Tenet Healthcare Corp (THC) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2010 Tenet Healthcare earnings conference call. My name is Jeff, and I'll be your Operator for today. At this time all participants are in a listen-only mode. Later we will facilitate 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, Mr. Thomas Rice, Senior Vice President of Investor Relations. Please proceed, Mr. Rice.

Thank you, Operator and good morning, everyone. Tenet's Management will be making forward-looking statements on this call. These statements are based on Management's current expectations and are subject to 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 question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time I will turn the call to Trevor Fetter, Tenet's President and CEO. Trevor.

Thank you, Tom and good morning, everyone. Well, I won't blame you if you write reports saying that this is a noisy quarter. In summary, our earnings number was huge and we're raising the bottom end of our 2010 outlook. The volumes were soft and the EBITDA is flat to 2009 if you make appropriate adjustments. We generated over $900 million in net income due to the accounting recognition of the value of our tax loss carry forward. Biggs will explain this further, but the key point is that while the existence of the NOL has been well known, it should be more tangible to investors now that it's on the books.

Looking beyond net income, we were challenged by soft volumes in the quarter. We reacted to a particularly weak July by implementing a reduction in force in August. The impact of this action to reduce costs along with improved volume trends after July led to a positive earnings trend in the quarter in which EBITDA grew steadily from July to August to September. It's worth noting that we faced a very tough comparison this year as adjusted EBITDA was up 50% in the third quarter last year. Once you allow for year-over-year variability, our longer term EBITDA trend remains strong. You can see the variability and the clear long-term trend demonstrated on slide four. Clearly our growth has been very strong, but not as steady as I'd like.

When you make your assessment of our growth in EBITDA in the quarter, please consider the items on slide five. The third quarter of 2009 included three favorable items contributing a total of $20 million. We called out these items on last year's third quarter call and nearly all of you noted them when assessing our performance. In contrast, this year's third quarter includes items with a net unfavorable impact of $16 million. In total, these items created a $36 million unfavorable swing from the third quarter of 2009 to this year's quarter. Net of these items, this quarter was essentially unchanged.

As I mentioned earlier we're raising the bottom end of our outlook for 2010 EBITDA to a new range of $1.050 billion to $1.1 billion. This is the second time this year we've increased one or both ends of the range. Volumes were certainly weaker than we originally anticipated, but this has been offset by stronger pricing, enhanced acuity and excellent cost control. We're also benefiting from the California provider fee being larger than we forecast and health IT spending being less than we anticipated.

Soft volumes were a dominant theme across the industry last quarter. So I'd like to give you some color on our experience. The overall takeaways that the volume declines were contained to a small number of hospitals and once again a single service line. OB accounted for a full third of our volume loss.

Total admissions declined 3.5% and commercial admissions declined 8.6% in the quarter. July was by far our weakest month for patient volumes. The trend was more encouraging in August and through mid-September. Through the first 28 days of October, commercial admissions trended slightly better than in Q3 but total admissions were slightly weaker.

As you can see on slide seven, outpatient visits were down 2% in the third quarter. Emergency department outpatient visits were down 1.7% in the quarter, but just over 70% of that decline is due to a reduction in flu so non-flu ED visits are basically flat year-over-year. Outpatient surgeries were up modestly increasing by 0.1% and adjusted admissions were down only 1.8%.

The volume losses this quarter and this year have been confined to a small number of hospitals. In fact, just seven hospitals comprised more than 70% of our total admissions declines in the third quarter. So while these seven hospitals caused the majority of our volume losses, the other 42 hospitals in the aggregate are performing better than the industry average. The seven hospitals are widely dispersed. There are two in Texas, but they're not in the same market. The other five are each in different states. Interestingly although California is challenged by extremely high unemployment in some of our markets, none of our California hospitals are among the seven.

There is no single theme for the volume losses at these seven hospitals. One of the hospitals is having a solid and growing year but faced an extremely tough comparison on volumes in Q3. Another one lost unprofitable volume. Those two plus three others grew EBITDA significantly despite their volume losses. The two other saw challenges with their physician channels. These are instances where physicians have gone into direct competition with the hospitals or where competing hospitals have engaged in very aggressive and sudden physician employment strategies. No matter the reason for volume declines, we are responding appropriately and we believe that we are already turning the losses around. In October, in these seven hospitals while still down, the volumes were down by a lower percentage than in the third quarter.

Turning to service lines, I already mentioned that a third of the total volume decline was in OB. Looking beyond OB to some elective service lines, I'd like to share some interesting insights with you. As we are deep into the recession, it's very clear that patients who have a significant personal financial responsibility are behaving very differently than patients who don't. We've known all along that this was driving reductions in our commercial elective surgical volumes, but let me give you some facts about orthopedic surgeries as an example.

If you look at slide ten, you'll see that total admissions for orthopedic surgeries declined by 2.5%. Commercially insured orthopedic surgeries declined by 9%. Orthopedic surgeries for all other patients, most of whom were covered by Medicare or Medicaid, actually increased 0.2%.

The same pattern is true with spinal fusions. Commercially insured spinal fusions declines by 160 admissions, or 15%, in the third quarter. But noncommercial spinal fusions increased by 17%, or over 150 admissions in the quarter. Since the same physicians are doing these surgeries for both payor classes, the loss of commercial volumes and the growth of noncommercial volumes suggest this behavior is being driven by the patients, not the physicians. We believe this patient behavior is largely related to economic uncertainty on the part of the patients, commercial enrollment losses and rising co-pays and deductibles for those who remain insured. Again on slide 10, you can see this pattern holds true across several service lines that we would consider as elective and easy to defer.

Slide 11 illustrates the when a procedure is harder to defer, like in the case of OB, the changes in volumes of the commercial and noncommercial populations are very similar.

Despite the challenges to volume growth, favorable pricing and acuity continue to drive a stable picture for revenues. Commercial pricing remains particularly strong. We also had a 2.4% increase in commercial acuity. The result was positive commercial revenue growth of nearly 1% for the quarter. Collectively, this helped us generate adjusted free cash flow of $53 million in Q3 bringing year-to-date free cash flow to positive $74 million.

We made a lot of progress on other fronts in the quarter. We continued to improve and derisk our capital structure pushing out the majority of our 2013 maturities to 2020 while retiring $229 million face value of debt. This brings our total debt slightly more than $4 billion with no meaningful maturities for five years. We also entered into a new $800 million credit line with new flexibility with regard to our capital allocation options including lifting an existing limitation on stock repurchases.

