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Tenet Healthcare (NYSE:THC)

Q4 2010 Earnings Call

February 25, 2011 9:00 am ET

Executives

Clint Hailey - Chief Managed Care Officer and Senior Vice President

Daniel Waldmann - Vice President of Government Relations

Thomas Rice - Senior Vice President of Investor Relations

Stephen Newman - Chief Operating Officer

Trevor Fetter - Chief Executive Officer, President, Director and Member of Executive Committee

Biggs Porter - Chief Financial Officer

Analysts

Shelley Gnall-Sazenski - Goldman Sachs Group Inc.

Gary Lieberman - Wells Fargo Securities, LLC

Justin Lake - UBS Investment Bank

Kemp Dolliver - Avondale Partners, LLC

Albert Rice - Susquehanna Financial Group, LLLP

John Ransom - Raymond James & Associates, Inc.

Thomas Gallucci - Lazard Capital Markets LLC

Darren Lehrich - Deutsche Bank AG

Adam Feinstein - Barclays Capital

John Rex - JP Morgan Chase & Co

Kevin Fischbeck - BofA Merrill Lynch

Operator

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

Thomas Rice

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

The presentation Tenet is making today, includes non-GAAP financial information. A reconciliation of this information to GAAP can be found in the appendix to the presentation.

Finally, we note that Tenet will be filing a proxy statement in connection with its 2011 Annual Meeting of Shareholders and urges shareholders to read these materials once filed with the SEC. At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO. Trevor?

Trevor Fetter

Thank you, Tom, and good morning, everyone. I'm very pleased with our strong performance in the fourth quarter of 2010. As you'll see on Slide 3 of the presentation that we posted to our website this morning, we grew adjusted EBITDA nearly 30%. And our EBITDA margin of 12.2% is the strongest fourth quarter margin we generated in seven years. We increased our EBITDA margin by 260 basis points versus the fourth quarter of 2009.

For the full year 2010, at $1.050 billion of EBITDA, we achieved the high end of our initial outlook. We accomplished this even without the contribution we had expected from the California Provider Fee. Our full year EBITDA margin was 11.4%, which is the highest annual margin that we've generated in seven years. 2010 also marks seven consecutive years in which we have increased EBITDA margins.

Turning to Slide 4. The primary driver of our strong fourth quarter results was an improving volume trend. After suffering a soft October, November and December were the best volume months of the year. I'm very pleased that we've seen this strengthening continue into January and February of 2011.

Admissions through last Friday, representing the first 49 days of 2011, increased by 0.2% year-over-year. We achieved this continued improvement in volume trends despite the truly awful weather events that impacted our operations across the Central and Southeastern United States and in Philadelphia for more than a week.

Outpatient visits grew by 2.9%, and paying outpatient visits grew by 3.2% in the fourth quarter. Outpatient visits are growing at higher rates so far in the first quarter. While our recent outpatient acquisitions were key to this growth, it reflected dramatic improvement compared to the 2% decline in third quarter outpatient visits whether you factor in the acquisitions or not.

As we described on our January 11 conference call, we expect this strong outpatient growth to continue in 2011. And with the help of additional acquisition activity, we expect it to accelerate even further. Although we are no longer disclosing commercial volumes statistics, we are seeing an improvement in both commercial inpatient and outpatient volume trends. A lack of flu volumes in the fourth quarter hurt our admissions and outpatient visits statistics by 30 and 90 basis points, respectively.

Surgery trends also improved with a decline of 0.7% in the quarter, less than half the rate of decline in Q3. And the sum of uninsured and charity admissions was flat in the quarter.

As you'll see on Slide 6, pricing continued to be a strong contributor to earnings growth in the quarter, and we expect this favorable pricing trend to continue into 2011. We have good visibility into our commercial book, with roughly 90% of our commercial revenues under contract for 2011, 60% for 2012 and 15% for 2013. This gives us a good balance between locking in attractive pricing and preserving meaningful flexibility should we see medical cost inflation accelerate.

There's been a lot of discussion recently with regard to Medicaid pricing, but we believe we've appropriately provided for this risk in the 2011 outlook that we issued on January 11. We see no need to adjust those assumptions at this point.

In addition to better-than-anticipated volumes, cost performance, which is noted on Slide 7, made a very important contribution to the quarter's results. Our cost performance in the fourth quarter was outstanding. Total controllable cost for adjusted patient day declined by 1%. This included an SW&B decline of 1.5% and growth in supply cost per adjusted patient day of just 0.9%.

Turning to free cash flow on Slide 8. For the full year 2010, adjusted free cash flow was positive $92 million. The California Provider Fee contributed only $9 million to cash flow in 2010. Speaking of the California Provider Fee, CMS finally issued written approval for the plan on January 18. As a result, we will record $64 million of incremental revenue and EBITDA in the first quarter of 2011.

As you may recall, we provided our 2011 outlook for adjusted EBITDA in a range of $1.150 billion to $1.250 billion during our conference call in January 11. And as you'll see on Slide 9, we are reconfirming it today.

Last summer, we introduced the seven items on Slide 10, which we expect will drive significant margin expansion and earnings growth over the next few years. While some of these items depend on a recovering economy, we made progress on the initiatives that are most directly under our control and are less dependent on external forces namely outpatient services, Conifer and our Medicare Performance Initiative. You'll see those noted on Slides 11, 12 and 13.

Some of our outpatient acquisitions were completed in the fourth quarter, but even so, the less than full quarter effect amounted to an EBITDA contribution of $3 million. Additional newly acquired outpatient centers are continuing to come online in the first quarter. We have an attractive acquisition pipeline and expect to invest $165 million in this business in 2010 and 2011 combined.

We anticipate that the outpatient acquisitions we completed in 2010 will contribute approximately $25 million to EBITDA in 2011 with an additional $10 million from the partial year contributions from acquisitions we expect to close in 2011.

Conifer continues to grow as well. Our sales pipeline is expanding, and we expect Conifer's non-Tenet-related revenues to double in 2011. Medicare Performance Initiative is contributing at an even stronger rate than we initially anticipated. We easily surpassed the $30 million in targeted savings we had initially expected for 2010. And while it's too early to increase our outlook number for 2011, I'm increasingly pleased with the progress MPI is making and have no reason to doubt our capacity to meet or exceed our $50 million target for 2011.

Turning to the situation with Community Health Systems. As you know, in December, our Board of Directors unanimously determined that Community's proposal of $6 per share in cash and stock grossly undervalues Tenet and is not in the best interest of our stockholders. In January, Community submitted a slate of 10 nominees for election to Tenet's Board of Directors, in our opinion, only to advance its goal of acquiring Tenet at an inadequate price. There have been no developments in the situation since the slate was nominated, and we remain focused on executing our business plan. We continue to believe that our growth trends and prospects offer compelling value for investors on a stand-alone basis. And as always, we are committed to acting in the best interest of all of our stockholders.

