Tenet Healthcare Corp (THC) 2013 Q2 法說會逐字稿

Welcome to the second-quarter 2013 Tenet Healthcare earnings conference call. presentation. My name is Cliff and I'll be your Operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. 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 on 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 now turn the call over to Trevor Fetter, Tenet's President and CEO.

Thank you, Tom, and thank you all for joining us this morning. I want to start by updating you on the progress we are making toward completing the Vanguard acquisition and planning for a successful integration. When we announced the acquisition six weeks ago, were excited about the opportunity to add Vanguard's strong network of hospitals and complimentary operational expertise to Tenet. I'm very pleased to say that we are even more enthusiastic today as we gain a deeper understanding of Vanguard's market positions, their strategies, operating strength and people, the potential we see for the combined Company is even greater. Both the Vanguard and Tenet integration teams are fully engaged and working well together. I'm very confident about the upside from this combination.

The approval process is also going well. Last Monday, the Federal Trade Commission notified us that it had granted early termination of the Hart-Scott-Rodino waiting period. This action clears a major regulatory hurdle and allows us to proceed with the transaction from an antitrust perspective. The remaining regulatory approvals, which exists in a handful of states, are proceeding smoothly. We've encountered no impediments of any kind, so I'm confident that we will be able to complete the transaction before the end of the year, possibly as early as October.

Vanguard has assembled a set of strong market positions, and as we work together to combine forces, the strategic priorities are clearer than ever. We're particularly looking forward to being in a number one or number two position in 19 markets. We're not changing any of the initial synergy assumptions at this time, but we are very pleased with what we've learned in the six weeks since announcing the transaction.

I'd like now to turn to the results for the second quarter, which we reported this morning. Compared to the expectations we set in our pre-announcement on June 24, we came in exactly where we expected to be on volumes and better than we anticipated on EBITDA. We drove solid growth in outpatient visits, improved commercial pricing and strong cost control in order to increase adjusted EBITDA by nearly 17%. Conifer did a great job of keeping our bad debt expense stable and they also generated solid revenue growth in their business. In our core hospital business, over a decade we have created an operating foundation built upon a highly efficient cost structure in skills and cost management. Our clinical quality remains outstanding and we've driven important improvements in patient safety. These value drivers cause me to believe that we are focused on the right strategies. I feel we are achieving successful outcomes across virtually every aspect of our operations accept for one, aggregate impatient volumes.

Healthcare utilization remains very soft, particularly in the inpatient setting. You've seen it in your surveys, in peer company results and in the low medical loss ratio office the managed care payers. Even though we are a growing market share overall, the soft volume environment is well below our expectations. There are many bright spots across the portfolio. We're generating strong growth in several high value service lines, such as neurosurgery, orthopedic surgery and trauma. I'm very pleased that we are successfully rebuilding our inpatient rehab service line, which is in nine hospitals today and grew by nearly 20% this quarter. We have markets that are growing at double digits, such as the Northern California market that includes our first ACO, and El Paso where our East side hospital is so busy after being opened only five years that we're expanding it's capacity by 65%. We're also growing in Memphis where we are adding capacity for the third time at our nine-year-old suburban hospital and where our 40-year-old downtown hospital is generating one of the top volume increases in the Company this year. We have hospitals that are growing sharply after investing in new robotic technologies or pursuing aggressive position alignment activities.

The point is that we have strategies that are working and markets and hospitals that are growing, but so far this year, the widespread weakness in many markets has caused our aggregate volumes to be well short of our business plans. These inpatient volumes challenges began to build in the first quarter. Though volumes improved in April, they trailed off again in May and June, and July was better than the recent trends. So after two full quarters in this environment, it's important to reassess our 2013 outlook. It now is obvious that we are facing stronger volume headwinds than when we created our business plans and communicated the outlook to you last November. We now believe our full-year 2013 inpatient volume will be in the range of negative 2% to negative 4% compared to our initial expectation of flat to up 0.5%. We now project adjusted admissions growth to be in the range of negative 1% to negative 1.5% compared to our initial expectation of flat to up 2%.

Although we reported earnings in the first and second quarters that were within our initial outlook ranges, we expect the soft volume environment to present a greater challenge in the second half due to the upward ramp in our plans. In essence, we are expecting existing volume trends to improve only modestly in the remainder of the year. These volume headwinds are driving the revision to our 2013 adjusted EBITDA outlook to $1.25 billion to $1.3 billion. At the midpoint, this is $55 million below the current consensus. I want to emphasize that these ranges only relate to Tenet in its current form. As you know, we are unlikely ever to report the fourth quarter results for Tenet as it currently exists because our fourth quarter will include Vanguard's earnings. Our third quarter outlook, which will be the final quarter to be reported by Tenet ex-Vanguard, is $275 million to $325 million.

