Tenet Healthcare Corp (THC) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q4 2009 Tenet Healthcare earnings conference call. My name is Kim and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Thomas Rice, Senior Vice President. You may proceed.

Thank you, Operator and good morning, everyone. Tenet's management will be making forward-looking statements on this call. These statements are made based on management's current expectations and are subject to risk 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. During the Q&A 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'm very pleased with our results for 2009. The recession made it a difficult year to navigate, but we focused on the basics and delivered very solid progress. Adjusted EBITDA was $982 million, a 33% increase over 2008. We extended for a fifth year Tenet's strong record of gross EBITDA and EBITDA margins. Our EBITDA in 2009 was more than twice what Tenet generated in 2004, when we had 40% more hospitals than we have today. Our adjusted free cash flow improved by almost $400 million to a positive $165 million. While adjusted free cash flow excludes our payments to the Department of Justice, it's worth noting that we will make the last of these payments in August and get us on track to begin generating positive absolute free cash flow and marking another important milestone for the Company.

I'd like to begin by giving you a summary of how we generated these results. One of the most important objectives was to control cost, and we did that very well. We made serious cost cuts in virtually all areas of our business. This showed up in our results every quarter. We had dramatic reductions in employee turnover and the use of contract labor. For several years, we've been working hard to reduce turnover. As we achieved solid gains in 2009, we took actions to maintain them. In Q4 we decided to make a $16 million discretionary contribution to the 401K account of our employees who are not eligable to participate in our incentive compensation plan. We also provided non-executive employees with merit increases above the rate of inflation. I mention these actions in order to point out that we've made investment in keeping our employee retention and satisfaction high.

We also met our objective with regard to pricing. The mix shift that occurred in 2009 makes these pricing increases less obvious, but they are very real. Health insurers recognize the value in retaining access to the quality of care that Tenent hospitals are able to provide their members and we've been able to negotiate appropriate pricing increases. So with cost and pricing in two parameters more or less under our direct control, we met or significantly exceeded all our performance objectives in these areas.

Turning to measures for which we have less direct control, we had a much better year with regard to bad debt expense than anyone might have projected last January. The volume picture however was mixed. We were very pleased with the 3.4 % year-over-year growth in same-hospital outpatient visits. And because margins are generally higher on the outpatient side, this growth helps us expand overall margins. Same-hospital admissions were down 0.6% year-over-year while total admissions were up by 0.2%, basically flat. One area of disappointment in 2009 was commercial admissions, which declined for the year by 4.7%. We have anecdotal evidence that these declines are consistent with the commercial volume declines our affiliated physicians are experiencing. We hear from our health plan customers that they saw declines at similar rates.

Continued weakness in the economy appears to be the main driver of this segment of the business. We have a broad group of initiatives to gain market share, but the environment for commercial admissions is very tough. Unfortunately the trend has not improved so far this year with year-over-year comparisons somewhat weaker than what we saw in Q4. It's pretty clear that we're off to a slow start for the year as far as volumes are concerned. Our outlook assumes overall volumes to be flat and commercial volumes down 3%.

The silver lining to the soft commercial volume story is we achieved very strong earnings improvement in 2009 in spite of it. The changes we've made to our cost structure has enhanced the potential profitability and operating leverage at the Company. For example, if we can generate even modest volume increases going forward, we believe we are well positioned to achieve significant growth in earnings and cash flow.

Let me now turn to some high level comments on our outlook for 2010. As you read in this morning's press release, we are projecting growth and adjusted EBITDA someplace between flat and up 7%. I'd like to highlight a few of the assumptions driving these numbers.

First, in order to optimize the financial impact of the health information technology provision in last year's stimulus bill, we expect to incur incremental clinical information technology expenses of about $40 million in 2010. As we've said in the past, we had already planned to make these investments, but now to qualify for the Government's incentive payments, we will accelerate their implementation. The adverse impact of these expenditures on 2010 EBITDA is largely a timing issue, this is because there's an 18-month mismatch between the early expenses of the program and the revenue recognition that begins no later than early 2012.

P&L impact of this initiative is truly significant when you consider that it reduces our expected EBITDA growth rate by 4 percentage points. These expenses will improve an important part of our business and are designed to meaningful enhance patient care and long-term profitability. People have more to say about this program and how it advances our Medicare performance initiatives.

All things considered, we see 2010 as a transition year. It will be a year of significant technology investments, potential risks from increasing bad debt, state Medicaid cuts and hopefully the tail end of a recession due to weakness in commercial volume. Even after taking all the upside and downside risks into account, we expect to see profitability growth of up to 7% and expect to generate more than $100 million in adjusted free cash flow. In other words, our outlook for free cash flow could well be positive in 2010 even including the burden of the cash outflow for our final DOJ payment.

To summarize, I feel very good about the progress we've made in 2009. We are heading into 2010 strongly positioned to deal with the challenges confronting the industry.

Before I turn things over to Steve, let me tell you about some changes to our Investor Relations program this year. Instead of holding our annual investor day in Dallas, we've decided to be more visible and accessible on the road. We intend to visit various cities in order to meet with more of you in person and we plan to participate in a few more conferences than in prior years. We've also decided to shorten our quarterly preannouncement quiet period, in order to accommodate more of your requests for meetings. I'll be anxious to get your feedback throughout the year as to whether this is a better approach. In the meantime, let me now turn things over to Steve Newman. Steve?

Thank you, Trevor, and good morning, everyone. I'd like to touch on four topics important to both short and long-term success. Our medical staff development activities, our health information technology initiatives, the status of our Medicare performance initiative and an update on our volume-building activities through innovations and marketing. We believe that the vast majority of new physicians joining our medical staffs are doing so as a result of our value proposition of having high quality, efficiently operated, inpatient and outpatient services. This value proposition is supplemented through the activities of our MED3000 practice resources joint venture, which I'll talk more about later.

As I mentioned on a previous call, we have focused more effort on attracting high quality, hard working, productive physicians and assimilating them more effectively into our medical staffs and hospitals. As a result, we're seeing tangible benefits from our more focused efforts.

