Tenet Healthcare Corp (THC) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2011 Tenet Healthcare Corporation earnings conference call. My name is Mary, and I will be your coordinator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Thomas Rice, Senior Vice President, Investor Relations. Please proceed.

Thank you, operator, and good morning, everyone.

Tenet's management will be making forward-looking statements on this call. These statements are based on management's current expectations, and are subject to risks and uncertainties that may cause those forward-looking statements to be materially incorrect. Management cautions you not to rely on, and makes no promises to update, any of the forward-looking statements.

During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question.

The presentation Tenet is making today includes non-GAAP financial information. A reconciliation of this information to GAAP can be found in the appendix to the presentation.

At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO.

Thank you, Tom, and good morning, everyone.

This quarter is pretty straightforward -- solid operating results, with some additional benefits to EBITDA. I'd like to refer you to the earnings release, 10-Q, and slide presentation that we filed this morning with the SEC. These documents are posted on our website.

On slide three, you'll see that EBITDA for the quarter came in at a very strong $379 million. Even without the California provider fee, this is solid performance.

By the way, you'll notice that the final California provider fee number was $63 million, not $64 million as we had estimated. The shortfall is due to some non-Tenet hospitals in California ultimately failing to pay into the program as required.

Biggs will take you through a number of the items impacting first-quarter EBITDA in a moment. For now, I want to point out that we recorded $25 million in Medicaid health IT incentive revenues in the first quarter. We had expected to book this income next year, but in five states, the program regulations got finalized by the end of March in a manner that enabled us to meet the requirements immediately. As a result of this benefit, and reflecting our continued confidence in our expected performance for the balance of the year, we are increasing our 2011 outlook for EBITDA by $25 million to a new range of $1.175 billion to $1.275 billion.

Inpatient and outpatient volume growth helped generate a strong start to the year. As you can see on slide four, we achieved positive admissions growth of 0.6%, growing volumes for the first time since the third quarter of 2009. Paying admissions grew at a virtually equivalent rate, increasing by 0.4%.

I'm pleased to be in positive territory, but more pleased that this is the second consecutive quarter in which we achieved an improving volume trend. As you recall, we were down 3.5% in Q3 last year, then down 2% in Q4, and now up 0.6%.

Outpatient visit growth was even stronger, growing by 6.1%. Paying outpatient visits grew by 6.2%. Those numbers include the benefit of acquired centers that are part of existing hospitals. Purely organic outpatient visit growth was a solid 2.5%.

Adjusted admissions grew a strong 2.3%. This volume strength was broadly based. As you'll see on slide five, all four of our regions, plus our Philadelphia market, achieved outpatient visit growth, and all but our central region achieved positive inpatient admissions growth. The implication is that the improving volume trend that we've generated since November is becoming increasingly well established.

You will see on slide six that pricing remains a bright spot. We continue to achieve our anticipated results from commercial managed care negotiations, and at this point, we've completed contracts for at least -- for approximately 90% of our anticipated 2011 commercial revenues, 60% of 2012, and 20% of 2013. We believe our hospitals continue to offer an excellent value proposition to our managed care customers.

We performed well on cost control once again this quarter. Our performance in the supply chain and bad debt expense were specific areas of strength. On labor, we incurred upward pressure from annual salary increases, but we improved productivity compared to the prior year.

I'd like to turn now to reporting on our growth initiatives and margin improvement drivers that are noted on slides seven through 14. Starting with our outpatient efforts on slide eight, we continue to close these transactions at the pace and with the pricing that we had anticipated. We closed on five outpatient acquisitions this year, three in January and two more on April 1. The full-quarter impact of these new acquisitions should be visible in our second-quarter results.

We continue to have an attractive pipeline of future outpatient acquisitions.

The second driver on our list is Conifer, which continues to make meaningful progress towards its growth objectives. We signed revenue cycle outsourcing contracts with two new customers since the first of the year. We expect these contracts to generate another $20 million in annual revenue.

At our most recent investor presentation, I made a comparison to a public company, Accretive Health, and showed that Conifer and Accretive are already similar in terms of number of customers, with the only major difference being that Accretive has less customer revenue concentration. Since that presentation, Accretive's market value has increased sharply to more than $2.8 billion. We are very confident in Conifer's capabilities and value proposition, and think this market is more than large enough to accommodate Accretive, Conifer, and HCA's upcoming revenue cycle service offering.

Our Medicare Performance Initiative continues to make progress toward its annual target of $50 million in incremental savings. The very small 1.2% increase in supplies' cost for adjusted patient day is evidence of the impact of MPI on cost control.

Health information technology, specifically our program to install advanced clinical systems, is the fourth driver on our list. We were certainly pleased to be in a position to record $25 million in Medicaid incentive revenues earlier than originally planned. Health IT implementation expenses continued to impact earnings growth in 2011, but remember that as the stimulus money exceeds the cost, this program will become a source of earnings in 2012 and beyond.

Item five on our list is bad debt expense. You'll recall from our January 11 presentation, we expect an improvement in bad debt expense as the economy recovers. This macro improvement is expected to be augmented by Tenet's own efforts to continuously improve the revenue cycle. Reduce bad debt expenses has already contributed positively to our first-quarter results, and this gives us added confidence in our EBITDA outlook.

