Tenet Healthcare Corp (THC) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first quarter 2012 Tenet Healthcare earnings conference call. My name is Jeff and I'll be your coordinator for today. At this time all participants are in a listen only mode. Later we will facilitate 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. Tom Rice, Senior Vice President Investor Relations, and you have the floor, sir.

Thank you, Jeff, good morning, everyone. First I want to apologize for the late start. There was some confusion around the phone number. I believe we have it properly sorted out at this point so we'll get started. Tenet's management will be making forward-looking statements on this call. These statements are qualified by the cautionary note on forward-looking statements contained in our annual report on Form 10-K. During the question and answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time I'll turn the call over to Trevor Fetter, Tenet's President and CEO.

Great, thank you, Tom, and good morning, everybody. Our performance in the first quarter got us off to a solid start for 2012. Here is some highlights. Adjusted admissions increased by a strong 2.8% against the tough comp of over 2%. That is stronger growth than all but one company in our peer group and it's also our sixth consecutive quarter of growth.

We achieved a 6.6% increase in surgeries, which is the best performance in our peer group this quarter. This growth came from both inpatient and outpatient surgeries. We grew ER visits by 5.2% indicating that we're gaining share. We continued to realize commercial pricing increases in our targeted range of 5% to 7% and as we demonstrated, once again strong cost controls, including a 2.2% decline in supply cost per adjusted admission. Those are the operational highlights.

In addition, the Medicare rural floor settlement exceeded our expectations and provided us with $77 million of earnings in the quarter for a total EBITDA of $314 million. This result exceeded virtually all analyst estimates and the consensus. The consensus was distorted by a wide range of estimates, some of which included settlements and some of which did not. The most accurate way to look at our performance in the quarter, however is that it fell short of our expectations by $15 million. Here is why.

Our expectation for the quarters EBITDA, excluding settlements and SSI, was $254 million. That would have been our point estimate in February when we said that Q1 would be roughly 0.2 of the full year. We came in, ex-settlements and SSI, at $239 million. Now while that was above the low end of the guidance that we gave you in February, it was $15 million short of our expectation at the middle of the range. The $15 million shortfall versus our guidance was created by four hospitals, each in a different region. The issues at the four hospitals are well defined and fixable and Britt Reynolds and our regional and local management teams are already addressing the issues. Turning to volumes.

We're very pleased once again to report some of the strongest volume growth statistics in the sector. We grew adjusted admissions by 2.8% due to strong performance on the outpatient side of the business, where about 75% of the growth was organic. That's much stronger organic growth than in recent quarters. Surgeries grew by 6.6% driven by strength in both inpatient and outpatient. We're very pleased with the organic growth of our existing outpatient surgery business and a strategic decision to augment that growth through acquisitions. Volumes in our emergency departments remained strong, growing by more than 5% fairly evenly across all payer classes. This provides compelling evidence that our historical investments in ER facilities, technology, throughput, and service are helping us gain market share.

As you've heard on other conference calls it was a very light flu season. Normalizing EBITDA last year's light flu season would have added 30 basis points to admissions growth. Acuity was slightly softer in the quarter with our case mix index declining by less than 1% to 1.33. Commercial CMI had a slightly better trend than our aggregate acuity. It's interesting to note that the largest declines in acuity were among our uninsured and surety patients.

Turning to service lines, we saw significant strength in orthopaedic and spinal surgery, major trauma and GI disorders relative to the first quarter of 2011. These service lines were all targeted as part of our targeted growth initiative. We've been working on building these service lines for years and it's extremely gratifying to see this growth. Steve Newman, who is with us here today, will have retired prior to our second quarter call, so I'd like to recognize him for the targeted growth initiative. It's something that he piloted in California some years ago and it, along with our other strategic initiatives, are major drivers of the improved performance that we've generated. These initiatives drove our 15% compound annual growth rate in EBITDA since 2004.

Returning to a review of the quarter, we continued to meet our pricing objectives which include an increase in net inpatient revenue per patient day of 2.1% and a 5.5% increase in commercial inpatient revenues per patient day. On the outpatient side, net revenue per visit increased by 2.3% and commercial revenues per outpatient visit increased by 7.1%. We also continue to have excellent visibility into our future commercial pricing. We've completed contract negotiations for approximately 95% of 2012 and 40% of our 2013 expected commercial revenues.

