Tenet Healthcare Corporation (THC) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Tenet Healthcare Earnings Conference Call. My name is Jeff, and I'll be your coordinator for today. [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. You have the floor, sir.

Thank you, Jeff. 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. [Operator Instructions] 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 1 year of solid progress and continued organic growth, consider the following points that you'll 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 7-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 $1,225,000,000 to $1,350,000,000. 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 and 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 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 aren't 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've also been successful in managing bad debt expense. Our fourth quarter bad debt ratio was 7.7%, down 60 basis points from 1 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 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 a.m. 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 midyear, we'll 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 in longer-term outlook. Let's start by looking at our updated outlook for 2012 on Slide 5 in 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 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, with a recognition of $29 million of HIT incentive payments relative to our prior expectations. Slide 5 provides the detail of assumption ranges we used for volume growth, pricing expenses and bad debt. Slide 6 provides a tabular walk forward leading to the adjusted EBITDA range of 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'll 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 for 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 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 as soon as 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 expanded 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's 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'll see the offsetting favorable variance in those years resulting from this near-term deferral. Turning to Slide 6, you'll see we assumed $25 million reduction in Medicaid contribution in 2012. This reflects 3 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 to 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 approved conversion of EBITDA to cash flow. The improvement in cash conversion reflects the collection 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 to 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 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 has enlarged 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, it was provider fees and HIT income front-end loaded. Specifically, rather than being 1/4 of our 2012 EBITDA, it's more likely that adjusted EBITDA in the first quarter of 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 of 2012, then the first quarter adjusted EBITDA will be greater than 19% to 21% I just gave. The bottom line is that for your modeling purposes, you should assume x settlements that the first quarter is only around 1/5 of your full year estimate. Just over 1 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. There's also 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 and 2015's outlook. We made some modest refinements to our expectations, reflecting actual results to date and the evolution of our thoughts around the 7 value drivers. Each of the value drivers is reflected in 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 endpoints 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 debt 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're 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're assuming a small $20 million favorable contribution from reduced bad debt expenses as the economy improves. We've 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 initiation of its favorable provisions beginning in 2014. Turning to Slide 10 and a 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're providing a waterfall to be consistent with the view provided last year, but the tabular presentation is a little easier to add explanations to. It shows the changes between the current 2015 walk forward and the one presented in January last year. The numbers are identical between the 2 slides. On Slide 11, you'll 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 1 year further along, we are adding 1 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 1 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 2 years in our 2015 planning horizon. This is conservative compared to the $70 million of MPI savings achieved in 2011 and the $80 million 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 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 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 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 have borrowed $80 million under our credit line as of December 31 and 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 4x 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 in 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, full year results continue our upward progression and demonstrated solid revenue growth, continued commercial pricing strength, inpatient volume growth, outpatient volume growth, good cost performance, net of cost 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 exceeding our strong track record of growth. With that, I'll ask the operator to open the floor for questions. Operator?

[Operator Instructions] Our first question comes from the line of Tom Gallucci with Lazard Capital Management.

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 onetime items but it looks like to me, last year was maybe in the vicinity of $300 million, if you adjust some of those out.

Biggs will take that question.

Sure, yes. The 2 bigger items in the first quarter of last year were the California Provider Fee of $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's $120 million of California Provider Fee as 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 1/5 number for the first quarter, but at the middle of the range, we increased the range 25 to 50 for the settlement, so middle range is 38. So the sum all those 3 is just 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's 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 -- eliminate the more discrete items I've talked about, we would expect more or less a steady build from our initiatives affected only by seasonality.

That's very helpful. In terms the progression, I guess, just trying to figure out where that base starts. I'm curious why might EBITDA be down year-over-year if you adjust those for those 2 items of that you mentioned, the $80-plus million 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 upfront.

Okay. And then just my follow-up, I guess, I know 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 of additional cuts on an annualized basis is in the $15 million to $35 million territory. And roughly half of that would be risk is Florida and half of it is Texas. The House in Florida proposed a 7% cut, the Senate's 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 million to $35 million on an annualized basis for the second half of this year would be half that.

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

This is Andy Valen in for Justin. A quick question on commercial contracting. Let me know how you're extracting for '12 and '13, at what rates and more specifically, have you seen any evidence of narrowed networks or tier networks in your commercial contracts? And 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'll ask Clint to -- Clint Hailey, who's Head of Managed Care Contracting for us, to comment about trends and without giving away the March 29th webinar content. Clint, make some comments about trends in ACOs, narrow networks, et cetera.

