Tenet Healthcare Corp (THC) 2012 Q2 法說會逐字稿

Great day, ladies and gentlemen and welcome to the second-quarter 2012 Tenet Healthcare earnings conference call. My name is Katina and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will facilitate a question and answer session towards the end of the presentation.

(Operator Instructions)

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

Thank you, operator and good morning, everyone. Tenet's Management will be making Forward-looking statements on this call. These statements are qualified by the cautionary note on Forward-looking statements contained in our annual report on Form 10-K. We undertake no obligation to publicly release any revision to our Forward-looking statements to reflect events or circumstances after the date of this communication. We make no promise to update any Forward-looking statement, whether as a result of changes in underlying factors, new information, future events, or otherwise. A set of slides which will be referenced on the call were posted to the Tenet website earlier this morning.

During the Q&A portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time I will turn the call over to Trevor Fetter, Tenet's President and CEO.

Great. Thank you, Tom and good morning, everyone.

I'm very pleased with our performance in the second quarter. We reported $288 million of adjusted EBITDA, well above our expectations and the streets consistent consensus estimate. These results included a portion of the 30-month California Provider Fee program, which we were able to recognize earlier than we had anticipated. The total amount of EBITDA from the California Provider Fee in the quarter is $47 million, of which $28 million is attributable to other periods. If you back that out of Q2, our EBITDA for the quarter is $260 million. We had provided an EBITDA outlook for the second quarter, of $225 million to $250 million, and if you exclude the entire $47 million from the Provider Fee on the basis that it was not in our guidance, we came in above the midpoint of our range. When we established our EBITDA outlook for the full-year we anticipated the entire California Provider Fee would be recognized in the fourth quarter. So while it's a positive surprise for the second quarter, the amount of the fee is roughly consistent with our expectations for the full year.

The high-level summary of the quarter is that our fundamental business trends in terms of volume growth, pricing, and cost controls remained strong. Let me quickly list some of the same hospital highlights for Q2. Volume growth in all categories compared very favorably with our peers. Adjusted admissions increased by 1.5%. Surgeries grew by 4.9%. ER visits grew by 5%, and total outpatient visits grew by 5.3%, and roughly 80% of that growth was organic. We achieved our commercial pricing growth objectives and our commercial book is solid. And again we demonstrated strong cost control, including a 2.3% decline in supply cost per adjusted admissions due largely to efforts around our Medicare performance initiative.

Taking a deeper look at volume metrics, as I mentioned we grew adjusted admissions by 1.5% due to strong performance on the outpatient side of the business. This marked our seventh consecutive quarter of growth in adjusted admissions, and while that's an impressive consecutive string, we've generated strong volume growth for a substantially longer period of time. Looking back over the last 5.5 years, we achieved positive growth in adjusted admissions in 17 out of the last 22 quarters. Over the same 5.5-year period, Tenet's same hospital admissions growth exceeded the peer group average by 90 basis points. Our case mix index in Q2 was flat compared to the first quarter, and down by 0.7% year over year due to volume growth in lower acuity services.

Turning to service lines, the significant strength we reported last quarter in major trauma continued into the second quarter. Neuro, thoracic, oncology, and vascular surgeries were also strong. Each of these service lines is part of our targeted growth initiative. Turning to revenues, even excluding the favorable impact of the $28 million out-of-period California Provider Fee, we exceeded our expectations on pricing. Net inpatient revenue per admission increased by 4.1%. Revenue per adjusted admission increased by 3.3%, and net revenue per our outpatient visit increased by 1.9%.

We also continue to have excellent visibility into our future commercial pricing. We've completed contract negotiations for approximately 95% of 2012, and 60% of 2013 expected commercial revenues. We continue to be able to negotiate new contracts with anticipated yields within our targeted 5% to 7% range. While some new contracts are higher and some are lower depending on where each health plan's pricing level start, the average increase remains consistent with our expectation. At the time of our first-quarter release we referred to the possibility of terminating a contract with a national commercial managed care payer. I'm happy to report that we entered into a new contract and will continue to serve that customer.