Earlier this year, we drew your attention to the seven items on slide 14 which we believe can drive significant margin expansion in earnings growth over the next few years. While some of these items depend on a recovering economy, three of the initiatives, outpatient, the Medicare performance initiative and Conifer were more directly under our control and less dependant on an economic recovery.

Just walking down the list for a minute, our newly acquired outpatient centers are already coming online. We expect to have invested about $70 million in outpatient acquisitions by the end of 2010 and believe there are enough great opportunities that we could do that again in 2011. We anticipate these acquisitions will add $100 million to $150 million to revenues in 2011, and given the much higher margins in this business contribute as much as $30 million to $40 million in 2011 EBITDA.

Turning to MPI, we are very much on track with our 2010 objective of a $30 million incremental EBITDA contribution. While we have not yet completed our MPI plan for 2011, our preliminary view is for another $30 million. Conifer will take longer to gain visibility but we remain very excited about it's prospects. Conifer's contributions from outside clients to 2011 EBITDA growth will exceed $10 million.

Our healthcare information technology initiative will again create incremental expenses in 2011, and as previously disclosed we are not planning on a positive net financial contribution from the initiative prior to 2012. Earlier last month we went live at four hospitals and the rollout went smoothly. We're going live at an additional three hospitals this month. In addition, we continue to achieve solid commercial pricing that's consistent with the trends of recent years. To make major progress on margin expansion and EBITDA growth, we need volume growth and to go back towards pre-recession bad debt expense levels. But it's still clear there is much we can achieve even in the absence of recovery.

So to wrap up, I believe we've demonstrated once again that we have the appropriate and effective leverage to pull in the short term to keep this on track relative to our longer term performance milestones. I also believe our long-term growth strategies have us well positioned to face the myriad challenges that 2011 will bring. And with that, let me turn the floor over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Trevor and good morning, everyone. The biggest item impacting our net income for the quarter is a recognition of the tax benefit or our net operating loss carry forward. This recognition resulted from our reversal of the previously established valuation allowance and added $981 million to our net income, or $1.75 per diluted share. Under Generally Accepted Accounting Principles, which arguably are conservative on this point, and in recognition of our sustained and sustainable return to profitability, the realization of this tax benefit has become sufficiently likely as to require its recognition in our financial statements. Given the conservative criteria applied under GAAP, this makes a strong statement about the expectations of our future profitability and the value of the NOL.

As results of this recognition, our income statement tax rate in future quarters will approximate a normalized tax rate of approximately 40%. From a cash perspective, however, we will continue to benefit from the tax shield and our cash tax payments on future income will be primarily limited to state taxes and will continue at the low level of recent years. They will remain low until our loss carry forward is fully utilized which is still a number of years out.

The biggest item not impacting either net income or adjusted EBITDA in the third quarter was the $64 million net receipt of revenues related to the California provider fee. Due to delays in a very complex approval process, this materially favorable event was not recognized in the third quarter. The portion of the plan related to direct Medi-Cal payments was approved after the end of the quarter with the managed care portion still pending. We had expected that up to $55 million would be recognized in the third quarter. This delay has no effect on full year income but will cause some of the cash receipts to slip out of this year into next which we estimate at a net $36 million.

Looking forward to next year, the California provider fee may be renewed for a half year and a new fee in Pennsylvania worth approximately $25 million is in the process of development. Other states are working on these types of arrangements. Just as food for thought, if you put the normalized 2010 value of the California provider fee at $37 million, the Pennsylvania fee and a partial extension of the California fee, could more than replace that. So you should not think of the revenue from the California provider fee as being entirely nonrecurring and looking at next year. From a cash basis, the cash received from provider fees could actually go up next year.

Adjusting both quarters for prior year cost reported adjustments, revenues grew slightly in the third quarter as a result of strong commercial pricing and case mix offset by adverse payor mix and aggregate declines in paying volumes. As in the prior quarters of this year, case mix on commercial managed care was strong relative to last year reflecting about a 3% increase. As I said in last quarter's comments, this increase in acuity has to be considered in understanding the economic effect of lower volume.

Our overall pricing picture remains positive. Even with the commercial volume declines we experienced in the quarter, commercial pricing gains were sufficient to drive growth up 0.9% in commercial revenues in the quarter. Because of the payor mix shift however, net inpatient revenue per admission increased by only 1.1% and net outpatient revenue per visit increased by 5.6%. The strong increase in outpatient pricing reflects the loss of H1N1 volumes from last year, which had generated lower revenues per outpatient visit. The absence of flu volumes in this year's third quarter volume drove average pricing higher. Once again this demonstrates the necessity of understanding the acuity in patient mix when assessing the economic effects of volume fluctuations.

While I'm on the topic of pricing, I will comment that we continue to have very good visibility with regard to our forward pricing. At this point, approximately 80% of our commercial contracting is complete for 2011 and 40% for 2012.

Turning to costs. Although the benefits weren't fully visible in the third quarter, we successfully took action to flex our cost structure. As Trevor, mentioned July's volumes were particularly weak. We responded very quickly to reduce our staffing and implemented a significant reduction in force in August. We incurred couple of million in severance cost as part of this, but this August action left us well positioned for the balance of the quarter. Those cuts should also have full visibility in our fourth quarter.

In addition, we have delayed our annual merit increases for the general population from October 1 to January 1. This takes us a step closer to timing our merit increases for all employees in the April time period where they used to be. Result of these actions are immediately evident in our internal measures of productivity which looks at FTEs per adjusted average daily census. Despite the soft volumes in the quarter, this productivity measure actually improved in the third quarter as FTEs per adjusted average daily census declined in September by 1.2%.

Supplies costs were essentially flat in the quarter. On a per adjusted patient day basis the increase in supplies cost was 2.6% as adverse operating leverage and the increase in acuity offset the effects of our supply cost initiatives.

The cost we recorded within other controllable cost line were more of a challenge. Many of the costs recorded under this heading are more heavily fix or semi-variable in nature and as a result are more difficult to flex in response to soft volumes. We also recorded incremental expense from items whose actuarially determined impact is adversely influenced by declining interest rates.

While malpractice expenses increased by only $1 million relative to last year's third quarter, the decline in interest and therefore discount rates added $11 million to malpractice expense in the current quarter. Combined with an increase of $3 million in workers comp expense, lower discount rates added $14 million to operating expense in the quarter. This discount rate adjustment should be considered unusual at this point given the low rates we were already seeing on US treasuries, and can be expected to more than reverse itself in the future when interest rates rise to normal levels thereby creating earnings upside of up to $40 million at some point in the future.

