Nov 3, 2009
Executives
Thomas Rice – SVP, IR
Trevor Fetter – President and CEO Steve Newman – COO Biggs Porter – CFO Dan Waldmann – VP, Government Relations
Analysts
Ralph Giacobbe – Credit Suisse Tom Gallucci – Lazard Capital Markets Sheryl Skolnick – Pali Capital Shelley Gnall – Goldman Sachs Darren Lehrich – Deutsche Bank Kevin Fischbeck – Bank of America/Merrill Lynch Kemp Dolliver – Avondale Partners John Ransom – Raymond James Gary Lieberman – Wells Fargo A.J. Rice – Soleil Securities Justin Lake – UBS Whit Mayo – Robert W.
Baird
Operator
Good day, ladies and gentlemen, and welcome to the third quarter 2009 Tenet Healthcare earnings conference call. My name is Louisa and I will be your operator for today.
At this time, all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference.
(Operator instructions). I would now like to turn the call over to Mr.
Thomas Rice, Senior Vice President of Investor Relations. Please proceed, sir.
Tom Rice
Thank you, operator, and good morning everyone. Welcome to Tenet Healthcare’s conference call for the third quarter ended September 30, 2009.
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 management will refer.
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 Generally Accepted Accounting Principles.
Management recommends that you focus on the GAAP numbers as the best indicator of financial performance. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow up question.
At this time, I will turn the call over to, Trevor Fetter, Tenet's President and CEO. Trevor?
Trevor Fetter
Thank you, Tom, and good morning everyone. I would characterize Tenet's third quarter with two takeaways.
First, despite the continued economic weakness, we generated solid growth and revenues. Second, we did an outstanding job managing costs.
Together these factors contributed to EBITDA growth of 50%, and this was the second consecutive quarter in which we posted EBITDA growth of this magnitude. And as you read in this morning's press release, we increased the outlook range for adjusted EBITDA by $25 million to 925 million to $975 million.
Let me walk you through the major line items to give you some detail. Cost control is proceeding as or better than planned.
Most of the impact on cost is a direct result of our initiative, although we believe the soft economy is contributing to a decline in employee turnover. These savings included a decline in malpractice expense, which was among the mouthful of objectives of our commitment to quality.
We also improved pricing in line with our objectives. This is due to a combination of our strong local market position as well as recognition that we offer high standards of clinical quality.
Keep in mind that the pricing improvement is not always fully apparent in our pricing stats, because of the impact of an adverse mix shift due to soft commercial inpatient volumes. Turning to volumes, trends are clearly improving and aggregate admissions appeared to be stabilizing.
After three quarters of negative growth in total admissions, we returned to positive growth in the quarter. This stabilization is evident whether you look at total or paying admissions and uninsured plus charity admissions only grew by a moderate 3.1% in the quarter.
In the context of current economic conditions, I think it is fair to say that a lot of companies across any number of industries would be delighted to show you the kind of volume trends that we see on slide six. Slide six also shows that last year's third quarter was actually quite a strong quarter for volumes across a variety of metrics.
This strength included a 1.9% increase in same hospital admissions. This is a fairly challenging prior year comp that makes our ability to generate even modest admissions growth in the economy all that more significant.
It is important here to note that we take a conservative view on our definition of same hospital data. Since our new El Paso hospital was opened in May 2008, some companies in this industry and other industries might include that hospital data in same hospital admission.
Had we done so, same hospital admissions would have grown by 0.8% instead of 0.1% and paying admissions would have moved into positive territory with growth of 0.6%. Under our method, we will start including Sierra Providence East hospital in our same hospital metrics in the first quarter of 2010.
Our success in stabilizing total admissions looks modest when we compare it to the robust growth that we are achieving on the out patient side of our business. Again, the improvement in virtually identical, whether you look at the 4.8% growth in total outpatient visits or 5.3% growth in paying outpatient visits.
Those of you who have followed the Tenet story for a couple of years know that our success in turning around our outpatient business is very dramatic given the high single digit volume declines that we are experiencing as recently as 2004 and 2005. All of this has converted into a solid increase in same hospital revenue growth which was a very respectable 5.2% in the third quarter.
As you can see on slide eight, this is the strongest increase in revenue growth that we have seen in the last four quarters. We have generated significant growth and profitability as a result of these factors, which has also has had a positive impact on our cash position.
We generated $142 million in adjusted free cash flow in the quarter. Since we are essentially a breakeven cash flow at June 30, after offsetting the seasonal cash consumption in our first quarter, our year-to-date positive adjustment free cash flow is $140 million which as you can imagine is a significant milestone for us.
Thus far in 2009, bad debt expense has come in much lower than we had forecasted at the beginning of the year. We were not alone in our concern regarding the risk of accelerating bad debt, but the results today have been better than we expected.
Another area of potential risks relates to commercial volumes. It is no secret that this volume is the most powerful driver of profitability in our business is providing care for the commercial managed care patients.
As shown on slide 10, we may have stabilized commercial outpatient volumes, they were flat relative to a year ago. On the inpatient side, however, we experienced a 4.5% decline in commercial admissions in the quarter.
This is relative to the 5.7% decline in the second quarter. The first question to ask is whether we're losing market share in commercial admissions.
As we said in past quarters, the lack of current market data makes it difficult to know. Based on numerous discussions with our physicians, we believe that the lack of growth in the commercial side is largely consistent with what our physicians were seeing, now that we are seeing a decline, because our physicians are seeing a decline.
There are at least two possible reasons for this drop in commercial admissions. First, many of the larger national commercial payers have reported membership declines and this erosion reduces the addressable commercial population for our physicians and ultimately for us.
Some of this erosion is significant. For example, in California, which has one of the best reporting systems for tracking commercial managed care enrolment, the estimated year-over-year decline in commercial enrollment is nearly 800,000 lives, which represents a decrease of almost 6%.
Since this approximates the drop in commercial admissions in our California region, and is significantly weaker than our 2.9% decline in commercial managed care outpatient business in California, it is probably fair to say that we are maintaining share in California. In other words, our commercial inpatient admission losses in California were in line with enrollment losses without patients being better.
Unfortunately, the data sources in other states are not as good but we have no reason to believe that this pattern doesn't hold true elsewhere. The second trend after commercial enrollment is the continuing softness in consumer confidence, as cost shifting has caused many of our patients to face rising financial responsibilities for their healthcare, some of them were choosing to defer treatment as they wait for the economy to improve.
Many of our most profitable services, including volumes in a number of our targeted growth initiative service lines, may have been impacted by this consumer behavior. Total company margin expanded in the quarter to 10.6% of net operating revenues, an increase of 310 basis points over last year.
There are many reasons for this, including the shift in our business mix for the outpatient side where margins inherently are wider. With that as an overview of the quarter, let me know shift gears to review the progress that we have made in reducing the risk profile of our balance sheet.
Over the past eight months, we have materially extended our near-term maturity. As a result of these actions, our first meaningful debt majority is more than three years away in early 2013.
We also had a successful $345 million public offering of mandatory convertible preferred stock from which we used proceeds to repay a portion of our 2015 senior notes. These actions also enabled us to achieve one of our interim leverage targets.
The beginning of the year was 739 million in adjusted EBITDA, our ratio of net debt to adjusted trailing EBITDA was 5.8. By reducing debt and improving earnings in 2009, our leverage ratio now stands at 3.7, a full two turns lower than just nine months ago.
The point is that we have significantly reduced the risk profile of the company both in terms of leverage and in terms of the average time to maturity of our debt. There is not much to say about healthcare reform beyond what you have read in the press.
