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Tenet Healthcare Corporation (NYSE:THC)

Q3 2008 Earnings Call

November 4, 2008 10:00 am ET

Executives

Trevor Fetter - President and Chief Executive Officer

Stephen Newman - Chief Operating Officer

Biggs Porter - Chief Financial Officer

Analysts

Adam Feinstein - Barclays Capital

Ralph Giacobbe - Credit Suisse

Shelley Gnall - Goldman Sachs

Thomas Gallucci - Merrill Lynch

Gary Lieberman - Stanford Group

A.J. Rice - Soleil Securities

Sheryl Skolnick - CRT Capital Group

Darren Lehrich - Deutsche Bank

Rob Hawkins - Stifel Nicolaus

Justin Lake - UBS

Kemp Dolliver - Cowen and Company

Kevin Fishbeck - Banc of America

John Ransom - Raymond James

Gary Taylor - Citigroup

Miles Highsmith - Credit Suisse

Whit Mayo - Robert W. Baird

Jeff Englander - Standard & Poor’s

David Bachman - Longbow Research

Operator

Welcome to Tenet Healthcare's conference call for the third quarter ended September 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. Mr. Fetter, please proceed.

Trevor Fetter

Thank you, operator. Good morning. I am pleased with our third quarter volume growth relative to what we are seeing in the industry. It is more evident that our strategies are working effectively. All of us were disappointed on the bottom line, which did not meet our expectations.

I would like to begin by commenting on some key elements in the quarter. This is now the fourth consecutive quarter with positive same-hospital admissions growth. More importantly, we produced another quarter of significant paying volume growth, both in our inpatient and outpatient businesses. This included positive growth in same-hospital outpatient visits for the first time in five years.

In October, our volumes were down slightly, 0.4% against a very strong October 2007. I consider this to be a continued solid performance in light of all the economic turmoil in October.

Pricing was also strong in the quarter, although an adverse change in our patient mix made this less visible than in prior quarters. On costs, the salaries, wages, and benefits line rose only 2.5% on a per adjusted patient day basis. As this increase is well below the normal inflationary pressures that we have experienced, this is a significant indicator that we are capturing important operating leverage and gains in productivity on the labor front.

By the time you get to the EBITDA line, the picture is mixed. On the same-hospital basis, we reported a decline in EBITDA of 2.4% or $4 million. While we had positive cost reports settlements in both periods, this year, the benefit was $11 million less than in the last year.

For those of you who typically eliminate cost report settlements from the numbers, we did grow same-hospital EBITDA by $7 million or 4.9%. Either way, however, our performance on EBITDA was below our expectations. The basic reason that EBITDA failed to meet our expectations was due to on unexpected adverse change in patient mix driven by a decline in commercial managed care admissions.

While we certainly had a number of success stories in the volume front, our successes were primarily in growing government volumes. The hugely successful turnaround story in our Florida region is a perfect example of this. Admissions in our Florida region were up 2.7% in the quarter, extending the strong recovery, which started towards the end of last year. The volume growth in Florida is mostly government-related business, which weakens our patient mix and distorts our pricing statistics.

While I want to emphasize that commercial is our highest margin business, the government related business does have a positive contribution margin. Positive contribution margins on our paying business are why we are so pleased with the 2.0% growth in paying admissions and the 2.3% growth in paying outpatient visits.

I am sure you are wondering how the economic downturn is impacting our business. We are paying close attention and looking for trends. We did not see any downward trends during the third quarter that were unmistakably linked to the macroeconomic environment.

Here is what we are watching. For the first time this year, the growth in quarterly unemployment statistics in the counties where is Tenet has hospitals, increased more than the national average everywhere, except El Paso. California accounted for 27% of the national total of foreclosure filings in the third quarter, the most of any state, while Florida had the second highest total.

The point is that the economies in many of our local markets are showing stress. But, do not forget that the downturns in the economy and the financial markets affect our competitors as well. I am not talking about the companies that you follow, but rather the not-for-profit hospitals, whose only source is capital are tax exempt debt, philanthropy, investment income and operating cash flow. We also compete against physician-owned hospitals, independent surgery centers and diagnostic centers that rely primarily on private sources of equity and equipment leasing.

All of these sources of capital are now constrained. We have already seen many of these competitors in our local market, engage in layoffs, abandon building plans and make other cuts. I think it is safe to say that some of the more extreme and costly forms of competition that we have seen in this decade will not continue.

Before I conclude, I would like to speak to our revised expectations. Biggs will walk you through how we have actually we performed so far this year, compared to our outlook for 2008.

The short version is that we are within the range on total volumes. On EBITDA, it is clear now that we have closed Q3, that unless we have a very strong finish to the year, our adjusted EBITDA for 2008 is likely to be in the range of $700 million to $750 million, below our prior guidance of $750 million to $825 million.

Even the upper end of our revised rage is well below the run rate, with which we expected to enter 2009. Based on this lower starting point, the billion dollars of adjusted EBITDA now looks very difficult to achieve.

In early August, we still thought it was an aggressive but achievable target. Now in the midst of a weakening economy, it seems that many trends would have to break in our favor. As we are in the midst of 2009 planning process, we are not yet prepared to provide our 2009 outlook, but will do so in late February when we release our fourth quarter results.

Finally, I hope you remember that at our investor day in June, we told you about a new strategy to leverage our expertise in revenue cycle and other services. Those activities have advanced to the point where we will soon be ready to make a broad announcement about them. We currently provide various services to non-Tenet hospitals and we are excited to begin offering them to an expanded customer base under a unified and distinct new brand.

While it is difficult to project the contribution of a new venture, we believe this entity could contribute up to 10% of our EBITDA in five years. I am very excited about this innovative new venture, so please stay tuned. We will elaborate about our plans in a separated announcement within the next few days.

Let me now turn things over to Steve Newman to review our performance against key growth objectives in the quarter. Steve?

Stephen Newman

Thank you Trevor, and good morning everyone. Trevor alluded to the central role, volume and payer mix plan achieving our financial objectives. I am going to take a deeper dive into these areas.

While the challenges on the commercial front are significant, I want to reiterate the progress we made in growing total paying volumes, with admissions growing by 2.0% in the quarter. Growth in total paying volumes has been a fundamental goal and we met virtually all of our objectives in this regard.

I commend our staff for achieving this growth and creating a firm foundation for further growth. Let's take a closer look at the components of paying volumes. Our total government programs admissions, including both traditional and managed Medicare and Medicaid increased by 4.3% in the quarter.

This is a huge increase. Let me emphasize that I am referring to the growth of our aggregate government program admissions and not the migration from traditional to manage government programs. Given the soft volume growth reported by many of our competitors in the third quarter, it is increasingly clear that we are capturing significant market share on the government side, especially in Florida.

To take our performance to the next level, however, it is imperative that we grow commercial volumes as well. Commercial volumes remain soft in the quarter with admissions down 3.4% and outpatient visits virtually flat with a decline of 0.6%. As we have mentioned in prior quarters, some of this volume loss is the result of a deliberate de-emphasis of certain service lines.

You will recall in the second quarter that more than 90% of our decline in commercial managed care admissions resulted from the reduction in OB admissions. In the third quarter, the decline in OB admissions remained an important factor and explained approximately half of our commercial admissions decline.

Let me take a moment to mention our surgeries growth in the quarter. We achieved good growth in surgeries, especially on the inpatient side, where our focused efforts produced growth of 2.6%. Our reported outpatient surgeries were unchanged from Q3, '07 but would have shown a 3.0% increase after normalization from the consolidation of the joint venture.

We continue to see different alley stronger growth in our targeted growth initiative or TGI service lines. For those of you new to the Tenet story, our TGI service lines are those services we have targeted for growth due to favorable demographic trends, attractive profitability, compelling community need and an absence of strongly positioned competitors.

Slide 13 provides a look at commercial admissions growth and the seven TGI service lines, we typically emphasize in our hospitals. In prior quarters, we included eight service lines on this slide. But, now we are excluding Cath/EP to reflect the implementation of a CMS directive mandating that many of these procedures previously performed on an inpatient basis be moved to an outpatient setting while commercial admissions decline in the aggregate and seven TGI service lines, at least the loss of admissions in the TGI service lines was less severe than the aggregate commercial decline.

Unfortunately, the size of the favorable differential was not as large as in prior quarters. Slide 14 is a new disclosure. This data is identical to slide 13 except it expands our analysis of TGI, admissions to look beyond commercial payers and include all payers. Looking at total playing patients, both growth rates are positive, but again, you can see the TGI service lines achieving faster growth.

On slide 15, the focus shifts to TGI's service lines and our outpatient business. Here we have graphed the TGI growth differentials for commercial outpatient business. Again, the positive growth differential in TGI service lines is readily apparent. Taking just a moment for a deeper dive on one of our T.G.I. outpatient service lines, commercial cancer outpatient visits increased by 2568 visits or 16.4% and drove 25% of our growth in our total outpatient volume in the third quarter.

This demonstrates the impact we can have when we identify our service line for growth. Despite the obvious threats from the recent economic climate, there are always potential opportunities embedded in every downturn. The current economic environment is no exception. The physicians in our markets report seeing the same declines and higher paying commercial managed care patients we are seeing.

This provides us with the opportunity to engage them in a collaborative strategy design to meet a community need and create a win-win-win situation for the physician, the community and for Tenet. In a number of recent cases, we have even built relationships with physicians who we have been unable to attract in the past.

Many of these strategies are not new, but in the current economic environment, we are finding them to be more important than ever. These initiatives include working with the physicians to help them initiate affiliations with commercial health plans in their markets. This strategy helps steer commercial volumes to these physicians and ultimately to Tenet's services.

As you know, we are focused on the expansion of our active medical staff as a leverage point for volume growth. In calendar year 2007, we added 1,744 new physicians to our medical staff. This growth includes 166 physicians, primarily in El Paso, who had existing privileges at another Tenet hospital. After attrition of some 898 physicians, this produced net growth of 847 physicians, an increase of 7.3% on a base of 11,603 active physicians at December 31, 2006.