Operating leverage, number six on our list, is difficult to quantify but we'll get it through volume growth. We've seen good momentum since November, but we still have great opportunity ahead of us. We believe the drivers of volume growth are primarily the investments that we've made in our facilities and advanced clinical systems, the value proposition we offer to payers, and the many physician alignment activities that we've been implementing.

Finally, healthcare reform, or the Affordable Care Act, was not expected to contribute to earnings in 2011 because the cuts came before the coverage. As you know, we are currently living with a 50 basis-point hit to Medicare pricing. Nonetheless, we overcame that revenue challenge to create strong earnings growth this quarter.

While we are continuously looking for more ways to drive value, we're on the right track, and I'm very pleased that since January when we first presented our 2011 outlook, we've reported two very solid quarters, representing tangible progress toward these longer-term objectives.

Before I turn the call over to Biggs to review our performance in greater detail, I wanted to give you a brief update regarding the Community situation. As you know, yesterday we received a revised proposal from Community to acquire all the outstanding shares of Tenet for $7.25 per share in cash. Our Board of Directors will review the revised proposal in consultation with its independent financial and legal advisors to determine the course of action that it believes is in the best interest of the Company and our shareholders.

I'd also like to give you a brief update on the lawsuit that we filed on April 11 to compel Community to disclose fully its admissions practices. On April 22, we filed a motion with the court requesting a scheduling conference to set a timetable for the proceedings. The judge has scheduled that hearing for May 13. Yesterday, we filed a motion on discovery that contains some of the items that we are requesting. Those are the only updates on the litigation.

Because the Board will be reviewing the proposal from Community and the litigation is pending before the court, please understand that we will not be taking questions on Community's proposal or the litigation on this conference call.

I'd like to conclude my remarks with a summary of our first-quarter results, so please turn to slides 15 and 16.

We had a solid quarter and we've gotten the year off to a great start. Our volume trends are improving, and the pricing and cost trends continue to be favorable. Most importantly, our first-quarter results provide compelling evidence that our positive earnings trajectory is gaining momentum and we're on track to meet our objectives.

We're pleased to raise our 2011 outlook for adjusted EBITDA to a range of $1.175 billion to $1.275 billion. Our initiatives in the Medicare Performance Initiative, outpatient services, and Conifer are meeting their interim milestones. While expenses from our healthcare IT program continue to be a modest drag on earnings growth this year, the program is on track and expected to contribute positively to EBITDA beginning next year.

And now, for further insights into our financial performance and outlook, let me turn the call over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Trevor, and good morning, everyone.

Adjusted EBITDA was $379 million for the quarter, with a margin of 15.1%. This is a very good result, reflecting improving operating trends and significant value being captured on a number of fronts. It also positioned us to increase our outlook for the year.

I will spend a few minutes discussing the value drivers and, to begin with, will provide some commentary on how to compare the quarter to last year from a purely operating perspective.

Because of the influence of prior-year provider fees and a couple of other items, we believe the relevant comparison to last year is $306 million for the first quarter of 2011 EBITDA to $283 million for last year's first quarter, for an increase of $23 million, or 8.1%.

I'll now highlight the elements of this comparison, which appear on slide 17. The largest of these items was the recognition in the quarter of the $63 million of California provider fees and of $13 million in Pennsylvania provider fees, both of which reflect earnings contributions from prior reporting periods. We also recorded $25 million from earlier than initially anticipated Medicaid HIT incentive revenue. This contribution from HIT incentives was partially offset by an incremental cost of $12 million from HIT implementation and related costs, as compared to the first quarter of last year.

Netting these incremental HIT costs of $12 million against the $25 million HIT incentives results in a $13 million net payable effect from HIT in this year's first quarter, as compared to last year. We may very well be able to accelerate additional Medicaid HIT incentives into this year, but will only include those in the outlook as they are finalized.

The provider fees and HIT incentives reflect real value. But it is important that they are put in the proper perspective from a quarterly earnings standpoint. The favorable impact of these items was partially offset by a $14 million net reduction in prior-year cost report settlements and by a $17 million negative adjustment in medical malpractice expense for unusually large claim adjustments on a few cases.

As I said a moment ago, after netting the effects of these items out of 2011 and 2010 results, adjusted EBITDA was $306 million in the first quarter of 2011, reflecting a $23 million, or 8.1%, increase over last year.

Revenues grew by $167 million, or 7.1%, in the quarter. In addition to what I have already described, revenues were enhanced by the finalization of $10 million from the Georgia Indigent Care funding and by the $7 million 2011 portion of the Pennsylvania provider fee. These two items were both anticipated and offset the negative effects of year-over-year declines we otherwise experienced in Medicaid reimbursement.

Just as a side note, last year the Georgia Indigent Care funding occurred in the second quarter, rather than the first quarter this year.

Turning to pricing, net inpatient revenue per admit increased by 6.5% in the quarter. Inpatient net revenue per patient day increased by 8.3%. As shown on slide 19, even without the provider fees and Medicaid incentives, net inpatient revenue per admission increased by 1.6% and 3.4% on a per-patient day basis.

