Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

John Merriwether - VP of IR

Burke Whitman - President and CEO

Bob Farnham - SVP and CFO

Kelly Curry - EVP and COO

Analysts

Jason Gurda - Bear Stearns

Tom Gallucci - Merrill Lynch

Shumin Huang - Goldman Sachs

Adam Feinstein - Lehman Brothers

Matt Ripperger - Citigroup

Ken Weakley - Credit Suisse

Gary Lieberman - Stanford Group

Cheryl Skolnick - CRT Capital Group

Bill Bonello - Wachovia

Health Management Associates, Inc. (HMA) Q3 2007 Earnings Call October 26, 2007 11:30 AM ET

Operator

Good morning. My name is Fredericka, and I will be your conference operator today. At this time, I would like to welcome everyone to the HMA Third Quarter 2007 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Merriwether, you may begin your conference.

John Merriwether

Thank you, Fredericka. Good morning, everyone. I'm John Merriwether, Vice President of Financial Relations for Health Management Associates. I'd like to welcome you to HMA's third quarter 2007 earnings conference call.

Before we get started with the call, I'd like to read our disclosure statement. Certain statements contained in this presentation, including, without limitation, statements containing the word believes, anticipates, intends, expects, optimistic, objectives and words of similar import, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may include projections of revenue, income or loss, capital expenditures, capital structure or other financial items, statements regarding the plans and objectives of management for future operations, statements of future economic performance, statements of the assumptions underlying or relating to any of the foregoing statements, and other statements which are other than statements of historical facts.

Statements made throughout this presentation are based on current estimates of future events and the Company has no obligation to update or correct these estimates. Listeners are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially as a result of these various factors.

In addition, EBITDA as mentioned on this call is defined as earnings before interest, taxes, depreciation, amortization and after minority interest. I will refer you to HMA's earnings press release issued today for a disclosure statement regarding EBITDA as a non-GAAP financial measure.

On the call with me this morning is Burke Whitman, our CEO; Bob Farnham, our CFO; and Kelly Curry, our COO.

Thank you for your attention. And now, I'll turn the call over to Burke.

Burke Whitman

Thanks, John. Good morning, everybody. You'll hear in a few minutes from Bob and Kelly, but I want first to give you some opening remarks to frame where we are and where we're going. The third quarter was my first full quarter as CEO, and also Kelly's first quarter as our COO. Our situation at this point is clear to us in two fundamental respects.

First, on one hand, we have a near term challenge in the form of higher bad debt expense that we have had historically. And that bad debt expense, obviously, has impacted our financial performance and mar it's near term discipline, especially given the higher financial leverage we have as a result of our recapitalization earlier this year.

We are attacking the near term challenge aggressively in order to stabilize bad debt expense as a percentage of revenue. Bob, in a few minutes, will address some of the initial results of this, and he will also explain to you in some detail our provision for doubtful accounts in this third quarter.

Kelly will address in greater operational detail exactly what we are doing about bad debt expense and why we expect that those things we're doing will make a difference even in the fourth quarter of this year and on in the next year.

In the face of a near term challenge, we're also taking actions to reduce our financial leverage by paying down debt. And this includes in the next few quarters, using proceeds from divestitures of some limited number of hospitals, perhaps 1 to 3 that may not be as good a fit with our operating strategy.

So that's a brief overview of our first fundamental aspect of our situation in the near term challenge. And as I said, Bob and Kelly will address the actions we are taking on this front in greater detail in a few moments.

The second fundamental aspect of our situation is equally clear to us, but it's more positive. And this is the significant opportunity we have to build value through implementation of a strategic vision for HMA that is new, and it builds on the historical foundations of a great and well-run company but does some things differently. And let me describe this to you in brief.

We are substantially repositioning the company competitively with respect to our key customers, who include our physicians, employees and patients, are working together with our physicians and with our employees to boost quality, service and satisfaction in order to preserve an enhanced market share and to build performance that is stronger, more viable and more sustainable in the competitive environment.

On the second front, Kelly is going to talk to you in considerable detail about the opportunity and the ongoing progress that we are making, as we speak now, on our key initiatives, as well as a number of additional new initiatives and actions that we have taken since I became CEO and since he joined me as COO, both this summer.

Some of these actions involve transactions, such as joint ventures with physicians, and we continue to look at a number of those. We're about to close on our fourth hospital joint venture with physicians. We closed on a number of ancillary service joint ventures, and we're working on another half dozen hospital joint ventures. But I would tell you that the most significant opportunity and actions we have on this front are really in simple blocking and tackling operations, and that's what Kelly will address.

We do have traction. You're going to hear Kelly describe to you aspects of that traction. It doesn't show up yet in our financial results for the third quarter in orders. It really didn't show up on our volumes yet. But the operational transaction is real, it's measurable. It's showing up in some hard metrics such as dramatically improved physicians satisfaction scores and in softer, intangible indicators, both of which I expect to lead inevitably to improve market share and financial performance in the coming quarters.

We now have in place almost all of the pieces that we need in order to solve the first situation of near term challenge and exploit the second of strategic opportunity. Since assuming the CEO role, I have got in the leaders and other people I wanted, the organization that I want to have, and have launched the additional actions that I want us to take. You will hear the tangible specifics in just a few minutes, particularly from Kelly.

Of course, we must produce results. I understand fully that's what you need from us. It's what we want. It's what we expect. At this point, we've identified the challenge and opportunity. We've declared a turnaround in some fundamental aspects of a solid company. We've pointed in the direction we need to move, and we've begun to take the actions that will produce the results we want. And I believe the results will come, and I think the things we're doing that Bob and, especially, Kelly will tell you about, will produce them.

I expect we have perhaps a couple more quarters, maybe three, in which the results may be dominated more by what we are doing to address the near term challenges. After that, I expect the results to be driven more by our success in repositioning the company competitively. Because of all of this, I remain excited and enthusiastic about what lies ahead of us, even in the balance of 2007, but especially in 2008 and 2009.

The challenges we face are real and, I think, considerable. But we have the elements in place to stabilize the challenge in the near term and overwhelm them over the next couple of years by competing more effectively for physicians, employees, patients and market share.

I'll turn the call over now to Bob Farnham, our CFO. He will be followed by Kelly Curry, our COO, and then we'll open up to your questions. Thank you.

Bob Farnham

Thanks, Burke, and good morning, everyone. Earlier this morning, we announced results for the third quarter and nine months ended September 30th, 2007.

For the third quarter ended September 30th, 2007, HMA reported net revenue of $1,070.2 million; earnings before interest, income taxes, depreciation and amortization, refinancing and debt amortization costs and after minority interests of $151.6 million; net income of $30.5 million; income from continuing operations of $20.1 million; diluted earnings per share of $0.12; and diluted earnings per share from continuing operations of $0.08.

For the nine months ended September 30th, 2007, HMA reported net revenue of $3,307.2 million; EBITDA of $480.4 million; net income of $107.4 million; income from continuing operations of $98.1 million; diluted EPS of $0.44; and diluted EPS from continuing operations of $0.40.