In addition, we recorded an incremental $4 million in HIT expense. As Trevor mentioned, we successfully went live on the first phase of these systems at four of our hospitals in the month of October. And we now expect the incremental effects of these expenses to be down to $11 million in 2010. We expect this incremental expense to increase in 2011 prior to being offset in 2012 by the recognition of federal incentive payments. This increase is not a deferral of 2010 expenses but is reflective of an increase in the number of implementation in 2011.

Our bad debt ratio declined to 8.3% in the quarter, a 20 basis point decline relative to 8.5% a year ago. This decline includes the recurring benefits of favorable Medicare bad debt recoveries as well as declines in uninsured volumes. We view the size of this quarter's Medicare bad debt recovery is representative of ongoing sustainable impacts that can be expected in future quarters.

We had $398 million in cash and cash equivalents at quarter end, a decrease of $313 million from June 30. The largest driver of the cash decline was use of $274 million to reduce debt. Cash provided from continuing operations was $160 million and adjusted free cash flow was $53 million after capital expenditures of $107 million in the quarter. In the third quarter year-to-date, our cash from operations has been held back by lower levels of accounts payable than in the prior year. Some of this is due to the timing of expenditures overdrafts and dispersements. We have not changed policy or contractual arrangements however, and we expect payables to expand again by year end.

Subsequent to the end of the quarter, we completed a sale of a number of our Florida medical office buildings, generating cash of $46 million. As a part of the sale, the buyers committed to certain capital improvements to the facilities which will benefit our physician tenants. These MLBs had immaterial annual rents and EBITDA. We continue to actively market additional MLBs and we believe a number of these transactions could be completed in the next few quarters. At this point, we have other MLB sales contracts pending worth approximately $50 million, but in real estate nothing is done until it's closes so it is not reflected in our outlook.

Turning to our outlook. We have raised the low end of our outlook to a new range of $1.05 billion to $1.1 billion. We raised both ends of the range on pre-tax income reflecting lower depreciation and interest expense. Our revised assumptions are detailed on slide 24. These revisions include the lowering of our volume and revenue estimates which are tied to related reductions in our cost estimates for the balance of the year.

There has been speculation that volumes will grow in the fourth quarter on more than a seasonal basis due to the effects of copays and deductibles. At this point we're going to be conservative and not count on that in our outlook. The walk forward of cash from September 30 to December 31 is provided on slide 25 breaks down fourth quarter cash flow into its major components.

It is too early to give an outlook for 2011, but I do not think it appropriate -- or I do think it's appropriate, excuse me, to give a little balance to what the headwinds and opportunities are going into next year. First, the biggest challenge remains on the volume side, but some of the effects of the economy and flu should anniversaried by the end of this year. Economic stability followed by recovery would presumably create upside. Second, we expect a full year benefit on the outpatient acquisitions we are completing in the second half of this year and a partial benefit of those we are targeting for next year.

Third, we're already seeing improvement in the yield on our physician additions the last couple of years and we expect expansion of that benefit in 2011 and beyond. Fourth, commercial pricing is almost completely negotiated with reasonable system price increases expected next year. Medicare all in is basically flat as outpatient increases offset inpatient decreases. I've already talked about a state funding and potential new provider fees, with the 2009 retroactive portion of the California provider fee being the one element most challenging to replace.

And finally on the cost side, we will increase our investment in our physician base and HIT both of which will yield improvements for the future. And we will continue to drive on our Medicare performance and related initiatives to reduce length of stay and supply costs.

In the aggregate we will continue to drive toward industry margins. We have confidence in the path we have laid out. The only gaiting consideration and what the near term timing and slow up of progress is going to be is the degree of economic headwinds we must offset.

On the positive side for 2011, we expect to drive value in outpatient investments, physician based initiatives, commercial pricing and the Medicare performance initiative. The big potential near term negative, longer term a positive is as I just said the effect of economic conditions. It is not clear and therefore remains subject to continuing evaluation by us as to what extent economic conditions will offset the net positive drivers of growth in 2011.

So to summarize, the value of our NOL carry forward has been confirmed from an accounting standpoint. We have raised our outlook for EBITDA at pretax of net income for the year. We approved cost efficiencies in the quarter as we were able to react quickly to significant volume declines in the first month of the quarter, this will be fully visible in the fourth quarter. Free cash flow came under pressure due to the timing of dispersements and rising CapEx, but because of the timing effects on accounts payable will reverse themselves, we have retained our free cash flow outlook for the year.

Pricing continued as a source of strength. Commercial case mix remained favorable compared to the prior year. California provider fee has been partially approved with full approval expected this quarter. And one last point, from a volume impaired mix standpoint this was the weakest quarter we've experienced, clearly reflective of the economic headwinds. However, the fact that we held earnings flat on a normalized basis in even this harsh environment demonstrates that we are well positioned to grow earnings as the economy moderates and/or as our volume initiatives yield increasing results. Let me now ask the Operator to assemble the queue for Q&A. Operator?

(Operator Instructions) Our question line comes from the line of John Rex with JPMorgan. Please proceed, sir.

Thank you, really appreciate all the detail you gave on volumes and analysis there, it's great. And just the issue here for me is just -- the-- when we look at the share-- the erosion in commercial. And it's just been persistent now over the past many quarters in terms of actually kind of seeing accelerating losses there. So my question is it looks like you're losing share when I compare it to what I'm seeing from others and then when I even think about I'm seeing as kind of more stabilizing trends and just commercial coverage broadly. So can you tell us how you look at that in terms of potential share losses that you might be seeing in your markets?

Yes, John, this is Trevor. It's a good question. And I just-- but I have to comment first, I'm going to turn it over to Steve Newman because we've done extensive analysis of this share question. But I first would have to make the comment that it is very difficult to compare the commercial statistics that we've been disclosing in any kind of context to the industry at large or even the peer companies because you aren't getting that same type of disclosure. So--- not that everybody should do it and not to say we don't regret starting with the disclosure, but you really can't look at these commercial numbers and draw any conclusion about share from them. Now having said that, we've done a lot of work on share, so I'll ask Steve to comment on that. Steve?