With a number of competing proposals coming out of Washington, it is still too early to make a definitive statement about the likely outcome. I can only remind you that by virtue of our geographic footprint, especially with our major exposure to California, Florida and Texas, there are significant uninsured populations, Tenet has borne a proportionate burden from the cost of providing health care to the uninsured.
From this perspective, the health of healthcare reform succeeds in providing coverage to a large segment of today's uninsured population, this could be very helpful to us. To quickly summarize, we feel very good about the progress that we have made this year.
We are heading into the final quarter of 2009 with significant positive momentum. The strong cost culture (inaudible) as our continued progress in pricing, more stable admission, and strong growth in our outpatient business.
Continuing macroeconomic weakness could surprise us in any number of ways, but hopefully will not distract or detract from the progress that we have made. It is also important that you not lose sight of the fact that with any meaningful resurgence of volumes, particularly in our commercial business, the improved operating leverage that we have created could have a very powerful impact on our financial performance.
Let me now turn the floor over to Steve Newman who will add some color on our cost efficiencies and volume growth. Steve?
Steve Newman
Thank you, Trevor, and good morning everyone. As Trevor mentioned, our third quarter results are boosted by the cost disciplines we built into the system.
You may recall we began the year by launching a series of initiatives designed to capture a $188 million in aggregate cost savings. I am pleased to report that we have made and in fact exceeded that goal as a result of better than expected hospital operating cost controls.
Clearly, the disciplines we have built into the organization which include the ongoing deployment of new cost management systems at each of our hospitals is having a sustained and visible impact on our overall cost performance. We're making similar progress on virtually every line item, starting with same hospital salaries, wages and benefits per adjusted patient day, which actually declined in the quarter.
Granted that decline was just 0.3%, but I think you'll agree that any time a unit cost metric declines, it is significant. In addition to the cost reduction initiatives, we introduced in January, a number of interrelated factors also contributed to this positive third quarter results.
First, we implemented a number of programs aimed at improving employee and particularly nurse attention. Second, the impact of the above mentioned programs has been amplified by the continuation of an uncertain economic environment, which has added to the available workforce intended to keep employees with their present employers.
And third, our hospital staffing and positioned control systems are proving to be effective and we monitor them daily. These initiatives contributed to a 27% improvement in employee turnover and a 29% improvement in registered nurse turnover, compared to Q3 2008.
We also produced a 31% decline in overtime and contract labor expense which represents a savings of $23 million. The net result of all these savings is the 0.3% decline in SWB per adjusted patient day I mentioned a few minutes ago.
Similarly, same hospital SWB as a percent of net revenues fell to 42.2% in the quarter. That is down from 44.1% in last year's third quarter.
At 17.2% of net revenue, supply expense was down from 17.6% in Q3 2008. This is remarkable when you consider the 2.2% increase in total surgeries, including a 4.4% increase in same hospital outpatient surgeries.
We're continuing to build on the strong foundation and cost management through the rollout of our Medicare Performance Initiative. Since April, we have rolled out MPI to eight of our hospitals.
We continue to be pleased with its acceptance by our physicians and nurses who are also embracing the need to improve quality while simultaneously reducing variable cost. While still early in the process, we are beginning to see small reductions in length of stay and variable costs for the DRGs we are targeting in phase I of MPI.
Now let us turn to mal practice results. We reduced mal practice expense by 13% or $4 million in the quarter, further extending our trend of year-over-year declines.
We continue to refine our commitment to quality and patient safety program activities which contributed significantly to the reduction in malpractice expense. Again while we are always cautious with regard to forward-looking statements, these savings were built on a foundation of clinical improvement we believe to be sustainable.
Each of the items I just mentioned contributed to this great result, a 0.6% decline in total same hospital controllable operating expenses on a per adjusted patient day compared to Q3 2008. Turning now to volumes.
You have seen the inpatient statistics in our release. I would like to give you some more insights into our strong outpatient results.
Outpatient visits on aggregate were up 4.8% and increased across all regions and in all segments of the outpatient business. The strongest segment of growth in our outpatient business were our emergency department visits which increased 9.3%.
This strong showing is the result of all the work we have done to improve customer service, throughput, and turnaround time, as well as the changing of emergency medicine physician groups in many of our EDs over the last year. Nearly 80% of the ED growth came from paying patients, less than 10% of the incremental volume came from influenza like illnesses, and fewer than 7% of the flu cases we did see resulted in admissions.
Speaking of the flu, let we share some statistics which address investor concerns of a possible linkage between recent flu patient volume and bad debt. Those of you who are following along on our slide presentation will want to look at the pie charts on slide number 20.
The pie chart on the left provides a baseline by showing the percentage of self pay patient, among all patients we have served in our EDs, in the first half of 2009. This percentage was 22%.
I call this snapshot a baseline because there was minimal flu in this time period but the recession was clearly having an impact. The pie chart on the right looks exclusively at the flu patient we treated in the third quarter, 22% of whom you can see were uninsured.
In other words, we are not seeing any meaningful difference in the insurance status between our flu patients and our general ED population. While we are discussing the flu, let me also briefly tell you about the expanded business intelligence and reporting tools we've have put in place to help our hospital outpatient departments track the spread of H1N1 and seasonal flu like illnesses.
We now have daily reporting of individual hospital emergency department volumes. This allows us to respond appropriately in the event of a surge in volumes.
We also have established an Internet site and system for hospitals to report the influenza like illness patient numbers. Both of these tools complement our long-standing and well developed pandemic management plan.
Quickly returning to our discussion on volumes, we also saw a significant growth in outpatient surgery and imaging, which were up 4.4% and 2.7% respectively compared to the third quarter of last year. Now let me quickly bring you up-to-date on the growth of our medical staff in the quarter.
Net of attrition, we added 266 physicians who are active medical staff in the third quarter putting us at 61% of our previous target of 1,000 net expansion of our medical staff for 2009. We now believe we will finish the year with an increase of active medical staff net of attrition of between 800 and 900 new physicians.
The reason we are unlikely to meet our target is that existing physician practices have slowed their succession plan because of the general downturn in the economy. We have a number of loyal physician practices where the senior positions have elected to postpone their retirements for one to two years.
I would remind you that we continue to expand our medical staff to meet community needs utilizing three tactics; re direction, re-location, and when necessary employment. This selection and distribution of these tactics is customized for our individual markets and hospitals.
We are continuing to refine out physician recruitment targeting and our on-boarding processes to improve the stickiness of our recruited and redirected physicians. Bottom line, we remain confident in our strategy, and we believe our focus in this area will serve as the foundation of our volume growth tactic, supplemented by increasingly effective physician relationship program.
With that, let me turn the floor over to Ted's chief financial officer, Biggs Porter. Biggs?
Biggs Porter
Thank you, Steve, and good morning everyone. Adjusted EBITDA was very strong in the quarter.
Since Trevor and Steve have provided a common flu overview of overall growth and progress on cost efficiencies, I will move directly to the topic of pricing. We achieved continued increases in net patient revenue per admission, up 3.7%, and net outpatient revenue per visit, up 2.7%.
The increases in both of these pricing metrics were restrained by our mix shift as commercial patients represents smaller percentages of our patient population in the third quarter. Note that however that we did achieve an increase of 4.2% in commercial managed care revenues.
This was achieved despite a decline of 4.5% in commercial managed care admissions and flat commercial managed care outpatient visits. While would not disclose our pricing increases for commercial managed care, the relationship of those metrics with revenue growth rate meaningfully stronger than volume growth provides visible evidence that we are continuing to see consistently strong increases in our commercial pricing.
