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

Tenet Healthcare Corporation (NYSE:THC)

Q1 2008 Earnings Call Transcript

May 6, 2008 11:00 am ET

Executives

Trevor Fetter – President and CEO

Steve Newman – COO

Biggs Porter – CFO

Analysts

Adam Feinstein – Lehman Brothers

Tom Gallucci – Merrill Lynch

Shelley Gnall – Goldman Sachs

Ken Weakley – Credit Suisse

Shirley Skolnick – CRT Capital Group

Justin Lake – UBS

Gary Lieberman – Stanford Group

Rob Hawkins – Stifel Nicolaus

Kemp Dolliver – Cowen & Co.

John Ransom – Raymond James & Associates

Mike Scaralango [ph] – Merrill Lynch

Miles Highsmith – Credit Suisse

Whit Mayo – Stephens

Operator

Good morning, and welcome to the Tenet Healthcare’s conference call for the first quarter ended March 31, 2008. This call is being recorded by Tenet and will be available on replay. A set of slides has been posted to the Tenet website, which the management will refer during this call. Tenet's management will be making forward-looking statements on this call. These statements are based on management's current expectations and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements.

Management will be referring to certain financial measures, including adjusted EBITDA, which are not calculated in accordance with general accepted accounting principles, or GAAP. Management recommends that you focus on the GAAP numbers as the best indicator of financial performance. During the question-and-answer portion of this call, callers are requested to limit themselves to one question and one follow-up question.

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

Trevor Fetter

Great, thank you, operator, and good morning. Let me start by saying I am pleased with our results for the first quarter. Tenet is performing more consistently than at any point in the recent past and it's becoming increasingly clear that the strategies we have in place are proving to be effective. We have now had two consecutive quarters of breakeven to slightly positive same-hospital admissions growth, which is a great improvement over the consistent declines we saw from 2004 through most of 2007. Our same-hospital admissions were up 1.0% for first quarter with flu contributing only 20 basis points.

While we still have more work to do, this is the first quarter in a long time in which I would say we are pleased with our EBITDA performance. Same-hospital adjusted EBITDA was up 23% to $239 million. And even though it's still well below our industry peer companies, our EBITDA margin rose 120 basis points year over year to 9.9%, continuing an upward trend of several quarters. Thanks to our efforts across multiple initiatives, we now have a steady flow of physicians joining our medical staffs. Going forward, we expect they will increase the number of patients they refer to our hospitals.

Additionally, we are getting attractive pricing increases from our commercial managed care customers. I believe this is a result of our multiyear efforts to raise our standards for clinical quality, improve the reputations of our hospitals, and Tenet as a company, and employ better informed contracting strategies.

The strong cost discipline that we've demonstrated in the past few years continued in the first quarter. One of the good things about our business is the operating leverage that you can generate through modest increases in volume when combined with good cost control. This operating leverage helped us deliver good performance in the unit cost metrics that we reported this morning.

And though we saw a modest increase in bad debt expense, even here we made real progress. The rate of growth in uninsured admissions slowed to 5.4% from the more challenging 7% to 10% growth rates we reported last year. Total uninsured and charity admissions actually declined by 1.2% in the quarter.

Those of you who follow the large managed care companies are well aware that enrollment trends across the managed care industry are flat. That trend, along with the enrollment declines in the rental networks, explains about one-third of the declines in commercial managed care volumes that we experienced in the quarter. Also, over half the loss in commercial volumes comes from just three hospitals. Steve Newman has some very interesting insights into commercial volume growth coming out of our targeted growth initiative, which he will share with you in a few minutes.

EBITDA grew more than 20% in the quarter versus Q1 '07. This stronger than anticipated performance was driven by pricing and cost control. We expect good – continued good performance on commercial pricing and costs. So if we can close the remaining gap on volumes, particularly the mix of volumes, we are well positioned to meet our earnings objectives for the year.

Looking to our 2009 objective, we need to build upon our rate of volume growth and maintain the pricing and cost discipline I just spoke about. I am pleased to report that our volume growth was strong in April with same-hospital admissions up by 3.7% and outpatient visits up by 2.8%.

Because there was a lot of noise in Q1 this year due to leap year and Easter we thought you would find some year-to-date same hospital statistics to be useful. For the first four months, same-hospital inpatient admissions are up 1.6%, commercial is down 2.6%, charity and uninsured are up 1.3%, and outpatient visits are down just 0.1%.

I want to close by commenting on two other items. Earlier this month, we announced that we had signed a nonbinding letter of intent to sell USC University Hospital and USC Norris Cancer Hospital to the University of Southern California. If this goes through, it will settle all litigation between the parties. And though we would have preferred to retain these hospitals, the continuation of litigation was beginning, in my opinion, to do irreparable harm. We disclosed in the 10-Q certain financial information about the hospitals and the sale transaction, but the key takeaway is that the sales price will be equal to net book value at closing.

As a point of reference, the net book value was $311 million at March 31, 2008. Last year, the hospitals generated EBITDA excluding corporate overhead and nonrecurring items of approximately $25 million. And a normal level of capital expenditures is at least $10 million per year.

Finally, let me remind everyone that we have our annual investor day scheduled for four weeks from today in Dallas. It will be available via live webcast. This full day of presentations will give us the opportunity to discuss, in detail, our operating strategies, progress, and growth initiatives. And with that, let me turn the floor over to Tenet's Chief Operating Officer Dr. Steve Newman to provide further detail on our activities during the quarter. Steve?

Steve Newman

Thank you, Trevor, and good morning, everyone. Let me start by reviewing our progress on medical staff development and relationship building. Physician relations represents an appropriate starting point because it's the cornerstone of our business, and physicians are incredibly influential in determining our market share and growth.

We continue to place significant effort into our Physician Relationship Program, or PRP. Through the PRP initiative we made 13,158 calls on 6,764 physicians in first quarter. The PRP targeted physicians with existing active staff privileges, increased their admissions to our facilities by 5.7% in the first quarter of '08 compared to their admissions in Q1 '07. This is our best quarterly performance since we launched the PRP program in late 2005.

We also called on 497 unaffiliated physicians in the first quarter. This group of almost 500 physicians represents practitioners currently lacking admitting privileges at any of our hospitals. This effort is aimed at redirecting physicians already in our service areas. This creates a virtual pipeline for future expansion of our medical staffs.

Many of the calls made in prior time periods resulted in new physicians joining our staffs and contributed to the admissions we achieved in the first quarter. We added 178 active medical staff in the first quarter net of attrition. When added to the previously reported 2007 expansion of our active medical staff, this aggregates to a 10.3% growth of our hospital's medical staffs since the beginning of 2007.

I want to highlight some of the enhancements we are making in the PRP program. We are extending the numbers of staff in our hospitals joining the PRP teams, and educating them through our expanded training curriculum. We are also launching a customized education program for our hospital-based physician recruiters.

Our overall admissions grew 1.0% in the quarter compared to admissions in the first quarter of '07. While we had a decline in aggregate commercial managed care admissions, the aggregate number of negative 3.7% doesn't tell the whole story.

You will recall that two years ago we began implementing our Targeted Growth Initiative, or TGI. Take a look at the data on Slide 15. As you are turning to Slide 15, I need to make an important point about TGI. While we are showing you how we are doing in attracting commercial patients to our hospitals in the targeted service lines, a number of service lines, which are heavily skewed towards commercial patients were deemphasized by TGI. These deemphasized service lines often include neonatology, obstetrics, and selected outpatient services.

