Tenet Healthcare Corporation
Q2 2008 Earnings Call Transcript

Published: 18 Aug 2008

[Operator:]

Good morning and welcome to Tenet Healthcare’s conference call for second quarter ended June 30, 2008. This call is being recorded by Tenet and will be available on replay. A set of slides has been posted to the Tenet website to which management will refer during this call. Tenet’s management will be making forward-looking statements on this call. These statements are based on management’s current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Management cautions you not to rely on, and makes no promises to update, any of the forward-looking statements. Management will be referring to certain financial measures, including adjusted EBITDA, which are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance. During the question-and-answer portion of this 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, President and CEO.

[Trevor Fetter:]

Thank you, operator, and good morning. I’d like to begin by referring back to two points that I made at our Investor Day in early June. First, it appears that we passed an inflection point nine to twelve months ago and are steadily now improving our performance. Second, our results for the quarter continue to demonstrate that our growth strategies and performance improvement initiatives are working and driving improving results. I’m very pleased with our same-hospital admissions growth. In addition to extending our steadily improving trend over the last twelve months, this is the best result that we’ve generated in more than four years and includes solid growth in both surgeries and paying admissions. These results included some noise in the statistics, as we once again actively managed our portfolio. As you know, results for continuing operations reflect not only our ongoing core hospitals, but also two hospitals that we lease from a real-estate investment trust, and that we’ve recently announced we will cease to operate when the leases expire. I’m going to give you some statistics for same-hospital continuing operations that exclude those two hospitals, so you can get a better idea of the performance of our ongoing core business. Going forward, we will refer to these as the core same-hospitals. Both sets of statistics are laid out on slide 4 in the presentation that we posted to www.tenethealth.com this morning. Core same-hospital admissions increased by 2.2%. Paying admissions also increased by 2.2%. Outpatient visits were basically flat in the quarter, marking an end of the declines that we’ve had for the last eighteen quarters, and extending the improving trend that we began showing eight quarters ago. But more importantly, paying outpatient visits were actually up by 0.6%, due to a decline in the number of charity and uninsured outpatient visits. We’re gaining success from our Medical Eligibility Program in qualifying more patients for Medicaid and other government programs. This success is coming from a new tool that’s being utilized by our Patient Advocates to assist in the screening process. We’ve also placed more patient advocates in our emergency rooms. Commercial managed care admissions were down by 1.7%. Although negative, this is a far better number than what we reported in the first quarter. Beneath the surface, however, our success in building our commercial business is even stronger. That’s because within our eight primary Targeted Growth Initiative service lines, commercial managed care admissions were up 1.9%. The primary reason for this sizable difference between overall commercial admissions and commercial admissions in the targeted service lines is that more than 90% of the decline in commercial volumes can be explained by a drop in obstetric services. As we’ve explained on these calls and at our Investor Days for the past two years, the Targeted Growth Initiative generally targets OB for de-emphasis. As I mentioned at the outset, our strategies are working, and this is one example. Turning to pricing from all payers, we obtained good increases in the quarter. However, the pricing increases slowed relative to the very strong pace that we reported in the first quarter. While for competitive reasons we no longer disclose commercial pricing alone, the overall pricing statistic masks the strength that we’re continuing to achieve with commercial payers. There are two main reasons. First, the industry tradition of using the term “pricing” synonymously with “net revenue per adjusted admissions,” allows changes in patient mix to obscure true pricing changes. And second, we achieved relatively higher volume growth in lower-priced markets, like Florida. As we knew that this patient and geographic mix shift was likely, we said on our first quarter call that the very strong pricing growth we reported in the first quarter would probably moderate. Having said all that, our commercial pricing growth was actually greater in Q2 than in Q1. Our performance on costs was also solid, with only a 3.2% increase in same-hospital controllable operating costs per adjusted patient day. This increase even included a significant jump in supply costs, in part because of the results of a strong 2.3% growth that we experienced in surgeries. I should add that the increase in surgeries is even higher, at 3.0%, when we use the core same-hospital statistic. We believe that the growth in surgeries represents additional evidence of our success in implementing the Targeted Growth Initiative. Biggs Porter will take you through the specifics of our outlook revisions, reflecting both our strong first-half performance and the financial implications of divesting certain hospitals and other assets. And while the individual impact of each of these actions is relatively small, this is a good opportunity for us to walk you through the details so that you can refine your models as you see fit. Since we last discussed our 2008 and 2009 outlook with you, we’ve taken the following actions. First, we announced or completed the divestitures of five hospitals in California. This includes the planned divestiture of USC, as well as four other hospitals, two of which have leases that will not expire until early next year. Although we hate to part with USC, we believe the transaction will be attractive from a financial point of view. The other hospitals, in the aggregate, were unlikely to ever contribute to free cash flow and faced economic difficulty in complying with the state’s seismic regulations. Second, more than four years after we announced our intention to divest them, we completed the sale of Encino in June and we’ll close on the sale of Tarzana later this month, removing a significant drag on free cash flow. Third, we’ve entered into a deal to monetize our investments in Broadlane, with the cash expected to be received in the third quarter. Finally, we continue to move forward on the sale of 31 medical office buildings. In the aggregate, and in conjunction with other actions that are part of our overall balance sheet initiatives, we expect to raise cash in the range of $750 to $950 million, of which $650 to $850 million should fall into this year. As we receive the cash, we’ll deploy it in the most efficient way, but at present, in terms of modeling the impact, you should assume that we will use most of this cash to retire debt. As investors often focus on EBITDA, don’t forget that the positive impact of these transactions on shareholder value will be driven below the EBITDA line. In our debt retirement example, this becomes very clear. In our example, while these transactions may reduce EBITDA on a full run rate basis by $50 million, their disposition will have a net positive impact on 2009 pre-tax income and free cash flow of up to $30 million, after reflecting an assumed $80 million pre-tax savings in net interest expense and depreciation. The transactions also eliminate $50 million of one-time seismic costs and end roughly $40 million of annual negative cash flow from Encino/Tarzana. There are a couple of things that are important to remember. One, this doesn’t happen all at once. USC, for example, has already been moved to discontinued operations, which reduces our EBITDA from continuing operations immediately, but the cash proceeds won’t be received until later in the year. Of course, we’re still retaining the operating profit and cash flows from the hospital until it’s sold, but those results now show up in discontinued operations. Second, it may turn out that we do not use all of the proceeds to retire debt. We remain very focused on growing our operations, and should an opportunity present itself, offering a superior means of deploying the cash, we will seek the highest risk-adjusted returns for our capital. Again, Biggs will have more to say about our outlook, but at a very high level I’m pleased that we can substantively confirm our existing range for adjusted EBITDA for 2008, adjusting it only for the USC divestiture and its prior anticipated contribution of $25 million to adjusted EBITDA. I’m even more pleased that we can maintain our $1 billion objective for adjusted EBITDA in 2009 and the related objective of approximately break-even free cash flow, despite these divestures and the monetization of the assets mentioned above. The bottom line is that we expect this series of transactions to unlock incremental value for our shareholders. We’re strengthening net income and free cash flow and taking some risks off the table. Finally, I’d like to preempt a question that we hear repeatedly

