Tenet Healthcare Corporation Q4 2007 Earnings Call Transcript

Feb.27.08 | About: Tenet Healthcare (THC)

Tenet Healthcare Corp. (NYSE:THC)

Q4 2007 Earnings Call

February 26, 2008 11:00 am ET

Executives

Trevor Fetter - President and CEO

Dr. Stephen Newman - COO

Biggs Porter - CFO

Analysts

Darren Lehrich - Deutsche Bank

Adam Feinstein - Lehman Brothers

Shirley Skolnick - CRT Capital Group

Henry Ritchotte - Deutsche Bank

Justin Lake - UBS

Ken Weakley - Credit Suisse

Shelley Gnall - Goldman Sachs

Erik Chiprich - BMO Capital Markets

Gary Lieberman - Stanford Group

Operator

Good morning and welcome to the Tenet Healthcare's conference for the fourth quarter ended December 31, 2007. Tenet is pleased that you have accepted their invitation to participate on this call. Please note that this call is being recorded by Tenet and will be available on replay. The call is also available to all investors on the web, both live and archived. A set of slides has been posted to the Tenet website to which Management intends to refer during this call. It is recommended that you download these slides for use in the following Management references.

Tenet's Management will be making forward-looking statements on this call. Those forward-looking statements are based on Management's current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Certain of those risks and uncertainties are discussed in the Tenet's filings with the Securities and Exchange Commission, including the Company's Form 10-K and its quarterly reports on Form 10-Q, to which you are referred. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. Management will be referring to certain financial measures and statistics, including measures such as adjusted EBITDA, which are not calculated in accordance with Generally Accepted Accounting Principles or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance, but is providing these alternative measures as a supplement to aid in the analysis of the Company.

Reconciliations between non-GAAP measures and related-GAAP measures can be found in the press release issued in this morning and on the Company's website. Detailed quarterly financial and operating detail is available on First Call and on the following websites: tenethealth.com, businesswire.com and companyboardroom.com. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question.

At this time, I will turn the call over to Trevor Fetter, President and CEO. Mr. Fetter, please proceed.

Trevor Fetter

Thank you, and good morning, everyone. This quarter we achieved a major milestone by generating positive growth in admissions. We also continue to demonstrate positive trends in several key areas and certain leading indicators have never looked stronger. I feel that the health in trajectory of this company is better than at any time in the recent past.

This was the first time in nearly four years that we had positive admissions in a quarter. And because it was just slightly positive, I want to add some color to the statistic. First, we've had more consistent results among our regions in the past quarter and we continue to move more hospitals into positive admissions territory. Admissions in Florida stabilized significantly to just below breakeven, compared to the decline of more than 3% that we've been reporting in recent quarters.

More importantly, the improving trend has accelerated into the first quarter of 2008, with same hospital admissions up 2.3% through January. Florida admissions growth was positive for the first time since Q1 '04 with an increase of more than 2% for the month. This upward trend has continued into February in both Florida and across the company, and even the trend in outpatient visits has improved.

Same-hospital commercial managed care revenues increased by almost 9%, despite a nearly 2% decline in commercial admissions. This is the single largest quarterly revenue increase we've reported in five years. We are positioned for further pricing strength as a result of the numerous managed care contracts we announced recently. In fact, these contracts with United, Cigna, and Blue Cross of California represent a third of our total commercial managed care portfolio. And once again, we kept the growth in controllable expenses on a unit of service basis at or below that reported by our peers.

The innovations we've made in the revenue cycle continue to produce tangible results, despite the challenge represented by the continued double-digit increases in uninsured admissions. Because of these efforts, we were able to increase our collection rates from both insured and uninsured individuals.

We also improved sharply in the non-financial metrics, which we believe are important to our longer term performance. These metrics are part of our balanced scorecard and incentive plan, and we believe they are leading indicators of our continued progress. We break the balance scorecard into five areas or pillars, which include quality, service, people, cost and growth.

The first of our three non-financial metrics falls into our quality pillar. According to CMS's most recently published hospital compared data, Tenet's scores are higher than any other investor-owned hospital company and CMS's core measures. And we have the third highest score among the top 10 largest hospital systems in the country. We continue to hit all-time highs in our quality statistics, even as CMS adds challenging new metrics to the mix.

The next pillar is service. Our scores here improved as well, with physician satisfaction increasing 2.5% over the prior year and patient satisfaction increasing nearly 1%. And in the people pillar, total employee turnover improved by more than 12%, employee satisfaction improved nearly 4%. And although it's not a balance scorecard metric, I know that you would find it interesting that our hospital CEO turnover in 2007 was just under 4%. This compares to 20% turnover among our hospital CEOs in 2006.

While we didn't generate as much cash from working capital as we planned, we did offset that at yearend with our other cash initiatives, which we expect will continue generating value going forward. Biggs will comment on those in a moment. Near the end of 2007, we engaged in a thorough business planning effort that resulted in the outlook we stated in this morning's press release. This outlook envisions 2008 EBITDA in a range of $775 million to $850 million, and 2009 EBITDA at $1 billion or better.

While I fully recognize that the $1 billion objective represents a significant improvement from the EBITDA we generated in 2007, I believe we set a clear path to achieving it. This will require strong and consistent performance on our part, capturing market share from competitors to meet our volume objective, continuing to implement innovative techniques to offset the challenges of bad debt, and extending the progress that we've made in controlling costs and achieving enhanced pricing, but it's certainly within our reach.

And with that as an overview, let me turn the call over to our Chief Operating Officer, Dr. Stephen Newman, who will provide you with some commentary on what's driving our improvement in patient volumes. Steve?

Dr. Stephen Newman

Thanks, Trevor, and good morning everyone. We made gratifying progress in the fourth quarter that is also continuing in the first quarter. In my opinion, our turnaround is accelerating and increasingly evident in a number of areas. To show you why I believe this, I'll give you a flavor for our momentum in three key areas; volumes, pricing and its relationship to our quality initiatives, and our progress in expanding our medical staff. I'll also touch on the improvements we're driving in Florida and the successes we've achieved in our new managed care contracts.

Let's start with volumes. Fourth quarter same-hospital aggregate admissions increased a tenth of a percentage point over Q4 '06. That's the first positive quarter for admissions growth in almost four years. January's inpatient admission growth was 2.3% and February has continued that trend. So, I think it's clear that our volumes are on an upward trajectory.

The progress in the fourth quarter and in January is especially gratifying when you remember that we had a mild flu season until four weeks ago. It's not our normal practice to disaggregate volume results and we make no promise to do this on a regular basis. But I think some drill down this time will help you understand the underlying trends we are seeing.

In our key Florida market, fourth quarter inpatient admissions were down to just three-tenths of a point, our best performance there since Q4'04. In Palm Beach County fourth quarter admissions actually increased to 80 basis points. Four of our five Palm Beach hospitals had positive year-over-year admissions growth. Additional evidence of our flood recovery is demonstrated by January admissions being up more than 2% over January 2007.

Our new Florida regional leader, Marsha Powers has accelerated our physician recruitment, redirection and employment activities. We're confident we are finally on the road to sustainable growth in that important market. Now, I can't resist saying a few words about the remarkable and continuing progress of our Philadelphia market. Both Hahnemann University Hospital and St. Christopher's Hospital for Children generated strong volume gains in the fourth quarter.