Yes. There's a lot of discussion about narrow networks and ACOs in the industry. Interestingly, most of the discussion where there's 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, cured 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 01/01/14 when the exchanges come -- open up.

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

All right. In terms of the 01/01/14, I guess, start date for lack of a better term, I know you probably can't give as a percent 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 of that?

It's 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. 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, a small group. But it's hard to say at this juncture, I mean, we're still 2 years out. I think we'll 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?

Yes, 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.

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

I have 2 questions, and I'll 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 that the Medicare Performance Initiative, that there's more to do on it and on the cost side. But I'm thinking in terms of the volume in market share, how much more there is to do? Your original guidance was, for down admissions, you have, I think, surpassed that for 2011. And at some point, I'm curious whether or not that's 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 question. 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 multifaceted question. But we'll 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're, 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 was 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 with our -- joint ventured 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 and 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 impatient moving forward. And I'll site 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 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 take 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 7 of our markets in 2012, help expand the channel by which our doctors get patients and our inpatient facilities grow.

Okay. And then on the topic of hospital acquisitions, let me just make a brief comment, maybe there's 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. 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'll 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 those appetite and then the ability to drive integration post acquisitions. So I'm looking forward to his contributions on that.

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'll get a sense of how the Street use the company, 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 it's 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 to really get to know the people, the leaders, the CEOs, the physicians in our marketplace and comparing that to what you guys 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're as good as I've 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've heard a little bit about today. Several things I like really, I like our physician strategy that Steve alluded to earlier. 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 a strategic leverage or just diversify our platform in our marketplace. And our quality is definitely in a solid range and improving. So I think from the organic growth question you asked earlier, I see significant opportunities both organically and accretive in the acquisition strategy that you actually asked about after that. On the outpatient side, you heard Biggs earlier talked about our growth and 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 pricing and direct access makes a big difference. And that continuum, I think, this organization is very well positioned for. And then the key, as with Conifer or with our outpatient solution, is integrating with our acute care operations and getting our processes in place, I think, is a great start there. There's, obviously, opportunities for improvement, but I would say that my initial take on the first couple months are good organic opportunity, good acquisition opportunity, and I'm pleased, as Trevor alluded to, good appetite for acquisitions going forward.

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

Trevor, I for one am looking forward to these webcasts, so I'll look forward to the managed care one coming up soon. But, I guess, maybe just my question would just be around the revenue per admit. The commercial number is very strong at 6.9%. I know you spoke about pricing trends being favorable as upside acuity being up slightly. But I just 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 just how are you guys thinking about that total number, I guess, and just any clarity?

Well, I mean, I think you heard it correctly, and it's a statistic that we don't like to disclose because it gets played back to us in negotiations. But there had 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 percent 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 the 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's 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 a maybe follow-up question, just around the service lines and you guys are doing a lot of interesting stuff there. You talked about some of this more specialized deals you guys have done recently within the radiation oncology, and you mentioned stroke and other areas. So I was just really interested in some of the those comments, and I know that's been part of the strategy for a while now, but can you just elaborate in terms of other, what I'll call, growth areas where you guys have either made investments recently or will be making investments in the coming months?

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

Well, Adam, let me to talk to you about 2 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's in the 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 St. 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 6 quarters. We've been down in orthopedic surgery. This, as we associated with the downturn in the 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, 3 of the 4 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's an example of our service line focus that we've done for the last 5 years, beginning to pay big dividends.

Our next question comes from the line of John Ransom with Raymond James. John W. Ransom - Raymond James & Associates, Inc., Research Division: Could you just help me sort out the moving parts between the fourth quarter EBITDA and the implied first quarter EBITDA, because it looks like you're guiding for that to be down sequentially, and I know that's not usually the case. So just help me understand if there's any particular moving part you'd like to highlight.

Sure. Biggs, you want to take that one?

Well, the -- I'll 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 what's giving -- we're not projecting anything in the first quarter of this year for the California Provider Fee, it's picked up to come in later. HIT incentives, although we didn't get everything we anticipated in the fourth quarter, we still had $5 million. So that's $32 million that was income in the fourth quarter that we don't have in the first. We do have growth in cost in HIT, as I said earlier. So those implementations will 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 [ph] employment adding costs as we go through the course of 2012 compared to 2011. So we've got some things that have 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. Another thing as I was -- as I reflect back on, I think maybe it's Tom's question early in the call, 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 1/5 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's 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. John W. Ransom - Raymond James & Associates, Inc., Research Division: Okay. 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 settlement that, at some point in the future, won't recur?