To quickly summarize on Slide 14, we had a solid quarter and year. Pricing and cost trends continue to be favorable. Our volume trends are improving, and bad debt expense is performing better than initially anticipated. Uninsured and charity volumes are showing early indications of stabilizing. More importantly, our fourth quarter and full year results showed that our positive earning trajectory remains intact and that the soft third quarter of 2010 is increasingly looking like an aberration in the longer-term trend. We remain confident in our strategies and are reconfirming our 2011 outlook for adjusted EBITDA.

Our initiatives in outpatient services, Conifer and MPI, are meeting all of their interim milestone. While expenses from our Healthcare IT program continue to restrain earnings growth in 2011, this program is also on track and is expected to provide a source of growth in EBITDA beginning next year.

I'd like just to make a couple of final points listed on Slide 15 before I turn the call over to Biggs. I'm proud of what we've accomplished at Tenet and the bright future that is ahead of us. In addition to all of the trends and metrics I just gave you on financial performance, this is ultimately a company that puts clinical quality, the care of our patients and the integrity of our company above all else. These things are hard to measure, but they are measurable.

In the area of clinical quality, although no one questions that better quality is good for patients, some have questioned whether it's good for shareholders. We launched our commitment to quality initiative more than seven years ago. Since then, just to use one metric, we have reduced malpractice expense for adjusted patient day by nearly 70%. In 2010, we achieved our highest scores to date in CMS's Evidence-Based Medicine measures. This, along with our ability to meet other safety, quality and service reporting requirement, enabled us to earn CMS's full 2% annual payment update for 2011. We also earned 100% of the pay-for-performance rate increases from United Healthcare for meeting their 2010 quality standards at every Tenet hospital.

The substantial investment in advanced clinical systems that we're making now will enable us to improve quality and safety in our hospitals and to earn incentive payments beginning late this year and avoid penalties that begin in 2015 and last into perpetuity.

Our patients and physicians seem to appreciate these improvements. Satisfaction among both groups, which we measure regularly and rigorously, reached all-time highs in 2010. Finally, we are well positioned for the future. As part of our ongoing effort to improve clinical outcomes, improve our appeal to payers and position us for accountable care, we recently launched new Joslin Diabetes Centers in two of our hospitals. These disease management centers: one is Cypress Fairbanks Medical Center in Houston; and the other at Brookwood Medical Center in Birmingham, are extensions of our strategy of clinical integration. We also recently opened a new urgent care center in a rapidly growing part of El Paso. And, while it's still early, volumes and payer mix are exceeding our expectations, and nearly half of the patients who visited the center in its first two weeks were commercially insured. We currently operate seven other urgent care centers and plan to open or acquire several more in 2011.

So I'm very pleased with how we're positioned at this early point in 2011, and I'm grateful to all of my colleagues across the country, particularly those who work directly caring for our patients for everything they do.

And with that, let me turn the call over to Biggs Porter, our Chief Financial Officer. Biggs?

Biggs Porter

Thank you, Trevor, and good morning, everyone. Adjusted EBITDA was $281 million for the quarter and $1.05 billion for the year. Revenues grew by 1.8% in the quarter, an increase of $40 million as outpatient growth and commercial pricing enhancements offset the decline in paying admissions.

Also as a positive, the effects of adverse payer mix shift were less in the fourth quarter than what we had experienced year-to-date. Revenue story was led by growth on the outpatient side where revenues grew by $39 million. Prior year cost adjustments [PYCA] were an unfavorable $3 million in the quarter as compared to a favorable $6 million contribution from PYCA in 2009's fourth quarter. Adjusting for this unfavorable swing in $9 million, total revenue growth was 2.2%.

Turning to pricing. Net inpatient revenue per admit increased by 1.8% in the quarter, and inpatient net revenue per patient day increased by 2.9%. Outpatient revenue per visit increased 2.7%, reflecting the effect on mix of our strong growth and imaging volumes, which are high-margin, but lower-priced services. This imaging growth is largely the result of our recent outpatient acquisitions.

Aggregate pricing was supported by both strong Managed Care contract negotiations and a modest increase in acuity. Our consolidated Case Mix Index of 1.33 increased by approximately 1% from 2009's fourth quarter. Our Medicare Case Mix Index at 1.53 was flat over the prior year fourth quarter. As in the prior quarters of this year, Case Mix on commercial managed care was strong relative to last year where the commercial Case Mix Index of 1.34 reflecting about a 2% increase over the prior year. As we have mentioned in prior quarters, we believe this increased acuity has been a function of the economic environment. This acuity shift is largely anniversary however, and Case Mix has been softening in the first quarter of 2011.

Medicare cuts to inpatient pricing, which became effective on October 1, restrained our pricing growth as Medicare revenue per admission declined by 3.6% in the quarter. The Medicare pricing picture was, however, dramatically different on the outpatient side with Medicare revenues per visit increasing by 5.1% in the quarter aided by acuity shift.

Also on the topic of pricing, I want to offer a few comments on a recently heightened investor concern regarding Medicaid reimbursement levels. Texas Medicaid rates have drawn the most attention, in particular, the proposed 10% reduction in provider payment rates for the state fiscal year beginning September 1, 2011. A number of analysts who attempted to estimate the impact on Tenet by working with a percentage of beds Tenet has in Texas. This is unnecessary because we disclose our Medicaid revenues state-by-state. Including managed Medicaid revenues and direct Medicaid revenues, our Texas hospitals received a total of approximately $175 million in Medicaid revenues, a relatively small portion of which was received from other states primarily New Mexico. If the full 10% cut were to be enacted and applied to both our traditional Medicaid payments and Medicaid managed care contracts that are tied to traditional Medicaid rates, our annual Medicaid revenues in Texas would be reduced by approximately $9 million with only $3 million of that impact hitting 2011.

California has also been an area of intense investor concern. However, the cuts proposed by the governor pertain only to hospitals, which have not contracted with Medi-Cal [ph]. Tenet has only three non-contracted hospitals. And as a result, even at the high-end of the proposed cuts, Tenet's potential for an adverse impact is expected to be less than $500,000.

Our 2011 outlook is initiated on January 11th and reconfirmed today, includes $30 million to $60 million in anticipated state reimbursement reductions, which includes risk related to Medicaid rates and state supplemental payments.

Before I leave this subject, I should mention that there are potential upsides as well, which would offset Medicaid funding risk. Those include an increase in the estimated value of a six-month extension of the California Fee, a proposal for a second extension in the Provider Fee in California covering the second half of 2011 and the proposed funding of the private hospital uncompensated care fund in Georgia. The Georgia item is recurring, but we had previously assumed, it would not be funded again this year. These aggregate to potential upside of over $40 million.

Cost performance was outstanding in the fourth quarter with controllable cost declining by 1% for adjusted patient day and salaries and wages and benefits declining by 1.5% on the same basis. Staffing management was excellent, but the cost decline over last year was driven by compensation decisions. Last year, we recorded a discretionary employee benefit award in the fourth quarter and provided merit increases for most employees as of October 1 compared to January 1 for this year's cycle.