We also had favorable patient mix which contributed to the commercial pricing stats. Looking forward at this point, we have negotiated the pricing on 74% of our expected 2010 commercial revenues and 61% for 2011.
Let's now turn to the topic of bad debt. Bad debt expense was 193 million in the third quarter or 8.5% of net operating revenues.
This represents a $28 million growth in bad debt expense for the quarter compared to last year on a same hospital basis. Because of the issue of bad debt has drawn so much attention in the context of a soft economy and rising unemployment, I would like to take a few minutes to discuss the complex manner in which bad debt actually impacted our bottom line.
As we have said before, because uninsured revenue and bad debt substantially offset each other, the real driver of the net P&L effect of carrying for the uninsured is not reported bad debt expense but rather the cost of care net of the small amount of collections we make. Since uninsured volumes actually declined relative to last year, the increase in bad debt expense in the quarter is primarily explained by pricing and mix, and the year-over-year decline in our aggregate self pay collection rates.
The pricing and mix element is just to gross up the bad debt expense against revenues. To put this in context, we disclosed in our 10-Q that the estimated fully burdened cost of caring for the uninsured and charity in the third quarter was approximately $130 million, excluding depreciation.
Against this, we collected approximately 15 million for a net fully observed P&L effect of $115 million. The same number for the third quarter of 2008 would have been $103 million.
This growth of $12 million is far less than the $28 million growth in bad debt expense even after including the cost of carrying for increased charity patients. Also this is fully burdened cost.
On a contribution margin basis, this would be significantly less, in the neighborhood of 50% less. I should note that this net cost for the uninsured and charity is not comparable to other period classifications because of variations in equity and length of say between the payer classes.
So to summarize at this point, increasing uninsured and charity volume were a concern but far less than what would be suggested by looking at gross bad debt expense. Having said that, both uninsured admissions and uninsured outpatient visits declined in the quarter by 3.1% and 1.1% respectively.
There are a number of factors which may have contributed to declining uninsured volumes in the context of the weak economy and rising unemployment rates. Certainly a portion of these declines can be credited to the financial counselors we have placed in each of our hospitals.
These counselors work with our uninsured patients to help determine whether they can qualify for various government programs. It is difficult to quantify the impact of this program with precision but clearly this program has had an important favorable impact.
Our "Right Care, Right Place" initiative also is believed to be contributing. While we're experiencing a decline in our average collection rates in self paid accounts, including balance after, our investments in the revenue cycle process, including automated dialer technology which allows us to place approximately 2 million outbound calls a month, resulted in our receiving partial payments from a much larger number of accounts.
Our continuing enhancements to our revenue cycle have also contributed to the mitigation of collection pressures. Cash collection at the point of service were 37.3% in the quarter, an increase of almost 210 basis points from a year ago.
On the commercial managed care side, our collection rate has been fairly stable at approximately 98% and our aging of accounts has improved. We had another very good quarter with respect to cash.
Adjusted free cash flow from continuing operations was a positive $142 million. This number is particularly strong considering that third quarter is one of our higher quarters for interest payments.
In addition to improved earnings, our emphasis on working capital has continued to produce results. With the mandatory convertible issuance and related activity in debt repurchases, there are numerous items impacting our cash position in the quarter, all of which are detailed in our earnings release and 10-Q.
That net result of these items is that we ended the quarter with 731 million in cash and cash equivalents. We have made only a modest change to our 2009 outlook, raising both the lower and upper end of the range by 25 million.
With year-to-date adjusted EBITDA of 764 million, this implies an outlook for the fourth quarter of 161 to 211 million. This Q4 range is 29 to 79, lower than the 240 million we reported for Q3, which is often our seasonally weakest quarter.
In terms of the (inaudible) in Q3 earnings to Q4, let me share with you the broad outlines of our thinking. We had a few items which favorably impacted the third quarter by approximately $20 million, including 11 million in favorable cost reported adjustments and 6 million from our minority interest distribution.
Let me emphasize that the earnings from these resources are very real and should formal a legitimate part of your assessment of Tenet's 2009 earnings power, but the simple fact remains that these items could have just as readily occurred in a different quarter of the year. Similar to other items affecting results in the fourth quarter could occur as they have in the past but generally we do not forecast them.
So all other things equal, we would use a baseline for the third quarter of 220 million as a point of comparison to our fourth-quarter outlook. We can readily identify three items which either will or could place earnings pressure on Q4 relative to our Q3 run rate.
These are the effects of our annual non (inaudible) merit increases, the continuing effect of the declines in our collection rates, and adverse mix shifts. Partially offsetting these are the effects of pricing increases and seasonal volume growth.
While the upper end of the range captures some risk in this area, the lower end of the range reflects additional uncertainties around the same or other incremental sources of risk. Other than that, we seen no need to make macro level adjustments to our estimates on volume growth, pricing or cost efficiencies, as our strategies for delivering results are largely consistent with our plans.
We have put slides 26 through 29 on the web which give our EBITDA and cash walk forwards and related outlook information. We have stated in the past we have not wanted to continue the practice of giving partial quarter volume stat.
However we have done it for each quarter of this year and recently when we updated our outlook in September, so although we might discontinue the practice in the future, our in patients stats for the period through October to date are as follows. Total admissions for the 28 days grew by 0.9%.
Impatient paying admissions grew by 0.3%. Impatient commercial admissions declined 5.9%, and uninsured and charity admissions grew by 9.4%.
The uninsured and charity number needs to be put in perspective because this is off of a very small base and represents only 327 incremental admissions over last year. On the basis I already described, unless these patients are unusual in their demands in the hospital, this represents estimated net incremental cost of less than $1 million.
One of the lessons learned from this is the statistics we give on (inaudible) is a much more meaningful way to look at the business and looking at total mix and then trying to adjust the model for the amount of bad debt expense are better implied in that number. There is far more positive leverage in paying admissions than there is negative leverage in charity and uninsured admissions.
Don't get me wrong, there is a big deal that almost 7% of our in patient and 11% of our outpatient volumes are charity and uninsured, for which we are inadequately compensated and which absorb capacity. But the percentage of growth of these numbers over the shorter to near-term does not have a significant effect on our bottom line.
I am going to conclude from focusing on bad debt expense. The key is to focus on what is happening to total paying admits and the mix with that.
Once again, the periods through October 28 is a short period, so it is not necessarily indicative of the fourth quarter. As a reminder, outpatient stats are not available until we close our books for the month.
We are not going to provide the 2010 outlook until we've released our fourth-quarter results as has been our practice. While we expect to plan for earnings growth next year, it is too early to indicate the range.
We believe that a most stable economy should provide benefits primarily in terms of payer makes over the course of the next year. We also continue to expect benefits from our volume, pricing and cost control practices and initiatives in 2010.
What we don't know yet or not yet ready to estimate is the lagging effect on the economy if payer mix and collection rates enter into next year. You will have a better feel for that starting point as we conclude the fourth quarter.
The other negative pressures we will watch are state funding and the amount of front end implementation expense on healthcare IT requirements as required by the stimulus bill. I should also note that with the recent provider tax legislation in California, there is both upside and downside of the state funding situation.
So my summary points are virtually identical to last quarter. A strong quarter on outpatient cost control and cash flow, bad debt pressures from the economy had increased, but are not the burden we would have expected earlier in the year.
The negative effects of the economy and commercial volumes have been offset by the positive trend on outpatient which may be a strong indicator of future growth, and we're confident in our strategies to remain conservative in outlook only for those factors outside of our direct control. With that, let me may turn it over to the operator for questions.
