Tenet Healthcare Corp. CEO TREVOR FETTER bought 100000 shares on 11-05-2008 at $2.68
DESCRIPTION OF BUSINESS
Tenet Healthcare Corporation is an investor-owned health care services company whose subsidiaries and affiliates primarily operate general hospitals and related health care facilities, and also hold investments in other companies (including health care companies). All of Tenetâ€™s operations are conducted through its subsidiaries. (Unless the context otherwise requires, Tenet and its subsidiaries are referred to herein as â€śTenet,â€ť the â€śCompany,â€ť â€śweâ€ť or â€śus.â€ť) At December 31, 2007, our subsidiaries operated 57 general hospitals (including three hospitals not yet divested at that date that are classified as discontinued operations in our Consolidated Financial Statements), a cancer hospital and a critical access hospital, with a combined total of 15,244 licensed beds, serving urban and rural communities in 12 states. Of those general hospitals, 48 were owned by our subsidiaries and nine were owned by third parties and leased by our subsidiaries (including one facility we owned located on land leased from a third party).
At December 31, 2007, our subsidiaries also operated various related health care facilities, including a rehabilitation hospital, a long-term acute care hospital, a skilled nursing facility and a number of medical office buildingsâ€”all of which are located on, or nearby, one of our general hospital campuses. In addition, our subsidiaries operated physician practices, captive insurance companies and other ancillary health care businesses (including outpatient surgery centers, diagnostic imaging centers, and occupational and rural health care clinics) and owned interests in two health maintenance organizations, all of which comprise a minor portion of our business.
Our mission is to provide quality health care services that are responsive to the needs of the communities we serve. To accomplish our mission in the complex and competitive health care industry, our operating strategies are to (1) improve the quality of care provided at our hospitals by identifying best practices and implementing those best practices in all of our hospitals, (2) improve operating efficiencies and control operating costs while maintaining or improving the quality of care provided, (3) improve patient, physician and employee satisfaction, (4) improve recruitment and retention of physicians, as well as nurses and other employees, (5) increase collections of accounts receivable and improve cash flow, and (6) acquire new, or divest existing, facilities as market conditions, operational goals and other considerations warrant. We adjust these strategies as necessary in response to changes in the economic and regulatory climates in which we operate and the success or failure of our various efforts.
In the third quarter of 2007, we streamlined our regional operating structure to further reduce our administrative overhead costs. Previously, our operations were organized into four regions and two local health networks: (1) the California region, which included all of our hospitals in California, as well as our hospital in Nebraska; (2) the Central-Northeast region, which included all of our hospitals in Missouri, Pennsylvania and Tennessee; (3) the Southern States region, which included all of our hospitals in Alabama, Georgia, Louisiana, North Carolina and South Carolina; (4) the Texas region, which included all of our hospitals in Texas; (5) the Miami-Dade Health Network in Florida, which included five hospitals in Miami-Dade and Broward counties; and (6) the Palm Beach Health Network, which included six hospitals in Palm Beach and Broward counties. Our operations are now structured as follows:
â€˘ Our California region continues to include all of our hospitals in California and Nebraska;
â€˘ Our Central region includes all of our hospitals in Missouri, Tennessee and Texas;
â€˘ Our Florida region includes all of our hospitals in Florida in two separate networks, the Miami-Dade Health Network and the Palm Beach Health Network;
â€˘ Our Southern States region continues to include all of our hospitals in Alabama, Georgia, Louisiana, North Carolina and South Carolina; and
â€˘ Our two hospitals in Philadelphia, Pennsylvania are part of a separate market, reporting directly to our chief operating officer.
Each of the regions described above also report directly to our chief operating officer. Major decisions, including capital resource allocations, are made at the corporate level, not at the regional level.
We seek to operate our hospitals in a manner that positions them to compete effectively in the rapidly evolving health care environment. To that end, we sometimes decide to sell, consolidate or close certain facilities in order to eliminate duplicate services or excess capacity, or because of changing market conditions. From time to time, we make strategic acquisitions of general hospitals or enter into partnerships or affiliations with related health care businesses.
Of the seven hospitals held for sale at December 31, 2006, we completed the sale of Alvarado Hospital Medical Center in California and Graduate Hospital in Pennsylvania during the three months ended March 31, 2007, the sale of the real estate of Lindy Boggs Medical Center in Louisiana during the three months ended June 30, 2007, and the sale of Roxborough Memorial Hospital and Warminster Hospital, both in the Philadelphia area, during the three months ended September 30, 2007. We are continuing to negotiate with buyers for the Encino and Tarzana campuses of Encino-Tarzana Regional Medical Center, which have been slated for divestiture since January 2004.
On August 31, 2007, our lease agreement to operate RHD Memorial Medical Center and Trinity Medical Center in the Dallas, Texas area expired; we had previously disclosed that another company had been selected to manage these two hospitals after the expiration of our lease. Also in the three months ended September 30, 2007, we decided to sell North Ridge Medical Center in Fort Lauderdale, Florida, and we began actively seeking a buyer for that facility. We signed a definitive agreement in February 2008 to sell North Ridge and expect to complete the sale in the second quarter of 2008 . In addition, on November 30, 2007, we completed the previously disclosed sale of Shelby Regional Medical Center in Center, Texas.
In June 2007, we purchased Coastal Carolina Medical Center, a 41-bed acute care hospital in Hardeeville, South Carolina. The hospital is located 27 miles from our Hilton Head Regional Medical Center. We intend to operate Coastal Carolina as a full service community hospital and will seek to enhance services to meet the communityâ€™s needs, in coordination with our nearby Hilton Head facility. In addition, we are planning to open two new 100-bed acute care hospitals in the next several years â€” one in El Paso, Texas and one in Fort Mill, South Carolina. Construction has begun on the El Paso hospital, which is targeted to open in May 2008. Our application for a certificate of need to build the Fort Mill hospital was approved in May 2006. The approval is subject to appeal by the other applicants, and we expect the appeal process to take up to two years or longer. Once construction begins, the hospital is expected to take up to an additional two years to complete. We also received approval for a 140-bed replacement hospital for East Cooper Medical Center in Mt. Pleasant, South Carolina. That replacement hospital is expected to open in early 2010.
Going forward, we will focus our financial and management resources on the 56 general hospitals and related operations that will remain after all proposed divestitures are finalized and the construction of our new hospitals in El Paso and Fort Mill is completed. Our general hospitals in continuing operations generated in excess of 97% of our net operating revenues for all periods presented in our Consolidated Financial Statements. Factors that affect patient volumes and, thereby, our results of operations at our hospitals and related health care facilities include, but are not limited to: (1) the business environment and demographics of local communities; (2) the number of uninsured and underinsured individuals in local communities treated at our hospitals; (3) seasonal cycles of illness; (4) climate and weather conditions; (5) physician recruitment, retention and attrition; (6) advances in technology and treatments that reduce length of stay; (7) local health care competitors; (8) managed care contract negotiations or terminations; (9) any unfavorable publicity about us, which impacts our relationships with physicians and patients; and (10) the timing of elective procedures.
Each of our general hospitals offers acute care services, operating and recovery rooms, radiology services, respiratory therapy services, clinical laboratories and pharmacies; in addition, most offer intensive care, critical care and/or coronary care units, physical therapy, and orthopedic, oncology and outpatient services. A number of the hospitals also offer tertiary care services such as open-heart surgery, neonatal intensive care and neuroscience. Four of our hospitalsâ€”USC University Hospital, Saint Louis University Hospital, Hahnemann University Hospital and St. Christopherâ€™s Hospital for Childrenâ€”offer quaternary care in areas such as heart, lung, liver and kidney transplants. USC University Hospital, Sierra Medical Center and Good Samaritan Hospital also offer gamma-knife brain surgery; USC University Hospital and Saint Louis University Hospital offer cyberknife surgery for tumors and lesions in the brain, lung, neck and spine that may have been previously considered inoperable or inaccessible by radiation therapy; and St. Christopherâ€™s Hospital for Children, Saint Louis University Hospital, Hahnemann University Hospital and USC Kenneth Norris Jr. Cancer Hospital, our facility specializing in cancer treatment on the campus of USC University Hospital, offer bone marrow transplants. In addition, our hospitals will continue their efforts to deliver and develop those outpatient services that can be provided on a quality, cost-effective basis and that we believe will meet the needs of the communities served by the facilities.