John, I think it's an excellent point and we've a great deal of evidence that we're not losing commercial managed care market share except in the markets of the hospitals that Trevor mentioned in his comments. Our evidence comes from three separate sources. First, our statewide all payor databases. The second, our large statewide Blue Cross plans where we have significant penetration in those markets. The third is a review of our market share with three of the largest national commercial payors. In summary, these studies all suggest, except in a few isolated incidents, our commercial market share is stable.

And I think we-- John we've triangulated on that question, as Steve said there are several different approaches to it, but very hard to do with precision. So this quarter we did something we hadn't done before which was essentially go to the payors who would give us this information to say look this is our change in volume with you in this particular market, tell us because, you have access to it, what is the share change. And it was very reassuring in all cases with the exception of a few where it's clear that we're losing share because there is some new competitor or some different dynamic in the market.

And my follow up being if you look at the seven hospitals that you spiked out, what percent of Company revenues would they represent? I'm trying to compare it so I think about your top seven hospitals and percentage of revenue they represent. You group these seven, where would they fall?

That's a good question. I don't have an answer off the top of my head. They do tend to be some of our larger hospitals. So we have a portfolio that ranges in size but does have some large ones. And I think when you have a quarter where the large hospitals are underperforming on any given statistic it tends to drives the Company in that direction and vice versa. And unfortunately this is one of those quarters and I've seen other ones over the time that I've been with Tenet where the largest hospitals, with exceptions, were moving in the wrong direction.

So these aren't our seven largest hospitals but amongst them are--

Amongst them are some large hospitals.

Okay. So I'd find some of that in that category then? And does the stabilizing coverage levels, do you think that's going to have impact? Or what you're seeing at this point is it less about erosion and just commercial coverage and more just about avoidance of the care incident at all?

Well you've got the base line high shrinking issues of the commercial enrollment losses that's been running around 4% among the big payors. You start with that and then you add to it some utilization issue that potentially is driven by the economic incentive that are inherent in higher deductible health plans. And now that-- the enrollment losses you could see turn around in a stronger economy. The shift towards higher deductible plans and whatever suppression of [consumptioning] is that could be a longer term trend.

But like just this morning I was encouraged to see in the newspaper the results of the Kaiser survey that among very small employers, coverage is going way up due to these tax incentives that they've been provided with. So among firms with something like nine to 13 employees or five to 13 employees, but the coverage percentage was up by like nine points. I may have some of that a little bit wrong but it was an encouraging trend among the smallest segment of the population, of the employer population.

Great. Thank you.

Our next question comes from the line of Shelley Gnall with Goldman Sachs. Please proceed, ma'am.

Hi, thank you. I guess just a couple of follow ups on the market share question. I'm wondering if is it possible to generalize across your markets those that are hardest hit? So for example, in California, you've got a number of markets where you've got unemployment north of 15% and 16%. And then you have healthier markets like those in Texas that are 8% to 10% unemployment. Is it possible to generalize where you are able to take share and where you just don't see a market share opportunity across all payor classes?

I think it's-- first of all, welcome back, Shelley.

Thank you.

Okay, so hard to generalize. And one of the reasons I mentioned that among the seven hospitals generating 70% of the admissions declines [in Northern] California because we do not see in terms of the volume performance of our hospitals a correlation with unemployment. In our highest unemployment markets, we're really not having a volume problem. In the-- conversely where we've seen this physician competition phenomenon that has really created new capacity and a new entrance into a market that's very aggressive, owned by physicians where they have the ability to direct patients, that's in some of our markets with the lowest unemployment or best trends in unemployment. So I would set aside the unemployment correlation.

We've also seen some very strong volume performance in Florida, which is a market that struggled for a long time, and that I think it can be attributed to strong management actions and a market working (inaudible) on business development activities. So you really-- at the risk of having added two paragraphs to my script on this volume stuff, I'm trying to convey an impression that there is not an overall trend one way or another that you can point to or some correlation that it's really more one off issues and that's the way we've had to manage them.

Okay, thank you very much. Just I guess a -- one more quick follow up. Other than the cost shifting that you're seeing from the commercial payors, are there any other specific actions that they're taking to limit utilization specifically on the inpatient side?

Well one thing that's causing a lot of noise in the statistics is this trend toward observation status, which originally was contemplated as something only to be used in Medicare and now it's widely used in the payors. And I think other companies have talked about that. We didn't break it out specifically, but it's of course a contributor to weak inpatient admissions.

Okay, thank you.

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

Thanks, good morning. I guess at first the slides ten and 11 that you offered on the commercial versus noncommercial admission trends very interesting data. Curious if you look back, is the discrepancy between those two payor classes growing or moderating or how would you consider that trend?

Well Tom, being that it's a new slide we didn't really look back on it and don't have a trend for you on that. We've looked for quite a long time at what we would consider discretionary versus less discretionary service lines and have had more pressure in the discretionary. And obviously when you're in a quarter that's as tough as the one that we just emerged from, you dig a lot harder for explanations and this was a very interesting one that came through. But we didn't go back and run it historically. It's actually not that difficult to do, so we could.

Okay, fair enough. And then you mentioned managed care 80% of your contracting I guess are done for next year, 40% the following year. Could you just remind us of sort of the average rates that your expecting? And also maybe more importantly comment sort of on the tone of discussions. I guess there have been some suggestions out there that obviously the managed care environment is getting a little more difficult for the payors. I'm wondering if that's leaking into the tone of conversations with you all?

This is Biggs. First of all to address the rate question. The rates we've negotiated for next year are very much in line with what we've budgeted as negotiated rates for 2010. Ultimately the yield we get on those will be determined by case mix index and any payor shifts between the plans, but the negotiations are very much in line with what we've budgeted and achieved this year from a pure rate negotiation standpoint.

And the tone of discussions as you're looking further out, maybe one, two years out?

As for tone, Steve, you want to add anything to that?

I'd just say that negotiations are taking a little bit longer than they have in the past and we're pushing for more pay for performance to be added to those contracts as we move toward a value based purchasing environment.

And I guess the only thing I would add is I've made an effort to stay close to the senior executives of some of our largest customers, and to remind them that we provide a very good volume, or sorry, value solution for them. We have demonstrated high quality. They assess that themselves, so I don't need to convince them of that. And our price point relative to our competitors in virtually all of our markets is certainly not the highest and sometimes it's on the low end of the market pricing. And typically with a large prominent successful not for profit system leading the way on pricing. So I feel that we are well positioned with the national payors from a value point of view.

