Tenet Healthcare Corp (THC) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third quarter 2011 Tenet Healthcare Corporation earnings conference call. My name is Larry and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to your host for today, Mr. Tom Rice, Senior Vice President of Investor Relations. Please proceed.

Thank you, operator. And good morning, everyone. This call is being recorded and will be available on replay. Tenet's management will be making forward-looking statements on this call. These statements are qualified by the cautionary note on forward-looking statements contained in our annual report on Form 10-K. During the Q&A portion of the call, callers are requested to limit themselves to one question and one follow-up question. A set of slides which will be referenced on the call were posted to the Tenet website earlier this morning. At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO. Trevor?

Thank you, Tom. And good morning, everyone. 7 weeks ago, we provided an early look at the results for July and August. September turned out to be a good month. So I'm very pleased to report a strong finish to the quarter. This enabled us to exceed the third-quarter expectations that we laid out in mid-September. I'm also pleased with the turnaround in admissions performance that we've driven all year long. Total admissions in the third quarter grew by 1.5% and paying admissions by 1.6%, rates that are near the high end of our peer group. Outpatient visits increased by 3.4% and surgeries grew by a very strong 3.2%. Adjusted admissions grew by 2.3%, marking our fourth consecutive quarter of positive growth.

Our Emergency business is doing well, with emergency department visits increasing by a solid 3.8%. Admissions through the ED rose by 3.7%. Growth in Commercial ED volumes was also positive. Though across multiple metrics, it remains clear that our emergency channel is growing nicely, and we believe we're taking market share. One driver of this strong aggregate volume growth is our Physician Relationship Program. In the past year, we've doubled the size of our physician sales force. Many of these new reps joined Tenet from the pharmaceutical industry. We have refined our approach to focusing and rewarding their efforts and it is proving very effective. We have also continued to add physicians to our active medical staff, which now stands at just over 16,000. This is a net increase year over year of 665 active physicians, or growth of nearly 4.5%.

Turning now to pricing, net revenue per adjusted patient day increased by 1.5%. In isolation, this pricing metric doesn't tell you very much, because it is impacted by a changing payer mix, and reductions in Medicaid rates among other factors. The statistic is also skewed by our growth in outpatient services but keep in mind that although the revenue per unit is low, outpatient services have a margin that is greater than inpatient so we're improving our overall book of business by focusing on outpatient as a growth area. The most critical piece of the pricing story, however, remains our new commercial contracts. We continue to reach agreements consistent with the range of our pricing expectations and we have excellent visibility into our future commercial pricing. At this point, we've completed contract negotiations for 72% and 22% of our respective 2012 and 2013 expected commercial revenues.

While I'm on the subject of managed care, I'm pleased to say that based on our quality performance, we're on track to achieve 85% of the possible pay-per-performance bonus payments that are available under our contracts. Our commercial pricing increases more than offset the adverse impacts from the reductions we've experienced in government programs. Although we've been getting rate cuts from state Medicaid programs, it's important to remember that on October 1, we received one of the best Medicare pricing updates in recent years. It is a 1% increase which is a meaningful positive change relative to last year's 55 basis point cut.

We grew net revenues by $80 million, or 3.5%. This growth would have been even stronger had we been able to record the California provider fee in the third quarter. Costs performance in the quarter was strong. Controllable costs per adjusted patient day grew by 3%. This growth included an increase over last year's third quarter of $10 million, from our advanced clinical systems initiatives, and $16 million from the adverse impact on certain expenses related to a lower discount rate. Excluding these 2 items, the growth was a very modest 1.7%. We did particularly well in managing our supply chain, with supply costs per adjusted patient day declining by 1.9%, providing even more evidence of the impact our Medicare performance initiative continues to have on profitability. We've done a good job of controlling bad debt expense, which declined in the quarter to 8.2% of revenues, from 8.3%.

Turning to EBITDA, we generated $195 million in adjusted EBITDA for the quarter. Since the California Provider Fee Program did not receive final approval in the quarter and therefore was not included, $195 million in EBITDA is considerably greater than the $177 million outlook excluding the fee that we expressed by way of our mid-September press release. Pending final approval from CMS, we now expect to record the $26 million contribution from the California Provider Fee in the fourth quarter. We are reaffirming our expectation that we will achieve the lower end of our outlook for 2011 adjusted EBITDA of $1.175 billion. Biggs will provide more detail on our outlook for the fourth quarter in a moment.

