Tenet Healthcare Corporation (THC) Q3 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Third Quarter 2010 Tenet Healthcare Earnings Conference Call. My name is Jeff, and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Thomas Rice, Senior Vice President of Investor Relations. Please proceed, Mr. Rice.

Thank you, operator, and good morning, everyone. Tenet's management will be making forward-looking statements on this call. These statements are based on management's current expectations and are subject to risk and uncertainties that may cause those forward-looking statements to be materially incorrect. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO. Trevor?

Thank you, Tom, and good morning, everyone. Well, I will blame you if you write report saying that this is a noisy quarter. In summary, our earnings number was huge and we're raising the bottom end of our 2010 outlook. The volumes were soft, and the EBITDA is flat to 2009, if you make appropriate adjustments. We generated over $900 million in net income due to the accounting recognition of the value of our tax loss carryforward. Biggs will explain this further, but the key point is that while existence of the NOL has been well known it should be more tangible to investors now that it's on the books. Looking beyond net income, we were challenged by soft volumes in the quarter. We reacted to a particularly weak July by implementing a reduction in force in August. The impact of these actions to reduce costs along with improved volume trends after July led to a positive earnings trend in the quarter, in which EBITDA grew steadily from July to August to September. It's worth noting that we face the very tough comparison this year as adjusted EBITDA was up 50% in the third quarter last year. Once you allow for year-over-year variability, our longer-term EBITDA trend remains strong. You can see the variability and the clear long-term trend demonstrated on Slide 4. Clearly, our growth has been very strong but not a steady as I'd like. When you make your assessment of our growth in EBITDA in the quarter, please consider the items on Slide 5. The third quarter of 2009 included three favorable items contributing a total of $20 million. We called out these items in last year's third quarter call, and nearly all of you noted them when assessing our performance. In contrast, this year's third quarter includes items with a net unfavorable impact of $16 million. In total, these items created a $36 million unfavorable swing from the third quarter of 2009 to this year's quarter. Net of these items, this quarter was essentially unchanged. As I mentioned earlier, we're raising the bottom end of our outlook for 2010 EBITDA to a new range of $1,050,000,000 to $1.1 billion. This is the second time this year we've increased one or both ends of the range. Volumes were certainly weaker than we originally anticipated, but this has been offset by stronger pricing, enhanced acuity and excellent cost control. We're also benefiting from the California provider fee being larger than we forecast and health IT spending being less than we anticipated. Soft volumes were a dominant theme across the industry last quarter, so I'd like to give you some color on our experience. The overall takeaways that the volume declines were contained to a small number of hospitals, and once again a single service line. OB accounted for a full third of our volume loss. Total admissions declined 3.5%, and commercial admissions declined 8.6% in the quarter. July was by far our weakest month for patient volumes. The trend was more encouraging in August and through mid-September. Through the first 28 days of October, commercial admissions trended slightly better than in Q3 but total admissions were slightly weaker. As you can see on Slide 7, outpatient visits were down 2% in the third quarter. Emergency department outpatient visits were down 1.7% in the quarter, but just over 70% of that decline is due to a reduction in flu, so non-flu ED visits are basically flat year-over-year. Outpatient surgeries were up modestly, increasing by 0.1% and adjusted admissions were down only 1.8%. The volume losses this quarter and this year have been confined to a small number of hospitals. In fact, just seven hospitals comprise more than 70% of our total admissions declines in the third quarter. But while these seven hospitals cost the majority of our volume losses, the other 42 hospitals in the aggregate are performing better than the industry average. The seven hospitals are widely dispersed. There are two in Texas, but they're not in the same market. The other five are each in different states. Interestingly, although California is challenged by extremely high unemployment in some of our markets, none of our California hospitals are among the seven. There is no single theme for the volume losses at these seven hospitals. One of the hospitals are having a solid and growing year but facing extremely tough comparison on volumes in Q3. Another one lost the unprofitable volume. Those two, plus three others, grew EBITDA significantly despite their volume losses. The two others saw challenges with their physician channels. These are instances where physicians have gone into direct competition with the hospitals, where we're competing hospitals have engaged in very aggressive and sudden physician employment strategies. No matter the reason for the volume declines, we're responding appropriately, and we believe that we're already turning the losses around. In October, in these seven hospitals, while still down, the volumes were down by a lower percentage than in the third quarter. Turning to service lines. I already mentioned that the third of the total volume decline was in OB. Looking beyond OB, there's some elective service lines, I'd like to share some interesting insights with you. As we're deep into the recession, it's very clear that patients who have a significant personal financial responsibility are behaving very differently than patients who don't. We've known all along that this was driving reductions in our commercial elective surgical volumes. But let me give you some facts that our other orthopedic surgery as an example. If you look at Slide 10, you'll see that total admissions for orthopedic surgeries declined by 2.5%. Commercially insured orthopedic surgeries declined by 9%. Orthopedic surgeries for all other patients, most of whom are covered by Medicare and Medicaid, actually increased 0.2%. The same pattern is true with spinal fusions. Commercially insured spinal fusions declined by 160 admissions or 15% in the third quarter, but noncommercial spinal fusions increased by 17% or over 150 admissions in the quarter. Since the same physicians are doing these surgeries for both payer classes, the loss of commercial volumes and the growth of noncommercial volumes to just this behavior is being driven by the patient not the physicians. We believe this patient behavior is largely related to economic uncertainty on the part of the patients, commercial enrollment losses and rising co-pays and deductibles for those who remain insured. Again, on Slide 10, you can see this pattern holds through across several service lines that we would consider as elective and easy to defer. Slide 11 illustrates that when the procedure is harder to defer, like in the case of OB, the changes in volumes in other commercial and noncommercial populations are very similar. Despite the challenges to volume growth, favorable pricing and acuity continue to drive a stable picture for revenues. Commercial pricing remains particularly strong. We also had a 2.4% increase in commercial acuity. The result was positive commercial revenue growth of nearly 1% for the quarter. Collectively, this helped us generate adjusted free cash flow of $53 million in Q3, bringing year-to-date free cash flow deposit of $74 million. We've made