Tenet Healthcare Corp (THC) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Second Quarter 2011 Tenet Healthcare Earnings conference call. My name is Jeff, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Thomas Rice, Senior Vice President Investor Relations. Please proceed Mr. Rice.

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 these 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.

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

Thanks, Tom. Good morning, everyone.

This quarter was very straightforward for Tenet. Consistent with our outlook, adjusted EBITDA was $277 million, up 3.4% relative to last year's strong second quarter. Adjusted admissions grew by 1%, our third consecutive quarter of positive growth on this metric.

Our inpatient business had both total and paying admissions that were essentially flat year-over-year in a period that was clearly a tough environment for many in the industry. We're pleased that surgeries grew by 1.1% and emergency department visits were strong. We are achieving our performance milestones in the core growth strategies of building our active medical staff and enhancing physician alignment through our physician relationship program.

We had some volume headwinds early in Q2. The month of April was weak, but volumes improved as we moved through the quarter.

Acuity was flat relative to last year with commercial up, and Medicare down, both within ranges that we see quarter-to-quarter. Commercial revenues as a percent of total patient revenues continue to climb due to a combination of pricing increases and moderation in the negative volume trends that we saw over the last several years. In the second quarter commercial revenues were 42% of total patient revenues, the highest level in more than five years.

Earnings growth was helped by increases in commercial pricing, continued tight cost control, health IT incentive pavements, favorable developments on bad debt, and growth in adjusted admissions due to our outpatient acquisitions. Q2 earnings were hurt primarily by hits to Medicaid revenues, some of which are specific program changes that are non-recurring. Our pricing statistics are diluted by the rapid addition of outpatient business, but overall, this is a good thing, because we're adding high margin business to our portfolio. While our program of adopting advanced clinical information systems remains a significant expense item, the impact of health IT costs was offset by government incentive revenues recorded in the quarter.

As I mentioned, our emergency business is doing well with strong increases in volumes. Emergency department visits increased by 2.6%, and admissions through the ED rose by 3%. Commercial ED volumes also grew and the acuity of services that we provided in our emergency departments increased by 1.4%. While it is hard to make any definitive statements on ED market share, with the nearly 3% increase in visits, we believe that we're growing share in emergency services. Outpatient surgeries continue to grow increasing by 3.3% in the quarter.

Once again, we had strong cost management in Q2. This is in spite of upward pressure on costs from growing our physician staff through hiring and relocation, plus the incremental costs of implementing and operating our advanced clinical systems. We did a terrific job on controlling supply costs which rose by just 1.4% per adjusted patient day. This is particularly impressive in the context of a 1.1% increase in surgeries. We've had great success recently in our initiative to manage implant costs. The new implant pricing that we've achieved should provide us with a multi-year cost advantage.

Commercial pricing was toward the upper end of our range of expectations, and we continue to achieve our pricing objectives in recently signed commercial managed care contracts. We have good visibility into our future pricing. At this point, we've completed contract negotiations for 90% of our 2011 commercial revenues, 65% of 2012, and 20% of 2013. The commercial pricing increases are more than offsetting the adverse impacts from the reductions in Medicare inpatient rates that were implemented last fall and the downward pressure on Medicaid reimbursement.

At this point, I would like to run through the seven growth initiatives that we introduced last summer and quantified in January, that are driving our growth in future earnings. Starting with our outpatient efforts, we continue to close these transactions at the pricing and pace that we anticipated. We closed on four additional outpatient acquisitions in the second quarter, bringing our year-to-date acquisitions to seven, for which we paid $40 million. With robust pipeline to work on, we anticipate achieving our targeted 15 to 25 outpatient acquisitions in 2011, at an investment of $100 million.

The second driver on our list of growth initiatives is Conifer. Conifer continues to make meaningful progress toward its interim objectives. Conifer signed ten new contracts in the quarter, two of which we mentioned on last quarter's call, as strong revenue cycle prospects. The remaining eight contracts were on the patient communication side and the pipeline for our Conifer business continues to expand.

We continue to make good progress on the Medicare performance initiative, and our annual target of $50 million of incremental savings. The most immediately visible evidence of MPI's progress, is another quarter of great cost control and supplies, which, as I mentioned, increased by only 1.4% per adjusted patient day.

Healthcare Information Technology is the fourth earnings driver on the list, it remains on track to become a positive contributor to earnings in 2012. While we had initially expected HIT to be an earnings drag this year, we're qualifying for the incentive payments sooner than anticipated, and it now looks like we'll be in a break even position in 2011. In the second quarter, the HIT revenues we recorded were sufficient to cover our costs in the quarter related to implementation and on-going operation of these systems. Once the systems are fully installed, we expect them to add to our Hospitals' competitive advantage in their markets, reduce errors, and improve quality and physician satisfaction.

Item five on our list is bad debt expense, where we generated a second sequential quarter of improvement. In the context of a continuing soft economic environment, it is too early to declare victory, but clearly, this was a good quarter for bad debt. We're encouraged by several trends, for example, the cost of treating the uninsured was flat in the quarter, unemployment rates are stable in our markets, and the credit scores of our patients are stable.

