Tenet Healthcare Corp (THC) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2011 Tenet Healthcare earnings conference call. My name is Jeff, and I will be your coordinator 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. And you have the floor, sir.

Thank you, Jeff -- excuse me -- thank you, Jeff, and good morning, everyone. 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. We undertake no obligation to publicly release any revision to our forward-looking statements to reflect events or circumstances after the date of this communication. A set of slides, which will be referenced on the call, were posted to the Tenet website earlier this morning. As the operator said, during the question and answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time, I will turn the call over to Trevor Fetter, Tenet's President and Chief Executive Officer. Trevor?

Thanks, Tom, and good morning, everyone. 2011 was a year of solid progress and continued organic growth. Consider the following points that you will find on slide 3 of the presentation that we posted to accompany this call. Tenet generated the highest same-hospital revenues, EBITDA, and EBITDA margins since 2003. 2011 was our seventh consecutive year of improvement in each of these metrics, and our compound annual growth in EBITDA over that seven year period was 15%. We also made great progress on some important internal measures. We reached new highs in our quality metrics, and our satisfaction scores from physicians and patients, and our strategic initiatives are all on track. These include growing our outpatient business, and our Conifer services business, and implementing our Medicare performance initiative and our advanced clinical information systems project. On the key financial measures for the year, we grew adjusted EBITDA by 9% over 2010, and same-hospital admissions and outpatient visits were up 0.5% and 3.1%, respectively. We would have achieved our 2011 outlook range, had we been able to close some of the favorable payer settlements that we've been working on for a number of months. We expect these settlements to be reached later this year, so we are raising our 2012 outlook for adjusted EBITDA by $25 million to $50 million, to a new range of $1.225 billion to $1.350 billion.

Turning to the quarter and starting with volumes on slide 4, Q4 was our fifth consecutive quarter of adjusted admissions growth, with a 1.3% increase. Growth through our emergency departments was particularly strong, with visits to our EDs rising 3.1%, and admissions through our EDs up an even stronger 3.3%. This growth demonstrates that we have held, and in some cases increased, market share for ED services. Total surgeries increased by 3.2%, driven by very strong growth in outpatient surgeries of 7.6%. That in turn was due to our acquisition of ambulatory surgery centers over the past few years. Acuity was up 0.3%, relative to the third quarter. We generated year-over-year growth in open heart, cath EP, major trauma, spinal surgery, and neonatology. Areas of softness included cardiovascular, general surgery and women's services including deliveries. We increased net operating revenues by $115 million, or 5.4% over 2010's fourth quarter.

In comparing our revenue numbers to prior quarters and to your models, note that we are early adopters of the new accounting standard of reporting net operating revenues net of bad debt expense, and that HIT incentives are now recorded as a contra-expense. We continued to meet our pricing objectives, with a 3.7% increase in net inpatient revenue per admission. This increase included a very solid 6.9% growth in commercial inpatient revenues per admissions. On the outpatient side, net revenue per visit increased by 2.6%, including a very strong 7.1% increase in commercial revenues per outpatient visit. This reflects a positive change in the mix of outpatient services that we're providing, meaning that we're growing surgery faster than imaging. Selected operating expense was well-controlled, increasing by only 4.4%, after excluding expenses related to the incremental physician employment and a couple of other items. While physician employment costs are a legitimate expense item on an ongoing basis, these costs distort our performance ratios while we're ramping up, because the physicians are not yet fully integrated and generating run rate revenues.

While I'm on the topic of physicians, we did very well with our overall physician recruitment program in 2011, adding almost 900 physicians net of attrition to our active medical staff. Our Medicare Performance Initiative, or MPI, continues to drive incremental cost savings. One area where these savings are particularly visible is in our supplies expense which declined by 0.2% per adjusted patient day. As we noted on our third quarter call, we now expect that MPI will deliver $80 million of incremental cost savings in 2012, a 60% increase over our initial objective of $50 million. We have also been successful in managing bad debt expense. Our fourth quarter bad debt ratio was 7.7%, down 60 basis points from a year ago, and down 50 basis points on a sequential basis from the third quarter. To quickly summarize the quarter and the year, despite some variability from quarter-to-quarter, our 2011 volume growth was the best we've seen since early 2008, before the economy slipped into recession. Commercial pricing trends continue to be favorable. Expense increases are largely limited to areas that drive our growth initiatives, and bad debt expense remains significantly better than initially anticipated. We hit new highs in many key metrics, and continued a pattern of strong consecutive growth in EBITDA for a seventh straight year. Our results for 2011 give us confidence that we're on the right track for long-term growth.