With that as an overview of the quarter, let me update you on the four factors that we identified in mid-September as having caused soft results in July and August. I will cover them one at a time. The first factor we identified was the discount rate. Lower interest rates continued to cause additional malpractice and worker's compensation expenses. But our loss experience, which is the fundamental driver of the liability and the expense, improved after the quarterly actuarial assessment was completed in September. In the end, although we took $16 million of hits due to declines in the discount rate, we had strongly better loss experience. So the net impact on the quarter was only negative $5 million. As you know, we've consistently improved loss experience for a couple of years, due to our earlier investments in clinical quality.

The second factor was outpatient volumes. While outpatient visits grew by 3.4% in the third quarter, this growth was well below our expectations. We experienced a steep decline in outpatient visits during July, followed by a strong recovery in August. So when we discussed our 2-month results in mid-September, there was some uncertainty relative to volume trends. We can now report that September's volumes extended much of the relative improvement that we experienced in August, although still at a rate below our initial expectations for the year. While acquisitions have made a healthy contribution to outpatient growth, we expected to have completed more of them by the end of the third quarter. We focused more this year on surgery center acquisitions, which generally involve more complex agreements with physicians and therefore, take longer to close. So far, this year, we have closed on the acquisitions of 10 centers.

The third factor impacting July and August was declining acuity in Medicare Fee-for-Service. Although this captured most of the attention, it is important to remember that this was only 1 of 4 items impacting July and August, and that it contributed only around 25% of the impact. It is hard to reduce the overall acuity story to a single sentence, but if I were to do it, I would describe it this way. Case mix rose in the third quarter but not by as much as it has risen over a longer trend. Case mix was higher in commercial, relatively flat in Managed Medicare, and down in Medicare Fee-for-Service. Within Medicare Fee-for-Service, there was inconsistency between months as to which product lines were up or down in volume. So in the end, we didn't see any real volume trends. To cut to the bottom line, we believe the aggregate effect of lower-than-expected acuity and Medicare Fee-for-Service ended up being less than $10 million of impact for the quarter.

The fourth item impacting July and August, which continued in September, was a payer mix shift due to strong growth in lower price Medicaid volumes. Medicaid patients, both traditional and Managed Medicaid, comprised 28% of growth in outpatient visits, but a more dramatic 78% of our third-quarter admissions growth. Since incremental Medicaid patients have a positive contribution margin, this type of growth contributes to earnings as long as it doesn't displace other higher revenue patient types.

Turning to commercial volumes, we see signs of an improving trend. The declines in commercial admissions are now the smallest we've seen in more than 3 years. Because commercial pricing and acuity continue to strengthen, commercial revenues, as a percent of total patient revenues, continue to climb. In Q3, they contributed 42.3% of total patient revenues, the highest level in more than 5 years.

Quickly reviewing some of our major growth initiatives -- in outpatient, we continue to close transactions at the pricing we had anticipated, but at a slightly slower pace. Through October, we closed on 10 acquisitions, for which we paid $45 million. With a robust pipeline, we expect to acquire another 5 centers this year. These 2011 acquisitions are likely to represent an aggregate investment of approximately $68 million. Conifer also continues to make meaningful progress toward its interim objective. Across its 3 service lines, Conifer now serves more than 200 unique hospitals and healthcare entities, including Tenet's 50 hospitals, and the pipeline for client expansions remains very promising. The largest of these businesses by revenues, Conifer Revenue Cycle Solutions, is growing rapidly in a very attractive segment of the market. Our Patient Communications business continued to add new contracts in the quarter.

Cap Management Systems, the third part of Conifer, provides actuarial analyses and risk pool and chronic disease management to more than 2 dozen external clients. It is also assisting Tenet in the development of ACOs in a number of our urban markets. Our Medicare performance initiative continues to achieve its objectives as well. We recently raised our target for 2012, from $50 million to $80 million in savings. The decline that we achieved in supply costs per adjusted patient day in the third quarter is further proof this initiative is working.

To summarize the quarter, volumes are on a strong growth trajectory. In fact, this year's volume growth is the best we've seen in 2.5 years. Commercial pricing and cost trends continue to be favorable. Bad debt expense is significantly better than initially anticipated. And certainly there is pressure on government reimbursement levels, but these have proved manageable to date. We believe Tenet is better positioned than many in the industry to withstand these pressures. More importantly, our 9 months' results give us confident we're on track for the year, and we believe we are well positioned to achieve accelerated earnings growth, once the economy shows more tangible signs of strength.