As you know, we expected to gain volume in St. Chris because of the closure of Temple University Hospital for Children. But the gains at St. Chris have far exceeded what can be attributed just to that new affiliation. For the quarter, admissions at St. Chris were up 20%, which translates to an additional 498 admissions compared with the same quarter of the year before. Also contributing to that success at St. Chris are aggressive outreach activities beyond the five-county metro Philadelphia area, as well as the addition of new high-end services, like bone marrow transplantation.

Meantime, Hahnemann's admissions were up nearly 1%. We are continuing to work with Drexel University School of Medicine to grow our faculty practices at Hahnemann and St. Chris, to benefit the educational research and patient care admissions of both organizations. We're in the process of expanding our facilities in Philadelphia in anticipation of future growth, but we have sufficient capacity there today, to handle the projected increases in volume over the near term.

California was another bright spot in the quarter. Our California hospitals had an aggregate increase in admissions of 3.2% over the fourth quarter of 2006. We knew we'd see an improvement in the quarter because of our acquisition of the Stanislaus Behavioral Health Center in Modesto, but we also had noticeable increases in two of our other key California markets; the Palm Springs area and Orange Country. For example, Cotton Valley was up 3.8% and Desert Regional increased admissions by 9% for the quarter.

The Stanislaus facility added 263 admissions to the California aggregate total. But even without that added volume, California admissions were up a solid 2.4%. We encountered some volume weakness in our Texas and Southern States markets, but we believe that softening will be temporary. One weak spot in the quarter was El Paso, but we've already seen improved admissions volumes in early 2008. A major refurbishing project at another one of our Texas hospitals temporarily closed a number of our medical surgical units there.

In our Houston markets, we're about to pass the first anniversary of an aggressive new physician-owned competitor that hurt another of our hospitals. We expect that situation to normalize in the near future. The challenges in our Southern States regions were very local in the fourth quarter. These resulted from slightly higher than expected physician attrition. We've taken swift action to accelerate our volume, building activities in both the Southern States and Texas markets.

I will wrap up this discussion of volumes, with brief comments on surgery and commercial managed care admissions. Our total surgeries rose three-tenths of a point compared to Q4'06. Outpatient surgeries were up eight-tenths of a point, while impatient surgeries were down four-tenths of a point. This represents a dramatic improvement over the losses we had absorbed in total surgeries during prior quarters.

As recently as the first half of 2007, quarterly declines in surgeries were 5% or more. Same-hospital commercial managed care admissions were down 1.8% in the fourth quarter. Our commercial managed care volume weakness was concentrated in Texas and the Southern States. Specifically, three hospitals located within our Texas market and Southern States region were responsible for 96% of this decrease, company-wide.

As I just described a few moments ago, we expect that situation to stabilize in the near future. We continue to generate growth in many of the TGI service lines I highlighted in the third quarter. Commercial urologic surgery admissions were up 8.1%, ENT surgery was up 19%, orthopedic surgery was up 0.3%, neurosurgery was up 3.7%, and vascular surgery was up 16% for the fourth quarter. Meantime obstetrics was down 2.7% and open-heart surgery was down nearly 14% or 68 procedures.

Overall, I would say the key take away about our latest admission performance is that we are continuing to drive growth in the service lines we targeted, as part of our targeted growth initiative. As you recall, over the past three years through TGI, we painstakingly identified the service lines with the best growth profit potential at each of our hospitals.

Now, let's talk about pricing. We successfully renegotiated several of our major managed care contracts in the fourth quarter and the first six weeks of 2008. With the completion of new multi-year contracts with United, Aetna, CIGNA and Blue Cross of California, we now have secured full network participation with everyone of our major commercial payers for all of our hospitals, free-standing ambulatory surgeries centers, diagnostic imagining centers, and physician practices.

These new contracts will also automatically add any new facilities or practices we might acquire during the term of the agreements. As you know, making sure that all of our facilities are network providers has been a top priority of our managed care strategy and I'm pleased to tell you that we have now achieved that goal with our recently completed contracts.

Our managed care pricing, including managed government programs, was up sharply with net inpatient revenue per admission increasing 9.4% and net outpatient revenue per visit up 9% in the fourth quarter. I believe that is a reflection of a number of focused efforts to align our targeted growth initiatives with our managed care strategy.

Another of our managed care goals has been to qualify for as many managed care centers of excellence programs as possible. Additionally, in the last four months we've executed two contracts that actually provide potential incremental reimbursement to our hospitals for meeting mutually agreed upon clinical quality goals.

Before I conclude, I want to share with you the latest results of our efforts to expand medical staffs at our hospitals. In the fourth quarter, net of normal of attrition, we added 241 new active staff physicians to our hospitals. For all of 2007, we added a net total of 1,086 physicians. As you know, this has been a critical priority for us. The success of our efforts in this area is especially gratifying for me and it bodes well for the future growth of our hospitals. I truly believe that this progress in physician recruitment is a key indicator of our future volume growth.

In the last year, we've increased a number of physicians with privileges to admit patients to our hospitals by almost 9%. It will take time for these new relationships to fully mature, but this growth represents a dramatic reversal of the erosion in our affiliated physician base that we experienced over the past several years. If I had to point to one item that gives me the most optimism about our future at Tenet, this would be it.

Through our physician relationship program, we visited 4,720 physicians during the fourth quarter. Of those we visited, we saw an increase in admissions of 2.5% from physicians who already had staff privileges at our hospitals. We also visited 437 physicians who did not have privileges at our hospitals. And we expect many of them to apply for privileges as a result of our visits.

This is an integral part of our strategy to gain market share in many of our fiercely competitive markets. To assist in these, and all our volume building efforts, during the fourth quarter we hired [Lloyd Mensinger] to lead our Business Development, Marketing, Advertising, Physician Recruitment and the Physician Relationship Program. Llyod has years of experience in the Business Development, working at both Baxter and Boston Scientific.

So to conclude, the bottomline from my perspective is this. In the fourth quarter, we made progress in all the major drivers of performance in our business. We grew inpatient volumes for the first time in almost four years. We've continued to do that in 2008. From a pricing, quality, and physician recruitment perspective, we continue to grow our channels for new business. Overall, I am very pleased by the trends I am seeing and I am confident we will continue to see improvements in 2008.

With that, I will turn things over to Biggs Porter, our Chief Financial Officer. Biggs?

Biggs Porter

Thank you, Steve, and good morning everyone. In the interest of time, I am not going to repeat the lot of the numbers in our earnings release or 10-K. I'll limit my comments to providing a relevant context for our disclosures. In the fourth quarter, we benefited from pricing, costs control, bad debt mitigation, and stabilized volume. We face the year with adjusted EBITDA the middle of our last outlook, and will adjust within the outlook range we started out with last March.

There were two unusual items in the quarters which largely offset each other. The first was a net charge of $12 million related to yearend accruals for compensation and benefits. This includes adjustments to a predecessor company pension plan, union settlements costs in Florida, workers' compensation adjustments and yearend incentive plan accruals.