Aggregate case mix was relatively flat year over year. Outpatient revenue per visit declined by 2.2%, reflecting the effect on mix of our strong growth in imaging volumes. Imaging visits have attractive margins relative to costs, especially incremental costs, but imaging is lower priced on a per-visit basis. This imaging growth is largely the result of our recent outpatient acquisitions.

Negotiated commercial managed care rate increases continue to favorably affect aggregate inpatient and outpatient pricing. However, Medicare cuts to inpatient pricing, which became effective on October 1, restrained our pricing growth. More specifically, Medicare revenue per admission declined by 1.9% in the quarter.

Turning to costs, staffing costs per adjusted patient day were up by 4.4%, reflecting merit increases, but also showing the impact of the staffing of our HIT initiative and increasing physician employment. Showing favorable results, supply costs were well controlled in the quarter. On a per adjusted patient day basis, supply expense increased by only 1.2%. You'll recall that the comparable increase was just 0.9% in the sequential fourth quarter, so the control of supply costs is becoming an increasingly important highlight in Tenet's ability to generate margin expansion through our Medicare Performance Initiative.

As I alluded to a moment ago, other operating expense included an increase in malpractice expense. While broad claims experience remains favorable, a $17 million charge from a few larger-than-normal claim adjustments held us back from continuing our malpractice improvement this quarter.

Other operating expense also reflected increased expense related to both HIT and to physician recruitment and relocation.

Bad debt expense was $182 million in the quarter, a decrease of $7 million, or 3.7%, from a year ago. This resulted in a bad debt ratio of 7.3%, 80 basis points lower than a year ago. The primary driver of this favorable result was an $11 million decline in uninsured revenues, primarily driven by a 2.5% decline in uninsured admissions.

We had $267 million in cash and cash equivalents at quarter-end, a decrease of $138 million from $405 million at December 31. As most of you are aware, our first quarter typically reflects seasonal cash pressures due to the annual cash payments for certain compensation and benefit expenses accrued through the prior year and a seasonal paydown of other liabilities.

As a result, $2 million in net cash was used in operating activities in the first quarter, a favorable variance of $20 million as compared to last year's first-quarter cash usage. This decline in cash use was the result of higher EBITDA, partially offset by net income tax payments this year of $24 million on prior-year tax settlements compared to net income tax refunds last year of $17 million, an aggregate adverse swing of $41 million in cash tax payments. Also, some of the income items in the quarter, including HIT incentives, the Pennsylvania provider fee, and the Georgia Indigent Care funding, will be recorded as cash in the second quarter, or later this year. We also used $18 million in cash to purchase three outpatient centers and generated cash of $3 million through the sale of another of our medical office buildings.

Turning to our outlook, we have included two slides, 23 and 24, which give some breakdown of our income and cash flow outlook for the remainder of the year. We are raising our 2011 outlook for adjusted EBITDA by $25 million, reflecting the $25 million we recorded in Medicaid HIT incentive revenues which we had not expected to record until 2012 or 2013.

It is also clear that we are outperforming a number of our initial assumptions. For example, admissions growth was 0.6% in the first quarter as compared to assumed declines of 1% to flat. Also, although acuity started up the quarter on a softer note, it finished flat to last year's strong first quarter. Although acuity and other elements of mix continue to shift as we go through the year, we now expect that our admissions for the year will be in a range of a negative 0.5% to a positive 0.5%, increasing the range by 50 basis points but still allowing for the vagaries of the economic environment.

We also outperformed our bad debt assumption, where the range for assumed bad debt ratio had been set at 7.6% to 8.2%. As you've seen, it came in at a significantly stronger 7.3%. Additionally, we expect continued growth in outpatient for the remainder of the year as we complete additional acquisitions and execute on our physician strategies, and also expect increasing benefit from the Medicare Performance Initiative. And provider fees, including the six-month extension of California, which is awaiting CMS approval, are expected to offset Medicaid pressures for the remainder of the year.

The bottom line is that we believe our 2011 outlook for EBITDA and cash flow is on very firm footing. Looking at it from a quarterly perspective, we can't say for sure in which quarter we will record the additional California provider fee and additional HIT incentives, but it is reasonable that they could be recorded in the third quarter. As a result, our best guess is that Q3 2011 will be much stronger than Q2 2011, in sharp contrast to a more traditional seasonal earnings pattern.

In summary, we remain confident that our initiatives to provide revenue growth, reduce costs, and drive increasingly positive cash flow will be successful. The ranges we've assumed in 2011 for pricing, revenues, and adjusted EBITDA allow for residual uncertainty largely related to the recession and other items outside our control.

Our first quarter continued our upward progression and exhibited solid revenue growth, continued commercial pricing strength, inpatient and outpatient volume strength, good cost performance net of allowances for implementing our growth strategies, and an encouraging decline in bad debt expense. Subsequent quarters can be expected to display continuing enhancements to our earnings power as our key initiatives gain incremental visibility.

Before we open the floor to questions, I'd like to remind you that we're here to talk about our first-quarter earnings, and we'd ask you to keep your questions focused on that. With that, I'll ask the operator to open the floor for questions. Operator?

(Operator Instructions). Doug Simpson, Morgan Stanley.