At the same time, TGI often emphasizes services principally to the senior population. For example, our resurgence in Florida, which made a key contribution to our profitability in the quarter was heavily Medicare-driven. The point to keep in mind is that the targeted growth means exactly that. We are targeting the service lines with the greatest potential for growth in volumes and profitability, and as Slide 15 shows, for commercial managed care, the targeted service lines performed better than the aggregate commercial volumes.

Let's look at the eight service lines most commonly targeted for growth in our hospitals. Seven of the eight service lines showed significant growth in comparison to volume in Q1 '07. The range is from up 0.4% to up 9.5%. The one service line that was down out of the eight, as we've mentioned on other quarterly calls, was cardiovascular services, also known as CAD EP, which was down 12.9%. The emergence of local competitors has caused to us lose market share in these services, but we have plans to stabilize, and subsequently recapture market share in this service line.

Moving our perspective from targeted service lines to individual hospitals, commercial volume declines were very concentrated, and more than half of the decline of 1520 commercial admissions occurred in just three hospitals. Each of these hospitals was confronting unique local issues. These issues are being methodically addressed, and we believe a number of them can be reversed within a reasonably short timeframe. In fact, in April, we saw commercial admissions return to flat in these three hospitals.

I would be remiss if I failed to spend just a few minutes highlighting the remarkable progress we continue to achieve in Florida. Our 10 Florida hospitals had aggregate admission growth of 1.1% in Q1 '08 over Q1 '07. This is the best performance turned in by our Florida operations since Q1 '04. We have continued to succeed in reducing outmigration from our network in neonatology, cancer care, and advanced cardiac services. We are regionalizing certain services like advanced neurointerventional activities at Delray Medical Center, while several of our other Florida centers are obtaining primary stroke center designations and will act as referral sources to Delray for the most advanced care. I should also note that commercial managed care open heart procedures in Florida increased 14 cases, or 17.7%, compared to the first quarter of 2007. This is our first market share gain in Florida commercial open heart procedures since 2005.

Finally, I want to offer some additional color on April volumes. We are very pleased to see April admissions growth of 3.7% over April of '07. Even if we normalized for the extra weekday in April '08 versus April '07, this would have to be characterized as a very strong performance. Importantly, all five of our regions achieved volume growth in April and broad based resurgence over a softer March. And importantly, commercial admissions grew by a very encouraging 0.9%.

Let's spend a few minutes looking at our outpatient business. We were particularly disappointed with the decline of 1.1% in outpatient visits, and a 2.1% decline from commercial payers in the face of an extra day for leap year. The majority of losses was in imaging and referred laboratory studies. While outpatient surgeries were down 1.7%, I am pleased to report the volume of outpatient surgery in our freestanding centers increased 11.7% in the first quarter.

With the moderation of outpatient losses over the last six quarters, we are becoming more aggressive in implementing initiatives to recapture market share. To do so, we have expanded the staff in our outpatient services group, and continue to make selective and opportunistic acquisitions in both ambulatory surgery centers, and diagnostic imaging centers. This is a highly competitive business, but we believe we can win the business with service excellence, quality outcomes, operating efficiency and industry-leading throughput times, which patients and physicians increasingly demand.

To this end, we are implementing centralized scheduling on a number of campuses, giving physicians and their critically important office staffs the ability to do one-stop scheduling. We are also replicating techniques, which are driving success in our freestanding centers and our hospital-based outpatient surgery units. Before leaving the outpatient discussion, it is noteworthy that April outpatient volumes were up 2.8% compared to April of ’07, additionally, as volume improvement was broad based with four out of the five regions in the company showing gains for the month.

Turning to pricing, we achieved very solid improvements in the quarter. This is the tangible result of the steady stream of new agreements successfully negotiated and announced since last summer. These enhancements include not only the normal inflationary resets, but also reflect significant progress towards our objective of closing the pricing gap relative to competitors to achieve rate parity. There are still isolated instances where we have yet to attain rate parity. While we have negotiated the great majority of our contracts in the near term, potential incremental gains remain in the intermediate to long term.

Our managed care teams carefully monitor our commercial volume activity in each of our markets. It's been interesting to observe that we have experienced good growth in commercial volumes in many of the same markets where we have seen significant pricing gains. A significant percentage of our pricing gains have simply closed the previously existing gap between Tenet's commercial rates and that of our key competitors. Since our rates have only just now caught up to our competitors, pricing has not been a deterrent to commercial volume growth.

Last week, we reached a memorandum of understanding with Independence Blue Cross for a new multiyear contract, which would give all of their subscribers in the Philadelphia area access to our two hospitals – Hahnemann University Hospital and St. Christopher's Hospital for Children. This new agreement will also cover our faculty practice physicians and all of our outpatient facilities. We are also pleased that this new agreement includes provisions for our hospitals to receive incremental payments for reaching mutually agreed upon quality goals. While the total dollar amount of these potential quality payments is small relative to the size of the contract, this formal recognition of quality differentials strengthens what we see as an important precedent in the industry. Our strategy is to position ourselves for success in a pay-for-performance environment.

We've also made substantial progress in improving the cost structure of our hospitals, outpatient facilities, and support services. Productivity, as measured by FTEs per adjusted average daily census, improved 1.2% in the quarter compared to Q1 '07. Same-hospital contract labor expense per adjusted patient day was down 10.7%. Part of this was due to an 18% reduction in registered nurse turnover in the quarter.

Same-hospital supply cost for the quarter were also well controlled, increasing by just 3.9% per adjusted patient day. This is excellent supply cost containment in view of a 1.2% increase in orthopedic, neurosurgical, and general surgery procedures, which required the use of implantable devices.

While we made significant improvements in overall cost during the quarter, we continue the rollout of new and improved tools for our managers to help them track productivity and improve throughput and efficiency through process redesign. We are also expanding our efforts to standardize many high-cost implants.

In summary, our strategies to grow our admissions, our medical staffs, and to control our costs are working. This, combined with improved pricing through managed care negotiation and TGI focus, delivered significant bottom line improvement.

With that, let me turn the floor over to our Chief Financial Officer Biggs Porter for his review. Biggs?

Biggs Porter

Thank you, Steve, and good morning, everyone. Trevor and Steve have already done a good summary, so I will focus more detail on some of the financial elements in the quarter. Before I do, I will note that our first quarter adjusted EBITDA of $234 million keeps us well on a path to achieve our outlook for $775 million to $850 million adjusted EBITDA for the year.

On a same-hospital basis, adjusted EBITDA increased to $239 million, an increase of 23%. It was a relatively straightforward quarter, but there are a few items I will mention. First, favorable cost report settlements added $2 million pre-tax, down from the $12 million recorded in the first quarter of 2007. Second, there was $8 million of bad debt mitigation resulting from the settlement of long overdue disputed managed care accounts.

Third, we recorded $6 million of funding from Georgia Medicaid, $4 million of which is retroactive to last year as the state reversed approximately $7 million of its funding cuts we disclosed last year. Fourth, we recorded $6 million in distributions from an HMO in which we have an equity interest. Fifth, we incurred impairment and restructuring charges of approximately $1 million. And six, we increased our provision for litigation related to California wage and hour and other matters by $47 million.

The first four items I just mentioned are included in our adjusted EBITDA results, the last two related to impairment and restructuring and litigation are not. It is, of course, a judgment call as to which of these items might be nonrecurring, not just for the quarter but for the year. Of those affecting adjusted EBITDA, the only item which I would rule out from repeating on an annual basis is the $4 million retroactive portion of the Georgia Medicaid funding. I will talk more about Medicaid funding in a minute.