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

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, 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. John W. Ransom - Raymond James & Associates, Inc., Research Division: Should we think about this just generally as kind of a renormalization of your relationship with managed care following kind of the post-crisis period, or is it again am I over thinking that?

Yes. I think you're over thinking it, and there's lots of payers involved here. It's not any individual one. So I don't think we can really go any further in terms of trying to characterize it as the payer category or the relationship at this point most likely [ph].

And we'll look forward to seeing you on Monday.

Our next question comes from the line of Ralph Giacobbe with Crédit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: I just wanted to go back to sort of the 2012 outlook assumptions just on the volume side. I guess, just your comfort level in 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 update or trends. So any comments this time around related to volumes or payer mix.

Biggs, you want to comment on our assumptions for the...

Well, sure. In the aggregate, last year, I don't think -- it's tough to look at one quarter and say that's the trend, or even 2 quarters. So on the aggregate last year we had good growth, we reestablished growth and had it there for the full year, and we think that all of our initiatives in the physician relationship program, outpatient acquisitions, our investments in our existing facilities, all those things will drive volume growth even without a big boost from the economy. Certainly as the economy improves, consumer confidence improves, it gives us additional opportunity. But we think we can grow even absent that. I'll say that for the entire -- the 4-year outlook 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 of work last year and all of our initiatives and looking at this year 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. Ralph Giacobbe - Crédit Suisse AG, Research Division: Any comments on the intra-quarter?

No, we're not going to comment on it today. It's something we don't particularly like to do. So we're going to try and have a New Year's resolution of not commenting on it. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay. And then just my follow-up. Just want to go back to kind of the cost side. Maybe if you can help us parse out kind of what the go-forward trend you expect in 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 is up 7% on adjusted patient day basis versus the 3% to 4% trend, I guess, in the first 3 quarters. I know you mentioned you're looking at sort of more employed docs but is that -- was that sort of some big on-boarding 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 med mal, there's other things in there, but any way you could sort of help parse out maybe onetimes versus what we should think about a unit cost going forward?

Sure. Let me -- I'll talk about the fourth quarter and I'll just try to put it in context of 2012. The 2 things in the fourth quarter that, I think -- or maybe it's 3 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, there was about a $10 million true up effectively of our accrual for medical benefits for all our employees in the fourth quarter. So that took up SW&B. And then higher spending on the HIT program, higher than fourth quarter than it was certainly 1 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 a 2012 standpoint, on per adjusted patient day basis, after reflecting the benefits of our initiatives, we're -- all-in, it's about a 5% increase in SW&B, around that kind of territory for the year. Once again, that includes physician salaries and ARA 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 controllable expenses, as you know, is up but that's ARA spend and physician recruitment and other factors sitting in there. So I think that, that's the -- those are the big drivers. You have to remember now, ARA incentives show up as a contra expense line. So when you look at total expenses, that's 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 for in terms of inflationary rates before and after our initiatives.

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

Sorry, if you covered this, 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?

Let's see -- oh, to the volume growth. I thought you were going to talk about expenses. No, it's 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 actually is something that's sort of important not to track.

Okay, okay. Can you tell us again, this maybe 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 physicians, Steve, do you remember the number?

Yes, we added 260 employed physicians in all of 2011.

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

I believe it was 72.

72, okay.

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

Actually, just following on that question. I'm 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 was the total base of physician SWB at this point, either in the quarter or annualized?

Yes, I don't think I have a number on that.

Yes, we may have to get back to you on that.

We'll see if we can get it real quick.

Total number of physicians, Steve, that we have as of this...

About 660.

Yes. Number of employed physicians, 660.

You have to remember, there's -- a significant number of those are associated with St. Christopher's Hospital for Children, in Hahnemann in Philadelphia where the staff is employed typically in the academic centers. They're not our employees, but in those 2 cases, they are. I think the total expense 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's going. Trevor, I guess, I'd just be curious if there's maybe 1 or 2 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 to just put into perspective what's really working there.

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

Well, I would say there were 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 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 costs, improving our predictability of clinical outcomes and positioning us for whatever payment system evolves under healthcare reform. Scott?

Scott, maybe a couple examples of successes last year, I mean 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 cost through standardization in 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 clinical outcomes. And 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, and we readily accept the challenge of the $80 million that was given to us. We have that earmarked. We've targeted, and we're going to be successful in that area as well.

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.