Tenet Healthcare Corp (THC) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 and year-end Tenet Healthcare earnings conference call. My name is Jeff and I will 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 risks and uncertainties that may cause those forward-looking statements to be materially incorrect.

Management cautions you not to rely on, and makes no promises to update any of these 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.

The presentation Tenet is making today includes non-GAAP financial information. A reconciliation of this information to GAAP can be found in the appendix to the presentation.

Finally, we note that Tenet will be filing a proxy statement in connection with its 2011 annual meeting of shareholders, and urges shareholders to read these materials once filed with the SEC.

At this time I will turn the call over to Trevor Fetter, Tenet's President and CEO.

Thank you, Tom, and good morning everyone. I am very pleased with our strong performance in the fourth quarter of 2010. As you will see on slide three of the presentation that we posted to our website this morning, we grew adjusted EBITDA nearly 30%. And our EBITDA margin of 12.2% is the strongest fourth-quarter margin we generated in seven years.

We increased our EBITDA margin by 260 basis points versus the fourth quarter of 2009.

For the full year 2010, at $1.050 billion of EBITDA, we achieved the high end of our initial outlook. We accomplished this even without the contribution we had expected from the California provider fee.

Our full-year EBITDA margin was 11.4%, which is the highest annual margin that we generated in seven years. 2010 also marks seven consecutive years in which we have increased EBITDA margins.

Turning to slide four, the primary driver of our strong fourth-quarter results was an improving volume trend. After suffering a soft October, November and December were the best volume months of the year. I'm very pleased that we have seen this strengthening continue into January and February of 2011.

Admissions through last Friday, representing the first 49 days of 2011, increased by 0.2% year-over-year. We achieved this continued improvement in volume trends despite the truly awful weather events that impacted our operations across the Central and Southeastern United States and in Philadelphia for more than a week.

Outpatient visits grew by 2.9%, and paying outpatient visits grew by 3.2% in the fourth quarter. Outpatient visits are growing at higher rates so far in the first quarter. While our recent outpatient acquisitions were key to this growth, it reflected dramatic improvement compared to the 2% decline in third-quarter outpatient visits, whether you factor in the acquisitions or not.

As we described on our January 11 conference call, we expect this strong outpatient growth to continue in 2011, and with the help of additional acquisition activity, we expect it to accelerate even further.

Although we are no longer disposing commercial volume statistics, we are seeing an improvement in both commercial inpatient and outpatient volume trends. A lack of flu volumes in the fourth quarter hurt our admissions and outpatient visit statistics by 30 and 90 basis points, respectively.

Surgery trends also improved with a decline of 0.7% in the quarter, less than half the rate of decline in Q3. And the sum of uninsured and charity admissions was flat in the quarter.

As you'll see on slide six, pricing continued to be a strong contributor to earnings growth in the quarter, and we expect this favorable pricing trend to continue into 2011.

We have good visibility into our commercial book, with roughly 90% of our commercial revenues under contract for 2011, 60% for 2012, and 15% for 2013. This gives us a good balance between locking in attractive pricing and preserving meaningful flexibility should we see medical cost inflation accelerate.

There has been a lot of discussion recently with regard to Medicaid pricing, but we believe we have appropriately provided for this risk in the 2011 outlook that we issued on January 11. We see no need to adjust those assumptions at this point.

In addition to better than anticipated volumes, cost performance, which is noted on slide seven, made a very important contribution to the quarter's results. Our cost performance in the fourth quarter was outstanding. Total controllable costs per adjusted patient day declined by 1%. This included an SW&B decline of 1.5% and growth in supply costs for adjusted patient day of just 0.9%.

Turning to free cash flow on slide eight, for the full year 2010 adjusted free cash flow was positive $92 million. The California provider fee contributed only $9 million to cash flow in 2010.

Speaking of the California provider fee, CMS finally issued written approval for the plan on January 18. As a result, we will record $64 million of incremental revenue and EBITDA in the first quarter of 2011.

As you may recall, we provided our 2011 outlook for adjusted EBITDA in a range of $1.150 billion to $1.250 billion during our conference call on January 11. As you'll see on slide nine, we are reconfirming it today.

Last summer we introduced the seven items on slide 10, which we expect will drive significant margin expansion and earnings growth over the next few years. While some of these items depend on a recovering economy, we made progress on the initiatives that are most directly under our control and are less dependent on external forces, namely outpatient services, Conifer and our Medicare performance initiative. You will see those noted on slides 11, 12 and 13.

Some of our outpatient acquisitions were completed in the fourth quarter, but even so, the less than full-quarter affect amounted to an EBITDA contribution of $3 million.

Additional newly acquired outpatient centers are continuing to come online in the first quarter. We have an attractive acquisition pipeline and expect to invest $165 million in this business in 2010 and 2011 combined.

We anticipate that the outpatient acquisitions we completed in 2010 will contribute approximately $25 million to EBITDA in 2011, with an additional $10 million from the partial year contributions from acquisitions we expect to close in 2011.

Conifer continues to grow as well. Our sales pipeline is expanding and we expect Conifer's non-Tenet-related revenues to double in 2011.

Medicare Performance Initiative is contributing at an even stronger rate than we initially anticipated. We easily surpassed the $30 million in targeted savings we had initially expected for 2010. And while it is too early to increase our outlook number four 2011, I am increasingly pleased with the progress MPI is making, and have no reason to doubt our capacity to meet or exceed our $50 million target for 2011.

Turning to the situation with Community Health Systems, as you know, in December our Board of Directors unanimously determined that Community's proposal of $6 per share in cash and stock grossly undervalues Tenet and is not in the best interest of our stockholders.

In January Community submitted a slate of 10 nominees for election to Tenet's Board of Directors, in our opinion only to advance its goal of acquiring Tenet at an adequate price. There have been no developments in the situation since the slate was nominated, and we remain focused on executing our business plan.

We continue to believe that our growth trends and prospects offer compelling value for investors on a standalone basis. And as always, we are committed to acting in the best interest of all of our stockholders.

To quickly summarize on slide 14, we had a solid quarter and year. Pricing and cost trends continue to be favorable. Our volume trends are improving, and bad debt expense is performing better than initially anticipated. Uninsured and charity volumes are showing early indications of stabilizing.

More importantly, our fourth-quarter and full-year results showed that our positive earnings trajectory remains intact, and that the soft third quarter of 2010 is increasingly looking like an aberration in the longer-term trend.

We remain confident in our strategies and are reconfirming our 2011 outlook for adjusted EBITDA.

Our initiatives in outpatient services, Conifer and MPI are meeting all of their interim milestones. While expenses from our healthcare IT program continued to restrain earnings growth in 2011, this program is also on track and is expected to provide a source of growth in EBITDA beginning next year.