Operating leverage, number six on our list, will be driven by inpatient volume growth. While we're not there quite yet, I'm pleased to say that we're -- that the rate of decline in commercial admissions continues to moderate, and our outpatient acquisitions are helping us achieve positive growth in commercial outpatient volumes. We're pursuing innovative arrangements to build our business.

The recent example of which is the private ACO arrangement with Blue Shield of California that we announced during the quarter. Tenet has the skills and experience, in risk-based contracting, that positions us to confidently enter into these complex arrangements. We believe the one we announced in June, will increase the market share of our hospitals in northern California with an important commercial payer.

Finally, healthcare reform or the Affordable Care Act, was not expected to contribute to earnings in 2011, because, as you are well aware, the cuts come before the coverage. As a result, we're currently living with a 50 basis points hit to Medicare inpatient pricing. Nonetheless, we successfully overcame that revenue challenge in Q2.

I'm very comfortable that Tenet is on the right track. This is the third quarter of tangible progress that we've reported toward our longer term objectives, since we laid them out in our investor presentation in mid-January.

Let me summarize by saying we had a solid second quarter, tapping a very good first-half. Commercial pricing and cost trends continue to be favorable, volume trends are stable, bad debt expense is significantly better than initially anticipated, and certainly there is pressure on government reimbursement, but this has proved manageable to date. And we have good visibility into Medicaid pricing for the remainder of the year. We believe Tenet is better positioned, than many in the industry, to withstand these pressures.

We remain confident in our strategies and we're confirming our 2011 outlook for adjusted EBITDA in a range of over $1.175 billion to $1.275 billion. One tangible expression of that confidence is our repurchase of approximately 17 million shares of stock through the end of July, representing 3.4% of our outstanding common shares. We believe, and hope you agree, that current share prices represent compelling value.

Finally, I want to mention a matter regarding management succession planning. As of next year, our Chief Operating Officer, Steve Newman will be 62 and will have been with us for 13 years. Steve plans to retire sometime in mid 2012. To ensure that we have an orderly process of identifying and evaluating candidates, both internal and external, selecting a successor and having an appropriate transition period, we've engaged the firm of Egon Zehnder International in Dallas, to launch a search in the near future. Since the search will be widely known within the industry, I wanted to make sure that you knew about it in advance.

And with that, let me turn the call over to Chief Financial Officer, Biggs Porter, who will provide with you further insights on the quarter. Biggs?

Thank you, Trevor. Good morning, everyone.

Trevor has provided a good overview on the quarter, so I'll focus my comments on providing some incremental color on revenues and bad debt, as well as recent actions impacting our balance sheet and a few comments on our outlook. You may have noticed that we did not post slides this morning to accompany our comments. We have, however, updated our standard investor book slides for the current quarter including the outlook, cash walk forward, and HIT slides, which you can access at your convenience via our Investor Relations web page. You don't need to rush to look at them now, as my comments will hit the key points.

In looking at revenue, in the quarter, there was a sharp $30 million decline year-over-year in effective Medicaid pricing in the second quarter. This was made up of a reduction in Missouri, that we're protesting, the shift of Georgia indigent care funding from the second quarter of last year to the first quarter of this year, and of more generic dis-reductions in other states. However, in your assessment of our current earnings power, I would only include about $10 million to $12 million of the $30 million as being reflective of continuing year-over-year reductions. Also, I would encourage you to note, that no revenues associated with the extended California Provider Fee Program were recognized in this quarter, even though the approval of $26 million in revenues for the first half is a relative certainty.

Because this $26 million is related to the first half of 2011, many, perhaps most of you, will be tempted to back these revenues out of our third quarter results. If that's your intent, then to maintain analytical consistency, you should reflect the relevant share of these revenues, or an incremental $13 million in our second quarter. These provider fee programs are explicitly designed to mitigate the financial pressures on hospitals, including pressures from recent reductions in Medicaid funding. The timing of CMS approval is creating a mismatch, however.

On another provider fee front, Pennsylvania has approved the second year of their program, which will provide lift in the second half of this year. And California is pursuing a multi year extension of its program. This is all evidence that these revenues may be lumpy, but are recurring in nature. The same will also be true of the HIT incentives. We've accelerated our 2011 incentive expectations into the first half of the year, but we've recognized only $50 million of the $320 million we expect over the next few years. So, these also reflect good annually recurring revenue sources.

Our revenue per adjusted admission of the quarter increased by 0.6%. If you set reasonable expectations for commercial in the 6% to 7% range, and used annual update rates for government programs, and did a weighted average of the different payers in in-patient/out-patient mix, you would have expected a revenue per adjusted admission increase of 2.8%. The reasons for the variance between the 2.8% and the 0.6% include the year-over-year swing in Medicaid, the effect of higher imaging volumes, not a bad thing, and a few other puts and takes. Before I leave the revenue stats, I should note that paying volumes were flat, and we continue to see favorable trends in uninsured and charity with an admissions decline of 1.9%.