[Stephen Newman:]

Thank you Trevor, and good morning everyone. As Trevor said in his introduction, we’re very excited about the mounting body of evidence that our strategies and initiatives are working and can be expected to drive continuing improvements in our operating results. You can see this in total admissions growth, the specific volume growth in our targeted service lines, and the significant net expansion of our active medical staff. Over the next few minutes I’ll explore each of these topics and I think you’ll see what I mean. While you already know that core same-hospital admissions were up by 2.2% for the quarter, you’ll be interested to know that, with the exception of our Southern States region, every other region was up by 2.5% or greater. Furthermore, Florida’s turnaround is actually accelerating, with admissions growth reaching 3% for the quarter. I couldn’t be happier with the turnaround and the trajectory of our volume growth in Florida. The Philadelphia market also generated strong growth with admissions increasing 5%. We expect this dramatic admission growth in Philadelphia to be somewhat muted in the third quarter and beyond, because of enhancements we’ve made in the use of InterQual screening of patients presenting to our Philadelphia hospitals. This rigorous preadmission review results in a significant number of patients being assigned to observation status rather than inpatient status. I would also point out that, because neither Florida nor Philadelphia offers a large commercial managed care population in our primary service areas, volume growth in these markets doesn’t contribute much to a rebound in aggregate commercial admissions for the company. Nonetheless, this Florida and Philadelphia growth is solidly profitable and their growth will help to drive our profitability. The 1.4% admissions decline in our Southern States region was our one weak spot for the quarter and continued a softening trend we’ve seen for the last three quarters. These losses are concentrated in several of our hospitals that previously have been strong performers from a volume perspective. Increased competition from not-for-profit health systems and increased turnover in our A team leadership had contributed to this decline. We have recruited new leadership team members to several of these markets and are taking other actions to offset competition, including increased physician recruitment and focused capital investment. While the 1.7% decline in core same-hospital aggregate commercial admissions was a weaker result than we would have liked, the fact remains that there’s growing evidence that our growth strategies are working. Looking just at commercial admissions growth in the eight service lines which are the primary focus of TGI, these admissions in these lines grew by 1.9%. The delta between the growth rate of aggregate commercial managed care admissions compared to the growth rate of the targeted service lines is 3.6%. As Trevor mentioned, this is compelling evidence of the ability of our TGI program to move the needle relative to this critical objective. Results like this don’t happen by chance. We’ve implemented many programs and initiatives which have contributed to this success. The acceleration of capital expenditures announced two years ago is now fully on stream and our market leadership in quality metrics continues to distinguish the value proposition our hospitals offer physicians, patients and payers. The final step in this process has been the successful execution of our Physician Relationship Program, or PRP. We use PRP to deliver to physicians the message of the progress we’ve made in service, clinical quality, technology and capital investment. We’ve made significant progress towards our ambitious goal of replicating our 2007 performance in the net expansion of our physician base. We added more than 1,000 physicians in 2007 and we are confident we can do so again in 2008. In the second quarter, we made 3,836 visits to 2,109 physicians presently without staff privileges at our hospitals. This is the largest number of visits made to the largest number of unaffiliated physicians since the inception of our program, and is the cornerstone of our redirection strategy, which we continue to emphasize and expand. These visits are really paying off. In the second quarter, we added a net of 354 new active staff physicians including 119 physicians added to the medical staff of our new hospital in El Paso. Let me emphasize that this growth is net of attrition. To bring consistency to this analysis I’ve provided these physician numbers for the 50 hospitals we will operate on a go-forward basis. Specifically, I have excluded USC and Norris, Garden Grove and San Dimas, as well as Irvine and Los Gatos. These new physicians are providing Tenet with a very solid flow of incremental inpatient and outpatient referrals, and were critical in producing the outstanding positive admission growth numbers I shared with you a moment ago. I know many of you would like the admissions data of these new physicians, as a means of forecasting our future volumes. Let me assure you that we are tracking this metric closely, but we are not yet prepared to disclose the specific productivity of this cohort of new physicians. Before sharing the growth statistics from these new physicians, we’d like to get a few more quarters of experience under our