I would like just to make a couple of final points listed on slide 15 before I turn the call over to Biggs. I am proud of what we have accomplished at Tenet and the bright future that is ahead of us. In addition to all of the trends and metrics I just gave you on financial performance, this is ultimately a Company that puts clinical quality, the care of our patients and the integrity of our Company above all else.

These things are hard to measure, but they are measurable. In the area of clinical quality, although no one questions that better quality is good for patients, some have questioned whether it is good for shareholders. We launched our commitment to quality initiative more than seven years ago. Since then, just to use one metric, we have reduced malpractice expense per adjusted patient day by nearly 70%.

In 2010 we achieved our highest scores to date in CMS' evidence-based medicine measures. This, along with our ability to meet other safety, quality and service reporting requirements, enabled us to earn CMS' full 2% annual payment update four 2011. We also earned 100% of the pay-for-performance rate increases from United Healthcare for meeting their 2010 quality standards at every Tenet hospital.

The substantial investment in advanced clinical systems that we are making now will enable us to improve quality and safety in our hospitals, and to earn incentive payments beginning late this year and avoid penalties that begin in 2015 and last into perpetuity.

Our patients and physicians seem to appreciate these improvements. Satisfaction among both groups, which we measure regularly and rigorously, reached all-time highs in 2010.

Finally, we are well-positioned for the future. As part of our ongoing effort to improve clinical outcomes, improve our appeal to payers and position us for Accountable Care, we recently launched new Joslin Diabetes Centers in two of our hospitals. These disease management centers, one at Cypress Fairbanks Medical Center in Houston and the other at Brookwood Medical Center in Birmingham, are extensions of our strategy of clinical integration.

We also recently opened a new urgent care center in a rapidly growing part of El Paso. And while it is still early, volumes and payer mix are exceeding our expectations. And nearly half of the patients who had visited the center in its first two weeks were commercially insured.

We currently operate seven other urgent care centers and plan to open or acquire several more in 2011.

So I am very pleased with how we are positioned at this early point in 2011. And I'm grateful to all of my colleagues across the country, particularly those who work directly caring for our patients, for everything they do. With that let me turn the call over to Biggs Porter, our Chief Financial Officer.

Thank you, Trevor. Good morning everyone. Adjusted EBITDA was $281 million for the quarter and $1.05 billion for the year. Revenues grew by 1.8% in the quarter, an increase of $40 million, as outpatient growth and commercial pricing enhancements offset the decline in paying admissions.

Also as a positive, the effects of adverse payer mix shift were less in the fourth quarter than what we experienced year-to-date.

The revenue story was led by growth on the outpatient side where revenues grew by $39 million. Prior cost report adjustments were unfavorable $3 million in the quarter, as compared to favorable $6 million contribution from PYCAs in 2009's fourth quarter. Adjusting for this unfavorable swing of $9 million, total revenue growth was 2.2%.

Turning to pricing. Net inpatient revenue per admit increased by 1.8% in the quarter, and inpatient net revenue per patient day increased by 2.9%. Outpatient revenue per visit increased 2.7%, reflecting the affect on mix of our strong growth in imaging volumes, which are high-margin, but lower-priced services. This imaging growth is largely the result of our recent outpatient acquisitions.

Aggregate pricing was supported by by the strong managed care contract negotiations and a modest increase in acuity. Our consolidated case mix index of 1.33 increased by approximately 1% from 2009's fourth quarter. Our Medicare case mix index of 1.53 was flat over the prior-year fourth quarter.

As in the prior quarters of this year, case mix on commercial managed care was strong relative to last year, with a commercial case mix index of 1.34, reflecting about a 2% increase over the prior year.

As we have mentioned in prior quarters, we believe this increased acuity has been a function of the economic environment. This acuity shift is largely anniversaried, however, and case mix has been softening in the first quarter of 2011.

Medicare cuts to inpatient pricing, which became effective on October 1, restrained our pricing growth as Medicare revenue per admission declined by 3.6% in the quarter. The Medicare pricing picture was, however, dramatically different on the outpatient side, with Medicare revenues per visit increasing by 5.1% in the quarter aided by acuity shift.

Also on the topic or pricing, I wanted to offer a few comments on the recently heightened investor concern regarding Medicaid reimbursement levels. Texas Medicaid rates have drawn the most attention, in particular, the proposed 10% reduction in provider payment rates for the state fiscal year beginning September 1, 2011.

A number of analysts who attempted to estimate the impact on Tenet by working with the percentage of the beds Tenet has in Texas. This is unnecessary, because we disclose our Medicaid revenues state-by-state.

Including managed Medicaid revenues and direct Medicaid revenues, our Texas hospitals received a total of approximately $175 million in Medicaid revenues, a relatively small portion of which was received from other states, primarily New Mexico.

If the full 10% cut were to be enacted and applied to both our traditional Medicaid payments and Medicaid mangaged care contracts that are tied to traditional Medicaid rates, our annual Medicaid revenues in Texas would be reduced by approximately $9 million, with only $3 million of that impact hitting in 2011.

California has also been an area of intense investor concern. However, the cuts proposed by the governor pertain only to hospitals which have not contacted with Medi-Cal. Tenet has only three non-contracted hospitals that as a result, even at the high end of the proposed cuts, Tenet's potential for an adverse impact is expected to be less than $0.5 million.

Our 2011 outlook, as initiated on January 11 and reconfirmed today, includes $30 million to $60 million in anticipated state reimbursement reductions, which includes risks related to Medicaid rates and state supplemental payments.

Before I leave the subject, I should mention that there are potential upsides as well, which would offset Medicaid funding risk. Those include an increase in the estimated value of a six-month extension of the California fee, a proposal for a second extension of the provider fee in California covering the second half of 2011, and the proposed funding of the Private Hospital Uncompensated Care Fund in Georgia. The Georgia item is recurring, but we have previously assumed it would not be funded again this year. These aggregate to a potential upside of over $40 million.

Cost performance was outstanding in the fourth quarter, with controllable costs declining by 1% per adjusted patient day, and salaries and wages and benefits declining by 1.5% on a same basis. Staffing management was excellent, but the cost decline over last year was driven by compensation decisions. Last year we recorded a discretionary employee benefit award in the fourth quarter and provided merit increases for most employees as of October 1 compared to January 1 for this year's cycle.

Supplies cost also were well-controlled in the quarter. On a per adjusted patient day basis supplies expense increased just 0.9%. On the topic of costs I should also mention the costs associated with our health IT program. Full-year HIT costs where $21 million in 2010, including $11 million in the fourth quarter.