Operator?
Operator
(Operator instructions). And your first question comes from the line of Ralph Giacobbe with Credit Suisse.
Please proceed.
Ralph Giacobbe – Credit Suisse
Thanks, good morning. I didn't want to go to bad debt expense, is there you know – I know in your last call you said bad debt for the back half of the year, 8.4% to 9.8%, clearly 3Q at the low-end of that range, but is there something seasonal about bad debt and specifically 3Q seems to jump up historically and then you kind of come down a little bit in the fourth quarter, any comments around that?
Biggs Porter
Yes, there is a seasonal effect, and generally speaking third-quarter is the worst quarter for bad debt from a rate standpoint. Some of this is numerator and denominator, lower volumes, lower commercial revenues typically in the third quarter as a result of people taking vacations, changes the mix.
And there is a very slight aging component to bad debt expense but it does affect us, so we have higher volume somewhere in the year, which are some level of bad debt recorded in the third quarter. So I would say it is definitely a seasonal effect and you can look at it both from a numerator and a denominator standpoint.
Ralph Giacobbe – Credit Suisse
Okay. And then just my follow-up, did you say you have 61% of the managed care revenue locked in for 2011, did I hear that right?
Trevor Fetter
That's right.
Biggs Porter
Yes.
Ralph Giacobbe – Credit Suisse
Is that – I mean I guess is it normal for you to have that much locked in sort of this early, any sort of extension out of contracts and maybe any changes to rates to compare to what you have seen over the last couple of years?
Biggs Porter
It is not unusual for us and I think as we have said before we think that 2010 we expect rate increases consistent with what we had in 2009. So no pressure, no change there.
We had said previously that we were going to hold 2011 to not more than 50% given risk of inflation. We have gone over that.
But from the standpoint of total negotiation, however there are inflation rate adjustments clauses in there, so we have not gone beyond our express commitment to forward price on a fixed price basis more than the 50% number.
Ralph Giacobbe – Credit Suisse
Okay, great. Thank you.
Operator
Your next question comes from the line of Tom Gallucci with Lazard Capital Markets. Please proceed.
Tom Gallucci – Lazard Capital Markets
Good morning. Thanks for the color.
I guess first you mentioned some of the TGI initiatives during the prepared remarks, I think in the past you have given us some color on some of the growth relative to the total as we can sort of monitor your progress there, so do you have any metric that you can offer in terms of growth in those areas?
Steve Newman
Sure, Tom. It's Steve Newman.
As you noted in the slides we have put on the web, consistent with the long-term trend, the decrease in commercial managed in the TGI priorities was actually less than the aggregate reduction in commercial managed care across all diagnoses. But I think that more importantly we are still pushing on those particular priorities and as we roll out to Medicare Performance Initiative and begin to look at all payers under the targeted growth initiative, we see stabilization compared to prior year.
And as the activity advances, we more toward developing a positive margin on those cases, which had previously been negative margin when they are outset of the commercial pay or category.
Tom Gallucci – Lazard Capital Markets
I guess I was wondering can you talk about any of the more specific areas within TGI, some of the ones that were better growth versus a little slow growth.
Steve Newman
Sure, for example, for orthopedic surgery in the commercial line was a 0.2%. If you look at all payers, it was a more than that.
If you look at other areas, spinal fusion surgery was an area that we have focused on significantly. It was up 10.6 in the commercial managed care category.
If you look across all payers for fusion surgery, it was about 11.5%. On the other hand, looking at obstetrics, it was down 3.3% in commercial managed care, and even slightly more, as much as 9% across all payers, probably consistent with what it is looking like nationally as they decrease birthrate, which you tend to see in this part of the economic cycle.
Open hearts were down 2.3% in commercial, and that has been pretty consistent with the trend over the last three quarters. So all in all, I would say we have movement towards stabilization but not on the right side of the zero line with respect to growth in those TGI priorities on the commercial side but doing better in the all paying categories.
Tom Gallucci – Lazard Capital Markets
Okay, that is helpful. And just a follow up, you ended the 5.9 decrease in commercial managed care admissions in October, but obviously that is a tough period, so it is hard necessary to trend that out.
Can you can talk about the variability that you saw and their metric during the third quarter? Was there big fluctuations from month to month or was it fairly steady at 4.5% or so rate?
Biggs Porter
There were fluctuations in the third quarter and we reported them somewhat piecemeal as the case may be because we gave stats when we gave the second quarter results back in early August and then we updated them when we updated our outlook in September. July was strong and then it fell off some from there.
So if you look at October, hat is actually up from what September was, but September was down from what July and August were (inaudible). And the quarter as a whole, third quarter was better than the second quarter.
So there is variability. You can't really take any shot period and extrapolate it and say that that represents a trend.
Tom Gallucci – Lazard Capital Markets
Okay, thank you.
Operator
Your next question comes from the line of Sheryl Skolnick with Pali Capital. Please proceed.
Sheryl Skolnick – Pali Capital
Good morning. I am not used to saying this, but nice quarter guys.
Trevor Fetter
Thank you.
Sheryl Skolnick – Pali Capital
You're welcome as far as you did hear that yet. Okay, could we go back, Steve, to your comments about the physician recruitment and the reigning in of your targets by about 200?
If you're going to be – first of all, you attributed that to the physicians being driven by the physicians, is there any impact you would forecast on volumes from having fewer of your senior physicians transition out to retirement?
Steve Newman
I think that is a very good point. And interesting that many of these senior physicians that they are intending to die if that disproportionately productive, which certainly gives rise to both concerns as well as positive feelings as they moved toward retirement.
It is our job to make sure that community need is met and if practices have disproportionately productive positions that retire appropriate or become the elder or disabled, then it can cause patients to out migrate from the service area to get services elsewhere. So we're very focused on making sure that most of our major practices have succession planning underway.
I would want to put in the context the whole issue of the target being 1000 and us coming in the range of 800 to 900. When you think about how we grow our business, for example in the quarter, we only added 15 employed physicians.
So net of attrition to our active medical staff, we added 266 doctors, so that 15 employed physicians is around 6, 6.5%, something like that. That means the remainder, the huge bulk comes from redirection or relocation of physicians.
The second part of the perspective is that we have really worked hard to improve the on boarding of physicians that we're bringing to our medical staff. I think in the past, as we attempted to move quantity to meet medical staffs over years that had shrunk to the point of not being able to meet community needs, we may not have been as selective, and once we did select physicians, we may not have assimilated them into our medical staffs as well as we can do today.
So when I referred to the stickiness of those positions, we want to make sure we are targeting the right physicians, and when we successfully bring them on our active medical staff, encourage them to participate in continuing medical activities within the hospital, introduce them to their referral sources, and take them around, show them various departments they would interface with, all the way from medical records to the emergency department physicians that will be seeing their patients, nights and weekends. So I don't think this materially in a negatively impacts our growth plans moving forward but does change some of the numbers that we have classically looked at.
Sheryl Skolnick – Pali Capital
Okay, that is helpful. Thank you.
And I've got so much to ask but I guess I will focus on this. For the first time in, I don't know, years since the bad old days, Tenet actually has had an absolute reduction in the amount of debt it is carrying, which is very nice to see.
And of course net of the cash, which is higher than at one point we thought it was going to be for the year, you know your net leverage statistics look very, very nice. So you are to be congratulated on both accounts, much improved operations coupled with a modest, very modest decrease in the amount of debt outstanding.
But you are still in absolute matter of fact a highly levered company, you are still in a situation where you have got debt three years out, which not that long ago we said three years looked that long and then all of a sudden it became short. So I guess where I'm going with this is, you have turned around the business to a very great extent.
