Tenet Healthcare Corp (THC) 2010 Q1 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Q1, 2010 Tenet Healthcare earnings conference call. My name is Caitlyn and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (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's call, Mr. Thomas Rice, Senior Vice President of Investor Relations. Please proceed.

Thank you, Operator. And good morning everyone.

Tenet's management will be making forward-looking statements on this morning's call. These statements are 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 the Trevor Fetter, Tenet's President and CEO.

Thanks, Tom, and good morning everyone.

I said on our February conference call that we're making changes to our Investor Relations program for 2010. As you've already noticed, we shortened our Earnings Release significantly. Our intention is to narrow the focus to the key items driving our performance in the quarter. Let me assure all of you who value the extent of our disclosures that we are still completely committed to transparency. All of the information you're used to seeing in our Earnings Release is still in our 10-Q. We are also going to streamline this call. Biggs and I will be the only speakers making prepared remarks, but Steve Newman and others are here to answer questions. We cut the length of our remarks to ten minutes so we'll have plenty of time for Q&A and can still finish the call within one hour. So in the spirit of being concise, let me jump right into a discussion of our results.

I'm very pleased with our adjusted EBITDA for the first quarter, which grew more than 7% over last year's first quarter and reached a margin of 12.7%, our highest quarterly margin in seven years. Our adjusted EBITDA in the first quarter was greater than in any first quarter since 2003, and we achieved it with half the number of hospitals we had then. On the basis of this strong start to the year, we are confirming our existing full year outlook for adjusted EBITDA in a range of $985 million to $1,050,000,000. While we achieved our earnings objective for the quarter, volumes were soft, but our performance was excellent in the other key economic drivers of acuity, pricing, and cost control.

Our proven ability to control costs has significant positive implications for our longer term operating leverage. Once we achieve a meaningful and sustained recovery in volumes, we know how to turn the resulting revenue growth into attractive growth on the bottom line. This quarter, for example, we took a decline of 2% in admissions, turned it into 3.4% growth in revenues, and into more than double that rate of growth in EBITDA. We should be able to do better than that with some volume growth.

While volumes for the first quarter were disappointing, the month by month trajectory of volumes was encouraging. To be specific, January and February were weak, but the trend was better in March. On the outpatient side, the year-over-year growth rates in March were more than 500 basis points stronger than February, indicating one of the strongest snapbacks we've ever seen. The trend in admissions to the first 28 days in April was similar to March, although commercial is trending a big stronger and outpatient visits are trending a bit weaker. This shows the kind of short-term volatility in patient volumes we talked about in prior calls. Other companies have mentioned that bad weather, lack of flu, declining birth rates and bad economic conditions depressed volumes and although we agree that they had an effect, it's difficult to quantify precisely.

Our admissions through the emergency department continued to achieve positive year-over-year growth in the quarter. This indicates that our soft volumes are primarily limited to our elective business. This should not be surprising as elective procedures are most directly impacted by a slow economy. Strong growth in revenues per unit continues to make a significant contribution to our earnings momentum. Inpatient revenue per admission ran 160 basis points stronger than the mid-point of our outlook assumption, and the favorable variance was more than 400 basis points on the outpatient side. Our pricing was enhanced by higher acuity, particularly in our commercial business and given that 80% of our contract volume is negotiated for 2010, and more than 60% for 2011, we are confident this strength will continue to help drive our earnings growth.

As I mentioned earlier, cost control was once again stellar in the quarter. Total controllable costs increased by only 1.3%. Malpractice expense continued to decline and we even picked up $2 million in savings in the quarter from reduced rent at our new corporate headquarters. Bad debt expense increased in the quarter, but the fully allocated cost of providing uncompensated care, that is, care to both uninsured and charity patients, increased by only $6 million from last year's first quarter. This is far smaller than the $33 million increase in bad debt expense year-over-year. The tangible EBITDA impact, of course, is strictly limited to the cost of care, as opposed to the largely offsetting movements in revenue and bad debt line items.

These numerous factors all helped us improve adjusted free cash flow in the quarter by $33 million compared to last year's first quarter. The first quarter is always the lowest in terms of adjusted free cash flow due to the timing of certain annual cash payments, but clearly it is trending in the right direction. To summarize, I'm pleased with our response to the continued weak economy and soft volume environment in the quarter. When confronted by these extraordinary challenges, our hospital management teams responded quickly and effectively to maintain our positive earnings trajectory. And with the resumption of volume growth I'm confident we can generate some truly outstanding bottom line performance.

Let me turn things over to Biggs who will share some commentary on our outlook and then open up the call to Q&A. Biggs?

Thank you, Trevor, and good morning everyone.

