Compilation of hospital fundamentals for 3Q10 with commentary.

1. State of the Hospital Industry
Summary and Analysis of Inflections & Themes
Third Quarter 2010 & The Outlook
November- 2010

2. Table of Contents
Hospital Industry Themes - Third Quarter 2010 Results
• Volume Growth Declined Sequentially, 4Q10 Growth Will Likely Improve Page: 2
• Pricing Growth Accelerated in 3Q. Managed Care Will Continue To Drive Price. Page: 6
• Bad Debt Expense Is Stable. Charity Care Continues To Rise. Page: 7
• Operating Costs Are Slightly Inflationary. Page: 9
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3. Volumes Growth Declined Sequentially
Quarterly Industry Trend Summary and Analysis
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4. Inpatient Hospital Admissions Were Weak in 3Q
Our inpatient analysis suggests volumes contracted -2.0% in 3Q10 which is a deterioration from 2Q results of down -1.0%. The volume declines
in 3Q were a function of weak obstetric volume, declining elective cases amongst managed care patients and a difficult year-over-year flu
comparison. Moreover, managed care companies continue to aggressively push observation status for patients which is negatively impacting
inpatient volume.
Based on our research, we believe volumes improved as the quarter progressed. Specifically, July was very weak and likely tracked in the -3.0%
to -4.0% range. August appeared to have improved relative to July and September also directionally improved. We believe this improvement will
continue into 4Q and we estimate industry volume will improve from down -2.0% to a range of 0.0% to -1.0% growth in 4Q.
For Profit Hospital Industry
Organic Growth - Inpatient Volumes
1.0%
0.4%
0.5%
0.0%
-0.2%
-0.5%
-1.0% -1.0%
-1.5%
-2.0%
-2.0%
-2.5%
4Q09A 1Q10A 2Q10A 3Q10A
Source: Cleveland Research Company
Source: Cleveland Research Company
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5. Total Volumes (Inpatient & Outpatient) Were Also Weak
Total volume or adjusted admission growth also declined sequentially. Based on our analysis, volume growth was down -0.4% in 3Q vs. being up
0.9% in the 1st half of 2010. This is largely driven by last year’s significant flu activity in hospitals across the country coupled with weak elective
procedure growth. Given that H1N1 pandemic quieted down near the end of October 2009 we believe volume growth will improve in 4Q as the
year-over-year comparison gets easier.
For Profit Hospital Industry
Organic Volume Growth, -Inpatient & Outpatient
5.0%
4.0%
3.0%
2.1%
2.0%
1.0% 0.9% 0.9%
0.0%
-0.4%
-1.0%
Source: Cleveland Research Company
Source: Cleveland Research Company
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6. Elective Procedures Remain Weak in 3Q Driven By Managed Care Patients
We believe elective procedures continue to be weak across the sector as patients continue to defer treatment given the proliferation of high-
deductible plans and the overall weak economic environment. We believe deferred procedures have created significant pent up demand in the
market. While we have seen 1 large operator show flattish surgical volume as a result of elective demand coming back, we don’t believe it’s a
widespread benefit at this point in time mainly because of high unemployment levels.
The charts below highlight results from a large chain comparing the volume growth trends between managed care patients and non-managed care
patients in elective and non-elective procedures. For elective procedures, managed care patients are deferring work (likely due to co-
pays/deductibles) at a significantly greater pace than non-managed care patients (Medicare, Medicaid, uninsured, etc). The 2nd chart shows
volume growth for non-elective procedures, which is very similar across all payers.
Volume Growth of Deferrable/Elective Procedures Volume Growth of Non-Elective Provedures
20.0% 0.0%
16.6%
15.0%
10.0%
6.1% 5.1% -3.0%
5.0%
0.2%
0.0%
-1.6%
-5.0%
-6.0%
-10.0% -6.3% -6.4%
-9.0% -8.5%
-7.0%
-15.0%
-14.8%
-20.0% -9.0% -8.5%
Orthopedic Surgeries Spinal Fusions Urology General Medicine OB Delivery Neonatal
Non-Managed Care Managed Care Non-Managed Care Managed Care
Source: Cleveland Research Company
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7. Pricing Growth Was Very Solid In 3Q10
Total revenue growth likely trended 5% higher in 3Q which is exclusively attributable to strong pricing growth. Managed care pricing growth of
5-7% continues to be the driver to pricing as non-commercial reimbursement continues to trend flattish. Going forward, we believe pricing growth
could moderate in 2011 as hospitals face several reimbursement risks including weaker inpatient Medicare reimbursement beginning October 2010
as well as Medicaid pricing risk in the 2nd half of 2011 when FMAP extension funds will be exhausted.
Overall, we believe managed care represents ~50% of net revenues while Medicaid and Medicare represent 10% and 25% of net revenues,
respectively. As a result, we believe pricing growth will be roughly 3-5% positive in 2011 as solid managed care pricing growth of 5-7% will
likely offset flattish/slightly down Medicaid and flattish Medicare reimbursement. Additionally, we believe higher margin managed care volume
will likely improve in 2011 as commercial enrollment declines should improve from down roughly -4.0% in 2010.
Hospital Industry
Pricing Growth
6.0%
5.0% 4.6%
3.8%
4.0%
3.0% 2.7%
2.2%
2.0%
1.0%
0.0%
4Q09 1Q10 2Q10 3Q10
Source: Cleveland Research Company
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8. Bad Debt Expense Is Stable. Charity Care Continues To Rise.
Quarterly Industry Trend Summary and Analysis