This is Aaron Gorin on for Doug. Thanks for taking the question. I just wanted to get your thoughts on leverage for the business and what kind of opportunities that you might pursue that could entail additional leverage. Thanks.

Let me just remind you that we've talked about acquisitions in sort of three segments of our business. Outpatient, and I detailed in the comments that I made how we are on track with our acquisition program of outpatient centers, both imaging and surgery, and we're very pleased with the way that that has been working so far.

We had recently become more active in seeking very selected inpatient acquisitions, and have competed in a process recently for a nonprofit that -- in which they selected a different buyer and a different structure than the one that we had proposed.

And then, we also expect to see acquisition opportunities, but probably smaller and more limited, in the services business. And those would have some bearing -- all those types of acquisitions would have some bearing on leverage.

With respect to leverage generally and the use of leverage to enhance returns, or just for the sake of generating leverage to buy back stock, I'm not going to comment on that specifically, but I would note that we have reduced leverage substantially over the last few years. If you take into account both the debt outstanding and the obligation that we once had to the Department of Justice, we've reduced outstanding leverage by about $1 billion since 2006.

Adam Feinstein, Barclays Capital.

Just wanted to go into a little more detail on the volume growth, just to get some additional thoughts there. I know you highlighted every region, but the central region was up. But just, the adjusted admission number was pretty robust. So just wanted to get some additional thoughts. And as you think about acuity, also, we've seen a trend where a lot of the companies talked about higher acuity in the quarter. So just curious in terms of just the mix of volumes or just any other additional points of view.

Sure, Adam. I'm going to ask Steve Newman to comment on volumes. Obviously, we're very pleased with those, as I mentioned the trend, but also the fact that we actually got into positive territory for the quarter. So, Steve, you want to comment a bit on the broad base of the volume trends and what is driving it?

Sure. Adam, we had a really strong quarter in volume, and as Trevor said, it really continues our trend that we've seen back since Q4.

It did impact pretty much every region of the Company. Every region was positive from the admissions perspective, except for the central region, and all regions were positive for outpatient, including our Philadelphia market, which was strong in the quarter.

I would say this. We are beginning to see early indications of return of elective surgical procedures. To be more specific, in the quarter, we actually had positive orthopedic surgery and positive general surgery in comparison to Q1 of 2010. That was for all payers, as well as commercial payers. This is really the first time we've seen this in a couple of years, and it gives us confidence that consumers are beginning to do discretionary surgery.

All our volume was in the context of still a decreased obstetrical delivery rate. However, that delivery rate was a little better than it had been in Q4. It was only down 2.2% compared to Q1 of 2010.

So I would say that as you look across the Company, as you look across our services, as you look across the new channels we've used to grow volume, it was a very strong quarter and gives us confidence moving forward.

Okay. And I just, with the follow-up question here, so you guys talked about your paying [and] admits being up. Originally, the guidance you had an adverse payer mix shift of $25 million. So is that still incorporated in the updated guidance?

Yes, we still think there is an adverse payer mix shift this year. We haven't updated a specific number relative to the $25 million, but still in that territory.

Sheryl Skolnick, CRT Capital.

Good morning, and thank you very much for the slide on the EBITDA. It was extremely helpful. Can you -- the first question is, can you give us some more color on the malpractice expense increases, and give us a sense of what happened there, and whether or not there are other cases that we should be prepared to increase our expenses for? And then, I have a follow-up.

Sure. Biggs, do you want to take that?

Sure. Good morning, Sheryl. We consider that malpractice adjustment in the quarter, or the set of adjustments, to be unusual. There's always adjustments. There's pluses and minuses every month, every quarter, as we evaluate our liabilities under the program.

But as I can recall over the last five years, or the five years I've been here, this is the first quarter where we've coincidently had several on which there were large adjustments that were negative. So, we consider this to be an unusual event and do not expect it to be recurring. As I said, it's always -- there is always going to be adjustments. But it's unusual for there to be several that are negative and of this magnitude. So that's the reason we called that out.

Other than that, our trends are, in fact, still positive across the broader universe of cases, evidencing all of our work on clinical quality and reducing malpractice liability over the last several years. So once again, consider this to be an unusual circumstance this quarter.

Okay. I'm sorry. This is not my follow-up question, but I do have to push back on this a little bit, Biggs. So, are these old cases before the quality improvements or are they -- can you characterize them in a little bit more detail as to -- I am having trouble reconciling what I see in the numbers and the quality improvement and the kind of investments that you've made. I think it's very clear that the hospitals score very highly versus a $17 million negative surprise in the quarter associated with a number of these cases. So, are they older cases? Was there a change that would make it less likely that you're going to see these big awards or were they just sort of accidents happen?

Some of them are older cases, some are not. I think that when you look at broad quality measures, of course, they're indicating our performance across every instance of clinical care across the Company, and all it takes is for one escape, if you will, of all of our control procedures to create an instance of malpractice liability.

So, that's why you still have these things occur, even though you may have very sound clinical quality systems in place, standards and education and everything that goes along with that. So once again, it's -- call these non-routine escapes, particularly when you look at the magnitude of them and the fact that it just happens to be that in one quarter we're making a series of negative adjustments on seven cases.