While our HIT implementation costs are expected to continue to rise through 2013, we expect that the revenue from federal incentive payments will more than offset the HIT costs hitting expense beginning next year. These projections are shown on slide 20, which replicates the discussion we provided in early January on this topic.

We saw a meaningful contribution in the quarter from declining malpractice expense. Included in this $21 million decline was a $10 million benefit as higher interest rates reduced the cost to our discounted future liabilities. This fourth-quarter benefit from higher interest rates almost precisely reverses the increase in malpractice expense recorded in the third quarter, which was caused by the low level of interest rates at the end of September.

You'll recall that we drew your attention to this unusual cost item as one of the factors which caused our third quarter to appear somewhat disappointing. If you net the two quarters there is no net impact from the change in discount rate.

Other operating expense per adjusted patient day declined by 1.6%, which included the $21 million in reduced malpractice expense. Bad debt expense was $191 million in the quarter, an increase of $10 million or 5.5% from a year ago. This resulted in a bad debt ratio of 8.3%, 30 basis points higher than a year ago, but unchanged relative to our third quarter.

The increase in bad debt expense in the context of declining uninsured volumes is driven by pricing increases, as well as declining collection rates. As we have said before, we expect the effect of declining collection rates in the current economy to reverse itself as the economy improves. As has been the case for the year, we have also seen an increase in the receivables related to balance after.

Turning to cash. We had $405 million in cash and cash equivalents at quarter end, an increase of $7 million from $398 million at September 30. Net cash from operating activities was $175 million, an increase of $34 million over the $141 million in the fourth quarter last year.

Adjusted net cash provided by operations was $180 million for the fourth quarter, an increase of $21 million as compared to the $159 million in the fourth quarter of 2009.

Adjusted free cash flow used in continuing operations was $16 million in the quarter, a favorable variance of $17 million as compared to the use of $33 million for 2009's fourth quarter. This improvement was primarily the result of a $58 million decrease in tax payments, and a $10 million reduction in interest payments, the latter a result of our debt retirement earlier in the year.

These favorable variances were partially offset by a $47 million increase in working capital and a $4 million increase in capital expenditures. While there are always a lot of factors, the working capital increase was affected by the timing of our volume increases and outpatient acquisitions. These volumes drove revenues up in the second half of the quarter, and therefore drove harder receivables in December. In this case, higher working capital associated with stronger revenue performance is a good thing.

The California provider fee had been expected to have a significant effect on cash in the quarter, but ended up only providing $9 million of the net total $64 million.

For the year adjusted free cash flow was $92 million, an adverse change of $30 million, as compared to $122 million in adjusted free cash flow recorded in 2009. Contributing to this year-over-year comparison, among other things, were non-cash income items in 2010, such as the Medicare bad debt recoveries which will convert to cash in 2011.

Note that we are no longer putting tax payments or refunds from our adjusted cash flow metrics. We believe this is an appropriate time to make this change following the recognition of our NOL in the third quarter. This change will negatively affect 2011 compared to 2010, but we expect will be more than offset by other cash generated from operations.

As I will discuss further in a moment, we expect substantial growth in EBITDA in 2011, but even greater lift in cash from operations.

Also impacting our cash position was the use of $21 million to fund our outpatient acquisitions in the quarter. As a source of cash we completed the sale of a number of our medical office buildings in the quarter, generating cash of $50 million. These MOBs generated just under $10 million in annual rents, and approximately $3.5 million in EBITDA. The sale required a $5 million impairment charge in the quarter.

As a part of the sale of the buyers committed to certain capital improvements to facilities, which will benefit our physician tenants. While a large additional transaction did not move forward, we continue to market additional MOBs.

Turning to our outlook. We previously placed our outlook for adjusted EBITDA in 2011 in a range of $1.150 billion to $1.250 billion. This represents an increase of 9.5% to 19% over 2010.

We accept expect GAAP cash from operations to be in the range of $570 million to $740 million, reflecting a growth of $98 million to $268 million. We expect slightly higher CapEx in 2011, reflecting the HIT initiative. And also expect to spend up to $160 million on outpatient acquisitions and assets acquired as a result of physician employment.

We assumed in the outlook that we use excess cash to retire our 2011 debt maturity when due. Our assumptions on volumes, costs, pricing and bad debt are provided on slide 24.

The burden from HIT expense in 2011 and the upside from outpatient acquisitions are identical to the views we stated on our January 11 presentation.

We have good visibility into commercial pricing, with contractual price increases in 2011 expected to be consistent with recent experience.

Medicare all-in is basically flat, as outpatient pricing increases offset reductions in in-patient reimbursement.

On the cost side we will invest -- we will increase our investment in our physician base and HIT, both of which will yield improvements in the future. We are already seeing improvement in the yield on our physician additions over the last couple of years. We expect expansion of that benefit in 2011 and beyond.

Also, we will continue to drive our Medicare performance and related initiatives to reduce length of stay and supply costs.

Let me now turn to slice 25, which provides a high-level context regarding the quarterly pattern for EBITDA for 2011. We expect our quarterly distribution of EBITDA to be fairly consistent this year with what it has been over the last few years.

More specifically, our seasonal pattern over the past few years has been to earn an average of 28% of our annual earnings in the first quarter. The third quarter is typically our softest with 19% to 25% of annual EBITDA. And the remaining EBITDA has been evenly distributed between the second and fourth quarters.

Last year's first quarter was particularly strong due to high acuity, a relatively strong volume comp, and favorable cost report adjustments. This year there may be a natural tendency by some to put a greater share of annual income in the first quarter than the historical average, because the California provider fee will provide additional strength to the first quarter. However, it is important to realize that we expect significant provider fee income in the remainder of the year, and that the $64 million is not a singular completely nonrecurring lumpy event in the first quarter.

In addition to other provider fees, later quarters will also be helped by the increasing benefit from growing cost savings from MPI and additional outpatient acquisitions as they occur over the year. The net result of this is that we expect EBITDA to be distributed over the course of the four quarters in much the same pattern as historically achieved, without any unusual front-end or back-end loading.

Just as a reminder, as in prior years, the first quarter will be negative from a cash flow standpoint, primarily as a result of the seasonal paydown of high year-end liabilities for capital expenditures, the 401(k) match and incentive compensation. For the full year we expect cash from operations to grow at a level exceeding the growth in EBITDA as a result of some of 2010's earnings converting to cash in 2011, and as we continue to drive cash collections.

2011 cash flow will also benefit by over $70 million in comparision to 2010 for the full retirement of our Department of Justice obligation, on which we made the last payment in the third quarter of last year.