9. Bad Debt Is Stable. Charity Care Continues To Rise.
Overall, bad debt expense has been contained well in a tough economic environment. The majority of operators experienced self-pay volume
declines in 3Q10. We believe this is a function of stable unemployment rates in most markets as well as a aggressive efforts to place uninsured
patients on government programs. As an example, one large chain experienced self-pay volume declines in the -5% to -10% range as Medicaid
qualifications and overall collections rose double digits.
The chart below highlights bad debt expense as a percentage of net revenues growing 0.2% which is an improvement from year-ago levels of
0.4%.
On the negative front, most hospital operators continue to see a spike in charity care as more patients are qualifying for uncompensated care and
uninsured discounts. When combining charity care, bad debt expense and uninsured discounts we believe hospitals continue to experience
unfavorable results as these categories continue to increase.
Hospital Industry
Yr/Yr Growth In Bad Debt Expense
0.6%
0.5% 0.4% 0.4% 0.5%
0.4%
0.3%
0.2% 0.2%
0.1%
0.1%
0.0%
-0.1%
-0.2%
-0.3%
-0.3%
-0.4%
-0.5% -0.4%
1Q09A 2Q09A 3Q09A 4Q09A 1Q10A 2Q10A 3Q10A
Source: Cleveland Research Company
Source: Cleveland Research Company
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10. Operating Costs Are Slightly Inflationary
Quarterly Industry Trend Summary and Analysis

11. Labor Expense Slightly Increased Sequentially
Aggressive labor expense management has been key to successfully maintaining solid operating results in a period of weak volumes for hospitals.
The most widespread tactic for cost containment continues to be flexing staff in periods of low census, which was commonly used in 3Q. We
also heard examples of facilities freezing pay and hiring activity in the interim.
Additionally, we continue to hear of restructuring efforts focused on optimizing staffing which has resulted in lower headcount at some facilities.
On a positive note, the industry has gained 38,000 employees since October 2009 according to government statistics. Moreover, the government
reported the hospital industry gained more than 5,000 employees (5%) in October vs. September 2010.
Overall, 3Q labor costs as a percentage of net revenue increased 0.6% in 3Q10 vs. a flattish result in 2Q.
Hospital Industry
Yr/Yr Growth In Labor Costs
1.0%
0.7%
0.8% 0.6%
0.6%
0.4%
0.1% 0.1%
0.2%
0.0%
-0.2%
-0.4%
-0.6%
-0.8%
-1.0%
-0.9%
-1.2%
Source: Cleveland Research Company
Source: Cleveland Research Company
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12. Supply Costs Continue To Be Flattish
Supply costs continue to run flattish in our index. This is likely a function of weak volume, improved GPO compliance, a lack of inflation on
medical products and successful materials management cost saving efforts.
Hospital Industry
Yr/Yr Growth In Supply Expense
0.5%
0.3%
0.1%
0.1%
0.0%
-0.1%
-0.2%
-0.3% -0.2% -0.3%
-0.5%
3Q09A 4Q09A 1Q10A 2Q10A 3Q10A
Source: Cleveland Research Company
Source: Cleveland Research Company
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13. Questions or Thoughts? My contact information is provided below.
Anthony J. Deem
Market Research Associate
Cleveland Research Company
Phone: (216) 649-7232
Email: adeem@cleveland-research.com
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