a lot of progress on other front in the quarter. We continue to improve and de-risk our capital structure, pushing out the majority of our 2013 maturities to 2020, while retiring $229 million face value of debt. This brings our total debt slightly more than $4 billion with no meaningful maturities for five years. We also entered into a new $800 million credit line with new flexibility with regard to our capital allocation options, including lifting an existing limitation on stock repurchases. Earlier this year, we drew your attention to the seven items on Slide 14, which we believe can drive significant margin expansion and earnings growth over the next few years. While some of these items depends on a recovering economy, three of these initiatives, Outpatient, Medicare Performance Initiative and Conifer, were more directly under our control and less dependent on an economic recovery. Just walking down the list for a minute, our newly acquired outpatient centers are already coming online. We expect to have invested about $70 million in outpatient acquisitions by the end of 2010 and believe there are enough great opportunities that we could do that again in 2011. We anticipate these acquisitions will add $100 million to $150 million to revenues in 2011, and given the much higher margins in this business, contribute as much as $30 million to $40 million in 2011 EBITDA. Turning to MPI, we are very much on track with our 2010 objective of a $30 million incremental EBITDA contribution. While we have not yet completed our MPI plan for 2011, our preliminary view is for another $30 million. Conifer will take longer to gain visibility, but we remain very excited about its prospects. Conifer's contributions from outside clients to 2011's EBITDA growth will exceed $10 million. Our healthcare information technology initiative will again create incremental expenses in 2011. And as previously disclosed, we're not planning on a net positive net financial contribution from the initiative prior to 2012. Earlier last month, we went live at four hospitals, and the rollout went smoothly. We're going live in an additional three hospitals this month. In addition, we continue to achieve solid commercial pricing that's consistent with the trends of recent years. To make major progress on margin expansion and EBITDA growth, we need volume growth and to go back towards prerecession bad debt expense levels. But it's still clear there's much we can achieve even in the absence of recovery. So to wrap-up, I believe we demonstrated once again that we have the appropriate and effective leverage to pull in the short term to keep us on track relative to our longer-term performance milestone. I also believe our long-term growth strategy have us well positioned to face the myriad challenges that 2011 will bring. And with that, let me turn the floor over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Trevor, and good morning, everyone. The biggest item impacting our net income for the quarter is a recognition of the tax benefit or our net operating loss carry forward. This recognition resulted from our reversal of the previously-established valuation allowance and added $981 million to our net income or $1.75 per diluted share. Under generally accepted accounting principles, which arguably are conservative on this point and in recognition of our sustained and sustainable return to profitability, the realization of this tax benefits has become sufficiently likely as to require its recognition in our financial statements. Given the conservative criteria applied in our GAAP, this makes a strong statement about the expectations of our future profitability and the value of the NOL. As a result of this recognition, our income statement tax rate in future quarters will approximate a normalized tax rate of approximately 40%. From a cash perspective, however, we will continue to benefit from the tax shield, and our tax payments on future income will be primarily limited to state taxes, and will continue at the low level of recent years. It will remain low until our loss carry forward is fully utilized, which is still a number of years out. The biggest item not impacting either net income or adjusted EBITDA in the third quarter was the $64 million net receipt of revenues related to the California provider fee. Due to delays in a very complex approval process, this materially favorable event was not recognized in the third quarter. The portion of the plan related to direct medical payments was approved after the end of the quarter, with the Managed Care portion still pending. We had expected that up to $55 million would be recognized in the third quarter. This delay has no affect on full year income but will cost some of the cash receipts to slip out of this year into next, which we estimate at a net $36 million. Looking forward to next year, the California provider fee may be renewed for a half year, and a new fee in Pennsylvania worth approximately $25 million is in the process of development. Other states are also working on these types of arrangements. Just as food for thought, if you put the normalized 2010 value of the California provider fee at $37 million, but Pennsylvania fee and a partial extension of the California fee could more than replace that. So you should not think of the revenue from the California provider fee as being entirely non-recurring and looking at next year. For a cash basis, the cash received from provider fees could actually go up next year. Adjusting both quarters for prior cost quarter adjustments, revenues grew slightly in the third quarter as a result of strong commercial pricing and case mix, offset by adverse payer mix in aggregate declines in paying volumes. As in the prior quarters of this year, case mix on commercial Managed Care was strong relative to last year reflecting about a 3% increase. As I said in last quarter's comments, this increase in acuity has to be considered in understanding the economic effect of lower volume. Our overall pricing picture remains positive. Even with the commercial volume declines we experienced in the quarter, commercial pricing gains were sufficient to drive growth of 0.9% in commercial revenues in the quarter. Because of the payer mix shift, however, net inpatient revenue per admission increased by only 1.1%, and net outpatient revenue per visit increased by 5.6%. The strong increase in outpatient pricing reflects the loss of H1N1 volumes from last year, which had generated lower revenues per outpatient visit. The absence of flu volumes in this year's third quarter drove average pricing higher. Once again, this demonstrates the necessity of understanding acuity and patient mix when assessing the economic effects of volume fluctuations. While among the topic of pricing, I will comment that we continue to have very good visibility with regard to our forward pricing. At this point, approximately 80% of our commercial contracting is complete for 2011 and 40% for 2012. Turning to cost. Although the benefits weren't fully visible in the third quarter, we successfully took action to flex our cost structure. As Trevor mentioned, July's volumes were particularly weak. We responded very quickly to reduce our staffing and implemented the significant reduction for us in August. We incurred a couple of million in severance costs as part of this, but this August, the action left us well positioned for the balance of the quarter. Those cut should also have full visibility in our fourth quarter. In addition, we have delayed our annual merit increases for the general population from October 1 to January 1. This takes us a step closer to timing our merit increases for all employees in the April time period where they used to be. The result of these actions are merely evident in our internal measures of productivity, which looks at FTEs per adjusted average daily census. Despite