Continuing same hospital admissions for the third quarter decreased 0.4%, while continuing same hospital adjusted admissions increased 1.9% compared with the same quarter a year ago. Continuing same hospital emergency room visits and surgeries grew 3.0% and 1.2% respectively compared to the same quarter a year ago.

Pricing in the third quarter showed continued growth with a 4.6% increase in continuing same hospital net revenue per adjusted admission relative to the same period a year ago, which resulted from a continuing same hospital net revenue increase of 6.5%. Our same hospital EBITDA from continuing operations for the third quarter was $168.4 million, and the corresponding same hospital EBITDA margin from continuing operations was 16.0%.

Continuing same hospital salary and benefits expense as a percent of net revenue was 40.0% for the third quarter or approximately 50 basis points higher than the same quarter a year ago. This increase is entirely attributable to employed physicians at same hospitals. Continuing same hospital supplies expense as a percent of net revenue was 13.0% for the third quarter or about 40 basis points less than last year.

We intend to continue maintaining our cost control discipline and try to hold the line on bad debt expense, recognizing that as our volume and net revenue cycle initiatives begin to gain traction, we have an opportunity to improve returns.

Uninsured patient volume and bad debt expense continued to dominate hospital industry headline. Continuing same hospital uninsured admissions for the third quarter totaled approximately 7.9% of total admissions, which is up 30 basis points from the same quarter a year ago and is flat sequentially compared to the second quarter ended June 30th, 2007.

As previously announced, during the second quarter ended June 30th, 2007, HMA added an additional $39 million to its bad debt reserves and modified its then existing bad debt reserve policy based on a review of accounts receivable and a look-back analysis of self-pay collections for the first six months of 2007.

Rather than maintaining a flat 60% reserve policy on uninsured accounts from the month of service and then reserving them 100% when the accounts exceed 300 days, the new expense policy modification incrementally steps up the bad debt reserve from 60% to 100% when the account exceeds 300 days. In conjunction with the bad debt expense policy modification, we announced our expectation that bad debt expense for the balance of fiscal year 2007 would be approximately 12% of net revenue.

There are three components that comprised how HMA accounts for uninsured and underinsured patients -- bad debt expense, uninsured discounts and charity and indigent write-offs.

Bad debt expense for the third quarter was $126.5 million compared to $94.1 million for the same period a year ago and $150.6 million for the second quarter ended June 30th, 2007. Bad debt expense for the second quarter ended June 30th, 2007 included the $39 million of additional bad expense related to a modification of our estimate.

As a percent of net revenue, bad debt expense for the third quarter was 11.8%, in line with our expectations. As part of our operational strategy to limit bad debt, HMA sold certain accounts receivable during the third quarter that were previously written off from its balance sheet. Bad debt expense for the third quarter includes approximately $16.0 million, a pre-tax benefit related to the sale of these accounts receivable.

Declining uninsured accounts receivable is further evidence that our bad debt policies are appropriately accounting for the uninsured. Net self-pay or uninsured accounts receivable declined by $9 million as of September 30th compared to June 30th.

Since February of 2007, HMA has given a 60% discount to uninsured patients for non-elective services. Uninsured discounts for the quarter were $155.6 million compared to $153.3 million for the quarter ended June 30th, 2007. HMA's charity/indigent care write-offs for the third quarter were $19.2 million compared to $156.9 million for the same period a year ago, and $18.4 million for the second quarter ended June 30th, 2007.

To accurately compare how HMA accounts for the uninsured, it is necessary to review all three components together. Therefore, the sum of bad debt expense, uninsured discounts and charity/indigent write-offs as a percent of the sum of revenue, uninsured discounts and charity/indigent write-offs was 24.2% of the third quarter compared to 21.9% for the same quarter a year ago and compared to 25.4% for the second quarter ended June 30th, 2007. The second quarter did include the $39 million of additional bad debt expense related to the change in accounting estimates.

As I have said since the inception of these policies, it would take several quarters to determine the impact of these policies on annual revenues and bad debt expenses. For the first nine months of the year, the implementation of our policy has resulted in lower net revenue and higher levels of bad debt expense.

We continue to expect to generate between $4.3 billion and $4.5 billion of net revenue in 2007, and we expect bad debt expense to be approximately 12% as a percent of net revenue for the fourth quarter.

Moving over to the balance sheet and cash flow statement, total assets are more than $4.6 billion. The balance in accounts receivable net as of September 30th, 2007 was $649.6 million, and the balance in the allowance for doubtful accounts was $557.8 million.

Cash flow from continuing operating activities was $241.2 million for the nine months ended September 30th, 2007, after cash interest and tax payments aggregating $235.9 million. It's important to note that the $16 million of aged accounts receivable sold during the third quarter will be collected over the next several quarters.

During the third quarter, HMA sold its two Virginia-based hospitals to the Wellmont Health System. HMA recorded a $22.3 million pre-tax gain relating to this sale, which is included in results from discontinued operations and is net of income taxes. Lastly, HMA days sales outstanding, or DSOs, as of September 30th, 2007 were 53 days compared to 74 days at September 30th, 2006 and 52 days as of June 30th, 2007.

Let's review the third quarter results. While our continuing same hospital admissions declined during the quarter by 0.4%, adjusted admissions, emergency rooms visits and surgeries increased 1.9%, 3.0% and 1.2% respectively. Continuing same hospital net revenue per adjusted admission increased 4.6%.

Net revenue increased 8.2% and same hospital net revenue from continuing operations increased 6.5%. Continuing same hospital EBITDA margins were 16.0%. Uninsured accounts receivable declined $9 million during the quarter as same hospital uninsured admissions as a percent of total admissions remained flat sequentially at 7.9% compared to the second quarter ended June 30th.

Before I turn the call over to Kelly, I wanted to make a few additional comments with regard to the $16 million on the sale of accounts receivable, which resulted in prior year AR written off. I've had a few phones calls and I've seen a few preliminary reports where the amount has been deducted from our results, and so rather than the $0.08 that we reported that we really made $0.04 for the quarter.

I think that conclusion is a little bit superficial. I think it's important to look at the $16 million of proceeds from the sale as part of our overall strategy and approach to managing our uninsured book of business. To help put things in perspective, recall that at June 30th, based on a more recent look-back and observation of the economy as a whole with regard to unemployment, housing and those sorts of things, we thought it was appropriate to recognize additional bad debt expense and reduce the level of our uninsured AR.

When we took the additional $40 million of bad debt expense and modified our reserve policy at June 30th, we said that as a result of the policy modification there will be a continuing impact on our earnings as the older gross charge AR aged out to 300 days and that would probably be, at least, another $40 million.

We know the majority of that was going to occur this quarter. The last bucket, if you will, of gross charge at AR will roll to 300 days as of November 30th. So we knew we were going to absorb the worst of it this quarter.

We estimated our bad debt expense would be in the 11.5% to 12% range for the balance of the year. And our strategy, as I said, to limit our bad debt expense in light of our June 30th policy and help with their newer impact on earnings included the possibility of sales from old AR.