We remain confident in our strategies and we are reconfirming our expectations, that we will achieve the lower end of our 2011 outlook range for adjusted EBITDA of $1.175 billion. One tangible expression of that confidence is our repurchase of approximately 60 million shares of stock through the end of October at an average price of $5.03, representing slightly more than 12% of our outstanding common shares. We believe that current share prices represent compelling value. For further insights into our financial performance and outlook, let me now turn the call over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Trevor. And good morning, everyone. Trevor has provided a good review of the third quarter so I will primarily focus my comments on our outlook for the remainder of the year. The achievement of the lower end of our range for 2011, or $1.175 billion for adjusted EBITDA, requires EBITDA of at least $324 million in our fourth quarter. Since EBITDA was $195 million in the third quarter, the required Q4 increment is $129 million. I will describe some of the items that we expect to create this lift sequentially in the fourth quarter over the third quarter. This will be in more detail than just referring to last year's sequential quarter over quarter increase.

On slide 3 on our website, you will find a score sheet summarizing this discussion. Let's start with a couple of items which are immediately evident. $26 million from the California Provider Fee, and $15 million in HIT and [SIP] payments, we expect to earn in the fourth quarter. You should remember that the third quarter reflects a reduction in Medicaid Fee-for-Service reimbursement, and higher year over year HIT implementation expenses but not all the Provider Fees and High-Tech Act Incentives which offset these.

The next relatively straightforward item is a swing we expect in the fourth quarter versus the third quarter, in discount rate assumptions. We don't expect the $16 million hit to recur. Conversely, we expect there to be a lift in EBITDA of $6 million based on the current forward curve for the 7-year treasury note. This aggregates to a $22 million improvement in the fourth quarter over the third quarter. Incremental cost efficiencies are expected to contribute $20 million to EBITDA in Q4 relative to Q3. These cost savings were referenced in our press release in September. Medicare in-patient pricing increases add $5 million to EBITDA in the fourth quarter, relative to the third quarter. And as we bring our accounts receivable days down in the fourth quarter, we also expect bad debt expense to improve in the range of $12 million. These are the things which are easiest to quantify and total $100 million.

The remaining sources of fourth quarter improvement are more subject to estimation but should be in excess of what is required to achieve the lower end of the EBITDA range; thereby, creating cushion for factors which could create an offset. First of all, there is a seasonal pick-up in volumes. In 2010, we saw a 1.1% increase in admissions from Q3 to Q4. But 2010 was in a year in which we saw an overall decline in admissions of 2.4%. 2011 admissions are stronger and provide a firmer platform for fourth-quarter growth. And finally, we also expect to generate income from the resolution of old accounts and disputes with commercial and government payers in the fourth quarter. We expect that we will successfully resolve a number of these in the fourth quarter, providing a lift to EBITDA. These recurred during the course of the year and in some quarters more than others. Where we have several, we presently have in our queue for resolution.

As I said, we expect these items and others to close the gap in the analyses to bring us to $1.175 billion of EBITDA or more for the full year. TO put all this in perspective, the drivers for the fourth quarter, not unique, are nonrecurring improvements. They were in evidence in the fourth quarter last year and/or in earlier quarters this year. They just weren't as evident in the third quarter this year or because of discount rates went in the opposite direction.

Turning to cash, net cash generated by operating activities was $148 million in the quarter, an increase of $20 million, as compared to the third quarter of 2010. This was favorably impacted by a $39 million decline in interest payments and an $11 million improvement in accounts receivable. Offsets to these favorable items included a $13 million net decrease in accounts payable and other items and $11 million of income tax payments. Our AR days were flat at 48, relative to June 30. We're actively focusing on bringing this day count down.

This increase in AR days is for the reasons I described on the second quarter call. Consolidation of our processing offices and delays created by our Medicare intermediary. We made progress on these, but experienced additional problems in the quarter with certain state Medicaid programs. We expect AR days to reduce in the fourth quarter. In addition to the expectation that the AR growth will reverse and produce up to $50 million additional cash in the fourth quarter, we also expect the second half cash flows to be enhanced by the collection of the remaining $32 million of the HIT incentives we've already recorded as well as a number of other items.