With the exception of the 25-bed Sylvan Grove Hospital located in Georgia, which is designated by the Centers for Medicare and Medicaid Services (â€śCMSâ€ť) as a critical access hospital and which has not sought to be accredited, each of our facilities that is eligible for accreditation is accredited by the Joint Commission (formerly, the Joint Commission on Accreditation of Healthcare Organizations), the Commission on Accreditation of Rehabilitation Facilities (in the case of our rehabilitation hospital), the American Osteopathic Association (in the case of one hospital) or another appropriate accreditation agency. With such accreditation, our hospitals are deemed to meet the Medicare Conditions of Participation and are, therefore, eligible to participate in government-sponsored provider programs, such as the Medicare and Medicaid programs. The critical access hospital that is not accredited also participates in the Medicare program by otherwise meeting the Medicare Conditions of Participation.
As of December 31, 2007, the largest concentrations of licensed beds in our general hospitals were in Florida (25.0%), California (24.4%) and Texas (17.1%). Strong concentrations of hospital beds within market areas help us contract more successfully with managed care payers, reduce management, marketing and other expenses, and more efficiently utilize resources. However, such concentrations increase the risk that, should any adverse economic, regulatory, environmental or other developments occur in these areas, our business, financial condition, results of operations or cash flows could be materially adversely affected. We currently anticipate that none of our hospitals will comprise more than 5% of our consolidated net operating revenues or 15% of our total assets, excluding goodwill and intercompany receivables, during 2008.
John Ellis "Jeb" Bush
Member of Nominating and Corporate Governance Committee and Quality, Compliance and Ethics Committee
Mr. Bush served as the 43 rd Governor of the State of Florida from January 1999 until January 2007. Prior to his election as Governor, Mr. Bush worked as a real estate executive and pursued other entrepreneurial ventures in Florida from 1981 to 1998, and served as Secretary of Commerce for the State of Florida from 1987 to 1988. Before 1981, Mr. Bush served in various positions at Texas Commerce Bank in Houston, Texas and in Caracas, Venezuela. He formed and serves as chairman of The Foundation for Florida's Future, a not-for-profit public policy organization, and the Foundation for Excellence in Education, a not-for-profit charitable organization. Mr. Bush holds a bachelor's degree in Latin American affairs from the University of Texas at Austin. He serves on the board of directors of one other public company, CNL Bancshares Inc. Mr. Bush was appointed to the Board in April 2007.
Member of Executive Committee
Mr. Fetter was named Tenet's President effective November 7, 2002 and was appointed Chief Executive Officer in September 2003. From March 2000 to November 2002, Mr. Fetter was chairman and chief executive officer of Broadlane, Inc., an affiliate of Tenet. He continues to serve on Broadlane's board of directors. From October 1995 to February 2000, he served in several senior management positions at Tenet, including Chief Financial Officer in the Office of the President. Mr. Fetter began his career with Merrill Lynch Capital Markets, where he concentrated on corporate finance and advisory services for the entertainment and health care industries. In 1988, he joined Metro-Goldwyn-Mayer, Inc., where he had a broad range of corporate and operating responsibilities, rising to executive vice president and chief financial officer. Mr. Fetter holds a bachelor's degree in economics from Stanford University and an M.B.A. from Harvard Business School. He is a member of the board of directors of The Hartford Financial Services Group, Inc. and the Federation of American Hospitals. Mr. Fetter has been a director of Tenet since September 2003.
Brenda J. Gaines
Member of Audit Committee and Compensation Committee
Ms. Gaines served as president and chief executive officer of Diners Club North America, a division of Citigroup, from 2002 until her retirement in March 2004. She also served as president of Diners Club from 1999 to 2002 and held a number of senior management positions within Citigroup from 1988. From 1983 to 1987, she worked in various management positions for the City of Chicago, including Deputy Chief of Staff to the Mayor and Commissioner of Housing. Ms. Gaines received her bachelor's degree from the University of Illinois at Champaign-Urbana and her master's degree in public administration from Roosevelt University in Chicago. She currently serves on the board of directors of three other public companies, Federal National Mortgage Association (Fannie Mae), NICOR Inc. and Office Depot, Inc. She is also a member of the board of trustees of the March of Dimes. Ms. Gaines was elected to the Board in March 2005.
Karen M. Garrison
Member of Nominating and Corporate Governance Committee and Quality, Compliance and Ethics Committee
Ms. Garrison served as president of Pitney Bowes Business Services from 1999 until her retirement in 2004. From 1978 to 1999, she held a number of senior management positions at Pitney Bowes and Dictaphone Corporation (then a subsidiary of Pitney Bowes), including vice president of operations and vice president of finance and chief financial officer of Pitney Bowes. Ms. Garrison received her bachelor of science degree in accounting from Rollins College and her M.B.A. from the Florida Institute of Technology. She currently serves on the board of directors of two other public companies, Kaman Corporation and Standard Parking Corporation. Ms. Garrison was elected to the Board in March 2005.
Edward A. Kangas
Chair of Compensation Committee and Executive Committee, and member of Quality, Compliance and Ethics Committee
Mr. Kangas served as global chairman and chief executive officer of Deloitte from 1989 to 2000. He also served as the managing partner of Deloitte & Touche (USA) from 1989 to 1994. He was elected managing partner and chief executive officer of Touche Ross in 1985, a position he held through 1989. Mr. Kangas began his career as a staff accountant at Touche Ross in 1967, where he became a partner in 1975. A certified public accountant, Mr. Kangas holds a bachelor's degree in business administration and an M.B.A. from the University of Kansas. He is a director of four other public companies, Eclipsys Corporation, Electronic Data Systems Corporation, Hovnanian Enterprises, Inc. and Intuit Inc. In addition, he is a board member of the National Multiple Sclerosis Society, and he serves as a trustee of the Committee for Economic Development. He is also a member of Beta Gamma Sigma Directors' Table and a trustee emeritus of the board of trustees of the University of Kansas Endowment Association. Mr. Kangas has been a director since April 2003 and was first elected Chairman of the Board in July 2003.
J. Robert Kerrey
Chair of Nominating and Corporate Governance Committee, and member of Executive Committee and Quality, Compliance and Ethics Committee
Mr. Kerrey has been president of New School University in New York City since January 2001. Prior to becoming president of New School University, he served as a U.S. Senator from the State of Nebraska from 1989 to 2000. Before his election to the U.S. Senate, Mr. Kerrey was Governor of the State of Nebraska from 1982 to 1987. Prior to entering public service, he founded and operated a chain of restaurants and health clubs. Mr. Kerrey holds a degree in pharmacy from the University of Nebraska. He is a director of three other public companies, Genworth Financial, Inc., Jones Apparel Group, Inc. and Scientific Games Corporation. He is also a director of the Concord Coalition. Mr. Kerrey has been a director since March 2001.
Floyd D. Loop, M.D.
Chair of Quality, Compliance and Ethics Committee, and member of Executive Committee and Nominating and Corporate Governance Committee
Dr. Loop retired as the chief executive officer and chairman of the board of governors of The Cleveland Clinic Foundation in October 2004, a position he held for 15 years. He currently serves as a consultant to the Foundation. Before becoming the Foundation's chief executive officer in 1989, Dr. Loop was an internationally recognized cardiac surgeon. He practiced cardiothoracic surgery for 30 years and headed the Department of Thoracic and Cardiovascular Surgery at The Cleveland Clinic from 1975 to 1989. Dr. Loop has authored more than 350 clinical research papers, chaired the Residency Review Committee for Thoracic Surgery and was president of the American Association for Thoracic Surgery. Dr. Loop holds a bachelor of science degree from Purdue University and received his medical degree from George Washington University. He is a director of two other public companies, Athersys, Inc. and Intuitive Surgical, Inc. He is also a director of Noteworthy Medical Systems, Inc., Passport Health Communications, Inc., Swissray International, Inc. and Visible Assets Inc. Dr. Loop has been a director since January 1999.