Normal taxes will be in the $20 million range we have talked about previously, which reflects state taxes and federal alternative minimum taxes. In addition, we get one final tax refund on our DOJ settlement payments. And we will pay final settlement on our old audit years on state and federal taxes in 2011, bringing our total cash tax expectations for 2011 to around $50 million. We expect them at around $20 million run rate annually after that, until our NOL is fully utilized as expected in 2014 or 2015.

In summary, we remain confident in our initiatives to drive revenue growth, reduce costs and drive increasingly positive bottom-line free cash flow. The ranges we have assumed in 2011 for pricing, revenues and adjusted EBITDA allow for the residual uncertainty largely related to the recession and other items outside of our control.

Our 2010 performance continued our upward progression and exhibited solid revenue growth, continued commercial pricing strength, outpatient volume strength, reasonably constrained growth in bad debt expense, and excellent cost performance.

2011 should look even better as our initiatives gain incremental visibility, and as cash flow grows due to higher earnings, receivables collections, and the retirement of our Department of Justice obligations.

In addition to the impact of these initiatives, if the volume strengthening we have achieved in the last three to four months can be maintained at a reasonable patient mix, we could have a very good year.

With that I will ask the operator to open the floor for questions. Operator?

(Operator Instructions). Justin Lake, UBS.

The first question just on the Medicaid cuts you talked about. The $30 million to $60 million in Medicaid for 2011 that is in the plan, what would the corresponding impact be to 2012 from that level, once it gets to a full-year run rate?

Well, it is little early to call because obviously there is a lot in play. I think that there is probably an additional above and beyond that maybe in the neighborhood of $20 million of risk to 2012. But as I said, there is still potential upsides as well, so I think that it is quite possible those get offset.

Okay, and then just another question on Medicaid, following up on your Texas comments there. It seems like you are indicating that about one-half of your Medicaid revenues in the state are tied to managed Medicaid contracts, which are subject to direct cuts, is that right?

Yes, because they are not tied to DRG payments, so they aren't subject to the normal course to reductions in DRG reimbursement.

Got it. But if Texas cuts the hospital rates and then reflects that in the rates that it is paying Medicaid managed care plans, are you saying there isn't risk that those plans are going to come back to you at some point and look to renegotiate a corresponding cut in the rate they pay you?

I will say, it shouldn't happen that way, but if you want to consider it a risk, we will say, okay, it is always a risk that there could be a renegotiation, but we will put that, once again, at only a few million dollars of additional risk.

Then just last question on the -- any comments you can give us on the -- I know you're not reporting it anymore, but the trajectory of your commercial admissions in the quarter would be great. Thanks.

I have covered that in the script, Justin. We will be releasing a transcript shortly.

Okay, great. Thanks.

Tom Gallucci, Lazard Capital.

I guess just wondering, Trevor or Biggs, could you discuss a little bit more the volume strength that you talked about or alluded to thus far in the first quarter? I know on some metrics the comps get a little bit easier, so just wondering if you could offer any color on the areas or the mix and the perceived sustainability of what you are seeing early in this quarter?

Sure, Tom, I will ask Steve Newman to give you a little color on that.

Thanks, Tom, for the question. We have seen strength across all the regions of the Company for the first 49 days of the quarter. We have very few hospitals that are negative year-over-year during that time period. We are seeing growth in some of the elective surgeries that we have talked about deferral over the last few quarters.

So I think the strength seems very broad-based. It is both inpatient and outpatient. And we have seen an increase in emergency department visits in the first 49 days with the pick up in flu, but that is really less than 25% of the growth in our total outpatient visits in the first five weeks of the year. So I would say it is very strong, broad-based and very encouraging.

Keep in mind, Tom, that is -- what Steve just said is not adjusting for any factors like weather or anything else. And clearly we all know that that presented some headwind. So those are just the raw stats.

Right. Steve, something you mentioned there, very few negative year-over-year thus far. In the last year or two has your data been skewed significantly by a minority of hospitals that you're seeing get better or is there any further comments you could make there?

Well, remember in the third quarter we isolated 70% of the volume decline on seven hospitals. And that the number of hospitals driving a disproportionate decline in the fourth quarter was reduced to four hospitals. So we are limiting the ones that are performing negatively and broadening the positive performance.

Okay, good. Then could you just remind us on -- obviously you are active on the outpatient side -- on the physician employment, what the strategy is there and your expectations are for this year?

Sure. We will have Steve cover that again.

We have really expanded our physician alignment activities. In the full year for 2010 we added 1,030 physicians to active staff, net of attrition. But more specifically we have expanded our physician employment activity. We expect to employ 300 physicians in 2011, and probably an additional 300 physicians in 2012 and 2013.

These are spread across the Company, and divided about 60% primary care and 40% specialty. In most markets it is a competitive situation. And in some markets we are the first mover in this particular strategy. But we believe as we move toward having to clinically integrate with our doctors, aligning them through employment, really helps us to accelerate the improvements from the Medicare Performance Initiative to improve our clinical quality, increase clinical standardization and drive down our cost of care and length of stay.

Thank you.

Adam Feinstein, Barclays Capital.

I guess maybe a first question here. Trevor, you alluded to the seven hospitals in response to that last question. Could you just provide a little bit more commentary?

The last quarter you outlined seven hospitals did contribute about 70% of the volume weakness. And you gave even some more details about orthopedic surgeries and spinal fusions and OB drove that. Can you just provide some more color about those hospitals? And then I think now you said there is four hospitals. So in the improvements you have seen maybe just talk a little bit about do you think were these just improvements in the markets or improvements in some of these initiatives. So just trying to understand the delta, if you will, between the third quarter and the fourth quarter in those markets.

Okay, and then, also, I think it is important to talk about that delta -- I may turn it to Steve -- but also how that is playing into this year. And unfortunately everything is situation specific, so rather than running through every story of the seven hospitals, Steve, why don't you just talk a little bit about some of the factors driving this.

Sure. As Trevor said, in the fourth quarter four hospitals were responsible for 72% of our admission loss. And to give you an example, one of those hospitals was the subject of two managed care disputes locally. We settled those managed care disputes at the end of the fourth quarter, and through the first seven weeks of 2011 that hospital has turned positive from an admissions perspective.

So I think that is an example of these unique localized situations that we are seeing to be fewer and further between as we see strengthening of volume across the Company.

Just a couple of comments about -- you asked about specific services. It is very interesting, for example, in the fourth quarter orthopedic surgery was actually up 1.8%. It is the first time orthopedic surgery had been up across the Company in over two years. I think that speaks toward movements in elective surgery.