I will limit my introductory comments this morning to the refinements we are making to our outlook for 2010. Our most important comment is that we're confirming the outlook range for adjusted EBITDA for 2010. Earlier in the year, we set our outlook range at $985 million to $1,050,000,000 that range continues to appear very realistic to us. A summary of our refinements to our outlook assumptions is provided on slide six on the web. On that slide, you'll see the softer volumes in our first quarter have caused us to re-evaluate our volume outlook for the year. Our outlook for admissions growth has been reduced by 100 basis points. We are now assuming admissions will decline 50 to 150 basis points in 2010, as contrasted with our initial assumption of approximately flat admissions for the year.

Because our initial assumption for 2010 growth and outpatient visits was significantly stronger, we reduced the outlook on the outpatient side by a more significant 200 basis points. Having said that, much of the volume declines of the first quarter relative to last year and correspondingly the variance in our expectation for the year is in lower acuity conditions, so the revenue and EBITDA effects are not as significant. Accordingly, pricing on a per patient basis is favorably impacted by this patient mix shift to higher acuity. We are now significantly more positive on the growth we assume can be achieved in unit revenues. Our assumption for growth and inpatient revenue per admission is now a more bullish 300 to 400 basis points, representing enhancement to our initial growth assumption of 100 basis points. We are making similar 100 basis point refinement to our assumed growth in outpatient revenue per visit to a new range of 400 to 500 basis points.

These enhanced assumptions for pricing significantly mitigate the adverse impact on assumed 2010 revenues. We believe only a $50 million decrease in assumed 2010 revenues would be necessary to reflect lower volume projection. We believe this modest reduction in our revenue outlook can be offset by an equal if not greater reduction in our outlook for 2010 controllable costs. About half of these savings are directly linked to the revised volume projection and the remaining are related to enhanced assumptions regarding incremental cost efficiencies. These efficiencies include the improvements in productivity, malpractice, and other controllable expenses we benefited from in the quarter.

Before leaving our cost assumptions, let me remind you again that we included $40 million in assumed incremental costs in our 2010 outlook to cover the impact of our accelerated HIT program. As we proceed with the implementation, we continue to look for opportunities to reduce the 2010 expense, but at this time, we are going to remain conservative with respect to this $40 million estimate. This program continues to be implemented on schedule, and we expect to begin generating some offsetting revenues as early as late next year and to be completely offsetting this incremental expense by revenues and operating benefits beginning in 2012. The increase in bad debt expense we experienced in the first quarter is fully consistent with our prior outlook, which therefore remains unchanged. We have no cause at this point to change any of the other assumptions embedded in our outlook. In particular, there's nothing incremental to report on the California provider fee, although investors should be aware that this is only $30 million in the middle of our range and there is considerable upside to that number.

As these assumptions for softer volumes offset by higher acuity per unit revenue and cost reductions are worked through our models, the result is confirmation of our pre-existing 2010 range for adjusted EBITDA. With no change to our EBITDA outlook, there is no change to our GAAP earnings, although we have made certain adjustments to our share count, in part reflecting changes in our share price. We've also added an outlook line item for EPS reflecting tax expense without any pro forma normalization for changes in our NOL valuation allowance. Book tax expense could, in fact, become significantly favorable this year should we qualify for the recognition in the tax provision for some or all of the $1 billion benefit of our NOL carry-forward and other deferred tax benefits prior to year-end 2010. Under Generally Accepted Accounting Principles, this recognition occurs when the Company has demonstrated that there is a reasonable expectation of future taxable income sufficient to realize the benefit of the NOL. Due to our demonstrated improved performance we are approaching that point in time and will continue to assess this quarterly.

In summary, we remain confident that our initiatives to drive revenue growth, control costs and drive increasingly positive bottom line profitability and free cash flow will be successful. The ranges we have assumed in 2010 for pricing, revenues and adjusted EBITDA allow for effects either partially or totally out of our control related to the recession. We believe the recent pattern of volume declines will improve, and on an inter-period basis these trends are improving. Looking past 2010, I will also reiterate that as the economy improves we believe we will see improvement in commercial volumes and bad debt expense and believe that we will also benefit from our initiatives to grow outpatient volumes organically and through selective acquisitions.

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

(Operator Instructions).

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

Good morning, thanks for the color and the extra time for Q&A.

Obviously you've done a strong job on the cost control side. Just looking at the volumes a little bit more closely, how do you view your market share? Do you think that the pressures that you're seeing out there are equal or perhaps you're losing any market share, both overall and then, particularly, within managed care?

Hey, Tom, good morning. It's Trevor. I'm going to ask Steve Newman to answer that question. Steve?

Thank you, Tom, for the question.

We shared your concerns regarding market share and during Q1, we did a very deep dive into our market share across the country and our results really were quite encouraging. For example, if you look at our hospitals and the following states, you get the following results. California was up 0.1%. Florida was up 0.3%. Texas was up 1.2%. Missouri was up 0.3%. Georgia was flat. And our only state that was down was North Carolina, where we lost market share of 1.1%. This covered the change in market share between 2008 and through 12/31/09.