Bad debt expense continues to outperform our expectations. Bad debt expense was $171 million in the second quarter, down $2 million or a 1% improvement over last year. This resulted in a bad debt ratio of 7.2%, 30 basis points lower than a year ago. This improvement was particularly notable, as it was achieved relative to a very tough comp from last year. You'll recall that bad debt expense in the second quarter of 2010, was reduced due to a $28 million favorable adjustment for Medicare bad debts.

There were multiple drivers contributing to the improving bad debt expense number this quarter. One factor was a $14 million decline in uninsured revenues attributable to a decline in uninsured volumes and downward adjustments to our pricing for uninsured patients in a few markets. A second factor was the favorable resolution of some older accounts receivable balances.

Our self-pay collection rate remained 27.9% in the second quarter. This is the first time we've seen the self-pay collection rates stabilize in 2.5 years. However, rather than focus on any of those measures, the real bottom line is that our cost-of-care for the uninsured and charity is basically flat year-over-year, which is the most meaningful way of looking at the true economic impact of caring for the uninsured.

Point-of-service cash collections were 39.7%, a modest decline from the 40.3% last year, but 160 basis point improvement from two years ago. Net cash generated by operating activities was $178 million in the quarter, a decrease of $13 million, as compared to the second quarter of 2010. This was favorably impacted by the $9 million increase in adjusted EBITDA, a $4 million deadline in interest payments, $27 million favorable variance income tax refunds, and the favorable impact of $12 million in lower payments against reserves and litigation costs. Offsets to these favorable items included a $59 million increase in accounts receivable, and a $6 million decrease in accounts payable and other items.

Our AR days rose to 48 at June 30. This increase of 3 days relative to March 31, was the result of the consolidation of our billing and collection offices in California. Although we saw a short-term degradation in AR days in Q2, we have already realized enhanced operating efficiencies, and expect AR days to recover to previous levels as the year progresses. In addition to the expectation that the AR growth will reverse and produce $50 million to $75 million in additional cash in the third or fourth quarter, we also expect the second half cash flows to be enhanced by the collection of the remaining $44 million of HIT incentives that we have already recorded, as well as a number of other items.

Capital expenditures were $82 million, up $5 million from last year. Pre-cash flow was a positive $96 million for the quarter, and slight negative $22 million for the first half, due to the normal seasonal heavy cash use in the first quarter. Pre cash flow was also negatively affected by a net $19 million outflow and discontinued operations.

We used $72 million for the repurchase of 11.5 million common shares during the quarter, and $24 million for acquisitions. So, despite significant cash outflows to build the business and leverage our balance sheet, we were successful in keeping cash and cash equivalents virtually flat at $264 million at quarter-end, a decline of just $3 million relative to March 31.

As noted in the earnings release, total stock purchases through July 31, were approximately $105 million. Our leverage ratio continued to strengthen and was 3.4 at June 30, down relative to 3.5 a year ago. This continues to give us significant balance sheet flexibility going forward.

Turning to the outlook. We're reconfirming our existing range for 2011 adjusted EBITDA of $1.175 billion to $1.275 billion. We're raising our EPS outlook for the year by $0.03, which reflects a $0.01 benefit from the lower share count attributable to the stock repurchases we have already made, and a $0.02 benefit from reduced income tax expense expectations for the year.

Our assumptions on the key EBITDA profitability levers are within, or in the case of bad debt, better, than the ranges we assumed earlier in the year. Admissions achieved slightly positive growth through the first half of 2011, which is broadly consistent with our assumption of an approximately flat admissions growth.

April was the only month with a negative volume in the quarter. And although Pyramix was still not what we wanted in the quarter, as Trevor said, the negative trend has been improving and the aggregate volume picture is achieving our interim milestones, and is consistent with our outlook.

I've already discussed bad debt in some detail, so you know bad debt in the first half is below our prior assumed range. Although everything to date leads to an improved bad debt outlook for the year, we believe it is still early and we'll remain conservative and not explicitly change our outlook at this point. We have no concerns on our ability to achieve our objectives due to pricing or cost efficiencies. These programs are well-established and closely monitored so the likelihood of surprises in either of these areas is remote.

In summary, we remain confident that our initiatives to drive revenue growth, reduce cost, to drive increasingly positive cash flow will be successful. Following our standard practice, 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 second quarter continued our upward progression and exhibited solid revenue growth, continued commercial pricing strength, inpatient volume stability, outpatient volume growth, good cost performance, net of cost related to the implementation of our growth strategies, and another encouraging decline in bad debt expense. Subsequent quarters can be expected to display continuing enhancements to our earnings power and cash generation, as our key initiatives gain incremental visibility.

With that, I'll ask the operator to open the floor for questions. Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of Justin Lake, with UBS. Please proceed.

This is Andy Valen in for Justin. I was just hoping we could drill down more on the acuity levels. You said they were well within normal ranges with Medicare down and commercial up. Can you give us a little detail on what the normal ranges are, and then where they were in the quarter, perhaps by month?

Sure, I'm going to ask Steve Newman just to comment generally on acuity. Steve?