The other item is a favorable adjustment to our bad debt reserve of $19 million. This reserve is set through the use of an 18-month look-back on our collection history. As you know, our collection rates continue to show modest improvement across most customer segments. In recent quarters, our results have often included cost report settlements generally with a favorable impact. The impact this quarter was effectively at zero.

With that brief analysis in mind, let me offer a few thoughts on the drivers, regardless to those results. Steve has already covered volume, so with that detail I will just reiterate how pleased we are to see aggregate positive growth, particularly considering the well advertised strong headwinds in the industry. I also want to note that our uninsured and charity volumes actually declined in January. So the positive 2.3% in admission growth Trevor referred to earlier will contribute to our bottomline.

Now on revenues, fourth quarter same-hospital revenues rose $2.2 billion, an increase of 6%. Because of the essentially breakeven volume growth, this 6% revenue increase was principally due to pricing.

Slide 18 on the web shows that we experienced solid progress in all our key pricing metrics. As a summary metric, normalized for cost reported adjustments in 2006, net patient revenues per adjusted admission were up 4.9%. A number of important contracts, including BlueCross of California and CIGNA were not effective until the first quarter of 2008.

We anticipate additional pricing increases to contribute to our 2008 earnings. Substantially, all of our existing contracts, including those negotiated into 2007 also have 2008 and 2009 escalators built in. We have good visibility into our managed care pricing for next three years because approximately 80% of our commercial rates for 2008 and over 60% for 2009 were already covered in signed contracts.

Turning to costs. Same-hospital controllable operating expense, per adjusted patient day, increased by 5.1%. As I mentioned a moment ago, this included $12 million expense accrual for compensation and benefits expense. If we normalize for that accrual and the higher supplies expense on greater implant utilization, our expenses would have been inline with the expectations we had going into the quarter, with a number of lesser puts and takes among the other elements of our controllable costs.

It is also important to note that we had $13 million reduction in malpractice expense in the quarter. Based on the investments we've made in clinical quality, we are pleased to see this reduction. Unfortunately, we also had some worse than expected cost performance in a few of our hospitals that lost volume in the quarter. We believe, as Steve mentioned, that both the volume and cost effects of that will reverse themselves.

On bad debt, same-hospital uninsured admissions rose by 10% in the fourth quarter and revenues from the uninsured rose by 17.5%. Let me remind you that this increase in uninsured revenue has been influenced by our recent efforts to improve the accuracy of acuity capture in our emergency departments.

Any change in uninsured billings creates parallel effect on bad debt expense. We estimate that $19 million of the $24 million in the uninsured revenue increase year-over-year is attributable to our efforts to improve the accuracy of acuity capture in the emergency departments, and to a much lesser degree, charge master increases. The corresponding $17 million bad debt increase has null effect on the bottomline, since it is offset by revenue increases. Also, since we modified our ED charge capture process in the second quarter of 2007, we do not expect similar year-over-year increases in bad debt from ED charge capture in 2008.

Growth in bad debt expense from higher uninsured admissions was approximately $5 million. Accordingly, the combined effort of uninsured admission growth and pricing compared to last year is approximately $22 million. Offsetting the adverse impact on bad debt expense from the growth in the uninsured has continued to progress on improving collection. Through our focused effort, we have been successful in raising the self-pay collection rate to 36% in the fourth quarter from 32% a year ago.

Managed care collection rates also moved up to 98% in the fourth quarter from 97% a year ago, due to lower denials, attributable to our previously discussed efforts to improve in this area. These include greater internal screening, clear contracting arrangements and better front-end processes. This improvement in collection experience led to the recording of the $19 million favorable adjustment to our bad debt reserves I mentioned in the beginning of my remarks. This is compared to an $8 million favorable adjustment last year.

In addition to overall collection performance improvements, we also resolved over managed care accounts, which should have been heavily reserved. The favorable effect of this on bad debt expense was offset by what we see primarily as a seasonal hedging of self pay accounts. Like others in the industry, we typically experienced a slowing of payments in the fourth quarter as our patients deal with yearend and holiday pressures on their household budgets. This has typically reversed itself by the end of the first quarter.

So to summarize, same-hospital bad debt expense grew over the prior year fourth quarter by $15 million, uninsured volumes contributed $5 million to this increase, pricing contributed $17 million and the net year-over-year reserve adjustment due to improved collections experience was a favorable offset of $10 million. Other variances included the effects of the settlement of the managed care disputes, netted $3 million.

While same-hospital uninsured admissions and revenues were up over the prior year fourth quarter, charity was down, making this another quarter in which there are opposing trends. Although not easily traced, we are optimistic that our strategies to emphasize favorable product lines and manage elective admissions and visits by uninsured are mitigations to what is the key risk in the industry. I emphasize the word elective in this regard.

We also continued to drive our best practices in our billing and collections activities. I just did a fourth quarter year-over-year compression on bad debt; but if you compare sequentially, it is important to note that uninsured revenues were actually down from the third quarter of this year.

Turing to cash flow and capital expenditures. We ended the year with our cash balance within our expected range. In accomplishing that, we did do as well on cash from operations as we expected; there has been slightly more capital, which should just be a matter of timing. But we continue to find other positive sources of cash in our balance sheet, which are more permanent in nature.

As I will discuss in a moment, the variances to our expectations in the fourth quarter will turn to expectations and improve free cash flow and cash generated from operations of 2008. Cash from operations and free cash flow become sequentially more important metrics as we proceed through the next few years and approach the refinancing of our debt. In this respect, if you consider 2007 is the year of heaviest investment for the company, with volume starting to show the benefits and with us well-positioned to show our improved earnings, cash flow and return on investment are going forward.

Capital expenditures from continuing operations were $300 million in the quarter. This figure was slightly above the higher end of our range we shared with you in our third quarter call and is roughly equivalent to the amount we spent last year. One of the influences on the higher spending in this year's forth quarter was that we wanted to make sure 2007 was our catch-up year, as we have previously projected. This leads us for the manageable amount of carryover projects.

On the web, we have included on slide 23, a listing in a major capital project of 2007. At this point, I expect capital spending of 2008 to be little more front-end loaded into the first and second quarters. Also contributing to the higher level of CapEx in the fourth quarter, favorable weather has allowed us to accelerate the construction of our Sierra Providence East Medical Center in El Paso, which will now open a month earlier than we had expected. This generated $22 million of CapEx in the fourth quarter. We've also started the construction of a replacement hospital for our East Cooper facility outside of Charleston, South Carolina, which we spent $2 million in the fourth quarter.

With respect to cash flow, adjusted cash flow provided from continuing operations came in at $127 million for the fourth quarter and was lower than anticipated. The primary deviation was in working capital, we typically expect to see a more significant build up at accounts payable and accrued liability yearend than we saw in this year. On a pure accounts payable side, we saw the increase we anticipated in the payment terms we set up in this system. However, there was $63 million decline in book overdraft in December 2007, compared to 2006, which occurred due to the timing of our yearend check processing. This book overdraft should return to more normal levels in 2008, thus creating a source of cash flow in 2008.

We also experienced $31 million build up and accounts receivable. This is attributable to the facts of higher revenues and low reserving for bad debts. This, therefore, doesn't reflect bad performance, it, in effect reflects improved collectibility. However, we did not generate the net improvement we targeted in accounts receivable.