Looking at the middle of the 2013 range, or $1.275 billion, our revised outlook represents a 6% increase over 2012. Not only is this 6% growth against a tough comp, but it exceeds the growth rates currently being projected by the rest of the industry. In short, our volume expectations from last November are turning out to be too optimistic. We think it's entire appropriate to have ambition goals and we push our operates to achieve strong growth and we ask everyone in the enterprise to control cost carefully. We also take personal accountability for our plans as our incentive compensation targets are consistent with our original 2013 outlook.

I also want to let you know that we are very deliberate in our planning for the rest of the year. It would certainly be possible for us to reduce costs further in the short run in an attempt to hit our original earnings targets. I don't think that's wise because the possibility that we could inadvertently jeopardize our longer term performance is simply too high. Cutting staff costs too deeply introduces the risk of entering a downward spiral of declining volumes and further staff cuts that creates an opening for our competitor to employ -- exploit. Given the opportunities that we see next year driven by newly insured patients, including those purchasing insurance on the exchanges, the fact that so many of our strategies are working, as well as the potential of the combination with Vanguard, I want Tenet to be in the strongest competitive position possible as we enter 2014.

The industry is experiencing what we believe is some short-term pain and there are probably a dozen reasons for it. You've seen this impact across the provider sector and unfortunately Tenet is not immune. Against this backdrop of weak utilization, I remain confident in our future. We're continuing to do what we believe are the smart things and the right things for our business, focusing on the areas where we can best control the outcome and using our strategic initiatives, our technology and our skills to drive a ninth consecutive year of growth. While we are confronting a challenging near-term healthcare utilization trends with impacts across the industry, we've positioned Tenet to take advantage of the opportunities in the near future and have built the team and invested in the tools to generate sustained growth over the long term. And with that, I'll turn the call over to Dan Cancelmi, our Chief Financial Officer. Dan?

Thank you, Trevor, and good morning, everyone. As Trevor mentioned, our second-quarter performance demonstrates that many of our strategies are delivering results. We drove outpatient volume growth to 2.5%. Our outpatient growth strategies also contributed to a 13.9% increase in total surgeries. And we grew our emergency department volumes 2.9%. We were especially pleased with our ED growth as we've made significant investments in ED technology, training and marketing. Also, we have improved throughput times and critical performance measures. Our EDs compete in markets where patients we serve have many care locations to choose from, since we only have a few sole provider markets. Patients in our markets have noticed the changes we have implemented and our investments are paying off as we are being rewarded with increased ED volumes.

We've also generated attractive returns from other service line investments. Several examples include solid growth across many of our targeted growth initiatives, including neurosurgery, orthopedic surgery and trauma. Our neurosurgery business had a great quarter as we grew this volume 14%. The success of these targeted investments is visible in the 1.4% acuity increase we reported for the quarter as we had generated acuity increases in every payer class. Conversely, a large portion of our volume decline was in lower acuity services. However, despite those successful trends, we still experienced softer volumes than we had expected with admissions and adjusted admissions declines of 3.5% and 0.7% respectively.

The softer than anticipated inpatient volume environment led us to conclude that it was necessary to moderate our aggressive growth assumptions in the second half of the year. These volume headwinds were confined to the inpatient side. With our outpatient business increasing by 2.5%, with about 40% of this growth being organic. Our outpatient growth strategies, including both de novo development and acquisitions, continued to achieve our objectives. Since the beginning of 2009, we have more than doubled our outpatient centers from 63 to 129. By the end of next year we expect to add another 45 to 50 new centers, including a continued focus on ambulatory surgery centers, which have a more significant impact on our earnings.

Outpatient centers separately licensed from our hospitals are one example of the projected growth drivers of our outpatient strategies. We anticipate growing the EBITDA of our separately licensed centers to an annual earnings run rate of about $100 million by the end of 2014. This represents a significant increase over the current run rate of $60 million. This outpatient strategy requires lower capital levels of strong margins, in fact, 30%-plus margins in many centers, and positions us to benefit from advances in technology and evolving consumer preferences. Our outpatient focus is driving an increasing percentage of our business to outpatient settings, which now represent 35% of our net patient revenues. We are investing in these business to both leverage our existing hospital markets and enter new attractive markets.