Okay. So that was your estimated change in market share for your facilities in those markets?

That's right, Tom.

And then, can you give us a little bit more detail?

We've seen a lot of headlines over the last couple years about managed care relationships and in certain cases expanding those, but can you talk about an update on what you're doing in terms of either physician recruiting or working on splitter type docs to really get the leverage out of the contracts that you're signing and get the volume through the door, ultimately?

I think those are both important aspects that we're working on, Tom. We have a big push to make sure all of our active medical staff are participating in the networks of the managed care companies that we've contracted with. We see variability across the country, by payer in terms of that; they range from 70% to 90%. We're trying to push all of them to the 90% level. That gives our doctors the opportunity to take care of those patients at our inpatient and outpatient facilities.

We're also organizing our physicians in selected markets around the country to contract with managed care payers on a single signature. We've done that in a couple of areas. We continue to do that. We believe that's a proactive strategy, getting us ready for the post health reform era with bundling and creating accountable care organizations.

Thank you.

Your next question comes from the line of Adam Feinstein of Barclays Capital. Please proceed.

Thank you. Good morning, everyone.

Good morning.

Just couple questions on the cost management. Obviously, very strong trends there. So just maybe a few things I wanted to go into.

I guess last quarter you called out some items that were somewhat one-time in nature in terms of labor cost, in terms of merit increases and 401-K matching, but I would expect there was probably some fall-through. Last quarter you called out about $25 million of incremental costs. I was just wondering if any of those costs were still -- any incremental cost there in the first quarter that we should think about?

Good question and I'll ask Biggs to answer that one.

Good morning, Adam. No, there weren't any unusual one-time type of expenses or step-ups over the prior year to note in the first quarter.

The HIT expenses, which we, of course, had said we expected for the full year, weren't very evident in the first quarter. That will ramp up more later in the year.

Okay. Great.

And then as we look at the costs -- once again, great cost management, controllable operating cost up 1.3% in the quarter, on a per adjusted patient day basis, up 3.5%, which is still a lower than normalized number, but just curious as you guys think about it do you look more at the total number or do you look at it more on adjusted patient day? So just as you guys think about that and I know what was going on with patient days, but I guess just trying to think about in terms of managing the business, in terms of how you guys analyze those metrics?

Well, we look at it both ways. Certainly the benefit of looking at it on a patient day basis is as it normalizes for volume swings, so that is an important metric. It is not a perfect metric because as we know, shifts between inpatient and outpatient and other mix shifts can create some distortion in the stat. So it's not a perfect stat. You have to always be aware of that. It is the best one available and it is one we use on a regular basis to look at our cost performance.

Okay. So you guys would think that that 3.5%'s a better way to think about cost growth as opposed to 1.3%? Is that -- ?

Well, you know, it's -- at the end of the day, obviously driving down total cost, while you're trying to drive up revenue is the key. So total cost performance is important. If we're looking at productivity, yes, we try to get down to a patient day basis, but obviously the bottom line is the most important thing, and so that's at a macro level we had to manage to.

Okay. Great. And then just one more question and I'll get back in the queue here.

In the 10-Q you mentioned -- you were talking about just the regional variability here and talked about three out of four regions saw a decline in volumes and then on the outpatient side just mentioned that the central region did well. So was just curious if you could talk a little bit more on the regions and what was it about the central region which led to better volume growth in than some of the other regions?

Steve, why don't you take that?

Adam, that's correct, we did say that in the Q. Let me give you some additional color about outpatient visits and variation by region. Certainly our outpatient declines across the Company were largely related to imaging declines. About 70% of the total was hospital-based imaging being declined for the quarter, also with outpatient laboratory testing contributed to that. It was really isolated to two sites in California and to some extent also compromised in Texas with respect to outpatient.

That may sound odd, since Texas is part of the central region, but in those two sites in California, physician IPA-owned facilities opened, which took imaging and laboratory testing out of the hospitals; and we have a unique situation in Texas where free-standing emergency rooms were approved by the legislature. That then pulled some visits out of our hospitals, especially in Houston and Dallas.

So central was stronger in aggregate, but those two issues really aggregated to keep our outpatient visits negative and when you consider the lack of the flu type syndromes that we saw last year in our ERs, which we didn't see this year, I think our aggregate performance down 0.6% in emergency visits really was quite minimal.

Okay. Thank you very much, appreciate the color.

Your next question comes from the line of Ralph Giacobbe of Credit Suisse. Please proceed.

Thanks, good morning.

I know you guys don't give quarterly guidance, but is it fair to look at the progression of EBITDA we saw last year as a way to think about this year? Or should we be thinking about that differently?