These statistics are slightly modified from those disclosed at our June investor day as they reflect our 50 go-forward hospitals. We referred to these 1,578 physicians who are totally new to Tenet as the Class of 2007.

In the third quarter alone, we receive 9,440 admissions from these Class of 2007 positions for an average referral rate of six admissions per new position. This is a stunning number and significantly exceeds our expectations. You will recall that we were hopeful we would average about ten admissions from each of these physicians in a full year and now we are getting six in a single quarter.

If we were to annualize our Q3 experience, we would be looking at 24 admissions per you are or two and a half times our preliminary expectations. We got those admissions in what is seasonally our weakest quarter of the year.

I am also pleased to report that we received an average of 1.5 commercial admissions from each member of the Class of 2007 on an annualized volume of six commercial admissions. At an annualized six commercial admission rate, our ramp up for commercial also is slower than total volumes but still running ahead of our expectations. Since, physician relationships take about 18 months to reach maturity; our relationships with the Class of 2007 may still show further growth.

We also testified 60,405 outpatient visits from the Class of 2007 in the third quarter. This represents an average of 38.3 outpatient referrals per physician. Of these 60,000 outpatient visits, 2,039 were for outpatient surgeries or an average of 1.3 per physician.

While the volume data to date from this Class is clearly impressive, I must caution you that you volume data can be extremely volatile. It would be a mistake to attempt overly precise projections based on this data. Despite this disclaimer, we are very encouraged by these results. If you are looking for concrete evidence supporting Trevor's earlier statement that our strategies are working, you will find it in these volume statistics.

The Class of 2008 is building as well. Through the end of September, we added 900 physicians to our active medical staff net of attrition. Putting us well on our way to surpassing our 2008 goal of 1,000 new physicians. As our physician relationship program or P.R.P. and our physician recruitment initiatives evolve, we have improved our ability to identify physicians with larger and more profitability commercial books of business.

As a result, the commercial referrals we are already seeing from the Class of 2008 are exceeding those from the Class of 2007. As I mentioned earlier, we have launched a number of initiatives to resolve some of the bottlenecks, which have inhibited portions of our commercial volume growth.

First, we are continuing to work toward the goal of achieving full participation of all our hospitals and outpatient facilities in the networks of all our major commercial payers. For the largest national payers, we have already achieved our goal of 100% participation of all our facilities. While we achieve our preliminary goal, the realization of the related volume potential will take time.

Physicians tend not to altar their referral patterns overnight, even if the barriers are removed. It may take a few more quarters before they take full advantage of their improved access to Tenet. With the barriers removed for our largest payers, we are now turning our efforts to our smaller commercial payers.

Second, this elimination of barriers theme is driving our initiative to work with managed care payers to get all physicians on our medical staff into their networks. Again, we are talking about a methodical effort to remove barriers to growth. Again, the link to the related volume growth requires behavioral changes. Our experience suggests that the required physician behaviors will emerge over time, once the relevant impediments have been removed.

Third, getting our P.R.P. initiative up to maximum potential; we are refining our techniques sequentially and sharing best practices across our 50 hospitals. In the third quarter, we called on 7,301 physicians as part of P.R.P. and saw admissions from these physicians grow by 4.4%. This is a labor-intensive effort that requires both listening to and acting upon the needs of our physicians. To drive this effort, we continue to roll out our targeted education programs for staff. We recently launched a customized program for our imaging business and just last month, we introduced an innovative program to train nursing leadership in proven sales techniques.

So in summary, we continue to make operational progress across a number of important strategies. We continue to grow our active medical staff and expect to exceed our goal of adding 1,000 new physicians net of attrition in 2008 as these new physicians join us, they are providing referral volumes, which exceed our projections and we are methodically identifying and removing barriers to the growth and commercial volumes for our existing staff physicians. I focused entirely on the volume issue in my comments this morning. There has been exciting progress on the pricing and cost runs as well.

I will now turn the floor over to Biggs Porter to discuss these and other issues. Biggs?

Biggs Porter

Thank you Steve, and Good morning everyone. To start with, in addition to aggregate paying volume growth, I want to say that we are pleased with respect to continued progress we made on the operating and pre-cash flow front for the quarter, as well as the cash generated from asset sales insurance settlements.

Although, we are in a tough economic environment, we are continuing to drive on these initiatives. I will come back to this later. On the P&L, there are a number of metrics and value drivers, which offset each other. So, I will give a few overview comments, and tentatively place our performance in context.

To begin with, there were a few factors which should be highlighted as key considerations for the quarter. First, there is seasonality, which negatively affects both volume and bad debts in the third quarter, typically the industries weakest.

Second, while cost report settlements remain positive in both the current and prior year quarters, we experienced an adverse wing in prior year cost report settlements of $11 million. Third, we had an estimated $4 million negative effect of hurricane Ike.

Fourth, we saw increased softness in commercial managed care volumes, which compromise the visibility of some of our other progress. We estimate that this had an adverse effect of approximately $15 million on EBITDA. The hurricane costs, adverse mix shift and a portion of the bad debt expense for the quarter aggregating approximately 20 to 25 million were outside the range of our expectations for the quarter and for the year and are therefore significant contributors to our lower outlook for the year.

With that context in mind, I will now turn to review of the major line items. With respect to revenues and pricing, our third quarter volumes were converted into a solid revenue growth of 5.2% on a same-hospital basis. Excluding cost adjustments in both quarters, same hospital revenues would have grown by 5.8%. Same hospital commercial managed care revenues in the quarter were up 5.6% or $45 million, despite the 3.4% decline in the same hospital commercial admissions, the 0.6% decline in commercial outpatient visits, and a $6 million negative effect of payer mix shift from higher price to lower price commercial payers.

We have just adjudicated the fist of our pay for performance payments with one of our largest commercial payers. These dollars will begin to be visible in early 2009. In the three-year period, 2009-2011, we continue to expect these payments could be worth as much as 35 to 40 million. We are currently contracted for 39% of our commercial revenues for 2009, on a basis consistent with our prior walk forwards.

Turning to trends and expenses, same hospital, total controllable operating expenses rose by 4.1% on a per adjusted patient day basis. Much of this increase is in supply costs related to the progress being made drawing attractive service lines, including surgeries and is substantially offset by higher pricing.

Irrespective of this, the control of supply costs remains a high priority item and our new outsourcing arrangement with broad line is designed to further improve supply chain performance. Continued improvements in operating efficiency were clearly evident in our salaries wages and benefits.

SW&B grew by just 2.5% on a same hospital per adjusted patient day basis, demonstrated benefits of our cost control efforts and a more powerful operating leverage we are capturing with volume growth.

We continue to improve our discipline in this area as well. We finished rolling out a new productivity tool, which gives managers much more realtime staff planning capability than they have had previously, making us more flexible with much improved monitoring and reporting capability at all levels of the organization.

On bad debt, we have put slides on the web, which gives some trend and other information. I will point out that on collections, our experience shows little sign of a softening economic environment. Our collection rate on commercial payers remains at 98% and our self-pay moved less than one half of a percent to 35.4% from 35.8%.

Also, we continue to improve our point of service collections. We are now collecting just over 35% of our total self-pay collections at the time of service. This is up from 30% a year ago, and we expect it to continue to improve as a result of our initiatives.

So to summarize, although partially offset by adverse mix and increase in bad debt expense, our earnings benefited from gains in paying volumes, commercial pricing and improved efficiencies and controllable costs. In the aggregate, we continue to see clear evidence that our strategies are working.

Turning to cash; as stated in the release, in the third quarter we have positive net cash provided by operating of a $151 million and adjusted free cash flow from continuing operations of $30 million. This is an area we have clearly been making progress. This is the second straight quarter of positive adjusted free cash flow.

This helped our combined cash in investments balance to increase in June 30th this year by $208 million to $560 million, which is also helped by a receipt of $144 million of proceeds from the sale of our investment in Broadlane.

You may have noticed on our balance sheet the $48 million in investments in the Reserve Yield Trust Fend. Like others with these investments, we have reclassified this outside of cash because it is being liquidated over time. Receipt of the $48 million was spread to the next year, with the vast majority expected to be received by the end of the fist quarter.

Including the cash from Broadlane, we have already collected $217 this year from the 2008-2009, balance sheet efficiency and other cash initiatives we announced earlier this year.

We continue to pursue the sale of our medical office buildings and our main hurdle the letter of intent to sell the USC Hospital. You might have guessed the MOB transaction has become more difficult for buyers to finance under the current credit market conditions. We completed the bidding process prior to the meltdown in the credit markets but not yet have a binding transaction supported by buyer financing. We still have interested buyers and believe the transaction can be completed as soon as financing becomes available.

On USC, the university has been completing its due diligence, which is taken longer than anticipated and negotiations are continuing. Unfortunately at this time, it is doubtful neither the MOB or USC transactions will close by the end of this year, under the current circumstances. We do still believe both will eventually close.

We are tightening the ranges slightly on all our 2008-2009 cash opportunities to a range of $780 million to $950 million, as compared to a range of $750 million to $950 million we would previously disclosed.

Slide 28 compares our current and prior estimates. Of course in the current market, nothing is considered done until the deal is closed and cash is in the bank. Although, we settled the insurance claims we had outstanding and collected $46 million in the quarter, there is another $9 million to be received this month.

We also have reached a tentative settlement agreement on a California waging hour case, for an amount which will range from $62 million to $85 million, which is expected to be paid next year.

On working capital, our cash management discipline produced visibile results in the third quarter as accounts receivable day declined to 51 days, down a from 52 days at December 31 and showing a marked improvement from 53 days at the end of the second quarter. We have accomplished this recollection of overdue accounts and by reducing the number of day sales residing at discharge, but not billed. We continue to work both those areas as a part of fulling achieving our objective of an additional one decline AR days by year end.

As you may recall, our normal trend on cash is to have negative cash flow in the first quarter resulting from the pay-down of year-end payables and annual payment of a 401-K match in a suit of compensation. We then stabilized the second and third quarter with the most significant cash generation from operations occurring in the fourth quarter due to the year end buildup of accounts payable. We expect that general trend to continue this year.

