Tenet Healthcare Corporation
Q4 2008 Earnings Call Transcript

Published:

  • Operator:
    Good morning ladies and gentlemen and welcome to the Tenet Healthcare’s Fourth Quarter, ended December 31, 2008, Earnings Results Conference Call. (Operator Instructions) A set pf 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 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 the call callers are requested to limit themselves to one question and one follow up question. At this time, I would like to turn the call over to Trevor Fetter, President, and Chief Executive Officer. Mr. Fetter, please proceed.
  • Trevor Fetter:
    Thank you, operator and good morning. Because our headline results for the fourth quarter were first made public more than a month ago, I would like to direct my comments to broader trends and observations about the quarter that were not in the pre-release. Our operating results for the quarter were among the strongest that we’ve achieved in years. We improved same hospital paying admissions, paying out patient visits and surgeries, as well as same hospital commercial managed care revenues, adjusted EBITDA, and free cash flow. The full year 2008 was the first year of positive same hospital admissions growth since 2003 and we had our best performance ever in many important non-financial metrics. Despite this strong operating performance our stock price plummeted in the fourth quarter. As recently as September 26, Tenet has closed about $6.00 per share, up roughly 20% for the year-to-date. But, by mid-November it was trading near $1.00 and since then we’ve taken important actions to turn this situation around. Despite all the uncertainty that is created by the economy, I think our business is remarkably solid and I am actually quite optimistic because of the progress we’ve made in a number of critically important areas
  • Stephen Newman M.D.:
    Thank you, Trevor, and good morning everyone. I want to begin by reviewing the relationship between our fourth quarter volumes and our growth strategies by service line. While total paying inpatient and outpatient volumes held up quite well in the fourth quarter, our commercial managed care admissions declined by 3.0%. This is a slight improvement relative to the 3.4% decline in the third quarter, but clearly not where we want to be. As we have discussed in prior quarters, our de-emphasis of the OB service line accounts for the majority of the decline in commercial admission
  • Biggs Porter:
    Thank you Steve and good morning everyone. Before I talk to the quarter, let me make a couple of broad comments on 2008. Our improvement embedded in our 2008 results may have, at times, become obscured by changes in state funding and in our hospital portfolio. As you can see from our earnings release, after all of the discontinued operations reclassifications last year, our adjusted EBITDA grew from $650 million in 2007 to $732 million in 2008, an increase of 11%. However, this is despite having lost approximately $54 million in Georgia, Florida, and North Carolina Medicaid funding. If you normalize for the Medicaid funding loss, there would have been an underlying operating improvement of $129 million or 20%. Some analysts were concerned that we weren’t growing margin on volume growth in 2008 due to adverse mix shift. This, in fact, is not the case. Even in the third quarter, which became such a focal point, is you consider the Medicaid reductions we had to offset. Mix shifts certainly hurt our result and remain a significant risk going into 2009, but it did not eliminate all the benefits of volume and our other efforts. Since I have touched on the subject of Medicaid I will comment that we see the stimulus bill as a risk mitigator of the budget pressures being experienced by several of the states in which we operate. The effects of enhanced SHIP and COBRA coverage should beneficial, but the effects cannot be reasonably estimated. As both Steve and Trevor have discussed, despite the dramatic collapse in discretionary consumer spending experienced in most sectors of the economy, Tenet’s volumes held up well in the fourth quarter. As our pricing remains strong, these volumes resulted in solid revenue growth of 4.9%. This growth included a 6.6% increase in net patient revenue from commercial managed care. As a minor footnote to this increase and what of the items which drew investor attention in our pre-release, our fourth quarter revenues included $8 million from what is effectively the partial reversal of the $17 million charge taken in the second quarter of 2008. This charge related to graduate medical education reimbursement at one of our California hospitals. This $8 million reversal does not reflect a successful protest of the issue at this point, but rather confirmation of the arrangement that we have with the county to be reimbursed for 50% of any losses we incur related to the residency program. In terms of normalizing its impact, the $8 million clearly made a one time contribution to our fourth quarter results, but should be noted against the earlier $17 million charge when assessing the full year. You should also note that the $8 million was recorded in other revenue and so it had not impact on our pricing statistics in the fourth quarter. Turning to costs, we had a very strong quarter in terms of operating efficiency. The increase in total controllable cost per adjusted patient day was held at just 0.8%. The bulk of this accomplishment was achieved in restraint on the salaries, wages, and benefits line, where the increase was also held at just 0.85. This SW&B results was aided by a 16.7% decline in contract labor expense. On the other operating expense line we saw a 50% decline in malpractice expense in the fourth quarter falling from $36 million in the fourth quarter of 2007 to $18 million in the fourth quarter of 2008. A few analysts viewed this $18 million decline as a unique event which D&B backed out of our results and their assessment of our fourth quarter earnings power. I would argue that backing this out is far too harsh an action. By backing this out analysts are failing to ascribe proper value to what Tenet accomplished through our investments in clinical quality. It is our belief that one of the many ways these investments have generated returns is through these declines in