Well thank you, Trevor. Acuity was stable in the quarter. And I think from a payer mix perspective, it is certainly within the range that we see from quarter to quarter. But it was, interestingly, really impacted by some positive and negative shifts. For example, our major trauma which is very high acuity business was up 3.8% in the quarter. This is a result of a lot of focus on our development of emergency services, CapEx investments, and our physical plants for emergency, and that sort of thing.

On the other hand, as we mentioned in the prior call for Q1, we've seen a decrease in the loss of OB care. So, our OB deliveries were down less than any time in the last 2 years. That tends to decrease the acuity. So, I would say, Trevor, that acuity was pretty stable across the Company during the course of the quarter.

Great, thanks. One quick follow-up on the Medicaid, HIT incentive payments. Can you give us an update on what's included in guidance from there and whether what you recorded in this quarter was a portion of what you were expecting?

Sure, this is Biggs. The $25 million we recorded in the quarter brings our total for the year to $50 million. What we included in our outlook before, and was reflected in our HIT multi-year slide, was $40 million. So, we're $10 million ahead. Some of that $25 million in the quarter was forecasted for later in the year and some was not. So at the end of the day, what we have is a $10 million raise in the HIT outlook, and there's still $10 million of opportunity associated with the Medicare meaningful use elements of that in the fourth quarter, but that one is a little more sensitive to timing and so at this point in time, we'll treat that as upside.

All right, great, thanks.

Our next question comes from the line of Matt Borsch, with Goldman Sachs.

I'm just wondering as you talk about the progression of volume trends during the second quarter, did you -- do you have any observations on what others in the industry saw? Because the general observation that we heard had been more that the volumes were weakest in June, but apparently you saw the opposite trend. I'm just wondering if you had any thoughts on that?

Yes, Matt. This is Trevor. We did -- obviously, we had a chance to listen to all of the calls, and I can't speak to why anybody saw any particular trend, but ours was very clear. That April was weak, May and June were stronger. And that improving trend has continued now through the month of July. I would attribute it more to our strategies and the execution, particularly of the physician alignment strategies that we have been pursuing for several years, as well as improvement in a variety of service lines in which we have invested.

And as you look at how trends have been developing, are there any regional variations that you can identify of significance?

Yes, regions always perform differently, but in this quarter, actually, we were pleased that the balance between the regions was much more uniform than what we've seen in the past. I think that contributed to that relatively, stable to growing set of statistics that we put out in the prepared remarks.

And my last question on a different topic, and I apologize if you've already covered this, but how far do you think you have to go on the supply cost initiatives as you look beyond this year? Is there a long-term percentage or number you can point us to?

You and Shelly have followed us for a long time, so you know that when we talk about supply costs, it is a series of very discrete initiatives on high value items, as well as on the utilization of low value items. People tend to think of these initiatives as being all about price. They're actually much more about utilization, elimination of waste, selection of the appropriate items. And so we believe that there is far more opportunity there. It is obviously harder than just negotiating price with vendors. But when we talk about our Medicare performance initiative, it is encompassing these supply cost initiatives that we envision going several years out.

Got it. Okay, thanks, I'm good.

Our next question comes from the line of Sheryl Skolnick with CRT Capital. Please proceed.

Good morning. Thank you very much for taking me early in the call. First of all, Steve, you have made covering the Company a whole lot easier and more pleasant, and you will be missed by 1 analyst on the street, and I thank you for all of your tremendous insight and efforts. --

No time to get teary now. It's -- we have nearly a year --

I'm not getting teary. But I may not be around in 9 months, Trevor, I'm sorry. I think Dr. Steve will, but I don't know about me. Because what's happening in the market to these stocks is enough to make anybody rethink their career.

But having said that, as we look at your earnings here, and as we look at your guidance for the second half, just to keep things focused in the near-term while Dr. Steve is still there. As I recall, there was a bit more waiting towards the back-end of the year, Biggs, than there was at the front-end when you gave this guidance. Granted, that you don't give quarterly guidance, but that was the commentary. And so, I'm curious as to what -- if you could review for us, what you expect to accelerate or perhaps decelerate, relative to a stable and strong first half, that will make the second half comparisons, perhaps on the EBITDA line, a little more robust.

Okay. I think the big drivers second half, when you think about it is, California Provider Fee, as I said earlier, is not recorded yet for the follow-on first half of this year. So, that's $26 million. There is another $12 million from Pennsylvania that we expect in the second half. There is a potential upside on California for the second half of this year, provider fee, which is modeling presently at $37 million, but that's not in our outlook at this point because we think that it is -- pretty questionable whether that would get approved by CMS by the end of the year. Unless, I pointed out, because it is -- we think it is a likely event, just not clear whether it will happen this year or roll into next year. Already talked about $10 million of upside that's left on HIT incentives which is not included in the HIT outlook that we gave, the slide that's out on the web and the investment book. But we're certainly going to try and still achieve that, on the Medicare incentives.

Then beyond that, MPI has always been back-end loaded. Those savings grow over the course of the year. We expect that to still be the case. Acquisitions on the outpatient side, and Conifer business which is, both of those are growing activities. Will grow in the second half over the first. And then we expect that there's upside from continuation of the favorable trends we've seen out of May and June. We just -- it is a ways to go here. But we're certainly leaving the first half on a positive note as, Trevor has already talked about, in the way the quarter was progressing.