So one might say that this $16 million is a onetime benefit, but the revision of our policy and the resulting bad debt expense this last half of the year is recording additional bad debt expense on our older AR as well as on our current book of business, largely as a result of a decrease in our historical collection rates. So we do see the sale of the old ARs as part of our management of our ways to just insured AR.

I also want to keep -- have you keep in mind a couple of data points. One, I mentioned this in my prepared remarks, and also we issued a revised news release this morning just before the market opened, that our net uninsured or self-pay AR, in spite of slightly higher uninsured volumes for the quarter, is actually down $9 million at September 30th compared to June 30th. So I have not recorded any additional receivables from this increased flow of uninsured business.

The second point is with regard to cash collections as a percent of net revenue less bad debt. Cash collections as a percent of net revenue less bad debts for the quarter was a 107%. I am saying that we are not looking at the sale of the AR as just a onetime event, but just as one element or part of our overall strategy to manage our uninsured AR.

If we continue with our -- we will, we do plan to continue with our current policy through the end of the year. It is an estimate. And if it does continue to reduce our self-pay AR overtime, we do think that's prudent. At this time, we do feel that we can continue to do that and keep our bad debt expense at a run rate of around 12% of revenue.

I'll now turn the call over Kelly.

Kelly Curry

Thanks a lot, Bob, and good morning to all who have joined us this morning. As Burke mentioned, and actually now I have been in my new role of COO for 15 weeks and now visited 25 of our hospitals, during that time focusing my energies on the operating and strategic initiatives, we believe will lead to improved volume revenue and EBITDA growth.

In addition, I'd have a lot of face time with our primary customers and also with our constituencies of our local community leaders and our employees. I also want to add some color from an operational perspective on our uninsured business and the emerging trends that we are seeing in our current mix of business.

First, let me be clear in saying that engaging in the sale of fully written off self-pay AR is and will continue to be part of our strategy for managing our collection efforts. What this will do is ensure that after a 12 to 24-month collection effort on our part, we will move you as a nonpaying account onto a financially motivated collector that will pursue you for another two to three years.

This means that the grapevine will carry the message that we offer a substantial discount. But if you do not pay, you can expect to experience four to five years of concentrated collection effort should you not deal with your account. This will get favorable momentum for us as our information was showing that people had driven to us specifically because we had a less robust collection effort than others. In addition, this is fully a part and factored into our expected provisioning of 11.5% to 12% for doubtful accounts, as we have stated previously and continue to report.

In a HMA hospital, as an uninsured patient, you will either pay the bill at discharge after our 60% discount or sign a contract promissory note for regular payments meant to liquidate your balance, or you will go immediately to a collector, no delays and no exceptions. We will use professionals to qualify the indigent status of account guarantors.

We are seeing progress in our triage programs for emerging payer. These programs are fully approved by council, consistent with industry practice and effective at stemming the flow of those who are well aware of the systems' weakness and accustom to taking advantage of it. The grapevine works both ways.

As to our mix of business, we are seeing a flattening of our three-year growth curve in uninsured patients. This trend is reflected in the quarter-to-quarter comparison of nearly flat private pay patient, and is extending into our most recent data. Part of the reason for this reversal relates to our efforts to improve our Direct Admit business through our [Connoisseur Admit] program for our physicians, which is being well received.

This past weekend we had our second Annual HMA Physician Leadership Forum with leading doctors from all of our hospitals. We have made significant progress in more closely integrating our relationships with our physicians, and this is reflected insignificantly, statistically valid improvement in our satisfaction. We have completed or will soon complete several outpatient in whole hospital joint ventures with physicians and there are more to come. We are a "we do" company, when it comes to innovation and coordinating the delivery of healthcare in our markets.

We now have a Clinical Excellence Team operating at senior level within our company and this will help dramatically in our physician relationships through direct improvements in care. It is our goal to be the top quality provider of care as a system in the country within two years.

We will also add to this a Chief Medical Officer hopefully by the year end to further demonstrate our commitment to quality care and physician relationships with our medical staffs.

Our mix-of-business particularly over the last three years has shown a decline in direct admit offset by our increase of ER admissions, which was significantly skewed towards the uninsured.

This resulted from our marketing program that emphasized building ER volumes as oppose to investing in direct admit physician relationships. The fact is that all operations is a bad relationship and building on these to the mutual benefit of the hospital, the physicians and the communities.

I can commit to you that we will be on my watch as COO, a company that is responsive to our physicians, not that we will always say yes, but we will communicate with them and give our reasons for decisions we make after we have sought their input.

This may sound basic to some of you, but when you have been accustomed to driving your business through the ER, it allowed us to be less than on the barge of our feet and working with our physician-customer relations. I can assure you that this is no longer the case at HMA.

For our patients we have fully implemented our patient aggregate and pricing representative programs. We've amended our patient billing statements to make them more straight forward and less confusing. We are conducting regular facility and plants surveys to assess functionality and cleanliness, and we are actively implementing our customer thank you program to acknowledge their patients has a choice for their healthcare services and we greatly appreciate their choice of us.

For our hospital employees, we are holding monthly Speak Easy to encourage communication across all levels. We are giving impact awards generously to recognize and reward creative thinking and extraordinary efforts and for the first time in several years, we have just completed the first round of employee satisfaction surveys.

In addition, senior executives are also involved in conducting employee meetings, to bring direct contact with senior management and our hospital co-workers. We have been developing a program called Physician Security Plus, which offers services to physician members of HMA hospital. Examples of these services include group purchasing of supply and service. Managed care contracting with insurance companies, prudentially, continued medical education and physician recruitment start-up services.

We have already had two groups of newly recruited or employed physician spend a full orientation day at the corporate office to meet senior management and review the services as our Physician Security plus program.

Our feedback has been positive, and we intend to have monthly orientation days for new physicians join our staffs going forward.

With that I'll turn it over to Burke. Thank you.

BurkeWhitman

Thanks Kelly. Just want to finish with kind of a fun explanation point, the points of attraction that we feel we are making on, so many of the front, you've heard a lot about the traction on stabilizing bad debt near term. On some of the things we are going to do long-term, Kelly mentioned a number of them. One was that we have seen improvement in our physician satisfaction scores. I thought, I'll just give the indication.

According to our latest results and our surveyors, one of the industry leaders attracting physician satisfaction scores in the country, reported that we have seen in the last nine months the greatest improvement that they believe they have ever seen for large hospital organization. It looks as though, on a percentile basis, we have improved more than 20 points down on some key measures more than 30 points as a company. We are not where we want to be, but that's encouraging and it is absolutely result of the deliberate efforts and actions that we are taking to move that forward. And what's exciting for me, as well is in every circumstance which I am aware, historically, when the physicians are that much more satisfied, that much happier with what we are doing and blocking and tackling to develop and sustain the relationship with them in a way that it's beneficial for them, volumes and financial performance will result. It will be mutual beneficial and I am confident about that in the coming quarters and expect that to happen.