As I say, normally there is some going up, some going down. It's a portfolio of risks that we manage and typically don't have this kind of coincidence of having a number of them going negative in one quarter.

And then, the follow-up is only somewhat related, but I'm going to ask it anyway. The comments that Dr. Steve made about the orthopedic case load and the acuity -- excuse me, and the elective or discretionary surgeries, you're not the first one to note that this quarter and it's not the first time you've noted an uptick in some of these surgery types. I think you have a slide on it either last quarter or the quarter before where you're beginning to see some of this. So, maybe we've got the three data points indicating a trend line here.

But I'm curious about whether or not you're seeing that continue into the second quarter, whether or not you can give us any color on what kind of volume trends or acuity trends you may be seeing in the second quarter.

And then, I'll stick in there the question of I noticed that you are giving admissions from the ER, whether or not you're seeing any of this coming in through the ER or whether you're actually seeing it through more of the outpatient surgical venue that would indicate that it is more discretionary as opposed to later and sicker.

Steve, do you want to comment on that? Just generally, acuity trends as we've seen them because it was a little bit unusual the way the year started and finished a bit stronger in the quarter, and then what we're seeing in the ERs as well.

I think that's right. Certainly, when you look at the ER, for example, our ER volume was up 6.1% compared to the same quarter of prior year. That was about 21,000 visits. About 3,000 of those visits were from influenza. But it's interesting -- 3,000 more than prior year.

But it's interesting that fewer of those cases were actually admitted. So the influenza was greater in frequency, but less in severity, in the first quarter. We've now seen the virtual elimination of influenza-like symptoms in our ED and our physicians' offices.

With respect to the acuity, as Trevor mentioned, and Biggs mentioned also, acuity started off soft in January and has strengthened through February, March, and now April. So, I think we've had a more consistent case mix index, mix of surgical patients compared to medical patients, and pretty flat in terms of the total percentage of admissions that are elective versus ED admissions.

John Rex.

I just wanted to circle back a little bit to kind of acuity and payer mix and putting it all together. So, when I adjust for the provider payments and the high tech and even -- and cost reports, it looked like kind of the revenue yield is about flat when you do that. You know, just maybe -- may get a 0.1%. So can you talk about the elements there that would be impacting that revenue yield? We're just seeing a little better yield from some of the reports, and I'd like to understand what was going on in the quarter.

I think that broad-based, as I said, consolidated or aggregate case mix was relatively flat year over year, but aggregate pricing on a per-inpatient basis was positive even after adjusting for the provider fees and HIT incentives. So, I'm not sure I get back to the same negative point that you're trying to reach (multiple speakers)

Sorry. I'm talking about revenue -- adjusted -- sorry, just on the adjusted admits, rather than all admits. Perhaps that's something to do with some of the outpatient (multiple speakers)

Yes, as I mentioned in my comments on outpatient, our average pricing is down, but that's because of the mix to imaging, which is still a high margin but it's lower price, lower cost and lower priced.

So as we've acquired the imaging centers and seen the dramatic growth in imaging volumes, just through the math, it reduces pricing on a per-visit basis, but it's not a function of lower pricing. It's a function of mix. And it's not a bad result. It's growth in our revenues from these acquisitions and it's highly profitable growth. But it just affects the average pricing metric.

And acquired at a low multiple, I might add.

Right, okay. And then, on payer mix, when I just look at kind of admits as a percentage of total, it looks like the category that moved up as a percent of total was really kind of the other category, which is kind of indemnity, self-pay, and other, and the other categories were all fairly a little more stable, I guess. Medicare edging down. Can you just talk a little bit about what's going on in that, and then just trying to understand which categories are growing within the payer mix?

We still saw some declines in commercial volumes, but the rate of decline has mitigated substantially, and as we've watched the insurance companies report their first quarter, we are encouraged by the enrollment trends that we're seeing there.

We also continued to have growth in some of the payer categories we've had before. I'm not sure about the other. Other typically a mix of all sorts of things, including tri-care and very limited indemnity, and to be honest, I don't have at the top of my head what's going on within other.

Yes, uninsured is down on inpatient. Charity is up on inpatient. Aggregate uninsured and charity is an increase of 3.5%, but once again it's driven by charity because uninsured is down. But as I say that, I think it's important to note that we also disclose our total cost of care on uninsured and charity, and it remained stable or flat over sequential quarters substantially year over year.

Tom Gallucci, Lazard Capital.

Just following up on the regions. Is -- what can you describe about the central region that may be different than the others? Is there any difference in unemployment or anything else in those markets that you can call out to maybe help us understand the positive and the negative trends that are out there and sort of see the inflection points?

Sure. Steve?

Tom, with respect to the central region, the weakness was primarily in St. Louis and Memphis. And we've seen those markets hit significantly from an unemployment perspective, and we had some issues with turnover in some of our medical staff there. So I think that was largely driven by those two markets. Throughout Texas, pretty stable volumes. A little weakness in Houston, but otherwise, I think the central region loss would be focused in Memphis and St. Louis.

