Tenet’s Q4 2007 Earnings Call Prepared Remarks
February 26, 2008
Trevor Fetter, President and Chief Executive Officer
Good morning everyone.
This quarter we achieved a major milestone by generating positive growth in admissions. We
also continued to demonstrate positive trends in several key areas and certain leading
indicators have never looked stronger. I feel that the health and 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.
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 than in past quarters, and we’ve
continued to move more hospitals into positive admissions territory. Admissions in Florida
stabilized significantly to just below breakeven, compared to the declines of more than 3
percent that we had 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 percent through January. Florida admissions growth was
positive for the first time since Q104, with an increase of more than 2 percent for the month.
This upward trend has continued into February in both Florida and across the company. Even
the trend in outpatient visits has improved.
Same-hospital commercial managed care revenues increased by almost 9 percent despite a
nearly 2 percent 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
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
Balanced Scorecard into five areas, or pillars, which include quality, service, people, cost and
The first of our three non-financial metrics falls into our quality pillar. According to CMS’
most recently published Hospital Compare data, Tenet scores higher than any other investor-
owned hospital company in CMS’ 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 ½ percent over the prior year and patient satisfaction increasing nearly 1 percent.
And in the people pillar, total employee turnover improved by more than 12 percent.
Employee satisfaction improved nearly 4 percent. And although it’s not a balanced scorecard
metric, I know you would find it interesting that our hospital CEO turnover in 2007 was just
under 4 percent. This compares to a 20 percent turnover among our hospital CEOs in 2006.
Q4 2007 Earnings Prepared Remarks Page 2 of 19
While we didn’t generate as much cash from working capital as we had planned, we did offset
that at year-end 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 of $1 billion or better.
While I fully recognize the billion dollar objective represents a significant improvement from
the EBITDA we generated in 2007, I believe we’ve 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 objectives, continuing to implement innovative techniques to
offset the challenges on bad debt, and extending the progress that we’ve made in controlling
costs and achieving enhanced pricing – but it is certainly within our reach.
With that as an overview, let me turn the call over to our chief operating officer, Dr. Steve
Newman, who will provide you with some commentary on what is driving our improvement
in patient volumes. Steve…
Stephen Newman, M.D., Chief Operating Officer
SLIDE 6: Stephen L. Newman, M.D. – Chief Operating Officer
Thanks, Trevor. And good morning, everyone. We made very gratifying progress in the
fourth quarter that is continuing in the first quarter. In my opinion, our turnaround is
accelerating and is increasingly evident in a number of areas.
SLIDE 7: Momentum Building in 3 Key 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 staffs. I’ll also touch on the improvements we’re driving in Florida and the
successes we’ve achieved in our new managed care contracts.
Q4 2007 Earnings Prepared Remarks Page 3 of 19
SLIDE 8: Volume Growth
Let’s start with volumes. Fourth-quarter same-hospital aggregate admissions increased a
tenth of a percentage point over Q406. That’s the first positive quarter for admissions growth
in almost four years. January’s in-patient admission growth was 2.3 percent 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’re seeing. In our key Florida market, fourth-quarter in-patient
admissions were down just three tenths of a point – our best performance there since Q404.
In Palm Beach County fourth-quarter admissions actually increased 80 basis points. Four of
our five Palm Beach hospitals had positive year-over-year admissions growth. Additional
evidence of our Florida recovery is demonstrated by January admissions being up more than 2
percent over January 2007.
Our new Florida regional leader, Marsha Powers, has accelerated our physician recruitment,
redirection and employment activities. We’re confident we’re 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 at 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 percent, which translates to an additional
498 admissions compared with the same quarter the year before. Also contributing to that
success at St. Chris are our aggressive outreach activities beyond the five-county metro
Philadelphia area as well as the addition of new high-end services like bone marrow
Q4 2007 Earnings Prepared Remarks Page 4 of 19
Meantime, Hahnemann’s admissions were up nearly one percent. We are continuing to work
with Drexel University’s School of Medicine to grow our faculty practices at Hahnemann and
St. Chris to benefit the educational, research and patient care missions 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 percent 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 County. For example, Fountain Valley was up
3.8 percent and Desert Regional increased admissions by 9 percent 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 percent.
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
have already seen improved admission 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 market, 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 region were very local in the fourth quarter. These
resulted from slightly higher than expected physician attrition. We have taken swift action to
accelerate our volume-building activities in both the Southern States and Texas markets.
SLIDE 9: Volume Growth (Cont.)
Q4 2007 Earnings Prepared Remarks Page 5 of 19
I’ll wrap up this discussion of volumes with brief comments on surgery volumes and
commercial managed care admissions.
Our total surgeries rose three-tenths of a point compared to Q406. Out-patient surgeries were
up eight-tenths of a point while in-patient 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
percent or more.
Same-hospital commercial managed care admissions were down 1.8 percent 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 percent of this decrease company wide. As I just
described a few moments ago, we expect that situation to stabilize in the near future.
We continued to generate growth in many of the TGI service lines I highlighted in the third
quarter. Commercial urologic surgery admissions were up 8.2 percent, ENT surgery was up
19 percent, orthopedic surgery was up 0.3 percent, neurosurgery was up 3.7 percent, and
vascular surgery was up 16 percent for the fourth quarter. Meantime, obstetrics was down 2.7
percent, and open heart surgery was down nearly 14 percent or 68 procedures.
Overall, I’d say the key takeaway about our latest admissions performance is that we are
continuing to drive growth in the service lines we targeted as part of our Targeted Growth
Initiative (TGI). As you recall, over the past three years through TGI we painstakingly
identified the service lines with the best growth and profit potential at each of our hospitals.
SLIDE 10: Pricing Gains . . . achieving our objectives
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 every one of our major commercial payers for all of
our hospitals, freestanding ambulatory surgery centers, diagnostic imaging centers and
Q4 2007 Earnings Prepared Remarks Page 6 of 19
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 our facilities are network providers has been a top priority of our managed care strategy,
and I am pleased to tell you that we have now achieved that goal with our recently completed
Our managed care pricing – including managed government programs – was up sharply with
net inpatient revenue per admission increasing 9.4 percent and net outpatient revenue per visit
up 9.0 percent in the fourth quarter. I believe that is a reflection of a number of focused
efforts to align our Targeted Growth Initiative 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 have executed two
contracts that actually provide potential incremental reimbursement to our hospitals for
meeting mutually agreed upon clinical quality goals.
SLIDE 11: Physician Relationships: Recruiting More Doctors
Before I conclude, I want to share with you the latest results of our efforts to expand medical
staffs at all our hospitals. In the fourth quarter, net of normal 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
I truly believe that this progress in physician recruitment is a key indicator of our future
volume growth. In the last year, we have increased the number of physicians with privileges
to admit patients to our hospitals by almost 9 percent. 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 the one item that gives me the most optimism about our future at Tenet, this would be it.
Q4 2007 Earnings Prepared Remarks Page 7 of 19
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 percent 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 Mencinger to lead our business development, marketing, advertising, physician
recruitment and the Physicians Relationship program. Lloyd has years of experience in
business development, working at both Baxter and Boston Scientific.
SLIDE 12: Summary - Operations
So, to conclude, the bottom line from my perspective is this: In the fourth quarter, we made
progress in all the major drivers of performance in our business. We grew in-patient 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 that 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, Chief Financial Officer
Thank you, Steve, and good morning everyone.
In the interest of time, I’m not going to repeat a lot of the numbers in our earnings release or
10-K. I’ll limit my comments to providing a relevant context for our disclosures.
Q4 2007 Earnings Prepared Remarks Page 8 of 19
In the fourth quarter, we benefited from pricing, cost control, bad debt mitigation and
stabilized volume. We finished the year with adjusted EBITDA in the middle of our last
outlook and just within the outlook range we started out with last March.
There were two unusual items in the quarter which largely offset each other.
The first was a net charge of $12 million related to year-end accruals for compensation and
benefits. This included adjustments to a predecessor company’s pension plan, union
settlement costs in Florida, workers compensation adjustments and year-end incentive plan
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
favorable impact. The impact this quarter was effectively a net zero.
With that brief analysis in mind, let me offer a few thoughts on the drivers that got us to those
Steve has already covered volumes, so without 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 percent in admission growth Trevor referred to
earlier will contribute to our bottom line.
Now on to revenues,
Fourth quarter same hospital revenues rose to $2.2 billion, an increase of 6 percent. Because
of the essentially breakeven volume growth, this 6 percent revenue increase was principally
due to pricing.
Q4 2007 Earnings Prepared Remarks Page 9 of 19
Slide 18 on the web shows that we experienced solid progress in all our key pricing metrics.
As a summary metric, normalized for cost report adjustments in 2006, net patient revenues
per adjusted admission were up 4.9 percent.
As a number of important contracts including Blue Cross 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 in
2007, also have 2008 and 2009 escalators built in.
We have good visibility into our managed care pricing for the next two years, because
approximately 80 percent of our commercial rates for 2008 and over 60 percent for 2009 are
already covered in signed contracts.
Turning to costs,
Same hospital controllable operating expense per adjusted patient day increased by 5.1
percent. As I mentioned a moment ago, this included a $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 in line 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 a $13 million reduction in malpractice expense in the
quarter. Based on the investment we have made in clinical quality, we are pleased to see this
reduction. Unfortunately, we also had some poorer 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,
Q4 2007 Earnings Prepared Remarks Page 10 of 19
Same hospital uninsured admissions rose by 10 percent in the fourth quarter and revenues
from the uninsured rose by 17.5 percent. 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 a 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 our emergency
departments and, to a much lesser degree, charge master increases. The corresponding $17
million bad debt increase has no effect on the bottom line 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
Growth in bad debt expense from higher uninsured admissions was approximately $5 million.
Accordingly, the combined effect on bad debt of uninsured admission growth and pricing
compared to last year is approximately $22 million dollars.
Offsetting the adverse impact on bad debt expense from the growth in the uninsured has been
continued progress on improving collections. Through focused effort, we have been
successful in raising self-pay collection rates to 36 percent in the fourth quarter from 32
percent a year ago.
Managed care collection rates also moved up to 98 percent in the fourth quarter, from 97
percent a year ago due to lower denials attributable to our previously discussed efforts to
improve this area. These include greater Interqual screening, clearer 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 at the beginning of my remarks. This
compared to an $8 million favorable adjustment last year.
Q4 2007 Earnings Prepared Remarks Page 11 of 19
In addition to the overall collection performance improvements, we also resolved older
managed care accounts which had been heavily reserved. The favorable effect of this on bad
debt expense was offset by what we see primarily as the seasonal aging of self-pay accounts.
Like others in the industry, we typically experience a slowing of payments in the fourth
quarter as our patients deal with year-end and holiday pressures on their household budgets.
This is typically reversed 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, including the effects of the
settlement of managed care disputes, netted to $3 million.
While same hospital uninsured admissions and revenues were up over 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 a key risk in the industry. I emphasize the word “elective” in this regard. We also continue
to drive on best practices in our billing and collection activities.
I just did a fourth quarter year-over-year comparison on bad debts, but if you compare
sequentially, it is important to note that uninsured revenues were actually down from the third
quarter of this year.
Turning to cash flow and capital expenditures,
We ended the year with our cash balance within our expected range. In accomplishing that
we didn’t do as well on cash from operations as we expected and spent slightly more capital,
which should just be a matter of timing, but we continued to find other positive sources of
cash on 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 of
improved free cash flow and cash generated from operations in 2008.
Q4 2007 Earnings Prepared Remarks Page 12 of 19
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
you should consider 2007 as the year of heaviest investment for the company, with volumes
starting to show the benefits, and with us well positioned to show improved earnings, cash
flow and return on investment going forward.
Capital expenditures in 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 fourth quarter was that we wanted to make sure 2007 was our
“catch up” year as we have previously projected. This leaves us with a manageable amount of
On the Web we have included on Slide 23 a listing of the major capital projects of 2007. At
this point I expect capital spending in 2008 to be little more front end loaded into the first and
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
in capex in the fourth quarter. We have also started the construction of a replacement hospital
for our East Cooper facility outside of Charleston, South Carolina on 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 in accounts payable and accrued
liabilities at year-end than we saw this year. On the pure accounts payable side, we saw the
increase we anticipated in the payment terms set up in the system. However, there was a $63
Q4 2007 Earnings Prepared Remarks Page 13 of 19
million decline in book overdrafts at December 2007 compared to 2006 which occurred due
to the timing of our year-end 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 a $31 million build up in Accounts Receivable. This is attributable to
the effects of higher revenues and lower reserving for bad debts. This therefore doesn’t
reflect bad performance. It in fact reflects improved collectability. 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 overly
optimistic in our ability to reduce accounts receivable over the course of one quarter. We
believe it is going to take a few more quarters into 2008 to accomplish this reduction.
Just to summarize the influences on 2007 in total, we had a net reduction in our book
overdraft of $63 million, a reduction in accounts receivable credit balances of $54 million,
and non-cash income related to prior year 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 aggregate impact from these items in
Accordingly, in 2008, as we indicated in the release, we anticipate having adjusted cash
provided from operating activities of $400 to $500 million. This compares to $209 million in
2007 for an improvement in the range of $190 million to $290 million. Higher EBITDA is
expected to contribute $75 to $150 million of this improvement. The remainder of the
improvement includes a restoration of a more normal book overdraft position at year-end
2008, the two day reduction in accounts receivable we previously stated as an objective for
the fourth quarter of 2007, and a reduction in the rate of pay down of credit balances.
As I have said previously, we have engaged in a review to increase the 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 in the fourth quarter. We added
$129 million in cash from these initiatives in 2007, of which $97 million was in the fourth
Q4 2007 Earnings Prepared Remarks Page 14 of 19
quarter. At the corporate level, we monetized certain investments previously residing in our
insurance subsidiaries and liquidated the cash surrender value of life insurance policies. We
anticipate that continuing efforts to execute on this initiative 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 or monetization of other excess land, buildings and other underutilized
and inefficient assets. Since some of these items require marketing and price negotiation, I
am not going to break them down into separate component values. Because the timing and
value is within a broad range, at this time this additional cash is not in our 2008 year-end
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 no impairments of
goodwill. This is a sign that our turnaround is progressing and that our forecasts at the
hospital level are for a broad based recovery. The single biggest reason for the impairments
we recorded was the prospective reduction of Medicaid funding in Georgia and not
attributable to our execution of our turn around strategies
With respect to capital spending,
For 2008 we expect Capital expenditures to be in the range of $600 to $650 million. This
includes $82 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
have been reluctant to specify a number. By example, if we replace an old 4-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 to the
question of maintenance capital has been to point investors to the sum of depreciation,
amortization and lease expense, net of implicit interest, which was approximately $500
Q4 2007 Earnings Prepared Remarks Page 15 of 19
million in 2007. Another way to look at this might be how much did we spend on our current
core hospitals over the period 2003 to 2005 excluding physical expansion and 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 “maintenance capital” at approximately $400 to
Having said that, the lower end of the range, or $400 million, would likely not sustain our
competitive position over a long term. Also, this excludes seismic and American Disability
Act requirements as well as 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 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 with 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 to $850
million – or growth of 10 to 20 percent 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’m referring here to the contracts we recently signed with our major 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 also were some set
backs, most notably the $60 million revenue loss from the Medicaid reductions in Georgia
We haven’t given a 2008 outlook previously, and over the course of last year, we maintained
a 2009 outlook which, while having a lot of subjectivity, was between $1 and $1.1 billion of
adjusted EBITDA. In the fourth quarter we updated the analysis indicating that of the $100
Q4 2007 Earnings Prepared Remarks Page 16 of 19
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 is by its nature very subjective.
As I said, we have given a range of $775 to $850 million for EBITDA in 2008. Clearly, if we
do 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 the objective
is achievable, based on our progress in pricing, cost control and positive progress toward our
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 on 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 relatively stable mix overall and a limited
increase in the percentage of uninsured and charity volumes combined, or we need to
get offsetting yield 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, it will remain
difficult to capture the operating leverage of fixed cost absorption. Although we have
seen a reduction in the variability of performance at the hospital level overall, if we
have a significant number of hospitals that suffer volume decline in 2008, that will
make the achievement of an aggregate 40 percent yield on volume growth more
In slide 26 on the web, we have included a sample walk forward from 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
Q4 2007 Earnings Prepared Remarks Page 17 of 19
combinations of line item performance which would 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 more subjective estimates of volume and mix. In a nut shell, volumes drive
approximately 33 percent 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 that
initiatives in place by the end of 2007 were 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 have thus implicitly assumed that the financial
contribution of our bad debt initiatives will act to mitigate any potential increase in the
uninsured or under-insured.
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 imbedded in our recent actual results and in our budgets, subject primarily to just full run
rate benefits, I will probably not keep isolating them going forward as they have become
integral to our operations and are no longer discrete. 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 in managed care pricing we
reflected in the walk forward, I can report that we are now negotiated on 100 percent of this in
2008 and 80 percent in 2009. There is still some potential additional pricing upside beyond
those numbers. So, as I said before, we feel very confident about our pricing estimates,
subject to any unforeseen regulatory change or mix changes.
You will note that the walk forward starts by backing two amounts out from the $701 million
2007 adjusted EBITDA starting point:
1) the effect of the 2008 Georgia and Florida Medicaid reductions, and, conservatively,
2) $40 million of the 2007 prior year cost report income
Q4 2007 Earnings Prepared Remarks Page 18 of 19
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
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 this sample walk forward, of approximately 2.2 percent in 2008 and 1.7 percent in
2009. Please remember that approximately 1 percent of this volume growth in 2008 is
expected from the recent additions of Stanislaus and the closing of Temple Children’s
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. It also would not reflect that we have negotiated price
increases on contracts beginning as early as January 1 of this year and that our annual wage
increases are phased in later and are primarily in October, creating timing advantage between
price and cost escalation.
I know that was a lot to digest, so before we go to Q&A, I’d like to summarize briefly,
• we showed real progress on volumes and pricing and took significant cost actions in
• we believe this progress is sustainable and that 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 indicator of
shareholder value growth.
Let me now ask our operator to assemble the queue for questions.
Q4 2007 Earnings Prepared Remarks Page 19 of 19