Although we're not satisfied with our volume levels, our other major drivers of performance are at levels equal to or exceeding our initial objectives. This includes our achievements on pricing, cost efficiency, our HIT system implementation initiative and bad debt management. You should take special note of the strength of our focus on identifying further cost efficiencies, which is becoming increasingly evident in our cost structure. Our hospital supply cost had a slight uptick of just 0.2% per adjusted patient admission, another proof point of our commitment to disciplined spending. We were very pleased with our supply management, especially given our higher acuity and surgical volume growth in the quarter. Total operating expenses of our hospital operations on a per adjusted admission basis only grew 0.9%, excluding expenses related to incremental physician employment.

Turning to revenue, we grew our net revenues 6.9% over the last year's second quarter. This growth was primarily due to negotiated commercial pricing increases, our outpatient development strategies and a significant ramp up in Conifer's revenues. These positive trends helped offset the headwinds on the revenue line from soft inpatient volume levels. We generated strong pricing growth of 3.2% and inpatient revenue per admission and 3.7% per patient day. Our outpatient pricing was also solid, with a 4.1% increase in revenue per visit.

From a commercial pricing perspective, we increased our commercial managed care revenue per admission and per day 4.7% and 6.3% respectively. We achieved even more favorable commercial outpatient pricing growth which increased by 6.9% per visit. Speaking of pricing, the benefits from the Affordable Care Act will begin to be captured in the near future and we are entering what I would call the home stretch of the pre-launch exchange negotiations. We have signed more than 40 contracts for exchange products and we have entered into at least one exchange contract at every one of our hospitals. Our exchange contracting objectives are about 80% complete, and I would like to thank our team for the hard work getting us to this point.

As we have previously discussed, our exchange contracts utilize existing commercial pricing methodologies, which means that our contracts are not based on Medicare pricing and many of our exchange contracts are at full commercial pricing. With limited exceptions, we are not accepting discounts from full commercial pricing unless we receive a form of narrow or tiered networks. These exchange-based plans limit deductibles and have no annual or lifetime caps. As a result, we believe these exchange plans will be more attractive to our patients and to us than many of our existing commercial plans.

We are implementing varied initiatives across our market to engage, educate and enroll uninsured individuals in the communities served by our hospitals. These efforts include targeted advertising, community outreach and education and enrollment events. As you know, we have concentrations of hospitals in states that historically have had a high number of uninsured patients. We are focusing our efforts in those areas to increase enrollment and build awareness among the soon-to-be newly insured about our hospitals, outpatient centers and physician practices.

Turning to Conifer, we are pleased with our Conifer services business continues to maintain tight control of our bad debt levels. Conifer's performance has contributed to a modest improvement in our uninsured collection rates and our bad debt as a percentage of revenue barely moved despite a $15 million increase in uninsured revenues. Conifer's revenues doubled in the quarter from $108 million to $219 million, and its EBITDA increased by 12% to $28 million. As you know, Conifer is still in the mist of its revenue cycle implementation with Catholic Health initiatives. We are very pleased with the CHI partnership and the implementation process is going very well. We believe another indicator that the relationship with CHI is progressing smoothly with CHI's recent selection of Conifer to begin providing value-based care services and managing the revenue cycle for 10 new hospitals.

Turning to cash flows, year to date we have generated net cash provided by operating activities of $128 million, down from $201 million last year. This variance is largely due to a timing issue related to cash collections from the California Provider Fee Program and the Texas 1115 Waiver program, as well as accelerated interest payments related to the repurchase and refinancing of some of our debt. Under our current $500 million share repurchase program that began in the fourth quarter of 2012, so far we have repurchased 7.9 million shares for $292 million, at an average repurchase price of $37.20 per share with approximately 2 million of those shares repurchased in the second quarter. Since mid 2011 our average price for all share repurchases, including the exchange of preferred stock, is $24.06 per share. We've invested $984 million to repurchase almost 41 million shares, which is approaching 30% of our fully diluted share count at the beginning of the program. We believe, and from what we have heard from many of you, this has been a very successful capital allocation program for our shareholders.

To wrap things up, we had a solid second quarter and first half of the year. We are expecting our second half of the year to be stronger than the first half with projected EBITDA growth of 9%. However, this is not as robust a ramp up as we projected in our initial outlook. Even with the volume headwinds, we are expecting EBITDA growth of approximately 6% for the year, which compares favorably to the growth projected by our peers. We have tremendous opportunities in front of us with the Vanguard integration, the volume growth and bad debt savings related to the implementation of the Affordable Health Care Act and the increasingly visible returns from our investments in technology, service line development and physician alignment. Now, I will ask the Operator to open the call up for our question-and-answer session. Operator?

Thank you. We'll now begin the question-and-answer session.

(Operator Instructions)

A.J. Rice, UBS.