Selected operating expenses were well controlled, increasing by just 1.9% for adjusted admission. Our Medicare performance initiative, or MPI, continues to drive incremental cost savings. One of the areas where these MPI savings are particularly visible is in our supplies expense line item, which declined by 2.2% per adjusted admission. Our bad debt ratio was 7.6%, a sequential quarter decline of 10 basis points. Our overall collection rates are essentially flat year-over-year and sequentially.

In terms of cash, we typically have significant outlays in the first quarter due to the timing of our compensation and benefit expenses, including 401(k) and annual incentive payments. Net cash usage by operating activities in the first quarter of 2012 was $42 million, compared with $2 million in the first quarter of 2011, an increased cash usage of $40 million. Last year, we had cash proceeds from the California Provider Fee Program that were $43 million greater than the proceeds this year. Normalizing for this timing difference, cash from operations was basically flat year-over-year.

We invested $136 million in capital expenditures in our businesses in the first quarter and we used $26 million to repurchase 5.3 million shares of common stock. This purchase completed the $400 million program that we announced a year ago. In the aggregate, this program retired 81 million shares, or 17% of our prior share count, at an average price of $4.94 per share. As you know, we repurchased roughly 90% of our mandatory convertible preferred stock at the end of April. This removed an overhang of up to 51 million incremental common shares. Without the repurchase we would have had to issue those shares in October. I'm very pleased that following this transaction, both S&P and Moody's reaffirmed, and Fitch upgraded their ratings on Tenet's debt.

The stock buyback and repurchase of the preferred speak to our confidence in the future financial performance and value of the Company. We saw a compelling opportunity to enhance shareholder returns and we took prompt and aggressive action. Eliminating these shares brings our total reduction in share count to almost 25% of the fully diluted share count from a year ago. We have now 411 million shares outstanding and 434 million shares on a fully diluted basis.

As you saw in our pre-release and as we reconfirmed this morning, we raised our 2012 outlook for adjusted EBITDA by $25 million to a new range of $1.250 billion to $1.375 billion. We expect the quarterly pattern of earnings in 2012 to be weighted toward the second half of the year, which is largely the result of California Provider Fees and health IT incentive payments that we expect to recognize in the fourth quarter.

Additional items which will contribute to the growth of earnings in the second half of 2012 include the closing and integration of incremental outpatient acquisitions, additional cost efficiencies from the Medicare performance initiative, and enhanced patient volumes from the new positions we've added and are adding to our medical staff. The big contribution should also come from getting the four hospitals, which were below budget in Q1, back on track. As we stated in the pre-release, our second quarter outlook for adjusted EBITDA is expected to be in a range of $225 million to $250 million.

To briefly summarize, we achieved stable inpatient volumes and impressive growth in outpatient volumes in the quarter, performing very well in comparison to our peer group. I'm extremely pleased with our growth in surgeries and ED volumes and I'm greatly encouraged by the growth that we achieved in our targeted service lines. Commercial pricing trends continue to be favorable. Costs remain well controlled and while bad debt expense remains elevated, as you would expect in the soft economic environment, it remains stable and within our anticipated range.

While I've mentioned several drivers of our margin growth, I haven't mentioned how we're tracking on our health IT, Conifer, or our outpatient acquisition strategies. Our health IT initiative is proceeding on time and on budget. In addition to the seven implementations that we completed last year, we completed seven more just in the first quarter. Conifer continues to meet its performance milestones and we remain pleased with the strong pipeline that we've identified in outpatient acquisition opportunities.

That's it for my prepared remarks. I'm joined here by Britt Reynolds, our President of Hospital Operations, Dan Cancelmi, our Chief Accounting Officer, and other colleagues who are ready to answer your questions. Operator, please begin the Q&A portion of the call.

(Operator Instructions). Ralph Giacobbe, Credit Suisse.

When we start thinking about the second half of the year, aside from the California Provider Fee and high-tech payments, any other things we need to consider that would help because the implied ramp in the underlying business seems pretty steep? Any specifics there you can give and then maybe along those lines, talk about what you can do for those four hospitals that you had discussed earlier that caused some of the shortfall in the quarter?

I'm going to draw on a couple comments from some of my colleagues, Dan Cancelmi, as well as Britt Reynolds on the second part of your question. There are a number of things that are weighted toward the second half, they are very helpful. You called out the California Provider Fee, some health IT fees. It's really a timing difference that's occurred in the recognition of health IT, but all of these things are payments that are essentially in lieu of either what would have historically been higher Medicaid rates or incentives that would have been recognized in earlier periods. Although it creates this ramp toward the second half of 2012, really those payments ought to be recognized into earnings over earlier periods, just you can't do that under GAAP.