Let's turn to review of the recent progress we've made in medical staff development. In 2009, we attracted 855 active staff physicians net of attrition. 249 of these physicians net of attrition joined us in the fourth quarter. We accomplished this through a variety of means, although the overwhelming focus was on the redirection of existing physicians. If necessary to meet demonstrated community need, we relocate certain physicians in a particular specialty, but relocations generally represent less than 10% of our growth in medical staff. Physician employment represents an even smaller share of our growth because we are utilizing this tactic very selectively.

Due to our improved assimilation process and because of improvement of the facilities and services we provide to physicians, the class of 2009 is among the most productive classes we've ever assembled. While the class of '08 has been extremely productive, the class of '09 is already outperforming them on several measures, while maintaining a commitment to our quality standards. Compared to the class of '08, these new '09 physicians are averaging 46% more total admissions, 27% more commercial admissions, and 32% more commercial outpatient visits. This productivity data is based upon Q4 performance only and therefore we expect even greater productivity gains from the class of '09 as their relatively young relationships mature over the next 12 months. We believe our improvements in quality, efficiency, service and other initiatives will strengthen our relationship with these and future physicians.

Let's turn to a brief discussion on Health Information Technology, or HIT. HIT is the glue that joins the existing strategies we've shared with you over the last three years. By the end of 2010, 19 of our hospitals will have begun installing advanced clinical systems. These activities will result in each hospital having a computerized physician order entry system, CPOE, and an electronic health record at the completion of deployment. The implementation at each hospital is expected to take 16 to 21 months, depending upon its existing systems. It's this 16 to 21-month implementation period which is the determinant of Trevor's earlier statement that we expect to earn the first of the incentive payments by early 2012.

While this hospital-based program is proceeding, we will simultaneously deploy our physician office HIT plan. This plan utilizes the resources of our joint venture, MED3000 practice resources. We will deploy a suite of products that includes an office-based electronic health record, a patient health record, E-prescribing technology, and electronic data interchange capabilities for claims submissions.

These new initiatives have been designed to dove tail smoothly with our existing systems. First, the computerized physician order entry system will contain over 600 standardized order sets. A number of these sets were developed to execute our Medicare performance initiative. This CPOE will allow us to accelerate the standardization of care in our hospitals, both improving clinical outcomes and driving down variable costs at the bedside. Second, the broad implementation of HIT will eliminate redundancy and increase the efficiency of care. This brings with it staffing efficiencies and will accelerate our efforts to optimize labor and supply costs.

These clinical systems also will provide us with improved patient safety and clinical outcomes, further advancing our long-standing commitment to quality. Finally, the HIT offering for physician practices will more tightly align our affiliated positions with our hospitals. It's an effective sales tool for our physician relationship program representatives, since our hospitals will be able to provide advanced IT systems to help physicians improve their practice efficiencies and obtain office-based financial incentives under the ARRA high tech funding program.

Next, I want to offer a couple of comments on phase I of our Medicare performance initiative rollout. Our MPI teams are currently deployed in 16 hospitals. We expect to have completed phase I of MPI at 42 hospitals by the end of December 2010, with all hospitals being completed by the end of Q1 2011. As you know, phase I focuses on the development of a customized list of five DRGs at each hospital where we identify the largest opportunity to decrease variable costs, while improving clinical outcomes.

It is important to remember that simultaneously, we have ongoing resource utilization initiatives, such as medication use management and standardization programs in cardiac rhythm management devices and orthopedic and spinal implants. We expect these combined programs to yield $28 million to $32 million of cost savings in 2010. Additionally, all of the savings from the progress made through these initiatives this year will not be fully visible until 2011, due to the timing of the rollout and the phased-in adoption of the clinical delivery system changes. I continue to be excited about the prospects for MPI and our early results strengthen my confidence.

Finally, turning to volume growth, we remain excited about our many initiatives designed to capture incremental market share. I'm particularly enthusiastic about our business-to-business initiatives in Texas and Florida, which take advantage of the employer channel to capture patients covered by commercial insurance. We also are enjoying increasing success in our direct mail and marketing initiatives, as we expand our use of variable dynamic printing to customize our mail drops. These programs are data intensive and include active and precise monitoring of the reactions of patients we know are covered by commercial insurance.

We are using more Internet marketing and are employing search engine optimization strategies to target select and receptive populations focused on both wellness and specific disease management. These initiatives are all designed to gain market share. With that, let me now turn the call over to, Tenet's Chief Financial Officer, Biggs Porter. Biggs?

Thank you, Steve, and good morning, everyone. As both Steve and Trevor discussed, despite the dramatic decline in discretionary consumer spending experienced in most sectors of the economy, Tenet's admissions exhibited only modest decline, while outpatient extended its trend of vigorous growth with an increase of 3.5% in the fourth quarter. Flu provided us with a modest boost to our biostatistics, but because of its low margin value contributed little incremental to the bottom line. Commercial volumes were weaker than expected in the fourth quarter, with declines of 5.3% and commercial admissions at 3.9% in commercial outpatient visits. As our pricing remains strong, even these softer volumes resulted in solid same-hospital revenue growth of 3.5%. This pricing growth included a 2.8% increase in patient revenue from commercial managed care, demonstrating continued pricing growth, given the context of declining commercial volumes.

As most of you know, we do not disclose the specific number for our commercial pricing increase, but I will note that our pricing increase in the fourth quarter was our strongest quarter in 2009. After making some minor tweaks to normalize our revenue reflecting prior year cost report adjustments and a favorable one-time item in 2008, revenue growth was an even stronger 3.7%.

Cost control continues to contribute to wider margins, with controllable operating expense growing by just 2.7%, and even more restrained 2.5% on a per adjusted patient day basis. Even these modest increases would have been still better, had we not elected to make a discretionary increase in our 401K match to employees who are not eligible for incentive compensation, that added $16 million to SW&B. Without this discretionary expense item, the increase in controllable costs per APD would have been 1.6%. We will only make discretionary contributions such as this in the future, if we have substantial increases in year-over-year profitability or, if necessary, to meet competitive pressures.