the soft volumes in the quarter, this productivity measure actually improved in the third quarter as FTEs per adjusted average daily census declined in September by 1.2%. Supplies cost were essentially flat in the quarter. On a per-adjusted patient-day basis, the increase in supplies cost was 2.6% as adverse operating leverage and the increase in acuity offset the effects of our supply cost initiatives. Because we recorded within other controllable cost line were more of a challenge. Many of the costs recorded in this heading are more heavily fixed or semi-variable in nature and as a result are more difficult to flex in response to soft volumes. We also recorded some incremental expense from items whose actual early determine impact is adversely influenced by declining interest rates. While now practice expenses increased by only $1 million relative to last year's third quarter, the decline in interest and therefore discount rates at $11 million to malpractice expense in the current quarter. Combined with an increase of $3 million in workers comp expense, lower discount rates added $14 million to operating expense in the quarter. This discount rate adjustment should be considered unusual at this point given low rates we were already seeing on U.S. Treasuries and can be expected to more than reversed itself in the future when interest rates rise to normal levels, thereby creating earnings upside of up to $40 million at some point in the future. In addition, we recorded an incremental $4 million of HIT expense. As Trevor mentioned, we successfully went live on the first phase of the system of four of our hospitals in the month of October, and we now expect the internal effects of these expenses to be down to $11 million in 2010. We expect this incremental expense to increase in 2011 prior to being offset in 2012 by the recognition of federal incentive payments. This increase is now a deferral of 2010 expenses, but is reflective of the increase and number of implementations in 2011. Our bad debt ratio declined to 8.3% in the quarter, a 20 basis point decline relative to 8.5% a year ago. This decline includes the recurring benefits of federal Medicare bad debt recoveries, as well as declines in uninsured volumes. We view the size of this quarter's Medicare bad debt recovery as representative of ongoing sustainable impacts that can be expected in future quarters. We had $398 million in cash and cash equivalents at quarter end, a decrease of $313 million from June 30. The largest driver of the cash decline was the use of $274 million to reduce debt. Cash provided from continuing operations was $160 million, and adjusted free cash flow was $53 million after capital expenditures of $107 million in the quarter. In the third quarter year-to-date, our cash from operations has been held back by lower levels of accounts payable and in the prior year. Some of this is due to the timing of expenditures or aggressive disbursements. We've not changed policy or contractual arrangements however, and we expect payables to expand again by year end. Subsequent to the end of the quarter, we completed the sale of a number of our Florida medical office buildings, generating cash of $46 million. As a part of the sale, the buyers committed to certain capital improvements to facilities, which will benefit our position Tenet's. These MOBs had immaterial annual ends and EBITDA. We continue to actually market additional MOBs, and we believe a number of these transactions could be completed in the next few quarters. At this point, we have other MOB sales contracts pending worth approximately $50 million, but in real estate, nothing is done until it closes so there's not reflected in our outlook. Turning to our outlook. We have raised the lower end of our outlook to a new range of $1.05 billion to $1.1 billion. We raised both ends of the range of pretax income, reflecting lower depreciation and interest expense. Our revised assumptions are detailed on Slide 24. This revision includes the lowering of our volume and revenue estimates, which are tied to a later reductions in our cost estimates for the balance of the year. There's been speculation that volumes will grow in the fourth quarter of more than a seasonal basis due to the effects of co-pays and deductibles. At this point, we're going to be conservative and not count on that in our outlook. The walk forward of cash from September 30 to December 31 is provided on Slide 25 breaks down fourth quarter cash flow into its major components. It's too early to give an outlook for 2011, but I do think it's appropriate to give a little balance to what the headwinds and opportunities are going into next year. First, the biggest challenge remains on the volume side, but some of the effects of the economy and flu should have average rate by the end of this year. Economic stability followed by recovery would presumably create upside. Second, we expect the full year benefit on the outpatient acquisition we're completing on the second half of this year and a partial benefit of those we're targeting for next year. Third, we're already seeing improvement in the yield on our physician additions the last couple of years, and we expect expansion of that benefit in 2011 and beyond. Fourth, commercial pricing is almost completely negotiated with reasonable existent price increases expected next year. Medicare, all in, is basically flat as outpatient increases offset inpatient decreases. I've already talked about state signing and potentially new provider fees with the 2009 retroactive portion of the California provider fee being the one element most challenging to replace. Finally on the cost side, we will increase our investment in our physician base and HIT both of which will yield improvements for the future. And we will continue to drive on our Medicare performance and related initiatives to reduce link to stay in supply costs. In the aggregate, we will continue to drive toward industry margins. We have confidence in the path we have laid out. The only gating consideration in what the near-term timing and slow for progress is going to be is the degree of economic headwinds we must offset. On the positive side for 2011, we expect to drive value in the outpatient investments, position base initiatives, commercial pricing and the Medicare performance initiative. The big potential near-term negative, longer-term appositive is, as I just said, the effect of economic conditions. It is not clear and therefore remains subject to continuing evaluation by us as to what extent economic conditions will offset the net positive drivers of growth in 2011. So to summarize. The value of our NOL carryforwards has been confirmed from accounting standpoint. We have raised our outlook for EBITDA and pretax and net income for the year. We approved cost efficiencies in the quarter, as we were able to react quickly to significant volume declines in the first month of the quarter. This will be fully visible in the fourth quarter. Free cash flow came under pressure due to the timing of disbursements in rising CapEx. But because of the timing effects on accounts payable will reverse themselves, we have retained our free cash flow outlook for the year. Pricing continued as the source of strength. Commercial case mix remained favorable compared to the prior year. California provider fee, has been partially approved while full approval expected this quarter. And one last point. From a volume and payer mix standpoint, this was the weakest quarter we've experienced, clearly reflective of the economic headwinds. However, the fact that we held earnings flat on a normalized basis and even in this harsh environment demonstrates that we are well positioned to grow earnings as the economy moderates and/or as our volume initiatives yield increasing results. Let me now ask the operator to assemble the queue for Q&A. Operator?