Our confidence in our strategies, together with the anticipated timing of the settlements I mentioned, provides the basis for increasing our 2012 outlook for adjusted EBITDA. We are also reconfirming our outlooks for 2013 and 2015. Before I turn the call over to Biggs, I want to mention a new initiative that we're launching to communicate with investors and analysts. On March 29 at 11.00 AM Eastern Time, we will hold the first in a series of investor webinars on subjects of interest to you. The first webinar will focus on managed care, and will be led by Clint Hailey. Clint will provide an overview of the current managed care contracting environment and future trends. We intend to follow with an additional -- with additional webinars on important topics like Conifer, outpatient services, MPI, and the supply chain. Around mid year, we will have a webinar on growth strategies and trends in hospital operations, hosted by our new President of Hospital Operations, Britt Reynolds. We hope you'll take advantage of these webinars, which are designed to provide regular and timely access to our leadership team, and to provide deep dive opportunities into key topics. We believe this approach will be more efficient than our traditional Investor Day. Now, for further insights into our financial performance and outlook, let me turn the call over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Trevor, and good morning, everyone. As Trevor has provided a good review of the primary earnings drivers for 2011 and the fourth quarter, I will focus my comments on our near and longer term outlook. Let's start by looking at our updated outlook for 2012 on slide 5 on the web. In early January, we provided our preliminary outlook for 2012 adjusted EBITDA in a range of $1.2 billion to $1.3 billion. This morning, we raised the low end of that range by $25 million and the upper end by $50 million. This increased outlook reflects delays in certain favorable settlements we've been working on for a number of months in 2011, which were previously in our outlook for 2011. These settlements are now expect to be finalized and recognized in 2012. This new outlook range for adjusted EBITDA represents growth between 7% and 18% over 2011.

The new 2012 range would have been even higher, had it not been for the recent change in HIT accounting. The new accounting rules defers out of 2012 the recognition of $29 million of HIT incentive payments, relative to our prior expectations. Slide 5 provides the detailed assumption ranges we use for volume growth, pricing, expenses, and bad debt. Slide 6 provides a tabular walk forward leading to the adjusted EBITDA range for 2012, reflecting contributions from each of Tenet's primary initiatives and other earnings drivers. I want to draw your attention to a few of the highlights. Starting at the top of slide 6, you will see our assumption regarding the expected performance of our outpatient acquisitions, which assumes a $30 million incremental contribution in 2012. This reflects enhanced performance from our completed acquisitions, and the anticipated contributions from new 2012 acquisitions. Compared to our prior assumptions, 2012 growth is a little better than previously assumed because of the timing of acquisitions. You may recall that we are focused now on surgery centers, which take longer to close. Conifer is expected to add an incremental $5 million of EBITDA in 2012. Conifer builds off of good performance in 2011, creating a tough comp. Also, we expect to be integrating significant new business in 2012, which initially compresses margins, but then on which margins will build over the next couple of years.

Next is MPI, the $80 million increment assumed from MPI in 2012 was previously shared with investors, and has been part of our thinking for a number of months. It reflects run rate savings coming out of 2011's efforts, and expanded initiatives in 2012. Health IT expenses ramp up as expected relative to 2011, and incentives recognized go down, creating a $40 million negative variance. This is largely the result of the new accounting treatment, which as I said defers recognition of our expected HIT incentive payments. These accounting changes are tracked on slide 7, which shows the deferral of $29 million of EBITDA contribution out of 2012, compared to what we previously expected. It is important to note that we haven't reduced our expectations regarding the size of the stream of cash incentives over the life of the project. When we get to the slides for 2013 and 2015, you will see the offsetting favorable variance in those years resulting from this near-term deferral.

Returning to slide 6, you will see we assume a $25 million reduction in Medicaid contribution in 2012. This reflects three things, the full-year impact of the cuts implemented in mid 2011, risk of further although smaller reductions in Medicaid reimbursement in the second half of this year, partially offset by the $11 million improvement we expect in revenue recognition from state provider fee programs in 2012. Provider fee programs contributed $129 million in 2011, growing to $140 million in 2012. Recent volume trends are reflected in our assumptions of a 1.5% to 2.5% increase in admissions, and a 2% to 3% increase in adjusted admissions in 2012. These volume increases and our expected payer settlements drive an incremental contribution of just under $100 million, from what we show under the heading of operating leverage. The last item is the incremental adverse impact from the Affordable Care Act of $25 million. This is related to the implementation of the productivity factor through the Medicare market basket. The 2012 outlook, cash outlook, is detailed on slide 8. I won't take up time to walk you through it this morning, but I do want to point out that in 2012, we expect a strong cash flow year from continuing operations. This is due to the increase in earnings, and improved conversion of EBITDA to cash flow. The improvement in cash conversion reflects the collection of provider fees and other income booked in 2011, and the recovery of our AR days to a level consistent with recent past experience.

Before leaving the discussion of our outlook for 2012, I want to draw your attention to the comments in this morning's earnings release, relating our expectations for adjusted EBITDA in the first quarter. While we will retain our well-established practice of not providing quarterly earnings outlooks, there are a number of significant items I want to draw your attention to, which are expected to impact the quarterly pattern of adjusted EBITDA throughout 2012. First, our strategic initiatives are expected to make an increasingly favorable contribution as the year progresses. This includes MPI, bad debt, outpatient acquisitions and HIT incentives. Second, certain discrete items are expected to be recognized in income later in the year. The California Provider Fee Program is the largest of these items, with an expected earnings of $120 million in 2012. We do not expect to recognize any of this $120 million in the first quarter. Contributions from other provider fee programs will be recognized in a more uniform fashion through the year, but these programs are considerably smaller than the one in California.