Supplies expense increased by 1.9% per APD, a larger increase than we've seen recently. This was driven by increased usage of high-cost pharmaceuticals and biologics, as well as continued growth in the use of implantable devices. As growth in the usage of implantable devices is highly correlated with growth in higher margin procedures, this growth in supply costs is not entirely unwelcome.

Other operating expense increased by $11 million, or 2.2% per APD. This increase was in part due to lower cost allocations for information systems and business office costs to discontinued operations, which required the absorption of some of those costs by continuing operations. Malpractice expense declined by $4 million, continuing a favorable trend we've seen throughout 2009. We will continue to drive on this, but for actuarial reasons, we don't forecast net reductions year-over-year in 2010, although in a rising risk-free interest rate environment, it is possible.

Bad debt expense rose by $12 million, as the bad debt ratio increased by 30 basis points to 7.9%. This is another area where, despite continuing employment weakness in many of our markets, we outperformed our earlier expectations. This increase was impacted by higher pricing as well as a 240-basis point decline in our soft pay collection rate during the course of the year, but was helped by a decline in uninsured volumes. Sequentially, however, our collection rate was substantially unchanged from the third quarter.

Turning to cash and cash flow. We ended the year with $690 million in cash, a decline of $41 million from September 30, but somewhat higher than the $525 million to $660 million we had projected in our 2009 outlook. Among other items, our cash position was impacted by higher than anticipated capital expenditures, which came in at $192 million, including an acceleration of HIT CapEx of $18 million, and $58 million in an early tax payment otherwise scheduled for 2010, which will save us interest costs between now and what was otherwise a June projected payment date. We also saw a benefit of $25 million, with another improvement in our accounts receivable. Days outstanding declined to 46 days at year end, down from 47 days at September 30. Since we started the year at 50 days, this was a significant improvement during the course of the year.

Let me now turn to our outlook for 2010. We have provided a fair amount of detail on our 2010 outlook in both our press release and slides we posted to the Tenet website this morning. The headline is that we expect adjusted EBITDA to be in a range of $985 million to $1.050 billion. This range includes at both ends incremental HIT expense in 2010 of approximately $40 million, as I'll discuss more in a moment. Without that spending, our range for 2010 for adjusted EBITDA would have been $1.025 billion to $1.090 billion.

We have considered numerous variables representing both risks and opportunities, setting the range of adjusted EBITDA. These include variables related to state funding and the continued unknowns related to the economy. In absolute terms, these variables create a potentially broader set of outcomes that was expressed in our outlook range. We have presumed that neither everything bad nor everything good happens in setting the adjusted EBITDA range, but we have considered continued adverse mix shift away from commercial and higher bad debt expense in even the upper end of the range.

At the middle of the range, we would expect commercial inpatient volumes to be in the range of a negative 3% year-over-year in 2010, which still represents a recovery from the declines we have recently experienced. The lower end of the range, all other things equal, could accommodate greater commercial volume declines, increases in the uninsured, lower state funding and/or additional declines in the collectibility of self pay and balanced after accounts.

Our outlook assumes total admissions will be approximately flat to growth of plus or minus 50 basis points. We continue to remain cautious on the outlook for commercial volume growth and our outlook assumes it will be premature to expect the eventual recovery in commercial admissions to occur in 2010.

Our assumptions are considerably more robust on the outpatient side, where we are assuming growth of 3% to 4% and significantly greater stability in terms of payer mix. We assume pricing increases of 2% to 3% in inpatient revenue per admission and a somewhat stronger 3% to 4% increase in outpatient revenue per visit. With the greater visibility of pricing growth on the outpatient side being helped by our assumption of stable payer mix on outpatient. These assumptions would afford us 2010 revenue growth of 4% to 6%, in line to modestly stronger than the same-hospital net revenue growth of 4.3% we recorded in 2009.

As we disclosed in our third quarter 10-Q, we had potential to receive as much as $60 million in annual revenues attributable to 2010 from the California provider fee legislation. This is one of the many variables we considered in setting our range. In fact, it could be a greater amount if retroactive treatment is deemed appropriate by CMS.

Controllable operating expenses are assumed to grow by 4% to 6%. This growth is significantly impacted by $40 million in incremental expense for clinical information technology spending. This HIT spending is tied to our plans to comply with the American Recovery and Reinvestment Act, or ARRA, and we expect this investment to qualify us for significant incentive payments starting in either late 2011 or early 2012. As we said last fall, this spending is consistent with our existing plans to invest in HIT, but in order to qualify for as much as the Federal incentive payments by achieving meaningful use milestones as we can achieve, we elected to accelerate that spending.

We believe this increased spending on HIT should be considered as in substance nonrecurring and its EBITDA effects in 2010 and 2011 is beginning in 2012 and in future years, we anticipate there will be incentive revenue and operational other benefits, which will offset this incremental expense. Although we are very far along in our scheduling of the work, we will continue to work the schedule against our requirements as they evolve, so it is possible we will see further change, including in the timing of expense.

Without that $40 million in incremental, accelerated HIT expense, the assumed 2010 outlook growth in controlled operating expenses would decline by a little over 50 basis points to 3.5% to 5.5%. Although we will continuously work on cost improvement and expect yield on these efforts in 2010, including in our supplies and Medicare performance initiatives, the incremental savings from these in 2010 will be more modest than the approximately $188 million we achieved on our various initiatives in 2009.

We assume bad debt expense to be in the range of 7.8% to 8.8% of net operating revenues. This will be a modest increase at the low end of the range to a significant increase at the higher end relative to the 7.7% recorded in 2009. But also note that this range encompasses the 8% total Company bad debt ratio, with which we ended the year. In terms of dollars, this would be an increase of roughly $30 million to $140 million relative to the $697 million of bad debt expense recorded in 2009.

