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Eight analysts and top management from eight sector firms examine the healthcare facilities sector in this special 73-page Healthcare Facilities issue from The Wall Street Transcript, available at (212/952-7433) or http://www.twst.com/info/info547.htm

TWST: What would you say has contributed most to the great industry environment that the healthcare facilities sector has enjoyed over the past couple of years?

Mr. Taylor: I see three factors. The first is rising utilization trends, driven by both demographics and slowing transformation of the insurance industry. Second, you’ve got an industry where volumes now are rising but capacity has declined 20% over 20 years. That in turn has thrown pricing power back in the hands of hospitals and lots of other providers. So there are several things feeding on themselves, but rising utilization has really been the most important catalyst.

TWST: Inpatient admissions are said to be higher than they have been since the 1980s. What has happened to length of stay?

Mr. Taylor: Average length of stay is down substantially over the last decade, from north of 6.6 days to around 5.2 days. It has actually picked up just slightly in the last couple of years and really appears to have found a bottom.

TWST: What are you projecting for hospital admissions and length of stay in 2002 and looking out over the next couple of years?

Mr. Taylor: Actually, last May we did a pretty substantial quantitative study that suggests that hospital admissions growth, which has been growing over the last four years at an approximate average of 1% a year, will accelerate for the entire industry into the 2%-3% range. We believe you’ll see the for-profit hospitals continuing to grow slightly faster than the total industry, so somewhere in the 3%-4% range. I believe length of stay is going to continue to remain fairly flat. On an acuity-adjusted basis we’ve found a bottom in terms of length of stay, so I’m not looking for a lot of movement in either direction.

TWST: You touched earlier on the transformation of the insurance industry. How do you see the relationship between the hospitals and the health insurers today?

Mr. Taylor: I think some people will say the relationship can only become more antagonistic if and when insurance companies are no longer able to extort the double-digit premium pricing they’re getting from employers. I actually disagree. I think the US insurance industry, after a decade of movement toward being involved in delivery of care, is now moving in the opposite direction, becoming a middleman — someone who takes in premiums, pools risk, processes claims and isn’t that involved in the delivery of care or attempting to actively control costs. Within that framework, hospitals on a market-by-market basis are in position to negotiate more favorable pricing. And I think the insurance companies are simply going to have to pay those rates and will be forced to pass along the costs to employers and consumers.

TWST: The last time we spoke, about a year ago, your top picks were Tenet and LifePoint. Have those stories worked as you’d hoped?

Mr. Taylor: Yes. From a fundamental basis, both companies’ reported results have been absolutely phenomenal. The earnings quality of these two companies has been fantastic. Tenet’s stock has absolutely been a blockbuster. From the last time we talked, LifePoint’s (Nasdaq:LPNT) stock is basically flat, so as a stock pick it certainly hasn’t performed as well, but the fundamentals of the company have continued to exceed expectations. Over the last year, you have seen a rationalization of valuations and multiples, especially in the smaller rural hospitals. Basically, in 2000 the average hospital stock more than doubled, and it took a year to digest those valuation levels.

This special issue includes:

1) Healthcare Facilities - In an in-depth (13,700 words) Analyst Roundtable, B. Kemp Dolliver, Managing Director at SG Cowen Securities Corp., Adam Feinstein, Vice President in Equity Research at Lehman Brothers, John Hindelong, Managing Director of Credit Suisse First Boston, Frank G. Morgan, Managing Director at Jefferies & Company, Inc. and Michael Yellen, Senior Portfolio Manager at AIM Capital Management Group, examine the outlook for the sector including earnings guidance, stock performance and share specific stock recommendations.

2) Hospitals & Healthcare Facilities - In an in-depth (3,500 words) Analyst Interview, Gary Taylor, Vice President, Equity Research at Banc of America Securities LLC, examines the outlook for the sector and shares specific stock recommendations.

3) Assisted Living & Healthcare REITs - In an in-depth (5,200 words) Analyst Interview, Jerry L. Doctrow, Managing Director, Equity Research at Legg Mason Wood Walker, Inc., examines the outlook for the sector and shares specific stock recommendations.

4) Long-Term Care & Specialized Service Providers - In an in-depth (6,700 words) Analyst Interview, Matthew Ripperger, Vice President and Equity Research Analyst at JP Morgan, examines the outlook for the sector and shares specific stock recommendations.

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