The effect of these items is to create a steeper than usual trajectory of earnings during the course of the year. Last year was the opposite, with provider fees and HIT income front-end loaded. Specifically, rather than being a quarter of our 2012 EBITDA, it is more likely that adjusted EBITDA in the first quarter 2012 was around 19% to 21% of our total 2012 adjusted EBITDA. What makes this particularly difficult to forecast, is the timing of the settlements we've talked about. Obviously, we thought they would occur in the fourth quarter of 2011, but they've been pushed into 2012. Should they be recognized in the first quarter 2012, then the first quarter's adjusted EBITDA will be greater than the 19% to 21% I just gave. The bottom line is that for your modeling purposes, you should assume ex-settlements, that the first quarter is only around one-fifth of your full-year estimate.

Just over a year ago, in January, 2011, we provided a pair of outlooks for 2013 and 2015. The purpose was to provide investors with some perspective regarding the expected financial impact of Tenet's major strategic initiatives, as well as a snapshot, pre- and post- implementation of the coverage expansion of the Affordable Care Act. Beginning on slide 9, we provide an update on the walk-forward to 2013's to 2015's outlook. We made some modest refinements to our expectations, reflecting actual results to date, and the evolution of our thoughts around the seven value drivers. Each of the value drivers is reflective of a single point estimate in the walk-forwards, as a representative build to the middle of the range, but in actuality, there are ranges for each of these items as well. But what is most important, is that the end points in both 2013 and 2015 are reaffirmed.

Starting with the walk-forward from 2012 to 2013 on slide 9, and again, reading from top to bottom, we are expecting outpatient acquisitions, Conifer and MPI, to each continue to provide strong growth into 2013. As you can see at the middle of the range, we are projecting the same incremental $80 million number for MPI in 2013, that we anticipate achieving in 2012. HIT has a positive net effect in 2013, as implementation expenses begin to taper off, and the deferred recognition of incentive payments from prior years, begins to be recorded in EBITDA. We are assuming Medicaid reimbursement remains under slight pressure, and prior cuts are not restored. We also assume an adverse impact for sequestration of $55 million. We are assuming a small $20 million favorable contribution from reduced bad debt expense as the economy improves. We have also assumed a $68 million incremental contribution from other operating leverage. This number captures volume growth, pricing, and core cost structure dynamics. Lastly, our assumptions around the Affordable Care Act are that it will still have an incrementally adverse impact, prior to the initiation of it's favorable provisions beginning in 2014.

Turning to slide 10, and the walk-forward to 2015, our assumptions are still fundamentally unchanged, with only a modest fine-tuning to reflect the events of the past year. We are providing the 2015 walk-forward, in both a waterfall and a tabular presentation. We are providing the waterfall, to be consistent with the view provided last year, but the tabular presentation is a little easier to add explanations to, and it shows the changes between the current 2015 walk-forward, and the one presented in January of last year. The numbers are identical between the two slides. On slide 11, you will note that we have added a new contribution of $20 million to our prior walk-forward related to incremental outpatient acquisitions. Last year, we included no growth in earnings from outpatient acquisitions after 2013. Now that we're one year farther along, we're adding a year of acquisitions to our outlook, along with some incremental growth from earlier acquisitions. Conifer's growth is the same over the entire outlook period, but compared to a year ago, their earnings growth is now a little more front-end loaded. This is probably conservative, as there is significant opportunity here.

We are assuming MPI generates $[50] million in each of the last two years in our 2015 planning horizon. This is conservative compared to the $70 million of MPI savings achieved in 2011, and the $80 million in MPI savings in the walk-forward for both 2012 and 2013. The outlook for health IT is now stronger in these out years. To repeat, we haven't changed our view on our HIT rollout, but the change in HIT accounting defers the recognition of incentive payments out of 2011 and 2012, and moves this income into the outer years of our outlook, increasing earnings in 2015. We made no changes to our assumptions around incentive cash flow for HIT incentives. We also made no change to the contribution from operating leverage, and only modest tweaks to the expected impact of the Affordable Care Act. As before, all of this takes us up to $2 billion of EBITDA in the middle of the range in 2015, and generates a lot of free cash flow, as it approaches that level.

Before I summarize, I want to make a couple of points, with respect to our stock buyback program and capital strategy. Through that program, we repurchased about 70% of our stock at $4.94 a share, a result that we were very pleased with. Please make sure to adjust your models to reflect the reduced share count. As reflected in our 10-K, we had borrowed $80 million under our credit line as of December 31, and we will increase our borrowings in the first quarter, due to normal seasonally high levels of cash outflows within the quarter. So, by the time we end the first quarter, we will have increased our leverage to over 4 times debt to EBITDA, partly as a result of the $400 million buyback program, putting us in line with the average of our peers. As a reminder, that buyback program was announced in May of last year, and was completed early. We will revisit the subject of capital strategy and deployment on a frequent basis 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. We have raised our outlook for 2012, and confirmed our outlook for 2013 and 2015. Our fourth quarter and full-year results continue their upward progression and demonstrated solid revenue growth, continued commercial pricing strength, inpatient volume growth, outpatient volume growth, good cost performance net of costs related to the implementation of our growth strategies, and well-controlled bad debt expense. We're starting 2012 on a solid footing, and are looking forward to extending our strong track record of growth. With that, I will ask the operator to open the floor for questions. Operator?