Before I go to the outlook, I would like to comment on our progress on the volume front relative to the expectations we set earlier in the year. In terms of total volumes for the quarter, we are now achieving growth rates on admissions for top of our outlook range for the year.

On the outpatient side where we got off to a slow start in 2008, the 1.1% growth we generated in the third quarter was well above the outlook range we had most recently established for the year. Although, we did not provide outlook ranges for paying volumes, our performance on that metrics is even stronger. If we succeed in stabilizing our improving mix, this volume growth will translate into significant earnings growth.

Let me now turn to our outlook refinements. I can not recall a more difficult time in which to be predicting future results. We know as well as anyone else, there are a variety of negative pressures which were resulting in conservative consumer behavior and increasing unemployment. We do not know how severe these will become and the corresponding effect will be on our business.

Acute facilities should not be as sensitive as those which rely solely on elective procedures. Also to the extent hardship hits the uninsured, its effect on us is muted because our collections on that group were relatively low anyway. Primary risk to Tenet was for our broad developed procedures which could result as individuals lose commercial insurance as employers drop coverage, increase deductibles or reduce employment levels. Or individuals simply tighten their purse strings in an uncertain environment.

Based on nine-month results and concerns about the economy and commercial admissions in the fourth quarter, we are reducing our 2008 outlook for adjusted EBITDA to a range of $700 million to $750 million from a prior range of $750 million to $825 million. About half of the reduction is due to results of the third quarter, and half to concerns about volume and mix in the fourth quarter.

Slide 30 on the web details line item revisions per outlook. You may recall that since 2007 contains $60 million of key funding, which did not repeat in 2008 and included $40 million of favorable cash flow adjustments. We always start our earnings well forward from an adjusted 2007 starting point of 600 million. Accordingly, a 2008 result in the new range of $700 to $750 million is still a sustainable performance. On the critical value drivers are paying volumes, pricing growth and diligent cost control.

We have also updated our cash walk forward to reflect the revised earnings outlook and the timing of our cash initiatives. Being without the sales, the MOBs and USC, we project ending the year with $375 to $47 5 million in cash and $24 million in investments, which puts us in a position but we do not expect near the credit line of 2009.

Slide 31 provides details on this walk forward. In terms of 2009, our prior walk forwards demonstrating a path of $1 billion of adjusted EBITDA 2009 had relied on an $825 million 2008 result as a required starting point. Since such a strong starting point is now unlikely the roll forward will need to be adjusted.

We are still in our planning process for next year, as this process normally culminates in December. At this point, the $1 billion target for 2009 adjusted EBITDA appears to be a considerable stretch. Until we complete our planning and have a better view of the economy going into the first quarter, we do not have a clear refinement to make.

The only thing I can carefully say at this point is that the targets will probably go down by the $75 million reduction we have made to the upper end of our 2008 range. With respect to adjusted free cash flow, I would not expect to make the same magnitude of adjustment to our 2009 expectation, because our other drivers we could possibly effect beyond EBITDA.

Regardless, we still expect significant improvement in 2009 earnings cash performance. As Steve mentioned, irrespective of last quarters decline in commercial volumes, we have a number of initiatives to either increase commercial volumes and improve payer mix or mitigate the effects of economy.

In addition, we still expect to benefit from improved managed care pricing, improved cost management and cost reduction initiatives, improved performance form our new hospitals, the continued benefits of investments made over the last three years and our working capital and other cash initiatives.

Turning back to highlights and comments on the quarter, we are making great strides in demonstrating the success of our strategies on both inpatient and outpatient visits and achieving their growth with paying patients. We have a broadset of actions to increase commercial and other targeted volumes.

We are achieving significant pricing and revenue improvement as a result of our managed care negotiations. We continue to control costs effectively. We have significantly improved cash flow year-over-year and including the 129 million we collected in 2007 and the 270 million in 2008 to date, we have generated $401 million of cash from our initiatives and continue to drive on the remaining $510 to $680 million of opportunities. With that, I will turn it over to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Adam Feinstein of Barclays Capital.

Adam Feinstein - Barclays Capital

Morning, everyone.

Stephen Newman

Morning, Adam.

Trevor Fetter

Morning.

Adam Feinstein - Barclays Capital

Just, I guess the key issue here today is really with the commercial mix and just the volume issues there. Just curious, I mean what was your expectation, you know, because if you look back over the last several quarters, the decline wasn't that much different. I mean, it was 3.7 in Q1 2.2 in the second quarter. So, just curious as you think about your own expectations in the commercial managed care. And then, I'm just curious to know what's embedded in the guidance for the remainder of an year. Are you assuming things get worse there, stay the same? So just one should better understand how different the quarter was from what you guys were looking for.

Biggs Porter

Okay. This is Biggs. I'll answer first and if Steve has anything and he wants to add, he can do that. In terms of the trends that we'd experienced, if you go back to 2007, we have been closing the gap on commercial volume losses and just about hit the break even point on it in the third quarter and then at the end of the year it retreated some and first quarter retreated some.

But then the second quarter got better, and we projected a continuing improving trend on it. That trend would have been driven by PRP initiatives, TGI physician recruitment, the non payer strategies, everything that we're doing to drive commercial trends, so our expectation was that we had declining commercial losses fist quarter to second quarter.

We had made improvement last year and accreted some but we had improved trends going to second quarter and that all of the things we were doing would drive us to further moderation and growth as we went through the rest of this year. So in terms of expectation, generally speaking, it was that as we had volume growth in the second half of the year, it would be on a relatively even mix compared to last year, which would mean that if we had volume growth overall, we would have volume growth in commercial.

Once again it's based upon all the individual value drivers that we look at as opposed to just looking at the aggregate trends, but the aggregate trends also showed that maybe we're heading the right direction in the second quarter. In terms of the fourth quarter, the range that we have out there certainly at the low end would provide for further decline along the lines, possibly even at a lower level than or worse if you will than what we experienced in the third quarter and the upper end of the range with somewhat of a moderation but not necessarily a constant mix or significant growth.

Adam Feinstein - Barclays Capital

Okay. And then earlier in some of the prepared comments, you guys were talking about overall commercial managed care volumes in your markets with -- I don't know, if I heard the comment right but is that something to the extent that commercial managed care volumes weren't growing in some of your markets, so, which would imply that you guys aren't necessarily losing market share, but just that we're seeing a decline within that patient group. Just curious if you can just provide some further commentary there some?

Trevor Fetter

Adam, first of all. I'd like to say that you're right to say this is the key issue out there. And it unfortunately is one where there is very little information available. Competitors do not disclose these numbers. Sometimes when they do they mix in managed governments and so it gets to be very hard to get to what we're really talking about through the managed commercial patients. We hear anecdotes from some of our not-for-profit competitors in the market where they talk about it being down more significantly but it's not reliable.

I think you have to look at the enrollment statistics for the top national payers. They do disclose those numbers. That suggests that the pie is certainly not growing. It may be shrinking a little bit. And we unfortunately, though, to really know what's going on, you'd have to get that down to virtually every payer out there, that information just doesn't exist.

So to point back to our strategies to target these types of patients both in physician recruitment and the other strategies, unfortunately we just can't say, are we doing a fantastic job, terrible job or in between because of that lack of context? So we would have put those statistics into the release if we had confidence in them. We just don't have confidence in anything about the overall environment for commercial managed care in our markets.

Adam Feinstein - Barclays Capital

Sure. That makes sense. Okay, thank you.

Operator

Our next question comes from Ralph Giacobbe of Credit Suisse.

Ralph Giacobbe - Credit Suisse

Great, thanks. So ,just going back to the admission question and just looking at the different buckets, just to clarify. You said about half, I guess it's a 3.4% decline in admissions was due to the deemphasize of OB. Is that right?

Trevor Fetter

That's correct.

Ralph Giacobbe - Credit Suisse

I guess in looking at that 13.5% increase in that government managed care admission, I guess obviously playing some role in the decline in Medicare. Can you maybe just give us a sense of pricing within those two buckets? Are they comparable?

Stephen Newman

Ralph this is Steve Newman. There's very little difference in terms of our net revenue on a case-mix index suggested basis between Medicare and managed care and Medicare fee-for-service. So, we don't really discriminate from that perspective.

Ralph Giacobbe - Credit Suisse

Okay, I mean and going forward, is there any leverage that you all may have on managed care to get those rates above Medicare rats similar to commercial or is that sort of off the table at this point?

Stephen Newman

In some of our locations, we really receive 102% to 103% of traditional managed care. Sort of gets washed out as we look at it over time, but based on legislative activity in Washington, there's been a lot of talk potentially about taking away some of the funding of Medicare Advantage plans. So over the next few years, we may, in fact, see a bigger move back into Medicare or fee-for-service. We tend to have higher utilization of our services with patients that are under Medicare fee-for-service. So that would be a good thing for us over time.

Trevor Fetter

I think Steve meant 102 to 103% of traditional Medicare.

Stephen Newman

Right.

Ralph Giacobbe - Credit Suisse

Okay. Then just my own fault. Can you remind us of your -- the size of your physician base?

Stephen Newman

We presently have a little over 13,000 active medical staff.

Ralph Giacobbe - Credit Suisse

Okay. And then, can you talk about maybe the ramp of the new docs? How long it takes to get to some sort of normalized level? And then anything you can do in terms of getting them focused on commercial. It sounds like some of the new recruits have been doing well, which means the existing base is slumping relative. So any trends there that we can pick up on a “why that is”? I know in the past, we talked about sort of splitter physicians. Any commentary there will be helpful.

Stephen Newman

I would say that our experience is that a ramp up in our newly recruited physicians varies anywhere between 12 months and 24 months in terms of their utilization of in-patient and out-patient facilities and referrals to an existing specialist of primary care and in fact, they're specialty recruits. So you can expect those volumes to ramp up over that time. That's why we're so encouraged that the Class of 2007 had annualized 24 admissions based on their Q3 '08 performance.

With respect to commercial managed care, when we relocate physicians from out of state, we get certification for them to participate in Medicare and Medicaid sooner in many instances than we do with commercial managed care. So, that ramp up would actually occur later in that 24-month time period than Medicare and Medicaid participation.