I'll ask Biggs to take that question.

Well, that's a good question. You're right, we don't give quarterly guidance and in truth at this point I'd have to go back and look at the progression last year. I think that last year was flatter than what we've experienced from a seasonal fluctuation standpoint in the past. While we're in a recession, I think it's a little harder to say that normal seasonal patterns work.

We certainly are expecting that as the economy stabilizes and improves that we will see some positive trends as we proceed through the year, and in particular the fact that we were off to a slow start on volumes, we expect to see that turn and for those trends to improve through the remainder of the year. So it makes it a -- I think a little bit harder to say it's going to look like the past. I'm sorry that doesn't answer, give you too clear a view, but --

The only reason I ask is last year, I think, it was something like 27% or 28% EBITDA came in the first quarter, and obviously this first quarter's a little bit weaker as it relates to the volume side of things, so just wondering if that wasn't a right way to think about things because last year, obviously, disproportionate came in the first quarter.

Well, I think if you -- certainly if you look at our outlook for the year, $985 to 1.050 billion, that suggests there's variation between the first quarter and remainder of the year. That's about as close as I can come to giving you a quarter by quarter look.

That's fair.

Just want to go back to your comments on the managed care side. I think you said 80% of the book was done for 2010, 60%, 2011. Can you give us the average rates between those years?

I'm sorry, what do you mean the average rates?

Range. Your pricing point increases.

In terms of pricing, I think what I'd say is this year should be the same as last year and then we're not quite at the point of projecting the 2011 numbers yet, even though we're 60% in. We have pretty good visibility, not to the point of 2011 guidance.

Okay. Thank you.

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

Hi. Thank you. A question on the supply costs.

So at first blush it looks like there's some improvement here as a percent of revenue. You've got the supply cost down to 17% now, that's down 30 basis points year-over-year; but if we look at the supply cost per adjusted admission, we're seeing -- first, is that how you look at it and would you agree we're seeing 3% inflation on the supply cost so far this year?

If that's the right way to look at it, can you tell us if we're seeing any of the benefits from your MPI initiative at this point in the results? Especially, are we seeing any of the $30 million in supply cost savings that were guided in the last call?

Why doesn't -- Biggs, why don't you address the outlook related part of that question and we'll have Steve say a little bit about MPI and some of the accomplishments there in the supply chain.

Well, I think we were pleased with our supply cost performance in the quarter. I think you had a question as to whether we look at it on a patient day basis.

I think that there are problems with looking at supplies, going back to an earlier question. In this case you can have a mix affecting the areas in which supply expenses are incurred that don't show up in the adjusted patient day denominator. By example, if you have more surgeries, it does proportionately change your patient days, but it may change your supplies more significantly. You really have to dig in and understand on a specific basis what's happening in the business and how supplies are performing against that.

Admittedly it's hard for you all to do that from the outside looking in. So for the year, we certainly still believe we're going to get yield from all of our supplies initiatives, including MPI, nothing has changed there. I'll let Steve talk to what we've been able to do so far.

Shelly, just for example, in the first quarter, our spinal surgeries were up significantly year-over-year. Those are very high cost implants. Yet, each of those still just contributes the same as any other surgical procedure, in terms of adjusted admissions.

We're doing a number of things in MPI to continue to drive our supply costs down. The impact from MPI is both short-term and long-term. We're able to certainly continue our efforts to drive down individual unit pricing in terms of implants. We just had a concession on our cardiac stent implants, with another 10% drop. That, combined with more appropriate utilization, is going to continue to drive down our supply costs in cardiac intervention.

So, I think those are two examples of how we're continuing to drive our supply costs down.

Just Steve, to follow up with what we've seen so far, have we -- if you are able to consolidate vendors, for example, on the spinal side or on the cardiac side for the hospitals, where you're doing MPI on targeted DRGs right now, is it too soon to see the supply cost savings in the results that came out today?

If you do consolidate vendors or limit your product selection, does that contracting take time to flow through, so we wouldn't see it until next quarter or six months from now or --? Does it get pushed out like that or will we see some cost savings in real-time?

I think to answer your question directly, Shelly, some of the savings you would have seen in the quarter in cardiac, especially, those where we touched those first wave hospitals in some of the cardiac DRGs in 2009. They would in fact show up in this quarter. Others, as we flow through, take more time to develop.

So it's both short and longer term cost savings in the supply area. Also, I should mention that we're working continuously on length of stay and driving down other variable costs, other than supply costs, through the Medicare Performance Initiative.

Okay. Great. Thanks. I really appreciate the color.

And then if I could, just one quick one on the charity care. You're seeing less charity care in the quarter. Is that part of -- can you talk a little about what's driving that? Is that the Right Care, Right Place Initiative?