Clearly you're not done the operations yet, so a couple of things. One, where are you in the turnaround?
Let's sort of put it there. Two, at what point do see much more significant deleveraging as part of this turnaround?
And three, how do you, and this is the biggie that I think everybody is worried about, you have cut so much cost out of the system already, how do you sustain this next year? How does it become get another year of the turnaround?
Biggs Porter
Well, Sheryl, those are hard questions to answer, as you probably knew when you're asking them. And just try and take them in order.
So first of all on the lead-in, I would agree obviously with your statements about the importance of having reduce leverage through improving operating performance, reduce the absolute amount of debt outstanding, and it is good to continue to draw attention to the cash balance we have, which has become significant in relation to the balance sheet and operations, all of which has been intended to reduce the risk profile of the company. So if you look back at all those capital markets transactions we did in the course of the year, and even prior to that, it has all been designed to reduce the risk profile, which was painfully evident as being too high when we were in the financial crisis just a year ago.
Also we have slides on the web that show that although the first debt maturity is in its – by the way, funny to hear you say, only three years away, some people would say, three whole years away, that is quite a long time from now, it all depends on one's perspective. But if you look at that bar chart of maturities, yes, there is a significant maturity for years, 3.5 years from now.
But we have also pushed way out the other maturities so that I think that the average maturity has been delayed quite a bit. So all of that contributes to a far lower risk profile which I think is good in the business.
Actually as to your comment about we are still a highly leveraged company, I think that is a fair comment as it relates to many industries, of course in the context of this industry, we have moved from being at the very high end of leverage to being towards the low-end of leverage. So it is a highly leveraged industry as you well know, just to put that in context.
As for how we would continue to deliver, we had said in our SEC filings and public comments that we had this interim target of four times. We are now and is slightly below the target, and I would expect that without making any specific comments about it or projections, that we would continue to seek to reduce the leverage, but perhaps not as dramatically as what we have done this year.
And then as to your last comment about which is essentially saying, can you continue this type of growth or what sort of growth should we expect in the future, as you know, this is the season where we engage in business planning, and we will make our first comments about 2010, and our outlook for 2010, when we report the fourth quarter of 2009 results. So it would be premature today although I am sure everyone would like to know exactly what is our outlook for 2010 but it is just too early to discuss it.
Sheryl Skolnick – Pali Capital
Okay. Obviously we would like to hear about that but I don't really want a number before you know what the number is.
I guess what I'm asking though is, with things like Medicare Performance Initiatives, you have got great buzzwords which makes it easy to talk about these things, but they're more than that. And I understand they're more than just buzzwords.
But with things like that, do you, you're not going to answer the question, but I am going to ask it anyway, are there so many negative trends that we on Wall Street are worried about, that perhaps that you all don't see, or are we looking at the right negative trends that things like Medicare Performance Initiatives and other strategies the Company is pursuing could offset?
Biggs Porter
Well you know maybe it was the Halloween season but I did think that Wall Street investors seem to be looking for ghosts or seeing ghosts in this industry in the last few weeks. We have called attention since the beginning of the year to the risks and in fact we did it today again in our number prepared remarks, the risks that we see out there.
So they relate to the economy, and job losses and a reduction in personal credit quality in an environment where patients are responsible today for a better portion of the financial responsibility than they ever have been before. So whether it is bad debt or it is insured or Charity, or commercial managed care, addressable population, those are the things that I think people have rightly focused on perhaps in recent weeks.
My personal opinion would be they have got to Michael in the morning about it. But we have taken it seriously, so you go back to a year ago where our stock was, I don't know where it was exactly but probably headed towards dollars, around the dollar, and that was a serious financial crisis, a capital markets crisis, and clearly evidence that we are in a series recession with job losses.
And so we responded to that and by building that foundation of a lower cost base and a stronger cost control discipline and also greater operating leverage as I've pointed out I think we're well positioned for any rebound. We are also well positioned if it continues to be tough for a period of time.
And there have been you know to some degree certain elements of the economic weakness have addressed us get this contributed to the gains and turnover that we have had. So I'm not sure whether I directly answered your question, but the things we worried about from the beginning of the year to the things we still worry about, we see some opportunities.
Obviously in health reform, there is a meaningful increase in the number of people who are covered into the future, that helps us. The aging of the population helps us.
All those demographics things have been out there for a long time, help us, and to think about something like the Medicare performance initiative, it is directly oriented to address those kinds of risks and opportunities that are out there, and we didn't talk much about you know the improvements we have made in the revenue cycle, but Steve Mooney who runs our (inaudible) revenue cycle solutions had a perspective client say to him the other day after touring our facility, you are the Mayo Clinic of the revenue cycle, which I take as an enormous complement in this industry, But that is a very powerful skill and competency that we have that will help us regardless of what happened from the economy or the trends in our business.
Sheryl Skolnick – Pali Capital
Okay. Thanks so much for the time.
Operator
Your next question comes from the line of Shelley Gnall with Goldman Sachs. Please proceed.
Shelley Gnall – Goldman Sachs
Hi thank you. I have a specific question on the supply cost I guess that we have seen so far this year.
Can we just clarify with the Medicare Performance Initiative, the key driver of the improvement we saw in supplies in the third quarter, and if not, can you talk a little bit about, or even if it was, can you talk about some of the specific developments that have been benefiting the supply cost?
Steve Newman
Well, thanks for the question, Shelley. I think that the supply chain initiatives that we have had for a number of years were actually responsible for the improved performance in Q3 2009 compared to Q3 2008.
The Medicare Performance Initiative is overlaid on the existing supply-chain initiative. More recently we've had a very focused supply-chain activities in cardiac rhythm management devices and orthopedic implants, those have been successful in all regions of the company now, and should drive down over time our unit costs, as well as the appropriateness of the units selected by our physicians utilizing better demand matching algorithms.
So I would not say that the Medicare Performance Initiative largely was responsible for driving down supply cost in the quarter but going forward certainly that umbrella of MPI oversupply cost as well as case management, length of stay management and that sort of thing, will help us to coordinate those efforts.
Shelley Gnall – Goldman Sachs
And it might be early for this question but would you be willing to put out sort of a long-term objective as far as the way you think supplies cost could go to as a percent of revenue?
Biggs Porter
We probably wouldn't give that sort of guidance, Shelley, on that line item or any of the other cost line items.
Shelley Gnall – Goldman Sachs
Okay, I had to ask. Thank you.
Operator
The next question comes from the line of Darren Lehrich with Deutsche Bank. Please proceed.
Darren Lehrich – Deutsche Bank
Thanks. So I wanted to ask about the outpatient trends, I think they were probably 10 straight quarters where I needled you about negative same store out patient visit growth and it is clearly turned into positive territory.
I guess two things I wanted to ask here. One, are you operators, is there any feedback that the outpatient activity that you're seeing right now could be COBRA driven such that we do get some fall off in future periods, anyway that you can look into your volumes to give us some indication there?
And then the second question is really more of a longer-term one, and I guess I am really trying to understand what the right baseline of your outpatient business could get to. You do a lot of outpatient services out over a period of years and I think that contributed somewhat, but is the right way to look at it, the number of outpatient visits to inpatient admissions in which case you're probably 15% to 20% below where you were in the early part of this decade?
How are you just thinking about the baseline of your outpatient business? Thanks.
Biggs Porter
Those are complicated questions. First let me answer the simple one and that is we don't have any good methodology to give you an answer on COBRA.