Supplies cost also were well controlled in the quarter. On a per-adjusted patient day basis, supplies expense increased just 0.9%. On the topic of cost, I should also mention the cost associated with our Health IT program. Full year HIT cost were $21 million in 2010, including $11 million in the fourth quarter. While our HIT implementation costs are expected to continue to rise through 2013, we expect that the revenue from federal incentive payments will more than offset the HIT cost hitting expense beginning next year. These projections are shown on Slide 20, which replicates the discussion we've provided in early January on this topic.

We saw a meaningful contribution in the quarter from declining malpractice expense. Included in this $21 million decline was a $10 million benefit as higher interest rates reduced the cost to our discounted future liabilities. This fourth quarter benefit from higher interest rates almost precisely reverses the increase in malpractice expense recorded in the third quarter, which was caused by the low level of interest rates at the end of September. You'll recall that we drew your attention to this unusual cost item as one of the factors which caused our third quarter to appear somewhat disappointing. If you net the two quarters, there's no net impact from the change in discount rate.

Other operating expense per adjusted patient day declined by 1.6%, which included the $21 million in reduced malpractice expense. Bad debt expense was $191 million in the quarter, an increase of $10 million or 5.5% from a year ago. This resulted in a bad debt ratio of 8.3%, 30 basis points higher than a year ago, but unchanged relative to our third quarter.

The increase in bad debt expense in the context of declining uninsured volumes is driven by pricing increases, as well a decline in collection rates. As we have said before, we expect the effect of declining collection rates in the current economy to reverse itself as the economy improves. As has been the case for the year, we've also seen an increase in receivables related to balance after.

Turning to cash. We had $405 million in cash, cash equivalents at quarter end, an increase of $7 million from $398 million at September 30. Net cash from operating activities was $175 million, an increase of $34 million over the $141 million in the fourth quarter of last year. Adjusted net cash provided by operations was $180 million for the fourth quarter, an increase of $21 million as compared to the $159 million in the fourth quarter of 2009.

Adjusted free cash flow used in continuing operations was $16 million in the quarter, a favorable variance of $17 million as compared to the use of $33 million for 2009's fourth quarter. This improvement was primarily the result of a $58 million decrease in tax payments and a $10 million reduction in interest payments, the latter, a result of our debt retirement earlier in the year. These favorable variances were partially offset by a $47 million increase in working capital and a $4 million increase in capital expenditures. While there are always a lot of factors, the working capital increase was affected by the timing of our volume increases and outpatient acquisitions. These volumes drove revenues up in the second half of the quarter and therefore, drove higher receivables in December. In this case, higher working capital associated with stronger revenue performance is a good thing.

The California Provider Fee had been expected to have a significant effect on cash in the quarter, but ended up only providing $9 million of the net total $64 million. For the year, adjusted free cash flow was $92 million, an adverse change of $30 million as compared to $122 million in adjusted free cash flow recorded in 2009. Contributing to this year-over-year comparison among other things, were non-cash income items of 2010, such as the Medicare bad debt recoveries, which will convert to cash in 2011.

Note that we are no longer excluding tax payments or refunds from our adjusted cash flow metrics. We believe this is an appropriate time to make this change following the recognition of our NOL in the third quarter. This change will negatively affect 2011 compared to 2010, but we expect it will be more than offset by other cash generated from operations.

As I will discuss further in a moment, we expect substantial growth in EBITDA in 2011 with an even greater lift in cash from operations. Also impacting our cash position was the use of $21 million to fund our outpatient acquisitions in the quarter. As a source of cash, we completed the sale of a number of our medical office buildings in the quarter generating cash of $50 million. These MOBs have generated just under $10 million in annual rents and approximately $3.5 million in EBITDA. The sale required a $5 million impairment charge in the quarter. As a part of this sale, the buyers committed to certain capital improvements to facilities, which will benefit our physician tenants. While a large additional transaction did not move forward, we continue to market additional MOBs.

Turning to our outlook. We previously placed our outlook for adjusted EBITDA in 2011 in a range of $1.150 billion to $1.250 billion. This represents an increase of 9.5% to 19% over 2010. We expect GAAP cash from operations to be in the range of $570 million to $740 million, reflecting a growth of $98 million to $268 million. We expect slightly higher CapEx in 2011, reflecting HIT initiatives and also expect to spend up to $160 million on outpatient acquisitions and assets acquired as a result of physician employment. We assume in the outlook that we use excess cash to retire our 2011 debt maturity when due.

Our assumptions on volumes, cost, pricing and bad debt are provided on Slide 24. The burden from HIT expense to 2011 and the upside from outpatient acquisitions are identical to the views we stated in our January 11 presentation. We have good visibility in the commercial pricing with contractual price increases in 2011 expected to be consistent with recent experience. Medicare all-in is basically flat as outpatient pricing increases offset reductions in impatient reimbursement.

On the cost side, we will increase our investment in our physician base and HIT, both of which will yield improvements in the future. We are already seeing improvement in the yield on our physician additions over the last couple of years. We expect expansion of that benefit in 2011 and beyond. Also, we will continue to drive on our Medicare performance and related initiatives to reduce length of stay and supply cost.

Let me now turn to Slide 25, which provides a high-level context regarding the quarterly pattern of EBITDA for 2011. We expect our quarterly distribution of EBITDA to be fairly consistent this year with what it has been over the last few years. More specifically, our seasonal pattern over the past few years has been to earn an average of 28% of our annual earnings the first quarter. The third quarter is typically our softest with 19% to 25% of annual EBITDA, and the remaining EBITDA has been evenly distributed between the second and fourth quarters.

Last year's first quarter was particularly strong due to high acuity, a relatively strong volume comp and favorable cost reported adjustments. This year, there may be a natural tendency by some to put a greater share of annual income in the first quarter than historical average because the California Provider Fee will provide additional strength to the first quarter. However, it is important to realize that we expect significant Provider Fee income in the remainder of the year, and that the $64 million is not a singular completely non-recurring lumpy event in the first quarter.

In addition to other Provider Fees, later quarters will also be helped by the increasing benefit from growing cost savings from MPI and additional outpatient acquisitions as they occur over the year. The net result of this is that we expect EBITDA to be distributed over the course of the four quarters in much the same pattern as historically achieved without any unusual front end or back-end loading.

Just as a reminder, as in prior years, the first quarter will be negative from a cash flow standpoint, primarily as a result of the seasonal pay-down of high year-end liabilities for capital expenditures, the 401 k match and incentive compensation. For the full year, we expect cash from operations to grow at a level exceeding the growth in EBITDA as a result of some of 2010's earnings converting to cash in 2011 and as we continue to drive cash collections. 2011 cash flow will also benefit by over $70 million in comparison to 2010 from the full retirement of our Department of Justice obligation, on which we made the last payment in the third quarter of last year.

Normal taxes will be in the $20 million range we have talked about previously, which reflects state taxes and federal alternative minimum taxes. In addition, we get one final tax refund on our DOJ settlement payments and we’ll pay final settlement on all the audit years on state and federal taxes in 2011, bringing our total cash tax expectations for 2011 to around $50 million. We expect them at around $20 million run rate annually after that until our NOLs fully utilize as expected in 2014 or '15.