Before I turn to costs, let me just mentioned that the Inpatient Prospective Payment System final rule came out last week and it was 100 basis points better than we expected. To help put this in perspective you should know that this is the largest increase in Medicare inpatient rates we've received in the last four years. Selected operating expense was well controlled, increasing by only 3.5%, per adjusted admission, which was better than our expectation. Salaries, wages, and benefits was the line item showing the most meaningful increase in the quarter, SWB per adjusted admission, which grew by 5.7%, included 180 basis point increase attributable to greater physician salary cost as we expanded physician employment in targeted markets. The continued decline in interest rates caused us to incur $8 million in unexpected incremental malpractice and workers compensation expense. Our Medicare performance initiative, or MPI, continues to drive incremental cost savings. Year to date, MPI cost savings are exceeding our expectations and we remain comfortable with our full-year outlook of $80 million.

One of the areas where MPI is particularly effective is in driving savings in the supply chain. Supplies expense declined by 2.3% per adjusted admission, and was led by initiatives in spine, orthopedics, and pharmacy. We also continue to incur expenses related to our healthcare IT program. I'm confident these investments will improve our productivity and value proposition over the next few years. There were no offsetting incentive payments in this quarter to our HIT expense, but remember that just as HIT is a headwind to earnings this year, it becomes a tailwind in 2013 and in subsequent years through 2016. The delta just between this year and next year is a positive $50 million.

Slide 4 on the slides that we posted to our website today is an updated version of something you've seen before, and contains our current productions for HIT incentives and expenses. Net debt expense as a percent of revenues before provision for doubtful accounts increased 40 basis points over last year's second quarter, but remained well within our outlook range of 7% to 8%. One of the most exciting developments in the quarter was the announcement of Conifer's groundbreaking partnership with Catholic Health Initiatives. This partnership solidifies Conifer's position as the leader in the healthcare revenue cycle and highlights Conifer's growth potential. It proves that we're capable of serving clients across the size spectrum from single hospitals to large national systems. Once Conifer has fully implemented the CHI hospital, it will provide revenue cycle services to approximately 150 hospitals and service $18 billion of net revenue annually. To help you assess the value created by this business, we are initiating segment disclosure of Conifer's financial performance. Conifer's adjusted EBITDA in the second quarter was $25 million, $16 million of which was from the Tenet business at market rates, and the remaining $9 million from non-Tenet clients.

I would like to close with some comments about our outlook for the remainder of 2012. Based on solid performance in the first half, we are reconfirming our range of $1.25 billion to $1.375 billion. This implies an increase in EBITDA of about $100 million in the second half compared to the first half to reach the midpoint of our range. We're comfortable with the current street consensus for Q3 of roughly $270 million, as our internal range is approximately $250 million to $290 million. I'd like now to share our best thinking on our expected performance for the balance of the year. Let me draw your attention to slide 3, which details the major line items we expect will drive our earnings growth in the second half. I'll focus on five categories. First, two of these items like provider fees and health IT incentives are easy to estimate. We have good visibility into these items and we are confident in our estimates.

Second, other initiatives like MPI and outpatient represent a continuation of well-established operating trends. Based on our historical performance, we have a high degree of confidence in our ability to deliver on our expectations. Third, the Medicare update and reductions in FICA and other capped payroll taxes are fairly mechanical, and easy to estimate. Fourth, we expect $50 million from incremental managed care revenue already under contract. The pricing component of this is driven by specific contracts that are signed and already effective in the third quarter. So while incremental commercial revenues may vary due to acuity or other factors, the variance is unlikely to be material. And fifth, the $20 million we've labeled volume acuity and payer mix is the category least under our control and hardest to estimate, so let me assure you that Britt Reynolds and his operation to team have precise operating plans by hospital with detail on how we will achieve these objectives. In the aggregate, as shown on slide 3, we expect a total of $715 million compared to the first half of $598 million, for a second-half increase of $117 million, which is sufficient to achieve the midpoint of our 2012 outlook.

To summarize the quarter, our results were led by strong topline growth in outpatient visits, surgeries, and ED volumes, and volumes in our targeted service lines. Our primary drivers of long-term value, including our initiatives in outpatient acquisitions and development, Conifer, and the Medicare performance initiative, are on track to achieve their most significant performance milestones. And of course please keep in mind that our substantial NOL, which is worth more than $1 a share, shields much of our future profitability from taxation. I'm very pleased at the strength of our core business. Commercial pricing trends continue to be favorable. Costs remain well controlled.