Actually, this so [Jawline Rothstein] filling in for A.J. Rice. A couple of questions if I can ask, on your 2013 guidance, is it fair to assume that $100 million guidance reduction is completely driven by lower volume expectations or has anything else changed for the second half outlook? And if you can highlight some headwinds and tailwinds you expect in the second half versus first half?

Yes, good morning. Yes, when we assessed our outlook for the second half of the year, we believe that based on the inpatient volume headwinds that we've seen in the past two quarters, we believed it was appropriate to moderate our aggressive growth assumptions in the second half of the year. I might add, we are still projecting growth for the year of about 6%. And our various initiatives that we have been focusing on, including outpatient development, our cost efficiencies that we've been focusing on through our performance excellence program, our pricing and negotiation with commercial payers, we've been doing very well on those initiatives and meeting or exceeding our objectives there. As well as our Conifer services business has been doing quite well, not only on their services business but also doing a very good job managing our bad debt levels. But, yes, getting back to your point, when we looked at our earnings for the second half of the year, given what we're seeing from an inpatient volume perspective, we thought it was appropriate to moderate our guidance.

Okay. And then my follow up on IPPS and those rules to release on Friday, any talks on that and I was wondering what is assumed in your guidance for fourth quarter now?

Yes. We were obviously pleased with the Medicare role that was issued on Friday. We got through the 2,200 pages over the weekend. We were pleased to see that there really wasn't any substantive changes from the proposed role over than the methodology that's being used for disproportionate share revenue estimates under healthcare reform came in slightly more favorable than we had anticipated. And we might add that we believe this new method that's being -- that was outlined in the final role is a fair method from our perspective in terms of trying to measure a hospital's uninsured volume levels.

Are you willing to quantify how much -- what that means for your fourth quarter? Is it going to be flat or still down?

No, we expect that our -- we do not expect our dish levels from a Medicare perspective to decline in the fourth quarter. There is still Medicaid disproportionate share revenue headwinds in the fourth quarter, but from a Medicare perspective, we do not anticipate any decline of any note in the fourth quarter.

All right. Thanks a lot.

Justin Lake, JPMorgan.

A follow up here on the revised guidance. You lowered revenue by $150 million. You lowered EBITDA by $100 million. Should we be thinking about that from a contribution margin perspective in terms of it just sounds pretty high relative to the revenue declines. Can you bridge that for us?

Good morning, Justin. How are you? Not necessarily, Justin. There's a range that we put out there. When we looked at where we saw our inpatient volumes heading in the second half of 2013, we moderated our inpatient growth that we had assumed in the second half of the year. And you need to also take into consideration the mix of the business between inpatient and outpatient as well.

Okay. I've always thought of outpatient as a higher margin business, is that wrong?

No, absolutely. Outpatient is a higher margin business.

Okay. So then lastly, you talked about exchange contracting. I'm curious in terms of the types of plans you are contracting with. I know you said you have at least one contract at every facility. But I'm thinking the Blues typically owned, have historically owned the individual business. I'm curious if you can give us a percentage of your hospitals that have a contract with their local Blue Cross/Blue Shield plan for 2014 in terms of exchange contract?

Sure, Justin this Trevor, I'm going to ask Clint Hailey to answer that. But to interject that the exchange market we think is going to be important for us next year and so we've had a very concerted effort to be out in front of this, and I'm very pleased with the stats that Dan reported in his prepared remarks about the degree of coverage that we have achieved as well as the fact that the plans with which were covered seem to be very successful in their price points relative to other plans in the exchange markets that exist so far. But Clint, why don't you add your perspective to the whole exchange topic.

Sure, thanks for the question, Justin. To elaborate on Dan's comments and Trevor's comments, 100% of our hospitals have at least one exchange contract. Roughly 50% of our hospitals have more than one exchange contract at this juncture. We really don't know at this point in most of our states what's going to be offered on the exchanges because it's not public at this juncture. However, we can speculate about it, but that's probably not a good idea. But what we do know is in California we had some release of information about specific plans and specific markets a month or so ago, two months ago. And in Florida just late last week we also saw who's participating and at what premium levels.

And Justin, I think that really goes to heart of your question which is how are we positioned relative to what's been -- what's out there in the public domain. And to give you a sound bite that I think is pretty good, we're in almost 80% of the least expensive two options amongst the silver plans. And we believe of all the things that have been written about where people are going to enroll, the silver plans look to be where most people are going to enroll. And so with us having 80% of the plans in those lowest two cost positions amongst silver plans, we feel pretty good about how we're positioned.

That's helpful, Clint. How many states do you feel like you've seen -- you have enough information to say that in outside of California and Florida? Are there any other states you can point to where you feel that level of comfort?