Richard R. Pettingill
Member of Compensation Committee and Quality, Compliance and Ethics Committee
Mr. Pettingill has been president and chief executive officer of Allina Hospitals and Clinics since October 2002. Prior to serving in this role, he served as executive vice president and chief operating officer of Kaiser Foundation Health Plans and Hospitals from 1996 to 2002. He served as president and chief executive officer of Camino Healthcare from 1991 to 1995. Mr. Pettingill received a bachelor's degree from San Diego State University and a master's degree in health care administration from San Jose State University. He is a member of the board of directors of Allina and also serves on the board of directors for Minnesota Hospital Association and Minnesota Business Partnership. Mr. Pettingill has been a director since March 2004.
James A. Unruh
Chair of Audit Committee, and member of Executive Committee and Nominating and Corporate Governance Committee
Mr. Unruh has served as principal of Alerion Capital Group LLC, a private equity firm, since 1998. Prior to founding Alerion, Mr. Unruh was the chairman, president and chief executive officer of Unisys Corporation from 1990 until 1997. Before being named chief executive officer, Mr. Unruh held a number of senior management positions at Unisys and its predecessor corporation, Burroughs Corporation. Mr. Unruh received his bachelor's degree in business administration from Jamestown College and his M.B.A. from the University of Denver. He is a director of three other public companies, CSG Systems International, Inc., Prudential Financial, Inc. and Qwest Communications International. In addition, he serves as a director of various privately held companies in connection with his position at Alerion. Mr. Unruh has been a director since June 2004.
J. McDonald Williams
Member of Audit Committee and Compensation Committee
Mr. Williams served as the chairman of Trammell Crow Company from 1994 until May 2002. Prior to serving in that role, he was the president and chief executive officer of Trammell Crow from 1990 to 1994 and was managing partner from 1977 to 1990. Mr. Williams received his bachelor of science degree from Abilene Christian University and his L.L.B. from George Washington University Law School. He serves as a director of one other public company, A. H. Belo Corporation. In 1995, Mr. Williams founded the Foundation for Community Empowerment to assist in redeveloping low-income neighborhoods in Dallas. He also serves on the boards of a number of foundations, including the Hoblitzelle Foundation. He is a member of the Leadership Council of the University of Texas Southwestern Medical Center and is a trustee of Dallas Medical Resource. Mr. Williams was elected to the Board in March 2005.
MANAGEMENT DISCUSSION FROM LATEST 10K
We continue to focus on the execution of our turnaround strategies. While we have seen certain areas of improvement, we are still facing several industry and company-specific challenges that continue to negatively affect our progress. We are dedicated to improving our patientsâ€™, shareholdersâ€™ and other stakeholdersâ€™ confidence in us. We believe we will accomplish that by providing quality care and generating positive growth and earnings at our hospitals.
Key developments include the following:
â€˘ Sale of North Ridge Medical Center â€” In February 2008, we signed a definitive agreement to sell North Ridge Medical Center in Fort Lauderdale, Florida. We expect the sale to be completed in the second quarter of 2008, subject to regulatory approval.
â€˘ New Agreements with Managed Care Payers â€” Since mid-2007, we have entered into new multi-year national agreements with Aetna, CIGNA and UnitedHealthcare, as well as regional contracts with Blue Cross of California, Blue Cross Blue Shield of North Carolina, Blue Cross Blue Shield of Texas and Coventry Health Care. With each of these agreements, members will have access to all of our acute care hospitals in the applicable geographic region covered under the agreement.
â€˘ Union Agreements â€” During 2007, we entered into new collective bargaining agreements with two labor unions that cover employees at certain hospitals in California and Florida. The agreements set stable and competitive wage increases and provide for greater predictability with respect to union organizing efforts. We also entered into separate â€śpeace accordsâ€ť that provide each union with limited access to attempt to organize our employees. In addition, we entered into a labor contract for nurses represented at four of our hospitals in California.
â€˘ Sale of Shelby Regional Medical Center â€” In November 2007, we completed the previously disclosed sale of Shelby Regional Medical Center in Center, Texas. Pretax proceeds from the sale were approximately $2 million, which will be used for general corporate purposes.
â€˘ Departure of Chief Medical Officer â€” Jennifer Daley, M.D., our former chief medical officer, resigned in September 2007. She will continue to serve as a senior advisor to us on clinical quality initiatives. Stephen Newman, M.D., our chief operating officer, will oversee our clinical quality department until a successor to Dr. Daley is found.
â€˘ Expiration of Lease to Operate Two Hospitals â€” In August 2007, our lease agreement with the Metrocrest Hospital Authority (the â€śAuthorityâ€ť) expired, and we ceased to operate RHD Memorial Medical Center and Trinity Medical Center, both in the Dallas, Texas area. We had previously disclosed that another company had been selected to manage these two hospitals after the expiration of our lease. It is our understanding that the Authority has not yet finalized the selection of an operator to manage the hospitals on a long-term basis.
â€˘ Realignment of Regions â€” Also in August 2007, we streamlined our regional operating structure to further reduce our administrative overhead costs. Our Central-Northeast region was eliminated, and our hospitals in Missouri and Tennessee became part of the renamed Central region (formerly, the Texas region). Our two Philadelphia hospitals now form a separate market reporting directly to our chief operating officer.
â€˘ Sale of Two Pennsylvania Hospitals â€” In July 2007, we completed the sale of Roxborough Memorial Hospital and Warminster Hospital in the Philadelphia, Pennsylvania area. Pretax proceeds from the sale were approximately $25.5 million, consisting of $15.5 million in cash, which will be used for general corporate purposes, and a $10 million note due in December 2009, of which we collected $5 million in October 2007 when the buyer subsequently sold Warminster Hospital.
â€˘ Acquisition of Coastal Carolina Medical Center â€” In June 2007, we purchased Coastal Carolina Medical Center, a 41-bed acute care hospital in Hardeeville, South Carolina, for approximately $36 million. We intend to continue to operate Coastal Carolina as a full service community hospital and will seek to enhance services to meet the communityâ€™s needs, in coordination with our nearby Hilton Head Regional Medical Center.
â€˘ Sale of Lindy Boggs Medical Center â€” In May 2007, we announced that we had completed the sale of the real estate of our former Lindy Boggs Medical Center, which sustained significant damage from Hurricane Katrina and had been closed since August 2005.
â€˘ Appointment of New Member to our Board of Directors â€” In April 2007, we announced that John Ellis â€śJebâ€ť Bush, former Governor of the State of Florida, had been named to our board of directors. Mr. Bush was elected as a director at our 2007 annual meeting of shareholders held in May.
â€˘ Retirement of Our Chief Accounting Officer â€” In April 2007, we announced that Timothy L. Pullen, former executive vice president and chief accounting officer, had decided to retire. We also announced that Daniel J. Cancelmi, vice president and controller, would serve as our principal accounting officer.
â€˘ Civil Settlement Reached with the SEC â€” In April 2007, we entered into a $10 million civil settlement with the Securities and Exchange Commission that concluded the SECâ€™s investigation into the adequacy of our disclosures regarding Medicare outlier payments prior to November 2002 and the appropriateness of certain of our managed care contractual allowance reserves. In the three months ended December 31, 2006, we recorded an accrual of $10 million as an estimated liability to address the potential resolution of the SEC investigation, which we paid in April 2007.
â€˘ Sale of Graduate Hospital â€” In March 2007, we announced the completion of the sale of Graduate Hospital in Philadelphia, Pennsylvania for pretax proceeds of approximately $16.5 million, which will be used for general corporate purposes.