General surgery, which had been down dramatically and subject to a lot of elective procedures, was only down 2% in the quarter. Finally, we saw increases in urologic surgery, some of which is elective. And spinal fusion surgery, which is usually elective, was down less than it had been over the the prior three quarters.

So we are seeing that strength in those service lines that we have targeted through the Targeted Growth Initiative. Some of the elective business is coming back.

I think the last thing I would mention is we are seeing a tick up in OB deliveries, which I think really is a precursor of return of consumer confidence. We were only at down 0.7% in OB deliveries in the fourth quarter, and that is again strengthening into 2011.

Okay, great. Then just one quick follow-up question, if I may. So you guys have that helpful slide, I think it is slide 20, that shows the healthcare IT impact. So you guys have that ramping up in 2012. I guess, is there anyway some of those payments would be more meaningful in the current year? So I guess there is a lot of moving parts as everyone has been trying to figure out the impact from this.

It is totally dependent on the implementation strategy and that -- or implementation plan and implementation reaching meaningful use. So it is not like you can really move that around a lot in a short period of time. So that is our best estimates based on our current plans, and we are on track with the program.

Okay, great, thank you very much.

John Rex, JPMorgan.

I appreciate your commentary on what you're seeing in volumes. The other indication I wanted to get is just in terms of mix. And your payer mix certainly seemed to stabilize out of it. But I didn't hear if you commented also as you looked into the January/February read if you were seeing a continuation of that pair mix also stable to improved.

Steve, you want to speak to that as well?

I would say that the payer mix is slightly improving as we go through the first seven weeks of 2011.

Okay, just on the margin. Then I was really kind of curious to get some of your thoughts on the Novations and the [Tronics skirmish], the import of that in terms of the GPOs and the mix on the high-end orthocardio devices, how you view that from your perspective and impact on yourselves?

So it is a fairly latebreaking thing. In fact, I first heard about it from an e-mail from you early this morning. I don't think we are well prepared to speak on the issue, but having been in the GPO business maybe I will just offer a little bit of perspective.

The manufacturers have never been wild about paying GPO fees. On the other hand, hospitals gain tremendous value out of the GPO activity. And it has always struck everybody as a little bit strange that it is the manufacturers who pay for the GPOs to exist.

I know, at least doing my experience at Broadlane, I believe they continued after I left on this. They were shifting the business model towards one where the customers were paying the fees, which is really an appropriate type of model.

I am sure this is something that will be sorted out. I wouldn't be overly panicked about it at this point. And, again, the GPOs play an essential role in the supply chain.

But in your own business right now on the high-end devices are you -- what is your balance between direct contract with the manufacturer versus using a GPO right now?

We do -- so always we are using -- we are doing a bit of both, where we are driving a program where the GPO is helping, because they have industry knowledge that we don't have. And we have the ability drive change in our hospitals that they don't have. So it is a very collaborative process. It is not as though you just buy off of a GPO contract for high-end devices.

Maybe I just don't understand it right. So would the contracts be your own or a GPO contract or --?

It depends on the device. Generally speaking in the cardiac area they are through a GPO, and in orthopedic they are direct. But the GPO can play a consulting value-added role in all high-end devices and all supply chain activities.

I see. Then just in the -- the issue, I know you guys have done a lot in trying to drive physician adoption, moving it down the chain. So when you do that, driving a physician adoption, can the GPOs play a role in that at all or --?

Absolutely. Absolutely. The GPOs -- let me also distinguish I am talking about kind of a large hospital system perspective. So the GPO is aware of best practices. They are aware of what really works and how to drive physician adoption. So it becomes a somewhat consultative role.

I would also say just as a matter of experience, both in -- for a while competing against med assets and then me being a customer of med assets, they are particularly good in this area, to the extent that is why you are asking us the question.

And if you are a small hospital, you really don't have the staff and the expertise to drive these kinds of things, or if you are a small hospital system. So in that case you're even more dependent on the GPO services in the supply chain.

All right, great. Thank you.

John Ransom, Raymond James.

I just wanted to drill down on your outpatient acquisitions. Relative to your guidance of around $100 million in spend, how much opportunity is there? Could you do more -- and when do you think you run out of runway?

Then, secondly, could you talk about multiples of EBITDA pro forma for the fact that they have become hospital-based versus when you're buying them, I assume they are freestanding. Thanks.

Sure. Well, I think that we have talked explicitly about the acquisitions we made in 2010, what we paid for them and what we expect to get, and you can calculate the multiple as being less than 5, if you want to think about it that way.

In terms of opportunities, there are abundant opportunities for a lot of different reasons. I think the best way to thing about our strategy in the area is in concentric circles. So where the tightest circle is those outpatient centers that exist within a short radius of the hospitals. And that is what we have been doing, and that is where we see continued opportunity. Once we reach some sort of natural saturation on that then we would consider going outside of the concentric circles.

We would still look for some sort of synergy in terms of the outpatient centers representing a channel to the hospital. But we have been very pleased so far. And as for why are these opportunities and why are the values the way they are, it is a fragmented business. The owners tend to be either physicians or local sources of capital. Like many small businesses, they have seen constraints to their ability to access capital.

And if you think about it, they are running a small business, but it is a very -- it is one that relies on some heavy capital equipment and IT, and it is subject to the same regulations that we are very familiar with in terms of healthcare compliance.

So I think the dynamic is a good one for us as a natural purchaser to whom these types of businesses would be worth more than they are potentially to their existing owners.

So what is your outpatient revenue mix pro forma in '11, taking into effect all these acquisitions? I know it was 32% at one point. Is that ticking up?

Yes, it is picking up. And I can't recall -- honestly, I am looking at Biggs as to whether we included that in our 2011 guidance. I don't want to get out ahead of myself here.

I don't think we did. I will see if I can come up with an answer here.

Yes, if we can come up with (multiple speakers) we will mention it later on.

I will jump off after this. But I guess what I'm getting at is there any over -- not this year and last year, but there is there any structural impediment to you guys driving that mix up into the kind of 36% to 38% range where some of your peers are?

I think that -- well, first of all, remember, some of the peers, and particularly when you look at rural hospitals, if you are a sole provider you are capturing all of the inpatient and outpatient business.

Right, yes, those guys are like 50%. I am talking about high 30%s, like some of the urban guys.

So I don't think there is any structural impediment. I think that would be a natural and supplemented by acquisitions type of aspiration to have. To go to something like 40% or 50% it would take a major amount of acquisition opportunity, including acquisitions outside of our markets.

Okay, thank you.

Gary Lieberman, Wells Fargo Securities.

So just to clarify on your comment that commercial case mix increased, that is due to what, I guess, you're talking about in the elective procedures that you think came back in the quarter.