Capital expenditures in the third quarter were $100 million, down $20 million from last year. Free cash flow was a positive $48 million for the quarter, but I should note that free cash flow was negatively affected by a net $22 million outflow in discontinued operations, due to the settlement of old claims and payables including for hurricane Katrina. For continuing operations, free cash flow was a positive $70 million. We used $124 million for the repurchase of 24 million common shares during the quarter, and $14 million for acquisitions. So despite significant cash outflows to build the business and add incremental leverage to our balance sheet, cash and cash equivalents were $185 million at quarter end, a decline of just $79 million from $264 million at June 30. As noted in the earnings release, total stock purchases through October 31 were approximately $300 million. After reflecting these purchases, at October 31, we had approximately 431 million shares outstanding.

Our leverage ratio continued to strengthen, and was 3.5 at September 30, down relative to the 3.7 a year ago. This continues to give us significant balance sheet flexibility going forward. In summary, we remain confident that our initiatives to drive revenue growth, reduce costs and drive increasingly positive cash flow will be successful. Our third quarter continued our upward progression and exhibited solid revenue growth, continued commercial pricing strength, inpatient volume growth, outpatient volume growth, good cost performance, net of costs related to our implementation of our growth strategies and only a modest increase in bad debt expense. Subsequent quarters can be expected to display continuing enhancement to our earnings power and cash generation, as our key initiatives gain incremental visibility. With that I will ask the operator to open the floor for your questions. Operator?

(Operator Instructions) Justin Lake.

Just wanted to ask a couple of numbers questions here. First, on the rate side, for Managed Care. You talked about having 72% of the book locked up for 2012. I'm just curious what the average rate is and that has been locked up?

Well, we said consistent with where our expectations, which we expressed earlier as a rang, and we're not going to quote a specific number. Sorry about that.

Okay. And then secondly, one of your peers has talked about a little bit higher impact from Texas and Florida Medicaid costs than previously expected. I'm just curious if you can give us your numbers there for the back half of this year into 2012?

Sure. Biggs, do you want to speak to the cuts that we've been seeing so far in Florida and Texas?

Sure. Just in the aggregate, we had expressed throughout the year that we saw $30 million to $60 million of risk in Medicaid cuts and that as the second quarter unfolded, and as the states finalized their budgets for this year, we saw that come in at the higher net range in terms of the effects for 2011. What we saw in the third quarter and aggregate was in the neighborhood of $15 million of effect from Medicaid Fee reductions. We think that, annualized, the number for next year is in the territory of $100 million, which is what I also had, I think, previously reported in another call. So everything is pretty much as we anticipated in terms of the risk profile going into the year and then as we reported in the second quarter, how it unfolded.

Okay. And Biggs, does that include the impact of the flow-through to Medicaid Managed Care as well? Have those contracts all been renegotiated?

Well, to the extent that there is a flow-through, I think there is some effect to that, in Texas, and it is included in the numbers.

So that is for contracts that are tied specifically to Fee-for-Service rates, I assume?

There's -- the answer is yes. But there is the ability for them to go and force the reopening of others. So we provide for that as well in the adjustments.

So that is in there as well. Great, thanks for the color.

Sheryl Skolnick.

Good morning. And very nice job [when] the communication (technical difficulty) what was going on in the quarter was very helpful intra-quarter was well as all the details in building the bridge. I just want to make sure that I understand a couple of points. As you look at your business and the performance that you had in improving the Commercial Managed Care as well as in managing through the weakened acuity in the Medicare, are there any trends that you can point to that would be -- what I'm trying to get at here is, are there any trends that are more supportive of you that the acuity is going to continue, the acuity decline is going to continue for awhile or that you have plans or strategies in place to offset it?

Because if I heard you right, you're not seeing that decline in the acuities so much in the Commercial business, so I'm trying to figure out if there is just something we're going to work through on an anniversary, a year from now? Or if there is something else that you can determine that is going on in your Medicare business, that is not going on in your Commercial business, i.e., perhaps different physicians or just simply different economic impact?

So Sheryl, let me make a brief comment about commercial and then turn it over to Steve to talk a little bit about acuity. I hesitate to have us talk too much about acuity because as we said in the prepared remarks, it is such a limited impact in the quarter even though it did capture quite a lot of attention. The only thing I would say about Commercial, you started by talking about trends in Commercial. We like what we're hearing coming out of the Managed Care companies about enrollment. That, we track it every quarter.