I think it would be a combination of things. It would be the Right Care, Right Place Initiative. Also, our Medicare eligibility program where we have reps in all the hospitals, working to get people qualified for Medicaid. I'm sorry, I may have said Medicare. I meant Medicaid.

So we're pretty confident that over the last couple years we've gotten more people qualified for Medicaid than we would have previously. So those are the two primary drivers. There's also some evidence, anecdotal, that some undocumented immigrants are returning to their home economies due to job loss, but that's once again harder to quantify or track but all those things are having an effect, we believe.

Thank you.

Your next question comes from the line of Sheryl Skolnick of CRT Capital Group. Please proceed.

Good morning, gentlemen. I want to compliment you on a couple of things, the press release was much easier to read, number one. Number two, the 10-Q was out in a timely fashion and had enough detail to even keep me happy. Number three, so far, so good, I haven't found anything in the Q that wasn't in the release, so you are to be complimented on that. Most importantly, I want to compliment you on the performance in the quarter.

I think Trevor you said it very well, that you not only doubled your revenue growth rate in your other operating statistics and your EBITDA, but you achieved a margin that no one -- no one in the deep, dark depths of 2003 thought this Company could ever achieve again. I think everybody should put results in that context as we discuss the call because, quite frankly, I'm tired of the stock going down on earnings day when you've done a stellar job running and improving the Company. Okay, so that's my soapbox.

Thank you, thank you, thank you and we appreciate the long memory.

Yes. At least somebody does. Okay.

Now, I have some more substantive questions, so -- the first thing is, I'm going to go back to MPI. And I think that there was some interesting disclosures in the Q with respect to the supply costs, et cetera. But what I'm more interested in is, we saw despite a significant increase in acuity that drove a really, perhaps even record rates of growth on outpatient revenue per visit as well as strong growth on net revenue per adjusted admission, despite that higher acuity we saw a reduction in the average length of stay.

Now, that to me is fascinating. Is this proof of Medicare performance initiatives beginning to take root? That's part one of the question.

Okay. Steve will take part one.

Okay, Sheryl, thank you for the question. I think the answer -- short answer to your question is yes. And it is particularly noteworthy that the length of stay was down in the quarter because our OB deliveries were down 4% or over 730 deliveries. Those as you know have a length of stay of between one and two days and tend to pull down the overall length of stay, so with the absence of those, you would have expected our length of stay to creep up.

I do think the effort that we're putting into the Medicare Performance Initiative and the roll-out of our case management program aggressively to each hospital has made a difference in the length of stay, which then will affect our variable cost and our profitability per inpatient stay.

Okay.

Second question is as we look at the Medicare Performance Initiative across the board, you address the issue of it being both a short-term and a long-term performance, but as you look at your pace at which you're rolling out, the degree to which physicians are accepting this, recognizing that changing -- you're not changing employee position behavior as much as you're changing community based physician behavior, which is the harder thing to do, what has been your experience and your track record to date?

How many hospitals have it? How many hospitals are scheduled to get it? And I'll then stop there and let you answer that question.

Okay.

Okay. With respect to how many have completed phase one of MPI, there are 20. We expect the remaining hospitals to be completed with phase one roll-out by the end of the first quarter of '11. We've also begun phase two, at some of our early hospitals, that would be the second five MSDRGs with respect to loss related to excessive variable cost.

Back to the issue of physicians, we continue to find physicians interested in learning more about the Medicare Performance Initiative. We kicked off MPI at one of our Houston hospitals yesterday. We had 30 physicians in attendance. Our corporate Chief Medical Officer was there as well as our regional Chief Medical Officer. And I think as the environment changes, as health care reform moves forward, as physicians understand their performance, both in their office as well as in hospitals and outpatient facilities, is being measured by both commercial and governmental payers with the potential for their Pro Fees to be affected, they are coming on-board with the idea they should participate with us.

So I do believe that the embracing of MPI by physicians is increasing with time.

Okay. And Pro Fees are professional fees and that aspect -- ?

Sorry for the acronym.

Yes, and all of that makes very good sense. I don't know of any doctor that wants to stand up in front of a court and say I take pride in providing lousy care at a high price.

Then if I could move on to another question, which is given where the performance is today -- I'm going to step back from the detail of the quarter-- given where the performance is today, would you describe the Company as having moved out of the initial phases of the turn around and into the middle innings? Number one.

Number two. If so, what is more crucial to do right now, and include in this, please, an update on your physician recruiting? Is it to recruit the right physicians in the right markets -- is it, as well as the Medicare Performance Initiative? Is it the control of costs? Is it expansion through acquisitions?

Can you give us an idea of your strategic thought process about where the business is today and where it needs to go, say in the next three years or pick a time frame, but where you are today?