We continue to make significant investments in health IT and physician relationships, and while a significant portion of these investments hit current period earnings, we're confident that they will make important contributions to future growth in our bottom line. We continue to feel very confident of our performance and quality. I'm proud of the 92 specialty center designations that we received last month from United Healthcare. These designations provide further evidence of the enhancements we continue to make in clinical quality. We're also pleased to have announced recent multi-year agreements with Cigna and Humana.

Last week we announced a major $110 million expansion at St Christopher's Hospital for Children in Philadelphia. The project includes the construction of a new critical care tower, as well as the development of the Center for the Urban Child, the community-focused initiative designed to help area children overcome a variety of health disparities. The internal rate of return on this project exceeds anything we've seen in recent hospital acquisition opportunities and it carries less risk. This is a great investment and we have more opportunities like it.

Although I'm the only speaker with prepared remarks on today's call, I'm joined by Britt Reynolds, our President Hospital Operations; Dan Cancelmi, our Chief Accounting Officer; Steve Mooney, our CEO of Conifer; and other colleagues who are ready to answer your questions. So, operators, let's begin the Q&A.

(Operator Instructions)

Ralph Giacobbe, Credit Suisse.

I just want to go back to some comments you made on the first quarter. I think you called out or mentioned some under performance in a handful of facilities. So I just want to get your update on what the progress is at this point, and maybe what the trajectory is for the second half, and if that's part of that $20 million that you talked about on slide 3 there?

Okay, Ralph, so actually, it isn't necessarily part of the $20 million, but Britt Reynolds, I would like you to comment on our EBITDA recovery plans for those hospitals that we called out on the first quarter.

Absolutely, Trevor, thanks. We are seeing improvement in each of the four hospitals from Q2 versus Q1. And in aggregate the EBITDA in the second quarter for those hospitals out-paced EBITDA for those hospitals in the first quarter. And in three of the four we're seeing significant improvements in the underlying causes that we attributed to those variances in the first quarter. And while we're not hitting every one of those targets, the detailed plans that Trevor identified that we review monthly with these hospitals, we're seeing significant improvements in those contributing factors.

Okay. And then just switching topics to the managed care side, anything to call out within some of the specific new contracts that you signed, whether it be narrower networks or payment rate updates, and maybe just take a step back and help us understand what percentage of your managed care book is negotiated for 2013 and 2014? And the just along those lines, specific to 2014, maybe help us understand as you start to get into contracting it with two- and three-year deals, will the exchanges just be a separate carved out piece that you'll negotiate at a later time? Or do you just expect those lives to roll into the existing managed care contract that's being negotiated today?

Okay. That's a bit of a massive multi-part question. Why don't we just step back a little bit -- I actually can't remember the very first part of the question. And I'll ask Clint Hailey to comment on -- I know you had a specific question about how much we contracted for 2014. And just generally speaking, I think the first part was are there any unusual features in some of the recent contracts that we have negotiated? Maybe just give an overview, Clint, of the over environment and contracting activity and see if you can answer the question about 2014 along the way.

Sure. Two things really quick. Trevor mentioned in his comments about 2012 and '13 percent contracted, we haven't quantified '14 at this juncture, so 2013 we're 60% contracted, roughly. And almost completely contracted for 2012.

So for '14 it would be substantially less --

Yes. That's a safe assumption. Definitely no more than 60%.

In terms of activity that we have had, you've probably seen several press releases that happened over the course of the second quarter. The United designations that Trevor mentioned in his prepared remarks, as well as our Cigna and Humana announcements. And one of the reasons we do those announcements is we do like to give a little bit of color about what is going on in terms of our negotiations, we obviously can't release the financial details because those are confidential, pursuant to both parties' interest. However, in the Cigna release, we talked about our CIOs, ACO activity. And that was kind of an exciting development there. There's been a lot of discussion in the ACO CIO realm, but not a lot of uptake. And so it was exciting to do something innovative with Cigna in that regard.

With Humana, a release we just put out last week we talked about a market share shift commitment made by the parties that was financially advantageous to both parties. And that was an exciting development in the sense that there's been a lot of discussion about network narrowing and steerage commitments and things like that. But there hadn't been a lot of activity in terms of concrete contract language around that and we did achieve that with Humana. At both parties -- both parties were interested in that.

Finally the last thing I'll address that I think you are asking about was exchanges. And we don't have for the record, any contracts today that are specific specifically for exchange products. We've had a lot of discussions with health plans about that. There are a lot of health plans talking about narrow networks on exchanges. And we anticipate there could be some market share shift opportunity associated with that, on 1/1/14. However we do expect that the broad network contracts that we have today with all of the health plans we expect many or most of those will be -- exchange products will be available for people to purchase that use those networks. But we're hopeful also that there will be some market share shift opportunity and strongly suspect there will be with narrow networks.