Turning to the outlook for cash. We provide the details on slide 25 on the web. A few comments on the major items. We are looking for capital expenditures in a range of $475 million to $525 million, or $20 million to $70 million increase over the $455 million in CapEx in continuing operations in 2009. Included in this outlook is approximately $7 million in HIT CapEx, a $20 million increase over the aggregate $50 million in HIT capital expenditures in May 2009. This HIT requirement is the principal reason for raising our CapEx outlook for 2010. Based on our above assumptions,we expect adjusted free cash flow from continuing operations in a range of $105 million to $125 million.

I'll remind you that free cash flow in 2010 will include the final $73 million we will pay as a part of our government settlement. The retirement of that obligation this year clears the runway for increasing positive free cash flow in the future. These assumptions would result in a cash position at December 31, 2010, in a range of $630 million to $700 million.

The question frequently arises as to what we believe we can achieve in EBITDA margin over time. For the near term, the effect of the economy on state funding, commercial volumes and account collectibility continues to create an uncertain environment, making it difficult to create a timetable and slope for improvement. Over the intermediate to longer term, Federal funding is also certain to contain pressures, which we must offset through our other efforts.

The highest target we've put out for ourselves when we first gave intermediate term guidance a few years ago was 13%, but we also said that that does not necessarily represent a ceiling. Irrespective of geographic and business mix considerations relative to our peers, we have excess capacity and a high fixed cost base. Stabilizing commercial volumes as the economy improves and achieving aggregate growth therefore, are one key to our continued margin improvements as we go forward.

We also expect our NPI and other cost control initiatives and increasing emphasis on higher margin outpatient business, organically or through continued selective acquisitions, to contribute measurably to EBITDA margin over the next two to three years. How fast these efforts fall to the bottom line will depend significantly on the externalities I've already described.

In summary, in 2009 we were able to accomplish the following key elements of performance. We constrained growth and bad debt expense, had strong outpatient volume growth which mitigated the revenue impact of softer commercial admissions, had solid revenue growth, excellent cost control and strong cash flow. We remain confident that our initiatives to drive revenue growth, reduce costs and drive increasingly positive bottom line free cash flow will be successful.

The ranges we've assumed in 2010 for pricing revenues and adjusted EBITDA allow for effects either partially or totally out of our control related to the recession. But having said that, the value of our initiatives are clearly demonstrated in 2009, creating a step function increase in our profitability and cash flow and providing a strong foundation for future growth. With that, I'll ask the Operator to open the floor for questions. Operator?

(Operator Instructions) Our first question is going to come from the line of Shelley Gnall of Goldman Sachs. You may proceed with your question, ma'am.

Hi, thanks for taking my question. I guess my first question is, and I do have a follow up, but the unemployment rate in your key markets actually look like it improved in December. So I'm just wondering, what are your thoughts reflected in guidance for sort of macro trends in your markets? And is it-- is the high end of guidance reflecting some sort of improvement in overall sort of unemployment rates?

I think that the unemployment rates as we've seen don't have a big effect on our uninsured volumes. We do think that it's contributing to the overall softness in commercial volumes and as you said, commercial enrollments have declined over the last year or so. So there is a correlation there. But I think that broadly speaking, we would see our markets behaving largely as the national markets are with stabilizing unemployment levels.

Outside of the effects on volumes, there's also a positive effect on that potentially with respect to our collections or our bad debt expense experience because what we've seen is historically, although there's not a great correlation between unemployment and uninsured volumes, there is a correlation between unemployment and our collection rates. So as unemployment has stabilized, we would expect our collection rates to stabilize. It remains a risk and we'll have to see how truly that plays out in 2010, but that would create some potential for us to move further up in our outlook range, if in fact collection rates are stable.

Okay, and then just to be clear, if your unemployment situation in your markets actually improves, would that be upside to your guidance range?

It would, as I say, move us up in the range.

Okay. Okay. And then just--

And keep in mind that at the middle of the range, we assume that there were commercial volume losses year-over-year of a negative 3%. And so, any improvement off of that as a result of greater employment, would move us up in the range.

Got it. Okay. Thank you. And then on the other operating expenses when you back out the healthcare technology operating costs, it looks like you are guiding to sort of, I think you said 3.5% to 5.5% for other operating expense -- controllable operating expense growth in 2010. That's certainly more cost inflation than you'd expect to see in a deflationary environment, so what -- why have we moved meaningfully away from this sort of deflationary environment that benefited operating costs in 2009?

Well, 2009 benefited significantly from the $188 million of cost reductions we put in place effective at the beginning of the year, which every quarter positively affected what otherwise would be seen as a nominal rate of inflation. We are still targeting cost reductions in 2010. Steve mentioned the approximately $30 million from NPI and other supply-related initiatives, which we expect to contribute to beating what otherwise would be an inflationary cost pressure, where they just aren't of the same magnitude as what we were able to accomplish in 2009 on more of a step function type of basis.

Okay. So since your operating costs are now seeing inflation back to the historical 3% to 5% range, is that fair to say?

That's where we're starting out with respect to this outlook, yes.

Okay, thank you.

Our next question comes from the line of Darren Lehrich of Deutsche Bank. You may proceed.

Thanks. Good morning, everybody. A couple things here. I guess I just wanted to start out with the $40 million of expenditure related to your healthcare IT initiatives and just the philosophy around expensing that versus capitalizing that. We're seeing definitely some divergence within the peer group about how to treat those types of expenses and would love to get your thoughts on how you are thinking about it. It would appear that you're expensing virtually all of the implementation costs, but can you just, can you just walk us through that?

Well, we're not expensing all of the implementation costs. There's a substantial amount of capital being spent next year, $70 million as we indicated in the release and in my comments. I can't speak to everybody else's accounting policies, I can only speak to our own. We interpret the accounting standards on this as certainly as we think is appropriate. But the incremental costs that we are taking to the bottom line, are projecting to take to the bottom line, are largely training costs, planning data conversion costs and then to the extent we bring up our production environment prior to it being fully utilized, that also falls to the bottom line as an unabsorbed cost. So those are the three elements of cost hitting expense next year, which as I said, is a two-year phenomenon. By the time we get out to 2012, it should be offset by-- that incremental expense should be offset by incentive dollars and beyond that by operational benefits.

And is there any additional risk element that you're embedding into guidance as it relates to potential implementation problems that you may have or anything like that, any thoughts there?