belts. This will allow the admissions data to stabilize and avoid the risk of providing misleading numbers. Our marketing efforts are not limited to new physicians and the expansion of our medical staff. We also devote significant resources to a companion effort designed to maintain and strengthen relationships with our existing staff. To this end, in the second quarter, we made 14,657 visits to 7,642 different individual physicians with existing staff privileges at our hospitals. This program identifies developing issues relevant to the physicians’ practice experience in our facilities to address opportunities to improve satisfaction levels among our existing staff. While this program is long term in nature, it also produces measurable direct and immediate benefits. In the second quarter, admissions to our hospitals from these physicians increased 5% compared to the same group’s admissions in the second quarter of 2007. Let’s spend a few moments reviewing the results of our outpatient business focus. We continue to see improvements in the growth trend for outpatient volumes as the aggregate for the quarter has improved to unchanged compared to the second quarter of 2007. Our actions also drove an increase of 0.6% in paying outpatient visits for the quarter. Notably, our freestanding ambulatory surgery centers increased procedures 28%. This was driven by recent acquisitions, as well as organic growth in many of the freestanding centers. We’re extending the lessons learned in our freestanding centers as best practices into the existing hospital- and campus-based outpatient operations and expect to see an inflection point where our aggregated outpatient volumes turn positive in the near future. Finally, I want to mention the exceptionally strong performance we saw in surgery. Our inpatient surgeries increased 1.4% and outpatient surgeries increased 4.2% when compared to those core same-hospital volumes in Q2 2007. Most notably, commercial general surgery increased 3.4% and commercial orthopedic surgery increased 5.3% compared to the second quarter of 2007. Through the activities of our performance management and innovation group, we continue to focus on improving throughput in our operating rooms as we strive to make them more efficient and inviting for our existing surgeons as well as those we’ve recently recruited or redirected. In summary, the results of this quarter provide incremental evidence that we passed the inflection point on so many metrics, most significantly inpatient volumes. We are meeting our objectives through innovative strategies, including an increasing focus on growing our medical staffs, refining and building our services consistent with our targeted growth initiatives, expanding and organically growing our outpatient business, while simultaneously maintaining our disciplined approaches to managed care contracting and cost management. With that, I will turn it over to Biggs Porter, our Chief Financial Officer.

[Biggs Porter:]

Thank you Steve, and good morning everyone. I have two primary objectives this morning

[Operator:]

Our first question is coming from Adam Feinstein - Lehman Brothers.

[Adam Feinstein:]

Just a few questions here, just on the mix, a lot of focus on that here, it’s helpful with all the details you give us. Just as you think about that, a couple of questions. One, how are you thinking about the profitability of a true commercial managed care versus a Medicare managed care patient these days? Secondly, you highlighted that the TGI areas showed better growth, if you could talk about, and I know it’s hard to give specific numbers, but maybe talk about percentage of total volumes, revenues, profits that come from those targeted areas, just so we have a better sense in terms of how significant those areas are, that that would be very helpful. Thank you.

[Stephen Newman:]

Let me try to address that good but complicated set of questions. First of all, certainly the profitability of our commercial managed care is significantly greater than the profitability of our Medicare managed care, as that is pretty close to a DRG payment or slightly over a DRG payment in most parts of the country where we negotiate those contracts. Second, we continue to focus on the growth of the Targeted Growth Initiative, eight service lines plus a couple of other service lines that we don’t include in that eight; for example, spinal surgery, where we have significant profitability and continue to work on the variable cost within those particular diagnoses. I didn’t mention in my prepared remarks that in the category of open-heart surgery, which is one of our Targeted Growth Initiative areas, we had a 7.2% increase in commercial admissions in that category for the quarter compared to Q2 of 2007. We’re focusing on each and every one of those lines, not only from a contracting point of view, but most importantly from a cost management point of view. Each and every day we have an opportunity to reduce our variable costs in the delivery of care, either by length of stay initiatives, supply cost initiatives, standardization of implants in many of those surgical procedures like orthopedic surgery or some of the vascular surgery procedures. I think we can really continue to expand those margins both in Medicare managed care where we have that fixed payment as well as our commercial managed care. Is that referable to your question?