In addition, we've got initiatives that have created this momentum that we've been showing in volumes that are intended to get stronger as the course of the year unfolds. There are other minor items, including some provider fees in other states, that should be kicking in, in the second half of the year. We've anticipated a lot of this into the fourth quarter. Dan, did I leave anything out that is worthy of mention that's part of that ramp up?

I think also looking at our MPI initiatives, we think there's further opportunities there in the second half of the year, not only on the salary wages line but also on the supply expense line item as well. Also, there's some additional pricing opportunities in the second half of the year, as well as we're looking at hopefully get some bad debt improvement also in the second half of the year.

I was going to add there's this other very material thing which is getting the four hospitals I mentioned back on track. I hope not to steal the thunder of anybody else who wanted to ask that question, but Britt, why don't you comment a little bit on what you've seen in those hospitals and how achievable it is to get them back on track.

As Dan alluded to, the opportunities that exist in those hospitals to get back where we are accustomed to seeing them perform and where we would project them performing in the balance of the year is really in those areas that Dan alluded to, the TGI initiatives. There's some variation in those hospitals among our others where we could see return back to performance in those targeted growth initiatives. There are some bad debt opportunities in some. There are expense initiatives such as salary, wages, and benefit opportunities, as well as some payer mix and mild acuity issues that Dan had alluded to. There are not any one particular issue that is systemic across the four. As Trevor alluded to earlier, they are in four different regions so there's nothing with a particular state payer or anything that would cause us concern from a systemic standpoint. It's more of a focus on those particular four.

I can tell you that we've dedicated each of our regional leadership teams in those regions to those hospitals. The reports I'm getting back are improving. The data that I see and the discussions I have with those regional leaders and the hospital leaders are that while we don't give intra-quarter guidance, I'm very encouraged by the improvement seen on volumes and on some of these initiatives that I spoke about that were some of the challenges. We saw that in April and just a week into the current month, we see that continuing to move along the lines we would like to see. I think going forward, as you asked the question about the outlook, I feel confident that we have the right team in place and the right things under focus to get those where we need them by the end of the year.

Kevin Fischbeck, Bank of America Merrill Lynch.

Can you talk a little bit more about the pricing? I guess it was worse than what we were looking for, sounds like mix shift was the big issue there. Can you talk a little bit about what happened there, what was driving that? It sounds like one of the things you're talking about as far as potentially improving the four assets was trying to help the payer mix. Is there anything that you're doing there to try and actively manage that or is that just a function of the economy?

There was some effect across the portfolio and I think others in the industry have talked about this as well, as slightly lower acuity was driven more by shifts in service mix than anything else. We listened last week to the earnings call of HCA, I think our acuity moved identically to theirs so nothing unusual, but I think that some of those pricing stats were driven by those changes which were really pretty minor.

You'd mentioned you had surgery volume across the inpatient and outpatient. Can you break out the surgery growth between those two things and is it that your target growth initiatives are geared towards some of these lower acuity items?

No, actually to the contrary. The targeted growth initiatives are geared to things like the orthopaedic and spinal surgeries that were two of our strongest performing service lines. I think a couple of key points on the surgery statistics, one was that the growth came from both inpatient and outpatient. That's important to see that growth returning in inpatient, was something we were very pleased to see. The second important point was that of the total growth in surgeries, 75% of it was organic. We've had some quarters going back over the past, say, four, where the percentage of growth in surgeries that was being driven by acquisitions of surgery centers was higher than that. We're really pleased to see the organic growth as strong as it was.

Is it really just the OB volume? What grew very quickly that out weighed the profits you're making?

OB grew pretty quickly.

That's the main one?

That also affected length of stay.

Tom Gallucci, Lazard Capital Markets.

On the Managed Care front, I think you'd mentioned that rates were locked in for various percentages this year and next. Can you give a little bit more color on rates? I think with the pre-announcement you might have talked about possible loss of a Managed Care contract, was wondering if you had any update there and maybe any general commentary on how contentious negotiations are maybe now versus a year or two ago.