Well, is there -- I mean the $40 million represents a best estimate. We would hope at the end of the day that it ends up being conservative, but I'm not going to promise that.

Okay and-- fair enough. Let me just ask a question related to volume growth and the medical staff growth has been very good. Dr. Newman's been talking about some of those trends and we've obviously seen very good outpatient growth. I'm just wondering if PRP is going to change at all with regard to how the focus is? It seems like, or my sense is at least, that you've been focusing a great deal of attention on improving the outpatient access points for your referring physicians. And is there a chance that you may have missed some inpatient opportunities as that process has rolled out? Can you just give us some comments there?

Well, Darren, I think you're right. I think that we continue to learn how to improve the efficacy of our physician relationship program. There are a couple of things we're doing to upscale that function and make it more effective in terms of capturing our target, which is more commercial managed care inpatient volume.

Number one, we're arming those PRP reps with items that we say are in their goodie bag, which is the tools and techniques to help the physicians practice more efficiently and effectively. We mentioned earlier the deployment of our office base HIT suite. That will once again attract not only physicians affiliated with our hospitals today, but those that are not affiliated that have a high book of commercial managed care business today.

I think the second thing we've learned is how to improve our targeting. It's fascinating that a significant amount of the value leak is occurring in physicians that are not our most frequent admitters. Over time, our referring physicians, especially our primary care physicians, don't come to the hospital as frequently as they used to. So in addition to deploying hospitals that are full time within the facility to take those referrals, we have to strengthen our outreach to those doctors who we don't see walking around the hospitals very frequently.

Additionally, we're improving the assimilation of those new to staff by introducing them to their referral sources. So I do believe that we have an opportunity to improve the output and efficacy of our physician relationship program and we'll go after those value leaks that today are causing us to not have increase in commercial managed care admissions.

Okay. Fair enough. Thank you.

Our next question comes from the line of Adam Feinstein of Barclays Capital. You may proceed.

Good morning. This is actually Brendan Strong dialing in on Adam's behalf today. Just first just had a couple questions here on guidance. And really the first one is as you think about 2009, you guys did a really, really good job managing your costs and then it looks like EBITDA for the year ended up coming in a lot better than what you had initially expected or even what you had expected as recently as the third quarter call. And so you ended up paying out this extra 401K match. Is there any way to think about that as really like a one-time item this quarter, unless EBITDA for 2010 ends up being just much higher than you're currently expecting?

I had a little trouble hearing you, Adam, but if you're asking on the 401K match, was it a one-time item, as I said in my comments, it should be considered a one-time item. We'll repeat that if we have substantial increases in future earnings or if competitive pressures should cause us to increase or make a further discretionary 401K match in the future. And Brendan, it's not in the 2010 outlook.

Brendan, just one clarification, so we're making that announcement today and we're setting the expectation for employees of what Biggs just said, that this is not something that is a permanent match, but it's a match that would-- it's an additional contribution that would be made again only if our performance in 2010 were substantially greater than in 2009. So we've left ourselves that flexibility. And we called it out so that you could make your own judgment as to whether to treat that as a one-time item or not. And just one last point of clarification, that was -- that contribution was made only to the accounts of employees who are not part of the incentive compensation plans.

Okay. Very good. And then Biggs, just one other question. On the tax rate, you guys are assuming a 40% tax rate for 2010, but you got the significant NOL there. I was just trying to understand that a little bit better. I mean ultimately do you think your taxes end up coming in a lot lower than what you're including in guidance? Just any color would be helpful around that.

Well the 40% represents on a normalized basis what we think we would have an effective tax rate, Federal and State combined. As it is the only thing that we are effectively paying at this point in time on current income is State taxes, which have been running more in the $15 million to $20 million kind of level on an annual basis. So that's, if you will, the State effects. And then the Federal effects at this point, of course, have been offset by the NOL. We would expect that the NOL is going to start to demonstrate its value as we go into the future and produce taxable income and we're happy to be-- on the one hand, you don't want to be a taxpayer. We'll be happy to be in position where we're generating taxable income and start to utilize the value of that NOL.

I guess-- I'm sorry, just to clarify there though. As you-- like let's say for example, when you end up reporting first quarter results, I mean what type of a-- I mean do you think you will be reporting like a 40% tax rate on the income statement, or do you think it would end up being lower to that?

No, and in terms of a reported basis in the first quarter, we would anticipate still just having State taxes effectively flowing through to the bottom line.

Okay, perfect. Thanks very much.

Our next question comes from the line of Sheryl Skolnick of CRT Capital Group. You may proceed.

Good morning, everyone. Okay, let me see where to start. First of all, I don't understand why you're giving it, to follow up on that one, I don't understand with the NOL, why you bother to confuse us with the 40% tax rate when the NOL is roughly $2.5 billion and will shelve a considerable amount of income for the next several years positively impacting your cash flow. I think it just confuses the issue and makes for estimates versus guidance comparisons to be negative, which I don't think you need.

The second thing is, I guess where I'm coming out on this quarter was that the right read is, I think you'll confirm, given the $16 million of discretionary payments that were not, certainly not expected in my model, that the earnings power of the Company in the fourth quarter from an EBITDA perspective was much stronger than anticipated. And I guess we're all sitting here with the stock down 9% a little bit disappointed that the 2010 commentary sounds so funereal. Now, let's all recognize-- recognizing that it's your job to be prudent and it's your job to be conservative, it's a little troubling to have the answer to the question, why is your-- are you assuming your costs going up 3% to 5%, or are you assuming a return to inflationary trends be positive when there doesn't seem -- when the articulation of where those pressures are hasn't been precise. So I would ask for better articulation of that.

And then the second issue around that is if your-- if you're rolling out Medicare performance initiatives this year and you're not rolled out to all the hospitals and your supply initiatives are only partially rolled out, the ones that go hand in glove with that, aren't there additional costs in your numbers that would show up in the other operating expense related to the Medicare performance initiative that you haven't enumerated?