[Adam Feinstein:]

Definitely. The other thing I wanted to follow up on is just with the revenue per admit. Basically you made some comments earlier in terms of the stop-loss payments there and the mix shift having some impact, but just wanted you to provide a little bit more detail. I was under the impression stop-loss did not really provide much to your managed care revenues these days, with all of the restructuring of the contracts in recent years, so I just wanted to get some more clarity there. Then how do you think about normalized revenue per admit? I know you’re not talking about a commercial pricing number per se, but just if we think about normalized revenue per admit, how are you thinking about that? Thank you.

[Biggs Porter:]

In terms of the stop-loss payments, yes, it has reduced over the years, and what we referred to in my comments was $7 million as the impact for a quarter relative to this time last year, and also the first quarter. So not a big move, not a heavy dependency, but our total stop-loss for the quarter is about $70 to $80 million. A slight variance in the quarter relative to that total, but nonetheless a factor. As to what we’re expecting, I don’t think I want to give a specific outlook on net revenue per admit. I would refer you just to our outlook or our guidance for the year in terms of the range of admissions and range of pricing, and you could deduce from that where we might land on that metric, but I’m not sure I want to give a spot estimate.

[Adam Feinstein:]

Okay, great, thank you very much.

[Operator:]

Our next question is coming from Thomas Gallucci - Merrill Lynch.

[Thomas Gallucci:]

Good morning. Thanks for all the color. I also was curious about the volume trend and wanted to ask a couple of follow-ups. So first, I think last quarter you had cited that that were three hospitals that were largely responsible for, I think you said, over half of the decline in the non-TGI commercial admissions. Curious how those three hospitals are performing. And can you give a number; like, how much was the OB actually down year-over-year? It would seem like that’s a pretty significant impact on the total, so curious the magnitude there. Then the last one is just from a practical standpoint with the very stark contrast that you’re showing between TGI growth and non-TGI growth, can you give us a little bit of color on the ground locally; how you’ll really drive one and not the other one when you’re dealing with doctors and just local patients and with the managed care companies themselves?

[Stephen Newman:]

Let me try to respond to those points. First of all, if we look at our commercial managed care product line, in obstetrics we had a significant drop for the quarter of about 7.8% compared to Q2 2007; that’s about 581 admissions. As Trevor said in his comments, this is generally purposeful, where we’ve de-emphasized obstetrics. At the same time we are looking at increasing the risk of the patients in obstetrics. So we’re focusing on high-risk obstetrics as opposed to general obstetrics, and that drives our neonatology business, upon which we have a significant margin. With respect to what we’re doing with the service lines at the ground level, to give you a little color on this, this is annually evaluated during the business planning process with each hospital, and once again we have a customized list of targeted growth areas for each hospital, the areas we report as the eight key areas or the eight top areas as we look across the portfolio of 50 hospitals. But as we execute that annual business plan, we have discussions with the A team leaders about the growth and/or de-emphasis of certain services, where they’re going to put their capital resources; what are they going to do from a recruitment perspective to meet growing community need, upon which the targeted growth priority is set. We then on occasion, have to help physicians relocate to other hospitals; where we have multiple hospitals in a market, we tend to move them and rationalize the service. We’ve done that with obstetrics in some areas as well as some of our other more specialized services. So this is a process that we look at annually, and we work continually with our A teams to execute those particular changes at the local level supporting them.

[Thomas Gallucci:]

Okay. And just going back to what you said last quarter, I think that there were three hospitals that were largely responsible for the decline in the commercial but non-TGI areas. Is there any update on those? And I think within TGI you actually had said also that Cath/EP was down 13%. Is there any update there? Thank you.

[Stephen Newman:]

With respect to Cath/EP, the Cath/EP is still down in comparison to second quarter 2007 by about 8%, or 162 procedures, in the commercial managed care line. We’re continuing to work with those three hospitals, as well as a couple of other hospitals in the Southern States region that contributed the bulk of the decrease in commercial managed care, but one of those three hospitals that we mentioned last time has shown significant improvement; the other two are improving more slowly, and we’ve added two other hospitals to that list as responsible for the bulk of the commercial managed care loss. Once again, as I mentioned, we’ve seen some volume erosion in our Southern States region. Certainly that’s an area that has a significant population of commercial managed care, unlike our Philadelphia and our Florida hospitals. So you would see a disproportionate loss in that region. We are very focused through leadership changes, capital expenditures, and other focus, to redirect physician business to shore up commercial managed care in those very few hospitals where it’s isolated.

[Operator:]

Our next question is coming from Sheryl Skolnick - CRT Capital Group.