In summary, we remain confident in our initiatives to drive revenue growth, reduce cost and drive increasingly positive bottom line and free cash flow. The ranges we've assumed in 2011 for pricing, revenues and adjusted EBITDA allow for the residual uncertainty largely related to the recession and other items outside of our control. Our 2010 performance continued our upward progression and exhibited solid revenue growth, continued commercial pricing strength, outpatient volume strength, reasonably constrained growth in bad debt expense and excellent cost performance. 2011 should look even better as our initiatives gain incremental visibility and as cash flow grows due to higher earnings, receivables collections and the retirement of our Department of Justice obligations. In addition to the impact of these initiatives, if the volume strengthening we've achieved in the last three to four months can be maintained at a reasonable patient mix, we could have a very good year.

With that, I'll ask the operator to open the floor for questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Looks like our first question comes from the line of Justin Lake with UBS.

Justin Lake - UBS Investment Bank

First question just on the Medicaid cut you talked about. The $30 million to $60 million in Medicaid for 2011 that's in the plan, what would the corresponding impact be to 2012 from that level, once it gets a full year run rate?

Trevor Fetter

Well it's a little early to call because obviously there's a lot in play. I think that there's probably an additional above and beyond that maybe in the neighborhood of $20 million of risk to 2012. But as I said, there's still potential upsides as well, so I think that it's quite possible those get offset.

Justin Lake - UBS Investment Bank

And then just another question on Medicaid following up on your Texas comments there. It seems like you're indicating that about half of your Medicaid revenues in the state are tied to Managed Medicaid contracts, which are subject to direct cuts, is that right?

Trevor Fetter

Yes, because they're not tied to DRG payments, so they aren't subject in the normal course to reductions in DRG reimbursement.

Justin Lake - UBS Investment Bank

But if Texas cuts the hospital rates and then reflects that in the rates that it's paying Medicaid Managed Care plans, are you saying there isn't risk that those plans are going to come back to you at some point and look to renegotiate a corresponding cut in the rate they pay you?

Trevor Fetter

I will say it shouldn't happen that way. But if you want to consider risk, we'll say, "Okay, it's always a risk that there could be a renegotiation." But we will put that once again at only a few million dollars of additional risk.

Justin Lake - UBS Investment Bank

And then just last question on any comments you can give us on the -- I know you're not reporting it anymore, but the trajectory of your commercial admissions in the quarter would be great?

Trevor Fetter

And I've covered that in the script, Jeff, and we'll be releasing a transcript shortly.

Operator

Up next, we have Tom Gallucci with Lazard Capital.

Thomas Gallucci - Lazard Capital Markets LLC

I guess just wondering Trevor, Biggs, could you discuss a little bit more the volume strength that you talk about or alluded to, some thus far in the first quarter? I know on some metrics, the comps get a little bit easier. So I'm just wondering if you could offer any color on sort of the areas or the mix and the perceived sustainability of what you're seeing early in this quarter?

Trevor Fetter

Tom, I'll ask Steve Newman to give you a little color on that.

Stephen Newman

We've seen strength across all regions of the company for the first 49 days of the quarter. We had very few hospitals that are negative year-over-year during that time period. We're seeing growth in some of the elective surgeries that we've talked about deferral over the last few quarters. So I think the strength seems very broad-based. It's both inpatient and outpatient, and we have seen an increase in emergency department visits in the first 49 days with a tick-up in flu, but that's really less than 25% of the growth and our total outpatient visits in the first five weeks of the year. So I would say it's very strong, broad-based and very encouraging.

Trevor Fetter

And keep in mind, Tom, what Steve just said is not adjusting for any factors like weather or anything else. And clearly, we all know that, that presented some headwinds. So those are just the raw stats.

Thomas Gallucci - Lazard Capital Markets LLC

Steve, something you mentioned there, very few negative year-over-year thus far. In the last year or two, has your data been skewed significantly by a minority hospital that you're seeing get better? Or is there any further comments you could make there?

Trevor Fetter

Well remember in the third quarter, we isolated 70% of the volume decline on seven hospitals and that the number of hospitals driving in disproportionate decline in the fourth quarter was reduced to four hospitals. So we're limiting the ones that are performing negatively and broadening the positive performance.

Thomas Gallucci - Lazard Capital Markets LLC

And then could you just remind us on -- obviously you're active on the outpatient side on the physician employment, sort of what the strategy is there and your expectations are for this year?

Trevor Fetter

Sure, I'll have Steve cover that again.

Stephen Newman

Sure, Tom. We've really expanded our physician alignment activities. In the full year for 2010, we added 1,030 physicians to active staff net of attrition. But more specifically, we've expanded our physician employment activity. We expect to employ 300 physicians in 2011 and probably an additional 300 physicians in 2012 and '13. These are spread across the company and divided about 60% primary care and 40% specialty. In most markets, it is a competitive situation. And in some markets, we're the first mover in this particular strategy. But we believe, as we move toward having to clinically integrate with our doctors, aligning them through employment really helps us to accelerate the improvements from the Medicare Performance Initiative to improve our clinical quality, increase clinical standardization and drive down our cost of care and length of stay.

Operator

Up next, we have Adam Feinstein with Barclays Capital.

Adam Feinstein - Barclays Capital

I guess maybe a first question here. Trevor, you alluded to the seven hospitals in response to that last question. Can you just provide a little bit more commentary? In the last quarter, you outlined seven hospitals did contribute about 70% of the volume weakness, and you gave even some more details about how orthopedic surgeries and spinal fusions and OB drove that. Can you just provide some more color about those hospitals? And then I think now you said there's four hospitals. So in the improvements you've seen, maybe just talk a little bit about, do you think -- were these just improvements in the markets or improvements in some of these initiatives? So just trying to understand the delta, if you will, between the third quarter and the fourth quarter in those markets?

Trevor Fetter

And then also I think it's important to talk about that delta -- I mean I'll turn it to Steve, but also how that is playing into this year. And unfortunately, everything is sort of situation-specific, so rather than running through every story of the seven hospitals, let me just talk a little bit about some of the factors driving this.

Stephen Newman

As Trevor said, in the fourth quarter, four hospitals were responsible for 72% of our admission loss. And to give you an example, one of those hospitals was the subject of two Managed Care disputes locally. We settled those Managed Care disputes at the end of the fourth quarter and through the first seven weeks of 2011. That hospital has turned positive from an admissions perspective. So I think that's an example of these unique localized situations that we're seeing to be fewer and further between as we see strengthening of volume across the company. Just a couple of comments about -- you asked about specific services. It's very interesting. For example, in the fourth quarter orthopedic surgery was actually up 1.8%. That's the first time orthopedic surgery had been up across the company in over two years. I think that speaks toward movements in elective surgery. General surgery, which had been down dramatically and subject to a lot of elective procedures was only down 2% in the quarter. Finally, we saw increases in neurologic surgery, some of which is elective. And spinal fusion surgery, which is usually elective was down less than it had been over the prior three quarters. So we're seeing that strength in those service lines that we've targeted through the targeted growth initiative. Some of the elective business is coming back, and I think the last thing I would mention is we're seeing a tick-up in OB deliveries, which I think really is sort of a precursor of return of consumer confidence. We were only down 0.7% in OB deliveries in the fourth quarter, and that's again strengthening into 2011.