On a more mechanical basis, it is a notable item. FICA, second half versus first half, contributes $20 million as we cap the compensation limits on FICA. So, that's always an expected lift in the second half, that people have a tendency not to think about. Q4, too, I guess, long-winded answer but I'll hit one more, Florida is a very seasonal business so Q4 traditionally gets a lift as volumes and results go up in Florida. So, we would expect that again this year. So, that probably leaves us with a stronger Q4 than Q3, but anyway, I hopefully have addressed the overall question, first half and second half.

You have. And if I could drill down on the one of them, the MPI savings? I noticed a slight reduction in length of stay, to maybe a tenth of a day. But at what -- if you could sort of work through -- what's in the back of my mind here is that the Street's obviously extremely nervous about the prospect for a 2% across the board cut in total Medicare program costs, and reflected that in most everyone's stock price yesterday in a very significant way, to say the least.

One of the worries that you always have there is that it is the price cut that perhaps can't be mitigated, and my thought was, for companies that are working on initiatives, like the Medicare Performance Initiative, I'm wondering just you know at what point we can start seeing the real powerful savings above and beyond the supply costs, not that they're diminishing those. But above and beyond those, that reflect the really hard things that there are to do. The improvements in, we'll call it productivity, efficiency, throughput, and reductions in length of stay, and then the recapture of quality base payments.

So, when do we start seeing that? And what has to happen in the hospitals for that to become the significant mover of cost reductions and margin improvement through MPI?

Sheryl, I would say this. Although we've been working on MPI for the last 2.5 years, we have so much more to do. So much more in both length of stay, but as well as clinical standardization process. Each week, we identify opportunities to drive down the variable cost of care, both from a supply perspective, one of the things we've never talked about on these calls is blood utilization.

It is a huge, very expensive issue with a big opportunity, for us to drive standardized evidence-based practice. We've worked on the acquisition costs, but the utilization savings are 5 times what the reduction in the acquisition per unit cost is. My sense is that with potential additional cuts, we just redouble our efforts and the external environment is really helping us galvanize the physicians.

And as we do alignment activities with our doctors, whether they're co-management agreements, in expensive areas like cardiology, orthopedics, or spinal surgery, or whether we employ our physicians, or whether we align better with our hospitalists and intensivists. This all has the potential to drive down not only length of stay, but total cost of care as we move toward a even more prospective payment system.

I just -- would add to Steve's comments, Sheryl, that the -- there is a slide out there on the web that we put out there in June, to give some reasonable reflection of what we expect out of MPI and productivity initiatives, based upon those which we've already identified over the next 5 years, and that slide totaled $280 million which is $30 million more than what we had in the 5-year outlook.

Also, importantly, included in that slide was besides the DRG related effort and supplies related effort, was a productivity initiative worth $60 million, which is going into effect now. Now we expect to achieve about $15 million of that this year, and hit the $60 million run rate next year. But that gives us the opportunity then, over the near term, to outperform the $50 million a year. So, as we put that initiative in place, there should be greater visibility from a productivity standpoint, and as I said, maybe enable us to beat the total $50 million a year and bring more of it forward to offset any other pressures.

That's wonderful. Thank you. A very quick one. What was your observation rate in the quarter?

12.3%.

Thank you.

As a reminder, ladies and gentlemen, please limit yourself to 1 question and a follow-up. Our next question comes from the line of Art Henderson, with Jefferies & Co. Please proceed.

Hi, thanks for taking the question. Trevor, in your comments, you talked about commercial pricing coming in at the upper end of the range. As you look out to 2013, can you remind us what that range was, and I think you previously said 5% to 7%. Is that correct?

Yes, that's right. I said we were coming in at the upper end of the range. We've been very pleased with what we've been able to accomplish in commercial pricing. And it is fundamentally based on a value proposition to the payers about quality and efficiency, a very efficient low cost revenue cycle and a very high degree of transparency and honesty in terms of putting valid claims forward. So, I like where we're positioned relative to our local competitors in terms of our relationship with managed care.

Okay. That's great. And then on the follow-up, obviously in light of this deficit reduction bill and the 2% that Sheryl was referring to -- Trevor, just how vulnerable do you think the hospital sector is, in particular, as you look forward to incremental cuts near term versus something that might -- you've given up quite a bit already in terms of the Health Care Reform bill. So, I was curious to get your thoughts on how vulnerable you think the hospital space is.

Well, okay, that's a hard question. Who knows? But let's look at the bigger picture. So, you're right to point out we gave up a lot already. It is always good to remember that you have an industry of which 80% is comprised of not-for-profit hospitals, that don't have, in the aggregate, an enormous ability to absorb cuts, and every Congressman understands this. And they're really understanding it now, with the mobilization of a grassroots effort across the industry both not-for-profit and investor-owned.

Also, very important as you analyze, we're all doing our homework at the same time, I think, on the 2% approach. Rather than jumping right to the conclusion that that is what is going to happen, let's not forget that that 2% kicks in after a series of failures to reach agreement prior to that, and doesn't kick in until the end of this year in terms of knowing that that's the outcome, and then, if it even does kick in, the cuts are not effective until October of 2012. So, you have quite a long period of time here before we would be dealing with any cuts.