Our sense is that we're continuing to work with our payers both the national payers and the large regional payers to get these newly recruited or relocated physicians into their networks even sooner than we've been able to do in the past. We've had good cooperation from the payers, and we've used a number of techniques to facilitate that affiliation.

Ralph Giacobbe - Credit Suisse

Okay. Thank you.

Operator

Our next question comes from Matthew Borsch of Goldman Sachs.

Shelley Gnall - Goldman Sachs

Hi thank. This is Shelley Gnall for Matt. Wondering if you could update us. I am not sure when your latest data set is available out-migration in your market, interested from both an inpatient and outpatient perspective?.

Trevor Fetter

Migration to what?

Stephen Newman

Out migration of what, Shelly, to what?

Shelley Gnall - Goldman Sachs

As we think about the opportunity to take share, if there is a shrinking pool of total admissions in the market, the market share opportunity, sounds like it can be pretty compelling. So is there a market share opportunity in your key markets?

Stephen Newman

What we certainly believe there's market share opportunity in all of our markets. We know there are patients that are out migrating from our individual networks. I think earlier in our earnings discussions, we've talked about the consolidated market in South Florida where previously we had patients both high-risk newborns, cancer cases and some higher acuity cardiac cases that were migrating out of our network to our competitors, both in-market as well as all the way down to areas like Miami.

So we know we have opportunities there. We've seen it in South Carolina where there's been out-migration from some of the cities in which we operate, especially those in rural and suburban locations. So we believe we have substantial opportunity to capture market share both of existing patients that are receiving service within the market, but also those that are out-migrating for services based on perception of what are service offered.

Recently, I was at Hilton Head in South Carolina visiting our Hilton Head hospital and our new Coastal Community Hospital. And we identified some out-migration to cities like Savannah and Beufort. And we have put into place specific tactics to communicate to our referring physicians primary care base, the existence of some services that they didn't even realize were being offered at Hilton Head and Coastal. Therefore, patients don't have to travel to Beufort or Savannah in terms of receiving those services. So out-migration is an issue for us. And we believe we can capture significant market share with tactical rollout customized for each market.

Shelley Gnall - Goldman Sachs

Okay. That's very helpful color. For those of us that track the off the market share opportunity, as of the last cost report filings, it looks like in your dominant zip codes, overall, not the key markets but overall, you had over 60% out migration in your markets.

And I'm happy to follow up with you offline on this one, but because there is a lack of data especially for the commercial managed care issue, if you could talk about to the extent you have data on changes in the total out-migration or market share opportunity, I think that would be very helpful for to us get a sense of more broadly what's going on in the industry.

And then, I guess just a couple of quick follow-ups, if I could. For the USC, for the university hospital transaction, was that a prefunded transaction and is all we're waiting for the due diligence?

Stephen Newman

I don't know what you mean by prefunded.

Shelley Gnall - Goldman Sachs

Do they have committed financing for that purchase?

Stephen Newman

No, they have a substantial endowment and they have the AA rating, the ability to issue taxes on financing, but they had not specifically prefunded this transaction.

Shelley Gnall - Goldman Sachs

Okay. And then, just one follow-up, I missed this comment. When had you commented on perhaps tapping the revolver? Was that '09?

Stephen Newman

Yes, I commented, we didn't anticipate meeting the revolver in '09.

Shelley Gnall - Goldman Sachs

You did not anticipate meeting it in '09?

Stephen Newman

Correct.

Shelley Gnall - Goldman Sachs

Okay, great. Thanks very much.

Operator

Our next question comes from Tom Gallucci of Merrill Lynch.

Thomas Gallucci - Merrill Lynch

Thanks, good morning everybody. Just on a commercial managed care volume, not to beat the dead horse here, but last quarter you said 90% of the decline was OB, and this quarter 50%. I think last quarter you also cited four or five specific hospitals that were a disproportionate drag.

So, can you give us a little bit more color in that context? And what else are you alluding besides the OB at this point and were there any particular facilities or is it seems more widespread maybe than it was last quarter?

Stephen Newman

Tom it's Steve Newman again. Certainly in this quarter, it would appear that the commercial volume loss was more broad based than we had seen in the prior quarter even though 50% could be explained by OB alone. We certainly had some decreases in areas that we expected to grow.

For example, orthopedic surgery in the commercial managed care area that we had targeted along with other payers in orthopedic surgery was down 0.6% compared to Q3 of '07. But a full three-quarter of our hospital, between two-thirds and three-quarters of our hospitals had decreased commercial managed care in the quarter compared to a much narrower scope of hospitals in Q2. So sequentially, we saw more of a national or broad based impact than we had seen before.

Thomas Gallucci - Merrill Lynch

So is it possible that you're just focusing so much on the certain lines there that you're targeting that some of the others following off or and also can you remind us why OB is such an undesirable plane for you I guess that you're losing so much of it?

Stephen Newman

Well, we're not losing it as much as we're de-emphasizing it. We de-emphasized it for any number of reasons. One is in markets that are highly competitive, there are lot of our competitors that offer OB services and are putting significant capital investments into OB, when our demographic assessments suggest the birth rate will fall in the relevant market over the next five and ten-year time period.

Therefore, it would not be a wise investment for us to upgrade those OB facilities. In fact, we can convert them into facilities serving service lines that will grow over time, whether that be gastroenterology or oncology services, diabetes care, neurologic care. So, that's true.

The second issue is, except in a rare instance, OB is not a profitable service line for us. And therefore, those are the two major reasons why we de-emphasized OB. With respect to the targeted growth initiative, it's interesting many of our markets have predicted significant use of orthopedic surgery, neurosurgery and spinal surgery over the coming years.

Our concern, quite frankly is that because of the economic circumstances nationally, many insured patients who really need this surgery done are putting that off so that we may see a balloon of utilization coming up in the next year or two, as those situations actually deteriorate and they may actually have more serious illness and consume more resources overtime.

But, in this economic climate, we have deductibles or co-payees or co-insurance, they may elect to not have that sort of barely serious surgery considering it not an emergent case, but one they can put off to next year or the second half of next year.

Thomas Gallucci - Merrill Lynch

Okay. And then, just relative to your comment there that OB is typically not that profitable. I think in your slides you mentioned that the decrease in commercial managed care cost about $15 million of EBITDA. So it's safe to assume that the 50% of decline that was not OB, is the primary driver of that?

Stephen Newman

That's correct.

Thomas Gallucci - Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from Gary Lieberman of Stanford Group.

Gary Lieberman - Stanford Group

Thanks. Good morning.

Biggs Porter

Good morning Gary.

Gary Lieberman - Stanford Group

At the risk of staying on a topic that's been beaten pretty dead here. I guess with respect to the managed care volumes, it's been going on for a while. It's been going on for three or four years that you've lost commercial share. So, I guess in your thoughts about it, is there something systemic either about the hospitals or the reputation or the physicians that you're recruiting that just is unable to get that going in a positive way?

Stephen Newman

Let me start off with that by saying that number one, we have no confirmed data that we're losing market share. We're losing volume compared to prior year. The second issue is, we're doing pretty well in terms of outpatient services at our same hospital. So I wouldn't think it would be a reasonable conclusion to suggest that there is something systemic about our facilities that is repelling commercial managed care.

I do think that we have a lot of tactics underway to eliminate roadblocks to those patients getting to our inpatient and outpatient facilities overtime. If we look at the payer mixes of our free standing facilities, our ambulatory surgery centers, our diagnostic imaging centers, those have very healthy commercial managed care business that are growing.

And we're seeing that in our hospital based outpatient surgery area also. So we don't think it's anything systemic within the hospitals themselves or our facilities. We think they're externalities that are affecting those volumes in sequential fashion.

Gary Lieberman - Stanford Group

Okay. And then I guess, you've had a couple f announcements for you to become the providers in a number of markets. Is there any data that indicates that that has helped in terms of increasing the commercial admissions or taking share?

Stephen Newman

We have some early data. As you all recall from some of our previous earnings discussion, we have become in network with a number of our larger hospitals over the last six months.

And that is beginning to translate into commercial managed care from those particular payers to our inpatient and outpatient facilities. That takes some time to ramp up because you have office managers that work for doctors, who are very used to five or ten years of almost as a default, referring those patients to other facilities not knowing that the new contracts allow those patients to be referred to the Tenet inpatient and outpatient facilities. So we anticipate that will be a significant contributor over the coming quarters.

Gary Lieberman - Stanford Group

Okay. Thanks a lot.

Operator

Our next question comes from A.J. Rice of Soleil Securities.

A.J. Rice - Soleil Securities

Thanks. Hello everybody. Just maybe, could you guys comment on where you're at in terms of your commercial and managed care contracting going into '09 at this point? What percentage is sort of done? And you commented on the relative rate increases between commercial managed care and your government managed care, is that governmental managed care seeing similar rate increases to the commercial?

Stephen Newman

Okay. The amount that we negotiated commercial managed care next year is about 79% of our 2009 commercial managed care so substantially negotiated for next year. In terms of increases, I believe we disclosed in the 10-Q, we're expecting about 3.5% increase on Medicare inpatient and we would expect certainly a bigger number than that on the commercial.

We haven't given a specific outlook for commercial. We'll give that, our indicators of that at least to the context of the overall in-patient pricing for next year when we get to 2009 guidance in February. But having said that, in the prior walk-forwards that we had for 2009 -- although we haven't updated them for this purpose until we complete the planning, there's still some value to those wall-forward on the elements other than the starting point. And so they give some indicator of what expectation might be for next year, although the line items will change by some degree.

A.J. Rice - Soleil Securities

Are the price increases on the commercial managed care, somewhat of the government managed care or that’s been because…?

Trevor Fetter

They are much higher, much higher.

A.J. Rice - Soleil Securities

Okay. Is it higher on the government managed care than the fee-for-service Medicare care?

Trevor Fetter

I think we'd expect those to be pretty much in line.

A.J. Rice - Soleil Securities

Okay. Then real quick on the 2.7% increase in Florida and you're attributing that to heavy government increased volume. Is that market or is that a function of your patient -- of your physician recruitment or just give us some color around what's happening in Florida from your perspective?