Thank you.

(Operator Instructions).

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

Good morning. Thank you very much. I guess the first one, I appreciate your comments on the first quarter, good things to think about there. Just wondering if you can give us any color on how you think about some of the positives and negatives on a year over year basis earlier in the year, adjusting for the fact -- I know there was a number of one-time items but it looks like to me last year was maybe in the vicinity of $300 million, if you adjust some of those out.

Thanks, Tom. Biggs will take that question.

Sure, yes. The two bigger items in the first quarter of last year were the California Provider Fee, $63 million, and $25 million of the HIT incentive income. If you look at this year's large items that will affect the timing of earnings during the course of the year, there is $120 million of California Provider Fees, I talked about in my comments a moment ago, which we don't expect to recognize any of that in the first quarter more likely, the second and the third. There's HIT incentives of $35 million, but those are towards the back end of the year. And then on settlements, we didn't put them in that 0.2 number for the first quarter. But at the middle of the range, the increased range $25 million to $50 million for the settlement, so the middle range of $38 million, so the sum of all of those three is under $200 million -- $193 million, if you just take the numbers that I added up there. So that is sort of the discretely identifiable things which don't occur in the first quarter, that will occur later in the year.

Then there is a number of things that build over the course of the year. MPI savings will build. The outpatient acquisitions will contribute increasingly as we go through the year. And then, of course, pricing, as new contracts come in, affect the year as we go forward. So the first quarter is definitely expected to be the lightest on that basis. And even with the -- you eliminate the more discrete items I talked about, we would expect more or less a steady build from our initiatives affected only by seasonality.

Okay, that is very helpful in terms of the progression. I guess, just trying to figure out where that base starts, I'm curious why my EBITDA would be down year over year if you adjust those, for those two items that you mentioned, the $80 million-plus or so together?

Well, there's higher spending, of course, this year than last on HIT. I didn't put that as a discrete item that affects the timing so much. Also, there was $19 million in Pennsylvania Provider, in addition to the $63 million back in the first of last year, so I didn't mention that one up front.

Okay. And then my follow-up, you mentioned Medicaid, maybe getting a little bit better later in the year. How are you thinking about Florida at this point?

Well, overall, we think the risk on Medicaid on of additional cuts on an annualized basis is in the $15 million to $35 million territory. And roughly 50% of that, would be risk is Florida, and 50% of it is Texas. The House in Florida proposes a 7% cut. The Senate has proposed a 10% cut. Both of those are better outcomes for us than what the Governor's proposal had been. But the Governor's proposal is not going forward, at least as we understand it. So we put the risk in the 15 and 35 on an annualized basis. For the second half of this year, it would be 50% of that.

Okay, thank you.

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

Hi, this is [Andy Valen] in for Justin. A quick question on commercial contracting. Can you let me know how you're tracking for '12 and '13, at what rates? And then more specifically, have you seen any evidence of narrowed networks or tiered networks in the any of your commercial contracts? How does that look for 2012 compared to 2011?

Okay. So first comment I would make is we're not giving specific pricing guidance like that. Although, we do have a high degree of visibility into contracting, and we've stated ranges that we expect. But I will ask Clint to -- Clint Hailey, who is head of Managed Care contracting for us, to comment about trends in -- without giving away the March 29 webinar content, Clint, make some comments about trends in ACOs, narrow networks, et cetera?

Yes, there is a lot of discussion about narrow networks and ACOs in the industry. Interestingly, most of the discussion where there is actually some movement, seems to be more in the local market, at the local market level. The national plans, I've talked to every one of them, about narrow network contracting, tiered benefit plans, et cetera. But I don't know that you're really going to see a lot of activity, in terms of actual narrow networks in force until perhaps 1/1/14 when the exchanges come -- open up.

And we've -- as you probably know, we began our first commercial type ACO in Modesto effective January 1. It is too early to tell how that is going. But I think on future calls and on Clint's webinar, we can give some insights on how that is working for us.

All right. But in terms of the 1/1/14, I guess, start date for lack of a better term, I know you probably can't give us a sense of revs that would be tied there, but is this going to be a meaningful amount, or is it going to be immaterial until it ramps up a number of years after that? How are you thinking about that?

It is hard to say. You just don't know. The forecast for the number of people that would be enrolled in these things, if I remember right, was 10 or 15 million people nationally.

Okay.

You don't know how much there might be come -- that might come out of the current commercial portfolio into those types of situations. There are some limits on that, limited to individuals as small group. But it is hard to say at this juncture, we're still two years out. I think we will have a lot better idea in another year.

Okay. And a quick follow-up on the acuity, you said it was up 0.3% sequentially with strength in open heart and cath, but cardiology was down, is that correct? And can you give us some insight there? And then, how does ortho look?

Steve, why don't you -- Newman, make some brief comments on acuity and service lines?

I think you heard that correctly. Our cardiovascular medicine itself was down 1.6% for the quarter. But our cardiac caths and our electrophysiology studies were up a little over 0.5% for the quarter. These are areas that we've been investing in aggressively, redoing our cath labs, creating hybrid labs, so that we can do endovascular surgery in the cath labs. So we feel good about that service line.

All right. Great. Thanks for the color.