As a final point I will save before I turn it over to your questions is that I apologies. I meant to do this in advance for my horse voice. I have been doing a lot of talking in the last several days on several fronts. A little harsh to hear, but appreciate your witness, make all these opening comments.

With that, John, I think we will turn it over to question.

John Merriwether

Yeah. Fredericka, we are ready to open it up for the Q&A portion.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). We will pause for just a moment to compile the Q&A roster. Our first question comes from Jason Gurda of Bear Stearns.

Jason Gurda - Bear Stearns

Thanks guys. Bob, I just wanted to clarify something you had said earlier about the change in the accounting policy for bad debt expenses you made on June 30th, that through November 30th, you would be running through an additional I think you said $40 million in bad debt?

Bob Farnham

These are basically said for the balance of the year, when we said $40 million or $39 million at June 30th and about another $40 million may be a little bit more to the balance of the year, that’s why when we changed our guidance, it was $0.10 representing the $40 million or so at June 30th and then another $40 million or $0.10 to the balance of the year. That was sort of our estimate at the time and the reason that contributed to the change in guidance at that time.

Jason Gurda - Bear Stearns

Is that evenly spread by month?

Bob Farnham

No, no and that’s a little bit of what I was trying to bring out is that the older gross charge, accounts receivable on a detail, will be done with that at the end of November. So, we have three months really to grow during this quarter and we’ll have two months to grow here in the fourth quarter. So, we do expect to see relief with the rolling of this old AR in the fourth quarter, so that’s why we said we thought the majority of that would come in this quarter.

Jason Gurda - Bear Stearns

So that sort of get you where because I think one of the questions raised by the fact that you had the gain from the $16 million sale was, if you added that back that would put bad debt upto 13.3. So, how would we get back to under 12% and that’s because this other layer should be winding down?

Burke Whitman

Yes. And that's when we -- yes, that's essentially it.

Jason Gurda - Bear Stearns

Okay. And I was just curious, I know that D&A expense was up sequentially, at least, nearly $3 million. Is there anything unusual there?

Bob Farnham

We do have some of the amortization now beginning to come in a little more on the accounting preannouncement where we have to capitalize our expected obligations, physician income guarantees…

Jason Gurda - Bear Stearns

Okay.

Bob Farnham

…that it's been 45. That does go in amortization, and that was about $2.6 million for the quarter.

Jason Gurda - Bear Stearns

Okay. And just a final question, if I could get an update on your CapEx expectations for the remainder of this year, then, maybe, also 2008?

Bob Farnham

Sure. Our CapEx expense through the September quarter was $213 million. That has broken down. Basically about $39 million of that has been finishing up the Carlisle Hospital and then some development in the medical office building as well. And so that leaves about $174 million on normal other hospital PPE.

I would expect that we'll probably spend another $25 million to $40 million in the fourth quarter, so that basically somewhere near the 200 to 210 number on basic hospital that we gave out at the beginning of the year.

Jason Gurda - Bear Stearns

And for next year any?

Bob Farnham

For next year, I think we've said on our previous call that we, for the last couple of years, when you exclude the effect of replacement hospitals tenant around the 5ish or so percent of net revenue, and I think as part of the ongoing effort with regard to improve relations with physicians and upgrade a little bit a number of the areas in our hospitals that we thought needed refurbishment and cleaning up based on a lot of surveys we have got back now from our patients, employees and physicians, that it will probably be a little closer to 6% of the revenue for 2008.

Jason Gurda - Bear Stearns

Okay. Thank you.

Operator

Our next question comes from Tom Gallucci of Merrill Lynch.

Tom Gallucci - Merrill Lynch

Thank you. Good afternoon. I guess just one follow-up quick to that last question. Rather than dancing around the number a little bit, do you have the number that sort of rolled through from the older receivables that we consider then lookout a little bit easier?

Bob Farnham

No. That's really hard to put a finger on that. I think it's probably the older is the difference between 11.5 and what would have been 13.3. That sort of looking -- at June 30th we tried to, I mean we probably could -- what we wanted to try and do at June 30th was take an amount at June 30th, and then we would recognize through the balance of the year was to get to what we thought would be an ongoing run rate for the company, which was the 12% or so.

So it's hard to come up with the exact number, but probably the difference between the 11.5 and 12, and what would have been 13.3% if we hadn't recognized the $16 million.

Tom Gallucci - Merrill Lynch

Okay. I think you also mentioned that sort of looking at that AR turning it over to collecting agency would be part of the ongoing strategy. Is there any obvious receivables in, I guess, in the near to intermediate term that we should be thinking about where we could see sort of another sale in the near term?

Bob Farnham

Yes. As Kelly said, we, as part of our ongoing strategies, we will sell all the written off accounts receivable to a third-party. And that, in essence, involves putting them back from the secondary collectors that we have historically used and give them to another collector.

What we turned to over this time was all accounts that were a year or more older that had previously already been long written off. Is that something we will do again next quarter, don't know, but probably it's not something we will do every quarter, but we will do periodically as it builds up and makes sense for us to do.

Tom Gallucci - Merrill Lynch

Okay. And I suspect you'll sort of call that out in the future like you did this quarter?

Bob Farnham

Yes, we would do that.

Tom Gallucci - Merrill Lynch

Okay. And then, maybe just shifting gears for one more, if I could ask Burke. I know you talked a little bit about, since you've gotten to HMA over the last year or so, JVing of hospitals and employee and doctor relationships, maybe, can you just give us an update on where some of those things stand today? Thank you.

Burke Whitman

Yes. I mentioned that we have made really rather remarkable exceptional progress in the relationships from sales that shows up in the satisfaction scores that we've gotten that improved certain macro within the last nine months. It also shows up in more intangibles such as the discussions that I have, that Kelly has, that others of us have in the community.

We still have much room to improve, which to me actually is exciting, because I look at where we are now and anything we could do to improve it will have a favorable impact on volumes and financial performance going forward.

But that progress we have made purely based on very direct application effort by our teams in the field at the hospitals and in the division to build on the base we had and directly improve the relationship with those physicians co-operationally, listening to them in the physician leader counsel meetings that we have at every hospitals, every months, and that we have regionally roughly each quarter, and that we're having in specialty areas on regular basis, and that we're having nationally now for the second time, ongoing news letter, CME training that we're providing.

We've got on our new website the John setup, we have a new CME program that all of our physicians can take, helping them with insurance underwriting and with purchasing. But mostly its individual day to day application of common sense to look at ways, and then, quickly and aggressively act upon them that will improve their watch, either their rewards clinically, professionally, financially, even spiritually that will make them like practicing in our hospitals better.

From the financial front, which is a small but significant piece, we had a number of things. We do now have four hospitals, whole hospital joint ventures. We are working on another half dozen, it will be too early to tell you which ones those are because they are simply in the works but I would tell you that I expect half of those probably at least so another three to come to fruition. We are not pushing those. We are simply being responsive, where physicians in the community are interested in doing them. We will happily do them now, and I would tell you what's also interesting is, in the cases where we have done them, the performance has improved, the quality numbers in metrics are better, the financial performance is stronger, and we are working as ever better together as a team.