Stephen Newman

A.J., I think we're making progress on all fronts in Florida. Our A teams and leadership are really geared up in terms of not only the physician relationship program and redirecting business to our inpatient and outpatient facilities from physicians already practicing there, but, we have expanded the employment model there and we’ve relocated a number of physicians from out-of-state to Florida. Obviously, the concentration of senior business in the three counties in which we operate is way above the corporate average.

So that we would expect, as we grew business we would disproportionally grow Medicare and manage Medicare. But by the same token, we are able to get these newly recruited and relocated physicians into commercial and managed care networks faster than we had in the past and we're seeing commercial volumes still down year-over-year but less so, than they were last year in Florida.

So I think we're making progress on all fronts in Florida. Obviously to some extent countered by the headwinds of unemployment and the financial issues that are affecting South Florida.

A.J. Rice - Soleil Securities

And the just the final nuance on that, is the increase in physicians in Florida disproportionate to the increase overall, that you're talking about?

Stephen Newman

Are you talking about increase in physicians across the company?

A.J. Rice - Soleil Securities

Right.

Stephen Newman

No, pretty proportional. Florida is carrying its own weight but so are the other regions. We do obviously have some differences in the percentage of those employed versus redirected versus relocation agreements. For example, in California where we have an anticorporate practice of medicine environment we don't employ physicians in Florida. So 100% of the growth of the medical staff in California, I'm sorry, and California is related to redirection and relocation.

A.J. Rice - Soleil Securities

Okay. All right. Thanks a lot.

Operator

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

Sheryl Skolnick - CRT Capital Group

Okay. I'm gonna go after this commercial managed care in a completely different way and I'm gonna ask a question that I think needs to be asked. You've clearly had overcome tremendous of obstacles, you've built volumes, you’ve done that. You are driving them now better relationship with physicians with better facilities that are clearly better managed and better represented with higher quality scores. So all of that's in place. You've done a tremendous amount.

I'm going to make an extreme statement. I'd like reaction to this. It doesn't matter if you don't put EBITDA on the bottom line. So why isn't the company driving the EBITDA higher? Is it that you only can drive -- get EBITDA leverage, meaning incremental EBITDA from incremental volumes, if you had your higher margin patients in the bed. It seems to be that one could interpret the trends numbers that way or is it so.

Then would I ask the question, if it's not labor productivity, although I'd wonder because your labor expense ratios appear higher than everyone else's and you've got some uptick in supply costs and bad debts are lower than everybody else's by, I don't know, 400 or 500 basis points, then its other operating costs. But there’s something there that's preventing the company from generating the kinds of EBITDA growth off these margin numbers that I worry is in addition to mix. And if it's the mix then it says you can only make money if you only have high margin patients in your beds. And hat's troubling because you have competitors who appear to be getting similar pricing and similar margins on Medicare Advantage patients in the beds as they get to commercial or so they say. They don't necessarily document that, but so they say.

So I'm very concerned about whether it's the pricing or it's the cost structure or it's the way the hospitals and the corporate meld together and operate that you can't drive this EBITDA to the bottom line. Do you have an answer for what it is?

Trevor Fetter

Well, aggregate utilization is still low. And we say we have a lot of excess capacity. So from a cost structure standpoint clearly there's excess capacity there to [stock] additional volumes. And the rate at which those volumes create incremental earnings to the bottom line will be significantly affected by mix. We will continuously look at cost structure and always try to improve it which we've been doing, we’ll continue to do.

But comparing ours to others is problematic when you look at the educational institutions we have and the California, where we have higher labor costs because of the various requirements of California and white rights. So it is hard to do the apples-to-apples comparison. Others are trying to do, although I respect it's a reasonable place to go to try and understand us versus them.

In terms of commercial versus the other payer categories, it really is not just a matter of measuring that. It's also a matter of measuring the mix within commercial and if you go back over to this year, in the first quarter we had commercial losses. Our volume loss is relative to the prior year. And they spike for that matter, but still we had a good year, a good quarter from a pricing standpoint because otherwise mix was favorable within the quarter on the patients we did have. And on the TGI. Volumes that we had targeted, we had greater separation in that trend versus the overall commercial trend.

So not just commercial but what kind of patients you had within the commercial category. And its not all price, it's a matter of what do we operate most efficiently on from the standpoint of volumes.

So clearly, continuing to drive TGI is very important, even if the overall metric was diminished. The examples earlier in the year show that we could still have a good performance and improvement to EBITDA without aggregate commercial growth. It's just one of many variables.

The company, I think has targeted the right strategies. We can become more profitable through Medicare patients, the positive contribution from Medicare patients, as well as stabilizing commercial.

Sheryl Skolnick - CRT Capital Group

I guess, okay, I hear you. So the answer is it depends on your patient mix and sometimes you can’t generate it, but it seems more often than not as goes commercial managed care so goes EBITDA. And I guess, as I said, I would be concerned that there's some other thing going on in, either the cost structure or the way the hospitals are being managed or in the nature of the mix that your getting that's preventing the company from getting incremental profit purely from the volume as opposed to being so dependent on the mix.

And I'd be curious about that, especially since -- I mean, I understand that your utilization still only 51% of beds and that you have more room to grow and that we may not be having this discussion at 60% utilization, so I get that part. Okay.

Moving on from here, are there specific steps or events that the company is looking toward to help it to become more profitable on the volumes that it's getting? And specifically, I'd like to understand Broadlane and what that can do for supply costs, how that contract will work to help you presumably to reduce costs over the life of the contract.

Stephen Newman

Couple of things on Broadlane, we through the outsourcing there's a couple of benefits. Reduced costs from the standpoint of the actual cost of operating our supply chain, meaning the internal costs would be reduced at just a result of outsourcing. And we also expect the costs of what we purchase to go down, because we'll have better capability to consolidate, avoid one-off circumstance where things are purchased.

It'll, let's say a less than optimal fashion because you had multiple players make independent decisions as opposed to being a more coordinated effort. So it reduced costs on both fronts. In terms of a large supply cost being attributed to implants and much, much more challenging circumstance to deal with, but that is not something that we give up on. We're working with our physicians, we'll work with the distributors to also try and create better standards and negotiate better prices, so that we can reduce those costs as well.

In terms of other aspects of Broadlane arrangements, Broadlane has assisted us for several years with respect to initiatives to improve our costs. I think of it more in a consulting fashion as opposed to an absolute execution of the procurement process standpoint.

And as a part of this arrangement, we will continue that with them on what we think are very economically satisfactory terms without being more specific. So that we'll be able to continue to drive costs down utilizing their resources to analyze, consult, and improve utilization to go forward. They're also going to help us with inventory management, which is gets to cash flow, so we expect to be able to reduce inventories as a result the outsourcing as well.

Sheryl Skolnick - CRT Capital Group

Okay. Are there any plans to improve the pricing on Medicare Advantage or the government managed care to get the rate increases up to a level more consistent with commercial managed care, since you're using the same network of physicians?

Stephen Newman

I don't think that we should expect to be able to accomplish that.

Sheryl Skolnick - CRT Capital Group

Okay. Thank you.

Operator

Our next question comes from Darren Lehrich of Deutsche Bank.

Darren Lehrich - Deutsche Bank

Thanks its Darren lehrich. I have just a question about the Medicaid environment and really what the risk assumptions that you built into your prior '09 guidance. And I guess, can you just remind us what was there in terms of accounting for risks whether it be higher bad debt or Medicaid cuts you didn’t about and today what do you know about Medicaid going into '09. And I guess specifically do you have any expectations relating to South Carolina, Alabama, or any other states you might be monitoring?

Biggs Porter

At this point, the states on which we have identified and had identified previously that there would be reductions going into next year were California and Florida. In California, we sized it approximately $8 million full year effect next year with a couple million affecting the fourth quarter of this year on their Medicaid reductions. And this is primarily one hospital.

You may recall that those reductions really only affect hospital providers, which are not under contract with Medicaid and we only had one hospital that was in that category. So that's at about $8 million. And then in Florida, on an annual basis, the reductions that they had put in place for $10 million with some affect this year so not a full year-over-year effect of $10 million.

That's what we identified, and those are the two states certainly which had seen the greatest amount of budgetary challenges they were having to work through. Certainly there are a lot of states which have budgetary challenges and we monitor those but at this point in time, we hadn't factored anything else into the 2009 outlook that we had out there before. We don't see any imminent reductions on the way.

Darren Lehrich - Deutsche Bank

And then, that's helpful. I guess just as far as the risk associated with higher bad debt clearly, you know that's an expectation we all have now given the unemployment trends. You guys have some pretty sophisticated revenue cycle data you presented at some of your investor conferences before.

I'm just wondering if you might comment for us without necessarily commenting on bad debt for '09. What you're thinking is in building up a bad debt forecast and tying it to unemployment or some of the key indicators you mentioned like foreclosures. Can you just help us, give us a sense for how you're thinking about that?

Biggs Porter

We keep watching for any trends in our collections associated with the economics of the markets that we're operating in. And I think that maybe as mentioned earlier in some of the markets where there have been the greatest challenges from an economic standpoint, the most foreclosures, the most amount of unemployment, we really hadn't seen significant effect on the hospitals or on collections.

The collections remained very stable. So through all of the economic noise to this point, we have not observed any trend negatively affecting our collections or our bad debts. Uninsured volumes and charity volumes combined have been going down. We have been very successful at taking patients who might have previously been uninsured of the charity and qualifying them.

For Medicaid, we'd put additional people into the emergency rooms of our hospitals to help in that regard. There is a MEP program if you will. We have the right care right place initiative, which may have resulted in people receiving care in more appropriate environments and high cost emergency rooms. It has also maybe had some impact here ,but all those things, number one have been mitigators and would continue to be mitigators and the outcome of that and other factors as we have not seen any real negative trends.

So, as we go into next year, once again, we wouldn't necessarily expect to see negative trends except this fact, it is possible it all of the increases are uninsured. It is possible they increase deductibles, but it will also keep driving on our all initiatives, getting more up front cash, worker swipes more effort to qualify people, better information gathering on the front end.