Okay. Thank you.

A.J. Rice, UBS.

Thanks for having one of the more straightforward releases and conference calls of the quarter for the hospital group. I'll ask my follow-up question up front, which is any update on the CFO search? And then second, just to speak and flesh out the commentary around Conifer a little more, obviously, the CHI contract seems to be a pretty big long-term positive. You aren't calling out Conifer for the back half of the year in terms of incremental EBITDA boost. Maybe comment on the ramp up associated with that, and what trajectory that Conifer has, looks like to you if possible? And then has that CHI deal driven any other interesting discussions or are you pretty much focused on ramping up CHI for now?

Great. I will take the first parts of the question and then I'll ask Steve Mooney to elaborate on the Conifer part. So with respect to the CFO search, yes, I know it seems like it's been going a long time. We've actually been very deliberate in our search. And I'm very pleased with the candidates who we have. But it's a very important decision. And something that we are going to make at the right time. And I really can't say more about it than that at this stage.

I would say that -- and I think you can see evidence now by the second quarter that we're doing a release and conference call with Dan Cancelmi, our Chief Accounting Officer filling in the role basically of backing up on guidance and any question that has a reasonable degree of detail. But we've been doing very well and certainly not suffering in the interim for lack of a permanent CFO.

Sure.

With respect to Conifer, with -- we wanted to avoid getting into discrete guidance for Conifer. We did put in this segment disclosure which I think should be very helpful to people in assessing the growth of Conifer as it evolves. But one important point to make, I said this in my prepared remarks just so everybody understands, we have set up an inter-company contract between Tenet and Conifer at market rates. We think that's important because to the extent that large customers come along and want a great deal, it's hard to make an argument that you should have a better deal than Tenet. So that helps you understand two things about what are market rates and what can you expect to earn at market rates from a customer the size of Tenet. And also the part that's non-Tenet, which is already $9 million in the quarter, I think is pretty impressive as an amount of income, particularly given the fact that none of that is coming from CHI because we only just signed the contract and began the implementation.

Now, I think that there may be some misunderstandings in the market about how that contract gets implemented and how exactly it gets rolled in because we've only just begun bringing people from CHI on board into Conifer. And I'd like Steve Mooney to talk a bit about the CHI implementation but then also, Steve, to A.J.'s question about what's new opportunities has that opened up, by having that relationship? And I think the answer to that basically is substantial, but go ahead.

A.J., this is Steve. I don't know if you were able to participate on the May 16 webinar that I did, but we actually put some information out there for the full-year, which around our EBITDA range for Conifer was expect to be in the $90 million to $100 million range and our revenue is about $385 million to $425 million. So we're still ringing maintaining that, we're not really giving guidance out further than that at this point in time. But right now the CHI initiative, there's clearly a lot of focus on that. That's got to be first and foremost, getting that implemented into our organization. We effectively transferred about 142 leaders into Conifer on July 1. And that was also the day that we effectively took over responsibility for that operation. We've been in the standpoint of having a three-day integration somewhat with those individuals, get them understanding our organization, plus working on all the implementation plans for the CHI program over the next two years.

For the balance of this year there's really no bottom line that's going to be contributed from CHI. There will be some revenue that's still being worked through, some of it is the actual people. We will also take over the supplier contracts, the significant ones over the course of 2012; that will generate some revenue. But the bottom line really won't start seeing that until 2013 as we get into the more implementation stage, and start actually making more significant improvements in our operation. The implementation roughly is going to be about two years overall. From the opportunity standpoint, we are -- since the Press Release, there was a Catholic Health assembly which is where all the Catholic hospitals come together. It was a pretty big buzz there about their relationship, Kevin Lofton, the CEO of CHI and he pretty much had a conversation I think with every one of the CEOs before they actually got there and every one of them knew about our transaction.

From a sales perspective, our pipeline has never been more full. Just to give you some sense, August is usually a pretty quiet month for us from sales activity, and a lot of individuals the hospital level CFOs, and CEOs are on vacation and this month alone we've had several individual meetings with hospital CEOs and CFOs about the service offerings. So things look good. Clearly like I said we have to be focused on CHI and have to get implementation of that done well and effectively, but we're also still pursuing other opportunities and making sure we grow effectively.