Our June 2006 global civil settlement with the federal government and other previously announced settlements have resolved several material threats to our company and should help us move forward in our turnaround strategy. However, there are still significant challenges, both company-specific and industry-wide, that will impact the timing of our turnaround. Below is a summary of these items.
Company-Specific Volume Challenge
We believe the reasons for declines in our patient volumes include, but are not limited to, decreases in the demand for invasive cardiac procedures, increased competition, managed care contract negotiations or terminations, population trends in Florida, and the impact of our litigation and government investigations. In addition, we believe the challenges we face in physician recruitment, retention and attrition continue to be a primary contributor to our volume declines. Our operations depend on the efforts, abilities and experience of the physicians on the medical staffs of our hospitals, most of whom have no long-term contractual relationship with us. It is essential to our ongoing business that we attract and retain an appropriate number of quality physicians in all specialties on our medical staffs. Although overall we had a net gain in physicians added to our medical staffs during 2007, in some of our markets, physician recruitment and retention are still affected by a shortage of physicians in certain sought-after specialties and the difficulties that physicians experience in obtaining affordable malpractice insurance or finding insurers willing to provide such insurance. Other issues facing physicians, such as proposed decreases in Medicare payments, are forcing them to consider alternatives including relocating their practices or retiring sooner than expected. In some of our markets, we have not been able to attract physicians to our medical staffs at a rate to offset the physicians relocating or retiring.
We are taking a number of steps to address the problem of volume decline; however, due to the concentration of our hospitals in California, Florida and Texas, we may not be able to mitigate some factors contributing to volume declines. One of our initiatives is our Physician Relationship Program , which is centered around understanding the needs of physicians who admit patients both to our hospitals and to our competitorsâ€™ hospitals and responding to those needs with changes and improvements in our hospitals and operations. We have targeted capital spending in order to address specific needs or growth opportunities of our hospitals, which is expected to have a positive impact on their volumes. We have also sought to include all of our hospitals in the affected geographic area when negotiating new managed care contracts, which should result in additional volumes at facilities that were not previously a part of such managed care networks. In addition, we are completing clinical service line market demand analyses and profitability assessments to determine which services are highly valued that can be emphasized and marketed to improve results. This Targeted Growth Initiative has resulted in some reductions in unprofitable service lines in several locations, which have had a slightly negative impact on our volumes. However, the elimination of these unprofitable service lines will allow us to focus more resources on services that are more profitable.
Our Commitment to Quality initiative, which we launched in 2003, is further helping position us to competitively meet the volume challenge. We continue to work with physicians to implement the most current evidence-based techniques to improve the way we provide care. As a result of these efforts, our hospitals have improved substantially in quality metrics reported by the government and have been recognized by several managed care companies for their quality of care. We believe that quality of care improvements will continue to have the effect of increasing physician and patient satisfaction, potentially improving our volumes as a result.
Significant Industry Trends
Bad Debtâ€” Like other organizations in the health care industry, we continue to provide services to a high volume of uninsured patients and more patients than in prior years with an increased burden of co-payments and deductibles as a result of changes in their health care plans. The discounting components of our Compact with Uninsured Patients (â€śCompactâ€ť) have reduced our provision for doubtful accounts recorded in our Consolidated Financial Statements, but they are not expected to mitigate the net economic effects of treating uninsured or underinsured patients. We continue to experience a high level of uncollectible accounts. Our collection efforts have improved, and we continue to focus, where applicable, on placement of patients in various government programs such as Medicaid. However, unless our business mix shifts toward a greater number of insured patients or the trend of higher co-payments and deductibles reverses, we anticipate this high level of uncollectible accounts to continue.
Cost Pressuresâ€” Labor and supply expenses remain a significant cost pressure facing us as well as the industry in general. Controlling labor costs in an environment of fluctuating patient volumes and increased labor union activity will continue to be a challenge. Also, inflation and technology improvements are driving supply costs higher, and our efforts to control supply costs through product standardization, bulk purchases and improved utilization are constantly challenged.
RESULTS OF OPERATIONSâ€”OVERVIEW
Our turnaround timeframe has been and continues to be influenced by company-specific challenges and industry trends, including decreasing volumes, declining demand for inpatient cardiac procedures and high levels of bad debt, that continue to negatively affect our revenue growth and operating expenses. We believe our future profitability will be achieved through volume growth, appropriate reimbursement levels and cost control across our portfolio of hospitals. In order to disclose trends using data comparable to the prior year, operating statistics throughout Managementâ€™s Discussion and Analysis are presented on a same-hospital basis, where noted, and exclude the results of Coastal Carolina Medical Center, which we have not owned for a full 12 months. Below are some of these statistics and financial highlights for the years ended December 31, 2007 and 2006.
Results of operationsâ€”Year ended December 31, 2007 compared to the year ended December 31, 2006:
â€˘ Same-hospital net inpatient revenue per patient day and per admission increased by 5.2% and 4.1%, respectively, primarily due to the effect of higher negotiated levels of reimbursement under our managed care contracts, partially offset by same-hospital patient days and admissions that were down 2.1% and 1.0%, respectively.
â€˘ Same-hospital net outpatient revenue per visit increased 10.1%, while same-hospital outpatient visits declined 2.0%. The increase in revenue per visit is primarily due to the effect of higher negotiated levels of reimbursement under our managed care contracts. The decline in outpatient visits is primarily due to increased competition.
â€˘ Favorable net adjustments for prior-year cost reports and related valuation allowances, primarily attributable to Medicare and Medicaid, were $47 million in 2007 compared to $37 million in 2006.
â€˘ Loss per share from continuing operations was $0.10 in 2007 compared to $1.73 in 2006.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
RESULTS OF OPERATIONSâ€”OVERVIEW
Our results of operations have been and continue to be influenced by industry-wide challenges, including fluctuating volumes, decreased demand for inpatient cardiac procedures and high levels of bad debt, that have negatively affected our revenue growth and operating expenses. We believe our future profitability will be achieved through volume growth, appropriate reimbursement levels and cost control across our portfolio of hospitals. In order to disclose trends using data comparable to the prior year, operating statistics throughout Managementâ€™s Discussion and Analysis are presented on a same-hospital basis, where noted, and exclude the results of Coastal Carolina Medical Center and Sierra Providence East Medical Center, for which we do not have a full calendar year of operating results. Below are some of these statistics and financial highlights for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.
Same-hospital net inpatient revenue per patient day and per admission increased by 3.3% and 1.6%, respectively, primarily due to the effect of higher negotiated levels of reimbursement under our managed care contracts. Same-hospital patient days were flat, while same-hospital admissions increased by 1.7%.
Same-hospital net outpatient revenue per visit increased 7.6% and same-hospital outpatient visits increased 1.1%. The increase in revenue per visit is primarily due to the effect of higher negotiated levels of reimbursement under our managed care contracts.
Income per share from continuing operations was $0.24 in the current period compared to loss per share of $(0.08) in the prior-year period, which is primarily due to a $140 million net gain on the sales of investments during the three months ended September 30, 2008.
LIQUIDITY AND CAPITAL RESOURCESâ€”OVERVIEW
Net cash provided by operating activities was $141 million in the nine months ended September 30, 2008 compared to $214 million in the nine months ended September 30, 2007. Key negative and positive factors contributing to the change in cash provided by operating activities between the 2008 and 2007 periods include the following:
Net income tax payments of $3 million in the nine months ended September 30, 2008 compared to refunds of $168 million received in the same period of 2007;
Payments of $73 million ($66 million in principal and $7 million in interest) in the nine months ended September 30, 2008 related to our 2006 civil settlement with the federal government compared to no payments during the same period of 2007 because such quarterly payments did not begin until the fourth quarter of 2007;
Additional aggregate annual 401(k) matching contributions and annual incentive compensation payments of $20 million ($116 million in the nine months ended September 30, 2008 compared to $96 million in the same period of 2007);
Additional cash flows as a result of enhanced management of accounts payable ($81 million) and accounts receivable ($44 million);
Insurance recoveries of $46 million in the nine months ended September 30, 2008 related to litigation, which was settled in December 2004, involving our former Redding Medical Center; and
Lease termination payments of $9 million in the nine months ended September 30, 2008 associated with the divestiture of the Tarzana campus of Encino-Tarzana Regional Medical Center.