I think I may have talked before about, with respect to elective procedures and order for an uninsured patient to receive an electric procedures goes up through the CFO level. The hospital to sign off and on because we think certainly, it should be elected who wants to come into the hospital or there should be some reasonable expectation on their part to pay for the service.

So, that action is well ahead. So, hope December would likely continue to help us. So there is a long lost of activities, the once we talked about at Investor Day, certainly included that will help us mitigate. Is it a risk? Absolutely, we will matter it but it's hard to say exactly what to expect. But that’s one of the thing, we'll size up as we watch what happens in the economy in the next few months.

Darren Lehrich - Deutsche Bank

Okay. And then, my follow-up is just, I know you mentioned, your expectation about the asset sales falling next year. Is there any change in evaluation that you'd put out into the marketplace on USC?

And if not, I guess I would just observe that there's a pretty wide range implicitly here on the MOB sale. Is that the right observation to make and is that just because of the financing conditions?

Stephen Newman

Well I think that we've left the range out there reasonably broad giving some room for give and take on a number of the items. So I wouldn't ascribe any change to any particular line item as much as saying that there's still just a range of outcomes.

Certainly, we've tightened it some indicating that net-net or increasingly confident to be able to operate within the range we put out there, before without talking about individual line items.

Darren Lehrich - Deutsche Bank

And do you have a closing date yet for USC?

Trevor Fetter

No. There's not a definitive agreement. So there's not a closing date at this point in time.

Darren Lehrich - Deutsche Bank

Okay. Thank you.

Operator

Our next question comes from Rob Hawkins of Stifel Nicolaus.

Rob Hawkins - Stifel Nicolaus

Thank you, good morning.

Stephen Newman

Hi Rob.

Rob Hawkins - Stifel Nicolaus

You guys have been getting traction by the TGI areas. It seems the game plan's shifting a little bit. Can you flush that out a little for me a little? It seems you might be -- you had other services and kind of what that might mean for the outlook?

Stephen Newman

Rob, I wouldn't say that we're changing the game plan at all. I think we're working to expand the tactics we use to execute the game plan. Our sense is that overtime, the sustaining in strategy we’ll be building services that people will need for the next five and ten years, and we believe that those services will be paid for at a price that will allow us to have a significant margin and to generate free cash for reinvestment into our facilities and people longer term.

So we're only adjusting the mechanism by which we roll out tactics to our hospitals to capture incremental managed care patients in the services that they have targeted, since each of the hospitals has a customized targeted growth initiative service list, based on factors in their own market.

Obviously, some of those could change over time individually in a local market if a competitor closes down a service, decides to not build a major facility or things of that nature, all of which could occur as a consequence of the changing economic environment and some of the capital structure effects it will have on our competitors. But I wouldn't say at all that we're changing our game plan in our hospitals who are now going through the business planning and budget process, have reaffirmed for the 2009 year their targeted growth services, as well as the medical staff development plan, which interfaces with that as well as their capital plan, which supports they're targeted growth priorities. So we're not changing the plan. We're adding tactics to execute it more successfully.

Rob Hawkins - Stifel Nicolaus

Is it fair say those tactics might have an impact, I mean, those are pretty good results you've gotten in terms of the referrals whatever on average from the folks that you've just been contacting in this quarter, but only about 25% of that was commercial mix. So does some of that have to do with, as you mentioned earlier maybe contacting the office manager to let you know they're in network or is there something more that you guys are doing to kind of change that [managed care]?

Stephen Newman

I think we've really continued to refine our techniques for identifying physicians that have larger books of commercial business. I think over time that will add to the percentage of commercial managed care referrals we're getting out of that newly redirected or newly established practice when we move a physician from out of state.

As I mentioned earlier, while we have the specific numbers in our text regarding the Class of 2007, based on our improvements in targeting the very, very preliminary information out of the Class of 2008, and we looked at the physicians that were active staff status began in Q1 '08. Their proportion of commercial managed care is even higher than the Class of 2007.

So, while we don't have a statistically significant sample that we want to give you the specifics on as we did the Class of 2007, we're very encouraged that these techniques will bear fruit with higher percentages of commercial managed care coming from those that we're adding now and in the future.

Rob Hawkins - Stifel Nicolaus

All right. Thanks. I'll jump back in the queue.

Operator

Our next question comes from Justin Lake of UBS.

Justin Lake - UBS

Just a couple questions on the bed that side. Specifically it looks like your collection rates declined in the quarter. I'm just wondering if you can give us an idea of where those specifically changed, whether it was balanced after the one insured.

Trevor Fetter

It was balanced. That 40 basis points would have been associated with the balance after. That has a relatively small effect on a quarter of bad debt, a couple billion dollars. I think that also affecting bad debt in the quarter were are about $7 million of charges related to just very specific accounts, managed care and Medicare accounts on which we had to place specific reserves not related to the economy or any other factor but just the circumstances of a particular account. So that would, if you will, would have been more of an unusual category which represented what was outside the boundaries of what was seasonal or might have been otherwise been expected.

Justin Lake - UBS

Got it, so, if you think about the blended self care rates and the improvement over the last three year to go from 32 to 36 and then I guess down to 35 at least in this quarter. Is there a potential or where do you think [you’d stop] with that rate from declining further given the -- given what's going on in the economy? Maybe you can just explain as to how you reserve for that.

Biggs Porter

We reserve based upon an 18-months look-back, we look at the history of what we collected by category of receivable and we reserve based upon that of what is a historical collection rate. We reserve for that up front at the point of discharge basically. So we continue on that process. That keeps us relative to current. There’s obviously a little bit of a tail there but it takes that kind of period in order to fully capture a full cycle of activity with respect to discharges.

Beyond that, in terms of further mitigation, we talked about more cash collection up front that has not just improved the timing of cash flow but it should improve the total overall collection, because you're taking some of it away from the risk category of having collected it later. We also have upgraded this self pay operation otherwise. We've got a predicted [analytics] technology allowing us contact more patients with the finer segmentation model.

We gain incremental visibility and payment patterns, the populations. So we can really do a much better job of identifying and targeting cash collections as we go along. A lot these things, Steve has talked about it in Investor Days So also we're free to go back there to understand the things that we're doing to drive improvements in revenue cycle.

I think that that 40% change although it rounds to a 1% change, 36 to 35 it's 40 basis points is less than a half. I wouldn't think of it as a serious trend or indicator. And we do watch as I said 18-month tail on the process is there. However, we look at it on each quarter and each month.

How do we do that month as well to make sure that there's no distortion or nothing indicating that there's a near-term trend which looks significantly different that we should be thinking about or adjusting to. And we haven’t experienced that. So when you look at 18 month or which is literally the way we do bad debt or you look at it – we also do from for a effective thing or event happening recently. We have not seen a negative trend.

Justin Lake - UBS

Okay. Then just quickly, the charity care admissions were down significantly year-over-year. It looked like it mitigated a lot of the increase in the uninsured. Anything you are doing differently there as far as classification of volumes?

Trevor Fetter

We aren't doing anything differently in terms of classification. We are, however, as I may have referred to earlier have our MEP. program where we -- Medicaid Eligibility Program ,we have basically people in the hospitals and the emergency rooms working with patients to identify whether or not they are eligible for Medicaid. As a result of that, we're being much more successful at getting patients qualified for Medicaid. And that would reduce charity and increase Medicaid from an admissions standpoint.

Justin Lake - UBS

Okay, that’s helpful. Thank you very much.

Trevor Fetter

Thank you.

Operator

Our next question comes from Mr. Kemp Dolliver of Cowen and Company.

Kemp Dolliver - Cowen and Company

Hi thanks.

Trevor Fetter

Good morning, Kemp.

Kemp Dolliver - Cowen and Company

Good morning. The first question is the spike in supply costs, I think your comments in the Q showed the change in mix of the increased surgeries et cetera., but at least this quarter the year-to-date numbers don't look so bad. It's a pretty significant increase give than in most of these specialties the reimbursement tends to compensate you for the higher supply costs. There's just something that went on in your process that didn’t work that well this quarter or is there another explanation for that?

Stephen Newman

We think that we were reimbursed for the supply costs. Sometimes it's directly traceable, sometimes it's not directly traceable but you can look at revenue categories and DRG s otherwise says you are getting it reimbursed at a reasonable level for what you're incurring in expenses, and we believe that's the case.

One thing that does fit outside of that if you're looking at it on a year-over-year basis is that last year we had some rebates in the quarter of about $3 million that didn't repeat this quarter. So as a matter of timing or otherwise there was a favorable adjustment in last year, which didn't occur this year. But, outside of the $3 million swing year-over-year, we would say we recovered it. About 35% of the growth in supply costs we had this year was attributable to the high priced implants. Once again we can trace that more readily than other things.

Kemp Dolliver - Cowen and Company

Okay, good. And I am going to slip back to the commercial managed care discussion. Earlier in the year, you all talked about physician, essentially physician rate by competitors and I think it's the Southern state's region and based on your earlier comments, am I correct in assuming that you haven't had any other significant situations like that and that what we're seeing may be just more reflection of broad based weakness in managed care utilization.

Stephen Newman

Kemp, I think that's exactly right. You are referencing the issues in the Carolinas. And correctly, we've taken steps to begin to mitigate and reverse that in our South Carolina Hospital that received an assault from the competitors that was effective and certainly diminished their commercial managed care business. But, as you stated this was a much more widespread broad based loss in the quarter than we had seen previously. And certainly suggests external influence in terms of the business coming to our doctor's offices that ultimately ends up being referred to our in-patient facilities.

Kemp Dolliver - Cowen and Company

That's great. Thank you.

Operator

Our next question comes from Kevin Fishbeck of Banc of America.

Kevin Fishbeck - Banc of America

Hi, thank you. I just wanted to get a little bit of color on the Cap Ex budget for 2008. It looks like you're bringing this down a little bit? What is driving that and then I guess my understanding was that the CapEx spending was a big part of beneficial recruiting, et cetera. How does that into play?

