2. Financial Overview â
Progress Towards Sustainable, Profitable Growth
⢠Only question: how steep is the upward slope?
⢠Two quarters of demonstrated improvement (Q4â07 and Q1â08)
â Plus two months of 1.4% admissions growth in Q2â08 (April and May)
⢠A visible path to $1B of Adjusted EBITDA in 2009
â Physician base
â Prudent investment
â Targeted Growth
â Cost control
â Price enhancement
⢠No firm ceiling on EBITDA margin
2
3. Financial Overview â
Increased Emphasis on Balance Sheet Efficiency
and Free Cash Flow
⢠$400 to 600 million in cash initiatives
⢠$310 million expected from USC sale
⢠Improved ROIC
⢠Abundant liquidity â potential for over $1 billion
in cash at 12/31/08
⢠Target at or around breakeven free cash flow
for 2009
3
4. Cost (PAPD) Growth
8.0%
3.5 %
6.0% Normalized
4.0%
2.0%
0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2006 2007 2008
⢠Q4 2007 was 3.5% excluding year end comp and benefits
accruals and increase in implant expense; 2.6% in Q1 08
⢠$100 million of run rate savings expected in 2008 compared
to 2007 based on cost actions already undertaken
4
5. Pricing Growth Net Inpatient Revenue per Admit (1)
Net Outpatient Revenue per Visit
15.0%
10.0%
5.0%
0.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2008
2006 2007
⢠Price growth driven by Managed Care and ED charge capture
⢠Further Managed Care price increases already negotiated
⢠Additional ED charge capture growth expected, but not in outlook
⢠Government programs expected to have more modest growth in Q4â08
⢠Outlook range conservative relative to Q1â08 actuals
(1) Inpatient pricing excludes prior year cost report and valuation allowance adjustments
5
7. Bad Debt Mitigation Summary
⢠Over the last two years:
â Charity volumes declined by approximately 6% in 2007 over 2006
â Uninsured volumes rose by approximately 9%
â Uninsured revenues increased by 21%
â But bad debt expense increased only 13% on an annual basis
⢠Bad debt expense was driven by pricing, not uninsured volumes
â Bad debt due to pricing has no bottom line effect
â Volume effects were mitigated
⢠Improved collection rates
⢠Improved aging
⢠Collection of older managed care accounts
⢠In 2006 and 2007 discretely identified mitigation contributed in excess of
$20 million each year,
â with $8 million already recorded in 2008
â Plenty of opportunity to sustain mitigation through our revenue cycle initiatives
7
9. Summary View of California
Announcement (1)
⢠$41 million in proceeds
⢠Small EBITDA impact on continuing operations
â 2007 EBITDA of $5mm expected to grow only slightly
in 2008
⢠Hospitals had $8mm negative free cash flow in 2007
â $21mm seismic estimate no longer incurred
⢠Cash burn is halted at Encino
(1) Sale of Encino, San Dimas and Garden Grove hospitals
9
10. 2008 Outlook Summary
Current
Prior Revised
(6/3/08)
(2/26/08) (5/6/08)
Admissions - growth (1) (%) 1-2 no change no change
Outpatient visits â growth (1) 2â3
(%) 1-2 no change
3.5 â 4.25
Net inpatient revenue per admit - growth (1) (%) not provided no change
Net outpatient revenue per visit â growth (1) (%) not provided 4.5 - 5.25 no change
Pricing â base line growth (%) 3.2 3.4 no change
Pricing â managed care increment ($mm) 36 47 no change
9.3 â 9.4
Net revenue ($ bil) no change no change
Bad debt ratio (%) 6.5 - 7.0 no change no change
Controllable operating expenses PAPD â Growth (1) 3.0 â 3.5
(%) no change no change
EBITDA ($mm) 775 - 850 no change no change
Adjusted cash flow from operations ($mm) 400 - 500 no change no change
Capital expenditures ($mm) 600 - 650 no change no change
200 â300 (2) 850 â 1,150
Cash balance at 12/31/08 ($mm) no change
(1) Same-hospital growth from 2007 to 2008
(2) Excludes potential proceeds from initiatives to raise $400-600mm, USC sale, and other non-operating items
10
11. Revised 2009 Outlook
2008 2009
($ millions) Revenue Cost EBITDA Revenue Cost EBITDA
Prior year 8,852 (8,151) 9,400 (8,550)
701 850
Cost Report Adjustments (40) - (40) - - -
Georgia/ Florida Medicaid (56) - (56) - - -
Volume (1) 167 (106) 61 151 (91) 60
Pricing â Base Line Increase (2) 291 (18) 273 312 (20) 292
Managed Care (3) 47 - 47 34 - 34
Other Initiatives (4) 51 (18) 33 - - -
Costs â Base Line Inflation (5) - (271) (271) - (286) (286)
Cost Reduction Initiatives (6) - 100 100 - 29 29
Other (7) 88 (86) 2 88 (67) 21
Divestitures (8) (140) 140 - (150) 150 -
9,260 (8,410) 9,835 (8,835)
Total (9) 850 1,000
(1) Annual admissions growth of 1.5 percent, outpatient visit growth of 1.5 percent using 2007âs average pricing with 40 percent margin assumption on incremental revenues.
(2) Base line pricing increases of 3.4 percent for 2008. These assumptions are before discrete initiatives valued in this analysis, and include certain assumptions on adverse mix change
(3) Price increases in existing contracts and anticipated future increases.
(4) Full-year impact of 2007âs ED acuity capture effort and incremental adjustments to chargemaster.
(5) Inflation rate of 3.5 percent reflects normal merit increases, union contract adjustments and other items before discrete initiatives valued in this analysis.