malpractice expense. Let me offer some perspectives on how our malpractice expense in the fourth quarter could be viewed. Stepping back to look at the full year decline, malpractice expense in 2008 was $128 million down $35 million or 22% from $163 million in 2007. However, even this is net of $15 million in charges related to declines in the discount rate used in the calculation. Without that, the year-over-year decline would have been $50 million. So, while the fourth quarter’s decline was somewhat larger, the decline through 2008 was also significant. This suggests that the fourth quarter’s decline is highly consistent with recent performance and it forms a legitimate part of our sustainable earnings power. Before leaving the topic of cost efficiency, I will comment on the very strong performance achieved in our adjusted fourth quarter sets as a stage for a favorable, yet highly credible, assumptions with regard to cost efficiency in our 2009 outlook, with unevenness of volumes between hospitals and periods remaining the greatest potential variable. Turning to bad debt expense, the high level story is mixed. We reported a same hospital bad debt expense ratio of 7.5% in the fourth quarter, slightly better than the 7.6% ratio reported in our third quarter, but up 110 basis points over the prior year. The good news on the bad debt front was a continuing decline in uninsured volumes, with uninsured admissions falling by 5.9% in the quarter and uninsured outpatient visits falling by an even greater 10.8%. We also made progress on our front end collections which increased to 37% of total patient collections, up markedly from 29% in the fourth quarter of 2007. The offset to these sources of good news was deterioration in our collection rates on a year-over-year basis both from the uninsured and balance after. As disclosed in our 10-K we have updated our collection rates for the last two quarters to reflect the effect of discontinued operations, or alternatively stated, to exclude collections on those hospitals which we have moved to disc option the last year. On that basis, our estimated weighted average collection rate from the uninsured to balance after was 33% in the fourth quarter of 2008, compared to 35% in the fourth quarter of 2007. There as an 80 basis point decline between the third and fourth quarter, or about half of the decline experienced over the last year. Bad debt expense was also adversely affected by pricing increases and improved charge captured on emergency departments. It is important, however, that investors understand these pricing strategies have a net positive impact on our profitability. You will also find in our 10-K some new disclosure on estimated costs of providing care from the uninsured and charity. I will emphasize that these are estimates and are fully burdened. For 2008 these are $362 million or $6,935 per adjusted admission for uninsured and $113 million or $10, 298 per adjusted admission for charity. Since these are fully burdened numbers, you would need to reduce them by about 40% to get to variable incremental cash costs of providing care before fixed cost absorption. To get the net effect of an uninsured admit, you would reduce the cost by approximately $0.10 to $0.12 on the dollar we collect on average from the uninsured. This brings a rough estimate of net pre-tax P&L effect down to approximately $2,500 per uninsured adjusted admission. As there is so much focus on the risk in 2009 of increasing uninsured, we think these disclosures help put that risk into perspective. What this points out is that although there may be a risk of increasing bad debt expense from the uninsured the real bottom line effect is much less. The real economic risk is the loss of a commercial managed care patient although that effect is exacerbated when the formerly commercial patient receives care as an uninsured. Turning to cash and cash flow, we ended the year with $507 million in cash, somewhat higher than the $375 to $475 million we have projected in our 2008 outlook. Our cash position benefited from the lower than anticipated capital expenditures which came in at $130 million; the receipt of $34 million from the reserve yield plus fund; and $10 million from our cash initiatives. I also wanted to make a few comments on our recent note exchange which is expected to close next week. As you know the exchange addressed the $1.6 billion maturing in late 2011 and mid 2010. Our strategy was to eliminate as much of the near-term maturities as we could at an acceptable price, while retaining long-term flexibility. This was not out of concern for our performance, but rather as a mitigator of capital market risk, particularly in view of the volume of refinancing which replaces the market by others over the next couple of years. Although the exchange remains open, the results of the early tender period are that 915 million of the 11’s and 484 million of the 12’s have elected to participate. The notes offered in exchange have maturities in 2015 and 2018 at coupons of 9% and 10% respectively. They also allow us to issue secured debt at the greater of $3.2 billion or four times EBITDA exclusive of our credit agreement, but have no performance tests. This is not a solicitation, but it is necessary to explain the financial statement feature financing implications. Based on this we anticipate a gain in the retirement of existing notes of approximately $170 t0 $190 million, although this will fluctuate with the market up to the time of close. There will be a corresponding discount recorded on the new notes, which will be amortized interest expense over the term of the notes. We currently estimate 2009 interest payments to increase by $22 million as a result of the exchange and total interest expense to increase by $50 to $60 million when accrued interest and the discount amortization is included. To the extent we retire additional debt in the future, or engage in interest rate swaps, we may mitigate some of this increase. While we are on the topic of liquidity, let me anticipate a popular question regarding our proposed medical office building sales. We still have interested buyers and at this time have broken the portfolio into at least two pieces
  • Operator:
    (Operator Instructions) Your first question comes from Adam Feinstein of Barclays Capital.