We're also exceedingly well positioned when they look at total cost of doing business with us because we have streamlined and automated the revenue cycle process with them so we have lower, they tell us, we have lower than average denials. We have better than average electronic connectivity and we offer a total solution that is, I think very effective as they start to look harder at price sensitivity and narrow networks in their markets. Operator?

Wonderful. Mr. Gallucci, do you have any more questions?

No thank you.

Thank you very much.

He actually adhered to the policy.

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

Hi, thank you. Good morning, everyone. Just I guess to follow up a few thoughts here. I guess the volume weakness is something that and everyone's talking about throughout the quarter. So I don't think that really caught people that off guard. I guess it was just throughout the year with the volume weakness you guys have been able to offset it through better unit pricing growth as well as just cost cutting.

So I guess the question is just as you look back on the quarter, Trevor, just maybe talk about -- and you called out a few things like the discount rate and some of the issues around cost there, but I guess just in terms of the ability to offset the volume weakness and not even just for the most recent quarter but going forward as well, maybe just to go back through and talk about some of the initiatives there. And certainly you have the great slide deck here with that but just to get some more clarity in terms of just visibility around the ability to offset volume weakness.

Yes and I think, Adam you -- in the beginning of your question you touched on a topic that I think is important just to be very clear about in case it wasn't clear enough in the scripts. But we were trying to make the point that although I think the industry-wide volume weakness was well known throughout the quarter, there were plenty of surveys and other indicators that that was taking place. What was surprisingly negative was July. And so I mentioned that July was particularly weak and then we took actions to reduce cost. Of course, those actions couldn't be taken in July, they were take in August and had that effect of creating a positive trajectory in EBITDA from July to August to September.

And as volumes-- the volume losses moderated from July through August through mid-September, then they did turn down in late September, that's the implication of saying that they were strong through mid-September. So I think one thing I would characterize as being unusual in the third quarter, at least for us, was how negative the first month was. And then the fact that although many in the industry anticipated some snap back, and August was encouraging, that that encouraging trend, at least in terms of volume, did not persist through the entire quarter. And then based on our comments about October, it didn't persist into October.

But I think to answer your question about what we can do and how we've been able to offset weak volumes,it obviously is very hard on a month-to-month basis. It gets easier on a quarterly basis and it gets yet more-- easier to accomplish, and I shouldn't use the word easy because it's not easy but it's less difficult to accomplish on an yearly basis. And so if you look at the quarter as a whole, we really overcame a lot of challenge that we had right out of the box on-- in July. But it's difficult to do more in a short period of time. I think we have positioned ourselves well going into the fourth quarter, but again we don't even have the first months of results on that yet.

Okay, great. And just a quick follow up. Just on the unit pricing, the 1.1%, you talked about mix having some impact there. So maybe just to get you to go back through some of that. I guess the commercial piece you talked about but just within the other categories just to maybe a quick update there in terms of -- and I guess, what do you guys think about in terms of a normalized revenue per advent number if you try to clean up some of the noise there?

Well what's normal at this point will depend largely upon whether the OB admissions stay down or not for an extended period. Because one of the reasons why case mix is up is because obstetrics are down. Obstetrics will probably stay down for quite awhile. So I would expect on that basis case mix did not change radically over the near term. As I said case mix on commercial managed care was up about 3%. It was up about 1% on Medicare managed care and up almost 5% on Medicaid managed care. So in most of the categories it was up in the quarter. We'll see, of course, what happens over the longer term, but there's nothing right now that indicates that that would change. So we'll just have to watch it, but I think it's reflective of the economics of today.

Okay.

I'd just point out, Adam that we had a 5.6% increase in revenue per outpatient visit. It's largely driven by increases relatively speaking of outpatient surgery on the high end imaging like CT and MRI.

All right. Thank you very much, guys.

Let me -- I'm going to add a response to I think it was John's question earlier on the revenue from the seven hospitals. We went and pulled the statistic and from a pure numeric standpoint, the seven hospitals are 14% of our hospital count, from a revenue standpoint they comprised 18% of the revenues in the quarter. So a little more heavily weighted than the peer hospital count, but not as I said because it's not all the largest hospitals that are in there, it's not a real disproportionate share of the revenues.

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

Thanks, good morning. In the release you mentioned increased physician employment and I think in the past you've talked about not necessarily wanting to employ. Can you maybe talk about what's changed, your strategy there? And maybe just give us a sense of the base that's employed currently and where that can go?

Steve, you want to take that?

Sure, Ralph, we've done a number of things to affect physician recruitment. First thing we've done is expanded the number of staff focused at hospital level as well as the regional corporate level on physician recruiting. Another thing we've done is we've reassessed our community need and revised the medical staff development plan for each of our hospitals. The third thing that I think we've done that's significant, is we revised the process for targeting redirection of our local physicians. And we've improved that on-boarding process as well as orientation for the successfully recruited or redirected physicians. Finally we believe that this will improve the productivity in the retention rate of the physicians that we've been able to recruit.

Okay. I guess I'm just trying to get a sense of is this sort of in reaction to what's going on in your markets where there perhaps was a reluctance to employ in the past but now you need to because others are doing it and perhaps that can explain some of the weaker volume trends that you've seen?

Well, look, I will be the first to say that I had a particularly bad attitude about jumping into the employment trend, having experienced first hand the disasters of the late 90s when hospitals rapidly purchased practices and employed physicians and lost tremendous amounts of money. But this is a trend that is inexorable, it started with the large most prosperous not for profits. We compete against a lot of those in our markets and we have completely adopted a, I think new and improved way to do this.

So just to go in order of sort of the problems and what we're doing about it, purchasing practices is really not market practice any more, it's employing physicians. So you don't have the problems from the 90s of spending a lot of capital on purchasing something that turns out to not be worth what you paid for it. So it's really hiring talent.

And then in terms of hiring talent, we've become very sophisticated about how to do it and in terms of providing incentives for productivity that we don't experience the next problem that was characteristic of the 90s, which is hiring physicians which essentially was enabling them to retire at the expense of the hospitals. So we're incentivizing productivity. And we've also experienced some churn of the employed physicians based on those who failed to meet the productivity targets leaving and those who are succeeding in the productivity targets staying and enjoying the benefits of that.

We've also been very selective in terms of the credentials of the physicians that we've been hiring. So just as if you undertook to hire a cadre of 200 MBA student, you want to go to the top schools and hire the best students, we're doing the same thing when it comes to physicians.