So, more of that to come, not just in the hospitals, but also in outpatient services, the diagnostic centers, service centers. Anywhere that it makes sense to work collaboratively with them. Kelly anything to add?

Kelly Curry

I would like to add just a couple of things there also that. In terms of dealing with our physicians and assisting them, one other things was that we were out because we have employed physicians. Negotiating managed care contracts without really having anybody on our team that knew what the secret reference, how did the managed care programs were using on us, and I suggested that we hire some people in that area and we have done that and it has not only has it sharpened us in our evaluations of those agreements but also, we've made them available to assist our physicians. What we are discovering is that there is lot of opportunity particularly for some of our physicians and their managed care contracting that they've been missing out on.

And obviously this is real concrete tangible help to them, we are providing that we weren't doing in the past.

Also, let me just say and reiterate here because I want to make to sure nobody misses out on this. By going through this process of booking these additional reserve that we did. And going forward and moving through these accounts, it still reflect gross AR does that put a margin pressure on, but at the same time we are concurrently reserving much more aggressively than we were in the past, on those accounts. And we will move through this period, of where we were experiencing a squeeze relative to both of those taking place at the same time that will end as of November 30.

So, we offer in terms of our management of this problem, we do offer a 60% discount program. I have talked to community leaders, I have talked to physicians in our communities, I have talked to our employees about this fact and everybody understands that we are being very upfront, very straight with people in terms of offering the substantial discount that we are.

Coupled with our emergencient care triage, a robust initial and follow-up on private pay balances, sending accounts on to ensure a long-term follow-up on private pay accounts. This will get resolved. I know it will get resolved. I have done it in the past. And I can see now already that we are starting to see those results out in the field with our existing business.

Tom Gallucci - Merrill Lynch

Thank you.

Operator

Our next question comes from Matthew Borsch of Goldman Sachs.

Shumin Huang - Goldman Sachs

Hi, this is Shumin Huang for Matthew Borsch. Thanks for taking our call. I have a question on growth of the uninsured. I was wondering if you could give us an update on the mix of the uninsured coming through the emergency department, relative to what you saw last quarter? And thoughts on whether the triaging is improving your outlook there?

Bob Farnham

Sure. Well, on the inpatient side, it was 184 increase. And in the uninsured it was 5,978 this quarter versus 5,794 last year. The emergency room was a little bit worse than last quarter, I think last quarter I said 24.8%, this quarter it was 25.7% versus 23.1% a year ago. So, last quarter we saw about 250 basis point increase and this quarter it was about 260. So, about a level increase compared to the prior year for this September quarter.

Shumin Huang - Goldman Sachs

And do you see the triaging effort improving your outlook going forward?

Bob Farnham

Yes.

Shumin Huang - Goldman Sachs

Okay. Go ahead.

Bob Farnham

We were doing interviews with patients to gather data that why they were coming to us, and we discovered that -- we were being told things like, well we don’t go to the other hospital because they are a lot tougher on us about paying. That’s why we started these procedures because we had evidently fallen behind in getting the word out that we expect to be paid also.

Burke Whitman

Just to be really clear. I think we’re seeing some initial benefit of this, but most of it still to come, this whole program is still early in stages and the great fan that Kelly talked about that we will need some time to work both ways, but having done this before we do believe that it will

Shumin Huang - Goldman Sachs

Okay. Great, thanks.

Operator

Our next question comes from Adam Feinstein of Lehman Brothers.

Adam Feinstein - Lehman Brothers

Okay. Thank you, good morning everyone.

Burke Whitman

Thank you.

Adam Feinstein - Lehman Brothers

I guess several questions and it sounds like lot of initiatives going on to improve your relationships with doctors and sounds like you are doing a lot of good things there. But just back to this bad debt issue, just seems like that's the issue that continues to be the hardest for us to forecast and obviously for you guys also, I am just trying to better understand everything going there. Just looking at where the bad debt has grown, the base its grown off of it. You guys are seeing the biggest growth. Just with that, backdrop, maybe if you could just help us understand, my thought and probably others a lot of it comes from Florida, just you guys have big pricing in Florida, big uninsured population in Florida. But maybe you can just talk a little bit about the regions, if we exit Florida, is it much better in other parts of the country, just trying to understand that.

And then just secondly, you made a comment before about, people may comment for you that they like coming to your hospital because you weren't aggressive in going after them in terms of paying the bill. Just, hearing that is something that’s very troubling and obviously for you guys, to change the policy but clearly what else is wrong into the field. If you are hearing comments like that, it just doesn’t still turn out of my confidence. So, just want to get a better sense and that’s a great feedback to get. But are there other things also that would be helpful for us know about?

Bob Farnham

Yeah. I can answer the first part of your question and then I will let Kelly, answer the last part. A very similar trend that what we saw last quarter, in other words, before last quarter the increase in the uninsured have been pretty well spread throughout all regions of the country through all of our states. And then in the June quarter, what we saw was mostly the increase did come in Florida, I would tell you that the same was basically true for this September quarter. Most of the states were actually flat to slightly down but Florida was up and made up for most of the increase.

Kelly Curry

This is a common sense business, Adam. And it's no different than any other business, you got to keep your eye on the ball all the time, then you got to do the blocking and tackling things that are necessary to stay on top of it.

And I can tell you that, as I've said on the last call, that there were a number of things that I know from experience that haven't been in the business in the past that -- particularly in the business offices and areas that we were just not doing the kind of job that we used to do in these areas. And there are various reasons for that, you kind of get your attentions on other things, things change, et cetera. But I can assure you that on my watch that these are issues that we are not moving away from.

I have all of my executives in the field. I have told them if they're in the office, they're not working. Nothing happens at corporate that matters. Everything that matters is out in the hospital. That's why I've been out there, that's why they've been out there. I've got another senior executives to go out there in order to have direct contact with our physicians and with our coworkers so that they can understand that we are all a part of this and that we've all got to run this business like it's our own checkbook, and pressing that point hard that every expenditure we make, any decision that we make, we need to make it as if that we were spending our own money.

And number two that when you make a decision, you discover it's a bad idea you shoot it in the head and move on. People get married to bad idea. They like to hang on to them because it was a good idea they like to think it's going to be a good idea. If it's not a good idea, you got to shut it down.

That's why I've got the executives in the field. That's why I'm shrinking the division size down. Our approach will be that we're going to be on the ball, we're going to be on top of the blocking and tackling issue, and we're going to be moving the ball forward every time. And where we have a player that's busted, we're going to quickly recover and move on.

Adam Feinstein - Lehman Brothers

Okay. It sounds like you're being very proactive. I look forward to seeing the results in the future. And maybe just a follow-up question, I appreciate all of the detail there. I guess, as -- and certainly a lot of disruption with all the bad debt now, but is there a longer term goal? Do you have a sense in terms of what you think a normalized bad debt can be three, five years from now? Clearly, I'd like to think that it will be lower than it is now. But is there a target range that you have as you look at now over the next five years, Burke?