Well, Sheryl, it's Trevor. You know that sports analogies are not my forte.

The only other thing was the second trimester pregnancy. I didn't think people would appreciate that either.

That wouldn't be any better. But so I'll defer on the innings question.

But I think, look, we've clearly put all of the cleanup and all of the legacy issues behind us and so we're just really operating the Company in a way where we're focused on the basics of building volume, making sure that the pricing increases we are able to get are fair and appropriate, and controlling costs and the -- and driving cash through a variety of initiatives. We don't necessarily talk about it on this call, but we've done very well wringing working capital out of the business; and even seemingly little things. I threw out that little factoid about the savings in rent on our headquarters move, but basically every decision we make is made with the cost imperative in mind.

I would say that for some time we've been operating in more of a stable environment. Clearly, volume remains our number one challenge. Few weeks ago we had our 350 top hospital and corporate managers here in Dallas for a conference. That was basically the entire topic.

The initiatives we have on volume, the initiatives we have around recruiting physicians, the MPI initiative, which is very directly focused on costs and quality and improving that, those are the engines that we are counting on to continue to drive improvements in the economics. And I think we're approaching a level where although our margins are still low relative to the industry peers, they're not orders of magnitude low like they were and we are within reach of continuing to improve to levels that we can be proud of.

Fair enough. And now I'm just going to drive one more question and that is, as we look at your guidance for this year -- and I think this was the question earlier for Biggs -- you did nearly $300 million in EBITDA this quarter. It appears to be as clean an EBITDA number as we've generally seen. So accepting that, and as you've noted volumes were especially weak, perhaps affected by weather and lack of flu, the volume comps should just simply get a little bit easier given that weather may straighten itself out, the economy may improve.

It just seems to me that why -- if you've done better in the first quarter, relative to the midpoint of your guidance, why would you then, therefore, be -- unless you thought you were going to do this well. Why would you, therefore, be apart from just generally being conservative, doesn't stand to reason that the implied numbers from consensus don't give you enough credit for getting traction on all of the positive things you've identified, but do give you credit for not getting traction on the commercial managed care?

Is this simply that given where you are today, it's just more appropriate to be conservative? Because when I look at your numbers and the way they work, I have trouble keeping them down.

Well, I think that the -- there's a couple points of conservatism or a couple points where mathematically, there's some cost increase remainder of the year, such as in Healthcare IT, where we haven't spent much in the first quarter and that's going to go up in the remainder of the year, so that's clearly identifiable as a variance, future quarters, relative to this one.

But having said that, your question is still a good one. I do think we're conservative with respect to cost performance otherwise. Malpractice expense, very low in the first quarter. We find that very challenging to forecast and won't give line item guidance. But in a nutshell, we presumed the remainder of the year that it goes back up from this first quarter level to stay conservative on that point. And it's quite possible that we'll do better than that.

I mentioned before, just besides our efforts to control malpractice expense, the fact that there will be likely increasing discount rates out into the future will cause that expense to be lowered. But at this point in time, that's a difficult thing to forecast, just like the economy, so we have left it at a conservative point.

Same with our overall cost performance. I think that we had a very good first quarter. Everything worked well, even in a period where we had declining volumes. I think that we haven't fully extended that level of performance out for the remainder of the year, to stay conservative as we watch the economy, but once again we will see how that unfolds.

In balance, as I said, we think that our outlook is -- we're very comfortable with it. I think that we're conservative on the cost, as I said. On the volume side, we still have some improvement to accomplish, so we've decided to leave it alone in the aggregate, as far as the overall EBITDA outlook looks, but you're right to look at the cost, and say, "Gee, it appears conservative."

Thank you very much.

Your next question comes from the line of John Rex of JPMorgan. Please proceed.

Thanks.

Just picking up and continuing on the cost commentary that you just gave there. Want to focus particularly on the other op expense line.

When you think about some of the elements you said that were running at lower levels than you expect for the full year, can you help us size -- if we're jumping off from the absolute dollar level that you reported in the 1Q, what do you think should be more normally -- a more normalized quarterly run rate for that category when you think about some of the elements you just described.

We'll have Biggs answer that question.

Well, to be clear, there's nothing in the quarter which isn't repeatable. I mentioned malpractice expense, the fact that it could go up. We're very conservative with respect to that point. However, it is possible that it will stay at a very low level throughout the year.

Just difficult to forecast. So I want to resist the temptation to try to create some new run rate and suggest that empirically there's a number in there which is what you should multiply times four to get to a full year estimate, because I think that it just doesn't quite work that cleanly.

You wouldn't spike out anything all that unusual? Let's take malpractice and set that difficult to forecast. Is there any other item you want to spike out and say unusually low in the Q? Or ex-malpractice, is this a decent run rate to be thinking about the stepping off here from the 1Q?