Capital expenditures were $413 million and $441 million during the nine months ended September 30, 2008 and 2007, respectively. Excluding the simultaneous purchase and sale of the Tarzana campus of Encino-Tarzana Regional Medical Center for $89 million, during the nine months ended September 30, 2008, we received proceeds of $71 million from the sales of facilities and other assets related to discontinued operations, primarily from the sales of North Ridge Medical Center, the Encino campus of Encino-Tarzana Regional Medical Center, Garden Grove Hospital and Medical Center, and San Dimas Community Hospital. Proceeds from the sales of facilities and other assets related to discontinued operations during the nine months ended September 30, 2007 aggregated $84 million. We also received proceeds, which are classified as investing activities, during the three months ended September 30, 2008 of $144 million from the sale of our investment in Broadlane, $25 million from the sale of our interest in a joint venture with a real estate investment trust and $8 million from our investment in hospital authority bonds related to previously divested hospitals in the Dallas, Texas area.
Our $800 million senior secured revolving credit facility is collateralized by patient accounts receivable of our acute care and specialty hospitals, and bears interest at our option based on the London Interbank Offered Rate (â€śLIBORâ€ť) plus 175 basis points or Citigroupâ€™s base rate, as defined in the credit agreement, plus 75 basis points. At September 30, 2008, there were no cash borrowings outstanding under the revolving credit facility, and we had approximately $208 million of letters of credit outstanding. In addition, we had approximately $512 million of cash and cash equivalents on hand as of September 30, 2008.
Although we are currently in compliance with all covenants and conditions in our revolving credit agreement and the indentures governing our senior notes, our borrowing capacity under the revolving credit facility was limited to $460 million at September 30, 2008, based on our eligible receivables and limitations related to our fixed charge coverage ratio under the agreement. (See Note 5 to the Condensed Consolidated Financial Statements.)
SOURCES OF REVENUE
We receive revenues for patient services from a variety of sources, primarily managed care payers and the federal Medicare program, as well as state Medicaid programs, indemnity-based health insurance companies and self-pay patients (i.e., patients who do not have health insurance and are not covered by some other form of third-party arrangement).
The Medicare program, the nationâ€™s largest health insurance program, is administered by the Centers for Medicare and Medicaid Services (â€śCMSâ€ť) of the U.S. Department of Health and Human Services (â€śHHSâ€ť). Medicare is a health insurance program primarily for individuals 65 years of age and older, certain younger people with disabilities, and people with end-stage renal disease, and is provided without regard to income or assets. Medicaid is a program that pays for medical assistance for certain individuals and families with low incomes and resources, and is jointly funded by the federal government and state governments. Medicaid is the largest source of funding for medical and health-related services for the nationâ€™s poor and most vulnerable individuals.
These government programs are subject to statutory and regulatory changes, administrative rulings, interpretations and determinations, requirements for utilization review, and federal and state funding restrictions, all of which could materially increase or decrease payments from these government programs in the future, as well as affect the cost of providing services to our patients and the timing of payments to our facilities. We are unable to predict the effect of future government health care funding policy changes on our operations. If the rates paid by governmental payers are reduced, if the scope of services covered by governmental payers is limited, or if we or one or more of our subsidiariesâ€™ hospitals are excluded from participation in the Medicare or Medicaid program or any other government health care program, there could be a material adverse effect on our business, financial condition, results of operations or cash flows.
Medicare offers its beneficiaries different ways to obtain their medical benefits. One option, the Original Medicare Plan, is a fee-for-service payment system. The other option, called Medicare Advantage, includes managed care, preferred provider organization, private fee-for-service and specialty plans. The major components of our net patient revenues for services provided to patients enrolled in the Original Medicare Plan for the three and nine months ended September 30, 2008 and 2007 are set forth in the table below:
In our Annual Report, we explained that we were in continuing discussions with CMS in connection with the graduate medical education (â€śGMEâ€ť) full-time equivalent limits and related reimbursement at our Doctors Medical Center in Modesto, California as a result of our 1997 transaction with a county-owned hospital in Modesto. During the three months ended June 30, 2008, we submitted additional information to CMS regarding that transaction. CMS subsequently contacted us and stated that: (1) they continue to disagree with our analysis; and (2) they instructed our fiscal intermediary to reopen settled cost reports to recover indirect medical education and GME payments made to the hospital. During the three months ended September 30, 2008, we submitted additional information for CMSâ€™ consideration in this regard. Also during the three months ended September 30, 2008, we received notices from our fiscal intermediary of its intent to reopen certain cost reports in connection with this matter. We have since received a settlement notice for the hospitalâ€™s most recent cost reporting period that reflects a disallowance of all of the hospitalâ€™s GME payments. Although we are pursuing a reversal of CMSâ€™ decision, the outcome is uncertain at this time. As a result, in the three months ended June 30, 2008, we recorded an unfavorable adjustment of $17 million ($16 million related to prior years and $1 million related to the current year), and during the three months ended September 30, 2008, we recorded an additional unfavorable adjustment of approximately $1 million related to the current year, which together reflect our estimate of the probable payments subject to recovery.
Medicaid programs are funded by both the federal government and state governments. These programs and the reimbursement methodologies are administered by the states and vary from state to state and from year to year.
Estimated payments under various state Medicaid programs, excluding state-funded managed care Medicaid programs, constituted approximately 8.5% and 8.8% of net patient revenues at our continuing general hospitals for the nine months ended September 30, 2008 and 2007, respectively. These payments are typically based on fixed rates determined by the individual states. We also receive disproportionate share payments under various state Medicaid programs. For the nine months ended September 30, 2008 and 2007, our revenue attributable to disproportionate share payments and other state-funded subsidy payments was approximately $121 million and $128 million, respectively.
In May 2007, CMS issued a final rule, â€śMedicaid Program; Cost Limit for Providers Operated by Units of Government and Provisions to Ensure the Integrity of the Federal-State Financial Partnership,â€ť that places limits and restrictions on Medicaid reimbursement to safety-net hospitals. A one-year moratorium on implementation of the final rule was included in the federal fiscal year (â€śFFYâ€ť) 2007 Supplemental Appropriations Act, which meant that the rule could not take effect before May 25, 2008. On May 21, 2008, CMS announced that it was voluntarily extending the moratorium for an additional 60 days, then in June 2008, the moratorium was extended through March 31, 2009 as part of the FFY 2008 Supplemental Appropriations Act. We cannot predict what further action, if any, Congress or CMS may take to extend the moratorium or implement the final rule. However, the provisions of the rule could materially reduce the amount of Medicaid payments we receive in the future.
Also in May 2007, CMS issued a proposed rule clarifying that the agency would no longer provide federal Medicaid matching funds for GME purposes; however, the FFY 2007 Supplemental Appropriations Act contained language that placed a one-year moratorium on any such restriction. The moratorium was scheduled to expire on May 23, 2008. On May 21, 2008, CMS announced that it was voluntarily extending the moratorium for an additional 60 days, then in June 2008, the moratorium was extended through March 31, 2009 as part of the FFY 2008 Supplemental Appropriations Act. We cannot predict what further action, if any, Congress or CMS will take on this issue.