[Operator Instructions] Our first question comes from the line of John Rex with JPMorgan. John Rex - JP Morgan Chase & Co: And the issue here for me is when we look at the share, the erosion in commercial, and it's just been persistent now as many quarters in terms of actually kind of seeing accelerating losses. So my question is, it looks like you're losing share when that compared to what I'm seeing from others and when I even think about what I'm seeing is kind of more stabilizing trends in just commercial coverage broadly. So can you tell us how you look at that in terms of the potential share losses you might be seeing in the markets?

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

John, I think it's an excellent point, and we've got a great deal of evidence that we're not losing commercial managed care or market share except in the markets of the hospitals that Trevor mentioned in his comments. Our evidence comes from three separate sources: First, our statewide all-payer database; second, our large statewide Blue Cross plants, where we have significant penetration in those markets; the third is a review of our market share with three of the largest national commercial payers. In summary, these studies also guess, except in a few isolated instances, our commercial market share is stable.

And I think, John, we triangulated on that question. As Steve said, there's several different approaches to it. But very hard to do with precision. So this quarter, we did something we haven't done before, which was essentially go to the payers who would give us this information to say, "Look, this is our change in volume with you in this particular market. Tell us, because you have access to it, what is the share change and was very reassuring in all cases with the exception of a few, where it's clear that we're losing share because there's, some new competitors some different dynamic in the market." John Rex - JP Morgan Chase & Co: And my follow-up, if you look at the seven hospitals that you spiked out, what percent of company revenues were they representing? I'm trying to compare, I think about your top seven hospitals and percentage revenue there. Group this seven, where would they fall?

They do tend to be some of our larger hospitals. So we have a portfolio that ranges in size, but does have some large ones. And I think, when you have a quarter where the large hospitals are underperforming at any given statistics, it tends to drive the company in that direction and vice versa. And unfortunately, this is one of those quarters and I've seen other ones over the time that I've been with Tenet, where the largest hospitals with exceptions were moving in the wrong direction.

So these are not our seven largest hospitals but amongst them are [indiscernible] hospitals. John Rex - JP Morgan Chase & Co: So I'd find some of that in that category then. And does stabilizing coverage levels, do you think there's going to have impact or what you're seeing at this point, is it less about erosion and just commercial coverage and more just about avoidance of the carenstein [ph] at all ?

Well, you've got the baseline high-shrinking issue of the commercial enrollment losses that's been running around 4% among the big payers. You start with that. And then you add to it some utilization issue that potentially is driven by the economic incentive that are inherent in higher deductible health plans. And now the enrollment losses you could see turnaround in a stronger economy, the shift towards a higher deductible plans and whatever's depression of consumption exist that could be a longer-term trend. But like just this morning, I'm encouraged to see in the newspaper the results of the Kaiser survey that among very small employers, coverage is going way up to these tax incentives that they've been provided with. So among firms with something like nine to 13 employees or five to 13 employees. But the average percentage is up like nine points. I may have sound of that a little bit wrong but it's an encouraging trend among the smallest segment of the employer population.