And I would just add that, that was great, Steve, that CHI itself is a fast growing and one of the fastest-growing if not the fastest-growing faith-based hospital systems. They are a consolidator within the faith-based universe. And couldn't have a better partner from that point of view.

Trevor, to that point they announced they're going to be assuming responsibility for Allegiant Healthcare, which is up in Nebraska. And that's another $1.2 billion healthcare system, which right now in discussions about bringing bring that to the organization as well, which wasn't part of the original CHI.

Right. And coincidentally the same entity that is purchasing our Creighton University Medical Center so that will be an easy transition, A.J.

Okay. Great. Thanks.

Kevin Fischbeck, Bank of America.

I want to go back to the commentary before around the commercial contracting. Whenever I hear providers talk about ACOs or narrow network contracts, or market share shifts, I get a little bit concerned that the commentary's moving towards trading volume for pricing. It sound like your pricing is holding in pretty steady, but how do you think about that in the context of the economics of these types of new structures? Are you willing to take a little bit lower pricing, and how do you think about that trade-off?

Clint, go ahead.

It's really a mathematical equation. You can tell how much you give up on price, how much incremental volume you need in terms of a market share shift commitment to make the economics of it work. In the Humana situation that we announced, the pricing shift while we are not going to give a lot of specifics it was less than mid-single digits. It was the pricing change give for the market share shift commitment which was much larger in terms of percentages. And so it's not that hard again to do it mathematically. And so that's the way we look at it.

Basically you have to get a low volume to make up for any kind of degradation in price. That's not a trade-off that we generally want or need to make in these negotiations.

So what is the genesis around -- sounds like two of these more recent deals have had those types of provisions in them, and I guess what's the rationale for pursuing these types of agreements if we haven't really seen a lot of that in the past?

No. I think -- look, it's something that we've been working on for years is trying to get hard steerage so to speak on volumes, because obviously the contribution from incremental volumes and managed care is so significant that, that math that Clint referred to is much easier on a managed care contract than in any other part of our business. And where you've seen us do other more innovative contracting like the ACO that we began in northern California on January 1, we're very pleased with the results that we've been seeing in something like that, and I just remind everybody that we've been doing capitated and risk-based contracting for decades as part of our heritage in California. And one of the secret weapons within Conifer is the cap management systems business that serves more non-Tenet customers than Tenet customers and does precisely that. They manage these capitated and risk-oriented contracts for providers.

So we're very comfortable with that world and what we're doing. I would just echo something Clint said early on -- this is very limited still. There's a lot more talk than action in this whole area.

And I guess is it fair to say that the market share shifts are very well defined here, and that you enter into the agreements feeling comfortable that the economics are going to work out the way that you think they will?

Yes. Very well defined and also relatively minor. But could be material to an individual hospital.

Okay. Great. Thanks.

Sheryl Skolnick, CRT Capital Group.

Very nice job. I'd be happy to be proven wrong if it benefits the Tenet shareholders.

Thank you, Sheryl.

You're welcome. Let me turn to the cash flow if I may. I don't know where I was going there. You had a very nice cash flow quarter. It was quite robust and a nice turnaround from the first quarter. To what extent did benefit from the rural wage floor settlement, and have you seen the actual cash from the provider fees? And just any other timing differences or other considerations that we should have as we look towards modeling out your cash flow generation capability, because were you to turn meaningfully cash fully cash flow positive, that could be and would be a very welcome change of pattern.

Yes. And that is what we expect. Dan Cancelmi, it's a great question. Dan, why don't you take that one?

Morning Sheryl. In terms of the cash flow from the rural floor settlement, we did receive almost all of that in the second quarter. About $81 million related to continuing operations and we also received a little bit in discontinued operations. There was about $5 million that was still outstanding at the end of June, and almost all of that was collected in the month of July. So that was certainly a positive in development to see the cash come in by the second quarter. The question regarding the cash related to the provider fee program in California, there was no cash flow during the quarter related to the California program. That will begin in the third quarter, where we'll start making payments as well as receiving payments.

So was there anything at all unusual in your collections? Were they especially good? Have you made improvements in that, because the outflow from receivables clearly was helped by that $81 million, but it still looked pretty good relative to where you've been before, so in the second quarter. Is there anything that's going on here other than just better operations second quarter?

