forward, obviously, the governors are expressing a lot of concern about the additional state budget outlays that are going to be required under the expansion of Medicaid, so I think those are issues that you will continue to see be worked through and addressed as part of health care reform.

And, Dan, any discussion in the senate right now for where that stands?

No discussion that I'm aware of. Although we are -- the senate is in a little bit of radio silence right now and while we are waiting to see the bill from majority leader Reid which is supposedly at CBO getting scored right now; he's indicated that not this week, possibly next week, maybe the week after.

Great. Thanks a lot, guys.

All right. Thank you very much.

Due to time restrictions, this concludes our Q&A session for today. I would like to turn the call back over to Trevor Fetter. Sir.

Thank you, operator and thanks to the audience, we weren't able to get to every question today. If you have a question, please feel free to call Tom Rice, and otherwise we will see you next on our fourth quarter call. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and have a great day.