Our next question comes from the line of Shelley Gnall with Goldman Sachs.

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

So hard to generalize and one of the reasons I mentioned that among the seven hospitals generating 70% of the admissions decline is none in our California, because we did not see in terms of the volume performance of our hospitals, a correlation with unemployment. And our highest unemployment market were really not having a volume problem. And conversely, where we've seen these physician competition phenomenon that has really created new capacity and a new entrant into a market that's very aggressive owned by physicians were they have the ability to direct patients, that in some of our markets with the lowest unemployment are the best trends in unemployment. So I would set aside the unemployment correlation. We've also seen some very strong volume performance in Florida, which is a market that's struggled for a long time. And that I think can be attributed to strong management actions and market working to see sizeably on business development activity. So you really -- at the risk of having added two paragraphs to my script on this volume side, I'm trying to convey an impression that there is not an overall trend, one way or another that you can point to or some correlation that it's really more one-off issues. And that's the way we've had to manage them.

Other than the cost shifting that you're seeing from the commercial payers, are there any other specific actions that they're taking to limit utilization specifically on the inpatient side?

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

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

First, the Slides 10 and 11 that you offered the commercial versus noncommercial admission trends, very interesting data. Curious if you look back is the discrepancy between those two payer classes growing or moderating? Or how would you consider that trend?

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

And then you mentioned Managed Care 80% of your contracting, I guess you're done for next year, 40% the following year. Could you just remind us of sort of the average rates that you're expecting and also maybe more importantly, comment sort of on the tone of discussion I guess there have been some suggestions out there that obviously the Managed Care environment is getting a little more difficult for the payers. I'm wondering if that's leaking into the tone of conversation with you all?

This is Biggs. First of all, to address the rate question, the rates that we've negotiated for next year are pretty much in-line with what we've budgeted as negotiated rates for 2010. It ultimately, the yield, we get on those will determined by patient mix index and any payer shifts between the plants, but the negotiation are very much in line with what we've budgeted and achieved this year from a peer-rate negotiation standpoint.

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

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

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

I guess the only thing I would add is, I've made an effort to stay close to the senior executives, some of our largest customers and to remind them that we provide a very good value solution for them. We have demonstrated high quality. They assess that themselves. I don't need to convince them of that. And our price point relative to our competitors in virtually all of our markets is certainly not the highest, and sometimes it's on the low end of the market pricing. And typically with a large prominent successful not-for-profit system leading the way on pricing. So I feel that we are well positioned with the national payers from a value point of view. We're also exceedingly well positioned when they look at the total cost to doing business with us because we have streamlined and automated the revenue cycle process with them. So we have lowered -- they tell us, we have lowered lower-than-average denials. We have better-than-average electronic connectivity and we offer a total solution that I think is very effective as they start to look harder at price sensitivity and narrow networks in their markets.

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

I guess to follow-up a few thoughts here. I guess the volume weakness is something that everyone was talking about throughout the quarter. So I do think that really caught people that of off-guard. I guess it was just throughout the year with the volume weakness you guys have able to offset it through better unit pricing growth, as well as just cost cutting. So I guess the question is, as you look back on the quarter, Trevor, just maybe talk about -- and you guys called out a few things like the discount rate and some of the issues around cost there, but I guess just in terms of the ability to offset the volume weakness and not even the most recent quarter but going forward as well maybe just to go back through and talk about some of the initiatives there and certainly, you have the great slide deck here with that, but to just get some more clarity in terms of just visibility around the ability to offset volumes.

I think, Adam, in the beginning of your question, you touched on a topic that I think is important just to be very clear about in case it wasn't clear enough in the scripts. But we were trying to make the point that although I think the industry-wide volume weakness was well known throughout the quarter. There were plenty of surveys and other indicators that, that was taking place. What was surprisingly negative was July. And so, I mentioned that July was particularly weak and then we took actions to reduce cost. Of course, these actions couldn't be taken in July, they were taken in August and have that effect of creating a positive trajectory in EBITDA from July to August to September. And as volume losses moderated from July through August through mid-September, then they did turn down in late September, that's the implication of saying that they were strong through mid-September. So I think one way -- the thing I would characterize as being unusual in the third quarter at least for us was how negative the first month was and then the fact that although many in the industry anticipated some snap back in August was encouraging, that, that encouraging trend at least in terms of volume did not persist through the entire quarter. And then based on our comments about October, it didn't persist into October. but I think to answer your question about what we can do and how we've been able to offset weak volumes, obviously, it's very hard on a month-to-month basis, because it's easier on a quarterly basis and it gets easier to accomplish. I shouldn't use the word easy. That's not easy but it's less difficult to accomplish on a yearly basis. And so, if you look at the quarter as a whole, we really overcame a lot of challenge that we had right out of the box in July. But it's difficult to do more in a short period of time. I think we have positioned ourselves well going into the fourth quarter. But again, we don't even have the first month of results on that yet.

Just on the unit pricing, the 1.1% you talked about mix having some impact there, maybe just go back some of that. I guess, the commercial piece you talked about but just within the other categories just maybe a quick update there in terms of -- and I guess, what are you guys thinking about in terms of being normalized revenue per admin number if you try to clean up some of the noise there?