[Sheryl Skolnick:]

Good morning, and thank you for taking my question. I’m going to ask this and I don’t expect an answer, but I’d love one. When are you going to report a clean quarter so people aren’t confused about what you report? It would be helpful. But having said that, if I heard you correctly, just a couple of points to clean up and then a real question. Biggs, did I hear you say that, setting aside the $16 million GME issue that’s pending, you had $22 million of negative prior-period adjustment in the quarter?

[Biggs Porter:]

No, that would include the $16 million. It was an all-in quarter for us.

[Sheryl Skolnick:]

So it would be $6 million additional negative in the quarter? Was that correct? $16 and $6 is $22 million?

[Biggs Porter:]

No, I think $8 or $9 million going the other way, so it’s $7 million net negative, if you add everything together in the cost report category. The $22 million is the variance between this quarter and last year. So last year there were changes in the opposite direction.

[Sheryl Skolnick:]

I see, okay. Thank you very much. Then, where I’m going with this is, you’ve improved volumes. You have clearly demonstrated you can recruit physicians. You have clearly demonstrated that cash flow is not always negative and that occasionally it’s positive. But I’d like an explanation for why the low level of CapEx this quarter. And you’ve clearly demonstrated that you can actually generate higher EBITDA from one quarter to the next. I’m concerned and confused by the stock price reaction to what clearly is the fourth quarter in a row of significant turnaround. Maybe part of that is your net income guidance may be confusing people, in addition to what your EBITDA number really was or really should be. I think your net income guidance may have gone down but if you can walk us through for 2008 where it was and where it is and what the difference is, that would be helpful. And if you can give us a sense for whether you can guide us to what the right EBITDA number should be on a run rate basis that we can focus on, it might be helpful.

[Biggs Porter:]

Okay. In terms of the results for the quarter, I think the unusual items, which if you looked at it versus what consensus was looking at, which would include USC, as I already said, you would add back, I think Modesto, and USC and the other hospitals, which takes you up to that $191 million level I had in my script. I think that stop-loss certainly we would expect to also restore itself to a more normal level, because, relative to last quarter, last few quarters and going back to last year, it was lower than normal. So add that $7 million back. So that would put you up closer to that…

[Sheryl Skolnick:]

$198 million.

[Biggs Porter:]

Yes, $198, $200 million level. Some of the mix issues, I didn’t quantify them, but said that there were anomalies in there. The reason I didn’t quantify them is because they’re just tougher to quantify and much more subjective by its nature. We would expect those to reverse themselves and improve going forward, and to have some lift from that. I just don’t have a number exactly to tell you what to expect. If you think of it in terms of, where do we go from here for the remainder of the year, we would expect that pricing would be up to 2% higher on a weighted basis in the second half relative to the first half. Just to point it back to Adam’s question, we do expect continued improvement in pricing from the managed care negotiations that are out there. We’re pleased to see the final inpatient rules and the 5% estimate from CMS regarding the effect on larger hospitals. There will be some possible reduction to that, as a result of the specific labor-related rates, labor index rates in different markets, but still that was a positive solidification of where we expect to be from a Medicare standpoint. I think that directionally everything is positive. We expect the outpatient to continue to grow. We saw the right trends coming out of the second quarter and expect it to grow going into the rest of the year and continue into next year. We’re on a good run rate on the admit side as well. So, when you eliminate payer shift in the mix, which I haven’t quantified, there’s reason to expect that future results will improve. You had another question?

[Sheryl Skolnick:]

Okay. Did the net income guidance change?

[Biggs Porter:]

Net income, I believe we reduced discontinued operations for the move of USC to disc ops, at an offsetting fashion from what we lowered the continuing ops on taxes I think actually improved. I think that as far as all the line items go, there’s just some movement between the categories. And the bottom line didn’t change.

[Sheryl Skolnick:]

Okay. Then let me go back to the EBITDA. I need to just drive this home a little bit. If I look at your prospects going forward, and I just looked at a run rate coming out of this quarter. Given that the company has on an ongoing basis, and this has been argued both ways, prior-period Medicare adjustments, wouldn’t it be fair to say that you take the $163 million you reported and look at that number and say, ‘okay, we’ve got to take that as the base, because we have to exclude USC.’ Then you don’t add back both USC and the $16 million, but at best, you would add back the $16 million, getting to $180 million of EBITDA and use that as your basis going forward?

[Biggs Porter:]

I would add that back and I’d also look at the stop-loss and adding it back but, obviously everybody’s got to make their own judgments, but I think the stop-loss is something we see as an anomaly in the quarter. I would also, as I said, believe that there’s the mix moved against us in the quarter and we should be able to restore that.

[Sheryl Skolnick:]

All right, and then $102 million of adjusted CapEx? Below trend?

[Biggs Porter:]

We’re actually roughly on target with respect to how we planned to spend the money through the year. We are judicious and we also try to maintain some flexibility so that we will flex CapEx with our results if we need to, which means that we are a little more back-end loaded in terms of how we’ve planned it out.

[Sheryl Skolnick:]

Okay. Fair enough. This is a fabulous quarter with great fundamental trends. I appreciate all that hard work. Thank you.