It's a good question and I'm going to ask Clint Hailey, our Chief Managed Care Officer, to talk about both the disclosure we made in the pre-release specifically, also just trends generally in pricing. I would point out as I turn it over to Clint, that we did disclose these commercial pricing statistics of inpatient up 5.5% and outpatient up more than 7% to add some proof to our assertion that we're still getting rates or showing rates of growth in commercial pricing that are consistent with the expectations we've set. Clint why don't you talk about the issues Tom has raised?

Let me start by saying that pricing is on plan. We've given some guidance on that and we're achieving that guidance. We do have good visibility into our pricing for next year, as Trevor mentioned in his earlier comments. 95% of our revenue, commercial revenue is locked in for 2012 and about 40% for 2013. As it relates to the one health plan that we talked about in our pre-release, that health plan, in the interest of respecting where we are in the negotiations should remain nameless for now, but I do think it's important to point out that they aren't amongst our top 15 commercial payers. The impact is somewhat muted as a result. Nevertheless, we are taking actions to address that so that we can accomplish our aims.

The rate that you're seeing, I know you've got a lot locked in, but what sort of rates are we looking at?

We've given guidance on a 5% to 7% range and as Trevor mentioned in his comments, our inpatient revenue per patient day on the commercial book was 5.5% in Q1 and our outpatient per visit was 7.1% in Q1, so very much within that 5% to 7% range.

That's what you're getting as you look out to '13 for example?

It varies by health plan. Some cases were higher, some cases were lower, but we feel very confident that 5% to 7% range is appropriate.

Adam Feinstein, Barclays.

Trevor, maybe just to go back through something here. It seems like volume growth was strong and you talked about the $15 million relative to how you were thinking about it on the EBITDA line. You talked about the mix and the impact from that, but maybe talk a little bit more about the costs. You mentioned the supply costs being down about 2%, but talk about some of the other cost line items as well and trying to think about how the costs came in relative to how you were thinking about it. Is the mix really the main issue here? Is that a fair way to think about it?

I think that is -- just cutting right to the bottom line, I think that is a good way to think about it. You could explain it that way or you could explain it by looking at four hospitals. Because we had four who were so far off budget, that's really the way we're looking at it. It's not a macro trend, but it's something much more isolated to the four. Cost control, I will ask Dan and Britt to comment on that, but pretty much all of the costs that are within our control, we are controlling very effectively. Now there's some costs that we are incurring as a way of investing in our future. HIT, that large initiative because of the change in the accounting recognition of the HIT incentives went from a profit center to a cost center this year, but it's still something that's very important to do.

Same thing goes for the investment in continuing to employ physicians. It's an offensive and a defensive strategy. I didn't really talk about those costs too much, but embedded within our overall costs are investments that we are making in the form of expenses in both the HIT and the physician area. As for costs controlled generally, Dan Cancelmi -- there's nobody better in the Company at controlling costs than Dan, so you want to talk about some of the other line items?

Our costs came in below our expectations for the quarter. We were quite pleased, as Trevor mentioned in his opening remarks. Our supply costs were actually below last years first quarter and I know if someone looks at our earnings statement and looks at the other operating expense line, there is an increase in those costs but those were planned, expected, some of them related to some items from last year. The unusual items where we had some credits related to some refunds and we've sold a medical office building. We were quite pleased with our overall cost performance in the quarter and again, our costs came in below our expectations.

Costs came in lower than what you were anticipating and you mentioned before about some of the things like HIT costs and the physician costs embedded in there. As you're thinking about the rest of the year and just once again, volume growth looked pretty good so it just seems like it's a function of managing mix and you're managing the cost. Is it your expectation that you'll see a gradual improvement in the mix? I know it's hard to think about it, but trying to better understand the impact from that.

Mix is always the hardest possible thing to control, but as Britt mentioned, we've seen already some encouraging trends just in the last five to six weeks.

Sheryl Skolnick, CRT Capital.

I think I heard you say that this was Steve's last call, so congratulations, Steve, on all you've accomplished. As you know, some of us will miss you greatly and wish you well. Britt, so now the focus shifts to you, which I hope that you're looking forward to.

He's been on the job for four months. He's not looking forward to it. He's already doing it.

No not looking forward to the job, looking forward to being grilled about the job, which any rational person would not be doing. I want to drill down a little bit more on these four hospitals if I may and also just clear up a detail point. The detail point is when Health Net reported poor earnings the other day, your stock seemed to go down in sympathy. As part of the operations or your answer I would welcome a clarification on your exposure to Health Net and whatever pricing pressure they might bring. I'm curious about these four hospitals, Britt.