Turning to volumes, the 1% admission growth we achieved first quarter was within the range used as the basis for our 2008 outlook. A very strong January and adequate-to-good admissions performance in February was followed by lower volume numbers in the month of March. Among other factors, there was no meaningful contribution of flu admissions in March. In fact, flu added only 20 basis points to our admissions growth for the entire quarter. It was essentially confined to the month of February.

Assessing the underlying organic growth in admissions in the first quarter is complicated by both leap year and an early Easter holiday. Although we looked at it, and I know others have tried to measure the impact, we don't think there is a single correct measure of the effects. Our only real conclusion is that we were close to our outlook range for the year on admissions, but fell short in outpatient visits, and had a negative payer mix shift away from commercial managed care.

We are still early in the year and we continue to believe we can achieve our outlook on admissions of 1% to 2% growth, but believe at this point that outpatient visits will more likely be in the range of 1% to 2% as well rather than our original outlook of 2% to 3%. We believe, however, that the softness in visits in commercial volumes have been and will be more than offset by favorable pricing.

Now, on to revenues. First quarter consolidated net operating revenues rose $2.4 billion, an increase of 6.9%. Although helped by admissions growth, this 6.9% relative increase was principally due to strong pricing. Slide 24 on the web shows that we experienced solid progress in all our key pricing metrics. Same-hospital revenue per adjusted admission increased by 5.5%. The net effect of year over year cost report adjustments and the unusual effects of the retroactive Georgia Medicaid funding and first quarter HMO distribution basically offset each other.

In addition to the positive effects of our managed care negotiations and other price enhancement effects, we averaged better than expected Medicare pricing in the first quarter. Before leaving pricing, I want to sound a word of caution we may experience some moderation in pricing gains as we proceed through the year. There are four factors. First, first quarter pricing was influenced by an increase in procedures requiring medical devices. These higher priced procedures may not continue through the year at the same level. Second, in the second and third quarter, we anniversary earlier pricing enhancements from our efforts to improve the accuracy of acuity capture in our emergency departments. We will continue to make refinements as necessary to increase accuracy, although it is still early to predict to what degree that might result in additional charges being captured. Third, we believe that as we proceed through the year we may experience payer shifts from higher priced smaller plans to our larger, more competitively priced large payers, and have additional shifts between payer categories.

Offsetting this, there will be additional increases in managed care, which are already negotiated. We also continue to monitor the status of Medicaid funding in California and Florida. Although these states continue to face budgetary pressures and we cannot predict the outcome, at this time we do not believe the effects will be material to our 2008 or 2009 outlook. Based on our current understanding, the effect on 2008 appears to be less than $10 million.

As you can see, there are still a number of variables that will affect pricing for the remainder of the year. For this reason we have left our pricing outlook range fairly conservative. Obviously, we will continue to monitor this. We do believe we have good visibility into our managed care contract pricing for the next two years because approximately 84% of our commercial rates for 2008, and 68% for 2009, are already covered in signed contracts. As a majority of these contracts include escalators, favorable commercial pricing momentum can be expected to continue.

Turning to costs, the cost strategies we implemented in the second half of last year had a dramatic and very visible impact on our cost metrics in the first quarter. Same-hospital total controllable operating expense per adjusted patient day increased by just 2.6%. This is a very good result consistent with the walk-forward for 2008 earnings we shared with you on our fourth quarter call in late February. (inaudible) in this tight cost control picture was an extraordinary low 2% increase in same-hospital salaries, wages, and benefits per adjusted patient day. This growth was below what we granted in our average merit [ph] increases. The low growth and S WB is, therefore, the result of declining headcount, further supported by the effective management of temporary labor costs. Some of these savings came from improved employee retention.

Supply costs also were well controlled with same-hospital growth of 3.9% per adjusted patient day. The growth in prosthesis and implant procedures and costs continued to pressure this line item, increasing by more than $10 million, or approximately 11%. We also realized a further decline in malpractice expense, which declined by $4 million, or almost 9%. This reduction was net of the adverse $5 million impact, resulting from lower interest rates, which increased the discounted future liability estimates. As of the impact of interest rates, we would have achieved a 19% reduction in malpractice expense.

Our costs were somewhat negatively affected by increase in length of stay in addition to higher utilization medical devices. There was some revenue offset for these, but it does affect cost performance particularly if you look at it from a per admit standpoint.

On bad debt, as previously mentioned, growth in same-hospital uninsured admissions moderated in the quarter, showing an increase of just 5.4%. And uninsured visits declined by 3.8%. This growth was well below the 10% increase in uninsured admissions experienced in the fourth quarter. Revenues from the uninsured rose by $18 million, or 12.2% on a same-hospital basis. This increase in uninsured revenue has been driven by increases in our chargemaster as well as efforts to improve the accuracy and acuity capture in our emergency departments. These changes in uninsured charges create a parallel effect on bad debt expense. For the last three quarters, our refined ED charge capture initiative has been the source of the majority of our increase in bad debt expense.

Another significant factor influencing bad debt in the quarter was a net growth in the amount of revenue billed as balance after insurance. The increase in balance after added $4 million to bad debt expense for the quarter. An offset to bad debt was realized as a result of the resolution of some older disputes with a commercial payer, the $8 million I mentioned earlier.

So, to summarize, bad debt expense grew over the prior year first quarter by $16 million. Pricing of the uninsured contributed $17 million, an increase in balance after insurance contributed $4 million, and several miscellaneous items contributed an additional $3 million for a total of $24 million. Bad debt was reduced by the aforementioned resolution of some older disputes with a commercial payer by $8 million. As this settlement related to relatively old accounts receivable, this cash had virtually no impact on our receivables.

Switching the focus to accounts receivable, Slide 27 on our website shows that the accounts receivable increase was concentrated in the 0 to 90-day bucket with both the 91 to 180-day and the over 180-day buckets showing improvements. Managed care and aggregate self-pay collection rates remained constant in the quarter on our 18-month look-back basis. While same-hospital uninsured admissions and revenues were up over prior year first quarter, charity was down, making this another quarter in which there are opposing trends.

As we have stated on prior calls, it is difficult to trace the precise cause and effect on this, but we continue to believe that our strategies to emphasize favorable product lines, educating patients on the appropriate source for healthcare services, and assisting patients with available funding options are mitigations to what is a key risk in the industry.

Turning to cash flow and capital expenditures, as we discussed in our fourth quarter call, CapEx in the first quarter included some spillover from the fourth quarter. Accordingly, most of the capital spend the quarter occurred in January as we paid for equipment, which was delivered or in the pipeline at the end of last year. We still intend to adhere to our earlier outlook of $600 to $650 million in CapEx in 2008. As we also stated in our fourth quarter call, we anticipate that our capital spending will be more balanced over the first and second half of the year with significantly less concentration in the fourth quarter.

I should note, we received regulatory relief with respect to certain of our California hospitals, which will reduce our seismic requirements over the next several years. Although not likely to be significant this year, we are still determining how large the aggregate effect will be.

With respect to cash flow, the earnings release lays out a fair amount of detail on the cash flow of the quarter, and how it compares to last year. You may recall that adjusted cash flow from continuing operations came in lower than anticipated in the fourth quarter of last year, primarily due to working capital. I indicated in the year-end earnings call that we were focused on payables and overdraft management, and reducing days in accounts receivable over the course of 2008. In the first quarter, we improved our payables position consistent with our objectives. The improvement in accounts receivable is still ahead of us, but we held the line in the first quarter with days in receivables flat against last year at 54 days.