In the fourth quarter of this year, we did resolve a number of our older managed care receivables, but this was offset by the seasonal aging of self-pay accounts I referred to earlier. Other than that, we were already optimistic in our ability to reduce accounts receivable over the course of one quarter. We believe it is going to take a few quarters in 2008 to accomplish this reduction.

Just to summarize the influences on 2007 in total, we had a net reduction in our book overdraft to $63 million, a reduction in accounts receivable credit balances of $54 million, and non-cash income related to prior cost report adjustments of approximately $35 million. Not all of these affect cash from continuing operations dollar for dollar, but they did have a significant impact. We do not expect similar impact from these items in 2008.

Accordingly in 2008, we indicated in the release, we anticipate having adjusted cash provided from operating activities of $400 million to $500 million. This compares to $209 million in 2007 for improvement in the range of $190 million to $290 million. Higher EBITDA is expected to contribute $75 million to $150 million of this improvement. The reminder of the improvement includes the restoration of a more normal book overdraft position at yearend 2008. The two day reduction in accounts receivable is an objective for the fourth quarter of 2007, and reduction in the rate of pay down of credit balances.

As I have said previously, we've engaged in a review to increase efficiency of our balance sheet and correspondingly, free up cash and increase return on invested capital.

Let me now turn to the progress we achieved towards this end of the fourth quarter. We added $129 million in cash from these initiatives in 2007, of which $97 million was in the fourth quarter. At the corporate level, we monetized certain investments previously residing in our insurance subsidiary and liquidated the cash surrender value of life insurance policies.

We anticipate the continuing efforts to execute on these initiatives can generate incremental cash, ranging from $400 million to $600 million over the next 24 months. These include the sale of our medical office buildings, the recapitalization of Broadlane, in which we hold a 48% interest, and the sale of monetization of other excess land, buildings and other unutilized or inefficient asset. Since some of these items require a marketing and price negotiation, I'm not going to break them down into separate component values because the timing of value is within a broad range. At this time, this additional cash is not in our 2008 yearend outlook.

Before I turn to the outlook for 2008, I want to comment on the impairments we recorded in the quarter. They were much reduced over the prior year and included non-impairments of goodwill. This is a sign that our turnaround is progressing and that our forecast at the hospital level is for a broad based recovery. The single biggest reason for the impairments we recorded was a prospective reduction of Medicaid funding in Georgia, and not attributable to our execution of our turnaround strategies.

With respect to capital spending for 2008, we expect capital expenditures to be in the range of $600 million to $650 million. This includes $80 million for new hospital construction, $32 million for seismic and American Disabilities Act requirements, and $25 million for outpatient growth. Investors have often asked us to identify the portion of our capital expenditures, which can be thought of as maintenance CapEx. Because of the many judgment calls necessary to distinguish maintenance CapEx from capital expenditures intended to grow the business, we've been reluctant to specify a number.

By example, if we replace an old four slice CT scanner with a 64 slice scanner, is that replacement or expansion? Intuitively, I would call that maintenance capital, although it may expand our capabilities. Our answer to date of the question to maintenance capital has been to point investors to the sum of depreciation, amortization and lease expense, net of implicit interest, which was approximately $500 million in 2007.

Another way to look at this might be, how much did we spend on our current core hospitals over the period 2000 to 2005, excluding physical expansion in new hospital construction. This was approximately $400 million per year over that period. If you look at the same statistic for the last five years, it was approximately $450 million. If you put all this together, then it would suggest an estimate of growth maintenance capital at approximately $400 to $500 million.

Having said that, the lower end of the range of $400 million would likely not sustain our competitive position over a long-term. Also, this excludes seismic and America Disability Act requirements, as well as the capital for expansion of the enterprise, or in certain cases, the construction or technology spending necessary to protect market share based on the action of our competitors. If you include those, it takes us up to the $600 million to $650 million level we have spoken to as a reasonable level of average annual spend to meet regulatory requirements and sustain and grow the enterprise.

Moving to the outlook. We have provided extensive detail in regard to our 2008 outlook in this morning's press release, so I won't repeat all the line item detail here. The 2008 outlook includes an expectation of adjusted EBITDA in the range of $775 million to $850 million. Our growth of 10% to 20% over the $701 million of adjusted EBITDA for 2007.

Much of the heavy lifting necessary to achieve performance at this level has already been accomplished. I am referring here to the contracts we recently signed with our managed care payers, and the other pricing initiatives and cost efficiencies we implemented last year that will achieve full run rate in 2008.

Having said that, there clearly were also some set backs, most notably the $60 million revenue loss from the Medicaid reductions in Georgia and Florida. We haven't given a 2008 outlook previously, and over the course of last year, we maintained a 2009 outlook which, while having subjectivity was between the $1 billion and $1.1 billion of adjusted EBITDA.

In the fourth quarter, we updated the analysis indicating that of the 100 million of risk inherent in that range, $60 million had now been consumed by the Medicaid reductions I just referred to in Georgia and Florida. This still left us with a 2009 outlook of $1 billion or higher going into the detailed 2008 planning process. We have completed that process and continue to believe that the $1 billion or more of EBITDA in 2009 is achievable, although projecting two years out as by its nature, is very subjective.

As I said, we've given a range of $775 million to $850 million for EBITDA in 2008. Clearly, if we did not perform in the upper half of that range in 2008, reaching $1 billion or more in 2009 becomes a very significant challenge. As I said though, we continue to believe this objective is achievable based on our progress and pricing cost control and positive progress toward our volume objectives.

If you ask me where the greatest areas of risk are that lead to the 2008 range or would cause us not to make the 2009 target. I would say the following two things stand out. First, although it seems we are turning the corner of volumes, this is of course a very subjective estimate. Equally important, mix between patients and payer categories can have a significant influence. To obtain $850 million in 2008 or $1 billion in 2009, we either need to have a relatively stable mix overall and a limited increase in the percentage of uninsured maturity volumes combined, or we need to get offsetting yields from our bad debt initiatives.

Second, we need to have broad based volume growth. If we achieve our aggregate volume objectives, but volumes remain volatile at the hospital level, they will remain difficult to capture the operating leverage of fixed cost absorption. Although we've seen a reduction in the variability performance of the hospital level overall, if we have a significant number of hospitals that are set for volume decline in 2008, that will make the achievement of an aggregate 40% yield on volume growth more challenging.

In slide 26 on the web, we've included a sample walk forward for 2007 actual results to 2008 at $850 million and 2009 at $1 billion of EBITDA. This is a sample walk forward, illustrating one path to our objective of $1 billion or more of adjusted EBITDA in 2009. It is not intended to give a series of spot estimates or line item guidance. There are certainly other combinations of line item performance, which will produce the same or higher or lower results. Having said that, this walk forward shows how the cost and price actions drive value relative to the most subjective estimates of volume and mix.

In a nutshell, volumes drive approximately 33% of the necessary improvement in the walk forward from an adjusted 2007 starting point, with our cost and price actions providing the rest. You may recall there are initiatives in place by the end of 2007; we're estimated to achieve $118 million of improvement in 2008 and 2009 compared to that achieved in 2007.