Adam Feinstein - Barclays Capital

And then just one quick follow-up question if I may. So you guys have that helpful slide, I think it's Slide 20 that shows the Healthcare IT impact. So you guys have that ramping up in 2012. I guess is there any way some of those payments would be more meaningful in the current year? If so -- I guess there's a lot of moving parts as everyone's been trying to figure out the impact from this...

Trevor Fetter

It's totally dependent on the implementation strategy or implementation plan and implementation reaching meaningful use. So it's not like you can really move that around a lot in a short period of time. So that is our best estimates based on our current plans, and we're on track with the program.

Operator

Up next, we have John Rex with JPMorgan.

John Rex - JP Morgan Chase & Co

The other indication I wanted to get is just in terms of mix, and payer mix certainly seemed to stabilize out a bit. And I didn't hear if you commented also as you looked into the January, February read if you were seeing a continuation of that payer mix also unstable to improve?

Trevor Fetter

Steve, do you want to speak to that as well?

Stephen Newman

I would say, John, that the payer mix is slightly improving as we go through the first seven weeks of 2011.

John Rex - JP Morgan Chase & Co

And then I was really kind of curious to get some of your thoughts on the Novation and Medtronic's skirmish kind of the import of that in terms of the GPOs and the mix on the high-end ortho, cardio devices. How you view that from your perspective and impact on yourselves?

Trevor Fetter

So, John, it's a fairly late-breaking thing. In fact, I first heard about it from an e-mail from you early this morning. I don't think we are well prepared to speak on the issue. But having been in the GPO business, maybe I'll just offer a little bit of perspective. The manufacturers have never been wild about paying GPO fees. On the other hand, hospitals gained tremendous value out of the GPO activity. And it's always struck everybody a little bit strange that it's the manufacturers who pay for the GPOs to exist. And I know, at least in my experience at Broadlane I believe they continued after I left on this. They were shifting the business model towards one where the customers were paying the fees, which is really an appropriate type of model. I'm sure this is something that will be sorted out. I wouldn't be overly panicked about it at this point. And again, the GPOs play an essential role in the supply chain.

John Rex - JP Morgan Chase & Co

But in your own business right now in kind of the high-end devices, are you -- kind of what's your balance between kind of direct contract to a manufacturer versus using a GPO right now?

Trevor Fetter

We're using -- we're doing a bit of both where we are driving a program where the GPO is helping because they have industry knowledge that we don't have. And we have the ability to drive change in our hospitals that they don't have. So it’s a very collaborative process. It's not as though you just buy off of a GPO contract for high-end devices.

John Rex - JP Morgan Chase & Co

And maybe I just don't understand, except -- so would the contracts be your own or a GPO contract or...

Trevor Fetter

It depends on the -- by generally speaking in the cardiac area, they're through GPO, and in orthopedic, they're direct. But the GPO can play a consulting value-added role in all high-end devices and all supply chain activity.

John Rex - JP Morgan Chase & Co

And the issue -- I know you guys have done a lot in trying to drive physician adoption moving it down the chain. So when you do that, in driving a physician adoption, can the GPOs play a role on that at all?

Trevor Fetter

Absolutely. The GPOs -- let me also distinguish, I'm talking about kind of a large hospital system perspective, so the GPO is aware of best practices. They are aware of what really works and how to drive physician adoption so it becomes a somewhat consultative role. I would also say just as a matter of experience those in -- for a while competing against MedAssets and then being a customer of MedAssets, they are particularly good in this area to the extent that's why you're asking us the question. And if you're a small hospital, you really don't have the staff and the expertise to drive these kind of things or if you're a small hospital system. So in that case, you're even more dependent on the GPO services in the supply chain.

Operator

Next up, we have John Ransom with Raymond James.

John Ransom - Raymond James & Associates, Inc.

Just wanted to drill down on your outpatient acquisitions. Relative to your guidance of around $100 million in spend, how much opportunity is there? Could you do more? And when do you think you run out of runway? And then secondly, could you talk about kind of multiples of EBITDA pro forma for the fact that they've become hospital-based versus when you're buying them there? I assume they're free-standing.

Trevor Fetter

I think that we've talked explicitly about the acquisitions we made in 2010, what we paid for them and what we expect to get. And you can calculate the multiple as being less than five if you want to think about it that way. In terms of opportunities, there are abundant opportunities for a lot of different reasons. I think the best way to think about our strategy in the area is in concentric circles. So where the tightest circle is those outpatient centers that exists within a short radius of the hospital. And that's what we've been doing. And that's where we see continued opportunity. Once we reach some sort of natural saturation on that, then we would consider going outside of the concentric circles. We would still look for some sort of synergy in terms of the outpatient centers representing a channel to the hospital. But we've been very pleased so far. And as for why are these opportunities and why are the values the way they are, it's a fragmented business. It’s -- the owners tend to be either physicians or local sources of capital, like many small businesses, they have seen constraints to their ability to access capital. And if you think about it, they're running a small business, but it's a very -- it's one that relies on some heavy capital equipment and IT and its subject to the same regulations that we're very familiar with in terms of healthcare compliance. So I think the dynamic is a good one for us, as a natural purchaser to whom these types of businesses would be worth more than they are potentially to their existing owners.

John Ransom - Raymond James & Associates, Inc.

So what is your outpatient revenue mix pro forma in '11 taking in effect all these acquisitions? I know it was 32% at one point. Is that ticking up?

Trevor Fetter

Yes it’s ticking up, and I can't recall -- honestly, I'm looking at Biggs as to whether we included that in our 2011 guidance. I don't want to get out ahead of myself here.

Biggs Porter

I don’t believe we did. I'll see if I can come up with an answer here.

Trevor Fetter

We can come up and we'll announce that later.

John Ransom - Raymond James & Associates, Inc.

I guess what I'm getting at is there any over -- not this year and last year, but is there any structural impediment to you guys driving that mix up into the kind of the 36% to 38% range where some of your peers are?

Trevor Fetter

I think that -- first of all, remember some of the peers and particularly when you look at rural hospitals, if you're a sole provider, you are capturing, sort of all the inpatient and outpatient business.

John Ransom - Raymond James & Associates, Inc.

Those guys are like 50 I'm talking about high-30s, like some of the urban guys.

Trevor Fetter

So I don't think there's any structural impediment. I think that, that would be sort of a natural and supplemented by acquisitions type of aspiration to have. To go to something like 40 or 50, it would take a major amount of acquisition opportunity, including acquisitions outside of our markets.

Operator

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

Gary Lieberman - Wells Fargo Securities, LLC

Just to clarify on your comment that commercial case mix increased. That's due to what I guess you're talking about in the elective procedures that you think came back in the quarter?