Yes, so Dan disclosed -- or talked about in his prepared remarks the fact that we feel like we're about 80% complete on exchange contracting. And that is not 80% in California and Florida, it's 80% across the portfolio. So we feel like we're in better shape in some states than others, however we feel like we're in pretty good shape in most of them. But we still have work to do.

Okay. Thanks for all the color.

Sheryl Skolnick, CRT Capital Group.

I am going to go back to the guidance but I'm going to approach it perhaps from a little bit of a different way. I want to understand the difference in not just thought process but performance versus what you described as maybe more aggressive volume growth assumptions in the back half of the year and maybe give you the opportunity to define aggressive lest we get inordinately worried about it. And particular, if the volume trends are weak, it was weak relative to what set of expectations? In other words, what did you think was going to happen that would set you up to meet those stronger volume objectives that failed to happen year to date and that you expect to fail to happen in the quarter? And the second part of the guidance question is was there any change to high tech, which is a footnote? And then I have another question, a follow up.

Okay, Sheryl, this is Trevor. Why don't I start by going back to very high level perspective on the business plans that we had. I'm then going to ask Dan to address specifically the guidance question, although maybe I will do that third. I'll have Britt comment after I do on some of the plans that we had that disappointed us that didn't work, and then also some of the highlights of the plans that are working very effectively. The big picture as we put these business plans together last October, we communicated the expectations in November. I mentioned in my prepared remarks that the plans that formed the basis of our outlook are essentially the same ones, the same targets, that we have for internal compensation purposes. So when we're failing to meet our own internal plans, this is felt by nearly 2,000 people throughout the organization. So we take this very seriously.

I think the big picture is we got off to a start finishing 2012 from a volume perspective that was below where we wanted to be or where we had anticipated being. And therefore we had a hill to climb on volumes right from the beginning of the year. As I mentioned, we started off a bit below where we had planned to be on volumes in the first quarter and obviously took appropriate actions on the revenue and cost side in order to come in within the guidance range on the first quarter. The second quarter was encouraging from the start in April although part of that was due to the calendar. The calendar as we all remember reeked a little bit of havoc in the end of the first quarter and the beginning of the second quarter. And what of course we had planned for is a higher level of volumes coming through the entire second quarter. That didn't really happen with April and -- I'm sorry, with May and June being substantially softer than we had expected.

As I mentioned, July is a little better than that trend, but I think in order to achieve the original expectations that we had from a volume point of view, you'd have to make fairly heroic assumptions of a dramatic, immediate turn around in volumes that just seemed unrealistic. We are encouraged by what we've seen in many of the initiatives that we have and markets we have, but there is this very pervasive volume headwind across the -- most of our markets that makes it unrealistic to achieve the original objectives. Now I think we -- as I mentioned, we have a lot of things that are really working that are bright spots. I'd like then Britt to comment on those and then some of the areas also where we've been disappointed. And then, Dan, why don't you come in with the answer to our guidance question after Britt?

Sure, Trevor, thanks and good morning, Sheryl. Where we're seeing some positive gains and some things that were consistent with our assumptions are really in the areas where we've invested technology to a large degree and many of the service lines that Dan had alluded to in his prepared remarks around neuro, ortho, trauma, and a lot of the high intensity, high acuity service areas. We are -- we're experiencing really positive growth in that high acuity. In fact, our acuity is up 1.4% overall in every payer class which is a positive for us. Our physician alignment strategies we've seen successes in, particularly in our Northern California ACO continues to grow. We've branched into other physician alignment and affiliation areas such as clinical affiliation arrangements, IPA partnerships in a significant way in several of our markets, and as we mentioned in our -- surrounding our hospital with our outpatient portfolio as a collaborative and feeder system. So those tactics remain unchanged and we're seeing successes in a lot of the service lines.

The disappointing side as we've seen volume drop in lower acuity service areas, but still important to us, bread and butter service lines such as general medicine and OB and GYN and GI. Those are all important to us but they are lower acuity and obviously lead to a little less to the bottom line. Another deep dive we performed, and I think is very important for everybody to understand, and clearly it was important for us to get our hands around, is around our market share positioning. And it would be one thing if we were losing ground in market share, however, I'm really pleased that we see an overall aggregate increase year over year of 0.2% in the majority of our key focused markets. And that coupled with our ED growth of roughly 3%, we're correlating that to positive choice by patients where they have a high degree of confidence. They wouldn't show up to our EDs, they wouldn't be there for highly complex procedures and we wouldn't be maintaining or growing our market share in a lot of these key markets if we didn't see a preference.

