Tenet Healthcare Corp (THC) 2013 Q3 法說會逐字稿

Welcome to the Q3 2013 Tenet Healthcare earnings conference call. My name is Vanessa, and I will be your operator for today's call.

(Operator instructions)

I will now turn the call over to Thomas Rice, Senior Vice President of Investor Relations. Sir, you may begin.

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

Thank you, Tom, and good morning, everyone. To summarize the quarter, we achieved adjusted EBITDA of $288 million, well within our outlook range and an increase of more than 7% over the prior year. As we projected, our inpatient utilization was soft. With virtually every company releasing Q3 earnings by now, it seems that most of the sector experienced similar conditions. Within this challenging context, however, we delivered an improving volume trend. We reduced the decline in adjusted admissions to just 0.5%. We also produced a 90-basis point improvement in our admissions trend, holding the decline to 2.6% in the third quarter, compared to 3.5% in the second quarter. This marks another quarter of sequential improvement during this difficult year.

Our focus on outpatient services continues to produce strong results. We grew outpatient visits by 3.5% and paying outpatient visits by an each stronger 3.7%. This outpatient growth was significantly stronger than the already impressive 2.2% increase in paying outpatient visits we generated in the second quarter. We are continuing to achieve strong organic growth in our existing outpatient facilities and augmenting that growth through acquisitions. We drove roughly half of our increase in outpatient visits through facilities we owned for more than a year. For yet another quarter, emergency services were a bright spot with growth of 3.1%. We achieved solid growth in all three of the higher acuity service lines we highlighted on our second quarter call, neurosurgery, orthopedic surgery, and trauma. This helped to drive an increase in acuity of 1.5%.

We continued to drive pricing gains in the quarter with increases in inpatient revenue per admission and per patient day of 2.8% and 2.0%, respectively. We drove an even stronger increase in outpatient pricing, achieving an increase in revenue per visit of 3.5%. We also maintained solid growth in commercial pricing, with increases in commercial managed care revenue per admission and per day of 2.3% and 3.4%, respectively. We achieved even larger gains in commercial outpatient pricing. We increased commercial outpatient revenue per visit by 3.7%. As some of you will remember, these increases are against a very tough comp in last year's third quarter. These strong performances in outpatient volumes, ED volumes, acuity, and pricing all contributed to our ability to drive a very strong 8.4% increase in revenues.

Turning to a topic of great interest, I'd like to fill you in on our progress in exchange contracting and health reform related topics in general. First, I'm very pleased with our exchange contracting, our position in the exchanges, and the positioning of the managed care plans with which we've contracted. In exchange contracting, we had a primary goal of gaining market share in an important new market for commercially insured patients with products that have better benefit design features. We quantified that goal, based on the value of the portion of the commercial book that we thought might migrate to the exchanges. We met our goal for legacy Tenet and the Vanguard hospitals exceeded that same metric. The pricing was important in achieving that primary goal. We're pleased that we achieved aggregate pricing that is very close to commercial.

Our secondary goal was to be contracted with plans that were well-positioned to succeed. I'm very please that we are contracted in approximately three-quarters of all the exchange plans that are offered in our markets. Even better, we're contracted with 80% of the number one or number two lowest priced silver plans. We have a couple of contracts under negotiation currently that will push those statistics higher. Obviously, there's been a lot of attention given to the issues with the exchange technology, especially with the federal exchange. We've been tracking the ease of accessing information and signing up for coverage in our markets. Across our entire geography the wait times for call center assistance have been coming down steadily since October 1, and the problems with online access to the federal exchange websites have been improving.

Please keep in mind that California is an important state for us. In California, the exchange in enrollment efforts are well-managed, well-funded, and working remarkably well. While there are plenty of problems with the federal exchange, we believe that those people who utilize hospital services and need health insurance the most will be the most persistent in their efforts to gain coverage. The young invincibles are necessary for a balanced insurance risk pool, but they are not frequent hospital patients. Our patients are typically older and tend to have more serious or chronic conditions. The mini-med insurance that they may have liked, but now can't keep, was of very little value us to. Just remember that hospitals have a very different perspective on this issue than other sectors of healthcare.