Our next question comes from the line of Sheryl Skolnick with CRT Capital. Please proceed.

Good morning, gentlemen. I have two questions. And I will structure them as a follow-up. The first thing is, as you look at the operations of the Company. You've done a really excellent job of driving growth organically. You're getting some lift right now from the outpatient surgery. But I'm curious how much more there is to do -- I recognize the Medicare performance initiatives, that there is more to do on that end, on the cost side. But I'm thinking in terms of the volume and market share, how much more there is to do? Your original guidance was for down admission. You have I think surpassed that for 2011. And at some point, I'm curious whether or not that is going to lead to fewer opportunities to gain occupancy and leverage in the existing facilities, or do you see that expanding? That's part one of the questions. And the second part of the question, is does that mean that you should consider some larger hospital acquisitions? And then a follow-up.

Okay. So why don't I start with a brief comment on -- I think it was a multi-faceted question. But we will start with outpatient, the additional opportunities in the outpatient sector. And I'm going to ask Steve Newman to comment on that. Your observation about growth coming from organic sources is largely correct. We were obviously helped by the acquisitions we made of outpatient centers, that are proximate to our hospitals, and are folded into same hospital statistics, but largely our strategies have been organic. We also did, as you point out, exceed not only the outlook we had issued for admissions, but also all of our internal projections as well, which is similar to the outlook. So it is a good year for us, in terms of volume growth. And we think that that is attributable to the strategies that we've employed, notably the physician alignment strategies, which exceeded our expectations as well. Steve, do you want to make just a specific comment about outpatient, and how that developed during the year and how we saw that? And also how we shifted from an emphasis on imaging towards surgery, during the course of the year?

Well, that's exactly right. Over the course of the year, we did shift our emphasis to acquiring these ambulatory surgery centers, where our joint venture with our physicians. That's a good thing for us, for a number of reasons. But one is that we build relationships with physicians, that don't always have privileges at our hospitals. So through that, they get to know our focus on quality and service. And they give us an opportunity to see how we care for their patients on an inpatient basis, as well as outpatient surgery basis. We also have acquired several radiation oncology centers. We believe that is a growing business, long-term, and it provides a strategic advantage to our existing market in assets.

Let me turn a bit to the inpatient side and challenge your assumption about the organic growth of inpatient. My sense is we have a lot of opportunity to grow inpatient moving forward, and I will cite one particular example. Over the last 18 months, we have developed 20 certified stroke centers. So in the quarter, when we look at 2011 admissions in neurologic medicine, and compare them to the same quarter of 2010, we're up 3.6%. So as we evolve and add more unique services that differentiate us from our competitors, we have the opportunity to make market share, which is normally scattered in many of the urban areas. So I would say opening the channels even wider than we have utilizing our emergency department as access, and now adding urgent care centers which we're adding in seven of our markets in 2012, helped expand the channel by which our doctors get patients and our inpatient facilities grow.

And then on the topic of hospital acquisitions, let me just make a brief comment, and maybe there is a follow up later on this topic. But we have been active participants in several auctions, processes for not-for-profit hospitals over the past 12 months. Frankly, in each case, we were either outbid, or we declined due to price or due diligence concerns, with the exception of one, which was really impaired by the overhang of the situation we were dealing with, up until last May. Our appetite for acquisitions in markets that we serve, or where we see demonstrable synergies is high. Unfortunately, the pricing seems to be high as well, so we will be disciplined on that. But I would make a distinction here and say, that Britt Reynolds who recently joined us and took responsibility for hospital operations in January, has quite a lot of experience and positive experience in hospital acquisitions, having been recently responsible for one of the largest acquisitions that HMA had made. And so, he brings sort of a new perspective to us, in terms of both appetite and then the ability to drive integration post-acquisition. So I'm looking forward to his contributions on that.

Which is why I asked the question, and thank you for that. And thank you very much, Steve, for setting me straight. I knew you would. You will be missed, and I wish you well. Britt, if I could, or Trevor if I could, direct a question to Britt. Welcome to the club, I hope you, with this quarter, I think you will get a sense of how the Street views the Company. And we're all very curious about you, and I guess my curiosity is piqued most by what your view is, of what you found coming from your extensive hospital experience at other companies when you got to Tenet? And what you think the status of the Company is today, and what its opportunity may or may not be?

Thanks, Sheryl, for the welcome. Well, as you might imagine, I spent the first couple of months with the organization in the markets, in our hospitals, really getting to know the people, the leaders, the CEOs, the physicians, and our marketplace, and comparing that to what you have read and seen about the Company over the last several years, in terms of our strategies. And I would tell you on the people front, we have talented folks, we have focused folks and motivated folks in our markets and frankly, from my experience with several proprietary organizations, I believe they are as good as I have seen. And I believe the strategies are sound. They are being executed as you've heard today, and as you've seen historically. And I really think we're well-positioned in the segments of acute care hospitals, outpatient services, and in our Conifer services as you heard a little bit about today.

Several things I like really are, I like our physicians, the strategy that Steve alluded to earlier, where we're adding physicians, we're continuing to employ as well as recruit physicians, in key and needed specialties. We're expanding upon services that either offer us strategic leverage, or just diversify our platform in the marketplace. And our quality is definitely in the solid range and improving. So I think from the organic growth question you asked earlier I see significant opportunities, both organically and accretive, and the acquisition strategy that you actually asked about after that.