Now that you've been in the role for four months, are you satisfied that as these hospitals were underperforming you had sufficient information to know that they were underperforming and perhaps to take some preventive action? Are the issues at these hospitals things that are as a result of the competitive positioning of the hospital, the operations of the hospital or are there things that you would like to change? Or, is it simply that -- is there some other reason? A little bit more detail on these four hospitals I think would be instructive so that we could get a feel for how much effort there will be to bring them around by the end of the year.

The four hospitals are definitely in competitive marketplaces. As we continue to work our MPI and TGI initiatives that you're familiar within those marketplaces, we're obviously competing. That is going to be a function. As we've alluded to, some of the challenges that we've seen on the payer side would apply to these and as Trevor mentioned, that's a little bit hard to predict on a go forward basis or on a proactive basis daily.

In terms of the expense management, I believe there is significant opportunity in that. I don't think these hospitals performed as well as they could from an expense standpoint and a part of that is something that we identified and addressed but can't be turned overnight. I don't think these are things that are outside of our control to get our arms around and make significant improvement in, throughout the course, even intra-quarter as I alluded to. I am encouraged intra-quarter at these four hospitals. Part of it is volume at those hospitals as well, just pure volume. That to me is probably the most encouraging sign I've seen.

The volume is rebounding?

Yes, Sheryl, it is and particularly in those four, and overall it's strong.

Which will lead into next question which is, you've got at the other, I guess it's 46 hospitals, you clearly had good results if not strong results. They aren't translating into cash flow so how should we think about the translation of the performance of the hospitals into cash flow for this year and at what point do you think the Company will be generating measurable free cash flow?

In terms of cash flow, first quarter is usually a usage of cash historically for a number of reasons; timing of year-end payables and some of our incentive compensation plans and our 401(k) funding for our employees. Actually our cash flow in the first quarter also was a little bit lighter than in terms of -- the usage was lighter than what our expectations were. The primary difference, if you're looking year-over-year, is essentially just due to the timing of the cash flows coming from the California Provider Fee Program. First quarter last year we received approximately $50 million in the first quarter. This year it was around $10 million, so there's about a $40 million delta between the two time periods. In terms of your question on in terms of the looking out into the future, probably see cash usage in the second quarter, and then as we go through the third and fourth quarter, consistent with the prior years, we'll start generating cash from operations of free cash flow.

A follow-up on that and I didn't get an answer on Health Net. The usage in the second quarter is not what you showed last year so can you comment on that difference?

You sort of faded out on us there.

I said the usage in the second quarter is different from a different pattern from last year and so can you comment on that difference and also I didn't get an answer on Health Net.

We'll circle back to -- actually why don't we do Health Net now and circle back to the cash question. I was surprised by the way it somehow being guilty by association for having operations in the same state as Health Net. We didn't really follow the Health Net situation very much. I think it is toward the bottom of our top 15 payers, we don't have very much exposure to all. It's limited a couple of markets of ours in California.

I'm getting back to the cash flow question in the second quarter, we'll have some debt maturities that we'll have to retire in the second quarter, as well as some settlement payment related to the recent government settlement.

(Operator Instructions). John Ransom, Raymond James.

I know we've kind of talked around this, but we calculated your EBITDA down quarter-over-quarter about 15%, if you strip out the one-timers from both quarters. Is it possible, could you break down that 15% among mix, bad debt, and maybe higher year-over-year HIT costs and anything else I didn't think of?

First, can I take issue with the one-time characterization? If you're going to strip out supplemental Medicaid revenues, there's no end to what you should strip out. It doesn't make any sense. Used to be that we just got paid rates for Medicaid that were payments for what we did and now in states across the country, I think there's 35 out of 50 states that now have these programs. You get paid a lower rate and then for having some characteristics that used to be a disproportionate share and now it's a share of heads or sometimes it's a share of dollars or whatever. You're getting these supplemental payments and they tend to occur at unique points in time and some have large retroactive elements to them.

The same thing is true with the Health IT incentive payments. You're incurring costs and expending effort along the way in a very even manner and then you receive these payments when you reach certain milestones. John, we need to change the dialogue away from characterizing some of these items as one-time because they really aren't.

