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Health Management Associates,Inc. (NYSE:HMA)

Q3 2007 Earnings Call

October 26, 2007 11:30 am ET

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 CapitalGroup

Bill Bonello - Wachovia

Operator

Good morning. My name isFredericka, and I will be your conference operator today. At this time, I wouldlike to welcome everyone to the HMA Third Quarter 2007 Earnings Call. All lineshave 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, youmay begin your conference.

John Merriwether

Thank you, Fredericka. Goodmorning, everyone. I'm John Merriwether, Vice President of Financial Relationsfor Health Management Associates. I'd like to welcome you to HMA's thirdquarter 2007 earnings conference call.

Before we get started with thecall, I'd like to read our disclosure statement. Certain statements containedin this presentation, including, without limitation, statements containing theword believes, anticipates, intends, expects, optimistic, objectives and wordsof similar import, constitute forward-looking statements within the meaning ofthe Private Securities Litigation Reform Act of 1995. These statements mayinclude projections of revenue, income or loss, capital expenditures, capitalstructure or other financial items, statements regarding the plans andobjectives of management for future operations, statements of future economicperformance, statements of the assumptions underlying or relating to any of theforegoing statements, and other statements which are other than statements ofhistorical facts.

Statements made throughout thispresentation are based on current estimates of future events and the Company hasno obligation to update or correct these estimates. Listeners are cautionedthat any such forward-looking statements are not guarantees of futureperformance and involve risks and uncertainties, and that actual results maydiffer materially as a result of these various factors.

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

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

Thank you for your attention. Andnow, 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 togive you some opening remarks to frame where we are and where we're going. Thethird quarter was my first full quarter as CEO, and also Kelly's first quarteras our COO. Our situation at this point is clear to us in two fundamentalrespects.

First, on one hand, we have anear term challenge in the form of higher bad debt expense that we have hadhistorically. And that bad debt expense, obviously, has impacted our financialperformance and mar it's near term discipline, especially given the higherfinancial leverage we have as a result of our recapitalization earlier thisyear.

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

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

In the face of a near termchallenge, we're also taking actions to reduce our financial leverage by payingdown debt. And this includes in the next few quarters, using proceeds fromdivestitures of some limited number of hospitals, perhaps 1 to 3 that may notbe as good a fit with our operating strategy.

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

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

We are substantiallyrepositioning the company competitively with respect to our key customers, whoinclude our physicians, employees and patients, are working together with ourphysicians and with our employees to boost quality, service and satisfaction inorder to preserve an enhanced market share and to build performance that isstronger, more viable and more sustainable in the competitive environment.

On the second front, Kelly isgoing to talk to you in considerable detail about the opportunity and theongoing 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 havetaken since I became CEO and since he joined me as COO, both this summer.

Some of these actions involvetransactions, such as joint ventures with physicians, and we continue to lookat a number of those. We're about to close on our fourth hospital joint venturewith physicians. We closed on a number of ancillary service joint ventures, andwe're working on another half dozen hospital joint ventures. But I would tellyou that the most significant opportunity and actions we have on this front arereally in simple blocking and tackling operations, and that's what Kelly willaddress.

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

We now have in place almost allof the pieces that we need in order to solve the first situation of near termchallenge and exploit the second of strategic opportunity. Since assuming theCEO role, I have got in the leaders and other people I wanted, the organizationthat I want to have, and have launched the additional actions that I want us totake. You will hear the tangible specifics in just a few minutes, particularlyfrom Kelly.

Of course, we must produceresults. 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 andopportunity. We've declared a turnaround in some fundamental aspects of a solidcompany. We've pointed in the direction we need to move, and we've begun totake the actions that will produce the results we want. And I believe theresults 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 couplemore quarters, maybe three, in which the results may be dominated more by whatwe are doing to address the near term challenges. After that, I expect theresults to be driven more by our success in repositioning the companycompetitively. Because of all of this, I remain excited and enthusiastic aboutwhat lies ahead of us, even in the balance of 2007, but especially in 2008 and2009.

The challenges we face are realand, I think, considerable. But we have the elements in place to stabilize thechallenge in the near term and overwhelm them over the next couple of years bycompeting more effectively for physicians, employees, patients and marketshare.