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

I just point, Adam, that we had a 5.6% increase in revenue per outpatient visit. That's largely driven by increases relatively speaking about patient surgery and high-end imaging like CT and MRI.

I'm going to add a response to, I think it was John's question earlier on the revenue from the seven hospitals. We want to pull the statistic and from the period of merit standpoint is the seven hospitals are 14% of our hospital count from a revenue standpoint, they comprise 18% of the revenues in the quarter. So a little more heavily weighted than the peer hospital account but not, as I said, because there's not all the largest hospitals that are in there. It's not a real disproportionate share of the revenue.

Our next question comes from the line of Ralph Giacobbe with Credit Suisse. Ralph Giacobbe - Crédit Suisse AG: In the release, you mentioned increased physician employment. And I think in the past, you've talked about not necessarily wanting to employ. Can you maybe talk about what's changed to your strategy there and maybe just give us a sense of the base that's employed currently where that can go?

Biggs, you want to take that?

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

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

Well, look, I will be the first to say that I had a particularly bad attitude about jumping into the employment trend having experienced first hand the disasters of the late 90s when hospitals rapidly purchased practices and employed physicians and lost on a tremendous amount of money. But this is a trend that is inexorable. It started with the large most prosperous, not for profits. We compete against a lot of this in our markets and we have completely adopted, I think new and improved way to do this. So just to go in order of sort of the promise that we're doing about it. Purchasing practices is really not market practice anymore. It's employing physicians. So you don't have the problem from the 90s of spending a lot of capital on purchasing something that turns out to not be worth of what you paid for. So it's really hiring talent. And then in terms of hiring talent, we've become very sophisticated about how to do it in terms of providing incentives for productivity so we don't experience the next problem that was characteristic for the 90s, which is hiring physicians, which essentially was enabling them to retire at the expense of the hospital. So we're incentivizing productivity. And we've also experienced some churn of the employed physicians based on those who failed to meet the productivity target leaving and those who are succeeding in the productivity target staying and enjoying the benefits of that. We've also been very selective in terms of the credentials of the physicians that we've been hiring. So just as if you undertook to hire a cadre of 200 MBA students you want to go to the top schools and hire the best students, we're doing the same thing when it comes to physicians. We're also being very selective about filling certain holes and specialties or building primary-care networks, where that strategy is right. And then finally, rather than attempting to manage all these practices ourselves, we've employed in a joint venture format a practice management company that's an expert in doing this and running them at economic results that are superior to what hospitals generally experience. So I think, all of these things together and I didn't mention the EMR solution that we're offering for physicians, I think it's a better solution, and we probably got started later than we should have. And perhaps it's because of historic bias, at least on my part, against that as a strategy. But we are well into it now and have a very strong pipeline of physicians that we are employing. Ralph Giacobbe - Crédit Suisse AG: And just my follow-up, I'm wondering sort of revisit capital structure. You talked about sort of refinancing, pushing out debt maturities. Are you kind of happy with where the company sits from that perspective? Is there anything else you would contemplate? Obviously, you mentioned share repo in your commentary, just given where the credit markets are in just the overall rate environment?

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

No, I think there's some small amounts of the '11 and '12 maturities still outstanding, so obviously, over time if not at maturity, we will retire those in due course. And otherwise, if the capital structure are big drivers to keep driving on improving free cash flow, drive up earnings and drive free cash flow along with it. And further improve all of the statistics and the ratios.

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

So maybe I'll just follow-on to that point a little bit more just to round capital and deployment of capital. If you include some value of your NOL, you're probably trading just a little under 5x your guidance for 2010 on an EBITDA basis. So I guess, I'd be curious to hear your thoughts what kind of assets you can buy that are out there that are more favorable than that type of valuation. So are you seeing any acute-care assets? You've commented a little bit more about your interest in getting aggressive on the outpatient side? Maybe just update us generally on capital deployment priorities.

Obviously, if you employ a rule of thumb that says you should only acquire things to trade a lower multiple than your own multiple. It's very limiting. Based on my comments about outpatient, it appears that we are doing that, and we're very pleased to outpatient acquisitions that we're making. I would say that the potential acquisitions of the acute care hospitals that would be of interest to us or of the greatest interest to us, there are certainly more hospitals considering selling themselves or seeking partnerships of some kind. And we're spending more time than we ever have exploring those types of things. I think it's premature to talk about value and whether we would actually proceed and devote our capital in that way. What we haven't been doing, you obviously noticed is we have not been competing in the auctions that has been out there for standalone hospitals or possibles that or -- whatever other acute-care transactions are out there. I don't think we are necessarily the best potential acquirers for those kinds of things. Where we have been focused is more in our markets and things that have some degree of synergy, where we understand the market, we understand the dynamics and the future trends. And obviously, given the uncertainties around healthcare reforms something you have to take into consideration when you evaluate the hospitals. So for that reason, we've been most focused on the outpatient side. I think that you'll agree since we gave some disclosure on those numbers that those are incrementally very helpful acquisitions for us. We like that business and will continue to do that as much as possible. And then, with -- there maybe opportunities in the future within our Services business, which we're also very excited about, the multiple issue tends to present a barrier there, but we have to keep our eyes open on that as well.