Burke Whitman

Kelly wants to go first.

Kelly Curry

I will tell you. I hope you've talked to your legislators. I can tell you that I have supplied to all of our hospitals a recommended letter or email along with the necessary information to contact your state and federal legislatures regarding this issue. I don't know whether you saw the article in the Wall Street Journal in the front page last Friday, I think it was, but it showed that no paid business from 2000, it moved from 13% to 16%, a dramatic increase.

What that doesn't show or include is that people that because their mortgage payment is going up, because they're paying $3, like in Florida, a gallon for gasoline that they're dropping their health insurance in some cases, which is reflected in that figure. But it doesn't show those that are electing deductibles in co-insurances as they cannot pay because to reduce their health insurance carry.

So these are issues that we have to work with. Now, I can tell you that in any business that you're in when you're dealing with this, we've got to make sure that we don't get an in or net part of that business compared to others. And I am sure you also -- the IRS did a survey on this, and they discovered that in 13 markets that those hospitals that don't pay taxes were actually given away less free cares than those that did it.

So that tells you that, right there that we've got to be proactive, we've got to be on our toes, we've got to be working for getting people qualified. We are continuing to expand our efforts in that area. One of the things that we're doing is helping and assisting more selling clinics in the community. We are looking at ways of rendering that care in a more efficient way as opposed to about opening clinics in the community and supporting government efforts to do that and that sort of thing.

Go ahead, Burke.

Burke Whitman

Yeah. The two fronts, we are pushing on both of them. On the political policy front, we along with the number of others, of course, are pushing hard with policymakers to try to address the much increased number of uninsured in the country, because that really is a big driver of the increase in bad debt expense that we've experienced. I don't know whether it will succeed, but I will say that there is more reason to be hopeful now than I think that there has been in probably 100 years.

Our discussion with folks on the hill, left and right, Republican and Democrat, really do acknowledge this problem and agree that something must be done and there are number from both sides that you were working diligently to produce something that they can all agree on, that will at least, if not completely, eliminate the problem, will at least go a long way to address even from a policy standpoint. I am confident that if that were to happen, maybe not even this year, but maybe perhaps after next year's Presidential elections, that we would be able to see a decrease in bad debt expense as a percent of revenue. I believe that would happen.

The second front we've talked about it a bit, all of the things we're doing in the way of blocking and tackling to triage the uninsured patients more effectively, to commit them to paying us in the form of notes, and to going after the collections aggressively. That will do two things. And the reason we're confident is all of us here have done this before. It will do two things. It will collect more effectively from those patients and it will make a number of them decide to go elsewhere rather than come to where they had too easy a time relative to what's really fair and appropriate.

I would hope and do expect at this point to really answer your question is that we can, at least in the near term, stabilize the numbers, and stabilize it, and then do the things that we're talking about that are going to build value, to build and leverage off that stabilized bad debt number.

If we do succeed in getting something out of the policy front, I think it would be quite helpful for us, maybe more importantly be helpful for the country because its fundamentally dysfunctional to have 50 million uninsured people in the United States who don't get healthcare until they are finally at the emergency point and show up in emergency room. Nobody thinks that that makes sense. It's more costly to the system, and hopefully, we'll get that changed. And if that changes you will see a more favorable bad debt number.

Adam Feinstein - Lehman Brothers

Okay. Thank you very much. Appreciate the detail.

Operator

Our next question comes from Matt Ripperger of Citigroup.

Matt Ripperger - Citigroup

Hi. Thanks very much. I just had a couple of questions. One of the things that they are proposing in Washington is to eliminate the whole hospital exemption. And given that the JV strategy is becoming more of an integral strategy of yours, I just wanted to see if you could weigh in and what you think the prospects of that are of going through and how that affects your strategy with JVing going forward.

Kelly Curry

Sure. Yeah, there is discussion, Matt, about eliminating that whole hospital exemption. It may happen at some point. There was some language in early version of S-chip bill, it was taken out of the bill that was assigned and then detail about present. But we may see it come up again in the future. If that happened obviously, in extreme form, we wouldn't be able to do more of these but it suddenly would not change the broader theme of working much more collaboratively with physicians than we haven't have. And we will still have lot and lots of opportunity to do that. If I look at the whole body of opportunity that we have to improve our performance by working more collaboratively with physicians, I guess, I would say, this is just subjective but at least 80% of that is purely operational and doesn't involve financial transactions anyway.

And on the financial transactions, probably the majority of those are not in whole hospitals but are actually in ancillary services, outpatients imaging and everything else. But right now the whole hospital section is fully appropriate and so right now it make sense for us to pursue these where physicians want, want to do them. I do not believe that a change in the future to that exception would make a substantive difference on our ability to prove our performance. I wouldn't favor it, I think it does make sense. I think they are of great benefits to the community, to healthcare outcomes, when we are partnered as hospitals with physicians. I believe that strongly and I hope that Congress does not move to eliminate it. We would be against that and would work legislatively to oppose it based on those very sound principals, but if it happens it will be fine.

Matt Ripperger - Citigroup

Okay, great. And then one second question if I could, you mentioned that you've got about one to three hospitals, you are considering divesting. Is that over and above the two Arkansas hospitals?

Burke Whitman

Yes. It does. We have just recapped kind of where we've been in the past quarter with divestitures and where we expect to go. We sold two hospitals in Virginia to Wellmont that closed this quarter. We sold those for about $70 million. That was a deleveraging event. And we expect to sell one of the hospitals in Arkansas this quarter, we expected to close this quarter. The other one closing date is not as clearly defined. Beyond those, I expect that we will sell 0, 1, 2, maybe 3 additional hospitals that just do not fit us strategically as well and it would be deleveraging events by executing those transactions. For obvious reasons, I can't disclose which hospitals those might be as things develop and when we can do so properly, we will describe it. So, that's kind of the range that we are looking at and I would expect that to happen. I would expect those to close most likely in the first half of 2008.

Matt Ripperger - Citigroup

Great. Thanks very much.

Operator

Our next question comes from Ken Weakley of Credit Suisse.

Ken Weakley - Credit Suisse

Thanks and good morning everyone. Bob, I was wondering if you could talk a little bit about the impact of the MSDRG is not aware in the fourth quarter essentially, like when you mentioned that perhaps it would, some of the changes will offset the market basket rate that you got, I don’t know if you’ve given a direct impact forecast, of what you think will happen given all the changes in systems?

Bob Farnham

It looks like Ken, net of all the changes, net-net will get about 2% increase, maybe a little bit more. The behavioral offset going from 1.2 down to 1.6, it still has to be all budget neutral, so what seem us to go back and do is adjust everybody’s blended rate up a little bit. But in essence, all that behavioral offset change going from 1.2 down to 0.6, we have to code, our documentation has to be better to be able to code better to get that. So, I guess, when we look at it, instead of starting-off in a whole that’s a 1.2 feet deep, we’re starting-off 0.6 feet deep and in a little bit of a whole. So, if hospitals don’t achieve any improvement in documentation and coding, they won’t get 0.6% instead of ahead of 1.2.