Further, many states in which we operate are facing budgetary challenges that pose a threat to Medicaid funding levels to hospitals and other providers. In Georgia, we estimate that the rebasing of Medicaid diagnosis-related group rates that became effective on January 1, 2008 will reduce total Medicaid payments to our hospitals by approximately $36 million in 2008. In Florida, the legislature enacted changes that further reduced the amount of Medicaid funding for providers in that state effective July 1, 2008. We estimate that the annual impact of these changes on our Florida hospitals will be approximately $7 million. On September 23, 2008, the Governor of California signed into law a budget containing more than $544 million in reductions to Medi-Cal, the stateâ€™s Medicaid program, for the fiscal year beginning July 1, 2008. Under the budget, a 10% reduction to certain Medi-Cal provider payments is in effect until March 1, 2009, when the 10% reduction will be reduced to 1%. At this time, we estimate that these payment reductions will reduce our revenues by approximately $9 million in 2009. The reductions also apply to capitation payments to Medi-Cal managed care plans; however, we cannot estimate at this time what impact the reductions will have on such payments. In addition to provider payment reductions, the budget includes payment deferrals and reductions in coverage. Although most states addressed projected 2008/2009 budgetary gaps in their final budgets, because of the recent economic downturn, many states are facing mid-year budget gaps that could result in additional reductions to Medicaid payments, coverage and eligibility. We cannot predict the extent of the impact on our hospitals of future actions the states might take to address additional shortfalls. Although legislation has been introduced to provide additional federal funding to states facing budgetary shortfalls, we cannot predict what action Congress will take on the legislation and the impact, if any, of such legislation on our hospitals.
Thank you, operator. Good morning. I am pleased with our third quarter volume growth relative to what we are seeing in the industry. It is more evident that our strategies are working effectively. All of us were disappointed on the bottom line, which did not meet our expectations.
I would like to begin by commenting on some key elements in the quarter. This is now the fourth consecutive quarter with positive same-hospital admissions growth. More importantly, we produced another quarter of significant paying volume growth, both in our inpatient and outpatient businesses. This included positive growth in same-hospital outpatient visits for the first time in five years.
In October, our volumes were down slightly, 0.4% against a very strong October 2007. I consider this to be a continued solid performance in light of all the economic turmoil in October.
Pricing was also strong in the quarter, although an adverse change in our patient mix made this less visible than in prior quarters. On costs, the salaries, wages, and benefits line rose only 2.5% on a per adjusted patient day basis. As this increase is well below the normal inflationary pressures that we have experienced, this is a significant indicator that we are capturing important operating leverage and gains in productivity on the labor front.
By the time you get to the EBITDA line, the picture is mixed. On the same-hospital basis, we reported a decline in EBITDA of 2.4% or $4 million. While we had positive cost reports settlements in both periods, this year, the benefit was $11 million less than in the last year.
For those of you who typically eliminate cost report settlements from the numbers, we did grow same-hospital EBITDA by $7 million or 4.9%. Either way, however, our performance on EBITDA was below our expectations. The basic reason that EBITDA failed to meet our expectations was due to on unexpected adverse change in patient mix driven by a decline in commercial managed care admissions.
While we certainly had a number of success stories in the volume front, our successes were primarily in growing government volumes. The hugely successful turnaround story in our Florida region is a perfect example of this. Admissions in our Florida region were up 2.7% in the quarter, extending the strong recovery, which started towards the end of last year. The volume growth in Florida is mostly government-related business, which weakens our patient mix and distorts our pricing statistics.
While I want to emphasize that commercial is our highest margin business, the government related business does have a positive contribution margin. Positive contribution margins on our paying business are why we are so pleased with the 2.0% growth in paying admissions and the 2.3% growth in paying outpatient visits.
I am sure you are wondering how the economic downturn is impacting our business. We are paying close attention and looking for trends. We did not see any downward trends during the third quarter that were unmistakably linked to the macroeconomic environment.
Here is what we are watching. For the first time this year, the growth in quarterly unemployment statistics in the counties where is Tenet has hospitals, increased more than the national average everywhere, except El Paso. California accounted for 27% of the national total of foreclosure filings in the third quarter, the most of any state, while Florida had the second highest total.
The point is that the economies in many of our local markets are showing stress. But, do not forget that the downturns in the economy and the financial markets affect our competitors as well. I am not talking about the companies that you follow, but rather the not-for-profit hospitals, whose only source is capital are tax exempt debt, philanthropy, investment income and operating cash flow. We also compete against physician-owned hospitals, independent surgery centers and diagnostic centers that rely primarily on private sources of equity and equipment leasing.
All of these sources of capital are now constrained. We have already seen many of these competitors in our local market, engage in layoffs, abandon building plans and make other cuts. I think it is safe to say that some of the more extreme and costly forms of competition that we have seen in this decade will not continue.
Before I conclude, I would like to speak to our revised expectations. Biggs will walk you through how we have actually we performed so far this year, compared to our outlook for 2008.
The short version is that we are within the range on total volumes. On EBITDA, it is clear now that we have closed Q3, that unless we have a very strong finish to the year, our adjusted EBITDA for 2008 is likely to be in the range of $700 million to $750 million, below our prior guidance of $750 million to $825 million.
Even the upper end of our revised rage is well below the run rate, with which we expected to enter 2009. Based on this lower starting point, the billion dollars of adjusted EBITDA now looks very difficult to achieve.
In early August, we still thought it was an aggressive but achievable target. Now in the midst of a weakening economy, it seems that many trends would have to break in our favor. As we are in the midst of 2009 planning process, we are not yet prepared to provide our 2009 outlook, but will do so in late February when we release our fourth quarter results.
Finally, I hope you remember that at our investor day in June, we told you about a new strategy to leverage our expertise in revenue cycle and other services. Those activities have advanced to the point where we will soon be ready to make a broad announcement about them. We currently provide various services to non-Tenet hospitals and we are excited to begin offering them to an expanded customer base under a unified and distinct new brand.
While it is difficult to project the contribution of a new venture, we believe this entity could contribute up to 10% of our EBITDA in five years. I am very excited about this innovative new venture, so please stay tuned. We will elaborate about our plans in a separated announcement within the next few days.
Let me now turn things over to Steve Newman to review our performance against key growth objectives in the quarter. Steve?
Thank you Trevor, and good morning everyone. Trevor alluded to the central role, volume and payer mix plan achieving our financial objectives. I am going to take a deeper dive into these areas.
While the challenges on the commercial front are significant, I want to reiterate the progress we made in growing total paying volumes, with admissions growing by 2.0% in the quarter. Growth in total paying volumes has been a fundamental goal and we met virtually all of our objectives in this regard.
I commend our staff for achieving this growth and creating a firm foundation for further growth. Let's take a closer look at the components of paying volumes. Our total government programs admissions, including both traditional and managed Medicare and Medicaid increased by 4.3% in the quarter.
This is a huge increase. Let me emphasize that I am referring to the growth of our aggregate government program admissions and not the migration from traditional to manage government programs. Given the soft volume growth reported by many of our competitors in the third quarter, it is increasingly clear that we are capturing significant market share on the government side, especially in Florida.
To take our performance to the next level, however, it is imperative that we grow commercial volumes as well. Commercial volumes remain soft in the quarter with admissions down 3.4% and outpatient visits virtually flat with a decline of 0.6%. As we have mentioned in prior quarters, some of this volume loss is the result of a deliberate de-emphasis of certain service lines.
You will recall in the second quarter that more than 90% of our decline in commercial managed care admissions resulted from the reduction in OB admissions. In the third quarter, the decline in OB admissions remained an important factor and explained approximately half of our commercial admissions decline.
Let me take a moment to mention our surgeries growth in the quarter. We achieved good growth in surgeries, especially on the inpatient side, where our focused efforts produced growth of 2.6%. Our reported outpatient surgeries were unchanged from Q3, '07 but would have shown a 3.0% increase after normalization from the consolidation of the joint venture.
We continue to see different alley stronger growth in our targeted growth initiative or TGI service lines. For those of you new to the Tenet story, our TGI service lines are those services we have targeted for growth due to favorable demographic trends, attractive profitability, compelling community need and an absence of strongly positioned competitors.
Slide 13 provides a look at commercial admissions growth and the seven TGI service lines, we typically emphasize in our hospitals. In prior quarters, we included eight service lines on this slide. But, now we are excluding Cath/EP to reflect the implementation of a CMS directive mandating that many of these procedures previously performed on an inpatient basis be moved to an outpatient setting while commercial admissions decline in the aggregate and seven TGI service lines, at least the loss of admissions in the TGI service lines was less severe than the aggregate commercial decline.