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

Like I said it's 1.2% improvement in productivity. So it's quite a little north of that approaching $40 million on an annual basis. Real near term depending on third quarter, the fourth quarter other improvements we expect on the malpractice and workers comp side really took the hits in the third quarter for the discount rate. We expect those to not occur in the fourth quarter and possibly will have improvement again in the first quarter as a result of what continues to be good claims experience. Another thing looking at the third quarter was it was a couple of million dollars of severance costs in there, so that was that was the cost of achieving the reductions and we don't expect that to occur in the fourth quarter of the future. So there's a number of things going on in addition to just appear FTE reductions to be considered looking at or maybe this year and on to the future. And of course, we're still driving on the MediCare performance initiatives, which is worth $30 million this year and expect to do similar amount next year in terms of incremental savings.

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

I was wondering if you just maybe elaborate a little bit more on the line in the slide about the Managed Care portion of the provider taxes still awaiting approval from CMS and what that involves?

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

And I guess just the Managed Care portion have to be put to bed before the entire plan can take place? Or is it should we view it kind of separate by some chance the Managed Care portion gets approved?

It's happening in pieces. And In fact, the direct payment portion of it, the fee-for-service portion, has already been implemented. And we've been invoiced and also receiving funds on that portion of it, which is about half of the total, near half the Managed Care piece will happen separately. But as I said, we expect it to happen.

And then one quick follow-up, Trevor, I know you mentioned that there wasn't any data on volumes for October. Any initial thoughts just in terms of where it might going to stand up?

I actually commented on the volumes on October. I'm not sure what you mean by your question.

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

No, it's too early for that. Usually, we have the volume data daily. And then at the close of the month but then to get clean service line and payer data takes a little longer.

Our next question comes from the line of Whit Mayo with Robert W. Baird. Whit Mayo - Robert W. Baird & Co. Incorporated: Trevor, can you go back and talk about the delay in merit paid? Did you say that, that was going to be pushed to January? I guess, I didn't follow you.

Let me just tell you conceptually what we decided to do. We had multiple employee populations with an expectation of annual inflation/merit-oriented salary increases at different times in the year. So we've had for a long time a desire to standardize that all at the same time of the year, which is really the spring being the best time. And so, given the sort of rapidly decreasing expectations of inflation and also the observations we made of competitive practice declining in terms of the increases that competitors appear to be giving to people, what we've decided to do was to implement the program effective January 1, but to tell people in advance what they would get. So I think it's a very good solution from a cost management perspective. It also administratively will simplify our administration of these programs in the future. And it obviously, was a prudent move to save costs in the second half of this year.

Is there any chance that, that may be delayed further in between '11? I guess I'm just wondering if that's a concrete start in January or whether or not?

No, that's concrete for January. Whit Mayo - Robert W. Baird & Co. Incorporated: And any other benefit design changes, anything that's meaningful as we look out to 2011?

Not that we're contemplating at this moment. Whit Mayo - Robert W. Baird & Co. Incorporated: My last question, Biggs, I was just curious if we could get the P&L expense and the cash CapEx numbers for your electronic health records been this year at least year-to-date and maybe a peek into what those two numbers may look like in 2011?

I'll do the second part first. On 2011, we're still in the planning process. We've completed, as we said four implementations here in the last couple of weeks. We have three more that are going live shortly among other things. We have to look at that experience what it's cost us what lessons learned are as a part of fully defining next year's budget and expectations that we would communicate as a part of our outlook. But in any event -- but we do expect it to go up as I said earlier. And maybe that's not so much, an increase off of what we originally expected for this year as it is just an increase in where we actually landed for this year. So the comparative number for this year has come down as opposed to saying next year is increased off of what might we have expected before. This year, we're spending around $90 million in incremental spend. It's actually that total spend -- it's about $66 million of that is CapEx and about $23 million is expense. And like I said, the expense of $23 million represents an $11 million increase over the prior year. Whit Mayo - Robert W. Baird & Co. Incorporated: On the P&L?

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

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

First question just on the outpatient side, specifically, you look at that as being opportunity. Talk about outpatient margin being significantly greater than inpatient. I'm just wondering if you can give us some color there in terms of a magnitude of differential between those margins?

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

Are you just talking about surgical centers at this point on the margin side because if that will all -- I think it's pretty clear those out margins that are much better than in in-patient hospital or acute care hospital.

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

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

I think, actually, the latter one on the provider fee, the amount of the provider fee attributable to 2009 is what I said the most challenging of the care provider fee and that's actually about $27 million of the $64 million. The amount, which is carrying over to next year from a cash standpoint is about $36 million.

Any other kind of provider fees or provider tax benefit you're getting this year that you don't expect? So you expect the other $37 million of the $64 million to reoccur again in 2011? Or that you would expect to guide to?

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

And then just healthcare IT increase year-over-year?

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

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

$10 million to $30 million would be in the low. Low tens is very [indiscernible]. But as I said, it's early yet to put a hard number out there.