I think as I said, everything is repeatable. There was good cost performance across the board. If you look at everything from utility to contract labor expenses, everything was running well. We managed very effectively all of our efforts over the last couple of years to fine-tune; our cost management practices were evident.

I don't think there's anything else that I would pick at and say gee, there's a single event which would unwind or some trend that would unwind. Malpractice is the single largest one in which there's -- it's relatively low in the quarter. It could stay low. But, for the sake of the forecast, we haven't predicted that. And then HIT expenses will go up over the remainder of the year as that's a more back-end loaded effort.

Appreciate the share data that you gave, the market share data. Just want to be clear on that. Was that all-in share or was that managed care volume only?

Go ahead, Steve.

That's all payers. It's not possible for us to really get the universe, specifically, of the commercial managed care covered lives in utilization so we use all payer data.

That makes sense.

Do you have a sense, it would seem like just given where the volumes are running that there has been a share loss on the commercial side, and I know this is going to be way more of an art than a science, but if you could think about just dis-aggregating the economic impact in your markets from what you think the share loss impact might be when we see the commercial volumes where they're trending?

This is highly speculative, but if we look at covered lives, from Q1, '09 through the end of Q1, 2010, there's about a 2.8% decrease in commercial managed care covered lives. If you couple with that not only the decrease in covered lives, but the utilization rates of those covered lives that still have commercial managed care coverage, then you would have to say that our losses are pretty much about what the shrinkage in the coverage and utilization is; and, therefore, I would come to the conclusion we're not losing commercial market share in most of our markets.

So your expectation right now would be a stabilizing economy would at least bring you back to a more flattish performance on the commercial side? Is that all it would take to get there? Or to stabilize in those numbers? Or is it more so you have to achieve some progress on the physician recruiting targets also?

We've got to do both. You know, first of all, you have to have job creation, get the enrollment numbers up. Presumably there's some pent-up demand when people become re-employed and reinsured again. And then, of course, the physician -- all of the efforts that Steve talked about earlier, but on the physician side, are incredibly important.

I'd give you one leading indicator to look at and while our outpatient surgeries in aggregate across the Company were down, in three of the four regions those outpatient surgeries were up for the quarter and outpatient surgeries are frequently more elective surgery and that might be an early indication of the consumer deciding to move forward and have those procedures done.

All right. And I guess if I was taking the commentary you gave on your March and your April results, assuming that continues and a lot can happen, but would your expectation be that the 2Q should show meaningfully better commercial volume results?

It's too early to make a prediction like that.

Okay. All right. Thank you.

Your next question comes from the line of Doug Simpson of Morgan Stanley. Please proceed.

Hi. Appreciate you taking my question.

Maybe just to flesh that out a little bit -- if we try to strip out the cyclical factors and just think about continued benefit buydowns and the pricing activity you've seen, how would you set out a three year trend line for commercial volumes, if you could isolate some of the shorter term dynamics?

I'd say it's impossible to answer that question. It's probably a question more appropriate for somebody following managed care, one of the managed care companies, but really hard for us to have visibility into that.

Okay.

And then just to follow on the comments on the commercial volumes, are you thinking about potential -- looking into the second half of this year as people start to hit the 18 month limit around the July, August time frame for the COBRA benefit, is that something we should be thinking about in the second half of the year for any impact on volumes? Is that something that would show up or does it not really move the needle.

We've been asked so many times about COBRA and as you realize when patients come into our hospitals they either have insurance or they don't, we don't know if they've obtained that insurance under COBRA.

I suppose that's just an expression of opinion. Seems to me that COBRA benefit has become pretty popular and is on the verge of becoming an entitlement.

We also have tried to estimate the effects. And although we don't have empirical data based upon statistics provided by managed care payers and others, we don't believe it's had a significant impact on us. That could prove wrong, but we don't believe so.

I know -- is there any directional commentary just in the second half cash flow seasonality, just as we're thinking through the models?

Well, the most significant element of cash flow seasonality is that in the first quarter we have a big usage in working capital related to the payment of 401-K, our incentive compensation plans and the normal paydown of payables that occurs after having it build-up at the end of the year.

That effectively reverses itself over the remainder of the year. So if you look at our cash walk-forward you'd see that working capital for the next three quarters is expected to be a significant source of cash.

Okay. In each of the three quarters?

Yes, but it, particularly, builds up I think in the fourth quarter.

Okay.

Some of the things like incentive comp, 401-K build more or less, over the course of the year, but we talk about payables growth -- that's more of a fourth quarter activity.

Okay. Thanks.

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

Hey, thanks. Good morning. I guess I'll just keep it to one question in the spirit of staying underneath the hour mark. But --

Get with the program. Thank you, Whit.