Unfortunately, the size of the favorable differential was not as large as in prior quarters. Slide 14 is a new disclosure. This data is identical to slide 13 except it expands our analysis of TGI, admissions to look beyond commercial payers and include all payers. Looking at total playing patients, both growth rates are positive, but again, you can see the TGI service lines achieving faster growth.
On slide 15, the focus shifts to TGI's service lines and our outpatient business. Here we have graphed the TGI growth differentials for commercial outpatient business. Again, the positive growth differential in TGI service lines is readily apparent. Taking just a moment for a deeper dive on one of our T.G.I. outpatient service lines, commercial cancer outpatient visits increased by 2568 visits or 16.4% and drove 25% of our growth in our total outpatient volume in the third quarter.
This demonstrates the impact we can have when we identify our service line for growth. Despite the obvious threats from the recent economic climate, there are always potential opportunities embedded in every downturn. The current economic environment is no exception. The physicians in our markets report seeing the same declines and higher paying commercial managed care patients we are seeing.
This provides us with the opportunity to engage them in a collaborative strategy design to meet a community need and create a win-win-win situation for the physician, the community and for Tenet. In a number of recent cases, we have even built relationships with physicians who we have been unable to attract in the past.
Many of these strategies are not new, but in the current economic environment, we are finding them to be more important than ever. These initiatives include working with the physicians to help them initiate affiliations with commercial health plans in their markets. This strategy helps steer commercial volumes to these physicians and ultimately to Tenet's services.
As you know, we are focused on the expansion of our active medical staff as a leverage point for volume growth. In calendar year 2007, we added 1,744 new physicians to our medical staff. This growth includes 166 physicians, primarily in El Paso, who had existing privileges at another Tenet hospital. After attrition of some 898 physicians, this produced net growth of 847 physicians, an increase of 7.3% on a base of 11,603 active physicians at December 31, 2006.
These statistics are slightly modified from those disclosed at our June investor day as they reflect our 50 go-forward hospitals. We referred to these 1,578 physicians who are totally new to Tenet as the Class of 2007.
In the third quarter alone, we receive 9,440 admissions from these Class of 2007 positions for an average referral rate of six admissions per new position. This is a stunning number and significantly exceeds our expectations. You will recall that we were hopeful we would average about ten admissions from each of these physicians in a full year and now we are getting six in a single quarter.
If we were to annualize our Q3 experience, we would be looking at 24 admissions per you are or two and a half times our preliminary expectations. We got those admissions in what is seasonally our weakest quarter of the year.
I am also pleased to report that we received an average of 1.5 commercial admissions from each member of the Class of 2007 on an annualized volume of six commercial admissions. At an annualized six commercial admission rate, our ramp up for commercial also is slower than total volumes but still running ahead of our expectations. Since, physician relationships take about 18 months to reach maturity; our relationships with the Class of 2007 may still show further growth.
We also testified 60,405 outpatient visits from the Class of 2007 in the third quarter. This represents an average of 38.3 outpatient referrals per physician. Of these 60,000 outpatient visits, 2,039 were for outpatient surgeries or an average of 1.3 per physician.
While the volume data to date from this Class is clearly impressive, I must caution you that you volume data can be extremely volatile. It would be a mistake to attempt overly precise projections based on this data. Despite this disclaimer, we are very encouraged by these results. If you are looking for concrete evidence supporting Trevor's earlier statement that our strategies are working, you will find it in these volume statistics.
The Class of 2008 is building as well. Through the end of September, we added 900 physicians to our active medical staff net of attrition. Putting us well on our way to surpassing our 2008 goal of 1,000 new physicians. As our physician relationship program or P.R.P. and our physician recruitment initiatives evolve, we have improved our ability to identify physicians with larger and more profitability commercial books of business.
As a result, the commercial referrals we are already seeing from the Class of 2008 are exceeding those from the Class of 2007. As I mentioned earlier, we have launched a number of initiatives to resolve some of the bottlenecks, which have inhibited portions of our commercial volume growth.
First, we are continuing to work toward the goal of achieving full participation of all our hospitals and outpatient facilities in the networks of all our major commercial payers. For the largest national payers, we have already achieved our goal of 100% participation of all our facilities. While we achieve our preliminary goal, the realization of the related volume potential will take time.
Physicians tend not to altar their referral patterns overnight, even if the barriers are removed. It may take a few more quarters before they take full advantage of their improved access to Tenet. With the barriers removed for our largest payers, we are now turning our efforts to our smaller commercial payers.
Second, this elimination of barriers theme is driving our initiative to work with managed care payers to get all physicians on our medical staff into their networks. Again, we are talking about a methodical effort to remove barriers to growth. Again, the link to the related volume growth requires behavioral changes. Our experience suggests that the required physician behaviors will emerge over time, once the relevant impediments have been removed.
Third, getting our P.R.P. initiative up to maximum potential; we are refining our techniques sequentially and sharing best practices across our 50 hospitals. In the third quarter, we called on 7,301 physicians as part of P.R.P. and saw admissions from these physicians grow by 4.4%. This is a labor-intensive effort that requires both listening to and acting upon the needs of our physicians. To drive this effort, we continue to roll out our targeted education programs for staff. We recently launched a customized program for our imaging business and just last month, we introduced an innovative program to train nursing leadership in proven sales techniques.
So in summary, we continue to make operational progress across a number of important strategies. We continue to grow our active medical staff and expect to exceed our goal of adding 1,000 new physicians net of attrition in 2008 as these new physicians join us, they are providing referral volumes, which exceed our projections and we are methodically identifying and removing barriers to the growth and commercial volumes for our existing staff physicians. I focused entirely on the volume issue in my comments this morning. There has been exciting progress on the pricing and cost runs as well.
I will now turn the floor over to Biggs Porter to discuss these and other issues. Biggs?
Thank you Steve, and Good morning everyone. To start with, in addition to aggregate paying volume growth, I want to say that we are pleased with respect to continued progress we made on the operating and pre-cash flow front for the quarter, as well as the cash generated from asset sales insurance settlements.
Although, we are in a tough economic environment, we are continuing to drive on these initiatives. I will come back to this later. On the P&L, there are a number of metrics and value drivers, which offset each other. So, I will give a few overview comments, and tentatively place our performance in context.
To begin with, there were a few factors which should be highlighted as key considerations for the quarter. First, there is seasonality, which negatively affects both volume and bad debts in the third quarter, typically the industries weakest.
Second, while cost report settlements remain positive in both the current and prior year quarters, we experienced an adverse wing in prior year cost report settlements of $11 million. Third, we had an estimated $4 million negative effect of hurricane Ike.
Fourth, we saw increased softness in commercial managed care volumes, which compromise the visibility of some of our other progress. We estimate that this had an adverse effect of approximately $15 million on EBITDA. The hurricane costs, adverse mix shift and a portion of the bad debt expense for the quarter aggregating approximately 20 to 25 million were outside the range of our expectations for the quarter and for the year and are therefore significant contributors to our lower outlook for the year.
With that context in mind, I will now turn to review of the major line items. With respect to revenues and pricing, our third quarter volumes were converted into a solid revenue growth of 5.2% on a same-hospital basis. Excluding cost adjustments in both quarters, same hospital revenues would have grown by 5.8%. Same hospital commercial managed care revenues in the quarter were up 5.6% or $45 million, despite the 3.4% decline in the same hospital commercial admissions, the 0.6% decline in commercial outpatient visits, and a $6 million negative effect of payer mix shift from higher price to lower price commercial payers.
We have just adjudicated the fist of our pay for performance payments with one of our largest commercial payers. These dollars will begin to be visible in early 2009. In the three-year period, 2009-2011, we continue to expect these payments could be worth as much as 35 to 40 million. We are currently contracted for 39% of our commercial revenues for 2009, on a basis consistent with our prior walk forwards.
Turning to trends and expenses, same hospital, total controllable operating expenses rose by 4.1% on a per adjusted patient day basis. Much of this increase is in supply costs related to the progress being made drawing attractive service lines, including surgeries and is substantially offset by higher pricing.