[Operator:]

Our next question is coming from Matthew Borsch - Goldman Sachs.

[Shelley Gnall:]

This is Shelley Gnall in for Matt Borsch this morning. Going back to your comment that Trevor had made at in his prepared comments, I think what we heard was that you’re seeing no impact on volumes related to the slowing economy. But if I could just ask, maybe from a different angle, are you seeing growth in uninsured admissions, variable by region? Specifically I’m wondering in some of the regions with either the highest unemployment or the highest growth in unemployment, markets such as Modesto, maybe Manteca, Philadelphia, are you seeing any variable growth in the uninsured admissions?

[Trevor Fetter:]

Not particularly. As I mentioned, and I think that the point I was trying to convey is, we get asked this question all the time about, are we seeing any impacts from a slowing economy? Particularly the closer you get to Wall Street, people are exceedingly concerned about that. But as we’ve examined what you would expect to see we don’t find it. We’ve looked hard. Those uninsured trends have been in evidence for a long time and we do operate some hospitals in some of the areas; for example, Stockton is the foreclosure capital of the United States, but then Stockton is not the same thing as Modesto, and in California and Florida we’re actually seeing those trends down. I hope that I’ve linked sufficiently the point that we’ve also improved the effectiveness of our medical eligibility program, to the extent that there are people coming in that would qualify for government programs like Medicaid, we’re being more effective in qualifying them, and that is improving our experience in the uninsured area.

[Biggs Porter:]

Shelley, just one additional point to follow up Trevor’s comments and add some clarity about how this is really a micro-market based issue. Our hospital in Manteca’s in San Joaquin County next to Stanislaus County where Modesto is. That is a huge agriculture area, and it was just announced this year that they expect to have record almond crops, a $2.5 billion crop for the year, which is some 20% over any previous crop, increasing the number of jobs in agriculture in San Joaquin County. National trends are one thing, but we’re very sensitive to the local trends in the micro-market.

[Shelley Gnall:]

Okay. I really appreciate the color, thank you.

[Operator:]

Our next question is coming from Darren Lehrich - Deutsche Bank.

[Darren Lehrich:]

Thanks, good morning, everyone. I do have a few questions here. The first just relates to your comments about case mix. Can you actually give us the case mix index in the period and what it was last year just to see if we can put that into perspective?

[Biggs Porter:]

I was careful not to call it case mix, as opposed to calling it patient mix. Case mix is actually flat year-over-year at 1.29%, but when you look at it by product line and where revenues land, you end up with a little bit different picture. Plus you’ve got to remember, over 55 hospitals, you can have one case mix going one way, but when you weight it by revenues, get one answer and on the flip side, another hospital going a different way. You just can’t correlate case mix if you look at revenue and margin effect.

[Darren Lehrich:]

Okay. Patient mix then. If I could just key into some of Stephen’s comments with regard to some of the shifting that you expect to see related to observation days. I want to ask the question in two ways. First, do we see anything at all in your unit revenue trends in the current period from what we’re hearing about in terms of the shift from cardiac caths moving more to outpatient, and some of the observation day trends perhaps having any kind of impact there? Then going forward, what you had to say about Philadelphia. How would you quantify that in terms of the impact to overall admissions and any of your pricing statistics in the back half?

[Stephen Newman:]

Darren, the issue with observation status is one that we’ve been looking at closely for a number of years. As you know, we were an industry leader in the implementation of InterQual criteria, so that we’ve been very proactive in screening patients presenting to our emergency room with respect to intensity of service or severity of illness. We have a significant number of patients going to observation status. To give you some statistics, about 19% of patients that present to our emergency room end up being admitted to inpatient status in our hospitals. About 3.8% of patients that present to our ERs end up going into observation status. In aggregate, across the company, that’s not changed much from quarter-to-quarter and year-to-year. The issue that I mentioned with respect to Philadelphia has to do with the fact it’s an academic medical center and we’re always working to have our residents involved in the process of screening patients and admission and determining the status of those particular patients. Recently we made some enhancements in Philadelphia that will increase the number of patients there that present to the ER going into observation status rather than inpatient status. You should see that decrease the aggregate Philadelphia admissions, quarter-over-quarter as we go forward. With respect to issues like cardiac cath, there is a third status that we don’t talk about much. You mentioned observation status, inpatient status, and the other is outpatient in a bed. If you have a cardiac cath standard procedure that doesn’t meet intensity of service for admission to the inpatient, or doesn’t meet criteria with a complication for observation status, the patient simply waits in a bed till they recover from sedation or anesthesia, and therefore that’s an outpatient in a bed. These are all regulations and procedures that we’ve had in place for many years, and I just mentioned it with respect to Philadelphia because I think that could have some meaningful effect in the short run on the total number of admissions to inpatient compared to same quarter prior year. Is that helpful?

[Darren Lehrich:]

Yes, that’s helpful, but none of that had any impact, in your view, on unit revenue this quarter. It really was the patient mix that Biggs referenced?

[Stephen Newman:]

That’s right. I don’t think it really affected unit revenue.