I'll turn the call over now toBob Farnham, our CFO. He will be followed by Kelly Curry, our COO, and then we'llopen 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 ninemonths ended September 30th, 2007.

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

For the nine months endedSeptember 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 operationsof $98.1 million; diluted EPS of $0.44; and diluted EPS from continuingoperations of $0.40.

Continuing same hospitaladmissions for the third quarter decreased 0.4%, while continuing same hospitaladjusted 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 quartershowed continued growth with a 4.6% increase in continuing same hospital netrevenue per adjusted admission relative to the same period a year ago, whichresulted from a continuing same hospital net revenue increase of 6.5%. Our samehospital EBITDA from continuing operations for the third quarter was $168.4million, and the corresponding same hospital EBITDA margin from continuing operationswas 16.0%.

Continuing same hospital salaryand benefits expense as a percent of net revenue was 40.0% for the thirdquarter or approximately 50 basis points higher than the same quarter a yearago. This increase is entirely attributable to employed physicians at samehospitals. Continuing same hospital supplies expense as a percent of netrevenue was 13.0% for the third quarter or about 40 basis points less than lastyear.

We intend to continue maintainingour 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 gaintraction, we have an opportunity to improve returns.

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

As previously announced, duringthe second quarter ended June 30th, 2007, HMA added an additional $39 millionto its bad debt reserves and modified its then existing bad debt reserve policybased on a review of accounts receivable and a look-back analysis of self-paycollections for the first six months of 2007.

Rather than maintaining a flat60% reserve policy on uninsured accounts from the month of service and thenreserving them 100% when the accounts exceed 300 days, the new expense policymodification incrementally steps up the bad debt reserve from 60% to 100% whenthe account exceeds 300 days. In conjunction with the bad debt expense policymodification, we announced our expectation that bad debt expense for thebalance of fiscal year 2007 would be approximately 12% of net revenue.

There are three components thatcomprised how HMA accounts for uninsured and underinsured patients -- bad debtexpense, uninsured discounts and charity and indigent write-offs.

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

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

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

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

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

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

We continue to expect to generatebetween $4.3 billion and $4.5 billion of net revenue in 2007, and we expect baddebt expense to be approximately 12% as a percent of net revenue for the fourthquarter.

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

Cash flow from continuingoperating activities was $241.2 million for the nine months ended September30th, 2007, after cash interest and tax payments aggregating $235.9 million.It's important to note that the $16 million of aged accounts receivable soldduring the third quarter will be collected over the next several quarters.

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

Let's review the third quarterresults. While our continuing same hospital admissions declined during thequarter by 0.4%, adjusted admissions, emergency rooms visits and surgeriesincreased 1.9%, 3.0% and 1.2% respectively. Continuing same hospital netrevenue per adjusted admission increased 4.6%.

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

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

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

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

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

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

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

I also want to keep -- have youkeep in mind a couple of data points. One, I mentioned this in my preparedremarks, and also we issued a revised news release this morning just before themarket opened, that our net uninsured or self-pay AR, in spite of slightlyhigher uninsured volumes for the quarter, is actually down $9 million atSeptember 30th compared to June 30th. So I have not recorded any additionalreceivables from this increased flow of uninsured business.

The second point is with regardto cash collections as a percent of net revenue less bad debt. Cash collectionsas a percent of net revenue less bad debts for the quarter was a 107%. I amsaying 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 uninsuredAR.

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

I'll now turn the call overKelly.

Kelly Curry

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

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

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

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

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

We are seeing progress in ourtriage programs for emerging payer. These programs are fully approved bycouncil, consistent with industry practice and effective at stemming the flowof those who are well aware of the systems' weakness and accustom to takingadvantage of it. The grapevine works both ways.

As to our mix of business, we areseeing a flattening of our three-year growth curve in uninsured patients. Thistrend is reflected in the quarter-to-quarter comparison of nearly flat privatepay patient, and is extending into our most recent data. Part of the reason forthis reversal relates to our efforts to improve our Direct Admit businessthrough our [Connoisseur Admit] program for our physicians, which is being wellreceived.