So, it was overall good to see the behavioral offset cut in half down to 0.6% but in total, I don’t think it will make any big difference. One of our big initiatives is to help with documentation and coding and improve that. And so, I think we are still in the 2% maybe a little bit more range.

Ken Weakley - Credit Suisse

Okay, very good. And just one follow-up if I could, it was mentioned earlier about the desire to alter the behavior, I guess, if our local employees in terms of getting them to run if I guess around which obviously makes a lot of sense. Historically, imperially, the best way to make that happen across is through compensation incentives. I was just curious as to what sort of changes the company has been able to put through in terms of that, to realign incentive subsets, employee behavior it's more aligned towards corporate profits and all that.

Bob Farnham

Fair enough. I can tell you that in the past that some of the incentive comp programs were more group related rather than specific and I have changed that, because I think we need to look at it on a specific-by-specific basis, hospital division et cetera.

So, that’s the change that we've made. In addition to that, yes, you would automatically assume that everyday you're going to go to work with the idea that you are going to make good common sense decisions. But when you know, when you are in a business, where the metrics are changing, when the ground moves down to your feet like this one.

You don’t go to work everyday with the same idea in your head. Go to work everyday with the idea what you're going to do different. And sharpening the pencil to have everybody that’s running one of our businesses up on the balls to their feet and emphasizing that. That’s not to say that that I am sure that in the past and certainly HMA in the past was a company that wanted to run its businesses. But I can tell you that with circumstances and metrics that we're facing today. What I use to do ain't good enough, when I am going to do.

And there are things, as I have already mentioned. For instance, the way we were handling, we were trying to qualify people as indigent. We are not any good at that. What we're good at is doing insurance. So we needed to do what we do well and move on with that. And what we don't do well, we need to get the experts involved, and we need to get them involved faster that have waited around 60 days or 90 days before we send account on the collector, you go to the collector today. We can haste on you. We were not been proactive on issues like that.

I guess part of it too is my background. I mean work in hospitals, I work in hospital ERs, I work in hospital business offices, I've billed patient accounts, I've gone to insurance companies and collected payments. I mean I've been there and done that. So we're not going to talk to people in the business office, which I make it my business to do when I'm in a hospital. I can tell you that having that bit of experience in your highest pocket is helpful in asking questions.

Burke Whitman

Let me add, Ken, couple of the points on this. Rewards are certainly a part of it, and we are now rewarding each individual business leader's performance in that individual business, not only on these numbers, but also, for example, on the quality and, say, expansion measures related to the opportunity we have to grow volume in market share, not just manage our bad debt expense.

Reward is just a part of it. We're also making it very clear that people are accountable, and they are. They will be rewarded if they achieve the objectives. They're going to be accountable if they don't. And I think we've got a team of folks who understand that, accept that and actually excited about it.

There is a third element though that -- just the intangible leadership. One of the reasons that I wanted Kelly to join us, really rejoin us, is that just using him as example, he has -- the message is now clear to everybody in the field. We have organizationally positioned ourselves to make it possible to execute on that message. We've put in place additional centralized support to key functions, including the key functions that are going to drive performance on revenue management, revenue cycle management.

And I think we've also reduced the scope of responsibility for the division leaders, so that they have fewer hospitals. And today you have so much, in-depth experience, including on these issues, can better support and lead what the hospitals are doing and get the results that we want. So absolutely, the rewards, there are more of them now, and we expect to have more of that. There is accountability, and I think the message, the organizational structure, the people are in place to make it happen.

All that I know is nice. We got to show the results, which you're just hearing us talk about of Kelly and me, is that the results are going to show, both on management of all aspects of our revenues; that is, the revenue cycle of collecting what we are doing, but also on the things that are going to create more sustainable performance, quality and satisfaction. And I believe we are at the point now where everybody understands that, and they understand they need to be on board on both those fronts.

Ken Weakley - Credit Suisse

Very good. Last quick question, did you disclose the value of the gross receivables that you sold for $16 million?

Bob Farnham

No, we did not do that. I just will tell you it was a competitive bid process. We did shop that, if you will, with a handful of agencies, but the terms we eventually came to are confidential in a contract.

Kelly Curry

It's just about mindless money talks and copycat walks.

Ken Weakley - Credit Suisse

Very good. Thanks.

Operator

Our next question comes from Gary Lieberman of Stanford Group.

Gary Lieberman - Stanford Group

Thanks. Good morning.

Bob Farnham

Hi, Gary.

Gary Lieberman - Stanford Group

Bob, I just wanted to go back to the bad debt expense and understand the $16 million and, I guess, whatever benefits that you're going to have in the fourth quarter. But as we go forward into '08 and, I guess, the benefit goes down substantially or you don't have it, is it unreasonable to assume that the bad debt trend, assume everything else sort of stays the same, is then kind of in a 13% range?

Bob Farnham

No, I don't think so. We changed policy at June 30th. As I said, we took $39 million hit then. We estimated that it would probably be at least $40 million through the balance of the year. And so, we're taking additional bad debt expense now, not only on some of that older AR because we perceive that our collections on that have deteriorated a little bit, but we're also taking more bad debt expense on our current book of business.

And without the 16% -- without the $16 million, yes, it would have been 13.3%. But as I mentioned, as Kelly mentioned this quarter, and at least through November, we're going to have the impact of that older accounts receivable at gross charge rolling through.

Additionally, we're really taking it on the chin with regard to this policy. In spite of seeing higher levels of uninsured in the current period, I've not recorded any additional receivable on that business. And in fact, my net uninsured or self-pay AR is down $9 million from June through September. So, I mean I am taking it on the chin, not reporting any additional receivable both on my current book of business and, to a certain extent, historical.

So we think we're going to get a benefit to that here somewhat in the fourth quarter, but additionally in 2008 as well. So I can't put exact number on it, but we just don't feel that it's 13% plus at this point in time that it's going to be around the 12% mark. And some of the things that we're doing operationally to try to limit the number of insured that will come through the hospital will help as well.

Gary Lieberman - Stanford Group

Okay. And then, if I could just ask a quick follow-up on the, I guess, the new collection policy of going after the patients for a longer period of time. Are those going to be the collectors that, I guess, are working for HMA now or additional collectors that will be working for the company or is it going to be outsourced to a third-party?

Bob Farnham

Now the difference is that we have always used primary collectors, the difference is that that were given to them whole lot faster. In terms of the account, they were already written-off, that have been placed with another, with a secondary collector, if you will. That if they own the account, their collection effort is going to be stronger than if -- because their interest is higher, than it would if we simply -- because they handle other accounts, as well, other company's account as well. And I wanted that additional effort them to have the financial if you will cheese in the fight to go after those accounts more firmly.

In the past, you might not have done that in this particular business. But because of the magnitude of the no-pay business and also because the numbers clearly demonstrated that we were receiving an inordinate share in some circumstances.