We are still targeting a day or two reduction in receivable days by the end of the year. Accordingly, receivables grew in the quarter proportionate to the growth in revenues, and as I said our growth in AR was in the 0 to 90-day bucket. Given $66 million in debt service, and $24 million payment to the Department of Justice in second quarter, in addition to continuing capital investments, our January 30 cash position is likely to be modestly below our March 31 cash balance. June 30 is expected to mark our quarterly low point in cash for the year. Going forward, we expect cash to build as a result of stronger operating cash performance in the second half of the year, our initiatives to produce $400 to $600 million of cash from balance sheet improvement actions, and the resolution of the USC matter. The respective upside and downside from there will largely be favorable resolution of the Redding insurance arbitration and the continuously reflected in our increased litigation reserve.

In terms of the $400 to $600 million in initiatives progress is being made. The MOB transaction is moving along as we have selected Jones Lang LaSalle as our broker on the transaction and we expect the formal offering announcement and related documents to go out the next couple of weeks. There is a slide on the web giving some high-level information on the MOB’s we own and are being offered.

We also continue to work with the other shareholders and the board of Broadlane to establish an approach to monetization of current shareholder interest. Accordingly, we still expect the list of action items in making up the $400 to $600 million to be completed by roughly the end of next year, although much of it could be and should be sooner.

Some of you have asked about earnings loss from these balance sheet initiatives. From a bottom line income standpoint, we expect the interest income generated from the cash proceeds to be sufficient to offset any loss of EBITDA generated presently by these assets. Looking at EBITDA alone, I don't believe we will have a loss of EBITDA sufficient to change our expressed outlook range for 2008, and the $1 billion or better in EBITDA targeted for 2009.

Moving to the outlook, Slide 29 gives our current outlook for the key metrics of financial performance. The 2008 outlook continues to include an expectation of adjusted EBITDA in the range of $775 million to $850 million, a growth of 10% to 20% over the $701 million of adjusted EBITDA for 2007. At this time, we are holding that outlook as we are the outlook on cash flow and year-end cash. I will remind you, though, that the cash outlook does not include any of the anticipated $400 million to $600 million in cash proceeds I just discussed, nor does our outlook reflect any effects of the sale of USC, the Redding arbitration, a litigation for which we have increased reserves.

We are adjusting our outlook for outpatient visits slightly as I described earlier, and offsetting that with improved pricing. We have updated 2008 and 2009 walk-forward charts on the web to show these effects. In the prior quarters I have done rather detailed, if not torturous, walk-forwards from year-to-date actuals to our outlook. This quarter, I am happy to say that outside of the offsetting changes to visits price I just referred to, there is no real need to establish a new reconciliation of actuals to the outlook.

Let me now ask our operator to assemble the queue for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is coming from Adam Feinstein of Lehman Brothers. Adam, you may go ahead.

Adam Feinstein – Lehman Brothers

Thank you, pretty close. Hey, thank you for all those details as always. Maybe just starting with the volumes, just clearly you are seeing improvement there on the commercial managed care side, you spent time talking about that. But I am just curious about the Medicare fee for service or Medicare Part A, just the weakness there. I was just curious if there was any reason why that would have been the case I would think with flu you'd see a lot of Medicare patients, so just wanted to understand that portion of the volumes.

Steve Newman

Adam, this is Steve Newman. We continue to show general strength across the company in the Medicare fee-for-service business. Obviously, the growing segment is the Medicare managed care business where we've seen significant growth over the last year.

Adam Feinstein – Lehman Brothers

Okay. So you think all of that is a function of just the mix shift to the commercial Medicare?

Steve Newman

Right.

Adam Feinstein – Lehman Brothers

Okay. All right. And then just a follow-up question, if I may here. So, with all the improvement you are seeing in pricing, when do you think we'll start to – I know, Biggs, you highlighted there could be some offsetting things throughout the year but just – you've been signing a lot of these contracts over the last several months. Just curious in terms of your thoughts when we'll start to annualize some of this benefit. Do you think that's something that will annualize in the fourth quarter or is that something that based on all the contracts you have signed that we won't see you annualize until the first quarter 2009?

Steve Newman

Well, I think that from the standpoint of the negotiated prices we should continue to see benefits throughout the year. We did have price increases kick in, in the second half of last year, so there will be some year-over-year effects of that anniversarying. Having said that, we do think the negotiations are going to continue to benefit the risk or the thing that's hard to measure is to what degree there could be payer shift as we go through the year that might offset that some.

Adam Feinstein – Lehman Brothers

Okay. Thank you very much. Great quarter.

Operator

Thank you. Our next question is coming from Tom Gallucci with Merrill Lynch.

Tom Gallucci – Merrill Lynch

Good morning. I just wanted to make sure I understand a little bit more on the volume side of things. You talked about year-to-date up 1.6%. I guess that the flu would have had maybe a 0.1% or 0.2% boost to that. And then you still have an extra weekday for the four-month period, and an extra day I guess in general. So, it would seem that maybe you are still under 1% sort of through the first four months adjusted for the day. Trying to think about going forward, the TGI category seemed to be doing well. The non-TGI categories, can you help us understand what – is there a thing that you are proactively closing, or is it just things that you are not emphasizing as much? And if you are not emphasize them as much, but you still want to be active in them, how do you stop that deterioration and actually get some growth in those non or lesser important categories?

Steve Newman

I think that's a good question. I think you've accurately characterized it. We are getting good growth in our TGI-focused areas. As will you remember early on in the rollout of TGI, we had significant service de-emphasis in our California region. As we moved TGI east across the company, there were less active service closures, but certainly de-emphasis has occurred. In many instances where we don't have a service line emphasized what we attempt to do is maintain market share and to work on improving the efficiency of rendering the care in those particular areas. Sometimes we work directly on variable costs, such as implants or length of stay or supply costs that occur in rendering of care to those patients. But all in all, I think the number of services that we have to shrink are very small today as we look across the entire company. So our efforts are to grow the targeted growth service lines both in terms of volume and profitability while focusing on improving quality and service in that area and maintain the standards, improving profitability in those services that were not in the targeted growth priority list.

Tom Gallucci – Merrill Lynch

Just as a matter of perspective, what percent of your business roughly maybe are the eight TGI categories versus the rest?

Steve Newman

Not to be glib, but not as much as we'd like in the future. Probably 40% of our total business are in the TGI service lines and we'd like to see that grow over time.

Tom Gallucci – Merrill Lynch

Thank you.

Operator

Thank you. Our next question is coming from Matthew Borsch of Goldman Sachs.

Shelley Gnall – Goldman Sachs

Hi, thanks for taking our question. This is Shelly Gnall on for Mat Borsch. Question on some of your markets. I am wondering if you are seeing any sort of differential demand for outpatient services that could be related to co-pays or increased price sensitivity because of the economy. And maybe if you could comment on any increase in unemployment in your end markets that would be interesting, too.

Steve Newman

Sure, Shelly. I've got the unemployment statistics. Let me start by saying that we have managed our portfolio in a way where we've reduced over the past few years our exposure in markets like California and Florida. In those markets unemployment is down slightly more than it is in the United States, but we have other markets importantly, El Paso, as an example, where the employment actually – employment is up, unemployment has decreased. And in the – we did a lot of looking for any sort of recession effects in our business. The only indication we could come up with is that in the managed care sector, our non-ER managed care business is weaker than our ER-based managed care business, but patient credit quality is even with last year and we have more of our uninsured patients are employed now than they were a year ago. That's up by 10 points to nearly 70%.

Shelley Gnall – Goldman Sachs

Okay. Great. Thanks. That's a lot of detail. And then as we look at the surgery declines, I'm wondering if you could comment on any color. Is there any important trend to take away from the decline in the surgery volumes related to the co-pays, deductibles or the elective component of these surgeries?