I think that-- taking the last piece first, the Medicare performance issue. It will effect a number of items of performance. Where ever cost is incurred is potential we're able to drive it down by reducing variability, length of stay, improving staffing as a result of that and our supplies and everything else. So there's certainly going to be effects more broadly than just looking at supplies, which is something that's typically been focused on when we talk about the NPI effort.

Back to the broader question on inflationary pressures, we did give a relatively normal looking merit increase in the fourth quarter. We talked about that when we issued our third quarter outlook. So there's a built-in inflationary pressure on SW&B from that action. And as Trevor mentioned, it was above what the rate of inflation has been. Union contracts also provide for some set increases, which are not tied to inflationary pressures. And so the SW&B line is not going to move literally with inflation or the absence of it for 2010.

On the supply side, certainly we expect to be able to continue to drive down costs, using NPI and our other initiatives. But in-- when you look at it across the entirety of our costs, that $30 million that Steve mentioned, gets somewhat muted by the numerator and denominator effect, the size of our number.

Okay. I guess where I'm going with this is, some of this is that you just did such a good job in 2010 that it's hard to repeat the performance, but you have other initiatives that you're spending money on in 2009 and 2010 that will begin to show results in 2010. And I guess I'm a little bit concerned because I would think that the employment situation hasn't gotten that much better that your retention rates should still be strong and improving the programs you have on labor retention and around reducing turnover should be strong and improving, your contract labor costs should be strong-- control should be strong and improving. Your other operating expenses I think have been historically low. Obviously there's some twisting around of that because of the new IT initiatives and some costs associated with that, which you've articulated in detail.

But I can't help feeling, and I'd be okay with this, I mean it's your job to be conservative, but I can't help feeling that there's still a lot going on that would suggest separate and apart from labor where, yes, calling that out is important, the other costs probably -- the pressure probably shouldn't be above an inflationary environment where we're not really in an inflationary -- above an inflation rate where we're not really in an inflationary environment. So I'm a little -- I think I know the answer, which is that this is your first look at 2010 guidance and someone someplace told you to set it conservatively. I think that was right, but I'd kind of like an answer to that question.

Well, I think that -- I mean one area where we are possibly being served, I mentioned in the-- in my comments, is malpractice expense. We drove systematically malpractice expense down during 2009, repeatedly making actuarial adjustments for favorable experience. At this point in time, we're not forecasting similar reductions to occur in 2010. So our guidance does not embed a continued reduction in malpractice. Having said that, we certainly have all of our efforts aimed in that direction and that is one of the things that would influence the other cost category and it is one area where we may prove to be conservative.

Secondly, as I said, in an environment of rising risk free, in this case discount rates, there also is a favorable impact on malpractice expense. It doesn't affect the cash piece of it but would effect the expense piece of it. And we hadn't presumed that into our forecast as well. But as we know, based upon the actions of the last week, that is very feasible to happen over the course of this year and if that does and that will provide lift as well. So there are, I mean there are areas of conservatism, but I'm not going to go so far as to lay it out and say yes, this is a conservative number and it's not a reasonable estimate on our part, it's obligation to go ahead and give reasonable estimate.

Okay. And then I'll also keep in mind that if we add back the $40 million, it's still substantially higher than it used to be, so maybe I should stop complaining, the EBITDA, I mean. I guess and then the other thing that -- I'm a little bit -- I have to go back to, on the physician recruitment and relationships, there was some mention on the third quarter call, Steve, that there-- you stepped back and you took a look at the physicians recruited in the program through third quarter and felt that you needed to make some adjustments in terms of the appropriateness of those recruits in their commitment to generate volumes. Now you're telling us in the fourth quarter that the volumes in the class of 2009 are comparing favorably to 2008. Should we not be concerned about that? Have you addressed those issues? Do you have the right road map going forward? And what would be your outlook for physician recruitment for 2010?

Well Sheryl, I think you're absolutely right. I think that the statistics I gave about the productivity of the class of 2009 compared to the class of 2008 was only for the date range of Q4, which means we have been able to make a mid-course correction in how we focus those PRP reps. I think one of the issues that we identified and we alluded to in the Q3 call was we may not have worked on the onboarding and the assimilation process of doctors that joined the staff as well as we could have. I think by focusing the PRP reps on those new recruits, as well as those that have not yet joined the staff, and then subdividing the ones that have joined by the ones that put a minority of their work at the hospital will increase our yield in terms of total referred inpatient and outpatient volume, as well as commercial managed care. So we are learning, we have changed things as a result of the observations we shared with you in Q3 conference call and I think we're making progress.

Over time, I think the goal will be to actually add fewer physicians who each contribute more in terms of meaningful inpatient and outpatient volumes that meet our community need and prevent patients from having to out-migrate from our service area. So that for 2010, we'll probably target 800 to 900 active staff physicians net of attrition. So I think you're right. I think we have made changes. We continue to improve that targeting. We improve our business intelligence at the hospital level so that those PRP reps know which physicians to call on and they have work plans that are defined for them a week in advance.

Okay. I guess in summary, if I can, am I supposed to take away from this that you're doing your job in giving guidance at the beginning of a very uncertain environment, a year of very uncertain environment, by not overreaching, by trying to make it, I'll say maybe not in your words, as conservative as is reasonable to make it? But that the actual earnings power of the Company could be as much as going up by $100 million in EBITDA and that there are -- there's significant progress having been made despite the reduction in commercial managed care trends? Is that fair?

Well, that's the part where we can't -- as I said earlier, we're not going to say that our range is not reasonable, that yes there is--

No, I said reasonably.

Potentially greater earnings power then what's reflected at just looking at the range by virtue of the nonrecurring hit from HIT and the fact that it is an uncertain environment and that's going to hold us back for a limited period of time here. But we expect that as the economy recovers, that our results return to a more steep upward trajectory.

Okay. I'll stop pounding on you. Thanks very much.

Our next question comes from the line of AJ Rice of Susquehanna Financial. You may proceed. You may proceed with your question, AJ Rice.

Operator, I think you should go to the next question.

Our next question comes from the line of Jason Gurda of Leerink Swann. You may proceed.