That's right. You've alluded recently to me to what seems to be a more aggressive posture with regards to outpatient investments and service line development. Trevor, could you talk a little about how you're thinking about end market acquisitions now and how important that is to your overall strategy going forward?

That's a very timely question because actually last Friday we closed on an outpatient acquisition, outpatient center acquisition in Nacogdoches, Texas. So acquiring outpatient centers is a key part of our outpatient development strategy.

We are taking a more aggressive position, at least in terms of activity, in looking at inpatient acquisitions. We're a little reluctant to get involved in these acquisitions I might characterize as turnarounds where you've got a system in distress, it's bleeding, and a lot of capital and some time is required to turn it around.

We've at least made it clear to brokers who are involved in the traffic of these types of transactions that we are people that they should talk to about it. We find the outpatient segment more fertile opportunity but obviously small dollars and a smaller impact.

Okay. And maybe any way to maybe sort of size up expectations of maybe what we can expect to see over the course of the next 12 months or so?

I don't think so at this point. I've always been reluctant to give expectations around acquisition pipelines because it can put undue pressure on the people inside the Company to try and make acquisitions work that otherwise we shouldn't make. But, I think you can expect us to announce and disclose them as we do them.

Thanks a lot, guys.

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

Hi, good morning.

Just trying to get a little more behind the strong pricing. Is that truly all pricing or was there some acuity in there as well?

It's clearly both. We do have strong pricing increases, result of all the negotiation that have taken place over the last couple of years, but, in addition, it is a fair amount of acuity in the quarter too.

You look through the remainder of the year, we wouldn't expect the same year-over-year increase in per unit revenue that we had in the first quarter on commercial, but it's still expected to be favorable and in line with last year from a negotiation standpoint.

What was -- for example, what was your Medicare case mix in exchange quarter-over-quarter?

It went up a few percent.

So if you had to guess, it is 60/40 price acuity? 70/30? 80/20? 50/50? Just some ballpark number.

I don't have the exact stats here. I don't want to guess.

I want you to guess, though. What about what I want?

Well, we always consider that.

I know. That's what you wake up thinking about doing. Okay.

And then the second question, just kind of going back, I'm always interested in when companies talk about things for a while and they try things and to see how they worked out. I know you had this big program under an old regime to engage these [splitter] positions and you also had a big -- you were earlier than most in terms of focusing on quality. So now that we're kind of three to five years beyond that, can you look back on that and say what worked and what didn't work and how we should think about it.

I'll ask Steve to answer that but we're running out of time, so you've got to make it brief.

The short answer, John, would be we're very happy we focused on quality. We continue to drive on quality. We're trying to improve patient safety.

We've been continuously disappointed that we haven't been rewarded with both hard steerage and enough premium, even though we're getting incentive payments from commercial payers today, for the effort that we put in, but we continue to believe long-term it's the right strategy.

With respect to our physician relationship program, we're continually refining that. We've recently changed the incentive comp of the PRP representatives, the organization of that comp. We're improving their targeting on a monthly basis. And we continue to believe that will pay dividends and we're confident in those strategies.

Thanks.

John, just to be clear on your earlier question, this morning I did wake up wondering what you and everybody else is going to ask.

Thanks.

And your last question comes in from the line of Justin Lake of UBS. Please proceed.

Thanks. Good morning.

Just a quick follow-up on some of the commercial questions. I was wondering if you could -- you talked about the disparity between price; there obviously mix is improving. Could you talk about the differential between elective admissions or schedule admissions versus admissions coming through the ER on the commercial side and how that might have changed?

Steve, you want to take that?

I think the short answer would be, Justin, that we've seen weakness in our elective admissions and it seems to permeate preferentially the commercial line as you might expect with deductibles and copays and people not wanting to miss work, their elective surgeries on the inpatient basis would be down.

On the other hand, Medicare elective admissions are not down significantly. Those people have annual copays, deductibles, that don't change dramatically year for year, and if they're on fixed incomes, neither do their incomes.

And does the average acuity of an elective admission, I would assume is probably lower than something coming through the emergency room? Would that be driving some of the mix shift?

That's generally correct.

Okay. So is there a way to think about that from a market share standpoint?

I would assume that the market share of emergency admissions is less tied to physician recruitment than your capital spending, things like that, what others are doing in the market, the ambulances come to the closest hospital rather than an elective procedure. Is there a way to think about that from a market share perspective and relate it versus the economy?

I'm not sure you could really interrelate those variables and draw a market share conclusion from that, Justin.

Okay. Great. Thanks a lot.

Okay. Thanks.

I'm sorry we weren't able to take everyone's questions but we were determined to leave this call at a one hour time length. If you have further questions, feel free to call us. Also, I would like to remind everyone that we will be in New York next week presenting at the BofA conference and we'll look forward to seeing many of you there.

Operator, this concludes the call.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.