This is Steve Newman. I would just say that it is pretty broad-based recovery in terms of the payer mix. Certainly some improvements in births helps us with respect to payer mix. But also those elective surgeries that we have targeted in the targeted growth initiative they are high-revenue, high-margin elective procedures -- frequently are in the commercial category.

I should mention that a lot of our volume-growing techniques are specifically targeted at commercially insured populations. As we have moved more of our marketing to an Internet strategy, we are able to target more specifically those that are enrolled in commercial-managed care plans. So I feel comfortable a lot of our tactics are reinforcing the consumer confidence that goes in those that are commercially insured to have those discretionary procedures.

Then any thoughts on Florida Medicaid? You didn't talk about those specifically. The governor's budget came out a couple of weeks ago and it looked like overall there were some cuts, but is it too early to tell there, or what are your thoughts?

Biggs, you want to comment on Florida Medicaid?

On Florida, there is certainly some risk there. We size the risk about $10 million annualized level. It is on just straight Medicaid. Then there is some additional risk associated with the low income pool of about $30 million. The combined impact of those two would be about $20 million, and that has been considered in our assessment of the $30 million to $60 million we gave earlier.

Okay, and then finally, just on the sale of the medical office building facilities, you said there is still some more to go. Anyway to get a sense of is that $50 million half of what you would like to sell or how much more you have?

Well, we had a letter of intent that was worth just under $50 million on the vast majority of what we had left and we were trying to actually sell. The buyer re-traded towards the end of the deal and we decided to terminate that arrangement. But that is about the size of the opportunity that is left.

But we have said several times we won't sell them for the sake of selling them, so if the price isn't fair we will continue to own them and operate them.

Okay, great, thanks very much.

As a follow-up, let me just -- as a follow-up to the question as to how much our outpatient as a percent of our revenues was growing in 2011 versus '12, it is by about 150 basis points. So it is increasing as a result of our growth in outpatient volumes in 2011 compared to inpatient, which we expect to be relatively flat.

Kevin Fischbeck, Banc of America - Merrill Lynch.

I just want to go back through all the Medicaid puts and takes here. Just to make sure I understand the California commentary, when you mentioned that the cut only applies to non-contracted hospitals, is that different from a Medicaid HMO issue? Or are you talking about the same type of issue that you just mentioned in Texas related to another question?

I think it's a little different. In California you have the choice of being contracted with the Medi-Cal system as a hospital or not being contracted. There certainly is greater protection by being contracted, as we have seen over the last several years when these kind of cuts have occurred or have been discussed. Whether occurred or not, they have been more directed towards non-contracted hospitals. So by virtue of the fact that we deliberately contacted the vast majority of our hospitals, we don't have as much risk.

I think there was some confusion in the market, because the initial language said cuts to certain hospitals. I think by the time it was translated on Wall Street the certain had been dropped. So that certain meant non-contracted.

Okay, that's helpful. Then as far as the Georgia issue and the California issue, when you say those could be upside, so those are not in the guidance, is that correct? (multiple speakers).

Correct. It is not in that $30 million to $60 million risk range we gave, so it is upside, both the Georgia funding and the extension of the -- second extension of the California provider fee. And on top of that our estimates of the value of the Pennsylvania and first California provider fee, that value has gone up. We had put it at $40 million previously, and it is now over $50 million in terms of our estimate.

So you've got a growth -- an upside beyond the guidance in what we believe the value of the first follow-on California and Pennsylvania fee is. And additionally you've got upside with respect to a second California provider fee arrangement, and there is upside from the George funding.

So those are all incremental to what we initially assumed, and of course, then provide significant offset to any other risks you want to throw in on Medicaid otherwise, or any other concerns.

Okay, so just to be clear on that, you view that as upside to guidance rather than getting to the high-end of the guidance or would those things coming through get you to the high (multiple speakers)?

It is hard to cherry pick individually what things move you from the middle of a range to the high end of the range. When we look at the high end of the range we look at all of our opportunities, all the potential upsides, we weigh them and consider them in deciding what the upside of the range is. So I don't think you can be so precise as to say this is outside of the upside of the range.

Okay, but it would give you comfort (multiple speakers).

If this and everything else went well, you could go through the upside of the range, but that is not the way we assess it.

Okay, that makes sense. Then one last question. On the acquisition outlook, a lot of the other hospital companies are very bullish about the actual hospital acquisition side of things; you guys seem to be very focused on the outpatient side of things. Can you talk a little bit about your view about the hospital deal market and why you seem to be more focused on the outpatient deals?

Well, we have been focused also on the acute care hospitals. But we have not participated in auctions of distressed hospitals or hospitals in markets that we don't find appealing just on a value basis. So what we pursued are hospitals where we felt they had good market positions and would be complementary to our existing networks.

That is difficult. There have been some -- there is an example of one we pursued where we didn't feel the pricing was something that we could be comfortable with, and withdrew, and it was subsequently signed up with someone else.

There is another one that we still are very focused on and is still a live process. Obviously, it is not helpful to have a cloud over the potential ownership of the Company when you're presuming that, but it is still something that is in an area that we are actively, but very selectively, pursuing.

On the outpatient side those uncertainties are not as big a factor in the acquisition process, and so that is why we continue to have more success on that.

That also I have said before we view our business as having three components. There is the inpatient acute hospitals, there are the outpatient services, and then there is Conifer, the service business that we have. We are also very actively looking and seeking complementary acquisitions that would expand our service offering and make for a more appealing product that we offer to our customers on the Conifer side. So we haven't had done yet of size, but don't rule that out either.

Actually, I guess, that brings up one more question, if I can. You just mentioned Conifer and the services side of the business, one of your bigger hospital competitors is also talking about growing their services business. Do you see that in any way changing the competitive landscape when you think about Conifer and those opportunities?

I will make a brief comment about that, and that our head of Conifer, Steve Mooney, is sitting right here, and I will ask him to give a little more color on what he is seeing in the marketplace and how we are positioned.

But as a general rule I would say -- and this would apply to HCA or to Accretive Health -- I think is great to have credible market participants in this market, because one of the big barriers, just as the IT outsourcers had 30 years ago -- one of the big barriers today in revenue cycle outsourcing is just convincing hospitals that the concept is a valid concept of turning over your business office and your revenue cycle, having people from another company actually call your patients to deal with their bills. That is an obstacle to overcome in growing a business like this.

If you have credible companies with a good product out there convincing hospitals of that, we feel very comfortable about our competitive advantages once hospitals have concluded that it is a concept that makes sense, we feel we are very well-positioned to win business in that.