In the walk forward, the combined EBITDA effect of the initiatives now amount to $162 million with $33 million related to revenue and $129 million related to cost. We have not assigned any value into the walk forward for our bad debt initiatives. We've thus simplistically assumed the financial contribution of our bad debt initiatives will act to mitigate any potential increase in the uninsured or underinsured.

The walk forward shows the effect of our cost and price actions and their effect on 2008, relative to 2007 in order to bridge to our prior disclosures of these initiatives. Since these are now embedded in our recent actual results and in our budgets subject primarily to just full run rate benefits. I will probably not keep isolating and going forward as they have become integral to our operations and are no longer discreet. This does not mean that we are not tracking execution of those plans and budgets, we are.

In terms of the incremental lift from rate parity adjustments and managed care pricing we reflected in the walk forward, I can report that we are now negotiated a 100% of this in 2008 and 80% in 2009.

There are still some potential additional pricing upsides beyond those numbers. So as I said before, we feel very confident about our pricing estimates subject to any unforeseen or regulatory change or mix changes. You will note that the walk forward starts by backing two amounts from the $701 million 2007 adjusted EBITDA starting point.

First, the effect of the 2008 Georgia and Florida Medicaid reductions and second, conservatively $40 million of the 2007 prior year cost reported income. We may in fact have some effect of cost report adjustments in 2008 or 2009, but for now we have taken $40 million of cost report adjustments out of the walk forward. By eliminating these two items at the start, our 2007 starting point for the walk forward is a conservative $601 million.

This conservative starting point of $601 million does make us more reliant upon volumes than in our prior walk forward. It now takes growth in volume related revenues over the two year period in the sample walk forward of approximately 2.2% in 2008 and 1.7% in 2009. Please remember that approximately 1% of this volume growth in 2008 is expected from the recent additions of Stanislaus and the closing of Temple Children's Hospital.

Last year, after we gave our 2006 results and 2007 outlook, some analysts tried to annualize our fourth quarter as a means of estimating what the next year should look like. I caution against this as it does not consider the effect of projected volume growth and the full run rate benefit of our 2007 initiatives. That also would not reflect that we've negotiated price increases on contracts beginning as early as January 1, of this year. And then our annual wage increases are phased in later and are primarily in October.

Creating timing advantage between price and cost escalations. I know there was a lot to digest. So before we go to Q&A I would like to summarize briefly. We showed real progress on volumes and pricing and took significant cost actions in the quarter. We believe this progress is sustainable and now we can continue to leverage those actions to produce much improved results in 2008 and 2009.

And we are driving on cash and return on invested capital as a key indictor to shareholder value growth. Let me now ask our operator to assemble the queue for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question is coming from Darren Lehrich with Deutsche Bank. Please go ahead.

Darren Lehrich - Deutsche Bank

Thanks. Good morning everyone.

Trevor Fetter

Hello Darren.

Darren Lehrich - Deutsche Bank

Hi. So, with regard to the walk forward that you have provided, I guess couple of clarifying questions I would like to ask. In terms of the 40% incremental margin that you are suggesting on incremental volume growth, can you just give us some color there as to what the actual results have been in hospitals that have turned positive, and how comfortable that 40% margin feels? It seems a little high still. And then, you do reference adverse mix changes in the walk forward, and I am just wondering if you could comment specifically what those are?

Trevor Fetter

Okay. With respect to our actual experience, certainly on those hospitals you look at it broadly. Where we've had volume growth and it has been consistent, I think we have been able to capture those kinds of benefits. On the flip side, in areas where we've had or hospitals where we've had volumes decline, particularly where they haven't been anticipated, or where we were expecting growth and still there were declines, we had difficulty managing the 40% relationship. So in 2007, if you look back, we weren't able to achieve what we would have targeted on this basis, because of the declines we experienced in some of our hospitals, offsetting the efficiency of those where we had gains. But certainly going forward, we think it is achievable, but as I said, if it's not a broad based volume growth across our hospital base, then it is more of a challenge.

In terms of your question on mix, basically that line for volume and the base line of price increases are all encompassing, so it’s embedded in there. But it definitely should be everything except for the effect of managed care pricing increases on the rate parity adjustments or the other initiatives. So we put the definition down there saying it included everything.

In terms of payer mix and mix in business there isn't a substantial amount assumed in the sample walk forward that would be a risk. If we have it, as I pointed out, then that could affect it, but for the sake of this particular analysis, we are not assuming to have any significant change in mix.

Darren Lehrich - Deutsche Bank

Okay. Thanks for that. My follow-up here just relates to the collection rates going up, and I'm curious to know how long and sustained that uptrend has been in place? And I guess, the real question would be, why make favorable adjustment at this point in the cycle, certainly after seeing some pretty large uninsured growth in the fourth quarter?

Biggs Porter

Well, we have been experiencing improved collection rates over the last couple of years. We've made an adjustment at the end of last year. We reported during the course of this year that we had improved collection rates. We didn't adjust the reserving percentages on that basis, although it was mitigating bad debt expenses through the course of the year. And then at the end of this year, as we do annually, we look at our experience on an 18 months look back and say, based upon that historical experience should we adjust our reserving percentages, and based on that we do. So, it is based upon historical performance, which includes an 18 months period, and so there isn't a lot of subjectivity to it.

Darren Lehrich - Deutsche Bank

Okay

Biggs Porter

In terms of why now, it's just simply that. I think I would point out that we would expect to continue to drive on collections. It would be our anticipation, and we'll continue to find mitigation of bad debt expense going forward.

Darren Lehrich - Deutsche Bank

Thanks very much.

Biggs Porter

Sure.

Operator

Thank you. Your next question is coming from Adam Feinstein with Lehman Brothers. Please go ahead.

Adam Feinstein - Lehman Brothers

Great. Thank you. Good morning, everyone.

Trevor Fetter

Good morning, Adam.

Adam Feinstein - Lehman Brothers

A few questions here. I was very pleased to see the improvement in the volume trends here. So a big change there. But I just wanted to get more clarity on the components of volumes. Clearly, the commercial managed care and Medicare piece did not grow. If you look at it, more of the growth was in some of the other categories. I just wanted to get some more color in terms of how you view that, in terms of some of the newly recruited doctors. Do they bring in some of those other patients first? So, clearly, I just want to get better sense in terms of the components.

And then, secondly, on the pricing side, you continue to show progress there, also. But I know there was some one-time benefits in the other third quarter such as the (inaudible) cost reports. But in terms of the peer managed care piece, if you could just refresh our memory, in terms of the trend in the third quarter relative to the fourth quarter, I just want to get better sense there in terms of what the underlining pricing difference was between the quarters? Thank you.

Steve Newman

Adam, this is Steve. Let me deal with the first part of your question. We are very much focused, as we expand our medical staffs, in making sure that they are high performing physicians that have a good book of commercial managed care business. And we are preferentially targeting those physicians to add them to our medical staffs. I think that the decrease in commercial managed care admissions on the fourth quarter was really isolated to three of our hospitals, where we had special situations.

In the absence of those three hospitals’ negative effects, we would have basically been even year-over-year in terms of commercial managed care admissions. We have seen an increase in Medicare admissions, and we've seen a bigger increase in Medicare of managed care admissions, because of the distribution of our hospitals in Florida, in California, where that payer is continuing to grow.