Stephen Newman

Gary, this is Steve Newman. I would just say that it's pretty broad-based of recovery in terms of the payer mix. Certainly, some improvements in births helps us with respect to payer mix, but also those elective surgeries that we've targeted in the targeted growth initiative, those -- they're high-revenue, high-margin elective procedures frequently are in the commercial category. I should mention that a lot of our volume-growing techniques are specifically targeted at commercially insured populations. As we've move more of our marketing to an Internet strategy, we're able to target more specifically those that are enrolled in commercial managed care plans. So I feel comfortable a lot of our tactics are reinforcing the consumer confidence that goes in those that are commercially insured to have those discretionary procedures.

Gary Lieberman - Wells Fargo Securities, LLC

And then any thoughts on Florida Medicaid? You didn't talk about those. Specifically, the Governor's budgets came out a couple of weeks ago, and it looked like overall there were some cuts. But is it too early to tell there or what are your thoughts?

Trevor Fetter

Biggs, you want to comment on Florida Medicaid?

Biggs Porter

On Florida, there's certainly some risk there. We sized the risk at the $10 million annualized level. It is on just straight Medicaid, and then there's some additional risk associated with the low income pool of about $30 million. The combined impact of those two would be about $20 million, and that's been considered in our assessment of the $30 million to $60 million we gave earlier.

Gary Lieberman - Wells Fargo Securities, LLC

And then finally just on the sale of the medical office building facilities, you said there's still some more to go. Any way to get a sense of is that $50 million, half of what you'd like to sell or kind of how much more you have?

Trevor Fetter

Well, we had a letter of intent that was worth just under $50 million on the vast majority of what we had left that we're trying to actually sell. The buyer re-traded towards the end of the deal, and we decided to terminate that arrangement. But that's about the size of the opportunity that's left. But we've said several times, we won't sell them for the sake of selling them. So if the price isn't fair, we'll continue to own them and operate them.

Stephen Newman

As a follow-up to the question as to how much are outpatient as a percent of our revenues was growing in 2011 versus '12, it's by about 150 basis points. So it is increasing as a result of our growth in outpatient volumes in 2011 compared to inpatient, which we expect to be relatively flat.

Operator

Our next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

Kevin Fischbeck - BofA Merrill Lynch

I just want to go back through the Medicaid puts and takes here. Just to make sure I understand the California commentary, when you mentioned that the cut only applies to non-contracted hospitals, is that different from a Medicaid HMO issue? Or are you talking about the same type of issue that you just mentioned in Texas related to the other question?

Stephen Newman

I think it's a little different. In California, you have the choice of being contracted with the Medi-Cal system as a hospital or not being contracted. And there certainly is greater protection by being contracted as we've seen over the last several years when these kind of cuts have occurred or have been discussed whether occurred or not. They have been more directed towards non-contracted hospitals. So by virtue of the fact that we deliberately contracted the vast majority of our hospitals, we don't have as much risk.

Trevor Fetter

I think there was some confusion, Kevin, in the market because the initial language that cuts to certain hospitals, and I think by the time it was translated on Wall Street, the certain had been dropped. So that certain meant non-contracted.

Kevin Fischbeck - BofA Merrill Lynch

And then as far as the Georgia issue and the California issue, and if you say that those could be upside, so those are not in the guidance? Is that correct?

Stephen Newman

Correct, it's not in the $30 million to $60 million risk range we gave. So it is upside both the Georgia funding and the extension of -- the second extension of the California Provider Fee. And on top of that, our estimates of the value of the Pennsylvania and first California Provider Fee, that value's gone up. We had put it at $40 million previously, and it's now over $50 million in terms of our estimates. So you've got a growth an upside beyond the guidance in what we believe the value of the first follow-on California and Pennsylvania fee is. And additionally, you’ve got upside with respect to a second California Provider Fee arrangement. And there's upside from the Georgia funding. So those are all incremental to what we initially assumed and of course then, provide significant offset to any other risks you want to throw in on Medicaid otherwise or any other concerns.

Kevin Fischbeck - BofA Merrill Lynch

Just to be clear on that, you view that as upside to guidance rather than getting to the high end of the guidance or with those things coming through get you to the high end...

Stephen Newman

It's hard to cherry pick individually what things move you from the middle of the range to the high end of the range. When we look at the high end of the range, we look at all of our opportunities, all the potential upsides. We weigh them and consider them and decide what the upside of the range is. So I don't think you can be so precise and say this is outside of the upside of the range.

Kevin Fischbeck - BofA Merrill Lynch

But it would give you comfort?

Stephen Newman

If this and everything else went well, you could go through the upside of the range. But that's not the way we assess it.

Kevin Fischbeck - BofA Merrill Lynch

On the acquisition outlook. I mean a lot of the other hospital companies are very bullish about the actual hospital acquisition side of things. You guys seem to be very focused on the outpatient side of things. Can you talk a little bit about your view about the hospital deal market and why you seem to be more focused on the outpatient deals?

Trevor Fetter

We have been focused also on the acute care hospital. But we have not participated in sort of auctions of distressed hospitals or hospitals in markets that we don't find appealing just on a value basis. So what we've pursued are hospitals where we felt they have good market positions and would be complementary to our existing networks, that is difficult. There have been some -- there's an example of one we pursued where we didn't feel the pricing was something that we could be comfortable with and withdrew, and it was subsequently signed up with someone else. There is another one that we still are very focused on and is still a live process. Obviously, it's not helpful to have a cloud over the potential ownership of the company when you're pursuing that, but it is still something that, in an area that we are actively, but very selectively pursuing. On the outpatient side, those uncertainties are not as big a factor in the acquisition process. And so that's why we continue to have more success on that. And then also I've said before, we view our business as having three components: There's the inpatient acute hospitals; there are the outpatient services; and then there is Conifer, the service business that we have. And we are also very actively looking and seeking complementary acquisitions that would expand our service offering and make for a more appealing product that we offer to our customers on the Conifer side. So we haven't done one yet of size, but don't rule that out either.

Kevin Fischbeck - BofA Merrill Lynch

You mentioned Conifer and services side of the business. One of your bigger hospital competitors is also talking about growing their services business. Do you see that in any way changing the competitive landscape when you think about Conifer and those opportunities?

Trevor Fetter

I'll make a brief comment about that, and then our Head of Conifer, Steve Mooney is sitting right here, and I'll ask him to give a little more color on what he's seeing in the marketplace and how we're positioned. But as a general rule, I would say and this would apply to HCA or to Accretive Health. I think it's great to have credible market participants in this market because one of the big barriers just as the IT outsourcers had 30 years ago, one of the big barriers today in revenue cycle outsourcing is just convincing hospitals that the concept is a valid concept of turning over your business office and your revenue cycle, having people from another company actually call your patients to deal with their bills. That's an obstacle to overcome in growing a business like this. And if you have credible companies with a good product out there, convincing hospitals that we feel very comfortable about our competitive advantages, once hospitals have concluded that it's a concept that makes sense, we feel we're very well positioned to win business in that. And Steve, you might just talk about what we've done to position Conifer and also not just positioning but the actual track record and then the systems work we've done to be able to integrate with customers.