The comments they make about their own enrollment trends, and it is a little better than it has been in previous quarters. And then as we mentioned in terms of our own commercial admissions performance, while still negative, it's the best we've seen in 3 years, the least negative that we've seen in 3 years. So we see some nice signs of life in Commercial which, obviously, is very important. Now turning to acuity and Medicare in particular, Steve Newman, why don't you comment on that?

Sure. Sheryl, we've seen some gradual strengthening in some of the service lines in the Medicare Fee-for-Service and Managed Medicare business. One that I would highlight would be Gastrointestinal Medicine, as far as admissions are concerned. For the quarter, it was up 5.7% in Medicare, compared to the same quarter prior year. The same was true in General Surgery; it was up about 3.4% compared to the same quarter prior year.

So we're seeing strengthening in many of the higher intensity Medicare service lines. On the other hand, as some of our peer companies have reported in Medicare [open heart], we saw a significant decline for the quarter; it was down 6.4% compared to the same quarter prior year. So depending on the service line, we're seeing either higher volumes, or lower volumes within Medicare. With respect to the overall growth of our business, we're continuing to work each channel by which we get patients, whether it is through the Emergency Department, or whether it is through the elective inpatient admissions, through our Medical Staff Development Plans, and the expansion of our business-to-business initiatives, in most of our urban markets.

Okay. Fair enough. And just so I can just follow up on a different topic. Your cash flow is improving, but as we look at this quarter, Biggs, I just want to make sure I understand what you said about the AR, that you are working to address some issues but that there was another issue that might mitigate against it? In other words, you're going to collect on some of the stuff, but that there are new things cropping up? Is there any situation that we need to be aware of there with any slowdown in payments from states, or from fiscal intermediaries, or is this sort of the normal issues that sometimes occur? Because I'm hearing fiscal intermediary is becoming more aggressive in home health, I don't know that, that is where I ought to go to and I'm hoping it's not where I need to go to in the hospital sector.

Sure, that's a good question. The issues that we've had during the course of the year, some of them were self-imposed by virtue of us consolidating some offices to create a more efficient process and more effective process over time, so that created a backlog which was then -- which we anticipated working down [over] the course of the year. But that backlog was exacerbated by a circumstance that our federal, our government, our medical intermediary, which had to implement some processing changes; and as a result of that, created additional backlog for us. Then what we experienced as we were working through those issues, in the third quarter, we experienced a couple of issues in states where there also were transitions or changes in the intermediaries on Medicaid.

It wasn't so much a, I think a push-back issue, as it was processing and other delays, through changes caused by those intermediaries in their own internal workings or in terms of adopting to any design changes by the states. So don't think there is a severe pattern of increased denial or other push-backs, which would give you concern about the states trying to work their own cash flows, or budgets through the intermediaries, but certainly we'll have to watch for that as we go forward.

Great. Thanks so much.

Adam Feinstein.

All right, thank you. Good morning on this busy hostile earnings day. Just I guess, maybe Trevor, just to follow up, I think one of the things that everyone seems to be very caught up on, is this mix shift, whether that is less surgical cases, whether that's more Medicaid cases, whether there's fewer cardio cases. It just seems to be creating some confusion in terms of how people think about not just the volume growth but the components of the volume growth. So I guess just with some of that uncertainty out there as you guys think about your business plan, how do you plan on managing through that? And clearly, a lot of the investments and initiatives you guys have put in place, will get you through that. But certainly just helpful to hear how much of this do you think is near term noise and how much of this do you think is going to be out there for longer term? And just so I guess it is a long question but how are you guys managing through it and how much of this do you think is real and how much do of this do you think is near term noise?

So I think it's, actually it is a very good question. And if you look at the summer period, you had quite a lot of noise. Now, step back for a second. We wouldn't have been commenting on July and August results at all but for the fact that we had 2 soft months in a row which put in jeopardy our ability to achieve the initial expectations that we have had. With a stronger September, now looking back, it looks like a lot of what we saw and were concerned about in July and August was noise. I mentioned in the prepared remarks, softness in July in outpatient, for example, that rebounded in August, and remained strong through September. And we talked -- Steve mentioned service lines, we had identified as being down sharply in July and August, but in the end, in the quarter, we're down but not so sharply.

So you did -- at any time that you start to look at shorter periods of time, you introduce a quite a lot of volatility that may not be a trend. And as we met with investors in September, we kept addressing the question, is what you saw in July and August a blip or a trend, and on a 2-month period of time, it is impossible to know. On a 3-month period of time, you can start to be more confident that there isn't some significant adverse trend, and of course, with various companies, the time periods in question are a little bit different. But I think over time, it certainly -- we've said, not to be flip, but it is not as though there is not some epidemic of wellness sweeping the nation. These longer term trends of fairly stable to slight declines in acuity among the Medicare population, increases in acuity among the commercial population, stability among the Medicaid population; those seem to be what we're reverting to as months get added to the time period that we're looking at.