On the outpatient side, you heard Biggs earlier talk about our growth in the acquisition on the outpatient sector. We're integrating those things, and we have a very strong appetite for further growth there. And I think this really positions us well for the consumer-oriented segment, where -- where pricing and direct access makes a big difference. And that continuum, I think with this organization is very well positioned for. And then the key, as with Conifer or with our outpatient solutions, is integrating them with our acute care operations, and getting our processes in place, I think is a great start there. There is, obviously, opportunities for improvement. But I would say that my initial take on the first couple of months are, good organic opportunity, good acquisition opportunity. And I'm pleased, as Trevor alluded to, good appetite for acquisitions going forward.

Great. Thanks very much.

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

Thank you. Good morning, everyone. And Trevor, I for one am looking forward to these webcasts. So I will look forward to the managed care one coming up soon. But I guess maybe just my question, which is -- be around the revenue per admit. The commercial number is very strong at 6.9%. I know you spoke about pricing trends being favorable. You talked about acuity being up slightly. But I want to make sure that I heard everything correctly, and had all of the pieces. And I guess just how does the mix impact that also, and in terms of just the surgeries and such? So how are you thinking about that, that total number, I guess?

Sure.

And just any clarity? Thank you.

Well, I think you heard it correctly. And it is a statistic that we don't like to disclose, because it gets played back to us in negotiations. But there have been some question in the last few months about -- and concern I think, on the part of analysts and investors, about pricing trends generally, in our business. And whether we would be able to deliver on the ranges that we had stated in the roughly 5% to 7% type range. And so I think the point of putting these numbers in, first of all, is to offer a proof point, as to what we're actually delivering, being consistent with what we said we would deliver. Second point is, as I remind people, all the time, we have a high degree of visibility into our contracts, since we have pursued for some years a strategy of entering into longer-term contracts, particularly with the large managed care firms.

And so we -- not only do we have visibility, but we're also performing consistent with the range. And really the point to read into it is, no more than that, with these very minor fluctuations in acuity that doesn't have much of an impact on it. I did call out that on the outpatient side, there was some lift, but it is very small, from a greater proportion and greater growth in surgeries, relative to imaging. But anyway, that's basically the point. You heard it right, and that's the reason that we disclosed it.

Okay. And then just maybe a follow-up question, just around the service lines, and you are doing a lot of interesting stuff there. You talked about some of this more specialized deals you have done recently, within radiation oncology, and you mentioned stroke and other areas. So was just really interested in some of those comments, and I know that has been part of the strategy for a while now. But can you just -- elaborate, in terms of other, what I will call growth areas, where you have either made investments recently, or will be making investments in the coming months?

Sure. Steven Newman, why don't you talk about that with respect to the stats for the fourth quarter?

Well, Adam, let me talk to you about two particular service lines that I think are showing promise. One is neonatology. So for the fourth quarter of 2011, we're up 3.8%, compared to the same quarter prior year. That is in face of the obstetrics delivered, still being down about 1%. So our attempt to really consolidate or aggregate the high risk newborn is working. Not only at our Children's hospitals, in Providence, I'm sorry, in El Paso at Providence, or at Saint Christopher's in Philadelphia, but the other tertiary care, neonatal units, for example, that we have in Modesto, or San Luis Obispo, California, obviously driving revenue, driving profitability, and creating a sustainable competitive advantage in the marketplace.

Let me then turn to orthopedic surgery. This is a theme you've heard on the call for the last six quarters. We've been down in orthopedic surgery. This, as we, associated with the downturn in economy, and lack of consumer confidence, we've been concerned about this. Well, for the quarter, we were down 1.4% compared to the same quarter prior year. But interestingly enough, three of the four regions were actually up in the quarter. So if we had not had our specific issues in one region, we actually would have been up as a Company, in orthopedic surgery. This is obviously one of our big areas of concentration. We're expanding the services in that particular area. And I think it is an example of our service line focus that we've done for the last five years, beginning to pay big dividends.

All right. Thank you. Appreciate it.

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

Hi. Good morning. Could you just help me sort out the moving parts between the fourth quarter EBITDA and the implied fourth quarter EBITDA. Because it looks like you're guiding for that to be down sequentially. And I know that is not usually the case, so just help me understand if there is any particular moving part you would like to highlight? Thanks.

Sure. Biggs, you want to take that one?

Well, I will do my best. I'm not sure I have an absolute reconciliation. But the first thing is the California Provider Fee in the fourth quarter of $28 million is -- once again, we're not projecting anything the first quarter for this year for the California Provider Fee, [expect that] to come in later. HI & T incentives, although we didn't get everything we anticipated in the fourth quarter, we still had a $5 million, so that is $32 million that was income in the fourth quarter that we don't have in the first. We do have growth in costs in HIT. As I said earlier, as those implementations ramp up, over the course of this year. 2012 is actually the peak year of implementation spending on the HIT initiative. We also have physician employment adding costs as we go through the course of 2012 compared to 2011, so we have got some things that add to the increased cost. What we just don't have in the first quarter is some of the additional income items, which will come in later on in the year.