  • Adam Feinstein:
    You provide some disclosure in the press release about the Florida and Central region reported strong growth whereas the California and some of the state regions reported weaker growth. I was just curious if you could comment a little bit more, so we have a better understanding of what’s going on in the different geographies and if there are any extraordinary factors that would have driven to the difference in those markets. Secondly, I wanted to ask you about working capital improvements. At your Investor Day you had outlined some opportunities and certainly a lot of things have changed since then, but I was just curious about your thoughts in terms of additional working capital improvements in the future.
  • Stephen Newman M.D.:
    With respect to volume variation, I think this is probably the fourth quarter that we’ve mentioned some weakness in our southern states region performance. We’ve taken a number of actions to again turn that around and those are somewhat mitigated by the activities of our new leadership in the hospital. We’ve also expanded our physician recruitment activities in the southern states region and added physician relationship program representatives there. I think that we’re seeing significant spikes in unemployment in some of those micro markets in the southern states region. For example, in the Carolina’s we’re seeing isolated unemployment rates that are approaching 10% and remember, we operate in very small markets in the Carolina’s where this can be a significant deterrent to overall volume as well as commercial managed care volume. We’ve also seen some softening in our Atlanta market recently as the economic downturn has begun to hit that metropolitan area. California is a different story and as you know, it has been the epicenter of the real estate foreclosure issue and in some of those markets where the foreclosure rate is up, along with unemployment, we’ve seen a decrease in elective utilization of hospital services. I would say that nothing was radically different in the fourth quarter with respect to our volume distributions and we continue to believe that we’ll make progress in all of those regions and will aggregate toward increasing volumes quarter-over-quarter this year with respect to admissions as well as outpatient procedures.
  • Biggs Porter:
    With regards to your question on working capital, as you know, we have focused on collecting more cash up front, on patient collections. We have focused on driving down the discharge, not final build metrics, so bills go out faster, and we have also focused on our collection processes after billing. All of those things did enable us to achieve a two day reduction in accounts receivable that we’re targeting for 2008, so we’re clearly pleased that we are able to accomplish that in what seems to be a difficult, or more challenging, environment economically. For 2009 we will continue all those areas of focus, however at this point in time, given the potential pressures that may be there on collectability, or on getting patients to pay as timely, or in the amounts that they did before, we have not forecasted an additional improvement in accounts receivable in the ranges that we gave this morning for 2009 working capital. Once again, that is not to say we are not going to go target all of those same areas, but the outlook does not incorporate them at this point in time. There are a couple of other things happening with respect to working capital in 2009, which caused the projected use on the web slide for the cash walk forward to be slightly higher than it would otherwise in the operating assets and liabilities caption and that is that some of the cost reductions that we have made, the cash reduction of that won’t show up in 2009, but would show up in 2010. That is because by example we have reduced the 401-K match for our employees. That does not affect the payment that we make in the first quarter of 2009, it affects the payment we make in the first quarter of 2010. So, if you will, the non-cash accrual declines in 2009, but the actual cash benefit doesn’t show up until 2010; so there has effectively been a pay down of that liability occurring this year. Then there are some other items like that, that are benefit related, so that number of $170 to $105 million of use of cash on operating assets in 2009 in the walk forward is higher as a result of those items.
  • Operator:
    Your next question comes from Darren Lehrich of Deutsche Bank Securities.
  • Darren Lehrich:
    I wanted to start on the cost side, you’ve done a very good job of expense management and I wanted to just get a little bit of color from you as to the cost cutting actions you have taken at year end. If you cold also just talk a little bit more about some of the expense reductions that roll in to 2009. As I understand it you’ve reduced your 401-K match, that’s part of the cost cutting action. So, if you could just comment a little bit on those kinds of things and if it’s true about the 401-K, how you expect turnover to trend in ’09.