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

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

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

Our mix-of-business particularlyover the last three years has shown a decline in direct admit offset by ourincrease of ER admissions, which was significantly skewed towards theuninsured.

This resulted from our marketingprogram that emphasized building ER volumes as oppose to investing in directadmit physician relationships. The fact is that all operations is a badrelationship and building on these to the mutual benefit of the hospital, thephysicians and the communities.

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

This may sound basic to some ofyou, 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 ourphysician-customer relations. I can assure you that this is no longer the caseat HMA.

For our patients we have fullyimplemented our patient aggregate and pricing representative programs. We'veamended our patient billing statements to make them more straight forward andless confusing. We are conducting regular facility and plants surveys to assessfunctionality and cleanliness, and we are actively implementing our customerthank you program to acknowledge their patients has a choice for theirhealthcare services and we greatly appreciate their choice of us.

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

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

We have already had two groups ofnewly recruited or employed physician spend a full orientation day at thecorporate office to meet senior management and review the services as ourPhysician Security plus program.

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

With that I'll turn it over toBurke. Thank you.

BurkeWhitman

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

According to our latest resultsand our surveyors, one of the industry leaders attracting physiciansatisfaction scores in the country, reported that we have seen in the last ninemonths the greatest improvement that they believe they have ever seen for largehospital organization. It looks as though, on a percentile basis, we haveimproved more than 20 points down on some key measures more than 30 points as acompany. We are not where we want to be, but that's encouraging and it isabsolutely result of the deliberate efforts and actions that we are taking tomove that forward. And what's exciting for me, as well is in every circumstancewhich I am aware, historically, when the physicians are that much moresatisfied, that much happier with what we are doing and blocking and tacklingto develop and sustain the relationship with them in a way that it's beneficialfor them, volumes and financial performance will result. It will be mutualbeneficial and I am confident about that in the coming quarters and expect thatto happen.

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

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

John Merriwether

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

Question-and-Answer Session

Operator

Thank you. (OperatorInstructions). 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 wantedto clarify something you had said earlier about the change in the accountingpolicy 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 baddebt?

Bob Farnham

These are basically said for thebalance of the year, when we said $40 million or $39 million at June 30th andabout 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 $40million or so at June 30th and then another $40 million or $0.10 to the balanceof the year. That was sort of our estimate at the time and the reason thatcontributed 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 ofwhat I was trying to bring out is that the older gross charge, accountsreceivable on a detail, will be done with that at the end of November. So, wehave three months really to grow during this quarter and we’ll have two monthsto grow here in the fourth quarter. So, we do expect to see relief with therolling of this old AR in the fourth quarter, so that’s why we said we thoughtthe majority of that would come in this quarter.

Jason Gurda - Bear Stearns

So that sort of get you wherebecause I think one of the questions raised by the fact that you had the gainfrom the $16 million sale was, if you added that back that would put bad debtupto 13.3. So, how would we get back to under 12% and that’s because this otherlayer 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, Iknow that D&A expense was up sequentially, at least, nearly $3 million. Isthere anything unusual there?

Bob Farnham

We do have some of theamortization now beginning to come in a little more on the accountingpreannouncement where we have to capitalize our expected obligations, physicianincome guarantees…

Jason Gurda - Bear Stearns

Okay.

Bob Farnham

…that it's been 45. That does goin 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 thisyear, then, maybe, also 2008?

Bob Farnham

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

I would expect that we'llprobably spend another $25 million to $40 million in the fourth quarter, sothat basically somewhere near the 200 to 210 number on basic hospital that wegave 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 saidon our previous call that we, for the last couple of years, when you excludethe effect of replacement hospitals tenant around the 5ish or so percent of netrevenue, and I think as part of the ongoing effort with regard to improverelations with physicians and upgrade a little bit a number of the areas in ourhospitals that we thought needed refurbishment and cleaning up based on a lotof 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 TomGallucci of Merrill Lynch.

Tom Gallucci - Merrill Lynch

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

Bob Farnham

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

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

Tom Gallucci - Merrill Lynch

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

Bob Farnham

Yes. As Kelly said, we, as partof our ongoing strategies, we will sell all the written off accounts receivableto a third-party. And that, in essence, involves putting them back from thesecondary collectors that we have historically used and give them to anothercollector.