Good morning. Thanks for the chance to get a question in. Wanted to ask about your accounts receivable. Looks like DSOs have been coming down every quarter this year. What's been driving that? Is there a point where you expect that to level off? How does that tie in also with your current bad debt expensing policy?

On -- well we haven't changed our bad debt expensing policy. We continue to reserve at the point of discharge for whatever our historic collection experience has been. So there's no reflection of a change in policy in the days in receivable. The collection rate overall has diminished on the 18-month look back basis over the course of the last couple of years, declining down to the third quarter at roughly 30% and then it stayed relatively flat in the fourth quarter, which is a positive sign.

The-- but what has improved over time was our upfront collection. So collecting more at point of service has been one of the contributors to our accounts receivable improvements. As well as the fact that we continuously improve our processes for integrating with the payors. We have much more electronic exchange of information, quicker adjudication of bills, et cetera, with our managed care payors, which enables us to collect more timely. We've also been driving down the discharge but not sent to payer time cycles, so we get bills out the door faster, we get paid faster. That's been a systematic approach over the last year.

We have routine so-called, cash is king, calls with all of our hospitals, where we go over those kinds of metrics, talk about cycle times on the receivables side, also look at inventories, which isn't a part of your question and make sure that we're driving down those as well. So it's a very concerted effort between what happens within Conifer and what happens within our hospitals, on everything associated with cycle time process, upfront collections, which have been driving down the receivables balances. And we obviously have been very successful.

And one of the things we're worried about in 2009 in a recessionary environment was the effect that would go the other way that we would have people paying us more slowly, and to the extent that has happened, it's been offset I said by the increasing point of service collections. The-- if you look at 2010, we're not projecting in our guidance that we continue to decline days in receivables, but that's certainly something that we're going to go try to accomplish as we continue to refine the processes and reduce cycle times.

Okay. And then as your upfront and collections continue to improve, is that putting downward pressure on the bad debt expense each quarter?

It does have a favorable impact. How much is hard to say, because the question is, are you collecting from the same people faster or are you collecting from people who otherwise wouldn't have paid? And it's going to be some of both, but it's very difficult to measure one versus the other.

Okay. And just a final follow-up question is on the California issue that you're, or at least California is waiting to hear back from CMS, do you have an expected timeframe on that?

It's the middle of the year. And since you bring that up, I know from reading your earlier notes this morning and some others, that there's some questions or some interpretational issues as to what we've actually reflected in our outlook for that. So, if you will, I'll take this as an opportunity to clarify. The release said that we had $35 million of State cuts outside of California, which essentially offset, or partially offset, by the receipt of up to $60 million for the California provider fee. The California provider fee is one of many risks and opportunities included in setting the range. So we look at every risk, every opportunity. We look at the probability of its occurrence as a basis for determining what kind of a range of outcomes we should expect for the year.

So in this case, effectively what's included in the range for the California provider fee, or for other things we deem to be risks and opportunities, are factored numbers. So if I was doing a walk forward to the middle of our range, I would use $30 million as the amount to include for the California provider fee. So not the full amount, but a factored amount. And you can get there by you're saying it was approved prospectively or it's a probabilistic outcome along with others considered at setting the range. And the-- so it's not I think appropriate for people to conclude that we've put $60 million into all levels of the range for the California provider fee and that our outlook is conditional upon the $60 million.

The bottom line of all of that is that when and if the provider fee is approved, which I said might not be towards more the middle of the year, we would not want analysts to immediately add the gross value of that fee to our outlook range. We'll need to reassess the range against all our areas of performance, all the risks and opportunities, costs, revenue, volume or otherwise in assessing how that provider fee would affect the range, we move it up or down or what.

So just to clarify what you said, the mid-point of the guidance, assuming nothing else changed, let's just assume all the other states come in fine. The mid-point of the guidance range was how much from the California private program, $30 million?

$30 million.

Okay, thank you.

Our next question comes from the line of Ralph Giacobbe of Credit Suisse. You may proceed.

Thanks, good morning. Just a couple quick follow ups here. Yes, in the press release you talked about certain regions showing better volume trends. What about within commercial bucket? Are you seeing any better, or maybe even potentially positive trends in any region, or is it managed care pressure basically similar across the board?

Ralph, I think we've seen some variability in commercial managed care. I think that there is some correlation with unemployment, but it's not an extremely strong correlation with unemployment. Within certain micro markets, we see strength. For example, a strong place might be Atlanta. A strong place may be Palm Beach County relative to our other facilities. But in general, the decline is fairly broad based, with occasional points of brightness within the group of 49 hospitals.

Okay. And then just following on that, any more detail, I think you mentioned a certain initiative to gain share in Texas and Florida specifically around commercial, any more color on that?

Yes. Specifically a great example of our business-to-business initiative in Florida is the relationship with Bank Atlantic, whereby we provide on-site screenings for their employees, education programs, flu shots, things of that nature on site. We're doing that with a number of other large regional employers in many of our markets. We've had a similar issue and initiative in several of our Texas markets which are proving to be very effect in opening that channel to accessing commercial managed care patients at the business level rather than simply focusing on physician referrals for commercial managed care.

Our commercial payors are actually helping with us, helping us with this, encouraging us to do this, because in our meetings with them, they tell us that we are a high-quality provider from the assessments they give. We are in their centers of excellence designation program and to the extent they're not able to do hard [steerage] they certainly help us in those connections with businesses.

Okay. Thank you.

Our next question comes from the line of Kevin Fischbeck of Banc of America. You may proceed. You may proceed with your question. We'll go ahead and proceed with the next question. Next question comes from the line of Gary Lieberman of Wells Fargo. You may proceed.

Thanks. I guess just maybe to follow up on the last question regarding the commercial admissions. You've talked about this in the past, but is it your sense that you're losing share or is it that your sense of the markets that you're in, it's sort of-- everybody's seeing it across the board decrease? What's sort of the dynamic that you think is going on there?

From our discussion, Gary, with a number of the large national payer leadership teams, as well as large regional teams, we don't think we're losing share. That may be true in a couple of isolated incidents, but our volumes in commercial managed care are pretty consistent with their losses in the markets in which we operate across the country.