  • Biggs Porter:
    Sure. The cost reductions of $150 million were $50 million at the hospital level and about $100 million in overhead benefit and other expense categories. If you look at it separately from a P&L standpoint, there is about $75 million in salaries, wages and benefits, about $25 million in overhead non-SGB related and than OCE and supplies reductions of about $50 million. So, it’s really very much across the board. Some of it is benefit related. Some of it is headcount related both at the corporate, administrative, and the hospital level and some of it is in the expense side for purchase services as well as expenses related to malpractice by example relative to what we would expect it otherwise. So it is pretty broad based. It will come in over the course of the year. In the first quarter we would expect not to be at the full run rate, but to have it grow over time. But, the $150 is the full year affect.
  • Darren Lehrich:
    Okay and as it relates to the bad debt commentary you’re giving us and what you’ve built into the guidance, this is probably a discussion you had from a few years ago you had at an Investor Day, but I think you noted that California bad debt was among the lowest in your portfolio at that time. I just want to revisit where you are with regard to California bad debt and if you could give us some comments specific to that given the housing issues in that state.
  • Biggs Porter:
    California has been increasing. There has been increased unemployment in California, although it is a mixed bag. We do have some areas where there is very high unemployment rate driving up bad debt expense, but also in at least one of those areas commercial volumes are going up at the same time. So, it is very difficult to say that there is a real absolute correlation between the economy and our results. But, if you are looking at California bad debt it has been increasing.
  • Darren Lehrich:
    My last question relates to your guidance and the line item in your walk forward with regard to adverse mix shift. I think you’re assigning a $43 million or so impact there relative to mix shift. Could you, in broad terms, describe what’s embedded in your thinking there? And, if your mix was X in terms of self-pay and Medicaid at year end what do you expect it to be embedded in that guidance at the end of ’09?
  • Biggs Porter:
    The two big drivers in there are, as I said, we assume commercial volumes declined in 2009 in determining that adverse mixed shift and that’s at about a -3% year-over-year decline in commercial volumes. Then on the uninsured we assumed that that went up by about 6%. Now we haven’t been experiencing that. We have been experiencing uninsured declines, but nonetheless with all the pressures out there we thought it was prudent to forecast some amount of increase in uninsured volumes.
  • Darren Lehrich:
    Then how is growth in Medicaid factor into that? I would assume that’s a lower margin source as well.
  • Biggs Porter:
    Well from a volume standpoint, I think that the government programs, broadly speaking, are increasing.
  • Operator:
    Your next question comes from Sheryl Skolnick of CRT Capital Group.
  • Sheryl Skolnick:
    I have one broader question about the guidance and then maybe a couple of details underneath that if I could. If I understand the top of your guidance range, because assuming that everyone will do the same thing we’ve done before and that is focus on the $800 million. I assume you focus on the $800 million and what that says. That says that your managed care volumes go down 3%, your bad debt goes up 100 basis points or $110 million, and your volumes are up 1% overall? Is that what is says?
  • Biggs Porter:
    If you look the detail on the slide, inpatient is up 0.8% and visits are up 0.5% in that volume line item on the walk forward.
  • Sheryl Skolnick:
    All right and then that assumes that you do get, not the full $150 million of the cost savings, b ut the run rate equivalent of it?
  • Biggs Porter:
    No. It’s the full $150 million. By the time you get to the fourth quarter the run rates would be higher.
  • Sheryl Skolnick:
    That’s helpful, thank you very much. Then I do have a couple of other questions. I need to understand a couple of things about your volumes and your mix. In particular whether we’re seeing the impact of the economy in El Paso and on Coastal Carolina whether you’ve considered the fact that you had flu last year in the fourth quarter and first quarter you don’t this year. Can you give us a sense of what the impact of the respiratory volumes might have been? If I remember correctly your January volumes were up 2% year-over-year last year, but that was before you took out USC and a couple of other things. Three, I’d like to understand whether or not our guidance going forward on a cash assumes further debt reductions as in additional repurchases and my fourth question is can you elaborate a little bit on the DOJ probe of the self reported admissions issues you found in South Fulton?