We're also doing a lot to help uninsured people enroll in insurance programs. We went live with a major outreach effort in October that is now active in all of our markets. We're positioning our hospitals as trusted sources of information on how to obtain coverage and assistance with enrollment. The extent of what we're doing is calibrated, depending on the number of uninsured people in each market, who are eligible for coverage, the relative burden borne by our hospitals, and the extent to which other organizations are conducting enrollment efforts. We are using advertising, local community organizers, our patient access staff, our Conifer call center, and partnerships with local community groups to identify, contact, educate, and enroll the uninsured people in our markets.

As you know, for many years our Conifer medical eligibility teams have demonstrated consistent, strong performance in enrolling people in insurance programs for which they are eligible. This new effort is a natural leveraging of that capability to capture the benefits of expanded coverage under the Affordable Healthcare Act. Conifer's call center is experienced in these efforts and is the principle point of contact for individuals in our campaign. We are using existing databases and Conifer's technology to do this in a highly effective and targeted way. In short, I'm very pleased with our exchange strategy and the outreach efforts and continue to be very enthusiastic about the benefits we'll see from health reform.

Let's now turn to our cost metrics. We held the growth in selected operating expenses per adjusted admission to 2.7%. This metric excludes Conifer and incremental physician employment. We achieved a favorable cost variance to our forecast for the quarter. This achievement is even more impressive, given the strong surgical growth recorded in the quarter. Surgical growth is strongly correlated to the growth in supplies which, on a per adjusted admission basis, we held to an increase of 3.4%. Dan Cancelmi will provide a more detailed analysis of the relationship of surgeries to costs in a few minutes. One of the reasons for our impressive cost performances is that our performance excellence program is having another great year. We expect to meet or exceed our 2013 objective of $80 million in savings.

Conifer continues to maintain tight control of our bad debt levels. We reduced bad debt expense to 8.0% of revenues. That is a 50-basis point improvement compared to last year's third quarter. We maintained a stable self-pay collection rate of roughly 29%. Moving beyond bad debt expense to look at Conifer's broader impact on our financials, Conifer drove a $103 million revenue increase in the quarter. This is an 84% increase in revenue. Total Conifer revenues in the quarter were $225 million. On an annualized basis, Conifer has achieved a revenue run rate of $900 million, marking another important growth milestone. Conifer delivered EBITDA of $36 million in the quarter, a 50% increase over last year. Conifer's operations are performing well, and its sales pipeline is growing.

I'm also very pleased that Vanguard's leader of revenue cycle, Neal Somaney, has joined Conifer so the integration of Vanguard's operations into Conifer will move quickly. Our other segments within Conifer are growing nicely. With some significant new customer wins, our value-based care business is now involved in some aspect of care management for more than 4 million people, and our patient communications business now has more than 180 hospitals and physician practice as customers. In addition to Keith Pitts and Phil Roe, who are here with us today, I'm also delighted to report that all of Vanguard's market and hospital leaders joined Tenet. We have visited them in the markets and have had the market and regional leadership to Dallas multiple times. I'm very pleased that this talented group of people joined us, and I'm very impressed with their capabilities and the strategies they are employing in our newly acquired markets. As I have visited our new markets and hospitals, I've been very positively impressed with the physical conditions of the facilities, the innovative strategies and tactics that Vanguard has employed in improving performance, their quality programs, lean programs, and physician strategies. I'm very excited about the new Company.

In summary, last night's earnings release delivered additional robust evidence that our key business strategies are working effectively and driving significant growth. However, the impact of soft utilization, especially in the commercial segment, presents a continuing challenge. We provided an updated outlook for our fourth quarter, which includes the expected EBITDA contribution from Vanguard. Our fourth quarter outlook reflects the realities of softer volumes and the costs of assimilating new physicians into our organization. Now I'll turn the floor over to our Chief Financial Officer, Dan Cancelmi. Dan?

Thank you, Trevor, and good morning, everyone. I want to take a few minutes to update everyone on the Vanguard integration, highlight a few notable items impacting our third quarter results, and provide some additional color regarding our outlook for the fourth quarter. I'd like to start off with an update on how the integration of the Vanguard facilities is going. Although certain of Vanguard markets are also encountering soft inpatient volume trends, as we become more familiar with the markets and facilities, we're more convinced of the strategic importance of these assets to our portfolio. The closing of the transaction went extremely smoothly, and we were very pleased with our day one readiness and subsequent plans to integrate the operations into our Company. We're also gratified that key leaders in the Vanguard organization have chosen to join our team and will be instrumental in successfully growing these operations in the future. From a synergy perspective, we have an intense daily focus on the successful execution of our strategies and have devoted significant internal and external resources to these efforts. We remain very optimistic about the upside value that we can capture over the next few years.