So to answer both the positive and disappointing and put it into a summary statement, Sheryl, we would love to see market share even greater than that, but I think that's very respectable. We'd love to see volume growth overall, but I think where we're seeing it, we believe those are tied specifically to our investment and technology and service line of physician alignment. And frankly as Trevor led off with, no one, I believe, in the industry would have seen 2012 data like we did of essentially flat volumes being pervasive through the first half of the year. And frankly when we describe it as heroic, we mean it in a way of we're reversing basically flat last year on our projection for the year to something greater than an aggregate 3.5% loss through the first half. So I don't think we had delusions, I just think we would not have ever expected that when we planned it. But we have plans detailed by these service lines and technology and physician alignment in every hospital and we're seeing good ground, but we've got a portfolio and some markets were challenged and we're continuing to work through that.

Dan, I think your question related to high tech.

Right, Sheryl, good morning. In terms of our HIT implementation program, there's no change in our guidance related to that. In fact, the program is going very well, the implementation program. It's right in line with our expectations that we set forth at the beginning of the year. In fact, the entire program continues to be running on time, it's under budget, not only the program to date but also this year. So we really couldn't be more pleased with the progress we're making on the HIT system implementation.

Great, and I guess the follow up along the lines of guidance is recognizing that it's not just Tenet but you're going to start integrating a company. You haven't done an integration, Trevor, since the last time we met in the rainbow Room for Orinda, so I guess it's wise to take the pressure off the operations in order to be able to focus on both the operations and the Vanguard first acquisition and second integration. Did that play a role in your decision to perhaps be a little more modest in your expectations for the second half? That wouldn't be a bad thing in my mind if you did, so it's okay if you spin it.

No, it really didn't. These are two completely disconnected things. The decision about the outlook revision is really to be completely transparent. The fact I as I mentioned is we'll never end up reporting in the fourth quarter for Tenet as a standalone, but we thought it wouldn't have be particularly helpful for us to give a third quarter outlook and then be silent with respect to the fourth quarter, so we gave that to everybody for modeling and evaluation purpose. But the fact is that we'll end up reporting the third quarter and then we're likely to have a fourth quarter that if most or all includes the contribution from Vanguard.

The integration is a very separate thing. That's really planning about how the two organizations come together, making the decisions collaboratively, making sure that on day one we are in an organized and thoughtful position in terms of our plans and we've -- everybody knows what they're supposed to do and knows where we're making investments and the plans that we have. And then it falls at a good time of year because it's the typical business planning cycle for us, so we should be able to get through this and be in a position to communicate expectations in the normal course of when companies do that. So anyway, as I mentioned, I'm very pleased about the way the integration is going, the degree to which the Vanguard and Tenet teams are working together, our understanding of the Vanguard markets and plans increases by the day and we're very pleased with what we've seen.

Great, thanks very much.

John Ransom, Raymond James.

Hi, a couple of things. Speaking or looking at Conifer, obviously revenues are up a bunch and EBITDA is only up somewhat marginally. As you normalize the implementation costs and you look out a couple of years, what's a reasonable EBITDA margin for Conifer once you get Vanguard and CHS fully integrated?

So let me handle that in a two-part way. I'd like for Dan to speak to the -- literally the question that John asked, but then I'd like Steve Mooney to talk about how this -- remind the audience about how this is working because we had an enormous increase in revenues, doubling of revenues, so a very modest increase in the margin. It's absolutely what we expected, but Dan, why don't you speak to the guidance implication of it and then Steve why don't you speak to how this is actually working in practice.

Good morning, John, how are you? A couple of things on the Conifer guidance. The sizable increase in Conifer's revenues and the uptick in the EBITDA is in line with how we had modeled this for 2013. As we mentioned several different times, this year we did not expect a significant margin on the CHI book of business this year due to the implementation and the integration of the revenue cycle operations of CHI into Conifer. Longer term though, as the integration and implementation process unfolds and matures, we certainly expect the margins for Conifer to be in the traditional range of mid-teens to upper teens to 20%. So it's proceeding exactly as we expected, so in terms of the results for the quarter -- actually, Conifer came in ahead of our expectations for the quarter. So we were quite pleased from that perspective.

John, this is Steve. So to remind -- I think you know how this works, but on the service side of the business, how we do our contracts, we take over the arrangement for instance for CHI at their current cost structure. And it's our job through our process, our technology and our scale to drive out those costs and ultimately get margins. So as Dan was saying, we are actually slightly ahead of plan from where we thought we would be from a margin perspective on CHI through 2013. So let me give you an example. So in January 1, we took over as you know the bulk of the staff. Well with that becomes vacancies. CHI paid us for those vacancies so when we get over day one, we're actually getting margin off of that, that delta between what the actual employee base is and what we're paying for versus the vacancies.