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

First, I want to complement you on the extensive diligence you've done on all the key questions that I would have had about the composition of the volume shortfall in trying to get comforted guidance in bridging, where we are from third quarter and the difficulties here versus the fourth quarter and then to 2011. So it's extremely helpful, and I think it was fair to do. But I'm going to turn to sort of a more conceptual question about the fourth quarter guidance if I could. If I take out the provider fee, anticipated impact in fourth quarter, which I believe you said was $64 million, and I look at that -- first of all, would it be correct to assume that, that would drop 100% to the EBITDA line?

Yes.

The answer to that I think is yes. And then second, if that's the case, then your guidance sort of implies something on the order of a quarter to flat on the EBITDA line with third quarter to something that is would be up around the sort of $270 million to $280 million in order to achieve the $10.50 million to $1.1 billion if my math is correct. So if I look at those numbers, I'm still not sure how you get to the upper end of the range. So my question then becomes, what really has to go right for us to be optimistic that you can get back on the path of exceeding not only consensus but achieving the high end of your guidance or even exceeding it?

I'll try to answer the first batch. Obviously, we've taken cost out. We've talked about that. And if you look at this from adjusted patient-day basis in Q3, our experience was around $2,050. Q3 year-to-date was $1,995. So clearly, Q3 jumped up. Q4, we look at being back around that $1,995 kind of levels. So based upon the reductions in staff, the improvements we forecast on mid now, severance is not recurring as I talked about some of other initiatives to drive down costs. We think we get back down to that $1,995 kind of level. So it's at the middle of the range. And of course, there's opportunity, they'll beyond with that to help drive towards the end of the range as well. From a revenue standpoint, we've just looked at what's real recent experience on volumes. And as I said, we didn't presume many kind of a hockey stick in the last two months of the year. But from an overall admit standpoint, at the middle of the range, we could be at a negative 4% to 5% and still hit the middle of the range and commercial still be in that 6% to 7% kind of range where we were at for the first half. Once again, be in the middle of the race. So those seem like based on everything we know, still some recent very conservative positions to be taken as we look at the underlying trends. So there's opportunity in my mind for us to do better than those of both on the cost side and on the volume side but as you know, we didn't take up the upper end of the range because we wanted to stay conservative and not presume that we're going to do better than those and left ourselves, I'd say to build a range based on those stats.

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

Well staff reductions, it's the only place for reducing cost to make our performance initiatives driving cost out and supply cost were basically flat and have very low inflationary rate even with higher acuity. So there is success in our efforts there, and they'll be continuing in success. But cost is also not the only way we're going to drive value. Even if we don't have increasing inpatient volumes over the near future because we have the outpatient acquisition is driving value. We have our investments in Conifer yield increasing value. The price negotiation, the commercially still favorable, the price on government, pretty much flat. So there's plenty of things we're operating on to create value besides just driving our cost but there's more cost opportunity too.

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

And just finally, on your commercial Managed Care negotiations, we've begun to see some more, shall we say, innovative almost back to the future kinds of tactics at the Main Street level on the part of some of the Managed Care companies with their relationship with physicians, with restructuring their contract for payment, for example, United with an oncology we've heard about the potential force some of the company's to have more direct even ownership relationship with providers, physicians, hospitals, outpatient, et cetera to have them do the rationing rather than the health plan, but the health plan gets the benefits thereof. But is there anything that you can see in your negotiations with the commercial Managed Care plans that might get more creative i.e., contracting for guaranteed volume within a disease or within a procedure or service lines where you might give a dominant or best quality provider in the market that could assure you some commercial Managed Care share in those markets and help you even to take share rather than just to maintain share?

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

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

First of all, I ask one that's sort of a long shot, but I think, Biggs, you alluded to the idea that people may have been managing their deductibles this year [indiscernible] more aggressively and therefore speculation get into Q4, you might see some pent-up demands so as deductibles hit. I guess my question first off would be, you guys have anyway to measure that? Can you see whether people are taking longer to hit their deductibles this year than they did last there or anything along those lines?

There really isn't any clear way for us to see that. We don't have that kind of visibility as to patient comes in or as we send the bill to the payers, so not great insight.

I have heard the theories as spouse payers, they have obviously much more insight, but I don't think that evidence at least as I mentioned earlier through the first 28 days of October that, that demand wave was ready to hit the beach.

The $100 million to $150 million that acquired outpatient revenues that you're looking for this year, is this year in your mind unusual with the focus on acquiring things like outpatient imaging? Do you think you can run at that rate of acquisitions for a couple of years?

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

I don't think you quantify to how much benefit you get from delaying the merit increase, maybe I missed it if you did for the extra quarters. How much would that benefit you in the fourth quarter? And then if you could just maybe I'm curious, when do you guys think you would offer -- we're talking around the 2011 outlook a lot, have you given some thoughts exactly when you're likely to actually give a formal outlook for 2011?

On the benefit of deferral of the merit increases, it's in the neighborhood of $15 million for the quarter. And that would be similar to numbers we've given in the past. And we've talked about what the effect of the merit increases were in the fourth quarter when we gave them by example last year? In terms of when we were given outlook, I mean, our baseline is we will look at results, we complete our planning process otherwise in December, we look at results through December ultimately and sort of re-evaluate and validate our expectations based upon that and then give you outlook when we released fourth quarter earnings.

So in February, at some point?

Yes.

Thanks AJ and thanks, everybody, for joining the call. And see you on the next one.

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