Stephen Newman

We reduced the CapEx outlook for the year by $25 million. But, I would say that’s primarily related to the fact that we have fewer hospitals. We disposed of San Dimas and Garden Grove earlier in the year. We have Los Gatos and Irvine in discontinued operations at this point.

So it's just appropriate to lower the outlook for that reason alone. There's always going to be a certain amount of variability with respect to capital and we'll try to maintain some flexibility. And you know, investment is appropriate based upon opportunity and also based upon what our performance is.

Kevin Fishbeck - Banc of America

Is there a target that you guys look for as far as the percent of revenue?

Stephen Newman

I'm sorry. As a percent of revenue? No, I think we'll look at it based more upon what we think the projects are, their opportunities. What the various commitments we have from a hospital construction, seismic standpoint and otherwise. Since I mentioned seismic, I'll point out that our seismic requirement now has been reduced down to $147 million from what was $400 million a year ago. So we've been very successful in getting so-called hazardous release, and that’s also helping us manage our capital spending as we go forward.

Kevin Fishbeck - Banc of America

Okay. And then earlier, you mentioned that going in 2009, there were a number of items on the cost side that you think you can manage. And I think, we covered the supply cost pretty well, but any other initiatives that you would point to is kind of bigger area of the cost saves and any thoughts on timing for when you might expect to see them roll through the results?

Stephen Newman

Well, I don't want to get ahead of myself too much here with respect to 2009 guidance. But, if you just went back and looked at the roll forward earnings that we had out there before, you would've seen we forecasted $29 million. It was a variety of initiatives from transcription and other process changes.

We talked a little about Broadlane earlier, Broadlanes of benefit next year over this year from the standpoint of benefit from the outsourcing arrangement. We'll constantly look at every element of cost to how to get better, talked about that we have new tools in place which will enable us to manage on a much more realtime basis all of our staffing due to planning better and monitoring and continue to execute better on that front.

So without giving more specific, we will just continue to drive on any number of fronts, did have their reference font point out there in the prior walk forward. Also, I missed it briefly from, you could call us cost manual or you call us otherwise, but certainly on the newer hospitals coastal Carolina and Sierra Providence, where the relationships between cost and revenue was not all we wanted just to be in 2008 because they're still more and are absolutely in start up mode in case to see our providence we expect very significant improvement on those in 2009. So that's another one of the value drivers next year over this year.

Kevin Fishbeck - Banc of America

Okay, great. Thanks.

Operator

Our next question comes from John Ransom of Raymond James.

John Ransom - Raymond James

Hi. This is for Biggs and one for Trevor. If we look at the adjusted free cash flow from continuing ops, you provide reconciliation at the end that has range of 185 to 210. I guess that's inclusive of the $75 million of the receivable collection that you have done. Is there anything else that we need to think about that would adjust out that would not be part of a run rate for 2009?

Biggs Porter

Well I guess, first of all, I wouldn’t presume that in 2009, we're going to be able to continue to improve receivables. We'll talk more about that when we get to 2000 in outlook but I think that we're not at the point of total excellence yet on discharged but not build by example. And that is something you just don’t ever stop on. You can change obviously try to find ways to get better.

John Ransom - Raymond James

Okay.

Biggs Porter

And so we would, I wouldn’t say that’s the one time event. We can't make anymore improvement. Otherwise, looking forward to 2009 if that is your question..

John Ransom - Raymond James

Yeah.

Biggs Porter

You know, we'll have to finalize where we are in terms of CapEx for next year. I think I had back at investor days, I'd said, we thought that would be lower than 2008. I would still expect that to be the case.

And we do expect improved earnings, so we expect to be able to improve next year in staying some level of working capital improvement and also improve earnings and improve, and have some reduction in CapEx, help us with our cash generation next year?

John Ransom - Raymond James

Sure. And is that, $100 million payment against reserves for restructuring charges is that kind of, what kind of numbers should we look forward for next year?

Biggs Porter

Well next year that is the Department of Justice Settlement, which next year would also be a $100 million.

John Ransom - Raymond James

Okay.

Biggs Porter

It's about $25 million a quarter. That diminishes in 2010. It's about $75 million and it goes away. So we start from a cash flow standpoint, getting improvement in 2010 and significant improvement in 2011 associated with that.

John Ransom - Raymond James

Okay. And then just two quick ones for Trevor. I know it's been a long call and thanks for the patience. Is there a cap rate at which the MOB deal, you'll just put on hold? I know the market has been around the 7 cap rate, but is there a number you have in mind that you say we'll just wait for a better day in the capital markets?

Trevor Fetter

We got to wait and see as that transaction gets to the final point. John we haven’t had one in line.

John Ransom - Raymond James

Okay. And then, just secondly, maybe on a happier topic. Your revenue cycle, IT initiatives, could you just describe what that looks like? Are you going to set up a separately reported software company and you'll go out there and sell your revenue cycle software against some of the public companies. So, just describe that effort a little bit more, if you would?

Trevor Fetter

Okay. I don't want to take away from the exciting announcement that I alluded to in my prepared remarks but just…

John Ransom - Raymond James

What's wrong with that? No, I'm kidding. I'm kidding.

Stephen Newman

At least he is trying to put in something exciting. A couple of points of clarification. One, is it's not really a software business, although there is a lot of propriety intellectual property that we use in our revenue cycle process. This is really a service business, as we have learned more about our abilities and revenue cycle, we believe that we perform relatively better than many competitors out there and certainly many of the services that are available to other hospitals.

So think of it more as a service than software, certainly although there's a heavy software element of it. By the way, as an aside, a footnote to our operations we have begun licensing some of the software that we have developed on a 'proprietary basis. We actually make a little bit of money, a few million dollars every year, by being in the software licensing business that we're recouping some of the investments we made in software and we are avoiding some future investment based on the deal we have

And we'll wait until later to address the issues of separate reporting and so forth, but think of this as a business line that serves other hospitals. By the way we are already doing some of it..

John Ransom - Raymond James

So it would kind of be and proprietary and intellectual property business not just selling software? And so that too…

Trevor Fetter

Now John, we’ve been outsourcing business.

John Ransom - Raymond James

Oh outsourcing. Okay.

Trevor Fetter

Yes.

John Ransom - Raymond James

So just for the record Biggs, if it gets to the happy 10% of EBITDA, would you then separately report it, of it is across the threshold.

Biggs Porter

Would we separately report it?

John Ransom - Raymond James

Yeah. If they cross 10% of EBITDA like Trevor mentioned?

Biggs Porter

I'll have to look at what the rules are that point in time and what makes sense...

John Ransom - Raymond James

I think that's the threshold if I remember, but accounting classes were a long time ago.

Biggs Porter

I understand. It gets down to, is this a segment or not. Also, all those rules may be that’s changed.

John Ransom - Raymond James

Okay. All right. Thank you.

Trevor Fetter

Thanks.

Operator

Our next question is from Gary Taylor of Citigroup.

Trevor Fetter

Hi Gary

Gary Taylor - Citigroup

Hi good morning, Gary Taylor. First I want to commend your stamina for sticking with us here through an hour and 43 minutes. Appreciate it.

Trevor Fetter

We thought we'd just do it until the operator says we have no more questions.

Gary Taylor - Citigroup

So I hope you packed your lunch as you might have few more in the queue. Just I’ll be quick. On the new initiative, you had mentioned getting the 10% EBITDA and I missed the comment, that was kind of a ultimately it could be 10% of EBITDA or was there something a little bit more near-term hope further than that?

Trevor Fetter

It was not more definitive than that.

Gary Taylor - Citigroup

Okay.

Trevor Fetter

We were starting off with a business that has X number and we'll have that in the announcement we make of other hospitals. It's a space and a business opportunity we feel very positive about. The other providers of the similar services, it's a fragmented business, it's not one where other competitors have direct experience running this type of a function for hospitals. So that's why we're deliberately vague. We're really starting something that we think has enormous potential but we don't want to -- it would be ridiculous to enter into a forecast of it at this point when you are literally going on hanging up the shingle.

Gary Taylor - Citigroup

Understood. Just wanted to clarify what you had said. On the, this question is for Stephen on the 900 new doctors year-to-date, that have been added to the medical staff, that's a net number, correct?

Stephen Newman

That is correct. Net of attrition.

Gary Taylor - Citigroup

And how many of those are either employed, acquired, or have a guarantee in some way?

Stephen Newman

100 are employed. About 50 are guaranteed and the rest are either additions to the existing practices or re-directions from in-market that have joined the staff for the first time. So you can see the bulk is not employed or income guarantees.

Gary Taylor - Citigroup

Okay. And on your 13,000 total active staff, what's the rough percentage of employed percentage?

Stephen Newman

I would say -- well, we have about 360 employed doctors so we can figure out that's about, what, 3%.

Gary Taylor - Citigroup

3%.

Stephen Newman

Right. A little less.

Gary Taylor - Citigroup

Okay. And then Biggs I may have missed this. But you guys have started a year ago there was a slide with your AR disclosure and more detailed gross AR by payer and I went through 'em quickly. I didn't see that this morning. Did I miss that or is that no longer being provided?

Biggs Porter

It's in the 10-Q.

Gary Taylor - Citigroup

So it will be in the Q?

Biggs Porter

Yes. Which is already out there, so you should be able to go and retrieve it.

Gary Taylor - Citigroup

How rolled out is TGI?

Stephen Newman

We have completed Phase One of all of our hospitals across the company, Gary, and so that means that every hospital now has a customized list of priorities that they're gonna focus on in they're own micromarkets. Many of the hospitals are in to Phase Two. Southern states region is not deeply into Phase Two yet. They were the last one to receive Phase One.

So Phase Two is beginning to execute the plans with respect to changes in physical planned services offered, potentially Cap Ex improvements and recruiting both nursing staff and physicians to round out that service that we're expanding to meet community need.

Gary Taylor - Citigroup

Okay. Last question, I just want to make sure I understand -- there was couple of comments about USC and there were a couple comments in response to a question. But Trevor, did you say there's no definitive agreement for the sale there?

Trevor Fetter

USC, that's correct. That’s not yet definite, we're still operating on the letter of intent, there’s no definitive agreement at this point in time.