We're also being very selective about filling certain holes in specialties or building primary care networks where that strategy is right. And then finally rather than attempting to manage all these practices ourselves, we've employed in a joint venture format a practice management company that's an expert in doing this and running them at economic results that are superior to what hospitals generally experience.

So I think all those things together, and I didn't mention the EMR solution that we're offering for physicians, but I think it's a better solution and we probably got started later than we should have and perhaps it's because of historic bias at least on my part against that as a strategy. But we are well into it now and have a very strong pipeline of physicians that we are employing.

Okay and that's helpful. And then just my follow up, wondered sort of revisit capital structure, you talked about sort of refinancing, pushing out debt maturities. Are you kind of happy with where the Company sits from that perspective? Is there anything else you would contemplate, obviously you mentioned share repo in your commentary, just given where the credit markets are and just the overall rate environment?

Well I think I'll answer and if there's anything left Biggs can chime in. But we've-- as I mentioned there are no significant maturities for five years, that's a long time. I don't think it would make any sense to push it out farther. That's actually quite a conservative approach to a capital structure, which I think is appropriate given the risks in the business and the historic leverage that we've had. We've also obviously brought down the leverage ratio substantially. This new credit line offers us a lot of flexibility. We're obviously not commenting today on the potential for share buybacks, but it's obviously something we couldn't even consider prior to this new credit line. So we'll just have to see depending on circumstances what we decide to do there. Biggs, did I leave anything out?

No. I think there's some small amounts of the 2011 and 2012 maturities still outstanding. So obviously over time, if not at maturity, we will retire those in due course. And otherwise respect to capital structure, our big drive is to keep driving on improving free cash flow. Drive up earnings and drive free cash flow along with it and further improve all of the statistics and the ratios.

Okay. Thank you.

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

Thanks, hi, everybody. So maybe I'll just follow onto that point a little bit more. Just around capital and deployment of capital, your-- if you include some value of your NOL you're probably trading just a little under five times your guidance for 2010 on an EBITDA basis. So I guess I'd be curious to hear your thoughts, what kind of assets you can buy that are out there that are more favorable than that type of valuation? So are you seeing any acute care assets that you've commented a little bit more about your interest in getting aggressive on the outpatient side? Maybe just update us generally on capital deployment priorities.

Okay, thanks, and so thanks, Darren. Obviously if you employ a rule of thumb that tells you you should only acquire things that trade at lower multiple than your own multiple, it's very limiting. Based on my comments about outpatient, it appears that we are doing that and we're very pleased the outpatient acquisitions that we're making. I would say that the potential acquisitions of acute care hospitals that would be of interest to us, or of the greatest interest to us, there are certainly more hospitals considering selling themselves or seeking partnerships of some kind. And we're spending more time than we ever had exploring those types of things. I think it's premature to talk about value and whether we would actually precede and vote our capital in that way.

What we haven't been doing, you've obviously noticed, is we have not been competing in the auctions that have been out there for standalone hospitals or hospitals that are distressed or whatever other acute care transactions are out there. I don't think we are necessarily the best potential acquirers for those kinds of things.

Where we have been focused is more in our markets are things that have some degree of synergy where we understand the market, we understand the dynamics and the future trends. And obviously given the uncertainties around healthcare reform, it's something you have to take into consideration when you evaluate the hospitals. So for that reason we've been most focused on the outpatient side. I think that you'll agree since we gave some disclosures on those numbers that those are incrementally very helpful acquisitions for us. We like that business and we'll continue to do that as much as possible.

And then with-- there may be opportunities in the future within our services business, which we're also very excited about. The multiple issue tends to present a barrier there, but we have to keep our eyes open on that as well.

Okay. And if I could just follow up on-- maybe clarify a point you made earlier about the cost savings actions in Q3. I guess just putting some rough numbers on the FTE figures you provided us, Biggs, it would seem like that's about a maybe a $20 million to $30 million type of annualized savings run rate. Is that a good range to work off of for what we'll see in Q4?

Well it's-- as I said, it's 1.2% improvement in productivity. So-- it's probably a little north of that approaching $40 million on an annual basis. Real near term comparing third quarter to fourth quarter, other improvements we expect are on the malpractice and workers comp side where we took the hits in the third quarter for the discount rate, we expect those to not occur in the fourth quarter and possibly will have improvement again in the fourth quarter result of what continues to be good claims experience.

Another thing, looking at the third quarter was, I said there was a couple million dollars of severance cost in there. So we don't-- that was the cost of achieving the reductions and we don't expect that to occur in the fourth quarter of the future. So there's a number of things going on in addition to just the pure FTE reductions to be considered looking at from later this year and on to the future.

That's helpful. Thank you.

And of course we're still driving on the Medicare performance initiative which I said was worth $30 million this year and expect to do a similar amount next year in terms of incremental savings.

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

Thanks. Good morning. Was wondering if you'd just maybe elaborate a little bit more on the line in the slide about the managed care portion of the provider taxes still awaiting approval from CMS and what that involves?

Sure. The way this has approved is in pieces. The fee for service portion of it was a little simpler in that's a-- it only involves the hospitals, the state and CMS and so that approval came first. The managed care portion of this has to flow through the managed care payors and so contracts and structures have to be adjusted in order to allow for that money to flow through the managed care payors. And until that is totally defined, CMS basically withholds their approval on that portion of it. And so it should be seen as largely administrative in our mind and that's why we're counting on the entire $64 million in our outlook. But it is a step that has yet to be completed between the states, the managed care payors and CMS.

Okay. And I guess just does the managed care portion have to be put to bed before the entire plan can take place? Or is it-- should we view it kind of as separate so if by some chance the managed care portion didn't get approval?

Yes, it's happening in pieces and in fact the direct payment portion of it, the fee for service portion, has already been implemented and we've been invoiced and also our receiving funds on that portion of it, which is about half of the total. The other half, the managed care piece, will happen separately. But as I said, we expect it to happen.

Okay. And then one quick follow up, Trevor, I know you mentioned that there wasn't really any data on volumes for October. Any initial thoughts just in terms of anything that might stand out?

Actually I commented on the volumes in October.

I'm sorry.

I'm not sure what you mean by your question.

Just in terms of any particular service lines that look like they've been reversing trend or sort of continuation in trend.

Well it's too early for that. Usually the-- we have the volume data daily and then at the close of the mont, but then to get clean service line and payor data it takes a little longer.

Okay. Thanks a lot.