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

Tom Gallucci - Merrill Lynch

Okay. And I suspect you'll sortof 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 justshifting gears for one more, if I could ask Burke. I know you talked a littlebit about, since you've gotten to HMA over the last year or so, JVing ofhospitals and employee and doctor relationships, maybe, can you just give us anupdate on where some of those things stand today? Thank you.

Burke Whitman

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

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

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

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

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

So, more of that to come, notjust in the hospitals, but also in outpatient services, the diagnostic centers,service centers. Anywhere that it makes sense to work collaboratively withthem. Kelly anything to add?

Kelly Curry

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

And obviously this is realconcrete tangible help to them, we are providing that we weren't doing in thepast.

Also, let me just say andreiterate here because I want to make to sure nobody misses out on this. Bygoing through this process of booking these additional reserve that we did. Andgoing forward and moving through these accounts, it still reflect gross AR doesthat put a margin pressure on, but at the same time we are concurrentlyreserving 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 squeezerelative to both of those taking place at the same time that will end as ofNovember 30.

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

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

Tom Gallucci - Merrill Lynch

Thank you.

Operator

Our next question comes fromMatthew Borsch of Goldman Sachs.

Shumin Huang - Goldman Sachs

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

Bob Farnham

Sure. Well, on the inpatientside, it was 184 increase. And in the uninsured it was 5,978 this quarterversus 5,794 last year. The emergency room was a little bit worse than lastquarter, I think last quarter I said 24.8%, this quarter it was 25.7% versus23.1% a year ago. So, last quarter we saw about 250 basis point increase andthis quarter it was about 260. So, about a level increase compared to the prioryear for this September quarter.

Shumin Huang - Goldman Sachs

And do you see the triaging effortimproving your outlook going forward?

Bob Farnham

Yes.

Shumin Huang - Goldman Sachs

Okay. Go ahead.

Bob Farnham

We were doing interviews withpatients 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 hospitalbecause they are a lot tougher on us about paying. That’s why we started theseprocedures because we had evidently fallen behind in getting the word out thatwe expect to be paid also.

Burke Whitman

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

Shumin Huang - Goldman Sachs

Okay. Great, thanks.

Operator

Our next question comes from AdamFeinstein of Lehman Brothers.

Adam Feinstein - LehmanBrothers

Okay. Thank you, good morning everyone.

Burke Whitman

Thank you.

Adam Feinstein - Lehman Brothers

I guess several questions and itsounds like lot of initiatives going on to improve your relationships withdoctors and sounds like you are doing a lot of good things there. But just backto this bad debt issue, just seems like that's the issue that continues to bethe hardest for us to forecast and obviously for you guys also, I am justtrying to better understand everything going there. Just looking at where thebad debt has grown, the base its grown off of it. You guys are seeing thebiggest growth. Just with that, backdrop, maybe if you could just help usunderstand, 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 alittle bit about the regions, if we exit Florida,is it much better in other parts of the country, just trying to understandthat.

And then just secondly, you madea comment before about, people may comment for you that they like coming toyour hospital because you weren't aggressive in going after them in terms ofpaying the bill. Just, hearing that is something that’s very troubling andobviously for you guys, to change the policy but clearly what else is wrong intothe field. If you are hearing comments like that, it just doesn’t still turnout of my confidence. So, just want to get a better sense and that’s a greatfeedback to get. But are there other things also that would be helpful for usknow about?

Bob Farnham

Yeah. I can answer the first partof your question and then I will let Kelly, answer the last part. A verysimilar trend that what we saw last quarter, in other words, before lastquarter the increase in the uninsured have been pretty well spread throughoutall regions of the country through all of our states. And then in the Junequarter, what we saw was mostly the increase did come in Florida, I would tell you that the same wasbasically true for this September quarter. Most of the states were actuallyflat to slightly down but Floridawas 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 eyeon the ball all the time, then you got to do the blocking and tackling thingsthat are necessary to stay on top of it.

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

I have all of my executives inthe 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 inthe hospital. That's why I've been out there, that's why they've been outthere. I've got another senior executives to go out there in order to havedirect contact with our physicians and with our coworkers so that they canunderstand that we are all a part of this and that we've all got to run thisbusiness like it's our own checkbook, and pressing that point hard that everyexpenditure we make, any decision that we make, we need to make it as if thatwe were spending our own money.