[Darren Lehrich:]

Okay. Then I do have a question as it relates to your cash initiatives. We can see that your outlook for success there is still intact, but maybe if you could help us in just thinking about the timing of some of these sales, perhaps update us on your medical office building process; where you are with that and relative to timing? And also update us on the insurance settlement proceeds that I think were still in discussion or negotiation from the Redding situation. Then Biggs, also, any other things like land sales or anything else that we might see hit this year?

[Biggs Porter:]

What we estimated is $750 to $950 million in total from all the cash initiatives. What we said was this year in the range of $650 to $850 million. We haven’t ever given a specific breakdown of what’s in there from a dollar standpoint because obviously it’s been subject to a negotiation or a sale process and we didn’t want to disturb that. But, out of what we have announced, there’s $50 million from San Dimas, Garden Grove and some other proceeds – I’ll use round numbers here – USC in the $300 million range and Broadlane, the $150 million range. If you add those up that’s $500 million from announced but not all closed transactions. Then there’s the MOB sales, which is our large one, which we have received initial offers on and will be moving towards a best and final process here over the next few weeks, but would not expect that to close probably until the fourth quarter. If everything closed this year and it was all cash and cash at closing, then you would get past the $650 million level. Staying at $650 million basically allows for some variation in timing or some possible change in structure on any of the transactions should it occur, although that’s not anticipated.

[Darren Lehrich:]

In your initial offers received for the medical office buildings, is that consistent with what you originally thought, and maybe just comment there on whether the commercial real estate market has had any negative effect on that process, in your view?

[Biggs Porter:]

Yes, the offers are within the range. I don’t want to say where in the range, because obviously we’re still going through our process. As to, has the commercial market had an effect? We don’t think it’s had an effect. We obviously continue to watch it, as evidenced by the trading in the market of healthcare-related bonds. Healthcare is still seen as a relative safe harbor, compared to the rest of industry. That does carry over still to the MOB market as being a relative safe harbor within the real estate area. But once again, we have to get to the point of closure. So we have more work to do.

[Darren Lehrich:]

Okay. We’re just trying to figure how certain your year-end net debt balance is going to be. And it looks like it’s more like $3.6 billion versus where we are today at $4.4 billion. It sounds like you’re certainly on track for that, given what you just said. So thanks very much.

[Biggs Porter:]

Yes, we still feel very good about operating in the range that we put out there at Investor Day and certainly believe all these transactions will close, and close at basis that’s consistent with that estimate.

[Darren Lehrich:]

Great, thank you.

[Operator:]

Our next question is coming from Ralph Jacobi - Credit Suisse.

[Ralph Jacobi:]

Good morning. Thank you. First, just real quick, when do we essentially anniversary the OB pressure that’s stemming from the weak managed care admits?

[Trevor Fetter:]

Probably not for a while. That’s something that’s an element of the Targeted Growth Initiative we’ve been rolling it out over several years. You missed the first part of the movie, in which we started this Targeted Growth Initiative probably three years ago and rolled it across the country and each hospital emphasizes or de-emphasizes different service lines according to a unique plan. Some hospitals would have anniversaried an impact on OB already; others would not do it for another year or more.

[Ralph Jacobi:]

Okay, fair enough. And then in the past, staying on managed care admissions, you talked about splitter physicians. Coming back to that, is that an issue any more? We’re not really talking about it anymore; is there some other dynamic at play?

[Stephen Newman:]

I think the fact that we visited over 6,000 physicians with existing staff privileges, of which 75 of them have privileges at other hospitals shows we have an emphasis on redirecting a larger segment of those physicians that have privileges at other hospitals to our hospital. The fact that that group increased their referrals to our hospitals 5% in the second quarter of 2008 compared to the second quarter of 2007 shows that we haven’t lost focus at all on that group, both the loyalists and those with privileges at other hospitals and our hospitals. But what we have added to it is the focus on physicians that don’t have privileges at our hospitals, and that’s going to provide great flow of work to our facilities over the coming quarters.

[Ralph Jacobi:]

Okay. Just my last question, on the Medicaid front, pressures you’re seeing there, and what kind of pricing expectation do you have for that book of business?

[Biggs Porter:]

On Medicaid, the two pressure points right now, in California, the reductions they made to Medi-Cal have a relative minor impact on us, a few million dollars; I think we’ve talked about that previously. In Florida, the budgetary reductions there probably have something in the range of $10 million impact on us on an annualized basis. Not fully this year, but next year that kind of a range. We also see from time to time other various funding appear from the states, which offsets that. It’s largely within estimating tolerance as you look out into the future. But generally speaking, as we forecast year to year we forecast Medicaid at no growth to flat.

[Ralph Jacobi:]

Okay. Great, thank you.

[Operator:]

Our next question is coming from Justin Lake - UBS.

[Justin Lake:]

Just a couple of questions as I look at the 2009 guidance roll forward and really just try to think about some of the key aspects there, around volume specifically. It looks like you’ve taken up your assumptions on admissions growth, not dramatically but up to around 2% from 1.5%. One of the things I get concerned about for the industry is the comps get much more difficult in 2009 than they were in 2008 because of the flu and because of some of the things that have improved volumes. What’s giving you the confidence to look out to 2008, 2009 versus 2008, and how much better you’re doing in 2008 that you think the volumes are going to get better there and how much does that add next year?