And then of course, you have other demographic shifts in place, of course, the fairly rapid increase in the Medicare population, the strong growth in our business from the Medicaid population, so we've highlighted that now for some period of time. And as long as we're managing our costs effectively, so that we do have a positive contribution margin for Medicaid patients, we welcome that growth. And we have a significant enough capacity that we can take on that Medicaid business without displacing higher paying customers. So I think if you blend it all together, you have Commercial in some kind of a holding period, approaching a little bit better, anticipating a time when we have a stronger economy and job growth that will lift that. You've got these longer term demographic movements at play on the Medicare book.

Medicaid is growing rapidly, obviously in some cases, that is the inverse of what you've seen in Commercial in terms of the population but also it reflects the health needs of the Medicaid population. Uninsured is very well under control. So you see we have had almost no growth in the uninsured; from time to time, we will have declines. But I think all of these things point to the same mandate for hospitals which is manage costs very effectively; you've got to keep the costs down and make sure that you're targeting profitable service lines and keeping channels open like I mentioned with respect to emergency departments and working on that physician channel all the time.

All right. Thank you, Trevor. Appreciate the details.

Tom Gallucci.

Hello, good morning, everybody. Thanks for the highlights. A couple of quick ones. Just first on the surgery side, you mentioned some areas of strength. Obviously, you've added a bunch of doctors, I think you mentioned in the comments. What other factors can you attribute some of the strength to? And is there any way to discern maybe your market share, generally speaking, given that you're seeing some of these surgery areas up versus maybe some other industry trends that we see, where there is more pressure?

Good. Steve Newman, why don't you comment on that?

Sure, with respect to the surgery, I previously mentioned a significant increase in general surgery of the quarter of 3.4%. We also had strength in ENT surgery, urological surgery, and major trauma which usually results in several different types of surgery. We did have orthopedic surgery down 1.3% for the quarter. And once again, the orthopedic surgery is the one that is most likely to be delayed based on lack of consumer confidence. So we would expect that to come back, as consumer confidence improves, as the economy improves, as unemployment goes down, as coverage in Commercial Managed Care in our markets continues to expand.

Your other question had to do with market share. In each December, we do a review of our market share, year-to-date, especially in the Commercial Managed Care areas in our 18 major markets. We will be doing that again in December. But based on our indications year-to-date, our market share in Commercial is either stable or slightly increasing in those urban markets.

Okay, and then what about on the outpatient side, the opposite, I guess, issue, you mentioned that maybe there was some weakness. Some of that was because of fewer acquisitions that you did, but was it also a little less on the organic side, not just in July, but generally speaking? And if so, how are you thinking about that topic?

I would say once again, our total outpatient visits were up 3.4%, compared to the same quarter last year. There were 3 meaningful, purposeful changes that really impacted that, actually prevented it from being higher. We had 2 large hospital-based clinics that we closed, that were responsible for 6,000 fewer visits in the quarter, and the third issue was the termination of a Managed Care ancillary agreement that was responsible for another 3,000 visit decline.

If you add those 3 things together, in the absence of those closures, our outpatient visits would have been up 4.5%, for the quarter in comparison to the same quarter prior year. Trevor mentioned that we had lagged our expectations in closing on some of the ambulatory surgery acquisitions, but those are performing very well and our hospital-based outpatient surgeries were actually up for the quarter. So while we didn't hit our own expectations, part of the reason we didn't is because we had adjusted those down related to those service closures.

And any background on those service closures would be great. Thanks a lot.

John Rex.

Thanks. So nice job of putting up the picture of stabilization, which is important in this backdrop and I'm wondering though if you can take that and roll us a little bit forward, so if one were to assume a similar macro economic backdrop and similar consumer confidence as you look out over the next year, so what would be the tailwinds that you would expect that could assist on EBITDA growth? What are the headwinds maybe you haven't referred to? You talked to Medicaid and if you can address these obviously, preferably quantitatively, but understand if it needs to be qualitatively at this point.

Okay, I will hand that one to Biggs (multiple speakers) to make some comments on that.

Pretty broad question.