Okay, and then, Biggs, just wondering, I think you had noted that some of the income items, some of the provider taxes and IT, Medicaid IT money, you had the income in the quarter, but you get the cash later. Can you just remind us of the recognition policy there just to make sure we understand the timing?

Sure. On provider fees, it's tied to when CMS approves the program. The state has to approve the program. It has to be enacted. It has to be modeled. All of that has to be approved then by CMS, and so the provider fees are recognized once CMS approves the program, but they're recognized only through that date or through the quarter end.

So, by example, in Pennsylvania, the period goes from July 1 of last year to June 30 of this year, so there are still $7 million of Pennsylvania provider fee just from the current year's or current instance -- program to be recognized in the second quarter. On -- but the cash has not -- it was -- CMS gave their approval in the first quarter, but the cash did not flow in the first quarter. It will flow, we believe, in the second.

On HIT, a little bit different, but also some similarities. Each state was allowed to offer incentives effective January 1 for the Medicaid HIT incentives. But once again, CMS has to approve each state's plan.

Also, the rules here, we weren't totally certain how they were going to evolve, and we thought there might be some incremental requirements, but what drives the recognition or the entitlement in each state, once their plan is approved, is whether or not you have a plan of adoption for a certified HIT system. Included in that is you have to own all the elements of the system to be installed and they have to all be certified. So you have to own and they have to all be certified.

So we had five states which CMS approved in the first quarter, and we do have ownership in the plan to install all the products necessary, so we were entitled in those five states. The other states that we operate in don't yet have approved plans. So we can't recognize those yet, but we'll do so once those plans are approved and we're satisfied that we have met the requirement.

Art Henderson, Jefferies & Company.

Just a couple here. You noted in your -- I guess on page six about the commercial pricing for 2013. I guess you've gotten 20% of your contracts signed there. Could you talk about the commercial contracting environment and how that's shaping up for the outward years?

Sure. I'm going to ask Clint Hailey who heads our managed care contracting effort to discuss that. Clint?

Yes, Trevor, thank you. As we talked about what percentage of the contracts we've got done, we've gotten most of calendar-year 2011 done, and we very purposefully haven't done a lot of the out-year contracting as we see how the system reacts to healthcare reform and things like that.

So, we're really on track with regards to what we're -- what we've sought to accomplish. And we continue to make progress every quarter and we expect that to continue over the course of the year.

Clint (multiple speakers). I'm sorry. Go ahead, Trevor.

I was just going to reinforce that what hasn't changed, in fact what's improved in our dialogue with managed care, is that we have a very compelling value proposition.

I talk about it all the time, but we are not positioned as the high-priced provider in virtually all of our markets. We are either in the middle of the pack or, in some markets, we still remain a little bit below. We offer demonstrably high quality. We have exceedingly low rates of denials or other adjudication problems. We have a highly automated back-office, and so when you're running a managed care plan and you look at doing business with us, it's a fairly frictionless environment in which to do business. And we think that that's important now that the customers of the managed care plans are starting to exert more pressure on them about costs.

From a pricing standpoint, as we said previously, we think that the contract rates that we're negotiating for this year are in line with what our actual experience was from a contractual rate increase standpoint last year. When we gave the January 11 presentation, we said that once we get into the out-years, we haven't given specific guide for 2012, but once you go well beyond that, by the time you get up to 2015, we thought they'd moderate down to mid-single digits, around 5%.

Okay. That's very helpful. Okay, and then the follow-up question, the Conifer asset is -- has got a lot of value to it, Trevor, and I know that it's continuing to kind of grow. Could you kind of talk about what your longer-term expectations are for that asset? Is that something that you keep underneath the umbrella for a while and then you look to spin it out, and kind of the growth trajectory going forward there, and how you plan to kind of maximize the return on that?

I don't want to speculate about our future plans with Conifer, but let me just make two points before you get too carried away. One of them is that I did make the point about revenue concentration. So, although we're growing the outside business and that momentum is increasing, really before you could have a viable standalone business, you'd have to have a much more diversified customer base and source of revenue. That's point number one.

Point number two is, you notice the excellent performance we have on bad debt expense, you know, in a pretty tough environment. I think we are going a bit against the current of the industry on that right now. That is due in large part to the excellent performance by our thousands of associates at Conifer, and it's very important to our bottom line to continue to have a high degree of management integration and systems integration with Conifer.

So it is an integral part of Tenet. I just keep pointing out the comparisons so that you don't forget there is something here that is a high-growing -- fast-growing, high-margin business that does have this comparable business out there that is -- has quite an extraordinary valuation.

Kevin Fischbeck, Bank of America Merrill Lynch.

This is actually Josh Marans in for Kevin. Could you please provide an update on your Medicaid outlook relative to your initial guidance for $30 million to $60 million of cuts?

Sure. Biggs, do you want to do that?

Sure. Happy to take the question. We still see it in the $30 million to $60 million range. We've obviously continued to watch all of the states, but haven't seen a change in the overall risk. Certainly there are several states or a few states that we watch, such as Florida and Texas, to see how it evolves, but we do see the risk in that $30 million to $60 million level for this year.

We also watch -- I should just point out we're also watching, of course, whether there will be a second California provider fee follow-on or whether Pennsylvania will have a follow-on or not, or whether there is other states which enact similar programs. So we're also watching for the upsides.