  • Biggs Porter:
    I may not have counted all of your questions adequately, so let’s see if I skipped one. You asked about flu and how that might be affecting our volumes and we don’t believe we have the same level of flu activity this year as last year, although putting a precise number on it is not possible through a 49 day period, that Steve mentioned earlier, because we don’t have 49 day flu stats year-over-year at our fingertips. But, it is down, or at least it appears to be down at this point in time. In terms of debt reduction in the guidance, we have not forecasted any debt reduction in the outlook for cash or interest expense or any other element. As I said on my script, to the extent we engage in interest rate swaps or retire debt, meaning taking cash and retiring debt, than that number can be mitigated downward, either this year or next year.
  • Sheryl Skolnick:
    Okay, can I just follow up on that? So that when you looked at the use of proceeds, say from USC, and I’m assuming that’s still on track to close, at one point you thought you were going to use that to buy back some bonds in the open market to potentially reduce debt in that way. Is it now that you might need it to have a cash cushion to fund working capital because the economy is more difficult?
  • Biggs Porter:
    I think that we’ll make that decision as we go through time. We obviously need to get the transaction closed. We want to see our other cash initiatives we’re doing. As I said, we don’t add the MOB proceeds in this year, but we’re still working it. So I think it’s too early to conclude as to what we will do with the proceeds of any/or all of those things until we get it closed and get a little bit further into the year.
  • Sheryl Skolnick:
    Okay and then the next series of questions which related to volumes was the impact of the economy in particular on either El Paso or Coastal, which contributes over and above the same store performance in the guidance and also presumably to the fourth quarter.
  • Stephen Newman M.D.:
    This is Steve. With respect to El Paso, we have not seen a significantly negative impact on our inpatient and outpatient volumes in El Paso related to the employment level. On the contrary, with the base realignment program and expansion of Fort Bliss, we’ve seen a significant growth, especially in the northeast quadrant of the city with civilians there to support the activities at Fort Bliss. That has really helped us ramp up the east side new hospital in terms of its volume. We have completed the specialty medical staff there; although we are continuing to recruit primary care and we’re pleased with that performance as well as the overall performance of the market. We’ve made some intricate changes in the market, not at the CEO level, but in the A teams, and expanded our physician recruitment and physician relationship program staff, so we’re feeling a very positive momentum now with our El Paso market. With respect to Coastal, Coastal as you know is a small hospital that has a very concentrated small, active medical staff. We’ve had some physicians move out of the area, our of state and we’re in the process of recruiting to back fill that, but clearly its collaboration with our Hilton Head Hospital is increasing. We have Hilton Head physicians covering the Coastal Carolina significant services like general surgery and orthopedic surgery now, and we have signed some letters of intent with specialists in those two areas for them to relocate to the Coastal Carolina, Hardeeville area shortly. With respect to unemployment around the country, as Biggs said, we’ve got a mixed picture and some of our markets with the highest unemployment rate we’re continuing to grow volume and grow commercial volume in comparison to Q4 ’07. In other we see a more significant delay in elective surgical procedures. It is sort of interesting, as you look around the country, our ER visits I the quarter were down compared to Q4 ’07. On the other hand, our admissions that come through the ER are actually increasing. So, what we’re seeing is that less seriously ill patients are not coming to the emergency room. Now we can speculate on why that’s happening, but one thing is those that were previously commercially insured may elect to find care when they need the sort of less serious care at other clinics, or even at private doctors’ offices, rather than coming into the ER. As Biggs said, we’re following the situation closely, we’re ramping up our efforts to take market share in all of the markets, especially in our TGI priorities, as well as our commercial managed care area, we’re expanding our business to business activities in terms of growing that commercial business and we’re optimistic we’re going to make progress in 2009.
  • Trevor Fetter:
    And Sheryl, this is Trevor; I think the last of your five-part question was on the inpatient rehab issue. There is really not much to say other than what’s in the 10-K, but essentially we identified an issue through our own compliance programs. We reported it to the OIG under a program that they set up for self disclosure of these kinds of issues. The question really is whether Medicare would pay for patients to be cared for in a rehab facility, a skilled nursing facility, or home health, or expect them to have been kept in the hospital longer. I think, as you well know, those rules changed over time, so the question is really how closely did our inpatient rehab facility adhere to the rules as they were changing.
  • Sheryl Skolnick:
    Okay great, terrific job on the fourth quarter and the year and congratulations on all those stocks and all the improvement, really great job on that.
  • Operator:
    Your next question comes from Henry Rakoff at Deutsche Bank. Deutsche Bank Securities
  • Henry Rakoff:
    My first question, circling back on the $150 million in cost saves, I think you guys mentioned that $75 million would come from SW&V. Then you also mentioned that in part you weren’t going to continue the match from the 401-K. Is the 401-K most of the savings in the SWV or is it just a sizable headcount, because $75 million is a fairly large number. Can you give us a little more detail on a refinement on that $75 million?