And number two that when you makea 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 agood idea they like to think it's going to be a good idea. If it's not a goodidea, you got to shut it down.

That's why I've got theexecutives in the field. That's why I'm shrinking the division size down. Ourapproach will be that we're going to be on the ball, we're going to be on topof the blocking and tackling issue, and we're going to be moving the ballforward every time. And where we have a player that's busted, we're going toquickly recover and move on.

Adam Feinstein - Lehman Brothers

Okay. It sounds like you're beingvery proactive. I look forward to seeing the results in the future. And maybejust 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 alonger term goal? Do you have a sense in terms of what you think a normalizedbad debt can be three, five years from now? Clearly, I'd like to think that itwill be lower than it is now. But is there a target range that you have as youlook at now over the next five years, Burke?

Burke Whitman

Kelly wants to go first.

Kelly Curry

I will tell you. I hope you'vetalked to your legislators. I can tell you that I have supplied to all of ourhospitals a recommended letter or email along with the necessary information tocontact your state and federal legislatures regarding this issue. I don't knowwhether you saw the article in the Wall Street Journal in the front page lastFriday, I think it was, but it showed that no paid business from 2000, it movedfrom 13% to 16%, a dramatic increase.

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

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

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

Go ahead, Burke.

Burke Whitman

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

Our discussion with folks on the hill, left and right, Republican andDemocrat, really do acknowledge this problem and agree that something must bedone and there are number from both sides that you were working diligently toproduce something that they can all agree on, that will at least, if notcompletely, eliminate the problem, will at least go a long way to address evenfrom a policy standpoint. I am confident that if that were to happen, maybe noteven 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 ofrevenue. I believe that would happen.

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

I would hope and do expect at thispoint 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'retalking about that are going to build value, to build and leverage off thatstabilized bad debt number.

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

Adam Feinstein - Lehman Brothers

Okay. Thank you very much.Appreciate the detail.

Operator

Our next question comes from MattRipperger of Citigroup.

Matt Ripperger - Citigroup

Hi. Thanks very much. I just hada couple of questions. One of the things that they are proposing in Washington is toeliminate the whole hospital exemption. And given that the JV strategy isbecoming more of an integral strategy of yours, I just wanted to see if youcould weigh in and what you think the prospects of that are of going throughand 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 somepoint. There was some language in early version of S-chip bill, it was takenout of the bill that was assigned and then detail about present. But we may seeit come up again in the future. If that happened obviously, in extreme form, wewouldn't be able to do more of these but it suddenly would not change thebroader theme of working much more collaboratively with physicians than we haven'thave. And we will still have lot and lots of opportunity to do that. If I lookat the whole body of opportunity that we have to improve our performance byworking more collaboratively with physicians, I guess, I would say, this is justsubjective but at least 80% of that is purely operational and doesn't involvefinancial transactions anyway.

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

Matt Ripperger - Citigroup

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

Burke Whitman

Yes. It does. We have justrecapped kind of where we've been in the past quarter with divestitures andwhere we expect to go. We sold two hospitals in Virginia to Wellmont that closed thisquarter. 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 closethis quarter. The other one closing date is not as clearly defined. Beyondthose, I expect that we will sell 0, 1, 2, maybe 3 additional hospitals thatjust do not fit us strategically as well and it would be deleveraging events byexecuting those transactions. For obvious reasons, I can't disclose whichhospitals those might be as things develop and when we can do so properly, wewill describe it. So, that's kind of the range that we are looking at and Iwould expect that to happen. I would expect those to close most likely in thefirst half of 2008.

Matt Ripperger - Citigroup

Great. Thanks very much.

Operator

Our next question comes from KenWeakley 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 theMSDRG is not aware in the fourth quarter essentially, like when you mentionedthat perhaps it would, some of the changes will offset the market basket ratethat you got, I don’t know if you’ve given a direct impact forecast, of whatyou think will happen given all the changes in systems?