We don't identify patients that come with commercial managed care whether they have continuous employment or whether they are on COBRA. So there is no way for us to answer that.
With respect to the outpatient business, I would say over the last 2.5 years or three years, we have really accelerated our focus in the outpatient arena across all of the segments of the outpatient business. I think there has been an understanding on the part of all of our operations leaders out in our hospitals as well as freestanding facilities that we have strong competitors and we have to win that business from doctors and patients each and every day.
We focused on our emergency department and we have been focusing on the ER for some period of time, we haven't talked about it in great detail because it is not the glitziest thing we do, but we have improved throughput, systems, turnaround time, our left without being seen is down dramatically as we've developed better systems to get patients' triaged and examined rapidly, returning their lab test or imaging test if necessary before final disposition. The ER has driven about two thirds of our growth in outpatient and the rest has been divided between surgery and imaging which are very profitable parts of our business.
I think over time the answer to your last question would be we believe we have opportunity to continue to grow our outpatient business. While we grow our impatient business, our outpatient business will become a larger percentage of the total business over the next 5 to 10 years.
So we are still accelerating that up. There's a couple of milestones along the way in terms of where our net revenue is, impatient versus outpatient, and we're headed toward moving those gradually towards that 50% level.
Darren Lehrich – Deutsche Bank
That is great. And then Biggs if I could just ask a couple of cost related questions, first just, where there any one-time costs associated with the headquarters move in the period to call out or to think about and any in the fourth quarter that we should be thinking about?
And then you did mention the merit increases, can you just quantify the annualization or the annual impact of that so we can plug that in the model? And then just a housekeeping one, what was the ending fully diluted share count?
Thanks.
Biggs Porter
Okay. On the move, nothing significant that I think you would point out in terms of third quarter or fourth quarter on the move.
In terms of the –the second part of your question was what, could you just give it to me again?
Darren Lehrich – Deutsche Bank
The merit increases?
Biggs Porter
The merit increases, I'm sorry, on the merit increases, the effect on – typically to put this in context, normally in the past, the effect of inpatient price increases on Medicare and the salary, wages and benefit effect of merits in the fourth quarter roughly offset this year because Medicare price increases are a little over. There is not the net loss between those two.
However as we go through time, the outpatient pricing comes in the first quarter next year and we have commercial price increases which come in over the course of next year. So pricing does improve at a rate better than the cost growth associated with salaries wages and benefits as you look out over an entire 12 month period.
It is just in the fourth quarter we will have a mismatch this year. The sizing of the effect on the quarter is probably in the neighborhood – it is between 10 million and $15 million on merit increases for the fourth quarter.
But as I said it moderates over the course of the – over the year relative to price increases. Share, 498 million shares.
Darren Lehrich – Deutsche Bank
That's the end of period count?
Biggs Porter
Yes.
Darren Lehrich – Deutsche Bank
All right, thank you very much.
Operator
Your next question comes from the line of Kevin Fischbeck with Bank of America/Merrill Lynch. Please proceed.
Kevin Fischbeck – Bank of America/Merrill Lynch
Okay, thank you. I wanted to go back to the physician recruiting because what you guys have done over the last couple of years is pretty impressive, I guess with the 7% growth in 2007 and the 9% growth in 2009 I mean is it fair to say that we are seeing the impact of that today, those two years of recruiting?
I guess I want to understand the differential between those pretty big numbers and what we're seeing as far as volumes, I think in the past you've given kind of how certain class of physicians are ramping up, just wanted to get a sense of what your though process is about 7% physician growth equal to 2% volume growth, or is that every that you think about that going forward?
Steve Newman
Well, Kevin, I would not say that there is a formulae driven way to assess positions recruited net of attrition that converts to incremental admissions and incremental outpatient visits or surgery. Nonetheless, we continue to track those through our physician contact management system, and we are seeing those prior classes tend to ramp up over time, once again proving our earliest postulate that it takes 18 months to 24 months for a physician who is new to staff to ramp up both their inpatient and outpatient activities at our facilities to a steady-state and the outpatient tends to be the first activity in physicians involve themselves in under their comfort level raises and they began to use it for inpatient activities.
We are continuing that physician relationship program and we have added in the last couple of quarters a significant number of those PRP reps that focus on the outpatient business. And so predominantly imaging as well as ambulatory surgery.
So I think with the overall program, we are seeing the yield from that. It continues unabated, and it will be the basis along with our physician recruitment program for powering the growth long-term.
Kevin Fischbeck – Bank of America/Merrill Lynch
Okay. And then I guess maybe to take the opposite end of a question that was asked earlier about leverages now, earlier you were kind of below average, in a highly levered space, I mean is there a point where you start to look at it and say, we are done, and things like acquisitions start to make sense again, what is your view them?
Steve Newman
I think that is a very good question to ask about acquisitions. I think we know, but it is impossible to answer.
So it is a good question to ask, impossible to answer. We will obviously look for opportunities that would expense with our portfolio and our footprint, and we would have some desire to diversify geographic risk that we have today, but I don't feel that we are under levered at this point.
So we were probably make more specific comments about our outlook on that when we talk about 2010 at the time we release fourth-quarter earnings but for now, just continue the line what we said recently in the SEC filings and public comments.
Kevin Fischbeck – Bank of America/Merrill Lynch
Okay, great. Thanks.
Operator
Your next question comes from the line of Kemp Dolliver with Avondale Partners. Please proceed.
Kemp Dolliver – Avondale Partners
Hi thanks. Steve, your earlier comment about the ED and the decline in left without being seen is interesting in that you know given presumed up ticks in patients without insurance, you would have some countervailing trends with regard to more uninsured showing up and potentially being triaged to a different settings, versus just the trends to improve ER turnover.
Could you talk in a little more detail regarding what you're saying with regard to patients left without being seen?
Steve Newman
The Left without being seen metric, Kemp, is one – each of our hospitals follows each month. They work on getting that down significantly, there are customized targets for each hospital in that particular area and they have activities that are both corporate driven and as well as local hospital government to try to improve the length of time from presentation, registration, to triage, and then to definite diagnosis care, either admission or discharge.
Once again, as we have grown our emergency departments, we have closely monitored the number of uninsured and charity cases that are there, and obviously when we have patients that present with emergency medical conditions, we don't even look at their financial status. We take care of the patients and ask questions later.
But for those that have non emergency medical conditions, we certainly work with our financial counselors in the emergency department, and make sure that they have a mechanism to pay, or triage to – community resources that can handle them. With respect to the payer mix in the year, we are actually seeing some improvement over time.
So one of the postulated consequences of the H1N1 and the real, at least in some areas, panic is that patients with commercial insurance, develop symptoms instead of waiting till the next day to go to the primary care physician, or ending up in ERs because they want to be screened, they want to be evaluated, and if necessary get prescriptions, get those sales, and get on any medication as soon as possible because the education programs in the mass media are saying the sooner you treat patients with H1N1, the less likely they are to develop serious cases and consequences. So all in all, we continue to focus on making our ERs more friendly to patients, and more efficient with our quality of care.
Kemp Dolliver – Avondale Partners
Right. If I could just zero in on one aspect of this, are you seeing increases in the number of self-pay cases that are showing up and leaving without being seen?
Steve Newman
No, we're not.
Kemp Dolliver – Avondale Partners
Great, thank you.
Operator
The next question comes from the line of John Ransom with Raymond James. Please proceed.
John Ransom – Raymond James
Hi. I had to pick myself off the floor, I saw the words free cash low, I just want to make sure it wasn't a typo?
Trevor Fetter
No, it is real.