  • Trevor Fetter:
    The 401-K would be about a third of it. There are other benefit changes, which may be taking up to about half, if you will, being related to benefits and then the other half being related to levels of staffing at the various levels of the company. Just one note on the 401-k because I think it was asked earlier, this 401-K five years ago or six years ago, had a match of 5%. We took that down to 3% in about 2004 or so and it had remained at 3%. We’ve taken it to 1 ½%. We’ve described to our employees that it’s temporary while we navigate through these uncertain periods, but we have not eliminated the program. So, we still believe we offer a competitive benefits package and it’s important to us to continue to drive to reduce turnover and increase retention, which are two things we did in 2008.
  • Henry Rakoff:
    My last question is kind of an industry question. With the Medicare Advantage, some of the reductions in that, for a Medicare patient who shows up either as a fee for service Medicare patient or a Medicare Advantage patient, is there a difference in profitability to you, or payment from those two different patients on Medicare generally?
  • Biggs Porter:
    The pricing on a managed Medicare patient is slightly less, but not significantly different.
  • Henry Rakoff:
    So if that was reduced a lot it would almost be a positive for you guys, since fee for service is a little bit more?
  • Biggs Porter:
    Well there is also a utilization impact, so the managed Medicare patients tend to stay in the hospital less than the fee for service. It actually helps us to the extent that Medicare Advantage is less attractive to the providers of that.
  • Operator:
    Your next question comes from Robert Hawkins of Stifel Nicolaus & Company, Inc. Robert Hawkins - Stifel Nicolaus & Company, Inc. Can you guys give a couple of details on where the MOB sale stands and some of the pricing? Is this the entire group of MOBs or are you doing it in, kind of, different parcels?
  • Biggs Porter:
    There were 31 MOBs that we put up for sale. Not every MOB that we own, some of which we occupy significantly, so we did not put those up for sale, or they had some other strategic purpose causing us to retain them. But, of the 31 that we put up for sale, we have broken them in to two buckets, as I said; 21 which there is a buyer trying to find financing for and then 10 which there are buyers interested in all, or just individually, elements of those 10. From a pricing standpoint, the 21 are probably more valuable than the other 10. That is one reason for breaking them up. Broadly speaking there is some amount of capital that needs to be deployed, and so as a part of this arrangement, when we sell the MOBs we are also requiring the buyer to put in capital so that, of course, it improves the facilities and improves them for our positions, but it also diminishes the proceeds somewhat.
  • Robert Hawkins:
    Okay. So the guidance has, I guess, a full sale anticipation?
  • Biggs Porter:
    No, the guidance in 2009 does not have the MOB sale in it at all.
  • Robert Hawkins:
    No, but I mean, I guess what I’m saying is on Slide 24 the estimate, I’m sorry. The cash initiatives and divestitures page, I’m sorry, I misspoke on guidance.
  • Biggs Porter:
    The cash initiatives list, that is all 31.
  • Robert Hawkins:
    How do you break up your bad debt guidance between what’s charge master, what’s unemployment and are there other components that we should be thinking about? Because, it seems like they’re pretty significant jump.
  • Biggs Porter:
    Yes, this will not be completely precise, but I’ll give you a little bit of break down in this way. On the slide we have $110 million of bad debt increase year-over-year. About $30 million of that would be just taking the full year 2008 up to the Q4 run rate, with also the Q4 bad debt rate being higher than the average. So, as a starting point you would raise it $30 million just to take it to the fourth quarter run rate. Then of the remaining $80 million break it down into collection rate, deterioration potential, $20 to $30 million on pricing and an additional $10 to $20 million increasing balance after due to cost shifting $15 to $30 million and then less mitigation for the collection of older accounts as aging is improved. As you know we’ve done a good job of improving the aging, so that would be $10 to $15 million. So those ranges, if you will, work their way into that $80 million.
  • Robert Hawkins:
    Okay and so the, I guess, the unemployment rate side of that would be the cost shifting the collection?
  • Biggs Porter:
    The collection rate piece, right, the uninsured affect is up on a different line of the walk forward up there in the mix shift. So there is some bad debt pieces on the chart, not solely in that bad debt line, but also in the pricing line and in the mixed shift line and in the volume line.
  • Operator:
    Your next question comes from Miles [Hystree] of Credit Suisse.
  • Miles [Hystree]:
    I think you said this, but I just want to be clear. Just on the med mal again, as we’re kind of looking forward and modeling this, does that run out going forward looking more like an 18 per quarter type number or more like a 36 per quarter type number?