Obviously, I'm targeting, I'm thinking about headwinds, tailwinds on '12, just -- (multiple speakers)

I will try and help to the best of my ability. We certainly haven't given 2012 outlook yet. We did give -- conversely, we looked out for 5 years, in 2013 and '15. And I think that the challenges going into that which we've already talked about are that Medicaid HITs were at the high end of our range of risks. But conversely, provider fees have come in very strong and we expect to be very strong next year with up to $146 million, or around that territory next year, reflecting the California Provider Fee approval and the multi-year program, which would create a 1.5 year worth of income on net program recognized next year, and then a full year of the Pennsylvania Fee. So that is more than enough to offset the Medicaid Fee reductions that we expect. Cost performance is running -- we expect to run better, we've already said next year, we expect to have $80 million of savings from our MPI-related activities as opposed to an initial target of $50 million. So that is a positive. Certainly, Commercial pricing we said was on track.

And from a volume standpoint, going into next year, what we said in the 5-year outlook was that we expected next year to be around a negative [1.5%] on Commercial. Now we haven't really updated that through today for an expectation which, again, I'm not giving full 2012 guidance, but certainly think that as we move from the improving trends we've seen this year into the future, we're in a good position to get the benefit of an economic lift, and increase in Commercial enrollments as we go forward at least consistent with our expectation of getting to breakeven on Commercial volume change year-over-year by the time we get to 2013.

Our bad debt assumptions, we've been running well this year from a rate standpoint. On an absolute dollar standpoint, we only have a very small increase year-over-year. So that has been performing well. Certainly, I think that as the economy improves, we've got the ability to improve our collection rates as we said before.

So I think that we're still well positioned. The Medicaid risks certainly have proven to be real but the provider fees are very real in the other direction. So we feel good about how those things have offset and how our cost performance and our plans have offset risk.

I can't answer your questions [articulating] about what the federal government is going to do with respect to the budget resolution, so we have set that one aside, and let it play out. But if I were to give an indication of what a 2% effect would be, on Fee-for-Service, and Managed Medicare, combined, that ran at about $55 million, and then we have to see whether it affects other elements of spend or not.

Okay. Great. And then for the acquisitions that you've done this year, did you size the revenue contribution of what you've done to date on the surgery centers and what you expect for annualized revenue contribution, at your target for the year?

I don't think we've given a revenue number. We had given on the January 11 presentation a multi-year view of what we expected. And as we've already said, we're not at our level of expectation for 2011 but we do expect to close that over the next couple of years. So that we will end up by that 2013 target where we expect to be.

Can you give revenue contribution for what you've done so far, annualized?

I, honestly, I don't think I have it at my fingertips. So I can't --

We may update that and, John, as we get into 2012 guidance, or update our multi-year guidance, but not at the moment.

Okay. Thank you.

Gary Lieberman.

Thanks. I'm not sure if you gave it but do you know what your Medicare Case Mix Index was in the quarter and how that compares year-over-year?

Hi, Gary, I will ask Steve to comment on that. We have traditionally given the trends and not the number itself; it's not necessarily directly comparable. But Steve, you want to comment on that?

Sure, our -- while we don't want to necessarily update this every quarter, but the Medicare Fee-for-Service Case Mix Index for Q3 was 1.502. And as we said, that's a slight decrease from our run rate. But we see those variations from quarter to quarter, and we're certainly, through our targeted growth initiative, pushing the more acute services in Medicare as well as Commercial Managed Care.

Okay. By a slight decrease, is that less than 5%, less than 1%?

Definitely less than 5%. It is around 1.4% from the run rate.

Okay and then can you just give us an update on Managed Care contract, as you head into next year?

I did in my prepared remarks, maybe you missed that, but I quoted the numbers of 72%, and 22% of our expected revenues for '12 and '13 are already contracted and the rates are consistent with the expectations that we've given in the past.

Okay, thanks a lot.

Kevin Fischbeck.

Okay, thank you. Good morning. A question on the cash bridge that you have there. I don't know maybe I am missing it but I didn't see share repurchase in the cash roll forward. Is that somewhere in there? And if not, how do you think about that? Do you think you've already done about $100 million of share repo in Q4?

We don't put any future cash purchases in the walk forward. We have not done that consistently so that is a discretionary decision at the time and rather than forecast it, we don't put it in. So we put in what we've accomplished to date as a part of the cash walk in the --

Kevin and if I could -- (multiple speakers)

In the financing activities line.