Turning to operating expenses, our cost management was very solid in the third quarter, including a favorable variance compared to our forecasted cost performance. Let me walk through our expenses during the quarter. We use the term hospital operations to identify costs related to our clinical operations in both our hospitals and outpatient centers. This definition excludes our Conifer services business and the expenses relate to an IPA, or independent physician association, in Southern California, with a multi-specialty network of over 400 physicians that we acquired in the third quarter. Beginning in the fourth quarter, when we include the results of Vanguard's health plans for the first time, we will also exclude the health plan expenses from our hospital operations cost metrics.

Using this definition, labor expenses increased by $50 million, and supplies expenses were up by $11 million in the third quarter. On a per adjusted admission basis, labor and supplies grew by 5.5% and 3.4%, respectively. The increases in both of these metrics are higher than we've seen in recent quarters, but they are consistent with the drivers of our growth strategies and our forecast. Let me explain. Beginning with labor expense, more than half of the increase or $28 million is related to the expansion of our physician employment. This growth reflects the increase in employed physicians since last September, plus the expenses of their office staff. Labor costs have also increased, due to insourcing certain physician practice management personnel that were previously paid through a third-party vendor, and included in other operating expenses in Q3 of last year. Also impacting labor costs was the fact that we provided our employees annual merit increases since the third quarter of 2012. In response to softer than anticipated inpatient volume levels, we did implement a series of actions in the third quarter that can be expected to have a favorable impact on labor costs going forward.

Turning to supplies, these costs on a per adjusted patient day, and per adjusted patient admission basis, were up 2.7% and 3.4%, respectively. The increases were primarily due to a changing mix in surgical versus non-surgical patients. Substantially, all of our third quarter admissions decline was in non-surgical categories, which have a much lower supply cost per case. A good example of this is a 3.8% decline in OB admissions, which accounted for 22% of our total admissions decline in the third quarter. As you know, OB is generally a very low consumer of supplies. It is also important to note that within our surgical service lines, we are doing a good job controlling costs as well. As a result of our performance excellence program initiatives, we drove a 2% decline in our supply costs per surgical case compared to the third quarter of last year. At the same time, supply costs per non-surgical admission also declined. These declines in surgical and non-surgical supply costs make it clear that a service mix shift was the key driver of the increases in supply costs.

To summarize the increase in unit costs in the quarter, it's actually a very good story. First, the increase reflects a favorable mix shift related to our success in driving accelerated growth in surgeries. Second, our surgery supply costs are actually declining on a per unit basis. Third, our selected operating expenses were favorable to our expectations, and fourth, we implemented actions with regard to labor costs late in the quarter that can be expected to have enhanced visibility going forward.

Turning to our outpatient business, we are achieving our goals with regard to our outpatient growth strategies. Over the last 5 years, we've grown our outpatient facilities from a total of 63 centers to today's 137, an increase of 117%. Adding Vanguard's 39 outpatient facilities brings us to a total of 176. We expect that growth will continue, as we have more than 20 additional projects in development, about three-quarters of which are either urgent care centers or satellite emergency departments, and the acquisition pipeline remains strong. We're also optimistic about the outpatient development opportunities in Vanguard's markets.

From a cash flow perspective, we did see an approximate 1 day increase in our days in AR from 51.4 days at June 30 to 52.6 days at September 30. The increase in AR days was due, in part, to several factors impacting Medicare payments, related to the transition to a different Medicare administrative contractor or MAC, serving the Company's hospitals. The change in our MAC was the result of CMS' periodic rebidding of MAC contracts as required by law. We are working collaboratively with the MAC and expect these issues to be sorted out fairly quickly. Also, our cash flows have been impacted by the fact that approximately $150 million of revenues related to the California provider fee program and the Texas uncompensated care 1115 waiver program have not been received by us as of September 30.