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

Hi, thanks. Trevor, can you go back and talk about the delay in merit pay, did you say that that was going to be pushed to January, I guess I didn't follow you?

Actually, Biggs talked about it. But I'll just-- let me just tell you conceptually what we decided to do. We had multiple employee populations with an expectation of annual inflation/merit or (inaudible) salary increases at different times in the year. So we've had for a long time a desire to standardize that all at the same time of the year which is really this spring being the best time.

And so given the sort of rapidly decreasing expectations of inflation and also the observations we made of competitive practice declining in terms of the increases that competitors appeared to be giving to people, what we decided to do was to implement the program effective January 1, but to tell people in advance what they would get. So I think it's a very good solution from a cost management perspective. It also administratively will simplify our administration of these programs in the future, and it obviously was a prudent move to save costs in the second half of this year.

Okay, is it-- is there any chance that may be delayed further into 2011? I guess I'm just wondering if that's a concrete start in January or whether or not --

No, that's concrete for January.

Okay. And any other benefit design changes, anything that's meaningful as we look out to 2011?

Not that we are contemplating at this moment.

Okay. And my last question, Biggs, I was just curious if we could get the P&L expense and the cash Cap Ex numbers for your electronic health record spend this year or at least year-to-date and maybe a peek into what those two numbers may look like in 2011?

Okay, I'll do the second part first. On 2011, we're still in the planning process. We've completed as I said four implementations here in the last couple of weeks. We have three more that are going live shortly, among other things, we have to look at that experience what it's cost us. What the lessons learned are as a part of fully defining next year's budget and expectations that we would communicate as part of our outlook. But in any event, in 2000-- but we do expect it to go up, as I said earlier. And maybe that's not so much an increase off of what we originally expected for this year as it is just an increase in where we actually landed for this year. So the comparative number for this year has come down as opposed to saying next year has increased off of what we might have expected before.

This year we're spending around $90 million in incremental spend, it's-- excuse me, that's total spend, it's about $66 million of that is CapEx and about $23 million is expense. And like I said, an expense of $23 million represents an $11 million increase over the prior year.

On the P&L?

We do expect that number in total both on CapEx and expense to go up next year. But as I said it's a little early to give a hard number.

okay. All right. Thanks a lot.

Our next question comes from the line of Justin Lake with UBS. Please proceed, sir.

Thanks, good morning. First question just on the outpatient side. Specifically you looked at that as being an opportunity. Talked about outpatient margins being significantly greater than inpatient. So just wondering if you can give us some color there in terms of the magnitude of the differential between those margins?

Well, I think they tend to be more than double. And the comments that I made in the opening suggest that we're buying these at very attractive multiples and that they very high margins relative to the overall business. And so it's a very attractive form of acquisition.

Are you just talking about surgical centers at this point on the margin side? Because I think we all-- I think it's pretty clear those have margins that are much better than an inpatient hospital or acute care hospital.

Actually, most of what we've been doing is imaging centers. We have bought some surgery centers. But this year not exactly clear how many we'll be able to close. But it'll be on the magnitude of 22 plus-ish imaging centers and three to four surgery centers. So far more on the imaging side.

Okay, great. And then just a little bit of a clean up on some of the 2011 moving parts. Can you give us any specifics on how much of a headwind healthcare IT is going to be next year? And then just confirm, I think I heard you say that the provider taxes would be a $36 million headwind year-over-year.

The-- I think actually -- once again the latter one on the provider fee, the amount of the provider fee attributable to 2009 is what I said was most challenging of the count provider fee and that's actually about $27 million of the $64 million.

Okay.

The amount which is carrying over to next year from a cash standpoint is about $36 million.

Okay, that's where we got those numbers confused. Is there any other kind of provider fees, or provider tax benefit, you're getting this year that you don't expect? So you expect the other $37 million of the $64 million to reoccur again in 2011, or that's how you would expect to guide to?

Well what I said was if you take the California provider fee, the current year portion of it, will be replaced by in part half year extension on California. We would expect, not yet done, but we would expect that plus $25 million from Pennsylvania also not yet done but in works. And the sum of those two, yes would offset the $37 million of current year California provider fee.

That's perfect. And then just the healthcare IT increase year-over-year? Thanks.

As I just said, it's a little early to say. I think that this year we've underrun significantly based upon not as occurring as much in the way of startup costs and also being very efficient in the implementations that we have successfully completed here in the last few weeks. So we've got to assess, if you will, what the -- what that means with respect to the implementation for next year. However, we do have more implementations next year than this year. More hospitals will be in-process. So we do expect the number to go up. It's probably in the say low tens of millions kind of number, not a radical change in overall profitability associated with it. But we just have to finalize that.

So is that like $10 million to $30 million is that-- or $10 million to $15 million?

Well if you get -- $10 million to $30 million would be in the low -- low tens territory--

Got it.

That I referred to. But as I said, it's just-- it's early yet to put a hard number out there.

Perfect. Thanks for all the color.

Our next question comes from the line of Sheryl Skolnick with CRT Capital Group. Please proceed, ma'am.

Good morning, gentlemen. And thank you very much for keeping the call going so I could ask my questions. First I want to compliment you on the extensive diligence you've done on all of the key questions that I would have had about the composition of the volume shortfall and trying to give comfort and guidance and bridging where we are from third quarter, and the difficulties here versus the fourth quarter and in 2011. So it's extremely helpful and I think was necessary to do.

But I'm going to turn to sort of a more conceptual question about the fourth quarter guidance, if I could. If I take out the provider fee anticipated impact in fourth quarter, which I believe you said was $64 million, and I look at that first of all, would it be correct to assume that that would drop 100% to the EBITDA line? And second--

Yes.

The answer to that I think is yes. And then second is if that's case then your guidance sort of implies something on the order of a quarter that's flat on the EBITDA line with third quarter to something that is-- would be up around the sort of 217 to 280 in order to achieve the $1.05 billion to $1.1 billion, if my math is correct. So if I look at those numbers, I'm still not sure how you get to the upper end of the range. So my question then becomes what really has to go right for us to be optimistic that you can get back on the path of exceeding not only consensus but achieving the high end of your guidance or even exceeding it? And then I have a follow up.

Okay, Biggs are you going to take that, or do you want me to?