Steve Newman

It's interesting. We've certainly seen a decrease over the last year in areas like plastic surgery. There are multiple factors involved in that. For example, many have been shifted to competitors’ ambulatory surgery facilities, so we see those volumes continue to drop. It's hard to know whether that is related to the overall economy or whether or not it's simply a shifting out of our facilities.

Shelley Gnall – Goldman Sachs

Okay. Great. Thanks very much.

Operator

Thank you. Our next question is coming from Ken Weakley of Credit Suisse.

Ken Weakley – Credit Suisse

Thanks. Good morning, everyone.

Trevor Fetter

Good morning, Ken.

Ken Weakley – Credit Suisse

I was just curious, in terms of the recovery of Tenet at some point debt paydown will be an element of that and I don't know if I missed it during the presentation, I didn't hear it all. But can you walk me through your thoughts on strengthening the balance sheet in times, say in '09, '10, what your plans are and hopes or for that sort of debt level in time?

Biggs Porter

Well, we continue to have the benefit of time. We don't have any debt due until December of 2011, so there's still a fair runway here and our general approach baseline plan has been and continues to be to improve our performance, and as we get out to the period of time, some reasonable period before December '11, start to refinance, get the benefit of improved performance, improved credit ratings, and lower interest rate. In between now and then, if the stars align and it makes sense to do something sooner, so be it, but the baseline is to concentrate on our performance, get the benefit of that.

Ken Weakley – Credit Suisse

Okay. And then second question, on the pricing strength, can you give a little more color on how uniform your pricing gains may be across your footprint, and what the duration of the contracts may look like in terms of – not just how long the contract is going to be, but what the increases will be in the out years? I mean sometimes there's a big difference between initial versus the latter prices. So I'm just trying to get a sense of what we should expect going forward.

Steve Newman

Ken this is Steve Newman. Part of your question is the duration of the agreements. And as we've said before they vary between two and four years.

Ken Weakley – Credit Suisse

Okay.

Steve Newman

Certainly we want inflationary resets on an annual basis, plus those things which move us along with the market to maintain our rate parity during that time period, but I wouldn't say that we are front-end loading or back end loading any of our contracts. It's fairly smooth throughout the period.

Ken Weakley – Credit Suisse

Okay. Very good. Thank you.

Operator

Thank you. Our next question is coming from Shirley Skolnick with CRT.

Shirley Skolnick – CRT Capital Group

Thanks very much. I am noticing that your shares are trying to be down about 4%. One of the other hospital companies are also down about 4%. And I can only speculate that it's related to concerns about the quality of your earnings about potentially – we've heard criticism, obviously, over the last couple of weeks of – that the company is over reserved, and to put it bluntly, the only way it can make its numbers is through one-time items. I guess I want to give you the opportunity to respond to that, so that I don't have to miss-state what the company's view is or I can reflect it accurately in my own thought process about the company. And specifically, related to as you discussed, Biggs, some of the, albeit in my mind small, one-time items this quarter that may, in fact, be ongoing issues for the company that are positive, but I think it is something that needs to be discussed, especially when you report an absolutely fabulous reported EBITDA number; you have negative cash flow from operations, albeit we understand the seasonality of that to some extent. It does lend itself to that criticism and I'd like to hear your response.

Trevor Fetter

Well, you know, we take the approach of communicating a lot about our results and trying to be as clear as possible as to what the content of items are, not to encourage people to back them out because they are one-time, but rather just to make sure that we give a good basis for analysis. And as I pointed out, and started out the conversation with the list of items which influenced the quarter, albeit some of it small, the only thing, which I've pointed out that seemed to be truly not repeatable, at least on an annual basis, is the retroactive adjustment on Georgia Medicaid, which is only about $4 million. One of the reasons for me mentioning that is because we had a focus on Georgia and Florida Medicaid DSH funding last year, and had said that it was reducing by 60 million. So clearly there was a $7 million reduction of that in – or improvement, if you will, restoration of that in Georgia, so it's worth noting. And in the context of that it’s worth noting that $4 million of it hit this quarter on a retroactive basis. In terms of one of the other items on the managed care negotiations and the $8 million related to the settlement of some old accounts, we have been doing that quarter after quarter. That has been a mitigation of bad debt expense. That is a reflection of the fact that we continue to work the older accounts and try to get favorable resolution. Of course, some of them are not favorably resolved. They're reserved for it. And it has no effect. Others that are favorably resolved were able to bring in cash and take that to the bottom line. And I'd call that myself good quality earnings because it's reflected in good cash performance. The bad debt provisioning in general is based upon historical collection rates. It's methodical. It is not judgmental so there is no warehousing of conservatism there. And just simply a matter of – if we are able to improve our collection rates and improve the history on them, then we are able to reserve less, indicating that we are going to have higher collections going forward. Once again, I think that that’s logical and appropriate, but certainly not any kind of measure of excess conservatism or tapping of reserves. I think it's just good accounting based upon reality of what we are experiencing. I think that every quarter there is going to be a certain number of items, which don't necessarily repeat themselves quarter to quarter, taking the HMO income by example. We may not have that this quarter, but there will be something else next quarter. There's always little things which will move around from quarter to quarter. And if somebody wants to systematically throw those out, I don't think it [ph] makes sense. We definitely believe that we are on a right path in terms of our aggregate pricing. There's little bits of noise in there, but think that negotiations are very strong. They're very favorable. And to the extent I expressed any kind of caution it's because there are unknowns with three quarters left to go, and it is possible that we'll have some payer shifts. And that's why we have a range of $775 million to $850 million in EBITDA. So I think that our approach is sound, our communication is very thorough. It's not intended to communicate that anything should be rejected from the quarter from a quality of earnings standpoint but rather just to give good insight what influenced it.

Shirley Skolnick – CRT Capital Group

That's very helpful. I mean because it is sort of a shame that you give you know what a 22-page press release and a 31-page slide show along with your earnings and it's held against you, and your investors more importantly. So, it just seems a little bizarre to me. I guess what I would just like to follow-up with is you had some very strong progress against the turnaround goals. You've talked about the physician recruiting, you’ve talked about the progress you are making with those doctors that you've targeted giving you almost a 6% increase in volumes. There were a couple of other volume related initiatives that I was wondering whether they too are operating as planned, the acquisition of the mental health business in Stanislaus County in California. We didn't hear about the Philadelphia hospitals this quarter. And also if you can give us any sense of what the outlook is for the performance of the new El Paso hospital that would be great.

Steve Newman

I'll start with the results from the results from the Stanislaus center in Modesto, Shirley?

Shirley Skolnick – CRT Capital Group

Yes.

Steve Newman

That particular facility has not quite met our expectations in terms of volume because we lost three psychiatrists in the first three months after the acquisition. It is still profitable. It is still adding to our volume. The total number of incremental admissions for the quarter is around 450. With respect to the transaction, St. Christopher's with Temple that is meeting our expectations, and added about 650 admissions to the quarter.

Shirley Skolnick – CRT Capital Group

And those were profitable additions, you'd say?

Steve Newman

Definitely profitable.

Shirley Skolnick – CRT Capital Group

Great. Thanks so much.

Operator

Thank you. Our next question is coming from Justin Lake of UBS.

Justin Lake – UBS

Thanks. Good morning. Couple of questions. First on bad debt. Your slide show indicates that your uninsured charity care admissions were up 1.3% year-to-date for April. That's materially higher than the 1.2% decline through March. So just doing some quick math, it looks like April uninsured and charity care admissions might have been up 8% to 10%. Can you tell you what you are seeing in April there on the uninsured and charity care side if those numbers sound correct?