If I heard you correctly, Kevin, I think you said $500 million, the actual number is (multiple speakers). Well, we did $300 million to date on the program. I just want to make sure that people listening don't get the wrong number.

I was thinking you did $100 million in October, I guess, is what I was saying and the next [financing] was minus $70 million to $85 million so I wasn't sure if that was in there but you're saying you would expect to end with cash of $85 million to $160 million including the share repurchase you've done so far in October?

Yes. And as I said, we just don't put anything further in there because it is a discretionary decision.

Okay, that makes sense. And just to understand, all of the numbers that we've talked about doing on the cost side of things, I just -- it wasn't clear to me about how we think about annualizing. So if you did $5 million of cost savings in Q3 and $20 million in Q4, does that annualize into $100 million so that you would net-- be getting something like an extra $70 million from what you have done this year into next year or is that distinct?

What we expect next year is an incremental $80 million over this year's baseline.

So but I guess if you did run rate, $25 million in Q3 and Q4, you really wouldn't have to do much more to get an annualized benefit of $80 million next year, is that right?

Well, much of the next year's number comes from what we implemented in the fourth quarter. But let's parse it into pieces. In the fourth quarter, we have a productivity initiative which was put into place, back in -- after seeing our July results which isn't fully evident until the fourth quarter and that grows to its full run rate next year and the run rate savings on that around $60 million. The other savings in the fourth quarter are reductions in discretionary spending, which don't necessarily have some run rate benefit as opposed to thought of more as a one-time. So it is maybe 50/50 in terms of what is made up of productivity versus what is made up of discretionary savings. If you look at the fourth quarter, $20 million incremental savings. So the productivity certainly grows in the next year and becomes a run rate; the other savings don't. All that is factored into that $80 million incremental year-over-year.

Okay. So a good chunk of that $80 million has already been put into place, I guess, at this point.

Yes, well, the $80 million is substantially put in place, but it includes -- it does include additional DRG and supply-related efforts for next year. Just the same as we've had this year.

Okay and then one last question. You mentioned that you had gotten 85% of your quality bonuses on your Commercial contract. How much of your commercial revenue is at risk right now or tied to quality?

It is tiny. I mean it is less than -- what I was talking about is less than $25 million but it is very significant, where we can negotiate rates we're happy with and then a bonus on top of that, think of it that way, to be achieving 85% of the potential bonus, I think speaks very well to our ability to generate quality numbers that the Managed Care payers are willing to pay for.

Okay, great. Thanks.

Ralph Giacobbe.

Thanks, good morning. I may have missed it, did you give what the uninsured volume was in the quarter?

No, we didn't. Do you guys have it?

We give the combined stat uninsured and charity, I think it is in the release. It is a modest growth this quarter of 0.5%.

Okay. And then just reconcile the lower bad debt expense? I don't know if you went through that.

Well, from a rate standpoint, it is slightly lower. From a gross dollar standpoint, it is slightly higher. The -- I think that from an overall dollar stand -- well, just you're comparing it to just a very small level of revenues, when we talk about the uninsured. Our collection rates in the aggregate have been pretty stable over the last couple of quarters. Only a very slight decline so we're not seeing any degradation there.

We have -- the only place where we have positive, really improved assumptions is on the very long term receivables, those things which are collected over the -- end up in the collection agency, our ultimate yield on those, is better than what we had previously assumed in our bad debt assumptions. So there is really no big changes in there. The rate is pretty stable. The collection rate is pretty stable. No big changes in uninsured volumes and a little better performance over the very long term in collection rates.

Okay. And then I think you mentioned Medicaid volumes still coming at a positive margin. Can you give us at all a sense of that margin, or just in terms of how much it dilutes overall margin, just given the volume strength?

On the -- you're talking about the payer mix shift?

Yes.

The -- in terms of pricing on an adjusted patient basis, it is probably around 50 basis points effect on our pricing.

On the Medicaid side?

Yes, the effective, the shift towards Medicaid.

Right. Okay, all right. That's fine. Thank you.

Okay, thanks. I'm sorry, we've got to cut it off but we got another company reporting here in a few minutes.

With no other questions, I would like to turn the call over to Mr. Trevor Fetter.

Sorry, I was just pre-empting you there, operator, to say that out of respect for another company that is holding its call, we are going to cut it off. If there were more questions we were unable to answer, feel free to call us during the day. Thanks, operator.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may disconnect at this time. Have a great day.