We were pleased with our cash collections from Conifer. There was an improvement. We've been placing a significant amount of emphasis on this area, Sheryl. You're right. The rural floor cash did come in, which helped the receivables come down and also had a positive impact on our days in AR, but we also saw improvement in our core operations as well. So we're very pleased to see that.

Okay. Very good. Thank you. I'll limit myself to just those two.

Gary Lieberman, Wells Fargo.

With healthcare reform having cleared at least one hurdle with the Supreme Court is there any analysis that you can share with us in terms of what you would expect the benefit to be to you either on a margin basis or on some sort of absolute dollar basis?

Well, okay. We have -- remember, we have the distinction of having some longer-term outlook out in the marketplace. And that did assume the benefits to healthcare reform and we had that explicitly called out in a bridge in terms of the contribution to say, 2015 from that. We see no reason at this point change the assumptions that we've had. That hasn't really been anything different in terms of the law. We're watching of course carefully the certain states like Texas and Florida. Dan, do you have any incremental comments on that you'd like to make on that?

Just want to point out we stress tested our model based on the Court's decision as well as the fact that there could be uncertainty regarding the Medicaid expansion. And we believe after looking at it a number of different ways that there is enough conservatism in our model to lead us to conclude that we do not need to make any changes to our outlook related to healthcare reform.

Okay. And then any incremental strategies or operational changes that you're making at this point to get ready for it?

I don't really think beyond the obvious, like making sure that we're providing good value to our customers, making sure we're really incredibly efficient in the revenue cycle, focusing intently on cost and areas like throughput and making sure that we have sufficient capacity for newly insured people, I think we've been doing those things for quite a long time. So we'd be well prepared for healthcare reform.

Great. Thanks a lot.

Tom Gallucci, Lazard Capital Markets.

This is Colleen Lang on for Tom this morning. I was just wondering if you could give any color on the admissions mix in the quarter, I think you mentioned in the release that you are seeing increases in the uninsured, I was just wondering if directionally you could talk about Medicaid, Medicare, and the commercially insured?

Let me ask Dan to comment on that, break it down a little bit for you.

Yes. So the overall admission mix, we were -- it was slightly negative. The trends were pretty good throughout the quarter. And then we saw a little bit of a drop-off in the latter part of June. But it wasn't across the board, all the hospitals. It was really at several hospitals. So nothing that necessarily would indicate that there's a long-term trend there.

In terms of the regions, the Florida region had pretty strong growth in volume in the quarter. From a commercial standpoint, our commercial volume was pretty much in line with our expectations overall. And Medicare, when we look at Medicare for the quarter, volume was pretty good as well as what was also a positive in the quarter was the Medicare acuity, the CMI also improved in the quarter.

Okay. Great. And then just to follow-up perhaps for Trevor, I was curious what you're hearing on the DC front. Are you expecting or hearing any rumbling's about changing sequestration at all before its implementation?

Most of those rumbling's are from us. But since Dan Waldmann, our Head of Government Relations and Public Affairs is here and he and I were in Washington yesterday, not yesterday, last week, doing some of that grumbling, I'll ask Dan to comment.

Thanks, Trevor. I think right now certainly there's a lot of noise out there, certainly coming primarily from the defense industry, screaming about the impact of the cuts. I think as Trevor said we were in Washington meeting with senior HHS and CMS people and talking about not only the Medicaid expansion but also the outlook in Congress for any changes that might be made on sequestration. I think it's going to continue to be noise until after the election and we really see what is -- what the political landscape is going to look like. And there's a lot of options on the table. They could do the normal kick the can down the road towards the end of the year when they need to fix the Medicare physician payments and the expiring Bush tax cuts and address sequestration. So I think it's a little too early to tell, but we are remaining engaged in Washington and we think that we're finding a very receptive audience right now to our concerns.

And as I mentioned, Colleen, it was interesting, you guys all covered it last week, that, that IPPS update, it is important to remember how good that is in the historical context.

Great. Thank you.

Whit Mayo, Robert W Baird.

I appreciate the segment disclosure, all the hospitals versus Conifer really helpful. And maybe this is a little too critical, but if I take your hospital EBITDA of $279 million this quarter and back out just the out-of-period California payment, it looks like the same-store EBITDA declined 5% to 6%, and I'm not exactly sure that's the way we should look at it. Trevor, can you help reconcile that with what appears to be some pretty good and respectable volume and revenue growth in the quarter?