That said, we're not satisfied with shrinking commercial volumes, even if the universe of addressable or contestable patients is shrinking. And that's why I mentioned our upscaled efforts to take market share and commercial managed care to access the other channels by which we can get those patients other than simply referrals from physicians. So we are focused on taking market share and growing commercial managed care even in a shrinking environment.

Okay, and then just one housekeeping item. Not sure if you gave it, but do you have the compact discounts in the quarter?

No, we don't, we don't track those effectively anymore. It's all just embedded into our routine.

Okay. Thanks a lot.

Our next question comes from the line of Kemp Dolliver of Avondale Partners. You may proceed.

Hi, thanks. Question relates to the stimulus bill spending on HCIT and you're going to spend about $110 million this year between capital and operating expenses. So as you look down the road to 2012 and beyond, what is your thinking with regard to how much of that you will ultimately recoup?

Well, I would refer you to the 10-K. We break out what the total project is expected to be over its life and what the incentive dollars are expected to be. And then above and beyond that, we expect to have operational benefits, which we haven't quantified. So it leaves you short of being able to totally answer your question as to what the economic effects are. But I'll go back and say this was something we were going to do anyway, so we felt like it had value anyway. We're just accelerating. So since we felt like it added value anyway, we felt like the economics were there for executing this program just on a different timetable.

Great, and my other question relates to expenses. You've mentioned with regard to the uptick in expense growth in 2010 versus 2009 the absence of a large cost reduction program and little, probably a little bit more generous wage increases. But it strikes me when I do the math that the overall costs, or approach to costs discipline, is still probably where it was a year ago. Is that fair, or is the mindset that the profitability in the business environment's a little bit better than what you thought a year ago, so at the margin, there are some things you're willing to do that you might not have done this time last year?

I would say we're not relaxing on anything. Our discipline in terms of cost management is now very ingrained and we are seeing continued success in terms of how the hospitals are managing staffing and flexing appropriately and avoiding contract labor and overtime and just being on a day-to-day basis much more effective than we were a few years ago as a result of all the processes we've installed. So nothing's changed along those regards. We always, even last year, we had to make decisions about, is there something that we should be investing in for the future? And so it's not to say that we-- there's zero dollars being invested for the future discretionarily even in 2009. There were some, but it's going to stay something that we are going to be conservative with respect to and very-- just day to day, it's a matter of being absolutely diligent with respect to cost control.

That's great. Thank you.

Our next question comes from the line of Justin Lake of UBS. You may proceed.

Thanks. Good morning. Just first question around, you made some comments around the fourth quarter being particularly strong on the commercial pricing side. Can you give us a little more color there around what was particularly strong there, maybe just talk the difference between pricing and mix?

Well we don't, we don't give out literally what our price increases are because it ends up being used against us negatively in our negotiations, because everybody wants to be at the average. So we've stopped giving information out a few years ago. There has been -- there was some lift in commercial managed care, case management index, some lift in acuity. We've talked about that over the last several months, that even though volumes were down, there was a positive shift in terms of patient mix. It's not strictly quantified, but that has been a positive that's been a trend over the last almost nine months I think.

Sure. So you're not saying basically that your contracting has gotten significantly better in the last quarter or two?

No, the contracting -- we've stayed on the path we've talked about previously. Our rate of increases, nothing changed significantly in the fourth quarter. And as we said before, the pure rate increases for 2010 we expect it to be in line with what we experienced in 2009 as well.

Perfect. And just one last question, typically you'll give us a little bit of visibility into what you've seen the first month of the quarter. Is there anything you could tell us about January particularly on the commercial volume side?

Well, as Trevor mentioned earlier, and as I've said in the past we want to try to work our way away from giving that information, because as often as not, it ends up being different from what the full quarter view is. So we have, we've decided at this point in time not to give specific stats, but Trevor did mention that the first quarter was starting out somewhat softer than what we ended the fourth quarter with, and that would be with respect to commercial volumes.

Great. Thank you very much.

Our final question will come from the line of Whit Mayo of Robert Baird. You may proceed.

Thanks. Just wanted to follow up on that last question, Biggs. Just any issues to think about with weather in the first quarter and just any perspective around that?

I'm sorry, issues--

I'll take it.

Okay.

Whit, it's-- I don't think that we have any particular insights about the first quarter, whether it was weather driven. I've heard that with respect to retailers, but I wouldn't want to speculate. All we wanted to say was that the trends are a little bit, in my opening comments at least, but the trends year-to-date are a little bit weaker than the fourth quarter and we're off to a slow start in terms of volumes for the year. But then to remind you that our guidance for 2010 assumed flat volumes and down 3% on commercial. So did you have a follow-up question? Because we wanted to give everyone a break before the HMA call?

Yes, no, and just wanted to clarify the comments that you made about self pay collection rates. Just wasn't sure if you said that it was down sequentially or flat sequentially, just--

It was effectively flat sequentially third quarter to fourth quarter.

Perfect. Okay. Thanks a lot, guys.

Okay. Thanks, and I'm sorry we weren't able to take all the questions. But we are mindful of the fact that the HMA earnings call begins in about ten minutes. I just wanted to make a couple of closing comments before we concluded the call. 2009 was clearly a very important year for us. It was a watershed in many respects. We showed very strong improvement in EBITDA and continuing a trend that has gone on for a number of years. We made major changes to the cost structure, which we are not letting up on. We did very well on pricing. We continue to have visibility into pricing long into the future. And we've made major progress in strengthening our medical staff.

We think those improvements are sustainable and represent a foundation for the future. But sitting here early in 2010, it's a very challenging year for which to forecast. I think many of your questions and comments have pointed that out. I would just say we've faced over the past several years much larger challenges and we have been able to overcome them and we have confidence as we enter 2010. And look forward to spending more time in person with you and as I mentioned, having a higher degree of visibility out there than we have had in prior years. So thanks to everybody for participating. Take a little bit of a break before your next call. And Operator, this concludes the call for us. Thank you.

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