As we mentioned in our press release, our fourth quarter outlook for adjusted EBITDA is in a range of $400 million to $450 million. This outlook reflects assumptions for continuing softened patient volumes and payer mix and includes earnings from the Vanguard facilities for the first time. Although Vanguard's earnings were not include in our Q3 results, since the acquisition was not completed by the end of the quarter, Vanguard's operating results for the September quarter were in line with our expectations when we evaluated and priced the acquisition. In the fourth quarter, we anticipate Vanguard's operations to perform within our deal model assumption. In terms of other items impacting the fourth quarter, we expect to record approximately $30 million of HIT incentives. As a reminder, we expect the costs relate to these system implementations to decline significantly in 2014, while the incentive payments are expected to remain at approximately 2013's levels. Before leaving the topic of our fourth quarter outlook, I want to remind everyone that we provided all the detail you need to calculate net income for the quarter, including interest expense, depreciation, amortization, and our projected share count on tables 3 and 4 at the end of our earnings release.

Let me now turn to the California provider fee program. We recognized approximately $19 million of revenue in the quarter under this program and expect to recognize a similar amount in the fourth quarter. As we've stated in our press release, we recently received good news regarding the continuity of this program. The California legislature recently approved, and the governor signed into law, an extension of this program for 3 years through 2016. Based on preliminary estimates, we expect to recognize approximately $475 million of revenues over the 3-year period. Quarterly revenues will be about twice the size of the current program. Under the new program, approximately $140 million of revenues or about $35 million per quarter relate to calendar year 2014. We will recognize approximately $115 million of revenues in calendar year 2013 under the current program.

We do remain excited about the positive impact we anticipate from the Affordable Care Act. Our optimism is based on the fact that our facilities, located in markets with historical uninsured headwinds, will now be able to take advantage of the tailwinds created by the ACA. Several important states we operate in have expanded or are in the process of expanding their Medicaid programs, including Arizona, California, and Michigan. We are pleased with the progress we have made negotiating exchange contracts. As we mentioned before, these exchange products will be attractive to patients who currently don't have insurance and patients who currently have plans with very high deductibles and annual or lifetime caps, as these exchange plans limit deductibles and have no annual or lifetime caps. In short, our geographic footprint has us strongly positioned to gain significant upside from expanded insurance coverage, and we have the tools and trained individuals in place to capture these benefits, beginning on day one.

Finally, I'd like to point out that we continue to reduce our outstanding shares as we repurchased an additional 2.6 million shares in the third quarter. Since mid-2011, we've invested about $1.1 billion to repurchase 44 million shares. These investments have reduced our fully diluted share count by about 30% since the beginning of the program. Our average price for these repurchases is just over $25 per share. It's pretty clear that we created a lot of value for our shareholders with this program, which will conclude in the fourth quarter, as previously disclosed.

In summary, our third quarter and year-to-date results provides solid evidence that our strategies are working effectively. We are looking forward to the launching of the more meaningful aspects of the Affordable Care Act in 2014, and we believe we are well-positioned to serve the healthcare needs of this expanded population of insured patients. Operator, please assemble the queue for our question-and-answer session.

(Operator Instructions)

AJ Rice, UBS.

Hi, everybody. Thanks for taking the question. First of all, just to maybe try to drill down a little bit more in the fourth quarter guidance. I think if we took your previous legacy Tenet and most people's expectations for Vanguard, and then it looks like you're getting about $15 million more in high-tech Q3 to Q4, I think we'd have come in closer to $490 million to $520 million in EBITDA for the fourth quarter. I know you're singling out concern about soft volumes. It sounds like a little bit on the commercial side, payer mix concerns. Are those the two primarily deltas where you come out within the updated guidance? Or is there anything else we should be aware of that's a factor there?

Hi, AJ. It's Trevor. There's a couple of comments there. The short answer to your question is yes, those are the items. I think it's also worth pointing out that Vanguard had not issued any expectations for the fourth quarter. Whatever shortfall there is in our overall guidance that could be attributable to Vanguard is really a gap between our expectations today and what the Streets' expectations were prior. It's not as though Vanguard had a number out there. On the Tenet side, we were overly optimistic about volumes in particular. The trend that we've seen throughout the year, although it may be in the middle of the pack in terms of the competitive environment, it's well below our expectations and business plans that formed the basis of our outlook. We have not seen reason to assume that that is going to improve dramatically in the remainder of the fourth quarter.