We feel very positive about the expansion in Medicare and managed Medicare, because we focus our cost structure to make sure that we have margins on those particular lines of business. Additionally, focusing on the targeted growth initiative, where we have that excess demand in the micro markets we're serving, we also identify those with exceptional margin opportunity, and the combination of those being both in Medicare, managed Medicare, and commercial managed care should contribute to our margin expansion over time.

Biggs Porter

And then the second part of your question on pricing. This is Biggs, Adam. There weren’t any managed care contracts, any new negotiations, kicking in into the fourth quarter relative to the third, so the effects of our negotiations were relatively [constant] in two quarters. We do have a number of pricing increases, as I commented in my script, which will kick-in on January 1, or did kick-in January 1 on contracts that we've negotiated.

Adam Feinstein - Lehman Brothers

Okay. But that 9.4% managed care growth number that you gave out, I [apologize] it was somewhere in the presentation, so that number would have been the same for the third quarter?

Biggs Porter

It's close. Both quarters had the effect of the ED charging effects and to a lesser degree, any flow through on charge master changes, but they would have been roughly the same.

Adam Feinstein - Lehman Brothers

Okay. Great. Thank you very much for all of the detail.

Operator

Thank you. Your next question is coming from Shirley Skolnick with CRT Capital Group. Please go ahead.

Shirley Skolnick - CRT Capital Group

Good morning, and on a day like today I'll take the statement of the name in [stride]. Nice job, Biggs. Thank you. I actually understood what you said. I appreciate it very much. It was very clear. A couple of little things, though. And I'm going to ask you a couple of things about the walk forward as sort of one question, if I can, and then I have another follow-up.

In the guidance you footnoted, if I am reading that correctly, it says that 1.5% increase in admissions, I think in the text it says 2% to 3% increase, is that on an adjusted admissions basis? Is that just the difference? One talks about inpatient and other talks about adjusted?

Biggs Porter

The aggregate number I gave of -- for 2008

Shirley Skolnick - CRT Capital Group

It’s 1% to 2%. Okay. It's the same thing.

Biggs Porter

If you get to the aggregate number that I used in my prepared comments, you get to it by taking the $193 million of revenue from volume in 2008, by example, and dividing that by the 2007 starting point, to get to, effectively, the revenue generated from volume growth presumed in the $193 million. So it is close to adjusted admission basis, but it's using the math that I just described.

Shirley Skolnick - CRT Capital Group

And it's based on same-store admissions of 1.5% in the middle of the admissions range, as opposed to the top end of the admissions range. So you're using the middle of the volume range to get to the top end to the EBITDA range.

Biggs Porter

I will say, I have to look at unit note one on the explanation to see whether we have been as clear as we need to be. But in general, okay, for 2008 and 2009, I would say the volume assumption here would be more towards the top end of our volume assumptions.

Shirley Skolnick - CRT Capital Group

Okay. Because you are at the top end of your EBITDA range?

Biggs Porter

Correct.

Shirley Skolnick - CRT Capital Group

Right. Okay. So, that's consistent. And also it’s part of your walk forward in your discussion of the cash. I think if there is a point of concern, it’s clearly the cash flow. So -- and also the fact that you would be somewhere around $200 million to $300 million at the end of '08 in the absence of any of the cash freeing initiatives from the balance sheet. I guess, what is the company's thought, that you would need to, or want to, or be likely to use the asset-backed revolver during the year as part of this, or is that not a factor into it?

Biggs Porter

Well, it's certainly not our desire to use it. It's not our anticipation to use it. We will have negative cash flow in the first quarter, which is typically the case, but we still don't believe that will put us into the revolver. So I think that there is an insurance policy, a safety net. But we expect to work very hard on our cash performance in 2008, get the improvement back and working capital that we expected in the fourth quarter, but didn't achieve. And as I pointed out in the script, there had been some other drivers of cash flow that were negative in 2007 that we don't expect to repeat themselves in 2008.

Sheryl Skolnick - CRT Capital Group

Yeah. Just tell people stop writing checks.

Biggs Porter

Yeah. We expect to execute.

Sheryl Skolnick - CRT Capital Group

Okay. And also related to walk forward, I'd like to understand what your targets implicit there for additional physician recruitment might be? And then if you could, the final thing would be an update on the healthcare property's lawsuit. I think I saw something that I'd like some explanation on?

Biggs Porter

Sheryl, let me deal with the physician recruitment issue and then let Peter give an update on the HCPI litigation. We are in the process of completing a fairly sophisticated medical staff development plan for each of our hospitals. We did what I would call a more elementary plan as part of the October through December budget process. We have that as a base line, but we're actually digging deeper into that in doing some extensive modeling on attrition related to aging of existing medical staff. I guess, in summary, we're probably looking to add 1,000 incremental active medical staff physicians to our medical staff in both 2008 and 2009. That will be our target for those years, and I think that will both handle the attrition, as well as meet the needs in those communities where demand continues to grow.

Sheryl Skolnick - CRT Capital Group

I am sorry, Steve. The targets for '08 and '09, I know you said it but I couldn't write it down (inaudible).

Biggs Porter

1,000 incremental active staff physicians.

Sheryl Skolnick - CRT Capital Group

In each. Okay.

Biggs Porter

Each year.

Sheryl Skolnick - CRT Capital Group

Okay. Great.

Biggs Porter

And sure we have Peter, if you have a detailed question on HCP, but we've disclosed in our 10-K that we're in settlement discussions. If there is a sensible settlement to make, we would prefer to settle it. But I think that's all we're going to say on the matter.

Sheryl Skolnick - CRT Capital Group

Well then, I guess I don't need to hear from Peter. So the summary is that no flow in January, but you had volume increases flow in February, getting some volume increases. Pricing is better than it was, and you are targeting the physician growth in areas where it’s going to help you. The way you target it, your capacity in areas is going to help you, and your cash is still an issue. Is that fair?

Trevor Fetter

Perfect summary.

Sheryl Skolnick - CRT Capital Group

Great. Thanks a million. Good job.

Operator

Thank you. Your next question is coming from Henry Ritchotte with Deutsche Bank. Please go ahead.

Henry Ritchotte - Deutsche Bank

Yeah. Just a question on the EBITDA for the quarter. Just on the normalized or the favorable bad debt adjustment that you were able to take in the quarter of $19 million. How much is that related to the fourth quarter, and how much of that is related to all of 2007?

Biggs Porter

Well, I would say that it all relates to 2007, so if you are trying normalization, I would normalize it out of the year, in which case then I would say it probably is equally spread over the course of the year. But as I said, there were other cost effects in the quarter that you would also normalize out, the compensation and benefits accruals that I referred to would be attributable primarily to the year. There is the case of the pension component of that, which is relatively a small portion of it, but that component probably is something that we wouldn't expect to recur at all.

Henry Ritchotte - Deutsche Bank

Okay. And then just on the pricing for the managed-care contracts, I know you had the -- I think it was the 9% growth and you got a couple of contracts that are being renewed or renewed after the end of the year. Should we be thinking about managed care pricing increasing along the lines to that 9% in 2008?