Steve, you might just talk about what we have done to position Conifer, and also not just positioning, but the actual track record and then the systems work we have done to be able to integrate with customers.

Sure, Trevor. What Trevor just said, we are actually -- the announcement of HCA, we think, was a positive one. Like Trevor just said, we think it obviously further [firmed out] the marketplace itself. We think it just once again validates our business model in the marketplace.

But our biggest impediment in the marketplace really is hospitals themselves. This is a space that typically hospitals used to provide the services internally. And you're starting to see, and we have seen over the last probably nine months, a lot more marketplace activity around hospitals looking outside their four walls for services in this space. One, because they have choices.

So as Trevor just said, it is great for us to have every competitor out there talking about why you want to outsource your revenue cycle to a third party. Because obviously there is a lot of risk. There is a lot more, obviously, with scalability in the marketplace. Compliance programs and (inaudible), and plus incredible capabilities on the service side of [that].

So we spent, since our launch back in 2008, a (inaudible) lot of time and money and energy around our interface capabilities, such that we can literally operate on any platform a hospital has already invested in from their patient accounting side or their clinical systems, that we can integrate to those. Which allows us to move it into our operation within the scalability perspective.

That is something we think we've got a major head start in the marketplace. It is not something our competitors do. They typically operate off the current hospital systems, which does not allow them to have the appropriate scale and efficiency levels that we have.

So we are still very, very bullish in this marketplace. We have seen our pipeline improved dramatically over the course of the last 9 to 12 months. We are expecting significant improvement in our -- as Trevor mentioned earlier -- in our revenues in 2011 and going forward. And I am pretty confident we are going to have some more good news and some sales in the next few weeks.

Thanks, Steve.

Thank you.

A.J. Rice, Susquehanna Financial Group.

Just a couple of specific questions and one broader one. Any timeframe on learning when the California provider fee program is going to get extended? Is there a timeframe in which you would find that out?

Dan Waldmann, our head of Government Relations is here, and I will ask him to address that. Dan.

On the six-month extension, the legislation has been prepared and the model has been prepared and agreed to by the California Hospital Association and the state. We are waiting for the legislature -- they've got what is called a spot bill already introduced in the legislature, and within the next few weeks we should see that amended with the actual legislative language -- and that to move forward. And we expect that to move fairly quickly.

They also have just recently introduced a spot bill for the extension beyond the June 30, and that is because it has got to have a different model and structure once the increased FMAP match goes away. There is discussions going on right now about developing that, but there is not the structure in place yet to move forward on that legislation.

Okay, great. Thanks for all the detail on the managed care contracting this year, next year. Is there any change in any terms, beyond just the pricing metrics and how that is going?

Like what do you have in mind?

I don't know, I just -- in terms of structure of the contract or any other -- I don't have anything specific in mind beyond pricing.

Clint Hailey, our head of Managed Care Contracting is here. You want to speak to that, Clint?

Sure, Trevor. Our contracts have been pretty consistent over the last couple of years. We have introduced some provisions like an inflation hedging provision because of the economic environment we're in, but other than that, no real significant changes.

What about pay-for-performance?

Pay-for-performance we have had in our contracts for probably the last three years -- introduced it about three years ago, and we're seeing it grow.

Quality metrics, these kind of things, Clint and his team have been very creative working with payers to help them expand marketshare where they want to expand marketshare and where it works well for us. As you know, we take a national approach to contracting with the big national payers, so we are really able to be very strategic with them at a very high level about how we set up our contracts.

Okay. And then my little broader question was, if I look at -- and it is always dangerous doing the math on the fly here -- but it looks like the guidance for 2011 assumes, especially you bag out the California benefit, you are still sort of assuming otherwise flat to improving controllable expense margins. You have given sort of specifics on bad debt, and that is flat year-to-year.

So in labor, supplies and other operating expense, maybe for a second can someone talk to where you see the potential for further improvement in margin on those three line items?

Sure, Biggs, go ahead.

Well, I think that clearly the MPI initiative, which we have said is worth $50 million in 2011, is going to improve supply expense, and to a lesser degree labor costs as we operate, not just on supplies, but length of stay and greater efficiency more broadly. So that is really the big driver that has been embedded.

There are cost increases in the guidance for health IT of about $15 million, which has a big impact. And I think I mentioned in the script, besides that we will be spending more on physician employment in 2011.

But otherwise, what we would see is largely the expected efficiency that we gain on increasing volume, which we expect on adjusted admits in 2011 to flow through the bottom line. So increasing efficiency on increasing volume, the $50 million in savings, and some offset from HIT and physician employment.

So not to put words in your mouth, but it sounds like other operating expense you might expect, because a lot of the stuff that is negative flows through that. A later pressure there, but potentially some improvement in supplies, and maybe even a little in labor if you get help on the volume?

I think it is just -- on the other operating expense line I would say our baseline assumption is just normal inflationary kind of trends. Granted inflation is not very high right now, but it would just be the normal set of items there, outside of the discrete things I mentioned.

Okay, I guess, actually maybe I should clarify. I the IT spending and the physician employment, does that go through other operating or tend to go through labor?

IT spending as a discrete element isn't a big piece of what we have in our physician employment costs. It is more purely the cost of employment, and some normal operating costs of physician offices, but it goes wherever it belongs. Typically that is going to be in other operating expenses if it is IT or facility related, but the labor cost is where the primary growth is.

I see. Okay, all right. Thanks.

Shelley Gnall, Goldman Sachs.

If I could just follow up on one of A.J.'s questions, the managed care contracting terms. Maybe not specifically for Tenet, but can you answer whether there are -- developments in your markets, especially your largest urban markets, is there any shift to narrower networks that you are seeing?

Clint, you want to address that?

Sure Trevor. You know, we have been hearing noise or rumblings about narrow networks for years and years, and there have been -- we have seen some uptake in that in terms of clients of large insurers buying these products. But still not to the extent that I think it shifts the business a lot or significantly.

It will be real interesting to watch over the next year or two to see if the uptake in that segment of the business continues or expands, or if it tails off if the economy improves.

So one of the things that Clint and his team have been very effective in doing is negotiating provisions, because again, we do contracting on a national basis, where we with payers, are guaranteed access to narrow networks when they are setting up narrow network structures.

Also just as a trend, I think, we are very well-positioned for narrower networks, because we have a very good value proposition to the payers. Not only do we have demonstrably high quality at a reasonable price, but we also are very fair and appropriate in the way that we deal with them on claims. And then in the back office we have a fairly frictionless, highly automated function that is lower cost for them to deal with.