Biggs Porter

Well, my first comment would be on a month-to-month basis as you drill into the various categories it obviously – you get more fluctuation when you look at it over a broader period. I don't think there's a particular reason or cause in there for a month-to-month fluctuation. Sometimes it's a matter of classification, particularly within – from a month-to-month standpoint. Charity, once somebody walks into the hospital, it will take a certain amount of time to determine are they going to be uninsured charity, do they get covered by Medicaid, and that creates some fluctuation on a month-to-month basis, including reclassifications that occur in subsequent periods where there's determinations made after the fact based upon further information given. So I don't think there's a particular story in there looking at the month. We will obviously look at it following May and for the quarter and see if there's a trend there, but for one month I wouldn't overreact.

Justin Lake – UBS

Okay, But that 8% to 10% number is approximately correct. And can you tell us what you are seeing as far as the – what the month of April would look like without – I know you report this number, the ex-charity care and uninsured admissions. If I were to back out 8% to 10% or 8% to 10% increase in debt uninsured it would like that 3.7% in April might have been low – closer to 1%. Am I in the ballpark there or what does April look like without the uninsured and charity care?

Biggs Porter

I don't have the breakdown, but I think that your math is producing too severe an adjustment.

Justin Lake – UBS

Okay, so 1% would be too conservative?

Biggs Porter

I believe so.

Justin Lake – UBS

Okay. And then just quickly, maybe you could comment on bad debt in general then.

Biggs Porter

Give me the question gain, Justin, and I’ll come back.

Justin Lake – UBS

Sure. Just looking for what the admissions look like in the month of April, if we ex out uninsured and charity care.

Trevor Fetter

Justin, we don't have the number. We didn't break it out that way. It would reduce it from the 3.7%, but not by as much as taking it down to 1%. We don't have a crisp answer for you on that.

Justin Lake – UBS

No problem. And just given what you are potentially seeing there in April, I know month to month this stuff is going to fluctuate, but following on the heels of what one of your largest peer in national [ph] said today regarding bad debt I'm just curious, what have you got embedded in your assumptions in that roll-forward table when you put out 850 million this years, a billion next year as far as your bad debt assumptions, either as a percentage of revenue or percentage of admits and how that is expected to roll forward?

Biggs Porter

Well, our outlook for the year gave range of 6.5% to 7% on bad debt expense. Included in the roll-forward table effectively is at the lower end of that 6.5%, which presumes that to the extent that we have any increase in uninsured we are able to mitigate it through our bad debt initiatives, which we have been doing. So I think it's a reasonable and achievable assumption that roll-forward table, but in terms of what the range could be, 6.5% to 7%.

Justin Lake – UBS

Okay. Just one last question on managed care pricing. You reported managed care pricing I think was 4.6% in the quarter. I know you billed in Medicare and Medicaid into that, government managed care. Can you tell us what it looks like just on the commercial book alone?

Trevor Fetter

Justin, you ask that question all the time and we always say the same thing. We don't break that out specifically, but thank you for your question.

Justin Lake – UBS

Thanks, guys.

Operator

Our next question is coming from Gary Lieberman of Stanford Group.

Gary Lieberman – Stanford Group

Thanks. Good morning. Could you guys just tell us what in your guidance – what you have embedded in terms of your expectations on the commercial admission growth, either for the TGI service lines or for the commercial managed care admissions all in?

Trevor Fetter

Well, the guidance has range. I think at the upper end of the range it would probably have relatively constant mix from the first quarter. At the lower end of the range it would have some shift, as I said earlier, from a payer mix standpoint between payer categories, not just between plans but between payer categories.

Gary Lieberman – Stanford Group

Okay. But I guess I mean if I look at it on – if I'm looking at the chart on Slide 15, is the year-over-year growth – do you need the year-over-year growth to become materially above zero%, or can it sort of stay in the sort of negative percentage–

Trevor Fetter

Okay. Price increases, we believe can offset what we've experienced and some continuation of volume loss in commercial managed care. Okay? So we think we can achieve in the range with further loss of commercial managed care, obviously it depends on how significant it is. It doesn't have to turn positive, in other words. Once you get to 2009 it becomes more important that we have commercial growth combined with other TGI growth where there's profitable target growth initiative lines that depend on Medicare. So it's going to take a combination of the profitable businesses volume growth they are in, in order for us to achieve 2009.

Gary Lieberman – Stanford Group

Okay. And then if I could just ask a quick follow-up to that. In terms of the sale of the medical office buildings, how – in terms of your thinking, how do you expect that to impact volumes in general, and I guess specifically sort of the commercial managed care segment. And I guess specifically with regards to the sale of the medical office building space, do you expect any – a portion of the physicians that are currently residing in those medical office building space to go somewhere else or what's your thinking there and what kind of visibility do you have into that?

Trevor Fetter

We don't expect it to have any impact on our volumes. We think that – we operate with them on a market basis. A new owner will operate with them on a market basis. And I think that also – the new owner be somebody who is a professional property manager and might be more effective at it than we are. That's one of the reasons why I think the MOBs are good assets to sell.

Gary Lieberman – Stanford Group

Okay. Great. Thanks a lot.

Operator

Thank you. Our next question is coming from Rob Hawkins of Stifel Nicolaus.

Rob Hawkins – Stifel Nicolaus

Hi, good afternoon. Most of my questions have been asked, but I've got a couple. The turnover for the physicians that you mentioned earlier and kind of the net number was pretty good. Can you give me a benchmark against last year, and speak a little bit to what your target is for this year? You did a 178 net. Is that right?

Trevor Fetter

Right. Rob, we expect that number to vary from quarter to quarter. It's influenced by a number of factors. The largest factor is when physicians finish their training, either in residency or fellowship, which is usually in June, so we expect to have them relocate to our hospitals and medical staffs, usually in the third quarter, and that's when you can expect, although not always, the highest number of staff additions. There's a pipeline for adding physicians to our medical staff, especially those that are being employed and those that are relocating from out of state. The pipeline duration is six to nine months after we identify the physicians, sign the letter of intent, eventually sign an agreement with them, and get them on site with a state license practice, and then after our malpractice coverage comes through, they can go before the medical executive committee, and the governing board to get their privileges granted. We expect, net of attrition, in 2008, to add a total of about 1,000 active medical staff. Once again, that's net of attrition. The numbers, in total, are larger than that, but they also include the comings and goings of hospital-based physicians, which really don't contribute to the growth of our inpatient and outpatient volumes.

Rob Hawkins – Stifel Nicolaus

And is that kind of in that same 10% range or better for kind of year-over-year, a 1000 net-net growth?

Trevor Fetter

A 1000 would probably mean our growth for the year would be in about the 8% range.

Rob Hawkins – Stifel Nicolaus

Okay, great. And I missed which states you are shifting or requalifying charity patients to Medicaid. That was kind of an impressive stat for this quarter. I know you mentioned you were having some problems with Florida and California and their Medicaid problems. But, can you kind of give us an update of what – where you got some of that benefit and maybe what the outlook is for other states for your facilities? Whether you might be able to – maybe continue to see that improvement?

Trevor Fetter

I don't think we have broken it out by state. We did comment in the release that there was the benefit of working to get people qualified, and that certainly has been a focus of ours, but I think it's a broad focus. And I wouldn't isolate it to any given state.

Rob Hawkins – Stifel Nicolaus

Okay. I thought the way it was worded in the press release made it sound that way. So, this is something that we can maybe continue to see whittle down a little bit, the charity care for the year?

Trevor Fetter

That's certainly our objective.

Rob Hawkins – Stifel Nicolaus

Okay, alright, I'll jump back in the queue. Appreciate your time.

Operator

Thank you. Our next question is coming from Kemp Dolliver with Cowen & Co.

Kemp Dolliver – Cowen & Co.

Hi, thanks.

Trevor Fetter

Good morning, Kemp.

Kemp Dolliver – Cowen & Co.

Hi. First question relates to USC. And I maybe over-interpreting the language in the 10-Q, but it says it might go into discontinued operations in the second quarter. What's the triggering event if it hasn't happened already? Do they need to raise financing, or do you need a definitive or?

Trevor Fetter

Well, certainly having a definitive agreement is more conclusive. There's a number of tests under the accounting standards that had to be passed or required before you pursue any disc ops or required to pursue any disc ops. Definitive agreement would be in lines I think with that. Keeping in mind this particular facility is little different from a normal disposition activity because it is related to resolving a dispute as opposed to just an action to go and change our portfolio. So the test on how they would apply would end up being a little different. But, as we progress through it, it becomes more definitive, yes, that would be the point where it make sense for it to go into discontinued operations.

Kemp Dolliver – Cowen & Co.

Okay. Thanks. The second question is when I do the math on the benefit from the Stanislaus acquisition, and then the pickup from St. Christopher's, those combined look like they accounted for three quarters of the same-store admissions growth in the quarter, which, given some of the statistics, in terms of physician recruiting and the like, it was surprising that their contribution is that large. So I guess I'm trying to appreciate what's going on in two contexts. What else other than the decline in commercial managed care was a drag on your volumes, and also, are any of these – are any of the statistics that you give in terms of physician recruiting like inclusive of the physicians who might be referring from St. Chris or the physicians that remained at Stanislaus? Thank you.

Steve Newman

Kemp, this is Steve. I think that your estimate is pretty close. My estimate was about 65%. You said three quarters. So I think we are pretty much in the ballpark. As we said before, three hospitals are responsible for the majority of the commercial managed care loss. The others are either up or flat to slight – very slight negative. And we've seen that across the company. I think that we continue to focus on things that we've identified previously. That is, expanding our medical staffs, especially consistent with the TGI service lines. That obviously takes awhile to grow those practices, and as we've said, ramping up the new physician practices, depending on whether there are specialists or whether they are a primary-care physician is an 18 to 24-month process. You will see those that were added in '07 add sequentially to the volumes going forward. We continue our PRP program. We continue our strategy to be an in-network provider in our managed care contracts. All of these things should aggregate to admissions volume growth over time. We are seeing in individual markets that we are clearly taking market share from the competitors, but there are all sorts of externalities, which have been identified earlier in the discussion including the overall economic conditions and the overall accentuation of activities by manage care payers to diminish inpatient utilization. So there are a number of puts and takes with respect to what aggregate volume looked like in a large company like ours that operates in 12 states and we'll continue to focus on those things growing volume locally.

Kemp Dolliver – Cowen & Co.

That's great. Thank you.

Operator

Thank you. Our next question is coming from John Ransom of Raymond James & Associates.

John Ransom – Raymond James & Associates

Hi, good morning. Good work on a multiyear turnaround. And I know it hasn't been easy. I have a strange question. Does quality matter yet to payers, and is there an inflection point coming, in your opinion, with CMS not paying for mistakes and infection rates becoming more public, et cetera? I mean, so, in other words, is there an investment – the investment you made in quality, is the return really still to come? I know you've gotten on some of these preferred list, but I just wonder if there is any tangible benefit yet, strange that sounds.

Trevor Fetter

You know, it's actually a great question, it’s one we ask ourselves all the time, John. I think we were early in emphasizing clinical quality. We made a bet that there would be a greater and quicker move towards both consumers as well as payers recognizing differences in clinical quality and then rewarding it with volume and price. We – as you point out on these Centers of Excellence our rate of designation is like six times the national average for these payers. We now have increasingly built in bonuses for good performance and quality into our managed care contracts, even though it's still small. Even last week when we announced this new agreement in Philadelphia that includes a bonus for achieving quality standards. It's becoming the strategy for CMS to differentiate on pay-for-performance. They haven't exactly figured out how to do it yet. We certainly are qualifying for all of the additional payments or the lack of deductions, however you want to look at it, that they put in place for the core measures, and then for the H cap surveys and all that. So as you look at different hospital organizations, we are submitting 100%, we are getting the supplemental payments and so forth. But it hat not resulted in the differential volumes that I would have expected. It has certainly helped our reputation. I think that that absolutely gives us leverage in this managed care negotiations and one of the – is a contributor to the strong pricing. And I also believe that it will come and it will come faster than anybody anticipates, and it's a really hard thing to do. It takes years, so it's good that we have had this head start. So we have no regrets on it, and as you look at whatever statistics you want to choose, we look good on quality. It's absolutely the right thing to do. I think it's a smart strategy, and it was probably a little bit early, but I think that it will ultimately be proven to be very effective from an economic point of view. Certainly the continued declines, stabilization and now declines we've seen in malpractices as a result of that as well.

John Ransom – Raymond James & Associates

Well, I mean, I think it's terrific. I guess my – as you look at your infection rates, do you have any good data on how your infection rates might compare to the industry average? And do you have any idea what your exposure might be when they stop paying for that stuff? And is that an area where you might see a quicker return on your quality initiatives than some other things?

Trevor Fetter

I’ll ask Steve to comment on that. Infection rates, of course, are now part of the core measures as well.

Steve Newman

Right. Certainly the surgical infections, ours are significantly lower than the national means, and compare well to those that are published that we see. Overall, infection rates across all hospitals are not published today, except on certain state databases, but we continue to focus on those things to decrease the likelihood of hospital-acquired infections. We also have a multiyear project to prepare us for what are called the never 27 or never 28 events that are supposed to not occur in hospitals in which certain payers, CMS with eight effective October 1, 2008, and subsequent years, probably adding to that list, we are working with our patient care services and nurses to improve our systems to diminish the likelihood that we have any of those never events. So this is a multiyear process for us, John. We continue to accelerate it. We think it will serve us well in the pay-for-performance environment and eventually we believe that premium outcomes should get premium payments.

John Ransom – Raymond James & Associates

Okay. Thanks a lot.

Operator

Thank you. Our next question is coming from Mike Scaralango [ph] with Merrill Lynch.

Mike Scaralango – Merrill Lynch

Hi, good morning. Biggs, just looking at the cash balance of 278, I think you mentioned that it would be down modestly at the end of the second quarter, which is going to be kind of a skinny number relative to the company's cash burn. So I was hoping we could nail down the timing of some of these cash inflows. So on the 400 to 600 by the end of next year, can you give us a sense as to how much you hope to have say by the end of the third quarter or by end of the fourth? And then USC, what's your best guess as to what quarter we should drop that in? And sounds like you should get around 300 million for that one if I heard that right. And then lastly, you mentioned some cash impact related to Redding and I totally missed what that was.

Biggs Porter

The – last question first. We've had arbitration proceeding going on for sometime with respect to insurance coverage on our Redding settlement. We don't have the final resolution of that, but if resolved in our favor that could produce positive cash inflow, and it’s disclosed in our 10-K. You can go look it at it for some more information. It's been out there for awhile. We would hope certainly that that is resolved and resolved favorably this year, but I can't give assurance. The – in terms of the broader question on timing, the reason we haven't given specifics as to timing of the 400 to 600 million is because depending upon market conditions and the inherent challenges with large transactions, it's hard to speculate as to MOB’s without complete third quarter or fourth quarter or – if there was a disruption in the market would we have to wait to complete it next year. Certainly our expectation would be that we can get that complete this year, but as I said, until it's done, we haven't rolled it into it our forecast – rare visibility there were have rolled into our forecast. In terms of a number of the smaller items on the list in terms of the 400 to 600, we would hope that we can get the benefit of those, second or third quarter, even if the MOB is not complete. So we are working on it. We are certainly interested in driving cash in sooner as opposed to later. Obviously that makes sense irrespective of our cash balance. Instead of break it down by quarter, I don't think it really makes sense to do that until we are little bit closer to knowing what the real timing is of execution on some of these.

Mike Scaralango – Merrill Lynch

And USC, is that definitely a second half event, or could that be next year?

Trevor Fetter

I wouldn't want to speculate. I think that we – we obviously want to get this wrapped up and would certainly hope that it's resolved this year, but there's plenty of things left to do.

Mike Scaralango – Merrill Lynch

Alright. Maybe I can just ask a simpler question. What do you think the likelihood is that you need to hit your revolver between now and the year?

Biggs Porter

What's the likelihood of hitting the revolver?

Mike Scaralango – Merrill Lynch

Yeah.

Biggs Porter

We still do not believe that we need the revolver this year, and accordingly through these cash activities, do not forecast needing it in the future.

Mike Scaralango – Merrill Lynch

Okay. Thank you.

Operator

Thank you. Our next question is coming from Miles Highsmith of Credit Suisse.

Miles Highsmith – Credit Suisse

Yeah, good morning, guys. Just a question. I know it's sort of intermediate to longer term but can you remind us what percent of your markets would you say you have a reasonable opportunity for achieving rate parity at this point?

Trevor Fetter

I would say that in almost all of our markets we have an opportunity to hit rate parity. We've done a lot of that over the last 15 months. We made a lot of progress there. It's a very small minority of our hospitals now. We are not at rate parity. We intend to give more information about that at investor day as we update our discussion from investor day last year, but certainly negotiating from a national perspective has helped us reach rate parity in a number of those markets that were below the mean previously.

Miles Highsmith – Credit Suisse

Okay. That's great. I think I probably asked the question poorly. Just to make sure, the real question I had was what percent of your markets remaining have the opportunity to achieve rate parity. I think your comment was it’s a very small percent that still remains. Is that correct?

Trevor Fetter

Right, right. I don’t think we’d characterize a specific number but it's a small number.

Miles Highsmith – Credit Suisse

Okay. Thank you.

Operator

Thank you. Our next question is coming from Whit Mayo of Stephens.

Whit Mayo – Stephens

Thanks. Just back to the volumes for a second, looking at the Medicare volumes, the mix shift that you guys talked about to more Medicare Advantage, can you put in the numbers what Medicare and Medicare Advantage was in terms of the percentage of the overall payer mix? I guess I can probably do the math, but – secondly, as we think about your TGI initiatives, how should we see that change in your Medicare and Medicare like volumes within the payer mix?

Biggs Porter

We don’t calculate it.

Trevor Fetter

We don’t have specific payer mix information we typically give out. If there's a different question you'd like to ask, we might help you on that.

Whit Mayo – Stephens

Well, I guess another question would just be, is there any particular state that you guys think you are seeing more of the shift from fee-for-service in the Medicare Advantage? I guess I would presume that Florida would probably be the largest one.

Steve Newman

I would say you are right. I think we are seeing it at Florida and we are also seeing it in California. California has really led the country as far as the states in which we operate the Medicare Advantage and Florida has gotten into that particular business, even with physician intermediaries in the last two to three years.

Biggs Porter

Whit, could you repeat your question on the payer mix? If you are just asking about the dis-aggregation of managed care, it’s in the press release.

Whit Mayo – Stephens

Yeah, I can do the math.

Biggs Porter

It's 16% managed Medicare, 9% managed Medicaid, but is that what you were asking?

Whit Mayo – Stephens

Yeah, that was it.

Steve Newman

Yeah, I am sorry, misunderstood it.

Whit Mayo – Stephens

No, no, no, that's fine, guys. And just, one other question I had just, do you have any internal expectations with the timing of monetizing or potential monetizing of Broadlane?

Trevor Fetter

You know, I think – it would be subject [ph] to the fact that it’s a company in which we are an investee and it's a matter for all the shareholders of Broadlane and for the board, so we are working our way through it with them, but I don't want to forecast a timing event on that beyond saying that we expect it between now and next year.

Whit Mayo – Stephens

Okay. Now, that's fair. Okay. Thanks, guys. I appreciate it.

Operator

Thank you. Our final question is coming from Shirley Skolnick of CRT.

Shirley Skolnick – CRT Capital Group

Thanks very much. I did want to follow-up on something you said is new news, Biggs, and that’s you got seismic relief?

Biggs Porter

Yes.

Shirley Skolnick – CRT Capital Group

And, yeah, can you be a little bit more – give us more detail on that? Because as I recall, this was a multi-billion-dollar issue for the company, even after you divested the most seismically needy properties. And also, is there any progress on the healthcare properties litigation and issues there, especially since I'm reminded that one of issues out there (inaudible) is seismic?

Trevor Fetter

Okay. On the seismic, the broader question, it's not a multi-billion dollar issue. I think in the 10-K we've had disclosures ranging around $400 million on a current dollar kind of basis subject to inflation. But the regulations in California were changed over the last couple of quarters to allow for a different form of testing, a different standard to be met, which if met, could create relief from the seismic requirements, and we have applied for that relief for a number of our facilities. For some of them we have received that relief. There are still some applications left in. So we know that we do have some amount of relief. We then have to translate that into revisions of our estimates of costs because it may not be the entire facilities receives relief but some portion of it.. And so we have to then take that information, basically redo our analysis of what the activity needs to be and what the cost of it is, have to get that approved by the state, et cetera. So there's a ways to go before we have a real definitive answer. We are certainly working to determine what a reasonable estimate is. And once we feel like we have something we have good confidence in, we'll share it.

Shirley Skolnick – CRT Capital Group

Okay, because if I remember, the press coverage of it initially was that it could be a very significant material reduction in the hospitals – California hospitals, generally, in theirs seismic costs. It could save the industry from significant–

Trevor Fetter

It varies hospital by hospital. Some hospitals will not get relief and will have significant expenditures, and others may have no expenditure to make whatsoever. So if you look at it on an individual hospital basis, it can be very significant for us but on an aggregate basis we're still measuring.

Shirley Skolnick – CRT Capital Group

Okay. And any update on the issues with the six leased hospitals and healthcare properties?

Trevor Fetter

We continue to proceed through our discussions. The litigation is stayed while we are in those discussions. We have been working actively with the ACPI to get resolution and are very hopeful that we will achieve that point near term.

Shirley Skolnick – CRT Capital Group

Okay.

Trevor Fetter

As to seismic impact, that would not have an effect on us either way because seismic is a responsibility at least our position has been seismic is a responsibility.

Shirley Skolnick – CRT Capital Group

Yeah, well I understand that. But my thought was this that if their issue is they don't want to pay for it and your issue is you don't want to pay for it and that facility happens to be one of the ones that qualifies to not have a big bill, perhaps that leads to an earlier resolution of the thorny little problem. That was my thought.

Trevor Fetter

I don't believe that the facility is going to qualify.

Shirley Skolnick – CRT Capital Group

Thank you very much.

Operator

Thank you. At this time I would like to turn the floor back over to Trevor Fetter for any closing remarks.

Trevor Fetter

We just don't have any closing remarks. We'll look forward to seeing you at our investor day. Thanks

Operator

Thank you. This does conclude today's Tenet conference call. You may now disconnect.

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

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

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

Source: Tenet Healthcare Corporation Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts