Tenet Healthcare Corp (THC) 2013 Q1 法說會逐字稿

Welcome to the first quarter 2013 Tenet Healthcare earnings conference call. (Operator Instructions) Please note that this conference is being recorded. I would now like to turn the call over to Mr. Thomas Rice, Senior Vice President of Investor Relations. Mr. Rice, you may begin.

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

Thank you Tom, and good morning everyone.

Let me start by saying we were pleased with our earnings in the first quarter, given that it was one of the industry's weakest volume quarters in memory. Adjusting for the Rural Floor settlement in last year's first quarter, Tenet's EBITDA grew by a very strong 17% and came in above the midpoint of our outlook range for the quarter. Credit for this is due to our operators and team here in Dallas. They recognized the volume problem soon after it started and made quick adjustments to our cost structure.

In January, we produced a solid start to the quarter, but volumes became soft in February, and even softer in March. Fortunately, we've gotten back to more normal trends in April. Given this early indication that our volume trends have been restored, and given our demonstrated ability to offset soft volumes with swift action on the cost front, we are reconfirming our EBITDA outlook range of $1.325 billion to $1.425 billion.

The calendar-related factors which suppressed year-over-year comparisons, like Leap Year in 2012 and the timing of religious holidays in 2013, contributed about half of the 400 basis points admission decline in the first quarter. The remaining decline of about 200 basis points appears to have been caused by consumer caution driven by pocketbook factors like higher copays and deductibles, lower paychecks due to the payroll tax, and soft economy in general.

Conifer's excellent systems provide us with some interesting insights into the financial responsibilities of patients in our hospitals. Between 2010 and 2012, we saw a 25% increase in the number of commercially-insured patients with high deductible plans, meaning copays and deductibles in excess of $1,200 for an individual. We know that patients with high deductible plans suppress their utilization of healthcare services, particularly early in the year.

Looking at our own employees, most of whom choose our high deductible plan, we saw a 3.5% reduction in hospital admissions last year. This 3.5% decline undoubtedly understates the first year impact, as many of our employees had already moved to high deductible plans in 2011.

While the features of many of these high deductible plans have been a headwind for providers, it's important to note that according to a recent study, the design of about a third of the individual plans being sold today don't meet the requirements of the Affordable Care Act. I'm referring to deductibles, annual caps, lifetime caps, and covered benefits. It's not possible to quantify the impact today, but each of these planned design features represents an area in which payers have enabled employers to transfer financial risk to patients and providers. Changing these features, as of the beginning of 2014, is an important and underappreciated positive impact that the ACA will have on our ability to get paid for the services we provide.

Our Outpatient business performed well. In an environment in which the consumer feels squeezed, I like our strategy of having an increasing part of our Business being delivered in a lower cost, more affordable setting. Once again we generated strong Emergency Department volume growth with visits up 3.1%. The less discretionary nature of ED visits is more evidence that financial pressure on the consumer is the primary driver of pressure on inpatient volumes.

We did not see an aggregate increase in observation cases. Although some of our markets did experience pressure on admissions growth from higher observation rates. Within the aggregate, obs didn't drive outpatient up or inpatient down.

Acuity increased by 1.6% in Q1 because we lost volume in some low acuity services and gained volume in some high acuity services. Two-thirds of our admissions decline came from four business lines with a weighted average acuity of just 0.82. These included OB/GYN, gastrointestinal medicine, cardiovascular medicine, and psychiatric services. Fortunately, we had growth in certain higher acuity service lines, such as neurosurgery, spinal fusion, and bariatric surgery. These service lines were part of our targeted growth initiative and stronger acuity contributed to earnings growth in the unusually soft volume environment of Q1.

Commercial pricing remains solid and on track to achieve increases of 5% to 7% that we assumed in our outlook for 2013. Commercial managed care revenue per admission increased 7.6%.

We continue to sign contracts with payers for products to be sold on the exchanges. At this point, we've entered into exchange contracts covering 60% of our hospitals, double the coverage that we had a couple of months ago. All of our exchange contracts utilize existing commercial methodologies, and in the aggregate, the pricing for these exchange products remains broadly in line with commercial pricing. To my point earlier about plan design, keep in mind that these plans will have design features that are more favorable from a provider perspective than the typical individual plans in our commercial book today.

Cost control continues to be outstanding. For the seventh quarter in a row, we reported a decline in supply costs per adjusted admission. This is solid evidence that our Medicare Performance Initiative, or MPI continues to achieve its performance milestones. This year, we've renamed MPI the Performance Excellence Program to reflect a broader emphasis than MPI, across all payers and incorporating clinical practice, as well as cost control in the mission of the program. We are essentially taking the cost reduction and process improvement discipline at Tenet to a new level. Our cost metrics this quarter also reflect our investments in advanced clinical systems. The impact of these investments was more visible in Q1, as no offsetting HIT incentives were recorded in the quarter.

We're pleased with how our Conifer Services business continues to control our bad debt levels. Our collection rate showed modest improvement, and if you remove the Rural Floor settlement from last year's revenue, our bad debt as a percentage of revenue barely moved. Conifer's revenues nearly doubled in the quarter from $107 million to $211 million, and EBITDA increased nearly 30%. We were very pleased with the organic growth at Conifer, as well as the new businesses we acquired in 2012.

Conifer's integration of the Catholic Health Initiatives business remains on track, and we are achieving key performance milestones on this transformative project. As anticipated, the CHI business did not have a significant impact on EBITDA growth in Q1, but we expect the contribution to gain momentum and visibility toward the end of the year, with a more meaningful contribution in 2014.

Now, for additional insights, I'll turn the floor over to our Chief Financial Officer, Dan Cancelmi. Dan?

Thank you Trevor, and good morning everyone.

Building on Trevor's summary of the quarter, let me now turn to our outlook for the balance of the year. We quickly reacted to offset soft volumes in the first quarter, as our operators implemented a coordinated set of actions to align our costs with the day-to-day variations in our patient volumes. Over the past several years, we have made key investments to enhance or develop labor management, supply, and other cost systems that enable us to monitor and manage our costs on a realtime basis.

By having technology that provides daily visibility into our volume and cost trends, we can immediately implement actions to manage our Hospital's business needs by patient service line and clinical department unit. These systems have proven to be highly effective in responding to patient volume fluctuations. Given the inherent nature of our cost structure, the large portion of our costs are variable in nature rather than fixed. As a result, we believe our ability to respond with realtime actions during soft volume periods will be sufficient to drive earnings growth throughout the year.

Looking more broadly beyond recent volume trends, we are pleased to report that the strategies we designed to drive our 2013 earnings growth are performing according to plan. We will capture at least $80 million of EBITDA growth in 2013 through our Performance Excellence Program. Because these initiatives will build momentum as we move through the year, about $60 million of these cost efficiencies are expected to be recognized in the second half of the year, which will be about $40 million higher than the first half of the year.

Another key source of earnings growth as we move through the year will be commercial managed care rate increases. Since about 80% of our commercial managed care contracts have already been negotiated for 2013, we have very good visibility into our anticipated reimbursement for the remainder of the year. These negotiated rate increases will drive significant earnings growth in the second half of the year.

Our Health Information Technology implementation initiative continues to be well executed according to plan and achieving cost savings. I want to point out again that through the end of last year, 26 of our hospitals had achieved the required meaningful use criteria, and an additional 14 hospitals will meet the criteria this year. We expect our HIT program will generate $35 million of incremental EBITDA this year, primarily due to us recognizing $77 million of HIT incentives later this year. We did not recognize any HIT incentives in the first quarter.

Also, we continue to identify, negotiate, and close on outpatient acquisitions according to plan. These acquisitions are expected to contribute an incremental $20 million to $25 million of EBITDA this year. We added seven outpatient facilities in Q1, including both acquisitions and de novo development. We are also driving incremental financial growth through the ramp-up from the outpatient facilities we added in 2012. Our Conifer services business will also generate incremental EBITDA in the second half of the year, including contributions from Conifer's two acquisitions that closed in last year's fourth quarter. We should also see earnings growth in the second half of the year from the usual seasonal pickups we see as we hit the caps on FICA and unemployment payroll taxes.

Turning to cash flow, our cash flow performance in the first quarter was better than we had anticipated, despite a temporary delay in receiving certain amounts related to the Texas 1115 waiver program. Kudos to our Conifer team for helping us achieve a solid quarter for cash flow by driving a one-day reduction in our days in AR. I want to point out that our cash flows in the first quarter are typically lower due to the timing of certain working capital requirements, such as the annual match of our employees' 401(k) contributions, our employee incentive compensation payment cycle, and certain payroll taxes. We've grown annual free cash flow every year since 2007, and with these seasonal cash outflows behind us, we remain confident that this trend will continue in 2013.

We also continue to reduce our share count through our current $500 million share repurchase program. We invested an additional $100 million in the quarter to repurchase approximately 2.5 million shares. Under our current $500 million program that began in the fourth quarter last year, we have repurchased about 5.9 million shares for $200 million at an average repurchase price of $34.12 per share. Since mid-2011, our average price for all repurchases, including the exchange of preferred stock, works out to $22.93 per share. We've invested $892 million to repurchase approximately 39 million shares, which is approaching 30% of our fully diluted share count at the inception of the program in 2011. Obviously, we've created a lot of value for our shareholders, and the program will continue, as we previously discussed.

Our outlook for adjusted EBITDA in the second quarter is in the range of $325 million to $375 million. Included in this outlook is $54 million of revenue from the anticipated approval of the managed care portion of the California provider fee program and $31 million of HIT incentives. As you probably know by now, last Friday, Medicare released its proposed inpatient payment rules that will go into effect on October 1 this year. Although it will be several months before the rules are finalized, we were pleased that the proposed payment reductions for disproportionate share revenue and coding and documentation recoupments appear to be quite a bit lower than we had originally anticipated. Obviously, we will be monitoring this very closely and will update everyone as we learn more.

Before closing, I want to reiterate our confidence in our ability to realize significant upside from healthcare reform. We see this contribution beginning in 2014. Our confidence is based on the simple fact that historically, Tenet's payer mix has included treating a large portion of uninsured and underinsured patients. As these patients obtain insurance or better insurance, and the burden of serving yesterday's uninsured and underinsured is diminished, we expect to achieve a substantial positive contribution to our operating results.

Operator, please assemble the queue for the question and answer session.

(Operator Instructions) Justin Lake, JPMorgan.

Hi, good morning.

Good morning, Justin.

Question on your outpatient initiatives. Can you give us an update there in terms of what you purchased, where you see that going over the next 12 to 18 months, and what the benefit has been, both from a volume standpoint and from an EBITDA perspective? Thanks.

Yes, great. I'll ask Dan to give you some of those numbers, and then I'll ask Britt Reynolds to comment on the, you know, strategy behind outpatient and some of the innovative new types of outpatient facilities we're building. Dan?

Hi, Justin. Good morning. Yes, we added seven centers in the first quarter, a mixture of surgery centers, as well as ambulatory surgery centers, as well as urgent care centers. When we look out into the future in 2013, we think there's -- we're pretty comfortable that we're going to grow our earnings by about $25 million for the lift that we will be able to capture as a result of bringing these centers online. Some of that relates to the centers we acquired last year, of course, later in the year as they will ramp up throughout this year.

Yes, Justin, thanks. In terms of our mainstay on our outpatient services, clearly our ambulatory surgery strategy has proven very strong for us as you saw in our surgical growth that we announced, and we've discussed so far. And we continue to see a very robust pipeline. In fact, it's a better pipeline this year than we've seen in previous years. And then the deals that we've closed thus far are really solid opportunities. We're also moving in the direction of de novo development, as we did last year, and continued to put greater emphasis on our urgent care centers and on our satellite Emergency Department centers, and those are growing nicely as well, too. So as you look at a net change standpoint, our surgery center business is growing at about a 20% clip. Our ED and urgent treatment center is growing almost double. And so we feel like that we're making nice, strategic investments and both developments in and around our markets. And I might add from the ambulatory surgery side, we are also expanding into markets that are not traditionally around our hospitals. And we see this as a great opportunity to leverage the strength and talents we have in the surgery center development area.

Great, thanks. Then my other question is just on the discussion you had on managed care contracting and exchanges. So the update you gave was around 60% versus about 30% last quarter. Can you give us an update? I think you had said an average of about a 10% discount in the exchanges -- in the contracts you had signed. Could you give us an update there? Then also, in terms of -- can you share with us on those narrow networks, I assume those are narrow network products you're signing, I should say, and what the typical terms are there in regards to what is the, you know, how narrow is the network? Is it half of the facilities are in, and are they more tiered or narrow in that the hospitals aren't in are just out?

Okay. So let me just make one quick comment. Then I'll ask Clint Hailey, who heads all of the managed care operations for us, to comment. My quick comment would be our pricing is more broadly in line with commercial. So I would like to, you know, exercise out of the vocabulary the 10% discount, which in any event we would prefer to describe as more than 90% of commercial. So that's -- our strategy is very focused on this. Clint, do you want to describe what's going on in the market with these?

Sure, Trevor. Thanks for your question. As Trevor mentioned in his prepared remarks, we've signed several additional contracts -- handful of contracts additionally that essentially doubled our percentage of our hospitals participating in narrow network or tiered benefit plan arrangements on exchanges. And so we've made significant progress. We continue to have a number of discussions with a variety of health plans. The 60% notably is all Blues plans. So the largest health plans with the most leverage that we deal with is, is all that we've signed at this point. We've got discussions going on with non-Blues plans and the remainder of our Blues plans. But we felt like those guys were going to be big players in exchanges, and we wanted to make sure that we were positioned well with them.

I also think that we'll have some potentially more innovative type of arrangements with health plans. We've talked to some of them about co-owning some entities oriented towards exchange products. And that's kind of exciting. And -- but we continue to have a lot of discussions. One thing I would like to point out about, that Trevor alluded to, talked a little bit about in his opening remarks, was just the nature of the products themselves. We are very encouraged by the fact that we feel like we're going to have a lot more of the amounts we've contracted for actually paid by health plans and less liability on members. These are really good products with good benefits.

The health plans complain a lot about the incremental costs that they expect to see. And part of that is associated with they are actually going to have to pay for quite a bit more coverage than they have in recent years. We think this is an attractive population. Very excited about seeing the lives come online on January 1.

And Clint, can you talk market share shift? Like how narrow are these things?

It's really hard to generalize about that. I attempted to do that on our call in February, and I don't think I did a very good job of it. They, they are a variety of different arrangements, but they all involve some kind of tiered network or limited network arrangements. Interestingly, some of the more recent ones we've signed are HMO arrangements that don't have any out-of-network benefit, or EPO arrangements with no out-of-network benefit. We feel like these are very important to be in the network in those type of arrangements. Most health plans, if you talk to them about what they are planning on offering, seem to me to be offering PPO-oriented plans, which will -- if you're not in the network, you still -- there's still an out-of-network benefit. But in the HMO plans, there's not an out-of-network benefit, and we think that's really good.

Great. Thanks for the detail.

Great, thanks.

Chris Riggs, Susquehanna Financial Group.

Good morning. Thanks for taking my question. I just wanted to come back to the guidance here and the sequential progression. When you look at the first quarter, and then what you're guiding to for the second quarter, and sort of has some catch-up payments in there related to Medicaid, I guess what -- is there anything notable in the second half of the year that you might want to spike out for us?

Sure. Dan, do you want to take that?

Good morning, Chris. There's a couple things. One in particular, the HIT incentives ramp up as we move throughout the year. But more importantly, our initiatives to grow our business are not only on the hospital side, but on the Conifer book of business, as well as our outpatient business. It's going to continue to grow as we move throughout the year.

Our PEP, or used to refer to as our MPI program, we're very pleased with that. We have a number of key areas that our PEP team is working on, that is going to continue to create additional efficiencies as we move throughout the year. And just want to point out, the program is focused not only just on supply costs, but now it's taking on a greater focus on the labor management front, including things such as workflow redesign, in terms of how the appropriate level of care in the various units, greater utilization and efficiency of our resources. We're looking at span of control from a labor management perspective, making sure we're benchmarking across all our facilities and making sure we've got the right management teams and the right people in place throughout the hospital.

Premium pay -- we're taking a close look at premium pay, and there's opportunities there. As always, we're driving on productivity, as we always have. On the supply front, again, MPI now PEP, is going to continue to capture opportunities as we move throughout the year. As I mentioned in my remarks, we think it will be at least $40 million higher in the second half of the year. You know, on supply front, number of different things we're working on there. Devices, implants, as well as the basic things like commodities, and medication use management, and blood and all those things.

So, you know, there's a lot of good things going on. We're continuing to increase our physician alignment. As well as I mentioned in my remarks, our managed care contracts that we have in place, we have 80% of our 2013 book of business already locked in. And that's going -- lot of those rate escalators begin in the third quarter and in the fourth quarter. And even moving beyond '13, when you look at -- not that we're commenting on 2014, but we have 80% of our 2013 book locked in, and we have over 60% of 2014. So we have very good visibility into our pricing in the second half of the year. So, we're very optimistic that we will continue to be able to drive earnings growth.

Okay, and then one follow-up here. And I appreciate the comments in the prepared remarks about the flexibility and the staffing model. But is there anything you can give us, in terms of more concrete examples, as to maybe how you've changed sort of your full-time employees versus per diems or anything along those lines, just to get a sense for how the business has evolved, in terms of the staffing side in the last few years? Thanks.

Yes, actually, good question for Britt and his team who manage that day to day.

Sure. In terms of our look, it's in a real-time daily basis for our operators and then -- meaning operators at our hospital and our outpatient center level. And then, we are looking at that from a home office standpoint and a regional level. So we have staffing standard modeling. We use external data sourcing and information that helps us from a predictive modeling standpoint. So we are able to not only flex the number of people that are being utilized, but also the type, whether from a specific skill set, as well as was alluded to, and I think was in your question, embedded, our ability to know the trends and replace premium pay individuals with full-time individuals.

So we're monitoring that daily. It's in part of the PEP initiative. So we're using technology trends. And then just good old fashioned question and answering and accountability to drive that. That's part of our DNA. And as you know, that's been in our organization for almost 10 years now, and we're only improving how we use that as a management tool. So I feel very confident about our teams, both at the local level, as well as the guidance they get here from our senior leadership.

And just to wrap it up, and then we'll go to the next question. The underpinning is in information technology system, proprietary one that is very well ingrained into the operations here. Okay, operator, we'll take the next question.

Ralph Giacobbe, Credit Suisse.

Thanks, good morning. Can you maybe just give us -- obviously the HIT impact came out and specifically for you guys in terms of what's embedded into the 4Q guidance, if you could parse that out in terms of the hit from coding and maybe dish separately.

Okay, Dan?

Good morning, Ralph. Yes, so obviously we are very pleased with the proposed rule that came out on Friday. The two big changes from our perspective, as I mention in my remarks related to the level of dish reductions that are likely to be there if the proposed rule is implemented. If you recall on our last call, we had estimated that our total dish in the fourth quarter was going to -- we had projected it to drop by about $35 million. Now, that did include some Medicaid dish. But, between the dish reductions that would be set forth in the proposed rule, as well as the slight -- the lower coding and documentation recoveries, you know that $35 million that we had in Q4, we feel pretty good if this rule would stand that those numbers would come down quite a bit from that particular number.

Okay. I guess you don't feel comfortable quantifying that amount today?

To help you out, obviously the rule's not finalized, but you know, if it -- if it's issued as it stands, you know, the $35 million that was in the fourth quarter likely would not be there.

Okay. All right. That's all. And then I guess just going and moving to the commercial pricing environment, maybe for '14 instead of '13. Can you give us what percentage of your managed care contracting is done outside of the exchanges for '14, one. And then two, I guess should we expect either the lower end of the range or below that 5% to 7% that you were sort of talking about as sort of a trade-off, if you will, for capturing exchange pricing near current commercial rates?

Dan?

The 2014 commercial book of business, we've signed up over 60% of our business for next year. So we feel real good about that. And as far as -- we're not making trade-offs on future pricing to sign up these exchange contracts whatsoever. In terms of -- as we've mentioned a number of times, our range for future commercial rate increases is in the 5% to 7% range. Although we did say, as we moved on, that would probably moderate somewhat and be closer to the 5%. We're not really changing that outlook at this point. We're very pleased with our pricing in the first quarter, and we expect that to continue through the rest of the year in to '14.

Okay, great. Thanks.

Sheryl Skolnick, CRT Capital.

Good morning. Thanks for the correction. Very nice job. It's lovely to see all that effort over so many years come to fruition in the challenging quarter when it counts. Having remembered when many of these investments went at some cost to the bottom-line. My question is about the business going forward. In view of the fact that it seems that Medicare is straightening out, your managed care contracting appears to be in good control. For the exchanges, the environment seems to be, however, you know, less optimal for some of the peers in the industry. So my question relates to acquisitions, and the Company's appetite for expansion at this juncture and this timing. Emanuel is done, correct? So A, how is that doing? And B, what is the outlook look like for the potential for future acquisitions, given your experience with Emanuel and the current environment?

Okay. So let me start by saying the Emanuel transaction is not done. It is taking a very long time, particularly because of regulatory scrutiny over the potential concentration of facilities in that market. So that -- it's interesting, Sheryl. You look at the environment overall. Just make a few observations here. One is that the regulatory scrutiny of acquisitions, particularly in-market acquisitions, is probably greater than ever. The degree to which hospitals of good quality are interested in having conversations about potential acquisitions, or joint ventures, or other types of structures is -- that's higher than ever. And we're really pleased with the quality of hospitals that we see on that. And so as a result, our appetite for those types of transactions is greater than ever. And we're really quite excited about that in the days ahead.

Now, I think the -- you look at our performance for the quarter, last several quarters, and it points to some very strong disciplines that come from economies of scale and also some of the systems that we have. So Britt talked about the labor management and reporting system, and the way that we use it. We talked about the performance excellence program. We talked about the supply chain and the revenue cycle, and these are all areas where we believe we can add substantial value to hospitals. Not necessarily ones that are in distress. We actually would prefer to find hospitals of very good quality and a solid footing. Anyway, long story short, we'll continue the pace of outpatient acquisitions we've been making. The outpatient de novo development is probably greater than it has been at any time And for acute care hospitals, they are awfully difficult to do in a one-off basis in market, but we are going to continue seeking those opportunities. And we see more abundant opportunities than we have at any time in the past.

That's interesting. If I can follow up, please, and maybe this is a real follow-up related to the first question. With Emanuel not being done, how does that impact the guidance going forward because you had included it? So could you walk us through which quarter you thought it would close in? And what impact, if any, that might have on the second half of the year? If it's delayed beyond the end of the second quarter?

Good morning, Sheryl, this is Dan. We did have Emanuel in our guidance, but it -- the amount really was not significant, because we had anticipated that it would likely close near the end of the second quarter. And therefore, given the traditional integration of the operations into our business, we did not assume any material amounts of earnings from Emanuel this year.

So if I can paraphrase it, it might impact the revenue if the timing is delayed beyond that, from a quarterly perspective. But it probably -- it wouldn't affect your EBITDA guidance if that were to be delayed?

That's exactly right. That's exactly right.

Okay. That's great. Thanks very much.

A.J. Rice, UBS.

Thanks. Hello, everybody. I guess, two questions. One is just a clarification. We've sort of talked around the IPPS proposed rule. Just to make sure I understand, so Dan, are you saying it's not in your guidance -- you're sort of holding out to wait till the final rule before you put anything in your guidance, is that right?

Good morning, A.J. We have not changed our guidance yet for that. We obviously will wait for the final rule to be issued. We're optimistic. We are very pleased that they made those adjustments compared to what a lot of people in the industry were thinking was going to be in there.

Right.

So obviously pleased. But we haven't specifically made a discreet adjustment to our guidance for that yet.

Okay. Then more broadly, you've talked a little bit about acquisitions, but maybe capital deployment broadly. You've got a lot of things going on, the share repurchase, which you've been working on. I guess you've got $1 billion dollars of debt callable next year that you could potentially refinance then or earlier with savings. You've got hospital acquisitions, and outpatient acquisitions, and Conifer-related acquisitions. Then you had the John Muir joint venture where you actually took some capital in. Do you see yourself doing more of those types of deals? What about the use of capital on an outgoing basis? Maybe give us the priorities a little bit.

Yes, so A.J., we've got all of the above. I think that was a very comprehensive list, and as to the priorities, they are a little bit fluid depending on timing and opportunities. So for example, the most obvious one would be refinancing high cost debt. Obviously goes both ways. The market for issuing new debt is very favorable. The existing high cost debt is very expensive. So we need to wait until those opportunities exist in a very aligned way. One of the things that you've mentioned, I believe I've already addressed the acquisition pipeline. But on the joint venture side, I think I would like to ask Britt Reynolds to expand a little bit on the rationale behind the joint venture that we did in Northern California. Because we do see more opportunities of that kind of structure. And as you point out, that was one where we took some capital off the table. But we remain very much in the market in a very active way and even collaborating with John Muir on expanding our reach of this newly formed system. Britt?

Thanks, Trevor. Yes, this strategy from a joint venture standpoint, just for clarification's sake, we're continuing to work with John Muir and the regulatory authorities to bring that to closure and really much like the Emanuel transaction, that's setting with ultimate regulatory approval. But the basic premise behind that kind of partnership is very much in our sights. We have ongoing conversations with multiple organizations across the country. And there has been interest expressed by those entities to create something, and they refer specifically to the John Muir health system type arrangement when they talk to us, as well as just daily discussions with our A&D folks, and also our operators.

There is sufficient interest with many large and very formidable potential partners in our marketplace. And we like that. We like that in terms of how it gives us a position in the marketplace. It strengthens us. And it gives us an ability to deploy our dollars, not all in one particular transaction, but rather be able to spread that across. It gives us greater flexibility. So, we like the strategy a lot, and we're pleased that other potential partners like the strategy a lot as well.

Just last comment on the topic, A.J., is one thing that really hasn't changed since our share repurchase program, where we are basically doing what we said we would do, on the schedule that we said we would do it. And $100 million a quarter going through the end of this year.

Okay. All right, great. Thanks a lot.

Thanks.

Kevin Fischbeck, Bank of America.

Great, thanks. Just wanted to get a little more color and clarify the commentary on the -- what is it now, the Performance Enhance -- Excellence Program. You talk about the ramp up the second half of the year being pretty significant, $60 million I guess, versus $20 million. Does that mean that the run rate heading into next year is going to be that much easier, that the one that started in 2014 annualized is that much better, or is there some sort of offset as we think about timing?

Good morning, Kevin. This is Dan. Now, what we have been thinking about for 2014 in terms of the PEP program, it doesn't change based on anything we're doing in 2013. How this is unfolding is we get into these various areas and look at premium pay, or span of control, or workflow redesign or medication use, management, all these various levers. You know, that's how we have designed the program to unfold. And so I wouldn't look at it and say anything in terms of in 2014 and beyond are being altered because of anything we're doing in 2013.

Well, the numbers that you have as far as savings, those don't just annualize into the following year?

Well, the savings stick, obviously, and we will capture incremental savings in 2014.

Okay. So the timing, the timing -- okay. Go ahead.

Sorry about that. If I could add something to that, we've always looked at our traditional MPI, and now with our PEP program, we have a component of that that sticks and is a carry-forward. And then we have incremental opportunity in each year, and on the horizon that we evaluate. So it's always assuming that what we do sticks and has future returns. One of the things that I would draw our attention to as we talk about this, and one of the real reasons that we wanted to draw attention to a Performance Excellence, as opposed to a traditional supply mindset, is that we have for a portion of '12 and definitely into '13, began integrating physicians in the process in a way like we haven't done in the past. So this is very much evolving into a real process design, whereby we're looking at efficiencies, throughput, waste, et cetera, with physicians engaged, as well as our own clinical staff. So if you look at that from an incremental perspective, that has dividends like we've not historically seen. So that's an ability for us to layer on, as opposed to change or even moderate down our outlook.

Okay. Then just second question then, on the exchange contracts that you have. I understand that they are narrow network, obviously, on your side of things. Do they preclude you from signing contracts with other managed care companies in-market or could you be in multiple narrow network products within a given market? Sounds like you're aligning with the best or the biggest plans anyway, but just want to understand your flexibility on the other side of it?

It's a very interesting question. This is Clint. We've been asked to do that, and that being defined as not signed contracts with other narrow network exchange arrangements, and we have not agreed to do that to date.

Okay. All right, great. Thanks.

Andrew Schenker, Morgan Stanley.

Good afternoon, guys. You called out in the release, the incremental expenses related to increased physician employment. Maybe if you could give us an update on how your physician recruitment program is progressing, and kind of how we should think about maybe those expenses through the rest of the year?

Okay. Britt, you want to talk about how the physician recruitment program employment generally is progressing?

Sure, sure, Trevor. Thanks, Andrew. Our physician recruitment, relocation, and redirection plan, that's the way we tend to think of that, in three buckets. We have big goals for ourselves this year, and currently on track through the first quarter, roughly adding 100 positions to our group of physicians that we have now. We're typically recruiting to meet market needs which is around service expansion, geographic expansion, retirements. It's a very well defined plan that covers multiple years. Then we have to be nimble enough to respond to market dynamics. So it is not only an employment, relocation, and recruitment process, but also an alignment process, which we've talked about before in our call. And I'm really pleased at the relationships we're developing with physicians that are outside their traditional recruitment employment foray, as well as into the nontraditional, more progressive. But I would characterize as very aggressive goals, based upon very aggressive needs, and we're pleased, but we want to continue to do more, and we plan to continue to do more as the year progresses.

Okay, and therefore, the -- I guess the expense related to that should ramp up kind of in line with those goals?

Yes. As you would imagine, Andrew, it's a rolling process, whereby we're employing physicians in the last half of last year. We're going to have an incurred expense. And then as things ramp up, those practices streamline. The patients then fill out in their office practices. And then essentially, the revenue side of the equation is a lag that catches up. That would be no different in this first quarter or even as we expand going forward. So you're always going to have an expense leader, and then a catch-up lag associated with that. The only difference would be if we had employed someone in a market. And that is a fair amount of what we're doing, employing folks that exist in markets. And in that case, you might not have a lag. But there is no one way to address the answer, other than it's a rolling process.