Okay. And then, just a follow-up on your revenue guidance. What are you assuming for the fourth-quarter revenue specifically related to hospital inpatient rates on the Medicare side following the proposal?

I think that we've assumed what -- I was going to say I think. We have assumed what CMS has put forward as their proposal of the 0.4% negative for urban hospitals. As disclosed in the 10-Q, I think that's worth about $5 million of negative effect. So, basically flat, if you get right down to it.

Kemp Dolliver, Avondale Partners.

Question on the Q3 EBITDA commentary, in that is the predominant driver of that comment going to be the provider fee or are there other factors as, say, they relate to last year or Q2 that we need to take in consideration in modeling that sequential uptick?

Well, I think that the big driver as we looked at it was the California provider fee, which is, if you modeled it today as it's structured, it would be worth $26 million, so that if it's recorded in our third quarter reflects a sizable blip, which would create a different pattern.

The other thing is the HIT, which -- what we have left in our outlook for HIT is $15 million, only $5 million of which is tied to state incentives and $10 million is tied to Medicare incentives. But if we do have other states which get their programs approved, it may very well be in the third quarter. It's tough to call, in which case there could be an additional acceleration of other income into the third quarter. But it's just too early to call.

That's fine. Second question relates to the line item in revenue that is other, which looks like that was about $120 million versus $90 million last year, and up about 35%. What is in there that would drive an increase of that size?

The state HIT is the largest component of that. Not sure what else is in other that would be the -- other than Conifer. Okay, Conifer's revenue is also going up. Not sure what else is in there. We'll look at it. If we'll get another answer or a little more (multiple speakers)

That explains virtually all of (multiple speakers)

(Multiple speakers) give you that over the course of the call.

Gary Taylor, Citigroup.

First, I rarely do this, but I did want to congratulate you on the positive patient volume year over year. I know you guys have been working very hard to achieve that.

I'm glad the call is being recorded.

But certainly credit where credit is due, and I'm sure you're very pleased by that.

Just a couple of questions. I think I can do this and I think I'm close, but if you guys have a better view I'd be willing to write down your numbers. But what is your view -- what would you call same-store net revenue growth excluding all the provider taxes and IT and so forth? That's kind of a 3.4% number?

I think we gave it on a slide. Let me make sure we get the right reference for you.

Yes, I saw the 3.4%. So I assumed that should be the right -- I saw that earlier. That should be the right view of kind of a same-store revenue number?

Yes.

So adjusted admissions, 2.3%. So kind of a correct kind of net revenue per adjusted admission number should be 1.1%, basically.

In that territory anyway, yes.

Yes, but keep in mind the things Biggs said earlier about that mix of more imaging coming into the outpatient side.

Right, so I was going to follow up and just hope, could you estimate what that is? Is that -- do you think that's 50 bps? Do you think it's 100 basis points? Is there a ballpark of impact you might believe that outpatient mix is having there?

You know, we haven't done that. I think that because there have been two questions on it, we're happy to do it and we'll get back to you with it.

My other question, just on the controllable operating expense growth per patient day. That kind of reached its nadir in 2009 when you drove 35% EBITDA growth. It now looks up in the fours. It actually looks probably higher than average, despite pretty strong adjusted admissions growth this quarter. You know, and you had a stretch there where you had some just absolutely fantastic results there for a while, where it was actually down year over year. Can you kind of help us think about how that number develops over the next three quarters?

You're looking for how the adjusted admit number develops?

No, the controllable operating expense per adjusted admission. That was up north of four. Is that pretty stable in your expectation through the year behind your guidance? It just strikes me that that number is a little elevated versus what we are seeing in some of the other hospital companies.

I think that from the standpoint of -- you kind of pick apart the pieces, salaries, wages, and benefits. The merit increase was the biggest part of the increase, but then you have to consider that we had increased costs associated with physician employment and increased HIT implementation and expense year over year.

There was a more substantial increase in the first quarter over prior year's first quarter, by example on the HIT, that we would expect for the full year because program ramped up over the course of last year. So, that rate of increase, although it will not repeat itself at that level, although there will be increasing expense in the remaining quarters of this year over last year.

The supplies expense was very favorable, under 1% increase year over year on an adjusted admission basis. So, it will vary with mix, but we certainly like that trend. And if you look at our MPI initiative, which we expect to produce $50 million of savings over the course of the year, a lot of that will show up in supplies and will show up, to a lesser degree, in labor when you also think of the length of stay initiatives that we have as a part of that.

So, I think that we'll -- we should trend favorably over the course of the year relative to what we were in the first quarter. But a lot will always depend upon the mix of patients, what happens with acuity and timing otherwise.

Gary Lieberman, Wells Fargo Securities.

This is Ryan Halsted on for Gary. I apologize if I missed it, but did you talk about the decline in the CMI? I think in one of the slides you point out that you saw a decline in your revenue per admission due to the decline in the CMI, and I was just wondering if -- some of your competitors have talked about maybe higher acuity with some elective procedures being done this quarter with sicker patients.