  • Biggs Porter:
    You’re referring to the expense of what the reported gross expense will be?
  • Miles [Hystree]:
    Yes.
  • Biggs Porter:
    I’m not going to give a line item estimate for malpractice expense for 2009, but clearly we think that the kind of reduction we experienced in 2008 was real and in the fourth quarter of course it grew some. We think that those reductions are sustainable. We think that in 2009 we can continue to benefit from our initiative and, is you will, have malpractice expense at a rate which is lower than what inflation would take it to, our normal cost increases would take it to. But, I don’t want to get to the point of giving specific line item guidance.
  • Miles [Hystree]:
    That’s great, that’s what I was looking for. Thank you.
  • Operator:
    Your next question comes from Gary Taylor of Citigroup.
  • Gary Taylor:
    Congrats on how the Tender offer is going. It sounds like that’s proceeding very well. Can you remind us what security you’re giving in that exchange to those new bond holders?
  • Biggs Porter:
    It’s secured by the stock of subsidiaries, so it gives them security, basically, to those subsidiaries which hold our hospital assets.
  • Gary Taylor:
    So you don’t have any first mortgages anywhere on your debt right?
  • Biggs Porter:
    No.
  • Gary Taylor:
    Am I correct that the revolver is the piece of debt that has the security provision protecting what’s defined as the principle properties?
  • Biggs Porter:
    No, that is in the unsecured debt covenants are indentured.
  • Gary Taylor:
    Okay, that applies to the bulk of the unsecured bonds that are out there?
  • Biggs Porter:
    Yes.
  • Gary Taylor:
    And then I have a question on the med mal as well. The full year ’08 is $120 million, so it’s down $35 million. Do you think that reduction is sustainable? Then the last comment you had made was you had thought the expense grows at a rate less than the rate of inflation in ’09?
  • Biggs Porter:
    Yes and the $35 million is net of $15 million of charges associated with reducing the discount rate over 2009. So, gross if you will, of the change in discount rate the reductions we experienced were $50 million.
  • Gary Taylor:
    Did you take the $15 for the discount rate? Was that in the 4Q of investment performance or was that earlier in the year?
  • Biggs Porter:
    There was a slight change in the fourth quarter, but there were changes earlier in the year as well.
  • Gary Taylor:
    Okay and then my last question, I seem to recall there were some tax changes a couple years back related to either executive pension or just executive retirement plans and so forth. Is there still anything in place that we’ve got that risk of that discount rate change that you still may have to take a mark on looking forward?
  • Trevor Fetter:
    There is still a relatively small retirement plan, but there is some limited risk from a discount rate change on it. It’s not anything that’s been substantial in the past.
  • Biggs Porter:
    There is no explicit tax concern, but yes there is always some under preserve valuing that goes on.
  • Gary Taylor:
    But not very material it sounds like? Not large enough to be?
  • Biggs Porter:
    No.
  • Gary Taylor:
    Okay, thank you.
  • Operator:
    Your next question comes from David Bachman of Longbow Research.
  • David Bachman:
    On the expense side, did the formation of Conifer have any impact on expenses in the quarter? As far as formation from a structural standpoint no
  • David Bachman:
    Okay and just the existence in the quarter didn’t change anything from a reporting?
  • Biggs Porter:
    No.
  • David Bachman:
    It’s a wholly owned subsidiary, correct?
  • Biggs Porter:
    Correct.
  • David Bachman:
    Can you clarify on the non patient revenue what the composition of that is now? Kind of what’s in there, so we can better think about that moving forward?
  • Biggs Porter:
    Non patient revenue would include all of he ancillary income at the hospitals. It would also include rent on office buildings. In the case of the equity earnings, the subsidiaries, physician revenues, it also included, I think, the $8 million Modesto credit in the fourth quarter.
  • David Bachman:
    So no one item in there really overwhelms the category?
  • Biggs Porter:
    I don’t think so.
  • David Bachman:
    Okay and then you talked about stimulus, SCHIP and COBRA against the back drop of challenging fundamentals. Am I reading you correctly that as you look at the puts and takes there that those sort of net out? Is that how you’re thinking about the impact of those for 2009 at this point?
  • Biggs Porter:
    Well I think the SCHIP expansion and the COBRA, to the extent that they occur, should be upsides, all other things equal. We should have more covered lives as a result of both of them; however trying to forecast exactly what that is, is really problematic. It goes, probably, beyond what we’re actuarially capable of doing with any kind of fidelity. So, we just have said that we don’t know what they’re cooperating for. It may be a small amount, it may be significant. They seem to be net positive, though, one way or the other. On the stimulus bill, we think that that just continues to support what the states otherwise would have planned or funded last year. So, we think that that neutralizes, if you will, risk with respect to state funding. Although there certainly could be risk out there, we think that the stimulus bill should substantially neutralize it.