Okay, thanks. And then you guys highlighted your exposure to the uninsured. What is your strategy to help enroll those patients into exchanges once they are up and running? Thanks.

Good question, and we do have some efforts under way. Dan Waldmann, who is our head of Public Affairs, along with Steve Mooney, who is CEO of Conifer here. And I guess Steve, why don't I talk -- turn it to you first to describe what we've been doing for a long time on this. And then Dan, you could describe the new initiatives that we have in the area.

Yes, certainly. This is Steve. So first of all, what do we currently have in the hospitals of the Tenet portfolio is, we have dedicated eligibility workers on site at the hospitals that help the insured population that show up through the ED to get qualified for any state or federally aided program, as well as those that come in from a treat and release perspective in the ED, that aren't admitted that we actually held through our call center operations. Just to give you some high level stats, for instance, in the first quarter, we -- of those we identified as eligible for our -- any state or federal programs, we qualified about almost 34,000 patients in the first quarter for a linkage rate or certification rate of up just about 90%, 89.6% of those patients that deemed as identified as eligible, we actually got qualified. We're actually now at Conifer trying to understand how we can play a larger part in the enrollment across the country, as the government tries very hard, we're going to get these 37-plus million uninsured patients enrolled.

Actually, we've had discussions with members of HHS. I've personally actually been in Washington to try to figure out how Conifer can play and assist in a larger role around the enrollment process. Just to kind of give you a little bit of color, we currently have about 470 eligibility workers in 21 states, including obviously border states. So we've got a lot of presence already in those marketplaces. Now can we continue to deploy those to help with the enrollment process. One of the things we're also doing is this summer, as the educational programs roll out around the exchanges themselves, the exchange products, is getting all of our individuals involved in that process as well. Then we've had involvement now in discussions with Enroll America, understand how we can help their outreach program from a marketing perspective to do the actual eligibility linkage. So that's kind of what we're doing for both the Tenet perspective and Conifer globally around the products. I'll turn it over to Dan to give some color.

Thanks, Steve. Yes, Steve's team and my team have been working pretty closely together as we reach out to the various groups in Washington, like Enroll America. They are going to be rolling out efforts, in the coming months, to provide information out to consumers. I think if you look at polls out there, there's just a huge amount of -- really lack of understanding among consumers about what's going to be available on the exchanges, and how the enrollment process is going to work. So we'll be looking at what we can do to make sure we're providing information out to our hospitals in the fields, so they can just be -- we should be a source of credible information for patients about what the enrollment process is going to be. I think, also things that we're looking at and a challenge that we need to be ready to address is, I think we stated before, we don't have concerns about capacity, but you are dealing with a population that hasn't had insurance before and might not really understand how to best access the healthcare system. So we'll be looking at what kind of information we can be putting out there as well, to really help educate people about how, once you become insured, how is the best way to go about securing access. So those are all things that we're working on right now, and that we'll be -- that we'll expect to be working on with our hospitals in the -- as we approach the enrollment period launch on October 1.

Great. Thank you.

We have time for one more question. Whit Mayo, Robert W. Baird.

Thanks for sliding me in. I guess just first, just a quick clarification on the California provider fee program. Dan, when do you think you'll have an idea on whether or not the managed care piece actually does get approved? Just curious on the timing.

We expect that to occur in the second quarter here, Whit. Good morning.

Just -- I mean, in terms of the approval process, is there a date that you anticipate hearing that, or is it just sort of up in the air?

Whit, they never give you a specific date, but based on the intelligence that we've been able to gather from a number of different sources. Obviously we stay very close to this, working with the state and other officials, it -- we're expecting this to happen in the near term, but we've had that expectation before related to the program and it has been delayed several weeks at times. But we do expect that to be approved here in the second quarter.

Okay. I was just curious, and maybe one for Trevor. One of your peers called out some pressure in Florida, as it relates to the growing prevalence of maybe MA plans and physician risk sharing. I'm just kind of curious what your perspective is. What you're seeing in the markets, and just any general thoughts.

Well, I would say that's Florida for you, and it's nothing new. I mean, those trends, the penetration of those plans, that's been going on for quite a long time.

Okay. So nothing new from your point of view?

No.

Okay, great. Maybe one last one here, just in the IPPS rule, were there any meaningful changes to IME or GME that would impact you? I don't think so, but just wanted to ask the question.

Nothing, nothing material, Whit.

Okay, great. Thanks.

All right. Thank you. Thanks everybody for listening. We had promised to get this call finished within an hour, and we'll see you in the next one. Thanks.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating.