Trevor Fetter
                            Q4’08 - Conference Call Script
                                     February 24,...
In addition to the financial metrics we report every quarter, we carefully measure and assess our
progress in several non-...
years earlier than we would have in a more stable market environment. With $1.4 billion of
the current notes tendered as o...
Capex

Turning to capital expenditures, we spent less than expected in the fourth quarter, with capex in
continuing operat...
at most of our hospitals, a significant portion of this lost commercial volume should be viewed
primarily as part of our o...
“active medical staff.” To qualify as an “active medical staff” member, a physician must either
admit 10 patients or perfo...
(SWB) per adjusted patient day to an increase of only 0.8 percent compared to the fourth quarter
of 2007.

The effectivene...
even in the third quarter, which became such a focal point, if you consider the Medicaid
reductions we had to offset. Mix ...
backing this out is far too harsh an action. By backing this out, analysts are failing to ascribe
proper value to what Ten...
Bad debt expense was also adversely affected by pricing increases and improved charge capture
in our emergency departments...
necessary to explain the financial statement and future financing implications. Based on this, we
anticipate a gain on the...
points, or $110 million, which would be a rate of approximately 8.5 percent. This would
accommodate lower collection rates...
By now, hopefully I have communicated how we applied some conservatism in our outlook
ranges for 2009 to accommodate the u...
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tenet healthcare QuarterEndedDecember312008PreparedRemarks

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Transcript of "tenet healthcare QuarterEndedDecember312008PreparedRemarks"

  1. 1. Trevor Fetter Q4’08 - Conference Call Script February 24, 2009 Thank you operator and good morning. Overview Because our headline results for the fourth quarter were first made public more than a month ago, I’d like to direct my comments to broader trends and observations about the quarter that were not in the pre-release. Our operating results for the quarter were among the strongest that we’ve achieved in years. We improved same-hospital paying admissions, paying outpatient visits and surgeries, as well as same hospital commercial managed care revenues, adjusted EBITDA and free cash flow. The full year 2008 was the first year of positive same-hospital admissions growth since 2003, and we had our best performance ever in many important non-financial metrics. Despite this strong operating performance, our stock price plummeted in the fourth quarter. As recently as Sept. 26, Tenet stock had closed above $6 per share, up roughly 20 percent for the year-to-date. But by mid-November, it was trading near a dollar. Since then, we’ve taken important actions to turn this situation around. Despite all the uncertainty that is created by the economy, I think our business is remarkably solid, and I’m actually quite optimistic because of the progress we’ve made in a number of critically important areas: • First, our physician relationship and recruitment programs are proving to be highly effective and helped us build solid momentum on inpatient volume growth. • Second, we’ve stabilized the outpatient business, which was quite negative as recently as 2007. • Third, our Targeted Growth Initiative strategy has successfully directed volume growth to our most attractive and profitable service lines. • And fourth, our achievements in quality have created a stronger value proposition for our hospitals as well as widespread recognition. This includes our numerous Center of Excellence designations and the bonus payments for quality that we’re receiving from some of the largest commercial payers. And the significant reduction in our malpractice costs is one of the tangible returns on our quality investment.
  2. 2. In addition to the financial metrics we report every quarter, we carefully measure and assess our progress in several non-financial areas that also drive value in our business. The first of these three non-financial metrics focuses on measuring progress in clinical quality. In Q4, we hit all-time highs in our quality statistics. For internal evaluation and incentive purposes, we measure our adherence to evidence-based medicine protocols, infection rates and compliance with standards for appropriateness of admissions. The next non-financial set of metrics is service. Our scores improved here as well, with physician satisfaction increasing 2.9 percent over the prior year and patient satisfaction increasing 1.1 percent. To give you an idea of the progress we’ve made in physician satisfaction, since October 2005 the average score went from 72 percent to 81 percent. And, third, we measure our progress in satisfaction of our employees. Total employee turnover improved by 20 percent in 2008. And voluntary hospital CEO turnover was negligible, demonstrating dramatic improvement from the 20 percent turnover among our hospital CEOs that we experienced a few years ago. These are just a few of the reasons that I’m optimistic about our fundamentals. Let me now turn to the current economic environment and Tenet’s strategic response to the challenges before us. The macro environment presents us with many challenges, but I think three are worth highlighting. The first issue is the extent to which growing unemployment will cause commercially insured patients to lose their insurance or to put off treatment altogether. The second issue is the extent to which declining household incomes and wealth, irrespective of employment status, suppress consumption of medical care or put at further risk our collection rates from both insured and uninsured patients. And the third issue is the tremendous uncertainty in the capital markets, and the effect it has on a company that is relatively dependent on access to credit and the cost of credit. On the first two issues, the growth of the uninsured and risk in collection rates, we are doing what we can to mitigate this, using the strategies that we have employed for some time in the revenue cycle, such as stepping up our capabilities in providing financial counseling to uninsured patients, improving consumer billing generally and point-of-service collections specifically. We also have continued with our strategies to build commercial admissions by recruiting physicians with commercial patients and targeting service lines with the greatest prospects for growth and profitability. On the third issue, relating to the unsettled capital markets, our most recent action to reduce the risk of our balance sheet is the note exchange set to close next week. We felt it was a good time to reduce the risk profile of our balance sheet by largely removing the debt maturities that were scheduled to occur in 2011 and 2012. We are undertaking this refinancing between one and two
  3. 3. years earlier than we would have in a more stable market environment. With $1.4 billion of the current notes tendered as of the early tender date of February 18, and assuming stable rates for the next year or so, cash interest expense will increase by $43 million on an annual basis. While we have confidence in our strategies, the operating environment in the next two years is uncertain and access to the capital markets is even less predictable. We felt that a window had recently opened for this exchange and that it was prudent to take the opportunity to reduce balance sheet risk. Given the weakness in the economy, I am pleased how well our business performed in Q4. Let me give you some additional highlights. Paying volumes were reasonably stable with paying admissions eking out a 0.1 percent increase and paying outpatient visits up a more robust 0.9 percent. Managed care admissions were up 2.5 percent from last year’s fourth quarter. Although that metric is commonly used by this industry, it includes a shift from traditional government programs to managed government programs, so we don’t consider it to be terribly relevant. The relevant metric is for commercial managed care admissions, and that metric was somewhat improved from the third quarter with a year-over-year decline of 3.0 percent. Commercial volumes in our Targeted Growth Initiative service lines were up a very strong 2.3 percent. We had solid performance in pricing – consistent with the strong growth that we’ve demonstrated for a number of quarters now. We expect continued pricing growth to remain a significant driver of earnings growth in 2009. Cost control was outstanding as well, with unit controllable costs rising by less than one percent on a same-hospital basis. We expect a similar level of cost efficiency going forward, as we anticipate capturing approximately $150 million from the cost cuts that we are already implementing. Macro-economic pressures presumably drove a modest softening of our collection ratios in the quarter and the related increase in bad debt expense. But our multi-year efforts to address the bad debt issue again generated results. Our same hospital bad debt expense was 7.5 percent for the fourth quarter, actually a slight improvement relative to the third quarter, and up only 110 basis points versus the fourth quarter a year ago. Taken together, these factors enabled us to generate an adjusted EBITDA margin of 9.1 percent, an increase of 160 basis points relative to the prior year’s fourth quarter. For the full year, adjusted EBITDA was $732 million, a little below the range that we had expected a year ago, but toward the upper end of the revised range that we laid out further into the year, and up 11.4 percent over 2007. Growth in same-hospital EBITDA was even stronger, up 14 percent year-over-year.
  4. 4. Capex Turning to capital expenditures, we spent less than expected in the fourth quarter, with capex in continuing operations of $130 million. We will continue to take a cautious approach to capital expenditures in 2009, which should contribute to our progress in moving toward positive free cash flow. That said, we will honor the promises for capital improvements that we’ve made to our physicians. We’ve worked too hard to rebuild our relationships with physicians to jeopardize that progress in 2009. Fortunately, the competitive “arms race” for capex in the hospital industry has subsided for the time being. 2009 Outlook Turning to 2009, we are looking at more than the usual set of challenges. With significant uncertainties in terms of volume growth, payor and patient mix, and bad debt expense, it is hard to offer a precise Outlook for 2009. Our Outlook for 2009 adjusted EBITDA is a range of 735 million to 800 million dollars, which is between flat to a 9 percent increase over our 2008 performance. With that as an overview, let me turn the call over to Tenet’s Chief Operating Officer, Dr. Steve Newman. Steve… Stephen Newman Conference Call Script - Q4’08 February 24, 2009 Thank you Trevor, and good morning everyone. Volumes I want to begin by reviewing the relationship between our fourth quarter volumes and our growth strategies by service line. While total paying inpatient and outpatient volumes held up quite well in the fourth quarter, our commercial managed care admissions declined by 3.0 percent. This is a slight improvement relative to the 3.4 percent decline in the third quarter, but clearly not where we want to be. As we have discussed in prior quarters, our de-emphasis of the obstetrics (OB) service line accounts for the majority of the decline in commercial admissions. In fact, 58 percent of our fourth quarter decline can be attributed to OB. And since OB typically is not a TGI service line
  5. 5. at most of our hospitals, a significant portion of this lost commercial volume should be viewed primarily as part of our operating strategy, and not as a critical shortfall relative to our growth objectives. Rather than illustrating our commercial admissions declines in non-TGI service lines like OB, slides 14 and 15 compare commercial and total paying admissions growth in our seven TGI service lines. These graphs show the “delta” between growth in TGI versus non-TGI service lines. The difference is real and it’s growing. Slide 14 provides an isolated look at only commercial admissions, while slide 15 illustrates all paying admissions. You can see on slide 14 that, in Q4’08, commercial admissions in our seven TGI service lines grew 690 basis points faster than our commercial admissions in non-TGI service lines. On slide 15 the focus shifts to total paying admissions, where there is a 300 basis point difference separating the growth rates in our TGI service lines compared to growth rates in our non-TGI service lines. The key take-away here is that we have consistently demonstrated an ability to grow commercial and aggregate paying volumes in our TGI service lines, precisely where we have concentrated the focus of our growth strategy. As we have selected our TGI service lines based on profitability, local market needs and attractive projected demand growth, our success in achieving disproportionately strong growth in these services should prove to be quite powerful in driving future financial performance. Before leaving the discussion on volume growth, let me bring you up to speed on our first quarter volumes. As you know, we don’t always give this sort of interim update because short- term volume trends can be volatile. But since we’re already close to two full months into the quarter, I’ll give you an early look. Through last Wednesday, February 18 – a period representing the same number of weekdays and weekend days as last year – our total admissions were down 0.8 percent, total paying admissions were down 0.7 percent, outpatient visits were up 0.5 percent, and commercial managed care admissions were down 3.1 percent. While these results are softer than we’d like, we are encouraged by the fact that they are not radically different from the trends we saw in the fourth quarter. Medical Staff Discussion I believe our success in sustaining reasonable volume performance in the face of a weakening economy is due in large part to our success in expanding our active physician staff. Let me briefly review the methodology we use to track our progress. The total medical staff at our 50 hospitals at the end of Q4’08 was slightly less than 23,000 physicians. Because many of these physicians make only a small number of referrals to our hospitals, we focus our analysis on a subset of this aggregate number, which we refer to as our