Bob Farnham

It looks like Ken, net of all thechanges, net-net will get about 2% increase, maybe a little bit more. Thebehavioral offset going from 1.2 down to 1.6, it still has to be all budgetneutral, so what seem us to go back and do is adjust everybody’s blended rateup a little bit. But in essence, all that behavioral offset change going from1.2 down to 0.6, we have to code, our documentation has to be better to be ableto code better to get that. So, I guess, when we look at it, instead ofstarting-off in a whole that’s a 1.2 feet deep, we’re starting-off 0.6 feetdeep and in a little bit of a whole. So, if hospitals don’t achieve anyimprovement in documentation and coding, they won’t get 0.6% instead of aheadof 1.2.

So, it was overall good to seethe behavioral offset cut in half down to 0.6% but in total, I don’t think itwill make any big difference. One of our big initiatives is to help withdocumentation and coding and improve that. And so, I think we are still in the2% maybe a little bit more range.

Ken Weakley - Credit Suisse

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

Bob Farnham

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

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

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

And there are things, as I havealready mentioned. For instance, the way we were handling, we were trying toqualify people as indigent. We are not any good at that. What we're good at isdoing insurance. So we needed to do what we do well and move on with that. Andwhat we don't do well, we need to get the experts involved, and we need to getthem involved faster that have waited around 60 days or 90 days before we sendaccount 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 mybackground. I mean work in hospitals, I work in hospital ERs, I work inhospital business offices, I've billed patient accounts, I've gone to insurancecompanies and collected payments. I mean I've been there and done that. Sowe're not going to talk to people in the business office, which I make it mybusiness to do when I'm in a hospital. I can tell you that having that bit ofexperience in your highest pocket is helpful in asking questions.

Burke Whitman

Let me add, Ken, couple of thepoints on this. Rewards are certainly a part of it, and we are now rewardingeach individual business leader's performance in that individual business, notonly on these numbers, but also, for example, on the quality and, say,expansion measures related to the opportunity we have to grow volume in marketshare, 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. Theywill be rewarded if they achieve the objectives. They're going to beaccountable if they don't. And I think we've got a team of folks who understandthat, accept that and actually excited about it.

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

And I think we've also reducedthe scope of responsibility for the division leaders, so that they have fewerhospitals. And today you have so much, in-depth experience, including on theseissues, can better support and lead what the hospitals are doing and get theresults 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 themessage, the organizational structure, the people are in place to make ithappen.

All that I know is nice. We gotto 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 ourrevenues; that is, the revenue cycle of collecting what we are doing, but alsoon the things that are going to create more sustainable performance, qualityand satisfaction. And I believe we are at the point now where everybodyunderstands that, and they understand they need to be on board on both thosefronts.

Ken Weakley - Credit Suisse

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

Bob Farnham

No, we did not do that. I justwill 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 areconfidential in a contract.

Kelly Curry

It's just about mindless moneytalks and copycat walks.

Ken Weakley - Credit Suisse

Very good. Thanks.

Operator

Our next question comes from GaryLieberman 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 tothe bad debt expense and understand the $16 million and, I guess, whateverbenefits that you're going to have in the fourth quarter. But as we go forwardinto '08 and, I guess, the benefit goes down substantially or you don't haveit, is it unreasonable to assume that the bad debt trend, assume everythingelse sort of stays the same, is then kind of in a 13% range?

Bob Farnham

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

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

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

So we think we're going to get abenefit to that here somewhat in the fourth quarter, but additionally in 2008as well. So I can't put exact number on it, but we just don't feel that it's13% plus at this point in time that it's going to be around the 12% mark. Andsome of the things that we're doing operationally to try to limit the number ofinsured that will come through the hospital will help as well.

Gary Lieberman - Stanford Group

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

Bob Farnham

Now the difference is that wehave always used primary collectors, the difference is that that were given tothem 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 strongerthan 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 willcheese in the fight to go after those accounts more firmly.

In the past, you might not havedone that in this particular business. But because of the magnitude of theno-pay business and also because the numbers clearly demonstrated that we werereceiving an inordinate share in some circumstances.

And coupled with the fact that wenow give a substantial discount to every patients that comes through the doorsbecause if you will in the past that may have been that somebody that wasuninsured would have a higher bills and somebody that was insured that's nolonger the case. They are getting a very fair opportunity to deal with this. Andanybody that recognizes and is prepared to work with us to resolve theiraccount balance, we are working with them. And the responses that I gettingfrom 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 ofthe lot didn't get paid for, you would need some help in being able to dealwith that issue and I think communities can probably understand that.

Gary Lieberman - Stanford Group

Okay. Thanks a lot.

Operator

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

Cheryl Skolnick - CRT Capital Group

Hello?

Operator

Maybe your line is on mute or youare on speaker phone.

Burke Whitman

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

Operator

Okay. The next question comesfrom Bill Bonello of Wachovia.

Bill Bonello - Wachovia

Just a couple of questions. Firstof all, thanks for the color on the bad debt. I certainly hadn't appreciatedthe magnitude of the impact from the oldest bucket of receivables, so that wasvery helpful. Just on a completely different topic, revisiting the questionabout Medicare. I just want to make sure the Medicare inpatient increase, whathave you realized this year?

Bob Farnham

This year it is probably about2.5% net-net.

Bill Bonello - Wachovia

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

Bob Farnham

Not, much worse but the sellingendpoint, 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 wouldhave it for 1.2, but everybody is going to have to work to get to close tothat.

Bill Bonello - Wachovia

Sure. Okay. And then, just youmight not touched this, but I am just curious if you have any preliminarythoughts on '08 numbers that are out there. There is consensus number out therethat 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 ofany sense of where you expect to be?

Bob Farnham

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

Bill Bonello - Wachovia

Sure. And then, maybe justanother way at least to help me to me think about it without you predictingwhat you are going to do. Have you guys created sort of what a pro forma, Q1result would have been if you would have the current bad debt policy in placein Q1? Or how much that would have changed EPS?

Bob Farnham

No. We did not do that. We had aDecember 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 sono, we've not done that.

Burke Whitman

Bill, as you can imagine. We dohave detail projection time going forward, we just don’t want to be givingguidance.

Bill Bonello - Wachovia

No, I understand that. Okay andthen different topic, I beat that one. The same hospital EBITDA was down prettysubstantially year-over-year, is that predominantly the change in bad debtexpense or is there anything else on a same hospital basis that causing EBITDAto be down?

Bob Farnham

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

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

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

And the other repairs andmaintenance was up couple of million dollars as well. I mentioned earlier, thatwe are spending more at the hospitals, as a result of the surveys, things havecome 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 apositive for the quarter. It was down about 40 basis points. About half of thatcame from in-plants. In-plant usage were down in volume and price to the tuneof about $2.1 million for the quarter. So that was about half of the overall 40basis percent savings in supplies. So that sort of, in a nutshell, was thechanges in the same hospital margin.

Kelly Curry

Bill, because I come out of theoperations background, I mean -- calculating on basis points and things likethat, but I'd like to point out to you that if you subtract the $168.4 millionfrom the $185.7 million, you got $17.3 million decline in EBITDA on samestores. And our provision for doubtful accounts is up $32 million of which99.9% is on same store.

Bill Bonello - Wachovia

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

Kelly Curry

I can tell you that in this -- Iwill just give you a quote. At a particular hospital, we had done maybe not aswell in physician relations in the past as opposed to some of our otherhospitals. That physician told me that when he talked to a bunch of otherdoctors from our other hospitals at our event that it was clear that -- andthis is a physician, I didn't know from the past by the way, this wascompletely unsolicited on my part. He told me, and he said this in an openmeeting as well, that it was clear that our emphasis on physician relations haddramatically changed from last year to this year, and that every physician thathe talked to, every single one that he talked to from our hospitals reported tohim 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 programthat we put in, our satisfaction is going up. Doctors are -- I always give themmy phone number and I give them my email. I know that may sound crazy, but onthe other hand, they are my customer. I want them to be able to reach me. And Igive it to everybody. And I can tell you that I expected to get some negativeemail, 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 tothank you. We're kind of out of our allotted time and I just wanted to thankyou everybody.

Burke Whitman

Thank you for joining the call.

Operator

You may now disconnect.

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Source: Health Management Associates Q3 2007 Earnings Call Transcript
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