Biggs Porter
Not a typo, and there was a lot of effort that went into it but thank you for recognizing the shock value of that.
John Ransom – Raymond James
I like negative free cash flow, it is kind of an oxymoron. Just I know you are not giving 2010 guidance, but just two quick things, CapEx and med mal, what should we be thinking about as we model this to for next year?
Any a significant changes from the trend we saw this year?
Biggs Porter
Well, med mal is getting pretty precise to get into a line item there for next year or for this year. Certainly, we think that our long-term initiatives to improve quality and reduce the occurrence of incidents which trigger any kind of a claim, we expect to continue to pay off for us over the long-term.
As we have potentially improve quality, they would expect to see continuous improvement in the underlying drivers of malpractice expense. Also, to discount a liability, so if interest rates go up next year, there is a potential positive from that.
Having said that, we obviously had some significant reductions this year, and I can't say those kind of reductions are going to recur next year. So we've just got a ways to go here before we will have a prediction internally on what we think med-mal would be next year.
And from our line item guidance standpoint, I wouldn't expect to ever give it at that level of detail but give you some indication when we give our 2010 outlook, what we directionally we're thinking about in terms of med-mal. We have said previously that the 400 million, $450 million we are running this year was something we thought we could sustain.
That sort of giving it as an outlook for next year. We as we completed our planning and look at what all of our priorities, what our opportunities are, we will come up with something more definitive for next year.
There is never a hard number because you always have to look at what do you think the right amount of spending is for any given year. But as I said, we saw this as sustainable number.
We have a new hospital which is East Cooper which is a replacement hospital which is completing early next year, so spending on that will wind down. We will have some increased spending on healthcare IT next year, going the opposite direction, and after that, it is a matter of what are all the other priority items and what makes sense investments to make investment for the long-term.
John Ransom – Raymond James
Okay. And my other just quick question is, sequential your guidance implies kind of flat 4Q on EBITDA.
Normally last year for example was up 40 million off of a lower base admittedly, but is there reason, you notice any reason to think about why it would be flat this year, anything unusual versus prior years, or it is usually up a little bit?
Biggs Porter
Well I think that – we have tried to remain – retain a conservative posture with respect to potential effects of the economy. So I think that our, our fourth-quarter estimates still contains some degree of conservatism with respect to what could happen with respect to mix.
Commercial decline, slightly lower potential for outpatient, although it is not necessarily the expectation remains something that we will see, how we will out the year. Bad debt expense, it is possible, we have had the slope of deteriorating collections over the last year, and we could have some further degradation into the fourth quarter.
And then there is a mismatch as I said between merit increases in the fourth quarter relative to government price increases which this year is a net negative effect they wouldn't have in the past. But as I said, I think that you're right.
Typically we expect fourth-quarter to go up over third quarter based upon higher volumes. I think we are just being a little conservative because of still the answer is around the economy.
John Ransom – Raymond James
Okay, great. Thanks a lot.
Operator
Your next question comes from the line of Gary Lieberman with Wells Fargo. Please proceed.
Gary Lieberman – Wells Fargo
Good morning. Thanks for taking all the questions.
Could you just break out the 20 million you guys noted with sort of I guess one-time on the expense side, could you just is breakout which expense line are impacted?
Biggs Porter
That wasn't expense items, I did characterize it as one-time to be clear. There is $11 million dollars of cost reported adjustments.
There was 10 million of cost reported adjustments in the third quarter of last year, so by definition, you wouldn't say those are one-time. If you look at the track record, there is lots of quarters where we have cost reported adjustments.
So it is definitely I would call one time. But on the other hand, I wouldn't necessarily forecast a like amount for the fourth quarter.
The other item that is $6 million associated with Philadelphia HMO which we own a minority interest and we received distribution on, were notified of this on in the third quarter. Last year, there was a similar amount, but it occurred in the first quarter of 2008.
So once again I wouldn't call it a one-time items. However, it is something that may occur in different quarters of the year, depending upon the timing of events with the HMO.
And then the third item is a pension related items of about $ million. They're all actually disclosed in the release and they are disclosed in the Q, but the aggregate, the $20 million, but the bulk of it is up in revenues.
Gary Lieberman – Wells Fargo
Okay, great. And then sort of looking at slight five and looking at the control board expenses, they have obviously – decline has been very low this year.
How should we think about that going forward, I mean in 2010? Can you maybe not keep it where they are now, but do they not go back to sort of where they have been in years past, or just in terms of how you are thinking about when you forecast what do you think about?
Biggs Porter
Well, this sort of plays back to Sheryl's question earlier about what do we expect for 2010 in terms of cost control in our various initiatives and we're not prepared to give an outlook yet on that line item. Certainly though we see cost improvement as a continuous process, we will never stop trying to drive on costs and become increasingly efficient.
As a discrete initiative, our discrete initiatives, supply cost initiative, we will continue the MPI initiative, where we are systematically attacking the DRGs which are the most problematic once in each of our hospitals. We will continue well into next year and the benefits of that are still out in front of us.
But those aren't the only things, and won't be the only events from a positive or a pressure standpoint that will occur. So we are not sitting on our hands.
You shouldn't conclude that everything that we can do is done, but on the other hand, we are not prepared to say what the net result is going to be.
Gary Lieberman – Wells Fargo
I guess but just looking, you have gotten four years of data there, and obviously this year has been very good without forecasting specifically 2010 which is you know very big picture, is there a reasons to think that we can continue kind of closer to the 2009 levels versus where you had been in 2006 or 2007 of 2008?
Biggs Porter
You know it is you're trying to get me sort of back into an outlook number by looking at a graph and I don't think you're going to get me there.
Gary Lieberman – Wells Fargo
Okay, thanks a lot.
Operator
Next question comes from the line of A.J. Rice with Soleil Securities.
Please proceed.
A.J. Rice – Soleil Securities
Hello everyone, thanks. Just thanks for the information about the contracting with the managed care and the fact that you have so much of it locked up even now into 2011, I guess with healthcare reforms rolling around and not only managed care, but also on the other side of the equation, your vendors medical device companies be under potential pressure, and I know some of those, a lot of those contractors long term as well.
I guess I'm curious whether there's any contingencies in those contracts that as what is on the table now plays out in either the managed care side of the question or the medical device side of the question, come back to you and say, let's re-look at some of these contracts that have been lockup?
Steve Newman
The only thing that is in the contracts from sort of an unusual flexibility standpoint that we haven't – that we had in the past is that inflation hedging or adjustment clause that we started working with some of the contracts to protect themselves against hyperinflation and we go out into the longer term or the midterm, 2011 and beyond. The I think that healthcare reform isn't likely to affect these contracts from any kind of a direct standpoint.
It could be changing the environment and you know if it does, both parties will consider what kind of effects that have although it does not seem like that is something that we are worried about in affecting 2010 or 2011.
A.J. Rice – Soleil Securities
Got it. I mean I'm thinking like the device companies maybe serving to this excise tax, there has been some discussion, will they turn around and push that over to you, but it sounds like in your contracting right now, you're not really – nobody is coming to you and saying, hey, I've got to build the contingency and your own cases go through or something like that?
Biggs Porter
No. We did try to get carve outs on implants and devices as a means of making it more neutral to us what happens in that area.
A.J. Rice – Soleil Securities
Right. I'm thinking more from them getting it coming to you and asking for potential concessions and you getting concessions from them.
Okay.
Biggs Porter
I mean if it is an excise tax that is paid at the point-of-sale which is one of the proposals, I am not sure that will really last, then obviously that is something that would be a cost increase to the purchase just sales taxes is, and that is not the intent of the Congress to tax the providers. They want to tax the device manufacturers, at least recover some of the excess economic surplus in that segment of the industry.