So I think that as the ultimate end customer becomes more sensitive on value, and as the insurance companies are more sensitive on value and cost, we are well-positioned relative to our competitors in local markets to succeed in that environment.

Great, thank you, that's helpful. Then just a follow-up. I don't think on the evidence of improvement in the surgery trend, I don't think this question was asked. I apologize if it was. Is any of this improvement related to taking share from the ambulatory surgery centers, or it sounds like (multiple speakers).

Awfully hard for us to know with any precision. It is still pretty early. We are talking about a trend there really just emerged over the last 3.5 months.

But it doesn't sound overall like this is an improvement in your markets more than just marketshare initiatives and physician recruitment. Is that the right assumption?

I think that is right. That is what we believe. We have had -- as you know, for a long time we have had a series of initiatives, and they seem to all be working and meeting or exceeding our expectations.

Great. Then one final question on the outpatient acquisition outlook. Can you just confirm, are we still looking at small-scale one-off outpatient type acquisitions or would you be interested in doing something larger, potentially something like a Radnet?

Well, I don't want to speak about any particular company, but we have done some groups of centers, where it was a company that owned nine centers in the Palm Beach area, for example. But still that was very much geographically driven.

So you're tending to still look at the smaller one-off or (multiple speakers)?

Well, I think by definition (multiple speakers).

We are definitely biased. We are biased towards those things which are close to our existing acute care hospitals. So that becomes a narrower focus, if you will, not to preclude anything else, but that is where the focus has been and where we -- if we look at the pipeline that is what we expect.

It is not about size; it is about strategy and about geographic fit.

Okay, great. Thanks so much.

Darren Lehrich, Deutsche Bank.

Just two things here. Just on the HIT program expense, I'm wondering if you can just help us think about what really a lot of those expenses relate to? I can understand the capital, but is there any way to put the number in perspective relative to training costs and outside consultants, how exactly does that breakout?

You have hit it. A lot of the cost is training costs. There is internal labor, there is outside consultants. We actually separate that, which is capital versus what is expense. But training is a big component of what is charged to expense. So getting everybody ready and the early operations or the operating costs prior to actually bringing it up is expensed.

I guess part of the question here is you have talked about some expense for some time, and as you have guided to it seems like some of that expense has continued to push out a bit, and if I recall, has been a little bit lower than what you have talked about or guided to.

I am just wondering if you can help us understand whether you have got any more certainty around the numbers in front of us for '11 than what we have seen before? And if there is still potential for that expense to be slipping or is it being incurred at that level at this point?

That is a good question. We never stop looking at ways to reduce or optimize, so we will continue to examine that. If you go back to 2010, as we entered the year, yes, we did underrun fairly significantly what we initially thought we were going to spend for the year.

It was driven by a couple of things. One is we made a decision -- started the year to pursue more of a single vendor strategy as opposed to multiple vendors. And as we were able to push that all the way through our estimates, that did significantly reduce our costs.

We also found ways to be more optimal. And it is always possible that a certain amount of cost doesn't end up captured discreetly in the HIT bucket, but is left at the hospital level in recurring operations.

I would say there has been a very significant learning curve as well, as we have gotten into this program and had these very successful implementations and the going live events at different hospitals. So we have also learned how to do this better. A year ago when we were making our estimates we were really in front of the program. Now we've got a lot of it behind us.

So I think that -- yes, we have increasing confidence in the fidelity of our estimates. But on the other hand, we will keep trying to find ways to optimize to drive it down if we can figure out how to get more incentive, we will figure out how to do that. And if we can figure out how to reduce cost, we will do that. So it is not a fixed number, but it does have certainly a greater fidelity to it than it did a year ago.

And just last thing on this topic. Considering how much work you have done with stage one meaningful use coming up, is there any way for us to assess how you have maybe tested or audited yourself, and how you stack up for stage one? And going into that event, given some of the implementations you have done, where you think you are in your most, I guess, fully implemented hospitals at this point?

I will ask Steve to comment on that from an operations point of view.

We have a number of checkpoints along the way to ensure that we have deliverables that we are going to be able to attest to that meet meaningful use criteria for stage one. We do it both with our own internal people as well as an external auditors. So that we are very comfortable that we are delivering the functionality that we need to provide to our doctors and nurses in order to meet meaningful use.

The issues come along about educating the staff and making sure, not that you have the functionality, but that the functionality is actually used at a certain level that you can attest to in order to hit meaningful use criteria and obtain incentives.

Those bars are set relatively low in stage one meaningful use. We think we will exceed it by two- or threefold. So we are comfortable in our implementation that we are going to get both functionality, as well as what is really important, utilization on the part of nurses and doctors of the advanced systems like computerized physician order entry.

We had a group of hospital CEOs here last week, including some who run hospitals where we have implemented the system so far, and they are very pleased with the way it has gone. So I think this program so far has been a real success and is very important in our competitive position in the future.

That's great. Real helpful. Thank you.

Kemp Dolliver, Avondale Partners.

Thanks and good morning. There has been a theory floating around regarding the potential impact of co-pays and deductibles on utilization. As the year comes to a fold and I'm hearing this commentary about an uptick in discretionary procedures, and admittedly broadly speaking, I think the data around this is mixed, but do you think there is -- that is a factor in some of the strengthening you saw in the fourth quarter?

It is funny. I think you and I talked about this late in the third quarter or early in the fourth quarter, this so-called demand wave that I was hearing it from a lot of the insurance company executives, this theory that there would be a demand wave in the fourth quarter.

I don't think we particularly saw it. And if that theory was even valid or attributable to the change from the third quarter to fourth quarter, you certainly wouldn't see the strengthening in the first quarter, because people would have accelerated procedures into the fourth quarter and then they would, because of co-pays and deductibles, be suppressing their consumption in the first quarter. So I think it was a false alarm, urban legend, something along those lines.

Good. The second question relates to the $10 million in EBITDA this year from expected outpatient acquisitions. Are the -- what is the status? Are these [daresay] under some kind of letter of intent or earlier stage, because historically companies used to do this when there was a lot more consolidation potential in their markets. Now that many of these areas have become more consolidated there has been general reluctance to build what I would call mystery acquisitions into an outlook. So could you tell us just how mature these processes are?

That is a great question and I am glad you asked it, because we do not believe in the mystery acquisition being put into an outlook. So all we did was to put in acquisitions that are identified by name at some stage in a pipeline in our strategies, where we are actively pursuing them.

So it sounds like some of these are still -- there may not necessarily even be a letter agreement at this point?

Oh, not necessarily a letter agreement, but where we are confident that we can proceed to make the acquisition.

There is more in the pipeline than what we have assumed in out outlook as well.

Yes, yes.

Okay, great. Thank you.

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