[Biggs Porter:]

I think there’s two things there. One is, you have to look at the hospitals in the portfolio now versus before. Certainly one of the hospitals which was going to be a detriment from a second half of 2008 standpoint and a 2009 standpoint was Irvine, because of the intense competition from the Kaiser hospital that opened up across the street. Irvine had 30% of its patients as Kaiser patients, so losing those was singularly a big negative impact which is removed from the proto statistics now. The portfolio that we have is a stronger one than the one we were talking about two months ago from a volume expectation standpoint. Secondly, I think we’ve demonstrated that we are on a positive track with respect to both admissions and visits. We think that all the work that we’ve done is going to continue to provide increased yield. We’ve also talked about all the recruitment exercises that Steve’s engaged in from a physician standpoint, and that there’s a bow wave of improvement associated with that, that there’s a lag in when those admits and visits come in. That will also show up as you go into the future. As I said earlier, and I think we’ve said all along, the strategies really seem to be working from targeted growth quality, the recruitment side. For that reason, we think it’s very reasonable for us to increase the expectation for next year. In terms of the quantification of it, I don’t know if I have it here. But basically if you take that half a percent times two-thirds of the revenue base and take a 40% margin on it, that would be a reasonable approximation of the inpatient margin.

[Justin Lake:]

That’s helpful. On the cost reduction side, is there anything that you could spike out as far as 2009 where you think the opportunities are? Around that $30 million you have there?

[Biggs Porter:]

There were a number of specific initiatives underneath that $29 million. They include current service implementation, the system changes around transcription; some other areas of cost improvement where we are taking things which have been operated on a very disparate basis, and multitude of systems and practices, and driving significant costs out. We also expect to have, I know I said only $29 million, but improvement in health benefit costs next year. We had a spike this year, but based upon negotiations with the various carriers for next year, we expect to have a significant reduction there. There’s a number of things which we expect improvement on. We didn’t all load them in that $29 million because at a point they become a part of normal practice just to go drive costs out of the business.

[Justin Lake:]

To follow up on that health benefit cost, I think I might have heard in the marketplace that you might have been switching plans as far as your health benefit administrator for 2009. Is there anything you can tell us about that?

[Trevor Fetter:]

One particularly important thing was to make sure that physicians that practice in our hospitals were included in the network so a Tenet employee who needed a particular service would be able to stay in network and have the service performed in our hospitals. I think the big change was that, rather than consolidating all the business with one carrier as we had done in some previous years, we were much more receptive to selecting the best option market-by-market. That did result in a number of changes with different health plans, some gain, some loss, in our business, but we’re very happy with the solution.

[Justin Lake:]

Can you tell us who the gainers were?

[Trevor Fetter:]

The gainers were basically CIGNA, Aetna, WellPoint, and I think that accounts for the bulk of it.

[Justin Lake:]

Okay. And who did that business go away from? Was that United?

[Trevor Fetter:]

Yes. But let me also just say we still enjoy a very good relationship with United. We think they’re an excellent company; we’ve obviously continued to participate very vigorously in their centers of excellence programs and as I said, this was a very objective process where the objective criteria had been spelled out in advance.

[Justin Lake:]

That’s helpful. Appreciate the color.

[Operator:]

We have time for one final question, coming from Jason Gurda - Leerink Swann.

[Jason Gurda:]

Thank you. Assuming you hit the midpoint of your year-end cash balance guidance, do you have a ballpark figure of how much you would expect to use for debt pay-down?

[Biggs Porter:]

At this point, it really is going to depend upon what the opportunities are; what the market’s like; what we think the right thing to do is. I think that from a cash minimum standpoint, probably we would carry something in $400 million or greater level, but that’s really going to depend upon planning from the market standpoint, what the best deals might be.

[Jason Gurda:]

Okay, that’s helpful. Lastly, how’s the new hospital in El Paso doing and how should we think about the contribution for next year?

[Stephen Newman:]

The El Paso hospital is doing well. We’ve had some delay in Joint Commission certification. We opened the hospital about May 17 and Joint Commission showed up June 26, and we were certified effective that particular day. Business is ramping up; ER business is high; obstetrics business is high. We’re recruiting, redirecting, and employing some specialty physicians to cover some of the surgical and medical specialty areas. In the meantime, when those services aren’t available, those patients are being transferred to our other two hospitals in El Paso, Sierra and Providence, which showed significant growth in the quarter.

[Jason Gurda:]

Okay, thank you.

[Operator:]

At this time, there appears to be no further questions. I’ll turn the floor back over to Trevor Fetter for any closing remarks.

[Trevor Fetter:]

I think there actually were further questions in the queue, but we had decided we would cut this call off at 9

[Operator:]

Thank you. This does conclude today’s Tenet Healthcare Conference Call. You may now disconnect, and have a great day.