So I think that A.J. as an opinion, I think that would probably trigger a lot closer scrutiny and maybe some re-contracting of that purchasing area.
A.J. Rice – Soleil Securities
Okay, all right, that make sense., I guess my other question to ask about was if you think about the areas that have been impacted by the economy, the level inpatient and outpatient activity generally in the facilities, the collection rate on yourself pay, the mix of patients skewing away from commercial the to a lot more self-pay, have you guys, do you have view as to as the economy stabilized in turn, which of those metrics might be the first indicator to turn and which ones are likely to be more of a lagging factor?
Biggs Porter
I think so to guess right, none of us have lived through the recession, but if you start having job creation, then clearly there is a addressable progress in terms of commercially insured patients. To the extent that converts people from uninsured to commercial insured, that is a good thing.
Even if we are having difficulty collecting the patient portion of it, at least the vast majority of them is covered by their insurance. So we guess I'm not an economist but you might look at job creation which leads to enrolment changes and we probably would get some early indications on that from looking at the managed care companies.
We watch on an instant basis collectibility of accounts and the experience we're having with individuals, whether they are insured or uninsured and how they pay us. We would probably start to see some improvement there as an early indicator which ultimately gets reflected one way or another in bad debt expense.
A.J. Rice – Soleil Securities
Sure, okay. All right thank you all.
Operator
Your next question comes from the line of Justin Lake with UBS. Please proceed.
Justin Lake – UBS
Thanks, good morning.
Trevor Fetter
Good morning.
Justin Lake – UBS
The first question I had was just on your commercial managed care, the government managed side of the commercial book, it seems to be going very nicely. I'm just curious with all the Medicare Advantage Plans out of the trying to create a network, are you available to negotiate prices that are better than traditional Medicare standpoint?
Steve Newman
I think first we have to pause for a little bit definitional moment. So you have actually raised an issue that I think there is a fair amount of confusion about.
When we talk about commercial managed care, we're not talking about anything having to do with a government program run by a managed care company. We're just talking about people who have jobs, who get insurance, and those are commercial managed care.
And the statistics that we give about commercial managed care conditions are by definition lower than if you we gave some sort of statistic that was a hybrid of commercial and government and managed care programs, which would be dramatically better, but it is a meaningless statistic. So I think you probably just misspoke, but I just wanted for the audience to clarify that point.
So you're just talking about the government programs piece of it and the question is whether we are able to negotiate prices with them that are better than what we get on traditional Medicare, and the answer is typically yes.
Justin Lake – UBS
Any order of magnitude you can share with?
Steve Newman
You know we really haven't quoted kind of a key pricing statistic, but it is small. There it is a small improvement and there is also a different – when you introduce that intermediary than post constraints on utilization, that suppressed surprised utilization versus the unconstrained Medicare fee-for-service patients, that is an important thing to remember.
So there is slight pricing up tick and there is a slight downtick in terms of utilization.
Justin Lake – UBS
Got it. And then just on the difficult commercial managed care book, we have been, I'm just curious, do you have any metrics to share with us as far as market share?
And the one I think might be interesting is just thinking about your local market share from a debt standpoint versus what you think your market share is from a commercial managed care initiative standpoint?
Steve Newman
If we go back to the very beginning of the call, my prepared remarks, it is really hard to come by good statistics. But I gave that example of California, where you can match up the enrolment losses versus our declines in commercial managed admissions and they're almost identical.
I think that is a very good proxy for market share and probably the only reliable one and only in the states where you can really get that data.
Justin Lake – UBS
So you would say that you market share hasn't declined, , I'm just curious.
Steve Newman
So we have used – in the opening comments I used facts to demonstrate that it in California, it had remained stable and then our inference was that there is no reason to believe it is not like the same experience in other states and we watch it pretty carefully. We just don't have the facts to go through prove it.
Justin Lake – UBS
Okay, thank you.
Operator
You next question comes from the line of Whit Mayo with Robert Baird. Please proceed.
Whit Mayo – Robert W. Baird
Hi, thanks. Good morning, thanks for squeezing me in.
Just looking through you Q, it looks like in the third quarter, CMS has suspended settling cost reports based on 2007 SSI percentages but still using that percentage for DSH, can you just remind us first, I guess, what is going on there and refresh us for what the physical intermediates are doing now? And maybe secondly just expectations for DSH and UPL over the next year and how that compares year-to-date?
Biggs Porter
On the SSI, the five-year cost reports are the ones on which there is some relative suspense as they have sought out what it is they are going to do in terms of adjusting the prior year. On the current year the intermediaries are applying new rate and we have said that the annual impact was about $8 million to us of the SSI changes that took place.
We recorded 22 million dollars in Q2 related – for the full effect through that date, and then in the second half, just been recording based upon that $8 million annual will run rate. So that is roughly speaking the status with respect to that.
On DSH, and all of the state funding areas, we watch it carefully. I don't think that there is outside of what I just mention pm the $8 million dollars anything else beyond what is in the 10-K with respect to looking forward on DSH relative to the past.
There is no other big changes in work on the state funding side. There isn't anything large pending in terms of any budgetary adjustments by the state to – state to flow through to us.
There is the big upside potentially in California, so (inaudible) talking about earlier which we disclose in the 10-Q and could have an effective of $61 million.
Whit Mayo – Robert W. Baird
Can you explain the eight million again, I do know if I fully understand exactly what that represents?
Biggs Porter
Well, it is the effect of applying the SSI adjustment to our reimbursement levels, sort of on a full-year basis, lower our reimbursement rate $8 million relative to what it was before.
Biggs Porter
Okay, that is helpful. And then maybe Trevor, just one other question with regards to Medicaid, lots of discussion about the increased match going away at the end of the year, you are obviously pretty close to the federation, just you know any thoughts about where you think that match could be (inaudible) any comments you have would be appreciated.
Trevor Fetter
Good. And you know what, instead of answering that myself, we had our Vice President of Government Relations, Dan Waldmann, fly all the way from Washington.
So he's sitting next to me, I'm going to ask him to answer that one. Dan?
Dan Waldmann
Yes. Just specifically obviously there is a lot of attention being given to that increased (inaudible) expiring at the end of next year.
There is a provision in the House bill that was just released that would provide for an extension for states with high unemployment rate but haven't identified which those are. And I think that as this moves forward, obviously the governors are expressing a lot of concern about the additional state budget outlays that are going to be required under the expansion of Medicaid.
So I think those are issues that you will continue to see, work through and addressed as part of the healthcare reform.
Whit Mayo – Robert W. Baird
And Dan, any discussion in the Senate right now for where that stands?
Dan Waldmann
No discussion that I am aware of although we're kind of the Senate isn't a little bit of radio silence right now, and were waiting to see the bill from Majority Leader Reid which is supposedly at CBO getting scored right now. He has indicated that not this week, possibly next week, maybe the week after.
Whit Mayo – Robert W. Baird
Great, thanks a lot guys.
Trevor Fetter
All right, thank you. Thank you very much.
Operator
Due to time restrictions, this concludes our Q&A session for today. I would like to turn the call back over to Trevor Fetter.
Sir?
Trevor Fetter
Thank you operator. And thanks to the audience.
We weren't able to get to every question today. If you have a question please feel free to call Tom Rice and otherwise we will see you next on our fourth quarter call.
Thank you.
Operator
Thank you for your participation in today's conference. This concludes the presentation.
You may now disconnect and have a great day.