Okay. Maybe my follow-up will just ask you a conceptual question. One of the things that had been a recurring theme and issue for Vanguard had been the commitment to the funding in Detroit and I guess in other markets, too, and the impact that it was having on cash flow the next couple of years. There had been some discussion about those returns could be maintained on those projects, but maybe some of that funding could be done off balance sheet to improve the cash flow stream of the Company. Now that that's in your purview, are you guys open to that? Have you looked at that? Is that something you might consider down the road?

AJ, let me make first an overall comment about Detroit and then I'll ask Keith to comment on the nature of the investment and the expected flow and what sort of flexibility we have. Detroit was one of the areas where we did a very deep dive before the announcement of the acquisition. Of course since then, it's been a real focus area for us. We believe that there is significant upside in Detroit. Vanguard had seen this opportunity, and upon really investigating it, we would confirm their views.

There are a couple of things I would just point out that people need to think about, when they're thinking about Detroit. One is that the healthcare economy in Detroit is very distinct from the overall economic environment of the city. While you read plenty of stories about the blight in Detroit, the bankruptcy, but also the revitalization of downtown Detroit, the healthcare environment is a bit different. We are the leading provider in Detroit. We have a lot of confidence in the ability to generate strong returns and significant performance improvement in Detroit, and it's something we are particularly focused on here. With respect to the capital deployment, I am going to ask Keith to comment on that.

Thanks, Trevor. Thanks, AJ, for the question. As you know, we had quite a few projects underway in Detroit and still do. We also have a brand new hospital campus in New Braunfels under construction north of San Antonio, which is a very large project. In fact, if you look at our expenditures, almost half of them are in the Texas and a little bit in the Arizona markets, as well as half are in Detroit, in terms of the construction and progress. We would anticipate the Texas projects or the expansion at North Central is just completing, and New Braunfels campus will open mid-calendar 2014. A lot of the Detroit things start opening in early- to mid-2014, on through early 2015. A lot of things that are there will be coming online.

We also have the flexibility in all of our capital commitments where it makes sense to use an off-balance sheet of financing. For example, if we wanted to build a big ambulatory building, we have the ability to do that and count against capital commitments. If you will, that's a financing mechanism, as you know, and we have a choice as to what financing mechanisms we want to do under all of our capital commitments with any hospitals we've ever made. We feel very comfortable as we decided that strategically, that was a better option for us. In any case, we have that avenue available.

All right. Thanks a lot.

Andrew Schenker, Morgan Stanley.

Hi. Thanks, guys. Just following up on the 4Q guidance, last quarter you updated your utilization guidance downwards. Are your expectations for the fourth quarter now still within the guidance you provided in 3Q, or are we expecting even worse volumes for the year?

The short story is worse. Dan Cancelmi, why don't you fill in a little bit of detail on that?

Good morning, Andrew. Yes, from an inpatient volume perspective, it's still within the range that we were evaluating when we put the guidance out in the summer. However, we had anticipated that there was going to be improvement in the inpatient volume as well as some improvement in the mix, as we moved throughout the quarter. Based on what we saw in the third quarter and what we have seen so far in October, we just think it's appropriate at this point to moderate the outlook for the fourth quarter. Again, it's an inpatient volume and mix issue. There's other variables. You also have to take into consideration when you're looking out into the fourth quarter including there are incremental HIT incentives out there, but there's also incremental costs associated with those incentives as we continue to roll-out our program. Despite the fact that there is approximately $15 million increase in the incentives in the fourth quarter, there's also in the neighborhood of a $10 million increase in costs. Net-net, it's not a $15 million increase, if you're looking at it on a sequential basis.

Changing direction here, you still need [to digest] Vanguard, which is closed, but you can maybe talk about your expectations for the M&A pipeline? Obviously, you guys still have Emanuel outstanding. Any updates there? And in Vanguard in Connecticut? Thanks.

Sure. One of the attributes we've gained through the combination of Vanguard is a robust pipeline and a talented team to join our existing team to work on that. I'll ask Keith to comment on the pipeline. He can also comment on Emanuel as well.