Biggs Porter

Well, I think that the walk forward should be reasonable view of what we expect in terms of incremental lift from the negotiations. We put $36 million into 2008, and $34 million in 2009, reflecting the price increases associated with achieving market parity on our contracts in those specific hospitals, contracts in markets where we needed to get ourselves back up to market level. Beyond that, we really don't make disclosure on managed care pricing and commercial managed care pricing separately. So I wouldn't want to give you the exact number, but I think a reasonable continuation of what we experienced in the fourth quarter of the second half is an acceptable approach.

Henry Ritchotte - Deutsche Bank

Okay. Thanks very much.

Operator

Thank you. Your next question is coming from Justin Lake with UBS, please go ahead.

Justin Lake - UBS

Thanks. Good morning, just a couple of quick questions on some of the numbers here. The bad debt, it looks like the uninsured, and that's where half the charity cares down. Can you remind me if there's been any change in charity care recognition versus uninsured over the last summer quarters.

Steve Newman

The only real change that occurred was a regulatory change in California, but it would have actually gone in the opposite direction and would not have declined or reduced the charity number. That was relatively minor, so on all that it’s apples-to-apples, but it does move back and forth as we go through time. In the aggregate, the trend seems to be narrowing and the rate of increase that we experienced in the past seems to have diminished and stabilized somewhat. Okay, on the two combined.

Justin Lake - UBS

Okay. That's helpful. And as you look at your volumes, I know you said there was much benefit from flow in January and same in February, but how is the payer mix looking?

Biggs Porter

The payer -- in the fourth quarter?

Justin Lake - UBS

No, I am sorry, January and February.

Biggs Porter

Oh, January and February is that. At this point, I wouldn't want to comment on that level of detail on the first couple of months or first month and a half on which we have the information. We give volume information, we started that practice and recognized it. We set that precedent, but I think drilling down in a greater level of detail, on an interim basis it wouldn't make a lot of sense.

Trevor Fetter

Yeah. We'll wait for the first quarter call. Yeah.

Justin Lake - UBS

Okay. Is there a reason, I think, that has been meaningfully different than what you've seen in the last couple of quarters?

Biggs Porter

That would be the equivalent I am giving in a comment on a great level of detail.

Justin Lake - UBS

And then on the managed care pricing, just a couple of quick questions and I'll jump back in the queue. Do you have the pricing of 9%? The ad net is down, because of those couple of hospitals. Given that you mentioned the contracts are bringing some of your hospitals in network versus other network. I would think the opposite effect will be happening, or your pricing will come down a little bit just because other networks normally have the inflation side is obviously on higher revenue, but that your ad nets will be going up because you're going in network. Is there a reason that's not happening?

Steve Newman

Well, what you've described Justin, is actually true, but because it takes time for those factors to work and it would take maybe two quarters before you actually see the effect of that dilution of bringing those out of those network providers.

Justin Lake - UBS

Okay. And then as I talked to some of the managed care providers. I talk about the pressure from hospitals out there as far as contracts negotiations. Some of them talked about giving in a multi-year contract giving a large increase upfront in the first year, so you might get to a 7% blended number, that you are giving 12 in the first year and 4 in the next two. Can you tell us are any of your contracts structured and I noticed you mentioned most of your contracts have an inflationary update to kind of factor in them, but…

Trevor Fetter

Well, without giving you specifics, Justin, we are very sensitive to that particular issue and we need to make sure that we stay at rate parity if we are dealing multi-year agreements. So our contracts range in duration from two to four years. And certainly there may be some variation over the course, but one of our major contracts we recently did, which will remain unnamed is actually higher in the outer years than it is in the first year. So that's very much to be individualized with each contract renewal, and it's also based on where we see that hospital in relationship to the competitors in the marketplace, so that we get parity for our acuity adjusted reimbursement.

Justin Lake - UBS

Okay. So you expect to see similar rates in the back years that you are getting right now.

Trevor Fetter

That is correct.

Justin Lake - UBS

Very helpful, thanks a lot.

Operator

Thank you. Your next question is coming from Ken Weakley with Credit Suisse. Please go ahead.

Ken Weakley - Credit Suisse

Thanks, and good morning everyone. Just a follow-up on Justin's questions on the Florida market. If you look back at the fourth quarter, I think you said the admissions were down 0.3. Can you tell us, historically at least, what that admission trend would have been if you take out Charity and uninsured. In other words, I mean clearly Florida has been a problem because of Charity and uninsured, so I'm just trying to get a sense of how that composition of admissions in Florida is changing?

Trevor Fetter

Well, we would have to get back with you on that. Maybe we'll have Tom Rice give you a call back. We wouldn't have that subtracted and ready to give you today.

Ken Weakley - Credit Suisse

Okay. Is it your sense, generally speaking, that Florida is improving in a qualitative way on the payer mix side? Clearly, over time, the uninsured has been a big issue. But I'm just wondering if tourism is coming back in a strong way, and that's really helping out the marketplace, or are you taking market share more aggressively than you had in the past?

Trevor Fetter

I think the answer to your question is yes, yes, yes and yes. Tourism has increased slightly in this winter season compared to prior year; it's not back to the pre-hurricane levels by any stretch of the imagination. Secondly, we are growing the preferred payers there and we are taking markets share from the competition in a number of key payer lines.

Kenneth Weakley - Credit Suisse

Okay. And as one follow-up for your Medical Staff Development Plan, adding 1,000 doctors could bring in some sort of financial risk, if you will, on a supply side. So can you give us some sense of where your safeguards are? In that respect, it's clearly, you know, doctors want to practice medicine the way they want to and that can really drive your margin the wrong way.

Biggs Porter

Well, clearly, Ken, whenever we do a relocation agreement with a physician or an employment agreement, we make sure there is a defined community need, and we have extensive methodologies with third parties that make that assessment before we do that.

Whether a given private practice decides to expand because of the aging of the senior members of that group is a totally different story. But we are very careful, and we look at it from a financial point of view, as well as what is that community need that we're expanding to meet with our active recruitment, relocation, redirection programs.

Kenneth Weakley - Credit Suisse

Actually, I meant supply costs, managing supply costs in light of bringing in lots of doctors. Sometimes that can be a challenge for hospitals. I'm sorry.

Biggs Porter

So you're talking about by medical supply cost?

Kenneth Weakley - Credit Suisse

Yes, yes.

Biggs Porter

Well, clearly, I hope and as we saw in the fourth quarter, that our revenue grows, as we do more procedures that include higher intensity of supplies. For example, in the fourth quarter, we had a 3.5% increase in the number of surgical procedures that required an implant. So there should be a compensatory offset of that in revenue.

Most of our managed care contracts have carve outs for those specific procedures, so we are very cautious about expanding the implant surgical business, such that we can offset those extraordinary supply cost. Additionally, we are always working on new supply contracts that will lower our cost of providing those particular prostheses.

Kenneth Weakley - Credit Suisse

And do you have case mix in the quarter?

Biggs Porter

Case mix in the quarter, it was up just slightly.

Kenneth Weakley - Credit Suisse

Okay. Thanks so much.

Operator

Thank you. Your next question is coming from Matthew Borsch with Goldman Sachs. Please go ahead.