Stephen Mooney

So what Trevor just said, I mean we're actually, the announcement of HCA we think was a positive one. Like Trevor just said, we think it's obviously further talking about the marketplace itself. We think it just, once again validates our business model in the marketplace. But our biggest competitor in the marketplace really is hospitals themselves. This is a space that typically hospitals used to provide the services internally and you're starting to see, and we've seen over the last probably nine months, I mean a lot more marketplace activity around hospitals looking outside their four walls for services in this space. One because they have choices. So as Trevor just said, it's great for us to have every competitor out there talking about why you want to outsource your revenue cycle to a third party because obviously there's less risk, I mean there's lot more obviously with scalability in the marketplace, compliance programs and thus and plus incredible capabilities around the service side of that. So we’ve spent, since our launch back in 2008, an incredible amount of time and money and energy around our interface capabilities. So that we can literally operate on any platform and hospital that was already invested in from the patient accounting side or the clinical systems that we can integrate to those, which allows us to move it into our operations with a scalability perspective. That's something we think we got a major head start in the marketplace. It's not something our competitors do. They typically operate off the current hospital systems, which is now not allowing them to have the appropriate scale and efficiency levels we have. So we're still very, very bullish in this marketplace. You've seen our pipeline improve dramatically over the course of the last nine to 12 months. We're expecting significant improvement in our -- as Trevor mentioned earlier, in our revenues in 2011 going forward. And I'm pretty confident we're going to have some more good news and some sales in the next few weeks.

Operator

Our next question comes from the line of A.J. Rice with Susquehanna Financial Group.

Albert Rice - Susquehanna Financial Group, LLLP

Any timeframe on learning when the California Provider Fee program is going to get extended? Is there a timeframe in which you'd find that out?

Trevor Fetter

Dan Waldmann, our Head of Government Relations is here, and I'll ask him to address that. Dan?

Daniel Waldmann

On the six-month extension, the legislation has been prepared, and the model has been prepared and agreed to by the California Hospital Association and the state. We're waiting for the legislative -- they've got what's called a Spot Bill already introduced in the legislature. And within the next few weeks, we should see that amended with the actual legislative language and that to move forward. And we expect that to move fairly quickly. They also have just recently introduced a Spot Bill for the extension beyond the June 30. And that's because it's got to have a different model and structure once the increased FMAP match goes away. There's discussions going on right now about developing that, but there's not the structure in place yet to move forward on that legislation.

Albert Rice - Susquehanna Financial Group, LLLP

Is there any change and any terms beyond just the pricing metrics and how that's going?

Trevor Fetter

Like what do you have in mind?

Albert Rice - Susquehanna Financial Group, LLLP

I don't know, just in terms of structure, the contract or any other. I don't have anything specific in mind just beyond pricing?

Trevor Fetter

Clint Hailey, our Head of Managed Care Contracting is here. You want to speak to that Clint?

Clint Hailey

Sure, Trevor. Our contracts have been pretty consistent over the last couple of years. We have introduced some provisions like inflation hedging provision because of the economic environment we're in. But other than that, no real significant changes.

Albert Rice - Susquehanna Financial Group, LLLP

What about pay-for-performance?

Clint Hailey

Pay-for-performance we've had in our contracts for probably the last three years, introduced it about three years ago. And we're seeing it grow.

Trevor Fetter

Quality metrics, these kinds of things, Clint's been very -- Clint and his team have been very creative working with payers to help them expand market share where they want to expand market share and where it works well for us. And as you know, we take a national approach to contracting with the big national payers, so we're really able to be very strategic with them at a very high level about how we set up our contracts.

Albert Rice - Susquehanna Financial Group, LLLP

And then my little broader question was if I look at -- and it's always dangerous doing the Math on the fly here, but it looks like the guidance for 2011 assumes especially if you back out the California benefit, you still sort of assuming otherwise flat to improving controllable expense margins. You've given sort of specifics on bad debt and that's sort of flat year-to-year. So in labor supplies and other operating expense, maybe for a second, can someone talk to where you sort of see the potential for further improvement in margin on those three line items.

Biggs Porter

Sure, Biggs. I think that clearly the MPI initiative, which we've said is worth $50 million in 2011 is going to improve supply expense and some degree, a lesser degree labor cost as we operate not just on supplies, but length of stay in greater efficiency more broadly. So that's really the big drivers that's been embedded. There are cost increases in the guidance for Health IT of about $15 million, which has a negative impact in our -- I think I mentioned in the script. Besides that, we’ll be spending more on physician employment in 2011. But otherwise, what we would see is largely the expected efficiencies that we gain on increasing volume, which we expect on adjusted admits in 2011 to flow through the bottom line. So efficiency on increasing volume, the $50 million of savings and some offset from HIT and physician employment.

Albert Rice - Susquehanna Financial Group, LLLP

So not to put words in your mouth, but it sounds like other operating expense you might expect because a lot of the stuff that's negative flows through that, a little pressure there, but potentially some improvement in supplies and maybe even a little in labor if you get help on the volume?

Biggs Porter

Well, I think it's just -- on the other operating expense line, I would say our baseline assumption is just normal inflationary kind of trends granted inflation's not very high right now. But it would just be the normal set of items there outside of the discrete things I mentioned

Albert Rice - Susquehanna Financial Group, LLLP

I guess maybe I should clarify. Is the IT spending in the physician employment, does that go through other operating or tend to go through labor?

Trevor Fetter

IT spending, as a discrete element, isn't a big piece of what we have in our physician employment cost. It's more purely the cost of the employment and some normal operating cost of physician offices, but it goes wherever it belongs. Typically, that's going to be another operating expenses if it is IT or facility-related, but the labor cost is where the primary growth is.

Operator

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

Shelley Gnall-Sazenski - Goldman Sachs Group Inc.

If I could just follow up on one of A.J's questions, managed Care contracting terms. Maybe not specifically for Tenet, but can you answer whether there are developments in your markets especially your largest urban markets? Is there any shift to narrower networks that you're seeing?

Trevor Fetter

Clint, do you want to address that?

Clint Hailey

Sure, Trevor. We've been hearing noise or rumblings about narrow networks for years and years, and there have been -- we've seen some uptake in that in terms of clients of large insurers buying these products, but still not to the extent that I think it shifts the business a lot or significantly. It'll be real interesting to watch over the next year or two to see if the uptake in that segment of the business continues or expands or if it tails off as the economy improves.

Trevor Fetter

So one of the things that Clint and his team have been very effective in doing is negotiating provisions. Because again, we do contracting on a national basis where we -- with payers are guaranteed access to narrow networks when they're setting up narrow network structures. Also just as a trend, I think we're very well positioned for narrower networks because we have a very good value proposition to the payers. Not only do we have demonstrably high quality at a reasonable price, but we also are very fair and appropriate in the way that we deal with them on claims. And then in the back office, we have a fairly frictionless highly automated function that is lower cost for them to deal with. So I think that as ---because the ultimate end customer becomes more sensitive on value and as the insurance companies are more sensitive on value and cost, we are well positioned relative to our competitors in local markets to succeed in that environment.

Shelley Gnall-Sazenski - Goldman Sachs Group Inc.

I don't think on the evidence of improvement in the surgery trend, I don't think this question was asked. I apologize if it was. Is any of this improvement related to taking share from the ambulatory surgery centers? Or it sounds like...