The decline in case mix that we disclosed was just associated with Medicare inpatient, which helped explain the overall decline in Medicare inpatient pricing, which was slightly greater than what the statutory rate increase was -- or decrease was, year over year. So, that's the reason we disclosed that.

Otherwise, case mix broadly across the Company was flat, which means that other payers had higher case mix -- in the aggregate.

And then, on interest expense, it looked like you are lowering your guidance there. I was just wondering if you could comment on what the assumptions on that is?

Sure. We entered into a fixed to floating swap for $600 million of principal, so that will give us some interest savings this year. We did this in 2009 and it generated us savings. We took it off in 2010, based upon our view of the forward curve at that point in time. Based upon where we are now, we felt it was appropriate to put it back up and capture the interest savings. That still gives us a predominantly fixed-rate interest rate structure, absent that $600 million fixed to floating swap.

A.J. Rice, Susquehanna.

Just, I guess, really just a couple of points of clarification around the guidance. The $1.175 billion to $1.275 billion new updated guidance, that $25 million increase, should we think about that as being basically the Medicaid HIT payment? It sounded like that -- that you got in the first quarter. And then, I guess, it begs the question about the $26 million California payment and additional HIT. Are they not in the updated guidance at this point?

Yes, you should view the $25 million increase of the guidance for the year as being driven by the $25 million HIT incentive we accelerated into this year and recognized in the first quarter.

The follow-on, California. The first six months, January 1 to June 30, California provider fee was always in our outlook for this year, albeit it was initially in at more like $15 million as opposed to what I said it looks like now to be $26 million. But -- so we didn't tweak for that. That $10 million or $11 million difference, but it's always been in the outlook.

Okay, and how about the IT stuff? Is there anything in there for that now at this point or not really?

There is $40 million -- if you're talking about HIT incentives, there is $40 million total incentives included in our 2011 outlook, $15 million of which was always in there, and then the $25 million that we received -- or that we recorded in the first quarter and we'll turn to cash here likely in the second or third, is in the outlook. So that's what makes up the $40 million, the $15 million original plus the $25 million additional that we recognized in the first quarter.

Above and beyond that, there is maybe up to $25 million we do not have on our outlook because we won't put it in until the plans for the states are approved by CMS and we are satisfied we qualify, but that's, if you will, the range of the additional opportunity that we think may be out there for additional HIT Medicaid incentives to be accelerated into this year.

Okay. If I could just quickly slip in a follow-up. Back in February when you gave your detailed guidance, you sort of laid out your thoughts about the quarters. 28% might come in the first quarter. 19% to 25% in Q3, Q2, and Q4 evenly split at sort of 24% to 26%. It looks like, if I use 379, your 30% to 32% in the first quarter of your new guidance range, and you're making these comments around second and third quarter. I guess, do you have either updated percentages or is the effective commentary lowered a little bit second quarter, but raised in third quarter? Is that the way to think about what you're saying?

I'd put it more in terms of raising third. The second quarter may not look seasonally out of whack, except that there is lumpy items that may show up. Of our total EBITDA for the year, an element like the California provider fee, which creates some lumpiness, is going to show up on the third. At least that's what we predict at this particular point in time.

Justin Lake, UBS.

This is Andy Valen in for Justin. Most of the questions have been answered, but I have two quick follow-ups, one on the impairments. You noted that the adverse payer mix shift guidance was unchanged, but then that the rate of the managed care decline has slowed. Could you give us a little insight into the magnitude of the slowing, and then, how this -- maybe some color around how this looks inpatient versus outpatient?

We're no longer going to give commercial managed care volume statistics because they've been misunderstood, and there is no comparable out there. So, we're going to stay on that path and not give exact statistics.

But we did give statistics in the -- all through last year, and the fourth quarter improved over the third, and the first quarter this year improved over the fourth quarter of last year. What we had assumed -- last time we give specific guidance, back in January, we said it was a $25 million effect and, sort of on a last time basis, we said that represented about a 3% decline in commercial managed care for the year. And we're not going to update or get precise, but from a dollar standpoint, that's still a reasonable territory.

Thanks. And the second quick follow-up was, Trevor, I think you'd mentioned there was an M&A question, and you're looking at inpatient, outpatient, and then service acquisitions as well. Can you give us a little more color on, maybe, what types of businesses you're looking for in the service area, and then how this fits with what you have now and then your long-term goals?

Really just, and this is unchanged from anything we've said about it before, but we have made a very small acquisition and are looking at other small ones to augment our revenue cycle services business.

We have a very robust set of -- suite of services that we offer to hospitals where they can outsource the entire revenue cycle operation to us or just portions of it, and as we have grown that business, there have been pieces where we would -- where we saw an opportunity to either fill in the services or there may be opportunities in the future to actually acquire other businesses that give us more aggregate business, where you can imagine the synergies as folding in a business like that into our existing operation could be very compelling.

Thank you. At this time, I would like to hand the call to Trevor Fetter for closing remarks.

Thanks, everybody. We had hoped to cut this off at 10. Sorry we're running a little bit late. I would note that our operator actually did what the instructions always say and cut people off pretty quickly after one follow-up question. So, if you have other questions that you would like to ask, we are here in the office. You can give us a call, and we'll attempt to answer your follow-up questions. But thanks for dialing in today.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.