Shelley Gnall - Goldman Sachs

Hi. Thank you. This is Shelley Gnall for Matthew Borsch. Question on the volume update. I think you mentioned that you were seeing some deterioration in Texas and that you were expecting to be resolved, can you give us a little more detail on the situation there?

Biggs Porter

Well, we don't disclose the names of the individual hospitals, but we do have one situation in Houston, where our physician-owned competing hospital opened early in 2007, so we're passing the anniversary date on that. And additionally, we are adding tertiary care services that will help to differentiate that hospital from the competitor about a mile or mile and half away.

Other situations, we have seen in at least one of our other markets, some erosion of the physician days, and we are working aggressively on a particular service line renovation and expansion, which should re-attract those particular physicians and the volume with those doctors.

Shelley Gnall - Goldman Sachs

Can I ask for a clarification? Is that because those physicians are retiring or they perhaps leaving for competitors in those markets?

Biggs Porter

In the second case, it was going to a competitor that made a very substantial capital investment and a similar physical plan, and we’re moving forward to extinguish that advantage.

Shelley Gnall - Goldman Sachs

Okay. Great. Thanks. And then one quick follow-up, if I could, on the asset sales issue. I'm just wondering if you can tell us where Broadlane contribution is on the income statement, I mean how much it impacted earnings in '07?

Biggs Porter

Well, we don't disclose separately Broadlane's contribution earnings, but it is in the equity earnings element of the financials. So if you look in the disclosures in our 10-K, you'll see disclosure of our equity earnings of the unconsolidated subsidiaries and [investies], but is just a component of that.

Shelley Gnall - Goldman Sachs

Yeah. Okay. Thank you.

Operator

Thank you. Your next question is coming from Erik Chiprich with BMO Capital Markets. Please go ahead.

Erik Chiprich - BMO Capital Markets

Good morning. Just a question, I know you talked about the good volume increases in January, and I know the first quarter last year was a bit weak, but can you talk about the monthly progression last year and kind of what the comps are that you're seeing in that months?

Steve Newman

Erik, this is Steve. You're correct. Last January we had weakness. February comp was fairly strong in '07. We are continuing to see strength in February as Trevor pointed out in his remarks fairly gratifying month-to-date. We have four more mid-nights to go through before we finish the month of February. So I am reluctant to make more predictions about that. But I think it’s fair to say that the strength we saw in January is continuing through February, and is extraordinarily broad based across all regions.

Erik Chiprich - BMO Capital Markets

Okay. And then, finally, could you just talk about what's embedded in your 2008 guidance for the help of the underlying economy, and what macro pressures might have on your volumes and bad debt?

Steve Newman

Well in terms of the outlook of 70 to 75 to the 850 of EBITDA, we said that one of the variables assumptions was bad debt expense. I think we gave a range on the year of 6.5% to 7%, which would be an increase of this year. So there is a combination in the range, should we have an increase in uninsured or a decline in the ability to pay above and beyond our ability to mitigate.

At this point in time, we don't see evidence of that. We looked at our collection experience over the last several months, and at this point, do not see once again any evidence, so it remains subjective, highly subjective, as to whether or not that's going to occur.

Erik Chiprich - BMO Capital Markets

Okay. Thank you, and good luck with your initiatives.

Steve Newman

Thank you.

Operator

Thank you. Your next question is coming from Gary Lieberman with Stanford Group. Please go ahead.

Trevor Fetter

Good morning, Gary.

Gary Lieberman - Stanford Group

Well, good morning. I appreciate the comment in the press release about the three hospitals accounting for the majority of the decrease in the managed care commercial volumes, but it's not like that this is the first quarter you've had that trend. It's been going on for some time and is actually accelerated in the fourth quarter from the third quarter.

So, tell me, if you could, talk a little bit more about what you are doing broader to get that trend going in your favor, because I think that it is an extremely important one, in terms of revenue guidance that you put out here?

Biggs Porter

Well, Gary, you are correct. It isn't important issue for us. But if you go back and look sequentially the fourth quarter was actually the second best quarter that we've had in the last three years. So, we're making progress. The third quarter was extraordinary, down 0.6%, so this really continues our trend line of moving towards zero year-over-year. So, I would suggest that third quarter was more of an aberration than the fourth quarter. But we are redoubling our efforts through the physician relationship program….

Gary Lieberman - Stanford Group

Are you there?

Operator

Ladies and gentlemen, this is the Operator. I apologize that there will be a slight delay in today's conference. Please hold on and the conference will be resumed momentarily. Thank you for your patience. The conference will now resume.

Trevor Fetter

Okay. Sorry about that we had a line disconnected here. We only have time for about one more question anyway, so operator, I'm not sure if you've lost the queue, but why don't you take the next caller?

Operator

(Operator Instructions). Your next question is coming from Tom Gallucci with Merrill Lynch.

Unidentified Analyst

Hi, good morning, this is (inaudible) on for Tom. Discussing your physician relationships, how quickly are your new doctors ramping up in their markets. And I guess as a follow-up on that, where are you guys attracting the doctors from, primarily?

Steve Newman

Well, two good questions. The first, it really depends on the specialist of the physician. We see that surgical specialists tend to ramp up their business over 12 months to 18 months, as opposed to primary care, which is more an 18 month to 24 month up tick to a plateau. So it does take a period of time, depending on the overall need and what the specialty of the physicians.

With respect to the greatest number of physicians we're adding to our medical staff, it clearly come from redirection of physicians who have practices in our combined service areas. That way, they're able to translate more discretionary admissions in out-patient utilization in a shorter period of time. That redirection activity really dwarfs the total number of patients we see as a result of both active relocation, as well as our employment strategies.

Unidentified Analyst

Okay. Great. And do you have a breakdown of the doctors that are specialists, like a ratio?

Steve Newman

Yes. In terms of our overall redirection strategy, about 60% of the redirection is in specialty, about 40% is in primary care. In terms of the employment strategy and relocation, it’s virtually the reverse, where we're needing to expand our primary care base to meet community need.

Unidentified Analyst

Okay. Great. And I just have one last one on the guidance. For EPS the front page of your press release says negative $0.03 to positive $0.06, and it looks like the reconciliation in the back on the text is, I believe, negative 10 to positive 5. Is there something quirky going on there with like taxes or a one time item?

Biggs Porter

Yes, the difference is, the one on the front page is normalized the way we understand the street traditionally does it, so it uses a normalized tax rate of 37.5%.

Unidentified Analyst

Okay.

Biggs Porter

The one in the back, you'll see in the tables, is reconciled to GAAP and uses $20 million actual tax expense, even at the low end.

Unidentified Analyst

Okay.

Biggs Porter

Now which drives to a lower number, and also includes $5 million of litigation expense, which is not included on the front page.

Unidentified Analyst

Okay. Great. Thanks for the color.

Biggs Porter

The front page is just very clean and normalized.

Unidentified Analyst

Okay. Thank you.

Trevor Fetter

Okay, operator. I think we have been going for an hour and a half; we plan to end the call at this time. So, for any of you still listening, who are in the queue for questions please just follow up by phone with Tom. And thank you all very much. We'll see you on the next call for the first quarter results.

Operator

Thank you. This does conclude today's teleconference; you may disconnect your lines and have a wonderful day.

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