Irrespective of this, the control of supply costs remains a high priority item and our new outsourcing arrangement with broad line is designed to further improve supply chain performance. Continued improvements in operating efficiency were clearly evident in our salaries wages and benefits.
SW&B grew by just 2.5% on a same hospital per adjusted patient day basis, demonstrated benefits of our cost control efforts and a more powerful operating leverage we are capturing with volume growth.
We continue to improve our discipline in this area as well. We finished rolling out a new productivity tool, which gives managers much more realtime staff planning capability than they have had previously, making us more flexible with much improved monitoring and reporting capability at all levels of the organization.
On bad debt, we have put slides on the web, which gives some trend and other information. I will point out that on collections, our experience shows little sign of a softening economic environment. Our collection rate on commercial payers remains at 98% and our self-pay moved less than one half of a percent to 35.4% from 35.8%.
Also, we continue to improve our point of service collections. We are now collecting just over 35% of our total self-pay collections at the time of service. This is up from 30% a year ago, and we expect it to continue to improve as a result of our initiatives.
So to summarize, although partially offset by adverse mix and increase in bad debt expense, our earnings benefited from gains in paying volumes, commercial pricing and improved efficiencies and controllable costs. In the aggregate, we continue to see clear evidence that our strategies are working.
Turning to cash; as stated in the release, in the third quarter we have positive net cash provided by operating of a $151 million and adjusted free cash flow from continuing operations of $30 million. This is an area we have clearly been making progress. This is the second straight quarter of positive adjusted free cash flow.
This helped our combined cash in investments balance to increase in June 30th this year by $208 million to $560 million, which is also helped by a receipt of $144 million of proceeds from the sale of our investment in Broadlane.
You may have noticed on our balance sheet the $48 million in investments in the Reserve Yield Trust Fend. Like others with these investments, we have reclassified this outside of cash because it is being liquidated over time. Receipt of the $48 million was spread to the next year, with the vast majority expected to be received by the end of the fist quarter.
Including the cash from Broadlane, we have already collected $217 this year from the 2008-2009, balance sheet efficiency and other cash initiatives we announced earlier this year.
We continue to pursue the sale of our medical office buildings and our main hurdle the letter of intent to sell the USC Hospital. You might have guessed the MOB transaction has become more difficult for buyers to finance under the current credit market conditions. We completed the bidding process prior to the meltdown in the credit markets but not yet have a binding transaction supported by buyer financing. We still have interested buyers and believe the transaction can be completed as soon as financing becomes available.
On USC, the university has been completing its due diligence, which is taken longer than anticipated and negotiations are continuing. Unfortunately at this time, it is doubtful neither the MOB or USC transactions will close by the end of this year, under the current circumstances. We do still believe both will eventually close.
We are tightening the ranges slightly on all our 2008-2009 cash opportunities to a range of $780 million to $950 million, as compared to a range of $750 million to $950 million we would previously disclosed.
Slide 28 compares our current and prior estimates. Of course in the current market, nothing is considered done until the deal is closed and cash is in the bank. Although, we settled the insurance claims we had outstanding and collected $46 million in the quarter, there is another $9 million to be received this month.
We also have reached a tentative settlement agreement on a California waging hour case, for an amount which will range from $62 million to $85 million, which is expected to be paid next year.
On working capital, our cash management discipline produced visibile results in the third quarter as accounts receivable day declined to 51 days, down a from 52 days at December 31 and showing a marked improvement from 53 days at the end of the second quarter. We have accomplished this recollection of overdue accounts and by reducing the number of day sales residing at discharge, but not billed. We continue to work both those areas as a part of fulling achieving our objective of an additional one decline AR days by year end.
As you may recall, our normal trend on cash is to have negative cash flow in the first quarter resulting from the pay-down of year-end payables and annual payment of a 401-K match in a suit of compensation. We then stabilized the second and third quarter with the most significant cash generation from operations occurring in the fourth quarter due to the year end buildup of accounts payable. We expect that general trend to continue this year.
Before I go to the outlook, I would like to comment on our progress on the volume front relative to the expectations we set earlier in the year. In terms of total volumes for the quarter, we are now achieving growth rates on admissions for top of our outlook range for the year.
On the outpatient side where we got off to a slow start in 2008, the 1.1% growth we generated in the third quarter was well above the outlook range we had most recently established for the year. Although, we did not provide outlook ranges for paying volumes, our performance on that metrics is even stronger. If we succeed in stabilizing our improving mix, this volume growth will translate into significant earnings growth.
Let me now turn to our outlook refinements. I can not recall a more difficult time in which to be predicting future results. We know as well as anyone else, there are a variety of negative pressures which were resulting in conservative consumer behavior and increasing unemployment. We do not know how severe these will become and the corresponding effect will be on our business.
Acute facilities should not be as sensitive as those which rely solely on elective procedures. Also to the extent hardship hits the uninsured, its effect on us is muted because our collections on that group were relatively low anyway. Primary risk to Tenet was for our broad developed procedures which could result as individuals lose commercial insurance as employers drop coverage, increase deductibles or reduce employment levels. Or individuals simply tighten their purse strings in an uncertain environment.
Based on nine-month results and concerns about the economy and commercial admissions in the fourth quarter, we are reducing our 2008 outlook for adjusted EBITDA to a range of $700 million to $750 million from a prior range of $750 million to $825 million. About half of the reduction is due to results of the third quarter, and half to concerns about volume and mix in the fourth quarter.
Slide 30 on the web details line item revisions per outlook. You may recall that since 2007 contains $60 million of key funding, which did not repeat in 2008 and included $40 million of favorable cash flow adjustments. We always start our earnings well forward from an adjusted 2007 starting point of 600 million. Accordingly, a 2008 result in the new range of $700 to $750 million is still a sustainable performance. On the critical value drivers are paying volumes, pricing growth and diligent cost control.
We have also updated our cash walk forward to reflect the revised earnings outlook and the timing of our cash initiatives. Being without the sales, the MOBs and USC, we project ending the year with $375 to $47 5 million in cash and $24 million in investments, which puts us in a position but we do not expect near the credit line of 2009.
Slide 31 provides details on this walk forward. In terms of 2009, our prior walk forwards demonstrating a path of $1 billion of adjusted EBITDA 2009 had relied on an $825 million 2008 result as a required starting point. Since such a strong starting point is now unlikely the roll forward will need to be adjusted.
We are still in our planning process for next year, as this process normally culminates in December. At this point, the $1 billion target for 2009 adjusted EBITDA appears to be a considerable stretch. Until we complete our planning and have a better view of the economy going into the first quarter, we do not have a clear refinement to make.
The only thing I can carefully say at this point is that the targets will probably go down by the $75 million reduction we have made to the upper end of our 2008 range. With respect to adjusted free cash flow, I would not expect to make the same magnitude of adjustment to our 2009 expectation, because our other drivers we could possibly effect beyond EBITDA.
Regardless, we still expect significant improvement in 2009 earnings cash performance. As Steve mentioned, irrespective of last quarters decline in commercial volumes, we have a number of initiatives to either increase commercial volumes and improve payer mix or mitigate the effects of economy.
In addition, we still expect to benefit from improved managed care pricing, improved cost management and cost reduction initiatives, improved performance form our new hospitals, the continued benefits of investments made over the last three years and our working capital and other cash initiatives.
Turning back to highlights and comments on the quarter, we are making great strides in demonstrating the success of our strategies on both inpatient and outpatient visits and achieving their growth with paying patients. We have a broadset of actions to increase commercial and other targeted volumes.
We are achieving significant pricing and revenue improvement as a result of our managed care negotiations. We continue to control costs effectively. We have significantly improved cash flow year-over-year and including the 129 million we collected in 2007 and the 270 million in 2008 to date, we have generated $401 million of cash from our initiatives and continue to drive on the remaining $510 to $680 million of opportunities. With that, I will turn it over to questions. Operator?