I was thinking of the large -- the California Provider Fee last year, Q1 '11 was pretty large. I know it shifted from Q4 to Q1 and then this year you got the $77 million from the Medicare settlement. Those are the two things I was thinking were not going to recur.

Not to be argumentative, but the California Provider Fee, we're going to get a very large payment in the fourth quarter of this year and that is essentially to compensate us for Medicaid revenues we've not been receiving in California all along in this period. You're going to continue to have those kinds of payments. Now the $77 million is really interesting because there was this companion piece of an SSI hit, which for us was incredibly mild. It was $2 million and for others it was much larger, but let's look at those two items which you're characterizing as one-time.

On the SSI piece, that was based on rates that were issued in 2009 and beginning at that time, we started accruing expense or accruing lower revenues, in essence, taking a hit for that in 2009 and '10 and '11. By the time we got to 2012 and these rates were issued just a few weeks ago, that's why our hit on SSI was so low. Our earnings had been depressed by virtue of accrual for that SSI, those SSI rates all along.

At the same time, the entire industry knew that the government had underpaid us on Medicare rates on this rural floor calculation for a very long time and you're not allowed to accrue for an expected positive settlement. All of a sudden it came but what it really was doing was adjusting for payments that should have been received over a longer period. Were it really appropriate to do so, we could publish pro forma statements that would show how the Company would have performed had those payments been received in the time periods that they were attributable to, but it's not the way you can actually do it.

I didn't mean to cause this big debate. It's hard but -- given all of this it's hard for people with SEC educations like myself to try to determine what's going on when you try to normalize this. I was just asking for some help trying to normalize because I also realized you're incurring costs this quarter with high-tech that probably are higher than what you would normally incur. The bad debt increase was a little surprising given where we -- presumably the economy is getting better, so that was a little bit of a surprise. We're just trying to figure out --

I understand. I don't mean to be argumentative, so Dan Cancelmi, who is actually much nicer than I am, would like to help answer your question.

To address the HIT, the incremental costs over last year were roughly $5 million and the other thing to keep in mind is first quarter last year, again one of these timing issues, we recognized about $25 million of HIT incentives in the first quarter last year and there was only about $1 million this year. Again, just due to the timing of when those items can be recognized.

Gary Taylor, Citigroup.

If we looked at the EBITDA as reported it would be $379 million down to $314 million and I'm sure the core underlying operating trend is better than that, (multiple speakers) concept of wanting to try to normalize the periods.

That's part of the challenge in trying to do something on a pro forma where you spread it out because then you would have spread that $379 million out over prior periods as well.

I wanted to make sure, on the same-store statistics or the organic statistics that I have some of the stats right. On Page 7 where you show the net inpatient, net outpatient revenue, it appears those numbers exclude the Medicare settlement and since HIT got reclassed out of revenue last year, I presume the first quarter '11 excludes that and it doesn't look like the California Provider stuff from last year -- is that all correct? That those types of items are excluded from the revenue disclosure on that Page 7 table?

The rural floor settlement would be included in the numbers. You're correct about the HIT incentives from last year. They are not in revenue.

The rural floor is in there and then also the California, Pennsylvania tax from a year ago is probably still in that first quarter year ago figure?

The provider fee revenue?

Right.

Yes.

If we're looking at -- and also these figures would include -- would this include some of the outpatient acquisitions and ASC acquisitions, so it's not purely a same-store figure?

It does include our outpatient businesses, the centers that we do pick up.

In order to be same hospital, they have to be within that hospital's market area or under its license. There's a definition where it is actually a part of the hospital.

This is where I'm getting at trying to think of the quarter. It looks like same hospital net revenue up 1.5% off of that table, adjusted admissions up 2.8% and I think even in the Q confirms the calculation that net revenue per adjusted admission down about 1.3%. With pricing up, acuity only down a little, a few guys have commented on mix, but with surgeries up, I'm just trying to reconcile that down 1.3% and the surgical mix was either a lower acuity mix or just different payer class than ideally what you'd expect or what you had a year ago. Is that the right way to think about it?

Let me address the decline in net revenue per adjusted admission of 1.3%. The big driver there is actually the growth in our outpatient volume. As you know, our outpatient business has a lower revenue per unit metric. The per visit number is a lot lower than our per admission number and as that outpatient business grows, it will drive down your adjusted revenue per admission. Actually, that accounts for about 270 basis points of that decline, so the 1.3% actually is positive 1.4%. If you put our outpatient business on the same level as it was last year. It's a pretty dramatic swing.