Gary Taylor - Citigroup

Okay. Thanks.

Operator

Our next question is from Miles Highsmith of Credit Suisse.

Miles Highsmith - Credit Suisse

Good morning, guys.

Trevor Fetter

Good morning, Miles.

Miles Highsmith - Credit Suisse

Just a couple of questions on asset sales. I guess more on MOB and not US C. Was the pushing back of the timing on that to Q1 pretty much solely the result of the financing environment and if so, I guess I'm just trying to get a sense of, if that's the case, is it right to think of the current environment continues for multiple quarters that that could take some time to close?

Trevor Fetter

I think that would be fair. It was a -- the delay was as a result of the financing environment. We were very close otherwise, and even as the credit market started to deteriorate in the September time period, still felt pretty good about it. But then it became a -- ultimately such a deteriorated position out there that obviously we couldn’t -- the buyers couldn't get the financing finalized.

So it was sometime deep into September, I think, or well into September before we determined it was not likely to happen on as timely a basis. As to delay, I think the credit market has already starting to stabilize some. And there are some buyers out there potentially that will have the cash resources. So that may shift in time. So I wouldn't tie it entirely to the financing market. But if it was linked solely to the financing market, then it's going to stretch as long as the credit condition restrains financing ability.

Miles Highsmith - Credit Suisse

Okay. That's helpful. And just one follow on to that. We know the USC is on LOI. But I guess on the MOB, can you just remind us a little about the nature of structure of the transactions. Can the buyers just walk away or are there like breakup fees or like any dead dates there if this current environment went on for a year [restrict them]?

Trevor Fetter

On those as well, we don't have anything that would be a definitive agreement that would be in any way restrictive. So, I think that at this point in time, although the bidding process got completed, but we didn’t get to the point of getting any kind of binding arrangement.

Miles Highsmith - Credit Suisse

Okay. Thanks a lot.

Operator

Our next question comes from Whit Mayo of Robert Baird.

Whit Mayo - Robert W. Baird

Thanks. One question. You covered a lot this morning. But, I've never had a great answer for this. But Biggs in the past you said we should some of the cash proceeds that are raised should be used to pay down debt. Just can you help us understand how we should think about the priorities there, do you down debt that's due first or more expensive tranches, just trying to understand a better idea of how you balance that?

Biggs Porter

Well I said the Baseline assumption would be to pay down debt, the absence of any other greater opportunity for the cash. But in terms of how we would utilize it, what maturities we'd go after we haven’s said and I wouldn't prognosticate at this point in time. I think we’d have to make that judgment at that time

Whit Mayo - Robert W. Baird

Okay. So just it's safe to assume you're going to build cash?

Biggs Porter

See the baseline would be, if we have the cash available, we're going to do something at least as attractive as paying down the debt, paying down the debt being the baseline, but which [trench] we would pay down is what I would say, I can't give you assumption to make on 2011 versus some other year.

Whit Mayo - Robert W. Baird

Okay, well that’s fine. All right thanks, guys.

Biggs Porter

Sure. Thank you.

Operator

Our next question comes from Jeff Englander of Standard & Poor's.

Jeff Englander - Standard & Poor’s

Good morning, guys. Thanks for the endurance. Just a quick question, on the 2009 EBITDA, you took the '08 range down by 75, was just maybe taking, the starting point would be taking the '09 range down by $75 million, and I'm wondering what kind of confidence can you give us that in February, we’re not just going to be delaying the inevitable and taking that down further? What are you seeing our there, what have you used in your assumptions that may give you some confidence that you think it would just be that amount for '09.

Trevor Fetter

Well, if I can give you an absolute range with absolute confidence, we do it today. We have to complete the planning process, before we can do that. I think that the great uncertainty is that the economy and any effects of it aren’t really as transparent to us as we’d like them to be.

So the next few months will give us presumably greater insight into that. Otherwise we would expect for 2009 is that we would still expect that we would have volume growth and that we could stabilize the mix. Obviously the economy has a bearing on that and so what we ultimately express as a range, we'd like to consider what the possible range of outcome is.

Therefore, in terms of the mix what we had previously projected was $60 million based upon 2% growth and in an isolation, we'd expect, we can still have that kind of growth or better, but we'll have to measure the economy against that.

The commercial pricing 79% negotiated and 2009 gives us a good visibility on that front, and we are very confident in the rate parity gains we put out there, as what we are going to be able to achieve this year and next year from the standpoint of those standpoint of those contracts, which were under market. The cost initiatives in the new hospitals, already talked about that. We still believe we can achieve cost reductions and get benefit from maturing of our new hospitals next year.

So there's, certainly positive value drivers out there on a basis that our line item may not be specifically in line with what we had in prior roll forward, but directionally, the prior roll forward is something that still has some value here in terms of saying here’s the things we are working on to drive value in 2009 or 2008 and the range on those in the aggregate was $175 million year-over-year. So we will still keep driving on all that. How it lands exactly from a guidance standpoint, we got to complete the process.

Jeff Englander - Standard & Poor’s

All right, great. Thank you very much.

Operator

Our next question comes from David Bachman of Longbow Research.

David Bachman - Longbow Research

Hi, good morning or good afternoon, I am not sure what time it is now. Just a couple of real quick questions here that you can clarify, remind me how many ASPs you know are operating and just sort of any color on, when you look at surgery business, how much of your business is being done in those centers versus hospitals?

Stephen Newman

Well David. Today we operate 34 ambulatory surgery centres across the country, and we have acquired a couple. And the recent past, which I think we have talked about in some of these calls, we're very pleased the way these are operating. Some of these are small centers that were owned solely by acquisitions.

Others were larger centres that were underperforming, where we have improved operations, we have improved the revenue cycle. We brought our manage secure a contracting to the ASCs. Some of them had previously had out of network strategy that we didn’t think was a sustainable model overtime.

So we’re pretty pleased with that. It still is a relatively small part of our overall out patient surgery done on the hospital and campus based surgical facilities, but we intend to grow that overtime selectively. We see a consolidation going on in many of the markets in which we operate, as Trevor mentioned earlier, many of these ASCs owned by acquisitions are undergoing significant distress related to payment changes from the payers both federal as well as commercial and their cost of leasing equipment has escalated because many of them have variable rate financing.

So we see that as an opportunity. We like to do those acquisitions where they strategically benefit our markets and we are very pleased with how the segment of the business is growing.

David Bachman - Longbow Research

Okay, great that’s helpful. And then just one other question on the out patient side, I think in the release, and may be you mentioned it earlier, I just forgot by now, in your release significant cause of the reduction in outpatient charity care visits was a government clinic that opened near one of your hospitals. I mean how key was that to the reduction?

Stephen Newman

We’ve had a number of hospitals in which we have both either federally qualified health centers or even volunteers in medicine clinics that have opened near some of our hospitals and therefore our ER’s. It is certainly a small part of the decrease in charity uninsured cases seen in our ER, but we see that growing and evolving in several of our markets.

So over time, I think that along with a MEP Medicaid eligibility program where we have those charity patients qualified for Medicaid, that along with Right Care Right Place, which includes their being seen in these offsite clinics, when they don’t have an emergency medical condition, should overtime relieve both crowding in our ER’s as well as any of the bad debt that ends up there.

David Bachman - Longbow Research

Okay, great thank you very much.

Operator

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

Sheryl Skolnick - CRT Capital Group

Yeah, thank you for taking the followup. I appreciate it and I’ll try to make this quick. As we look at the business today, and there’s, obviously, at least on my part a lot of concern about not making an estimate although you weren’t as far away from it as maybe I thought you were to begin with, but on the EBITDA line.

But, as we look at the business today, it seems to me that with the volume growth being driven by doctors that the doctors that you’re recruiting now are capable of at least or better than the kind of volume growth that doctors that you recruited in the first year of the program. A lot of things going right in terms of the fundamentals of operating the hospitals that you not where you would like to be, and then you get an economic whip.

So I guess one is that the right characterization of the company? Two, if that’s correct then as we think about the business going forward, do we think about it being able to do I guess what I want to say kind of better than flat for next year? In other words if you take the trends from the third quarter is it appropriate to annualize 6% revenue growth and 6% supply growth or is it more appropriate to think of maybe 6% to 7%, you know 6% revenue growth, 5% to 6% revenue growth and improving trends on the cost line from a variety of sources?

Because I think what we have to do is kind of look at where you will be in another transition year before you can get the turnaround leverage maybe in the year after. So that’s one question I would ask you to address and second question is given where your stock is, which is down 23% or $3.50 would management and the board consider buying stock again.

Trevor Fetter

Okay. Sheryl the good news is you are the last question. Bad news is half the audience has now dropped from the line, but those are very big questions so let's take them one at a time.

Sheryl Skolnick - CRT Capital Group

All right. Well we could do it now, we could do it afterwards that’s okay. You can answer the stock purchase question.

Trevor Fetter

That’s all right we wanted to let this go until there were no more questions. So I think on the first question, back to your assessment, I think it is correct. Point is there are lot of questions in there, they are related to, I think got close line item guidance for ’09 so lets just back up and I think Biggs early in response to your question, said if you go back to our earlier walk forwards and assessment, differences between ’08 and ’09, a lot of these relationships, we see us still being valid.

And clearly as we said here today, we are in a very uncertain economic environment. We also, it happens to be election day, in much of ’09, there could be an entirely different agenda for legislation that affects very directly our industry both in a positive way or in a negative way. Looking forward, we can see more negatives, but it's hard at this point to be very specific.

It’s really more appropriate at the end of February to talk about that, we’ll have an idea of how’s that lining up. As for your question on stock buybacks, it's really kind of a personal issue and one that’s obviously always available to management and the Board, I just wouldn’t want to speak for anybody at this point.

Sheryl Skolnick - CRT Capital Group

Okay. Well, you know what signal has sense, I don’t have to tell you, but that was my thought, my question, thanks so much for all the time.

Trevor Fetter

Okay. Thanks and I think operator that was the last question. For those few of you who are still on the line, thank you for participating and we'll see you at the end of February.

Operator

That does conclude today’s teleconference. Thank you for participating. You may now disconnect.

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