No, I'll try to answer the first pass. Obviously we taken cost out, we talked about that. And if you look at this from a projected patient day basis, in Q3 our experience was around $2,050. Q3 year-to-date was $1,995. So clearly Q3 jumped up. Q4 we look at being back around that $1,995 kind of level. So based upon the reductions in staff, the improvements forecast on med mal, severance not recurring, as we already talked about, some other initiatives to drive down cost, we think we can get back down to that $1,995 kind of level. So that's at the middle of the range. And of course there's opportunity to go beyond that to help drive towards the upper end of the range as well.

From a revenue standpoint, the-- we've just looked at what's real recent experience on volumes. And as I said, we didn't presume any kind of a hockey stick in the last two months of the year. But from an overall admit standpoint at the middle of the range we could be at a negative 4% to 5% and still hit the middle of the range, and commercial still be in that 6% to 7% kind of range that we were at the first half. Once again it'd be at the middle of the range. So those seem like, based on everything we know, still some reasonably conservative positions to be taken as we look at the underlying trends.

So there's opportunity in my mind for us to do better than those both on the cost side and on the volume side. But as you know we didn't take up the upper end of the range because we wanted to stay conservative and not presume that we're going to do better than those and left ourselves, I say, to build a range based upon those stats.

And then-- I mean because all of these questions I think are getting around the point of just for how long is the pattern we'd be seeing in your earnings as well as others, for how long will the cost savings continue to, save the day as it were, as volume continues to deteriorate? I mean that's not an issue unique to Tenet. And I guess the answer to that is nobody really knows. But how much more do you have left on the cost? I mean it seems like you've been doing just about everything you can on that score, you found another 800 FTEs. But at what point do you have to stop doing this?

Well staff reductions aren't the only place we're reducing costs. The Medicare performance initiative is driving costs out. And supply costs were basically flat and had a very low inflationary rate even with higher acuity. So there is success in our efforts there and there will be continuing success. But cost isn't also-- also isn't the only way we're going to drive value even if we don't have increasing inpatient volumes over the near future because we have the outpatient acquisitions driving value. We have our investments in Conifer yielding increasing value. The price negotiations, our commercial are still favorable. Price on government pretty much flat. So there's plenty of things we're operating on to create value besides just driving out cost, but there's more cost opportunity, too.

I would just add to what Biggs said, Sheryl that opportunity longer term is the clinical standardization where we really get in on more and more of the DRGs both inpatient as well as our outpatient care standardize that, eliminate some redundancy, drive down that variable cost and really affect the cost metrics, and something outside necessarily of the salary wages and benefits are direct supply costs. We're also working on length of stay. We're working on re-admission rates as we look at more prospective payments. So there are lots of opportunities to drive on the cost side of the equation going forward.

Okay. And just finally, on your commercial managed care negotiations, we've begun to see some more, shall we say, innovative almost back to the future kinds of tactics at the main street level on the part of some of the managed care companies with their relationships with physicians, with restructuring their contracts for payments, for example United with oncology. We've heard about the potential for some of the companies to have more direct even ownership relationships with providers, physicians, hospitals, outpatients, et cetera to have them do the rationing rather than the health plan, but the health plan gets the benefit thereof.

But are-- is there anything that you can see in your negotiations with the commercial managed care plans that might get be more creative, i.e. contracting for guaranteed volume within a disease or within a procedure or service line where you might be the dominant or best quality provider in a market that could assure you some commercial managed care share in those markets that help you even to take share rather than just to maintain share?

So the short answer is every creative structure that you can imagine and probably more are under discussion. But still, it is today an environment that's all about cost and access and companies obtaining benefits with the sort of least amount friction for their employees and all that. But I think we're well positioned on those creative types of structures because of quality, because of our visibility and ability to understand what it is that we're actually doing in terms of the provision of the service. And then we have this little secret weapon that we've used for decades in California that is a unit that assesses risk and helps us on [compitated] types of arrangements and serves clients beyond Tenet. And so I think we're very well positioned when risk taking enters the equation as well.

That's kind of what I thought. Thanks so much.

Our final question comes from the line of A.J. Rice with Susquehanna. Please proceed.

Hello, everybody. So first I'll ask one that's sort of a long shot. But I think, Biggs you alluded to the idea that people may have been managing their deductibles this year with a weak economy more aggressively and therefore speculation to get into Q4 and you might see some pent up demand as those deductibles hit. I guess my question first off will be, do you guys have any way to measure that? Can you see whether people are taking longer to hit their deductibles this year than they did last year or anything along those lines?

There really isn't any clear way for us to see that. We don't have that kind of visibility as the patient comes in. So--

Okay.

Or as we send the bill to the payors. So not great insight.

I have I heard the theory espoused by payors, that have obviously much more insight, but I don't think there is evidence at least as I mentioned earlier through the first 28 days of October that that demand wave was ready to hit the beach.

Right, okay. Otherwise just a couple quick clean up things here. The $100 million to $150 million in acquired outpatient revenues that you're looking for this year, is that-- is this year in your mind unusual with the-- or with the focus on acquiring thing likes outpatient imaging, do you think you can run at that rate of acquisitions for a couple years?

Well, we said we think we can do it for next year. I mean obviously we've been very sensitive about doing this where we have the ability to put these centers within the hospital structures. So you run out of opportunities just geographically over time. But there are other ones where the sellers-- we've seen some where the sellers initially said they didn't want to sell or their price expectations were unrealistic and their coming back to us now. So that's why we made the comment with respect to 2011, I wouldn't speculate on 2012 at this point.

Okay. And then I'm going to use prerogative as the last person here. I don't think you quantified how much benefit you get from delaying the merit increase, maybe I missed it if you did, for the extra quarter. Is-- how much will that benefit you in the fourth quarter? And then if you could just-- maybe I'd be just curious, when do you guys think you would offer, we're talking around the 2011 outlook a lot, have you given some thought to exactly when you're likely to actually give a formal outlook for 2011?

On the benefit of deferral of the merit increases it's in the neighborhood of $15 million for the quarter. And that would be similar to the numbers we've given in the past when we've talked about what the effect of merit increases were on the fourth quarter when we gave them by example last year.

Sure. Okay.

The-- in terms of when we-- we're giving outlook, I mean our base line is that we will look at results. We complete our planning process otherwise in December, we look at results through December ultimately and sort of re-evaluate and validate our expectation based upon that, and then give the outlook when we release fourth quarter earnings.

Okay , so in February at some

Yes.

All right, that's great. Thanks a lot.

Okay, thanks A.J. and thanks, everybody for joining the call and see you on the next one.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.