Then you should also have a deflationary impact on expense growth per adjusted admission as well, which was higher than that this quarter. Because you basically are saying outpatient revenue is inflating the adjusted revenue or the adjusted admissions debt and then dividing your net revenue by that is driving a lower perceived pricing stat, right?

That's correct. If you look at the ratio of adjusted admissions to admissions, it's about 1.55 I believe this year and it was about 1.50 last year. If you assumed our outpatient business was consistent with last year, that metric would have been an increase of 1.4% instead of the negative 1.3%.

Going back to the commercial contract, back from the pre-release where you talked about the possibility. I think someone else mentioned on this call but I'm not sure I heard the answer, perhaps I wasn't listening carefully enough. Can you talk about is that purely a rate growth dispute, is it likely to be resolved, is it related to anything else in terms of risk assumption or what are we to think about that contract?

We did not name the health plan in question, just in the spirit of where we are in the negotiations we didn't feel it appropriate to call them out. As it relates to the causes of the issue, it has to do frankly with expectations. The industry at large has certain expectations about what renegotiations look like right now, as do hospitals. Typically when you see a dispute between a health plan and a hospital, somebody stepped out of line relative to those expectations. Our expectations are driven by our rate parity strategy that we've had for many years with regards to trying to keep all of the health plans within a relatively narrow range of one another, from a pricing standpoint. This one is more difficult, if you will, as it relates to those ranges.

Just to be clear, Gary, this is a decision we didn't take lightly. You haven't seen this from us, I don't think almost at all in the last five or six years. We made the decision to initiate termination of the contract obviously because we feel it's in the best long term interest of our business even if it creates the potential for short-term disruption. That's pretty much as simple as that.

Gary Lieberman, Wells Fargo Securities.

Have you guys had a chance to look at what the impact would be from the proposed changes to the allocation of Texas DSH?

We've done a preliminary assessment. We don't believe it will have a material impact on our numbers.

Whit Mayo, Robert W. Baird & Company.

Sorry if I missed this and you usually have a really good slide deck with this information, but did you confirm your 2013 to 2015 outlook?

I think we've seen no reason to change it. I don't know that we have to affirmatively confirm it every time, but consider it confirmed by virtue of the conference call.

Trevor, looking at your Q at your physician income guarantee disclosures, the total liability now is about $146 million. I know the estimated liability, the real liability is lower than that around $100 million or so, but that number has doubled in a year. Maybe if you could talk about the strategy there and what the corresponding P&L cost is now? I'm trying to put that number into perspective since it's growing so much, which presumably is a good thing, too.

It's part of our strategy. We've talked about it for a couple of years about physician alignment and when you hire or relocate physicians, you end up with these multi-year contract. It's this standard way of doing it in the industry and so, Dan, do you have any comment on the disclosure?

That's exactly right, Trevor. It's really just it's a relatively recently new rule. It's similar -- it's just like a disclosure potential long term commitment. It's really the maximum amount when you look at these physician contracts and employment arrangements or relocation arrangements. The accounting rules dictate that you look at the maximum payments over the life of the contract and that's the number you disclose. But you're right, the actual liability's a lot lower because that's again, the maximum amount the organization would ever have to fund.

Obviously this adds a layer of cost to your operating cost structure? It adds a layer of cost to your cost structure now and I'm trying to get a sense of what the annual P&L cost is now and maybe where it was a year ago. It's kind of hard to parse out what the $100 million means disclosed and what the real operating expense is?

It's actually impossible to parse it out because you've got a cost of the employment, you've got, depending on the type of physician it is, you may have basically no revenues associated with physicians, but you typically have revenues in the practice. To the extent that physician is directing patient volumes into your hospital you didn't have before, you have revenues associated with that. It's really something that is -- it's impossible to break out and it would be very difficult to actually do it and attribute all those patients. Again remember, you've got employed hospital lists, you've got employed medical, chief medical officers in the hospitals. You've got a wide range of different kinds of physicians in that employment category.

Ladies and gentlemen, since there are no further questions, that concludes the Q&A portion of our event. I'd now like to turn the presentation over to Mr. Trevor Fetter for closing remarks.

Great, well thank you, Operator. I'm glad we were able to take everybody's questions and get it done within an hour and if you have any follow-up questions please feel free to give us a call. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.