(6) Full year impact of cost initiatives initiated in 2007.
(7) Includes impact of Sierra Providence East Medical Center (El Paso), Coastal Carolina Hospital, physician practices and other non-acute operations.
(8) San Dimas and Garden Grove hospitals previously reported in continuing operations
(9) Various risks including volume growth, volume mix, and bad debt create at least $75 million in uncertainties for 2008 performance, hence the adjusted EBITDA outlook range from $775
mm to $850mm. 2009 uncertainties exceed those identified for 2008. This schedule is not intended to provide a series of spot estimates or line item guidance. Other combinations of line
item performance could produce the same or higher, or lower results.
11
12. 2008 Cash Walk Forward
($mm) Low High
December 31, 2007 Beginning Cash 572
2008 EBITDA 775 850
Add Back: Stock Compensation Charges 37 37
Changes in Cash from Operating Assets and Liabilities (16) 9
Interest Payments (396) (396)
400 500
Adjusted Net Cash Provided by Operating Activities
Income Tax (payments) refunds, net (17) (17)
Payments against reserves for restructuring charges, litigation costs and
(103) (103)
settlements
Net cash provided by (used in) operating activities from discontinued
(80) (55)
operations
Capital Expenditures (600) (650)
Other Investing Activities 33 58
Net Financing Activities (5) (5)
Cash initiatives and divestitures 650 850
Cash Outlook December 31, 2008 850 1,150
12
13. 2008 Cash Walk Forward High
Low
($mm)
March 31, 2008 Cash Balance 278
EBITDA Outlook, remainder of 2008 541 616
Add back: Stock compensation charges 27 27
Working capital timing and improvements 210 235
Interest Payments (271) (271)
507 607
Adjusted Net Cash Provided by Operating Activities
Income Tax (payments) refunds, net (18) (18)
Payments against reserves for restructuring charges, litigation costs and
(76) (76)
settlements
Net cash provided by (used in) operating activities from discontinued
(80) (55)
operations
Capital Expenditures (411) (461)
Other Investing Activities 5 30
Net Financing Activities (5) (5)
Cash initiatives and divestitures 650 850
Cash Outlook December 31, 2008 850 1,150
13
14. Reconciliation of 2008 Outlook Net Loss to
Adjusted EBITDA ($mm)
Low High
Net loss (135) (35)
Less: Loss from discontinued ops, net of tax (50) (25)
Income (loss) from continuing operations (85) (10)
Income tax expense (10) (10)
Income (loss) from continuing operations, before income taxes (75) -
Interest expense, net (400) (400)
Operating income 325 400
Litigation and investigation costs (50) (50)
Depreciation and amortization (400) (400)
Adjusted EBITDA 775 850
14
15. Categorizing 2008 Capital Expenditures
650 600 - 650
76 - 82 Hospital construction
524 - 568
Other construction and expansion
92 - 100
432 - 468
83 - 90 Clinical information systems and technology
349 - 378
CapEx Major equipment â 6 cath labs, 7 CTs, 2 cyber knives, etc
53 - 57
296 - 321
($mm)
Renovation, facility maintenance and routine equipment, includes
249 - 270 $31M in seismic and ADA requirements.
47 - 51 Replacement of basic clinical equipment
0
Maintenance Investing for
CapEx Growth
Note: Current dollar seismic estimates for 2008 and
beyond have been reduced by as much as 50%.
15
16. Special Items have been Primarily Favorable
$ in millions â unfavorable special items in brackets
2006 2007 2008
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Total
Cost Report Adjustments 27 4 (10) 16 12 13 22 _ 2 86
DSH Payments â
29 55 41 35 40 44 48 38 41 371
Medicaid
Adjustments To:
Bad Debt reserves 5 8 19 32
Compensation & Benefits 14 (12) 2
Disputes with MC Payers 10 4 8 22
Gains on Sale 7 7
Distributions from HMO 6 6
Contractuals (3) (3)
Other Misc. (18) (1) (1) (20)
Total 5 11 6 11 13 46
Except for cost reports for last two quarters, disclosed items
have largely recurred at least on an annual basis.
16
17. Free Cash Flow Objective (2009)
($mm)
EBITDA 1,000
Stock compensation expense 40
Interest expense (net) (360)
(0 â 50)
Working capital
(550 â 600)
CapEx
Free Cash Flow 30 - 130
Global settlement (90)
Net Free Cash Flow (60) - 40
Beyond 2009 Free Cash Flow is expected to improve from:
ď§ Global settlement obligation is retired in 2010
ď§ 40% estimated margin rate on volume growth
17
18. Risks and Opportunities to $850M-$1B EBITDA
⢠Key strengths demonstrated in Q1
Annual Growth
â Volume growth Paying Admits
Total Admits
â Commercial pricing O/P Visits
â Cost control
⢠Key risks
â Cost impact of uneven volume growth
â Accelerated growth in uninsured and
patient payment behavior
â Volume growth less than 1.5%
⢠Key opportunities
â Patient mix
â Payer mix
â Volume growth greater than 1.5%
â Improved collections
40% estimated margin on volume growth
18
19. Summary
⢠Progress towards sustainable profitable growth
⢠Two quarters, plus two months of Q2â08 demonstrate
improvement
⢠A visible path to $1B of Adjusted EBITDA in 2009
⢠No implied ceiling to longer-term EBITDA margin
⢠Abundant liquidity â Potentially $1B in cash at 12/08
⢠Targeting approx breakeven Free Cash Flow in 2009
â Expect EBITDA and Free Cash Flow expansion in 2010
and beyond
19