Sure. Actually, let me just hand it to Dan who's prepared to address that question.

Yes. The one thing to keep in mind is the second quarter last year had $25 million of HIT incentives that we were able to recognize last year in the second quarter. We did not have any HIT incentives in the second quarter 2012. So that's one item right out of the gate that creates the variance between Q2 this year versus Q2 last year.

So on a same-store hospital basis maybe it's best to look at it as a flattish quarter? Is that a fair assessment?

Flattish to slightly improved.

Okay. That's helpful. Want to make sure we're looking at that correctly. And I know this is a little complicated to talk about, but, Trevor, are there any other potential provider fee programs that could get approved this year? Anything that states are discussing right now? And is there also any chance that you may be able to qualify for any of the Texas UPL program funds or waiver plans, whatever that's being called now?

Yes. I'm glad you asked that question. We haven't talked about that. Dan is our expert on provider fees. And can give you an answer on that and comment on Texas as well.

Brief overview on the provider fee program. California, there's two components of it. The fee for service component as well as the managed care component. Managed care portion has not been approved yet, but we expect that to be approved by year end. So that is the incremental $66 million of California Provider Fees that we anticipate recognizing in the second half of the year. So that's California.

In the second quarter, North Carolina's Provider Fee program was approved. So that was a two-year program. We've been notified of the funding through September of 2012, so through the end of our third quarter. We anticipate the program to be continued into the state's fiscal year 2013, which begins in October. We've not been notified yet of those amounts yet, but we fully expect that we will receive some notification on that. If it's not done in Q3 certainly during Q4. In terms of the other primary state where we have the provider fee programs in Pennsylvania, that was a three-year program that runs through the end -- June of 2013. And actually we expect that to be renewed as well. Those are the states with the primary provider fee programs.

And in terms of the Texas UPL, yes, we are looking at opportunities in various areas in the state. In particular in El Paso, there is a program there that will commence in Q4 in all likelihood. It will be upside for us beginning in Q4 this year. And that will extend through 2013. And we're looking at other areas throughout the state for the right opportunity to enter into those type of programs.

Any sense for the size of El Paso? I know you haven't exactly gotten the approval -- gone through the approval process yet.

Yes. The number hasn't been completely finalized. Initial estimates could be in the $5 million to $10 million neighborhood.

Okay. Great. Thanks.

Gary Taylor, Citigroup.

Three questions I think are quick. The first is do you have an estimate of high-tech operating expense above the EBITDA line this quarter?

High-tech operating expense above the EBITDA line? Okay. Dan's looking for that. What's the next one?

Next one is as the actual California provider tax payments begin flowing next quarter or maybe I guess just in terms of how you'd recognize it in this quarter. Typically when we see companies book these on the income statement, we see a grossed-up revenue figure, and then we see a provider tax running through the other operating expense line equating to a net EBITDA impact. So is the California program going to work that same way? Or are you just accounting differently and just netting those both in the revenue line? Or what's the difference?

Dan, go ahead.

Good morning. In terms of your question regarding the HIT operating expenses, it's approximately $25 million in the quarter.

And that was up from maybe $10 million last year? Of expense?

It's about $5 million higher than Q2 of 2011.

Okay.

In terms of the provider fee programs, we account for those -- in particular let's talk about the California Provider Fee. We account for those on a net basis. In other words, the net revenues from those programs we recognize in our net revenue line. We've thoroughly evaluated this, whether the income statement should show the gross amount of the revenues and the expenses or the payments that we make to the program, but we view these in substance as an additional Medicaid funding. And to gross up the revenues and expenses, we just don't believe it makes the most sense, at least for us. We certainly recognize that other hospital companies do present it on a gross basis and that's a perfectly fine approach as well.

Let me just give you some ballpark numbers on the California program. The gross -- this is the 30-month program. The gross payments that we will make are in the neighborhood of about $300 million. And the receipts that we get from it over the 30-month time period is about say, $495 million. So when you look at that and say, okay, what's the program in substance? The program in substance is to provide additional supplemental Medicaid funding for a number of reasons, including various cuts in Medicaid funding. To present those type of numbers, especially in California on a gross basis, we believe would be distorted to our cost metrics as well as our revenue metrics. So that's why we present it on a net basis.