Thanks, Trevor. On Emanuel, we are still in regulatory review, but we see the light at the end of the tunnel there soon, so we should have a direction after the regulatory review pretty soon. In terms of Connecticut, we have three letters of intent. We are in process of solving a handful of regulatory conflict issues that affect all the transactions there, but we still feel very comfortable with the direction in Connecticut and are working hastily to try to get those continued to make new filings. We are on the third transaction we announced, which is a partnership also with Yale New Haven Health System. We are just completing the due diligence process there and beginning the negotiations on the definitive agreement.

Sheryl Skolnick, CRT Capital Group.

Good morning, gentlemen. I thank you for the color that you've given us on the fourth quarter guidance. It's obviously the question of the day, so I'm going to go back to it. Trevor and Dan, you indicated that perhaps we made some modeling errors relative to the real story at Vanguard. I'm hoping that you can help us to understand where we might be a little bit too aggressive. Obviously, we didn't have the benefit of guidance just prior to putting these models together, so anything that you could give us I think would mitigate the pressures that we're seeing on your stock today and would enhance your investors' understanding of why you bought what you bought, and what you intend to do with it. The question is this, certainly for premium revenues, I can imagine that there might be issues there. But anything else that you can give us in terms of parsing the guidance? Some are talking about shortfalls relative to expectations of $50 million to $100 million at the top end for the fourth quarter. If you can parse the shortfalls, given there are some tailwinds and headwinds, how much of it might be from this estimation of the Vanguard model versus core fundamental performance?

I think it's hard for me to. I wouldn't characterize it as modeling errors, maybe just difference in assumptions. It's a little bit hard to understand what's in everybody's mind. But I think, after reading some of the reports and getting back to the GAAP and guidance, what I would suggest pointing you toward is I think there may have been a gap in understanding of how the impact of the health plan loss of business in Phoenix particularly affected Vanguard's earnings, especially in the fourth quarter. Dan can talk more about that, as can Phil Rowe, who is here. To be just very broad about it, we'd probably say the expectation today relative to prior expectations on the Tenet side was overly optimistic by us. We obviously gave guidance for this, implied guidance for the fourth quarter, when we talked about the remake half in August. That is really driven by volumes and the mix of volumes, and our continued investment in physician practices, which actually has ramped up in this second half. That's what's providing the GAAP relative to our expectations on the Tenet side. On the Vanguard side, actually the operational story is better but the health plan story probably provides a GAAP relative to the street. Dan, do you want to explain that a little bit, and we'll ask Phil to chime in as well?

Sure. Good morning, Sheryl. A couple of things on the Vanguard facilities, as we mentioned, there have been inpatient headwinds in the Vanguard facilities, as well as ours. That said, we had been tracking that and when we modeled the transaction, we took those type of issues into consideration. There's obviously some inpatient volume pressure impacting the Vanguard numbers in the fourth quarter.

As Trevor mentioned, the health plan operation, to use a round number here, but given the fact that the new contract's in place, the earnings impact of that is about $10 million on a quarterly basis from a normal run rate. I'm going to ask Phil to comment upon that real briefly here in a second. You have about $10 million of pressure on the health plan side in the fourth quarter, compared to what the normal sequential operations would have been. In addition, there is some Medicare and Medicaid disproportionate share or DSH cut pressures sequentially in the fourth quarter. As you know, various reductions under the Affordable Care Act related to Medicare DHS, as well as Medicaid DSH, go into effect here in the fourth quarter. The impact on their operations roughly it's in the $5 million neighborhood on a quarterly basis. It's just another bit of pressure impacting their quarterly results. Let me ask Phil to maybe just give a brief overview of the health plan operations, just so everyone has a good understanding of the dynamics related to that business.

Thanks, Dan. Sheryl, you, I'm sure, recall that we went under the capped contract effective October 1. The initial indications are that our membership will drop about 50%. We'll be just under 100,000 lives post the cap, all of those are in Maricopa County. We have made an intentional decision to communicate with our partners there with Arizona Medicaid that we're going to appropriately take care of the membership that's in run-off and take care of those 98 to 100,000 lives that we continue to serve in Maricopa, by being very conservative on our staffing and very conservative on our G&A while we take care of those run-off costs from the previous quarter. As a result of that the December quarter, as Dan indicated, will likely be down $9 million to $10 million down on a sequential basis and from a year ago because we are keeping those G&A costs at a level that will allow us to adequately serve those members and move forward.