And coupled with the fact that we now give a substantial discount to every patients that comes through the doors because if you will in the past that may have been that somebody that was uninsured would have a higher bills and somebody that was insured that's no longer the case. They are getting a very fair opportunity to deal with this. And anybody that recognizes and is prepared to work with us to resolve their account balance, we are working with them. And the responses that I getting from the communities or I have spoken to people in this regard is positive. They see the need, if you are Chevy dealer and every seventh car that rolls of the lot didn't get paid for, you would need some help in being able to deal with that issue and I think communities can probably understand that.

Gary Lieberman - Stanford Group

Okay. Thanks a lot.

Operator

Our next question comes from Cheryl Skolnick of [CRT Capital Group]. Sir your line is open.

Cheryl Skolnick - CRT Capital Group

Hello?

Operator

Maybe your line is on mute or you are on speaker phone.

Burke Whitman

Okay. Well couple of seconds here to see if she comes up. Cheryl, we can't hear you, if you are there? I guess we can circle back. Why don’t you take us to next caller, we'll circle back later.

Operator

Okay. The next question comes from Bill Bonello of Wachovia.

Bill Bonello - Wachovia

Just a couple of questions. First of all, thanks for the color on the bad debt. I certainly hadn't appreciated the magnitude of the impact from the oldest bucket of receivables, so that was very helpful. Just on a completely different topic, revisiting the question about Medicare. I just want to make sure the Medicare inpatient increase, what have you realized this year?

Bob Farnham

This year it is probably about 2.5% net-net.

Bill Bonello - Wachovia

Okay. So, it's not going to be much worse next year actually, than it was this year.

Bob Farnham

Not, much worse but the selling endpoint, there is we have to work to get it, because of the behavioral offset. We don't have to work as hard to get it at a 0.6 behavioral offset as we would have it for 1.2, but everybody is going to have to work to get to close to that.

Bill Bonello - Wachovia

Sure. Okay. And then, just you might not touched this, but I am just curious if you have any preliminary thoughts on '08 numbers that are out there. There is consensus number out there that just seems over sort of a pro forma '07 to imply sort of huge EPS growth. And I don't know, if you've taken a look at that or if you guys have sort of any sense of where you expect to be?

Bob Farnham

No, I am not going to go there Bill. Not yet. I think we need to get more out of this fourth quarter under our belt. And we've talked about bad debt. So, I think we've said and we think that should be in the 12% range, but we are not prepared at this time to go into our other objectives. I will tell you that 2008 will include a full year of interest expense, this year it did not. So, interest expense will for sure be a line item that has a larger increase.

Bill Bonello - Wachovia

Sure. And then, maybe just another way at least to help me to me think about it without you predicting what you are going to do. Have you guys created sort of what a pro forma, Q1 result would have been if you would have the current bad debt policy in place in Q1? Or how much that would have changed EPS?

Bob Farnham

No. We did not do that. We had a December 31st policy change and then we had a February 1st policy change. Now, we've had a June 30th change. So, we've had a number of modifications and so no, we've not done that.

Burke Whitman

Bill, as you can imagine. We do have detail projection time going forward, we just don’t want to be giving guidance.

Bill Bonello - Wachovia

No, I understand that. Okay and then different topic, I beat that one. The same hospital EBITDA was down pretty substantially year-over-year, is that predominantly the change in bad debt expense or is there anything else on a same hospital basis that causing EBITDA to be down?

Bob Farnham

Yes, Bill. At the back of the news release, you can see that same hospital margins went from 18.8% last year to 16.0% this year, that's 280 basis point and bad debt expense went up 230 basis points, so that's a majority of the increase. A couple of line items I did mention in my remarks, salary and benefits was up 50 basis points. That essentially has to do with our physicians on the clinic side.

On one had, we are hiring more physicians, through September 30th, we've hired 122 physicians into the clinics in the quarter it was 48, year-to-date, we've hired in 100. Assuming, we also terminated physicians, as well, as we try to convert a number of our contracts for those physicians to production type of contracts. We have terminated 132 physicians year-to-date. 67 in the quarter and a lot of those terminations have to do with physicians that we were not able to convince to convert to more of a production contract and we have incurred $3.7 million year-to-date in severance payments with regard to those physicians that have decided to leave the company.

The other area of increase was in other expense and that’s broken down into three areas: Professional fees was about $1.5 million to $2 million largely as a result of increase in physicians call coverage or paying for welcome tenants, that kind of thing. Additionally outside services is up in a number of cases. We're adding some services that do make sense where we have capacity in the hospital like wound care, sleep lab and those sorts of things. So, those will show up this increases in other expenses but we will have revenues to offset those. Not as high as our overall company margin rate but our accretive.

And the other repairs and maintenance was up couple of million dollars as well. I mentioned earlier, that we are spending more at the hospitals, as a result of the surveys, things have come back to us where we see the areas of the hospital needs brucing up, whether it's refinishing doors or hallways and lighting and things like that. So we are spending more money there.

The supplies expense was a positive for the quarter. It was down about 40 basis points. About half of that came from in-plants. In-plant usage were down in volume and price to the tune of about $2.1 million for the quarter. So that was about half of the overall 40 basis percent savings in supplies. So that sort of, in a nutshell, was the changes in the same hospital margin.

Kelly Curry

Bill, because I come out of the operations background, I mean -- calculating on basis points and things like that, but I'd like to point out to you that if you subtract the $168.4 million from the $185.7 million, you got $17.3 million decline in EBITDA on same stores. And our provision for doubtful accounts is up $32 million of which 99.9% is on same store.

Bill Bonello - Wachovia

Perfect. That's actually really helpful. And then, just one last question. The surgery admissions was better than it's been in a while. Can you tie that to any of your particular initiatives or is it just sort of luck of the draw this quarter?

Kelly Curry

I can tell you that in this -- I will just give you a quote. At a particular hospital, we had done maybe not as well in physician relations in the past as opposed to some of our other hospitals. That physician told me that when he talked to a bunch of other doctors from our other hospitals at our event that it was clear that -- and this is a physician, I didn't know from the past by the way, this was completely unsolicited on my part. He told me, and he said this in an open meeting as well, that it was clear that our emphasis on physician relations had dramatically changed from last year to this year, and that every physician that he talked to, every single one that he talked to from our hospitals reported to him that over the last year our physician relations had improved significantly.

And that's, I believe, that's anecdotal. I think we're going to see more results from that. The Direct Admit program that we put in, our satisfaction is going up. Doctors are -- I always give them my phone number and I give them my email. I know that may sound crazy, but on the other hand, they are my customer. I want them to be able to reach me. And I give it to everybody. And I can tell you that I expected to get some negative email, but almost, without exception, I've been getting positive emails.

Bill Bonello - Wachovia

Perfect. Thank you very much.

Kelly Curry

Hey, everybody. I just want to thank you. We're kind of out of our allotted time and I just wanted to thank you everybody.

Burke Whitman

Thank you for joining the call.

Operator

You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Health Management Associates Q3 2007 Earnings Call Transcript
This Transcript
All Transcripts