Well then our job is to get those vacancies filled, to get performance back where it needs to be, which we've been doing other the course of last six months. We're really at full employment now at CHI from that standpoint. So we had a -- realistically a higher level of margin for them in the first quarter than we did in the second, but as we said, right on plan. And then what we'll do over the course of 2013 and as move into 2014, is to start driving efficiencies as we move them on to our standardized platform. So it is planned as Dan said, we're actually certainly ahead of plan. We expect our ultimate margins to be somewhere in the mid to upper teens as a business sustainability level and things are going well.

And again to recap, the revenue recognition is somewhere around 4% of collected revenue still?

How much?

I did not get that question.

John, this is Dan -- what -- did you --

I'm sorry. So if you're processing $26 billion of gross revenue, your [bulk] revenue is around 4% of that or so?

Yes, sorry, okay now I know what you're saying. Yes, so that really depends on the contract, it really depends on the services we're offering for that particular client. It could range anywhere from 4% to 5.5% depending on the actual level of services.

Okay. And then secondly, switching gears to the hospital business, have you guys -- I know a while ago you tried to do some reform modeling and I know those are stale and not useful, but looking at your specific states and looking at the fact that Florida and Texas are unlikely to expand Medicaid in '14, have you done any preliminary modeling of at least what you think the volume uptick may look like and the split between Medicaid and exchange volume?

John, this is Dan. Yes, we've done quite extensive modeling. In fact, we've done it hospital by hospital and state by state, taking into consideration the states that have indicated that they are going to expand Medicaid, as well as the states that have also indicated that they are not. Obviously we're monitoring that very closely and in terms of the -- I won't get necessarily into the specifics by state, but we still feel very optimistic about healthcare reform as we move into 2014 and beyond that. We certainly would expect a ramp up over '14, '15 and '16. But we certainly expect incremental volume and we are looking at that and trying to estimate by state and by market, hospital market, what we think the impact will be.

All right. So on that point, are you agnostic about Medicaid expansion? Is it better for you to have say a third the lives at a higher price than it would be Medicaid at maybe one third the exchange price? Or how are you thinking about that specifically Texas and Florida? Are you--

John certainly we would prefer that all the states that we operate in expand their Medicaid program. And we certainly believe at some point in time there should be some form of expansion, whether it's traditional form or some of these alternative approaches that have been discussed, I guess we'll have to see. No one knows the specific answer to that yet. Now that being said, in certain cases if an individual who may have landed in a Medicaid program ends up being in an exchange product, I think it's fair to say that the reimbursement would be different for that particular type of patient. And listen, we'll see some of that.

You can look at vary statistics by state. Some states, many states the percentage of the uninsured population that otherwise would go into a Medicaid program, but depending on the state, because many states it's 30%, 40% of that pool of uninsured individuals would qualify for some form of an exchange subsidy. So we'll see, we would expect some of those individuals, even if a state does not expand in 2014, to end up in an exchange product and we're okay with that. But generally speaking it's fair to say that we would much prefer a state expand its Medicaid program. We think it's best for the patients as well as us as a hospital Company.

Great, thank you.

Tom Gallucci, Lazard Capital.

Two quick ones. First you mentioned strength in inpatient rehab. Just curious if you've got any plans to become more aggressive or expand there in the future or unique opportunity that maybe down the road in that area. And then second, Trevor, I know you're pretty active in D.C. historically, some good news recently on Dish. Wondering what you're hearing, as what we should be thinking about over the next six months, whether it's relative to the Government budget coming together or anything else relative to reform that you hear that we should be aware of?

Okay, Britt, why don't you talk about rehab first.

Absolutely, morning, Tom. On our rehab business as we mentioned, we've seen a healthy 19% year over year uptick in that business. And that's no coincidence. We took a very deliberate look at our rehab programs over this past at least six to nine months and we felt like there was a lot of opportunity there. We took a look at all of our policies internally, our procedures our folks and physicians that utilize those services. And frankly as I mentioned earlier, where we're growing core high acuity business that relate hand in glove to rehab services, we felt like there was an opportunity. We relooked those, we revamped those and they are paying off. And obviously, it's frankly the highest growth percentage in our year over year growth.

To your question of does it make sense to look at that, obviously I believe it does. We -- these are TGI drivers that we have throughout our organization and they're not unique to any one particular hospital, but globally. So it would absolutely make sense for us to look at rehab in a very deliberate way across the Company and I think we'll continue to see good results there.

And Tom, as far as Washington is concerned, Dan Waldmann who heads government affairs and public relations for us wrote a note to me that said Groundhog Day. And that essentially is the way to characterize what we see going on in Washington over the next few months, it's the same issues, it's the debt ceiling negotiations in the fall, and then we'll have the debate about the SGR fix toward the end of the year. And now that we're through the update and the methodology on Dish. And then there was a more technical issue relating to this Medicare pricer, we're pleased with the way that those ended up. They seem very fair approaches to us, but I would like to say no big drama, but apparently that is fairly big drama, the debt ceiling and the SGR fix. But it's the same things that we've been dealing with it seems like every year and about at the same time for the last few years.

Okay, Trevor, thanks.

Andrew Schenker, Morgan Stanley.

So following upon exchanges for those markets where you've decided not to contract with the provider, what was the main driver there, did it relate to pricing or are you on the outside of a narrow network? And related to that, what is the process when someone shows up to your ED who out of network, I assume you'll receive at least commercial if not better pricing for that person? Thanks.

So Clint, why don't you address the contracting issue?

Sure. Generally speaking, when we are looking at a potential non participation situation for an exchange product, it's usually about price, and that's just the simple fact. However, something that we have been looking at and working on, there are a couple of instances where we think we will be non par and we've been working with health plans to establish a price that is higher than our commercial price. Your commercial -- there is some question as to what the law allows on that front, so Medicare usually customary or commercial price. And our thinking is if we're going to be non par, we should be higher than any of those things. And so we do have some situations where we've established a non par price point that's higher and we'll seek to accomplish that with all the other ones that we're non par with.

And I'd ask Steve Mooney to comment. This is obviously something Conifer is got to be very adept at doing both for us and for other clients in this new world. Do you want to comment on your state of preparedness for that?

Yes, absolutely, Andrew. Yes, Conifer has a program called our medical eligibility and counseling services. And we got about 470 eligibility representatives and we do this program in about 27 states around the country, which are helping those who come in as uninsured in any kind of network, with trying to get them qualified for state or federal program. But on top of that as we move forward the exchanges, we're also getting our individuals certified as an assister into the certified application counselor process, which will start obviously other the course of the summer. Our people are being trained now. And so what they're going to be responsible for is providing in healthcare, consumers with Medicaid and qualified health plan enrollment assistance, which includes information about the plans, some that are being offered in the marketplaces, as well as information on tax credit and cost sharing subsidies that will be available to the individual. Which is important because you get some retro authorizations coming from Medicaid and some of the exchanges are even offering that on the OB side of the fence. So we at least will have minimally one certified enrollment assister per hospital that's received either the federal or state training to provide that assistance across the Tenet portfolio.

Great, thank you.

If I might slip one more in here. Changing directions a little, you mentioned you expected benefit from the removal of annual and lifetime caps, I was wondering if you could walk us through the trends in bad debt related co-pays and deductibles today and maybe how you think that might change per exchange price given the known actual values of the different metal tiers? Thanks.

Yes, Steve, go ahead. Dan, sorry.

I'll handle this one, Andrew, good morning. There has been an uptick obviously in the level of accounts that Conifer is processing related to high deductible plans. We've seen that building over the past several years and it's continued into 2013 as well. Now I might add that Steve and his team are doing a very good job managing our bad debt levels and keeping them relatively stable. And in fact, in certain cases there's been some slight improvement in our collection rates. So we're pleased with that, but obviously the number of accounts that we're seeing that relate to these high deductible plans has been building and it has been putting pressure on our bad debt levels.

Yes. This has been a continuing trend for actually a few years now as a continual uptick of the larger co-pays on our balance, we call it our balance after insurance side of the fence and that continues. Although we're obviously deploying more strategies to conquer that. But also to realize the ACA also includes some subsidies for cost sharing as well, so that's a big thing which we think is going to have an impact as it goes forward.

And when we talked about we're excited about next year, we keep referencing this on calls, but if some of these more arcane details about the way that insurance plans are structured, the subsidies, the cost sharing, these various attempt to get at this pervasive issue of shifting more and more of the burden on to individuals which ultimately just shifts it on to hospitals. So it's one of the things that we are -- a big area that we're well prepared for and particularly enthusiastic about for 2014.

I will now like to turn the call over to Trevor Fetter for closing remarks.

Great, Operator, thank you. I did not have any formal closing remarks. I would like to thank everybody for participating today and look forward to our next call where we will be presumably announcing the completion of the Vanguard acquisition and we'll be reporting results for the final quarter of Tenet as a stand alone entity. Thanks again.

Thank you, ladies and gentlemen. This concludes today's conference, thank you for participating. You may now disconnect.