  6. 6. “active medical staff.” To qualify as an “active medical staff” member, a physician must either admit 10 patients or perform an equal number of outpatient procedures annually. You will recall that last year at this time we established a growth target of 1,000 net new physicians for 2008. This target indicated our intent to repeat the strong growth we had achieved in 2007. I’m excited to tell you that we actually exceeded our 2008 objective, with net growth of 1,122 physicians for the year, or an increase of 9.0 percent. This brought our total active medical staff at the end of 2008 to 13,571 physicians, and represented growth of 17 percent since Jan. 1, 2007. The details of this growth are shown on slide 16. To demonstrate the significance of this growth, let’s look at the 2008 performance of the physicians who joined the staff of Tenet hospitals in 2007. These physicians, whom we refer to as the “Class of 2007,” were responsible for more than 45,000 admissions and 275,000 outpatient visits in 2008. On average, this translates to 26 admissions and 158 outpatient visits per member of the class, and represents a more rapid ramp- up than we had anticipated. These increased volumes were partially offset by volumes lost as a result of attrition within our existing physician base. Early indications from the Class of 2008 are very encouraging. In fact, this class appears to be ramping up even faster than the Class of 2007 during their first few months with Tenet. As our physician relationship program has matured, we have refined our linkage between targeted physicians, their books of commercial business and our TGI service lines. We believe the early superior growth from the “Class of 2008” reflects these refinements. Pay-for-Performance Payments Switching gears to incremental pay-for-performance revenue, you may recall that we mentioned at last summer’s Investor Day that we had negotiated the potential to receive up to $35 million to $40 million in “pay-for-performance” revenues from several of our commercial managed care payors for the period between 2009 and 2011. We have just completed our first adjudication of these payments reflecting our performance against the relevant quality measures in 2008, and I am pleased to tell you that we will be receiving quality incentive payments of approximately $7 million, or 70 percent of the 2009 opportunity. While the current level of these premium payments is attractive, the truly important point is the precedent we are setting with these commercial payors, who have decided that rewarding our hospitals for superior clinical quality is an important part of their business proposition. Cost Efficiencies Turning to costs, the fourth quarter provided powerful evidence of the improving cost discipline by our hospital managers. In the quarter, we were able to limit salaries, wages and benefits
  7. 7. (SWB) per adjusted patient day to an increase of only 0.8 percent compared to the fourth quarter of 2007. The effectiveness of our labor management has been enhanced by the online tools we’ve developed under our PMI, or “Performance Management and Innovation” group. These productivity tools address a critical challenge in our industry – namely the efficient management of “staffing” in the context of rapidly fluctuating demands. Getting this right can often be the difference between attractive profitability and unacceptable performance. One of the most important metrics we use to track staffing productivity is “paid FTEs per adjusted average daily census.” We saw an improvement of 0.7 percent in this performance metric in Q4’08. These kinds of savings are the result of our investments to provide real-time, actionable information to front-line management. Our PMI team has developed an Internet-based staffing grid, which matches staffing levels by skill mix to the immediate requirements of our current patient census. These staffing tools are also forward-looking, assisting us in the management of open positions and driving our hiring objectives and staff flexing. These tools also assist us by minimizing the use of contract labor, which we were able to decrease by $6 million dollars compared to Q4’07. All of these tools are linked to a daily reporting system providing real-time productivity monitoring and assuring that our performance targets are being met. Managing our staffing on this hour-by-hour basis has helped us to avoid disruptive personnel actions including unplanned reductions in force. This improves our bottom line and supports our objective of improving employee satisfaction. With that, I’ll turn the floor over to Biggs Porter, our CFO. Biggs. . . Biggs Porter Conference Call Script - Q4’08 February 24, 2009 Thank you Steve and good morning everyone. Before I talk to the quarter, let me make a couple of broad comments on 2008. Our improvement embedded in our 2008 results may have, at times, become obscured by changes in state funding and in our hospital portfolio. As you can see from our earning release, after all the discontinued operations reclassifications last year, our adjusted EBITDA grew from $650 million in 2007 to $732 million in 2008, an increase of 11 percent. However, this is despite having lost approximately $54 million in Georgia, Florida and North Carolina Medicaid funding. If you normalize for the Medicaid funding loss, there would have been an underlying operating improvement of $129 million, or 20 percent. Some analysts were concerned that we weren’t growing margin on volume growth in 2008 due to adverse mix shift. This in fact is not the case,
  8. 8. even in the third quarter, which became such a focal point, if you consider the Medicaid reductions we had to offset. Mix shift certainly hurt our result, and remains a significant risk going into 2009, but it did not eliminate all the benefits of volume and our other efforts. Since I have touched on the subject of Medicaid, I will comment that we see the stimulus bill as a risk mitigator of the budget pressures being experienced by several of the states in which we operate. The effects of enhanced SCHIP and COBRA coverage should be beneficial, but the effects cannot be reasonably estimated. Overview As both Steve and Trevor have discussed, despite the dramatic collapse in discretionary consumer spending experienced in most sectors of the economy, Tenet’s volumes held up well in the fourth quarter. As our pricing remained strong these volumes resulted in solid revenue growth of 4.9 percent. This growth included a 6.6 percent increase in net patient revenue from commercial managed care. As a minor footnote to this increase, and one of the items that drew investor attention in our pre- release, our fourth quarter revenues included $8 million from what is effectively the partial reversal of a $17 million charge taken in the second quarter of 2008. This charge related to graduate medical education reimbursement at one of our California hospitals. This $8 million reversal does not reflect a successful protest of the issue at this point, but rather confirmation of the arrangement we have with the county to be reimbursed for 50 percent of any losses we incur related to the residency program. In terms of normalizing its impact, the $8 million clearly made a one-time contribution to our fourth quarter results, but should be netted against the earlier $17 million charge when assessing the full year. You should also note that the $8 million was recorded in “Other Revenue,” and so it had no impact on our pricing statistics in the fourth quarter. Controllable Operating Expense Turning to costs, we had a very strong quarter in terms of operating efficiency. The increase in total controllable costs per adjusted patient day was held to just 0.8 percent. The bulk of this accomplishment was achieved in restraint on the salaries, wages and benefits (SWB) line where the increase was also held to just 0.8 percent. This SW&B result was aided by a 16.7 percent decline in contract labor expense. On the “Other Operating Expense” line we saw a 50 percent decline in malpractice expense in the fourth quarter, falling from $36 million in the fourth quarter of 2007 to $18 million in the fourth quarter of 2008. A few analysts viewed this $18 million decline as a unique event, which needed to be backed out of our results in their assessment of our fourth quarter earnings power. I would argue that
  9. 9. backing this out is far too harsh an action. By backing this out, analysts are failing to ascribe proper value to what Tenet has accomplished through our investments in clinical quality. It is our belief that one of the many ways these investments have generated returns is through these declines in malpractice expense. Let me offer some perspectives on how our malpractice expense in the fourth quarter could be viewed. Stepping back to look at the full-year decline, malpractice expense in 2008 was $128 million, down $35 million, or 22 percent, from $163 million in 2007. However, even this is net of $15 million in charges related to declines in the discount rate used in the calculation. Without that, the year-over-year decline would have been $50 million. So, while the fourth quarter’s decline was somewhat larger, the decline through 2008 was also significant. This suggests that the fourth quarter’s decline is highly consistent with recent performance and forms a legitimate part of our sustainable earnings power. Before leaving the topic of cost efficiency, I will comment on the very strong performance achieved in the fourth quarter sets us a stage for favorable, yet highly credible, assumptions with regard to cost efficiency in our 2009 outlook, with unevenness of volumes between hospitals and periods remaining the greatest potential variable. Bad Debt Expense and Collection Rates Turning to bad debt expense, the high-level story is mixed. We reported a same-hospital bad debt expense ratio of 7.5 percent in the fourth quarter, slightly better than the 7.6 percent ratio reported in our third quarter, but up 110 basis points over the prior year. The good news on the bad debt front was the continuing decline in uninsured volumes – with uninsured admissions falling by 5.9 percent in the quarter and uninsured outpatient visits falling by an even greater, 10.8 percent. We also made progress on our front-end collections, which increased to 37 percent of total patient collections, up markedly from 29 percent in the fourth quarter of 2007. The offset to these sources of good news was deterioration in our collection rates on a year-over- year basis – both from the uninsured and balance-after. As disclosed in our 10-K, we have updated our collection rates for the last few quarters to reflect the effect of discontinued operations, or alternatively stated to exclude collections on those hospitals, which we have moved to discontinued operations in the last year. On that basis, our estimated weighted average collection rate from the uninsured and balance-after was 33 percent in the fourth quarter of 2008, compared to 35 percent in the fourth quarter of 2007. There was an 80 basis point decline between the third and fourth quarter, or about half of the decline experienced over the last year.
  10. 10. Bad debt expense was also adversely affected by pricing increases and improved charge capture in our emergency departments. It is important, however, that investors understand these pricing strategies have a net positive impact on our profitability. You will also find in our 10-K some new disclosure on the estimated cost of providing care for the uninsured and charity. I will emphasize that these are estimates and are fully burdened. For 2008 these are $362 million, or $6,935 per adjusted admission for uninsured, and $113 million, or $10,298 per adjusted admission for charity. Since these are fully burdened numbers, you would need to reduce them by about 40 percent to get to the variable or incremental cash cost of providing care, before fixed cost absorption. To get the net effect of an uninsured admit you would reduce the cost by the approximately 10 to 12 cents on the dollar we collect on average from the uninsured. This brings the rough estimate of net pretax P&L effect down to approximately $2,500 per uninsured adjusted admission. As there is so much focus on the risk in 2009 of increasing uninsured, we think these disclosures help put that risk into perspective. What this points out is that although there may be risk of an increasing bad debt expense from the uninsured, the real bottom line effect is much less. The real economic risk is the loss of a commercial managed care patient, although that effect is exacerbated when the formerly commercial patient receives care as an uninsured. Cash Flow from Operations Turning to cash and cash flow, we ended the year with $507 million in cash, somewhat higher than the $375 to $475 million we had projected in our 2008 Outlook. Our cash position benefited from: • lower than anticipated capital expenditures, which came in at $130 million, • the receipt of $34 million from the Reserve Yield Plus Fund, and • $10 million from our cash initiatives. Note Exchange I also want to make a few comments on our recent note exchange which is expected to close next week. As you know, the exchange addressed the $1.6 billion maturing in late-2011 and mid-2012. Our strategy was to eliminate as much of our near-term maturities as we could at an acceptable price while retaining long-term flexibility. This was not out of concern for our performance, but rather as a mitigator of capital market risk, particularly in view of the volume of refinancing which will be placed into the market by others over the next couple of years. Although the exchange remains open, the results of the early tender period are that $915 million of the 11’s and $484 million of the 12’s have elected to participate. The notes offered in exchange have maturities in 2015 and 2018 at coupons of 9 percent and 10 percent, respectively. They also allow us to issue secured debt at the greater of $3.2 billion, or 4 times EBITDA, exclusive of our credit agreement, but have no performance tests. This is not a solicitation, but is
  11. 11. necessary to explain the financial statement and future financing implications. Based on this, we anticipate a gain on the retirement of the existing notes of approximately $170 to $190 million, although this will fluctuate with the market up to the time of close. There will be a corresponding discount recorded on the new notes, which will be amortized to interest expense over the term of the notes. We currently estimate 2009 interest payments to increase by $22 million as a result of the exchange and total interest expense to increase by $50 to $60 million when accrued interest and the discount amortization is included. To the extent we retire additional debt in the future or engage in interest rate swaps we may mitigate some of this increase. Update on Medical Office Buildings While we are on the topic of liquidity, let me anticipate a popular question regarding our proposed medical office building (MOB) sales. We still have interested buyers and at this time have broken the portfolio into at least two pieces: a 21-MOB group for which a buyer is seeking financing and a 10-MOB group which we are discussing with potential buyers for sale as a group or individually. Slide 24 on the Web updates the status of our various balance sheet initiatives. For the remainder of 2009, these include the USC sale, the effects of the sale of PHN (our Medicare HMO subsidiary), and a number of other items we have been working on. For conservatism, at this time, we are not projecting the MOB sales in our cash estimates for this year, although as I said above, it is still a work in process. 2009 Outlook Let me now turn to our outlook for 2009. We have provided a fair amount of detail on our 2009 outlook in both the press release and slides we posted to the Tenet Web site this morning. The headline is that we expect adjusted EBITDA to be in a range of $735 million to $800 million. The fact is there are a number of variables related primarily to commercial and uninsured volumes, collectability and state funding, which create a potentially broader set of outcomes. You can see from a line item stand point we have communicated a fairly broad set of ranges. We have presumed that neither everything bad nor everything good happens in setting the adjusted EBITDA range, but we have considered a fair amount of adverse mix shift away from commercial and higher bad debt expense in even the upper end of the range. While this outlook is based on projected admissions growth of flat to 1 percent, we are considerably more cautious on commercial volume growth. While we will still drive for commercial volume growth, due to the current economic environment, the upper end of the EBITDA range assumes commercial year-over-year declines consistent with 2008. The upper end of the range also assumes growth in the bad debt rate from Q4 2008 of almost 90 basis
  12. 12. points, or $110 million, which would be a rate of approximately 8.5 percent. This would accommodate lower collection rates, increasing balance-after percentages, and/or less mitigation from the collection of older accounts. The lower end of the range, all other things equal, could accommodate greater commercial volume declines, increases in the uninsured, and/or additional declines in the collectability of self-pay and balance-after accounts. Offsetting the pressure on commercial volume and bad debt, we have budgeted cost reduction initiatives of $150 million in 2009 at the corporate, administrative and hospital level. We also continue to work additional initiatives in the areas of cost, charge capture and pricing, which are beyond those included in the range of outcomes. Slide 23 shows a current “walk-forward” of our adjusted EBITDA from 2008 actual to the range we have given for 2009. The biggest change on this chart is the starting point. With 2008 now known, we enter 2009 building on a base of $732 million in prior-year adjusted EBITDA. At the upper end of the range, we expect the effects of volume and mix to largely offset, because of the pressures we expect will continue on commercial managed care volumes. Having said that, we continue to expect lift from managed care pricing, including rate parity adjustments and pay- for-performance as shown in line five of the slide. The primary driver of the costs increase on line six of the slide is inflation or other cost increases we expect before consideration of our cost reduction efforts. Our expected 2009 cost efficiencies are evident on line seven which shows the expected impact of our latest round of cost initiatives launched in late-2008. This figure of $150 million indicates our expectation for a markedly larger contribution and significantly exceeds last summer’s projections of $29 million. The walk forward is completed on line nine with an estimate of $27 million in contributed EBITDA from growth in year-over-year performance anticipated in our newest hospitals, Sierra Providence East in El Paso and Coastal Carolina. The walk forward subtotals on line 10 are at the upper end of the range of $800 million. We then show the $65 million for risk, on line 11, which brings us to the $735 million bottom end of the range for adjusted EBITDA. Slide 25 summarizes the range on cash flow and our projected year-end cash balance. It is important to remind everyone that there are two cash uses in 2009 which will not recur over the longer term. First, there is the estimated $75 million use of cash for the settlement of two California wage and hour cases. Second there is the $24 million quarterly use of cash for our Department of Justice settlement, which is fully retired in the third quarter of 2010.
  13. 13. By now, hopefully I have communicated how we applied some conservatism in our outlook ranges for 2009 to accommodate the uncertainties of the current economy and the corresponding effects on commercially insured volumes, collectability and uncompensated care. This, along with the lower starting point, alone explain our 2009 outlook today compared to what we expressed a year ago. Underneath that conservatism, however, remains the same set of aggressive actions: to drive paying volumes, including commercial; achieve continuing and increasing yield from our managed care negotiations; and to reduce cost on a continuous improvement basis. Although 2009, at this point, remains a difficult year in which to establish firm expectations, regardless of the variations we may experience, we believe our actions will enable us to do well in a difficult environment. As one final note, we would like to announce June 2 as the date of our 2009 Investor Day. With that, I’ll ask the operator to open the floor for questions. Operator?

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