And then I think the most important thing that was pointed out, to us yesterday evening, was that when you think about this 2%, you have to start subtracting from it, Medicaid. And you have to start subtracting Medicare part C and part D, and you get, at least by one piece of analysis I've seen, you get down to it, a potential cut under that method for hospitals, that is $45 billion over a 10-year period beginning in October 2012. And if some of your fears in analyzing a particular company might be on these various provider fees, those wouldn't be at risk until 2014 or potentially later. At least -- it's hard for me ever to know what Wall Street is thinking out there, but it seems like maybe they're thinking about a worse case, than might be the worst-case, scenario in actuality, for hospitals.

Yep. Thank you very much, Trevor.

Our next question comes from the line of Tom Gallucci, with Lazard Capital Markets.

Good morning, this is Colleen Lang on for Tom this morning. Biggs, given the number of moving parts of Medicaid this quarter, do you still expect to see cuts in the $30 million to $60 million range for the year? Can you discuss just the general outlook for Medicaid in the second half of the year, relative to the first half, now that we have more clarity on state budgets?

Sure, and I did mention in the prepared remarks that we -- sitting here now in August, we have much more visibility in the Medicaid pricing for the rest of the year. So I'll ask Biggs to comment specifically on how it relates to our guidance.

Sure. The $30 million to $60 million number did encompass all of the risks which have unfolded, obviously disappointed by some of it. Don't think that the Missouri cut should have occurred. So we're protesting that one, but with the Missouri cut, it puts us at the upper end of that range of $30 million to $60 million of incremental. If you look, 2011 Medicaid hits compared to what we had coming out of 2010.

In terms of how all of that spreads and it is kind of put together a global analysis of everything, the recurring, if you will, coming out of last year cost was around $10 million a quarter for the reductions that were put in place primarily July 1, 2010. And then on top of that is the $60 million of incremental for this year bringing the total of about $100 million.

In the second half, what we think there will be is about $50 million greater hit in the second half compared to the first half. So, the -- little bit more of the detrimental effect will be in the second half as a result of these recent round of cuts.

Okay, great, thanks for the color. And then can you are remind us how many employed physicians you have at this point, and where you expect the number to be over the next few years?

Yes, Steve?

Yes. As we said previously, our intention was to add 300 employed physicians for the next 2 to 3 years, and we're on track to do that. As of the end of the second quarter, we had a little over 600 employed physicians. So, we're on track to hit our goal for 2011, and I should add that in addition to employed physicians, we're certainly increasing our alignment activities with those that are affiliated.

Through the first 6 months of the year, we've added 382 physicians to active staff net of attrition. Our outlook for the year was to add 800, so we're right on track to hit our 2011 guidance, in terms of both employed physicians as well as total active medical staff addition.

Thanks so much.

Our next question comes from the line of Adam Feinstein, with Barclays capital. Please proceed.

Yes, thank you. Good morning, everyone. Let me also say we'll miss Steve, and really enjoyed working with you over the years. Look forward to working with you over the next year here as you transition out. But just wanted to mention that.

Thank you.

I guess maybe as a starting point, there's been a lot of questions about mix this quarter in all of the calls. I guess, as a starting point, when we look at your overall revenue mix, your managed care revenues were up about 150 basis points as a percentage of total, Medicaid being down. That looks like it an improving payer mix there. You talked about the pricing coming in at the high end of the range. But, certainly, just wanted to get more clarity as you guys think about your overall payer mix, and then just have a quick follow-up.

Okay. Actually, I think one of the best ways to think about payer mix is to drill into what we're seeing in some service lines, Adam. Because we are, if you remember-- our targeted growth initiative, for example, we made a very deliberate move, beginning several years ago, to invest in certain service lines that would differentially attract commercial business, since its margin is so much higher than all of our other business.

I'm going to ask Steve to give you more commentary on some of the service lines that are growing, doing particularly well. What that says about payer mix, because I think that's the right way to look at it. Steve?

Okay, Adam. I think that our investments are certainly paying off. Both in terms of CapEx as well as our physician alignment activities. One of the targeted areas that we've been working on for the last 18 months has been in the area of spinal surgery. And in the quarter, our spinal surgery was up 4.3% compared to the same quarter prior year.

Another area we've been investing in is growing comprehensive urology surgery programs, and we've done this by targeted investments in technology, including robotics. And in the quarter, our urology surgery was up 4% compared to the same quarter prior year. It is interesting when we grow one of these comprehensive urology programs, we get the minimally invasive business, but the big margin business is the non-minimally invasive business that comes as part of growing the comprehensive urology business. The open surgical procedures, if you will. So, we can differentiate ourselves from our local competition and take market share in some of these high revenue, high margin businesses with intermediate term investments, both in aligning medical staff as well as capital expenditures to grow technology.

Our orthopedics was stable in the quarter compared to Q2 of 2010. That's pretty remarkable to have orthopedics stable, understanding the pressures of decreased utilization across the market. In fact, you could make an argument that the drop in utilization in orthopedic procedures, and our being stable actually equates to taking market share in orthopedic surgery. So, I feel very good about our focus, the alignment of our capital expenditures, our physician development activities with those service lines that we've identified that the population is going to need as it ages through the commercial age group and into the Medicare age group.

Okay. And just a quick follow-up and I'll get back in the queue here. So Biggs, you talked before about the revenue per adjusted admit should be about 2.8%, if you take the different pieces and back into it relative to the 0.6% in the quarter. So, do you think in the back half of the year we should model in 2.8%, or is there still -- I guess it gets hard with all the puts and takes with the provider fees and some of other things that tend to bounce around between quarters.

Yes, I think, set aside provider fees, there wasn't any in the second quarter, so they're not in there. That would provide lift if they come in, in the remainder of the year. The remainder of the year, I think, we will still have some reductions in Medicaid, we already talked about that. Still expect our imaging volumes to grow, although some of that will anniversary. The compact or the discounts, to our gross charges to pricing the uninsured, will still continue, but I will note, once again, those wash out against bad debt. So, those things will continue.

On the other hand, in the mix overall, there was payer shift -- payer mix shift, which we expect to reduce in the second half as we continue to see, what we believe, will be a moderation of what has been the negative trend there. And also, I mean we're getting into some of the more finite stuff that wasn't in my summary comments, but there were also lower stop loss payments for this quarter, which -- those things bounce around so that easily could come back in in the third and fourth quarter.

So, I would say -- I would expect it to be -- plus or minus the 2.8%, depending upon how all of those factors play out. Provider fees one direction, these other things in the other direction. But it is going to vary by quarter. It is really not too predictable, but for the most part, a lot of things don't really end up falling to the bottom line. It depends upon what the effect of the margin rate is on the individual drivers.

All right. Thank you very much. I appreciate the details.

Our next question comes from the line of John Rex, with JPMorgan. Please proceed.

Thanks. So, just actually, I wanted to follow on that most recent line and just see if you can give us any insights. Kind of maybe narrowing the gap or helping explain the gap in terms of where your revenue yields fall, and what we've been seeing more broadly over the past couple of quarters. I think you've highlighted a few here, but it just seems like it is a still, fairly, several hundred basis point gap that we're seeing from the others. Do you have any insights into why you would be trending so differently?

Okay. Well, let me do a few things just from making sure there is a good baseline of understanding of how we do our statistics to begin with. First of all, HIT incentive revenue is not included in patient revenue, because of the way the regs are constructed. It says it is not for delivery of patient care, it is for completion of system implementations, and so we didn't put that into patient revenues so it is not in our stats. Others may have it in their stats, I don't know.

Also, we don't include physician revenue on employed physicians in our patient revenue for sake of these stats, and of course, growth in Conifer is also not included, because that's not patient revenue. So, there is a number of elements of revenue which we have which are growing, which are not in the stats. And that may be creating some apples to oranges.

Beyond that, I can drill into greater detail on some of the things I already talked about, and quantify a little bit. But the things that people might not otherwise think of, as I said, we had the increase in -- or decrease, if you will, in our pricing of the uninsured, in certain markets where we felt like it was the right action from a competitive standpoint in a tough economic environment, and that was -- had a 0.5% or a 50 basis point move in the overall price per adjusted admit number.

Once again, that's offset by lower bad debt expense, so it doesn't fall to the bottom line. I think the payer mix shift was worth about 0.5%. I would expect others have that as well, or possibly even greater, but I don't have visibility. And then, I hate to go there, but the whole adjusted admission process is an estimation of how to combine inpatient and outpatient. If you instead do a waiting of our visits, pricing growth, and our inpatient pricing growth, you'll get a number about 0.4% difference. So that also is a driver of the stat. I mean, still, everything's directionally correct, but it has some measurable effect as well.

So, that is some of the things I think that people otherwise wouldn't see. The Medicaid hits are apparent. The imaging volumes we've talked a lot about. So, when you put all of those together, it explains the difference for us. And as I said, some of that just really doesn't follow to the bottom line, so it is more optics than reality.

That actually helps to clarify some of that. Then you had mentioned in the acuity topic, which has been the topic, you had mentioned a decline in Medicare CMI. I don't think it was much the way you characterized it, but were there any specifics in terms of categories, since cardio has been getting spotlighted here, in terms of where you might still have declines?

I would say that you're spot on. We certainly saw what everyone in the industry has seen, with the decrease in cardiac, cath, and electrophysiology procedures, and cardiovascular surgery. We're seeing more cardiovascular medicine than surgery. But we've seen these trends years ago.

And we prepared ourselves by diversifying the focus of our hospitals, that in the first half of the decade, we're very focused on cardiovascular disease, to mainly outpatient cardiovascular care, and we're in the areas that will drive acuity on an inpatient perspective over the next 10 years, based on not only technologic improvements, but the demographic changes.

Do you have a handy stat there just in terms of what the decrease in cardiac surgeries-- what it was in the quarter? In your Medicare book, in particular, I'm thinking about.

Our overall was down approximately 3%, which I think is consistent with what others in the industry have seen.

Yes, that does sound consistent. All right, thank you.

Our next question comes from the line of Ralph Giacobbe, with Credit Suisse. Please proceed.

Thanks, good morning. Maybe I missed it. Did you guys actually give what the Medicare CMI was for the quarter in year-over-year?

No. We prefer to just talk about it in terms of ranges, because it -- otherwise, you don't have any basis for comparison, versus, say, a company with much larger portfolio that would be expected to have different ranges or less volatile.

Sure. What about just your year-over-year change for your own Company?

No. We're not talking about it, Ralph, sorry.

Okay. And then on the bad debt side, obviously better than expected. Just want to make sure, that's related to just the declines in the uninsured, or was there anything in terms of changing your discount policy? Anything we need to be aware of there? And then just in terms of your comments of favorable resolution of aged accounts, can we get more color on that?

Sure. This is Biggs. The bad debt expense, there were 3 drivers. It was lower volume. It was the change in the pricing to uninsured. So, both of those things drove lower revenues, and the pricing to uninsured, that wasn't broad-based, that was a few markets, but nonetheless, it has an affect.

And then the third thing is the resolution of the older accounts, and what that comes down to is, routinely, it varies in amounts, but routinely, we reach a resolution with managed care payers on older receivables, and as we do that, typically it is a pickup. And this quarter we had that, and like I say, we have most quarters, and we'll have in quarters in the future, but it was one of the drivers.

Can you quantify that amount?

The amount associated with that on bad debt expense, I don't know the exact number, but I think it was between $5 million and $10 million.

Okay. All right, thank you.

Our final question comes from the line of John Ransom, with Raymond James. Please proceed.

Hi, just trying to normalize a little bit, the second quarter trends. What I've got is you've got a $30 million headwind from Medicaid and a $10 million additional payment from HIT. That would leave you $20 million year-over-year. Anything else we should think about year-over-year in terms of the EBITDA trend? And then you said $5 million to $10 million on the recovery of bad debt. Anything else we should think about?

I'm sorry. I didn't follow the first part.

What John is basically saying you've got a net headwind of $20 million. Negative on Medicaid and positive on HIT.

Well, the -- to reiterate. If you're looking at the quarter --

Yes, I'm just trying to get a normalized quarter-over-quarter EBITDA --.

Yes. Okay. So normalizing the quarter, you need to take the $20 million out of Medicaid, $10 million of which was just a movement to the first quarter this year for the second quarter last year, on Georgia. You need to take out the $10 million on Missouri which was a retro hit.

Then, kind of below the radar, there's a $5 million hit we took on a discount rate in medical malpractice, which we certainly expect to reverse, as a matter of fact, we did it today. It was more than reversed because interest rates have changed. Then there's -- growth in -- physicians' salaries and wages which has occurred, but there will be benefits later on associated with that. In total between relocation costs and salaries and wages, that's a $6 million growth. There is future benefit associated with that. Something to consider in terms of how you normalize this, versus what kind of expectations there are for growth and revenues following. Those are, I think, the big things. So, --

What does that net to? I mean, again, I had kind up with $20 million, but I was trying to double check that.

Yes, net-net. You're in that territory.

Then Missouri was $10 million. How much of that is going be in the back half? Was that a one time or is that going to be $10 million a quarter?

No, it will not be $10 million a quarter. That $10 million reflects a full year. Going forward it is worth about 2.5. Which is why I said the recurring element of the $30 million was in the 10 to 12 range.

Okay. And then you talked about $37 million California provider fee. That's in addition to what you are getting this year? If you got that in the first quarter, you would be plus $37 million less $63 million you got this year? So kind of a $25 million-ish short of net change?

Well, actually, what they're doing in California, is constructing now a multi-year program.

Okay.

Which then we would expect to have a more efficient approval process, so it is actually possible that next year, if it wasn't approved until next year, there would be that $37 million and then -- or $36 million to $37 million, and then another $72 million on top of that, representing the full year of 2012 fees.

So, when you start to add everything together, even with the $63 million this year that we had on California provider fees, and I'm not giving guidance for next year yet, but it is possible that next year's total provider fees will actually be bigger than this year's, even including the $63 million in this year's.

Oh, great. And just lastly, a couple on mix. Outpatient mix, I know one of the goals of the Company is to grow your outpatient to total. Where do you think you'll be by the end of the year?

I -- you know, hard to say, John.

I think a lot depends upon the ultimate timing of the acquisitions. We've got our acquisitions targeted. We know what each of them should drive, based upon when they're actually brought on board, but I think that the timing is subjective enough to where it doesn't make sense for us to give an absolute.

Is Conifer -- when do you think Conifer would have meaningful revenue from non-Tenet hospitals? Is that a 3 year? 5 year? 2 year? What's your goal there?

Well, I think -- it could be 1 year; it could be 3 years. I think that it just depends upon whether or not we're able to bring on board some very large systems as clients, and there are large systems that are interested in us.

Great. Okay. Thank you.

All right, thanks, John.

All right, ladies and gentlemen that will conclude today's conference. Thank you for your participation. You may all disconnect and have a wonderful day.