That's extremely helpful. I can come up with $15 million of delta perhaps from my model, or maybe from some Street expectations. But I guess I'd like to go back to the Tenet guidance itself because my sense was that we were all pretty concerned about the guidance to begin with, and got the sense that Tenet was trying very hard at the end of the second quarter to take the numbers down and be as conservative as it could be. With all due respect, it's not the first time that we've been in this situation with Tenet, where management's a little bit more optimistic, we find out with 20/20 hindsight. I guess I would ask, again respectfully here, how you're going to think about your guidance going forward, so we don't have to replay this again?

Cheryl, this is Dan. We're obviously disappointed that we've had to adjust the guidance for the fourth quarter. We had assumed some improvement in our inpatient volume trends. We've seen some of it, in certain service lines where we've been making some nice investments. We just didn't see the growth that we were anticipating in other service lines.

Dan, do you know why? Do you know why you didn't see the growth?

When we look across our portfolio, and see okay, is this a market share issue or something else? We believe we're holding our own with market share. Our ER volume is actually improving nicely. We're making investments in the business that we fully believe are going to pay off over time. But what we've seen so far into the fourth quarter and what we saw in the third quarter, Sheryl, we just concluded it was appropriate to moderate some of these assumptions in the fourth quarter. We're trying to be as transparent and as timely as possible with our guidance as we look out over the next quarter. The payer mix that we saw in the third quarter, and what we're seeing so far in the fourth quarter, is just not as robust as we would've liked. We certainly took that into consideration when we developed our outlook for the fourth quarter.

I certainly appreciate all that insight. It is extremely helpful. Thank you.

Josh Raskin, Barclays.

Just in terms of the Vanguard transaction, I just want to make sure, relative to expectation, I know you guys talked about $100 million to $200 million of synergies, full run rate with about half of that coming in, in the first year. We'll assume that's 2014. Are you guys still confirming those synergies?

Good morning, Josh. Absolutely. We've continued to spend an incredible amount of time and energy on capturing these synergies. We're certainly as confident, if not more confident, in the synergy opportunities that we have previously communicated.

Okay. Then on a similar vein, still assuming first year accretions, net with revised operations expectations?

Obviously, we're not giving 2014 guidance at this time. We'll be addressing 2014 guidance early in the year. We'll obviously provide clear visibility when we deliver the outlook at that point in time.

Okay. Then just getting back to the guidance for the fourth quarter in terms of the pressures, seeing on both legacy Tenet and the Vanguard assets, if you looked at your guidance from last quarter implied a fourth quarter number of maybe $365 million or so? It actually probably would have been a bit higher, if you look at where the number came in for 3Q. Assuming that $365 million, I'm curious what your updated perspective on a Tenet number would be? I'm a little questioning the commercial weakness in light of that trend in high deductible health plans. In recent years, we've seen commercial come in a little bit better on a sequential basis in the fourth quarter. I'm just curious, specific to the commercial comments as well.

Josh, this is Dan. We're one Company now. You shouldn't expect us to report separately, like a separate segment for Vanguard and a separate segment for the legacy Tenet business. When we sat down and started really diving into the results, for the quarter, the third quarter as well as what we think the fourth quarter's going to look like, the improvement that we had anticipated from an inpatient volume perspective as well as a mix perspective, we just haven't seen it at the level across a broad enough category of service lines to leave our guidance at its previous levels. That's why we thought it was appropriate to regulate it at this point and moderate it, based on some of the trends we have been seeing.

Last question, I think you mentioned in your prepared remarks that you have some labor initiatives that you were taking for savings in the fourth quarter. Could you elaborate on what those are and the potential savings from that?

It's obviously in reaction to our inpatient volume levels. As we do routinely, we evaluated our cost structure. There were some actions that we took. You'll see there will be some visibility into that as we move forward. It's normal routine type of costs analysis, efficiency that we always try to drive.

Justin Lake, JP Morgan.

Thanks, good morning. I want to take one swing myself at this Q4 issue. The way I'm just looking at it, guys, is that you gave guidance for the fourth quarter, of $425 million at the midpoint. If we just put a number around Vanguard. Let's say the Street was too optimistic, and instead of $140 million-ish, it was $125 million, give or take. That would still leave the Tenet business at $300 million. I'm looking at the $288 million number in the third quarter, and you will get some pickup from high-tech. Trevor, typically third quarter is the weakest quarter of the year, right?

