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Six analysts and top management from seven sector firms examine the Health Care Facilities sector in this special 64-page issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info386.htm

TWST: One sellside analyst has said that the current environment is more favorable than at any time in the last decade.

Mr. Murphy: Let’s go back to the early 1990s. You had hospital admissions declining for about 15 years through the mid-1990s and then they turned around. So yes, admissions have been showing relative strength for several years. Also, reimbursement has improved over the last year from both Medicare and managed care payors. Depending on the company, Medicare can represent 35%-55% of corporate revenues and as a result the reimbursement cuts mandated by BBA97 were devastating for the industry. Let me give you some numbers. The Medicare program should approximate 250 billion in year 2002 and BBA97 Medicare cuts amounted to approximately 230 billion (before recent givebacks) over the five-year period of 1997-2002. Congress literally eliminated one year of the Medicare program—that’s how severe the cutbacks were. The hospital industry is projected to generate 500 billion of revenues in year 2002 and represent approximately 33% of the total 1.5 trillion of healthcare spending in the country. Medicare spending on hospitals should represent about 150 billion of the above noted 500 billion of total hospital spending for 2002. Congress in its wisdom has decided to give back approximately 50 billion of the 230 billion of Medicare cuts, with hospitals receiving 20 billion. What all these numbers mean is that the hospital management industry will have experienced a 100 billion reduction in their base revenues due to BBA97. This represents 20% of base revenues for the industry. That was a severe cutback. Even with this reduction, the hospital management industry will generate a 5% compound growth rate in revenues during the 1997-2002 period. Along with the recent 20 billion Congressional giveback for Medicare, reimbursement from managed care has also improved over the last year with rate increases in the 6%-8% range. Also, the managed care industry appears to be improving the timeliness of their payments, causing an improvement in the hospital management industry receivable DSOs. You probably know that the managed care industry itself is generating rate increases in the 12%-13% range. So they too are in a more favorable position.

TWST: Is this a good place for investors to be for the near to intermediate term?

Mr. Murphy: It is as long as the industry has relative earnings momentum. Sometime in 2002 other sectors of the market will appear capable of generating earnings growth in excess of 20% and will assume the relative earnings growth leadership. At that point the hospital management stocks could begin to struggle and should be sold. However, that is somewhere down the road. I should comment on valuations. If you look at EBITDA multiples or EPS multiples based on 2002, this group is not cheap. During the last 10 years or so the group has sold at enterprise value/EBITDA multiples of about 7 times and today you’re looking at multiples of probably 8-9 times on the urban companies and over 10 times on the rural companies. I continue to believe that the group will perform well into the immediate future, but you have to be conscious of these valuations and pick your points of exit. Among the urban companies I continue to prefer HCA (NYSE:HCA). The next name I like is LifePoint (Nasdaq:LPNT). While having a similar enterprise value/EBITDA valuation as HMA, LifePoint has a higher growth rate, reflecting the age of the company. This is an organization that is small enough to receive a significant kick to earnings from acquisitions. They have an underleveraged balance sheet due to an equity offering earlier this year. I think they have a tremendous opportunity to improve their operating margins and continue to make acquisitions. The stock has moved up recently, but I believe that they have more upside.

This special issue includes:

1) Health Care Facilities - In an in-depth (12,400 words) Analyst Roundtable, Adam Feinstein, Vice President in Equity Research at Lehman Brothers, Leslie Henshaw, Managing Director at ING Asset Management, Gary Taylor, Vice President of Equity Research at Banc of America Securities LLC, examine the outlook for the sector including, volume trends in hospitals, demographics and share specific stock recommendations.

2) The TWST confidential Off-The-Record survey of management performance at seventeen sector firms asked market insiders about the ability of management teams to create shareholder value.

3) Investing in Health Care Facilities - In an in-depth (4,700 words) Analyst Interview, James Kumpel, Health Care Services Analyst at Raymond James & Associates, examines the outlook for the sector and shares specific stock recommendations .

4) Specialty Healthcare Providers - In an in-depth (3,500 words) Analyst Interview, Peter Emch, Director-Equity Research at Credit Suisse First Boston, examines the outlook for the sector and shares specific stock recommendations.

5) Hospital Management Stocks - In an in-depth (3,300 words) Analyst Interview, Leo Murphy, Vice President-Senior Analyst at Pioneer Investment Management USA, Inc., examines the outlook for the sector and shares specific stock recommendations.

6) CEO interviews (average 2,500 words). Top management of seven sector firms examine the outlook for their firm and the sector.