  • David Bachman:
    Okay that’s helpful color, thanks.
  • Operator:
    Your next question comes from Whit Mayo of Robert W. Baird.
  • Whit Mayo:
    Can we get a spot number for what you think your seismic cost or expense will be in 2009? I know you’ve benefited a little along the way from some small reprieves, so are there any additional changes to think about there?
  • Biggs Porter:
    I’m not going to give you a spot number for 2009, among other things it’s still under evaluation. We gave the $147 million in the 10-K for the total requirement. But, we still have some appeal processes, some discussions underway, to reduce that number and that could have an affect not just on the total number, but what we would spend in 2009. So, I don’t think it makes any sense to give a spot estimate at this point.
  • Whit Mayo:
    Okay, that’s all I have, thanks.
  • Operator:
    Your next question comes from Shelly Gnall of Goldman Sachs.
  • Shelly Gnall:
    I have a question on the more conservative CapEx strategy. I’m just trying to understand the motivations there. Understanding that certainly part of it is to minimize cash burn, or as Sheryl was mentioning, to build up your cash balance. But, what about the opportunity here to more aggressively go after market share in some of your more challenging, more competitive markets. I guess I would love to hear an update on changes in your capital strategy. What kind of projects are going to get priority in this environment?
  • Trevor Fetter:
    Shelly, thanks. I believe you are our last question as we wanted to finish in time that people could then take a break and tune in to the HMA conference call coming up in 10 minutes. So just briefly, part of it is we’re being cautious because of a cautious or an uncertain economic environment. That’s a big motivator. We also, as you know, have spent heavily in the last 2 ½ years, including the Tenet’s capital stimulus that we put in place following the government settlement in mid 2006. So, we feel as though our hospitals are competitive and we are able to do this and remain competitive. As I mentioned, the arms race has diminished competitively and so we’re really focusing much more on execution in 2009.
  • Shelly Gnall:
    Okay, thanks for the color.
  • Operator:
    Your last question comes from Ralph Jacob of Credit Suisse.
  • Ralph Jacob of Credit Suisse:
    I just want to go back to the uninsured volume. I think in 3Q uninsured volume was up 4.95 and this quarter it looks like it’s down 5.9. That is a huge swing. Is there anything specific that drove that?
  • Trevor Fetter:
    Generally speaking our uninsured volumes have been trimming lower as we’ve gone through the last couple of years. There are a couple of reasons. One is our Medicaid evaluation program where we really assist the individuals in the emergency room. We have people on staff to counsel and determine eligibility with patients as they come in, so we are getting more people qualified for Medicaid. Secondly, the right care, right place initiative, which has tried to get people to more efficient forms of care as opposed to the emergency room when they really don’t have a critical need.
  • Ralph Jacob of Credit Suisse:
    Okay and then just to be clear, next year the assumption is for the uninsured, though, to be up about 6%, is that right?
  • Trevor Fetter:
    Yes. That’s what I said was in the upper end number. One other thing that we’re doing, back to the uninsured, is on the elective side, before we take an elective uninsured patient it gets signed off on by the CFO of the hospital or an equivalent level individual, so that we reduce the risk of non-paying uninsured elective procedures.
  • Ralph Jacob of Credit Suisse:
    Okay and did you give a recruiting goal for 2009? And then, could you talk about the strategy around employing doctors and any trends there?
  • Trevor Fetter:
    Once again, for 2009 we’re setting an ambitious target of 1,000 active medical staff net of attrition. That would be our third consecutive year of setting those, I think, lofty goals, having hit them in ’07 and ’08. We’re continuing to ramp up our physician recruitment and redirection activities. Again, as we’ve said before, over 70% of the new physicians joining staff are those that are in the contiguous market area that previously didn’t use our inpatient and outpatient facilities
  • Ralph Jacob of Credit Suisse:
    In terms of employing doctors though?
  • Trevor Fetter:
    We continue to gradually expand that in a very strategic and selective way, where, generally speaking, we can’t have an adequate primary care base to serve the needs that we have and occasionally, for example in Florida where we can’t get emergency department coverage from sub specialists, we employ sub specialists.
  • Ralph Jacob of Credit Suisse:
    Okay, thank you.
  • Operator:
    Thank you. This concludes today’s conference call.