Trevor Fetter

Awfully hard for us to know with any precision, Shelley, and it's still pretty early. We're talking about a trend that really just emerged over the last three and a half months.

Shelley Gnall-Sazenski - Goldman Sachs Group Inc.

But it does sound overall like this is an improvement in your market more than just market share initiatives and physician recruitment. Is that the right assumption?

Trevor Fetter

I think that's right. That's what we believe. I mean we've had, as you know, for a long time, we've had a series of initiatives, and they seem to all be working and meeting or exceeding our expectations.

Shelley Gnall-Sazenski - Goldman Sachs Group Inc.

And then one final question on the outpatient acquisition outlook. Can you just confirm -- are we still looking at sort of small scale one-off outpatient-type acquisitions? Or would you be interested in doing something larger potentially something like a RadNet?

Trevor Fetter

I don't want to speak about any particular company, but we've done some groups of centers where it was a company that owned nine centers in the Palm Beach area, for example. So that was very much geographically driven.

Shelley Gnall-Sazenski - Goldman Sachs Group Inc.

So you're tending to still look at smaller one-off?

Trevor Fetter

Well I think by definition...

Stephen Newman

[indiscernible] biased. We're biased towards those things, which are close to our existing acute care hospitals. So that becomes a narrower focus, if you will, not to preclude anything else, but that's where the focus has been and where we -- we look at the pipeline that's what we expect.

Trevor Fetter

It's not about size. It's about strategy and about geographic fits.

Operator

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

Darren Lehrich - Deutsche Bank AG

Just on the HIT program expense, I'm wondering if you can just help us think about what really a lot of those expenses relate to? I can understand the capital, but is there any way to sort of put the number in perspective relative to training costs and outside consultants, how exactly does that break out?

Biggs Porter

Well I think you've hit it, a lot of the cost is training cost. There's internal labor, there's outside consultants. If it's -- we have to separate that, which is capital versus what's expensed. But training is a big component of what's charged to expense. So getting everybody ready and the early operations or the operating cost prior to actually bringing it up is expensed.

Darren Lehrich - Deutsche Bank AG

And I guess part of the question here is you've talked about some expense for some time. And as you've guided to it, it seems like some of that expense has continued to push out a bit and if I recall has been a little bit lower than what you've talked about or guided to. I'm just wondering if you can help us understand whether you've got any more certainty around the numbers in front of us for '11 than what we've seen before? And if there's still potential for that expense to be slipping or is it kind of being incurred at that level at this point?

Biggs Porter

We never stop looking at ways to reduce or optimize, so we will continue to examine that. If you go back to 2010, as we entered the year, yes, we did under-run fairly significantly what we initially thought we're going to spend for the year was driven by a couple of things. One is we made a decision at the start of the year to pursue more of a single-vendor strategy as opposed to multiple vendors. And as we were able to push that all the way through our estimates, that did significantly reduce our cost. We also found ways to be more optimal. And it's always possible that a certain amount of cost doesn't end up captured discreetly in the HIT bucket, but is left at the hospital level in recurring operations.

Trevor Fetter

And I say there's been a very significant learning curve as well as we have gotten into this program and had these very successful implementations and going live events at different hospitals. So we've also learned how to do this better. A year ago, when we were making our estimates, we were really in front of the program. Now we've got a lot of it behind us.

Biggs Porter

So I think that yes, we have increasing confidence in the fidelity of our estimates. But on the other hand, we will keep trying to find ways to optimize, to drive it down if we can figure out how to get more incentive we’ll figure out to do that if we figure out how to reduce cost, we'll do that. So it's not a fixed number, but it does have certainly a greater fidelity to it than it did a year ago.

Darren Lehrich - Deutsche Bank AG

And just last thing on this topic, considering how much work you have done with stage one meaningful use coming up, is there any way for us to sort of assess how you have maybe tested or audited yourself? And how you stack up for stage one and going into that event given some of the implementations you've done? Where you think you are in your most, I guess, fully implemented hospitals at this point?

Trevor Fetter

I'll ask Steve to comment on that from an operations point of view.

Stephen Newman

Darren, we have a number of checkpoints along the way to ensure that we have deliverables that we're going to be able to attest to that meaningful use criteria for stage one. We do it both with our own internal people as well as external auditors, so that we're very comfortable that we are delivering the functionality that we need to provide to our doctors and nurses in order to meet meaningful use. The issues come along about educating the staff and making sure, not that you have the functionality, but that the functionality is actually used at a certain level that you can attest to in order to hit meaningful use criteria and obtain incentives. Those bars are set relatively low in stage one meaningful use. We think we will exceed it by two or threefold, so we're comfortable in our implementation that we're going to get both functionality, as well as what's really important utilization on the part of nurses and doctors of the advanced systems like computerized physician order entry.

Trevor Fetter

And we had a group of hospital CEOs here last week, including some who run hospitals where we've implemented the system so far, and they're very pleased with the way that it has gone. So I think this program so far has been a real success, and is very important in our competitive position in the future.

Operator

Our final question comes from the line of Kemp Dolliver with Avondale Partners.

Kemp Dolliver - Avondale Partners, LLC

There has been a theory floating around regarding the potential impact of co-pays and deductibles on utilization. As the year comes to unfold, and I'm hearing this commentary about an uptick in discretionary procedures, and admittedly broadly speaking, I think the data around this is mixed. But do think that, that is a factor in some of the strengthening you saw in the fourth quarter?

Trevor Fetter

Well, it's funny, but I think you and I talked about this in the late in the third quarter, early in the fourth quarter this so-called demand wave that I was hearing it from a lot of the insurance company executives. This theory that there would be a demand wave in the fourth quarter. I don't think we particularly saw it. If that theory was even valid or attributable to the change from the third quarter to the fourth quarter, you certainly wouldn't see the strengthening in the first quarter because people would've accelerated procedures into the fourth quarter. And then they would because of co-pays and deductibles be suppressing their consumption in the first quarter. So I think it was a false alarm, urban legend, something along those lines.

Kemp Dolliver - Avondale Partners, LLC

The second question relates to the $10 million in EBITDA this year from expected outpatient acquisitions. What's the status? Are these daresay under some kind of letter of intent or earlier stage? Because historically, companies used to do this when there was a lot more consolidation potential in their markets. Now that many of these areas have become more consolidated, there's been general reluctance to build, what I would call, mystery acquisitions into an outlook. So could you tell us just how mature these processes are?

Trevor Fetter

I'm glad you asked it because we do not believe in the mystery acquisitions being put into an outlook. So all we did was to put in acquisitions that are identified by name at some stage in a pipeline in our strategies where we're actively pursuing them.

Kemp Dolliver - Avondale Partners, LLC

That sounds like some of these are still [indiscernible]. There may not necessarily even be a letter of agreement at this point?

Trevor Fetter

Not necessarily a letter of agreement, but where we are confident that we can proceed to make the acquisition.

Biggs Porter

There's more in the pipeline than what we've assumed...

Trevor Fetter

Yes.

Biggs Porter

In our outlook as well.

Operator

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

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