No. I totally agree. I just wanted to make sure we understood that going forward. And that same accounting treatment is being used North Carolina, Pennsylvania, Georgia, other places as well?

That's correct.

Okay. My last question is when I look at in the Q, you give a mix of admissions and then obviously in the press release you give a mix of revenues. And when I look in the first quarter, that managed care bucket, admissions were up about 1.6%, revenues were up about 4%. And then when I look in the 2Q, admissions were up about 1.9% so about the same, a little better. But revenue was down approximately 1% and maybe there's some rounding there, but it looks like the revenue in the managed care bucket is flat to down year-over-year in the 2Q versus being up 4% in the first quarter. And I guess the only thing that changes is that Creighton comes out of it, but I guess I'm trying to understand what might have driven that type of sequential change, if that meant real commercial outpatient revenue or acuity or something was weaker sequentially? Is there a ready answer to that?

Yes. There's not a pricing problem. It's really a mix issue. In terms of -- that line item, Gary, includes both commercial as well as government managed care. So it's a combination of those categories. One thing to keep in mind is we had a fairly large pay-for-performance payment in the second quarter of 2011 from one plan. As well as some other settlements, somewhat larger settlements in the second quarter last year. So when you look at quarter over quarter, in terms of this year versus last year, that has an impact of making those statistics not seem quite as robust, but I can assure you in our pricing that we've been able to achieve was in line with our expectations for the quarter, both on inpatient side as well as in outpatient side.

So your real commercial admission trend I guess weakened sequentially? I know you used to disclose that. You don't break that out anymore, but is that a fair conclusion that the year-over-year growth wasn't as strong in the 2Q as 1Q? Or is that --

No. I wouldn't draw that conclusion.

Okay.

Sheryl Skolnick, CRT Capital Group.

It was a major event on the HCA call and we all thank you for not being nearly as dramatic a call as the HCA call was. But I was wondering if you could comment now that you're out from under the corporate integrity agreement, I would assume that you're compliance programs remain quite robust. But could you comment on what you're seeing in terms of physician behaviors in your hospitals regarding the interventional cardiac procedures and what protections you have around those activities?

Sure. And having anticipated we might get a question on that topic I invited our special guest, our Chief Compliance Officer, Audrey Andrews, and Chief Clinical Officer, Kelvin Baggett, to join us here. Audrey, why don't you take the safeguard question and then Kelvin, why don't you take the part about what are we seeing anything different in terms of clinical practice? Audrey, why don't you start with the safeguards?

Sure. Hi, Sheryl. We have a number of safeguards in place that continue beyond the expiration of our CIA to ensure that our patients receive safe and medically-necessary cardiac care and really frankly, all clinical care. We use a number of systems, we use InterCall to assist with level of care, assessments, inpatient and outpatient. We also use the American College of Cardiology Standards to document the medical necessity of care and we have an internal Tenet peer review process that we've implemented, so that other Tenet physicians can review the cardiac care in our hospitals and provide feedback to the physicians that perform the cases on medical necessity and quality of outcome. So I'll turn it over to Kelvin to add a little more color on that.

Thank you, Audrey. So as Audrey mentioned, we do have some internal processes, one being a checklist that has to be completed prior to the performance of these procedures, and what that ensures is that the physicians who are performing cap procedures are actually completing it and attesting to it, and it's also being verified, so was a stress test, the angiogram, or some of these other tests performed, and does that indicate a need for that procedure? Audrey also mentioned our external process, which is done by a interventional cardiologist who was not a member of that medical staff, who reviews those procedures.

And the other thing that we do is we participate in a national database, the National Cardiovascular Data Registry, which is by the American College of Cardiology has about 2,000 hospitals participating, and it's also providing evidence, guidelines, and feedback. What we do with those last two pieces in terms of the external review and the NCDR, the National Cardiovascular Data Registry, is we also have a internal process that we call our close call, where we look at the data, we look at any patterns, we provide feedback to the hospitals which also goes to those physicians, to make sure that they're aware of any concerns that might arise regarding the clinical practice and that corrective action plans are put into place. And so we've been working through that, recognizing that there is an opportunity to address various areas of care, and to make sure that we have strong processes and practices in place to ensure that it's safe care and that it's high quality.

Great. That sounds quite extensive and complete and very much appreciated. Thank you.

There are no further questions at this time.

All right. Well, thank you, operator and thanks to the audience. We will see you again in another three months.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.