And another thing is, as I reflect back on -- I think maybe it was Tom's question early in the call, the first quarter last year, we would have had some settlement dollars in there. This year, in the first quarter, as I said, when we gave that 19% to 21%, or 0.2 of the total year, we don't have settlement dollars in there at all. So -- and we did have some even in the fourth quarter of last year, just not nearly what we anticipated. So that's one of those things, it is a little harder to predict, as demonstrated by the fact that we didn't get in the fourth quarter what we expected. But they're still out there. And that could certainly, more than normalize quarter over quarter, fourth quarter to the first quarter this year.

Okay. Thanks. And just one quick follow-up. Are these settlements, should we think about these as kind of recurring settlements that you try to accrue for, and you're conservative? Or are we kind of working off a backlog of settlements, that in some point in the future won't recur?

Well there -- unfortunately, all of these discussions are confidential, so there is not a lot I can go into, in terms of detailing, and giving you character. Once we get to the point of negotiating and booking them, we can talk more articulately about what is recurring, and what is not. And there's a number of these. So there are a couple of them that are bigger than average, but there's more than that in there. So some of them would definitely fit into the category of routine course of events, and others, because they're larger-than-normal, are just that, larger than normal. The -- but there are so many more out there, in the queue. As I said going into the fourth quarter, the normal -- and that is still the case today. Excuse me.

John, I would just add that settling old managed care accounts is a normal course of business activity. We're drawing some additional transparency to it today, because of the amount, and also in the recent past. I'm not an accountant, but I don't believe it is appropriate to accrue some anticipated settlement. You basically accrue what you expect to receive, absent the settlement. And then the settlement becomes an event that gets recorded. And in some quarters, we've had them and some quarters we haven't, but it is a very routine activity.

Should we think about this, just generally as kind of a re-normlization of your relationship with managed care, following the kind of post crisis period? Or is it again, am I over-thinking that?

I think you're over-thinking it, and there are lots of payers involved here. It is not just an individual one. So I don't think we can really go any further, in terms of trying to characterize it as to a payer category, or the relationship at this point. We will just have to wait.

And we look forward to seeing you on Monday.

Okay, thank you.

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

Thanks, good morning. I just want to go back to sort of the 2012 outlook assumptions, just on the volume side, I guess just your comfort level and that kind of 2% to 3% adjusted admission, and the volume numbers that you gave, just given the results kind of this quarter, and the macro challenges. And then in the past, I think you've given us at times, intra-quarter updates or trends. So any comments this time around related to volumes or payer mix?

Biggs, you want to comment on our assumptions for the --?

Sure. In the aggregate, last year, I don't think -- it is tough to look at one quarter and say that's the trend -- or even two quarters. So in the aggregate last year, we had good growth. We established growth, had it there for the full-year. And we think that all of our initiatives in the physician relationship program, the outpatient acquisitions, our investments in our existing facilities, all of those things will drive volume growth, even without a big boost from the economy. Certainly, as the economy improves, the consumer confidence improves, it gives us additional opportunity, but we think we can grow even absent that. I will save that for the entire -- the four year outlook we that we have there, doesn't rely significantly upon the economy creating additional new volumes. Our overall volume assumptions are much more modest than that. So for the most part, I think the economy gives us upside. We look at the full year's body work last year, and all of our initiatives an looking at this year's as -- estimates as being very achievable.

And I would also just add that our physician alignment activities were weighted toward the back half of last year, giving us more momentum going into this year.

Right.

Any comments on the intra-quarter?

No, we're not going to comment on it today. It is something we don't particularly like to do. So we're going to try to have a New Year's resolution of not commenting on them.

Okay. And then to my follow-up, just want to go back to kind of the cost side. Maybe you if can help us parse out kind of what the go-forward trend you expect, and some of the cost line items, maybe on a unit cost basis, versus maybe some one time increases in the fourth quarter that we saw? Just looking at the salaries line, for instance, up 7%, on an adjusted patient day basis, versus a 3% to 4% trend, I guess in the first three quarters. I know you mentioned you're looking at sort of more employed docs, but is that -- was that sort of some sort of big onboarding in the fourth quarter that really caused that to jump? Or help us think about that trend going forward, the 7% versus 3% to 4%. And maybe similar, we saw a big step-up in the other expense. I know there's been now other things in there, but any way you can sort of help parse out maybe one-times, versus what we should think about in unit costs going forward?

Certainly, I will talk about the fourth quarter, and I will try to clear the context of -- excuse me -- 2012. The two things in the fourth quarter, that I think -- or maybe it is three things that are worth identifying. One is physician salaries. There's about $13 million of higher physician salaries in the fourth quarter. Then on medical benefits, it was -- there was about a $10 million true-up effectively of our accrual for medical benefits for all of our employees in the fourth quarter. So that took up SWMB.

And then higher spending on the HIT program, and it was higher in the fourth quarter than it was certainly a year ago in the fourth quarter. So those things all drove the increase in the fourth quarter. And if you normalize for those, you get back down to more like that 3% kind of level on salaries, wages, and benefits that we would normally expect as a result of our merit program. If you look at it from a 2012 standpoint, on -- for adjusted patient day basis, after reflecting the benefits of our initiatives, all-in, it is about a 5% increase in SWMB, around that kind of territory for the year. Once again, that includes physician salaries, and they are a [ARAI] spend, and if you normalize for those, you get back down around 3%.

Supplies expense, all-in, after our initiatives, once again, considering the MPI savings, we got expected out there, we expect to be pretty close to flat nominally around 3% to 4%, but then offset by the benefit of all the MPI-related initiatives. Other control book expenses, yes, you noticed it's up, but that is ARAI spend and physician recruitment and other factors fitting in there. So I think that that's the -- those are the big drivers. And you have to remember now, ARAI incentives show up as a contra-expense line, so you look at total expenses, that is going to create some distortions period to period, quarter to quarter, depending upon how much is flowing through. But hopefully that helps you in terms of what we're seeing, or what we're looking forward at in terms of inflationary rates before and after our initiatives.

Yes, now that is helpful. Thank you very much.

Our next question comes from the line Matthew Borsch with Goldman Sachs. Please proceed.

Yes. Sorry if you covered this, but I don't think you did though. But can you just talk to -- is there any sort of breakout you can give, for how much you think the -- if you can measure it, how much you think the physician employment that you added last year contributed to the volume growth?

Oh, to the volume growth? I thought were you going to talk about the expenses. No, it is really not something that you can break out. Physician employment, you do for a variety of reasons. One is to fill in channels to the hospitals, fill in gaps in specialists, and that sort of thing. And physicians who you recruit through various means don't have an obligation to refer to the hospital. So that is actually something that is sort of important not to track.

Okay. Okay. Can you tell us again, this may be disclosed separately, and I just didn't note it, but how many new net new physicians did you add, in terms of employed physicians for last year?

Let's see. In terms of employed positions, Steve, do you remember the number?

We added 260 employed positions in all of 2011.

And in the fourth quarter, if you can break that out?

I believe it was 72.

72. Okay. All right. That's it for me. Thank you.

Okay. Thanks, Matt.

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

Thanks. Hi, everybody. Actually just following on that question, curious just to get the base of employed physicians at this point, for the Company? And then, if you could maybe just put that $13 million number, Biggs, that you referenced in year over year higher physician salaries into perspective, what is the total base of physician SWB at this point? Either in the quarter or annualized?

Yes, I don't think that I --

We may have to get back to you on that.

We will see if we can get it real quick.

Total number physicians, Steve, that we have as of this --?

About 660 --

Yes, number of employed physicians, 660.

And the total me -- (Multiple Speakers).

You have to remember, there is a significant -- a significant number of those are associated with Saint Christopher's Hospital for Children in -- (Multiple Speakers). In Hahnemann in Philadelphia, where the staff is employed typically in the academic centers. They're not our employees, but in those two cases, they are.

Sure.

I think the total expenses associated, or total SWB associated with employed physicians is around $40 million a quarter.

Okay. That's helpful. And then I guess, just if I could here, I want to just follow up, you made lots of reference in your presentation about MPI, and how well that is going. Trevor, I guess I would just be curious if there is -- maybe one or two things that you highlight that are going particularly better than expected, on that initiative? And you've got a lot of savings in the walk-forwards in future years, so I think it would be important for us just to put into perspective what is really working there?

Sure. Well, credit where credit is due. Steve Newman and Scott Richardson, his colleague, who has been our operations CFO, has -- they have really driven this program. So Steve, why don't you answer that, that question?

Well, I would say there are a couple of things, and maybe Scott will comment. I would say, that as we move to a more clinical intervention focused approach, we're broadening and deepening the MPI. For example, you know that we have focused on individual customized lists of DRGs for each hospital, and we've made great progress there. But we believe we can accelerate the success of MPI, by adding to that a supplemental approach where we go after a specific clinical intervention, like for example ventilator management. There are over 100 DRGs that end up in the hospital with a patient being on a ventilator. So to the extent, we can standardize our approach to managing patients on ventilators, we actually touch many more patients, many more DRGs, and begin that march to driving down our variable cost, improving our predictability of clinical outcomes, and positioning us for whatever payment system evolves under health care reform. Scott?

And maybe a couple of examples of successes last year. Implantable devices come to mind, for example.

Yes, total joint implantable devices has certainly been a big focus area, where we've executed a great initiative, where we've been able to really reduce costs through standardization and different pricing techniques. We're working on implantables, both in the cardiac rhythm devices. We're also looking at spines, and we've been seeing good success there. As well as on the labor management side, in terms of actual staffing, we've become more efficient, and we continue to strive to be as efficient as possible. We also look at our length of stay, trying to maximize the effectiveness of the length of stay of patients in the hospital. Making sure they get through the system, and have the great outcome, the clinical outcomes, in the -- mostly in the supply area. And that I think was demonstrated last year, with the small amount of increase year over year. So we continue to always look for new ways to be innovative, and I think we've been quite successful. We readily accept the challenge of the $80 million that was given us to. We have that earmarked. We've targeted it, and we're going to be successful in that area as well.

Okay. Great. Thank you.

All right. Well, thank you, everyone for listening in on our call today. Again, we have this March 29 webinar scheduled, and look forward to talking to you again in between. Thanks.