Correct.

Fourth quarter, we should see some seasonal improvement. Your guidance almost, ex high-tech for Tenet business, seems to imply flat. We know third quarter was weak. Let's just say fourth quarter is still weak. Wouldn't you still see some seasonal improvement? What are we missing here? Do you feel like you've now erred on the side of gone more conservative versus optimistic before? Or do you feel like this is a reasonable number, and why?

I don't think you're missing anything, but Dan can fill in a little bit of blanks here.

Good morning, Justin. How are you? Let me try to address your sequential (inaudible) forward. One thing I would want to point out, Justin, is on the HIT incentives, the high-tech incentives, as you pointed out, we will have incremental incentives in the fourth quarter. We're also going to have incremental costs associated with that. We pointed out that there's about a $14 million, $15 million ramp from Q3 to Q4. There's also going to be a ramp in the cost. Net-net, it's probably in the $5 million type of territory between the two quarters.

Also to your sequential point, yes, Q3 is typically the lowest volume quarter in the calendar year. As a couple of points of reference, last year from Q3 to Q4, we had about 420 additional admissions between Q3 and Q4. We had about 18,000 additional visits from Q3 to Q4. When we modeled our outlook for Q4, this year we did take that into consideration that there is typically a seasonal ramp in volume at those levels. Depending on the year, those numbers can move around a little bit. Just from a ballpark perspective, I think that's what we saw last year. We did take that into consideration when we built the outlook.

I know everyone looking to see you know what's the Tenet piece of this versus the Vanguard piece of it? Obviously, we're not going to continue to report separately because we don't have two different segments here. As we pointed out, there is inpatient, the headwinds continue. There's not the improvement on the inpatient side that we would like to see. We were pleased in some of the service lines that we pointed out, but it's not broad-based enough for us to retain our previous guidance. In addition to the mix that we saw in the quarter, as well as what we've seen so far in October, we concluded it was appropriate to make the adjustment to the guidance.

Okay. You're saying that even with this guidance, this does assume a seasonal improvement from 3Q to 4Q, that's typical of what you've seen in the last few years?

When we modeled this, we built that into consideration, yes.

Okay. Then on Vanguard, I think someone might have asked the question similar, so I apologize if I'm duplicating here. You had talked on the Vanguard call about the accretion being single digits in year one and double digits going forward. Given what's happening here, is there any change to that view?

Yes. We're not commenting upon 2014 guidance at this point. We'll certainly get into all those details when we go through our 2014 numbers early in the year. I would tell you, as I mentioned earlier, as we continue to learn more and more and become familiar with these assets, we're firmly convinced that it was the right decision. We become more confident, as we evaluate the value opportunities related to synergies that are out there.

But you did say it's in line with your acquisition model, right?

Yes.

Okay. So nothing off plan that you know of, or anything that you want to point out to us?

No.

Okay. Lastly, on the share repurchase, you did the buyback in the quarter, which is great. We're just hoping you'd tell us how the Board is thinking about buybacks here, given the current authorization should run out this quarter. Thanks.

Justin, it's Trevor. We've got to be quick here because we want to finish the call before 10 for HCA, and we would like to take one more question. But short story on the share buybacks, the current program extends another 60 days. We'll be evaluating what to do in 2014.

All right, thanks.

Ralph Giacobbe, Credit Suisse.

Thanks for squeezing me in. I'm hoping to understand mix maybe a little bit better. Can you give us a sense of where you were trending for the first half of the year, relative to the third quarter? What have you seen so far in the fourth quarter, in terms of deterioration, just from a payer mix perspective? The second piece is just on a acuity mix, how should we think about the outpatient growth helping or hurting on the acuity side?

Ralph, it is Dan. Good morning. From a mix perspective, I wouldn't necessarily categorize it as a deterioration, per se. When we modeled our outlook for the second half of the year, we assumed improvement in inpatient volume levels, as well as improvement in the mix. We're just not seeing it at the level that's robust enough to support the previous outlook assumption related to inpatient volume levels, as well as the mix related to that.

Okay. And then on the acuity on the side?

From an outpatient perspective, we're very pleased with our outpatient strategies. We're growing our surgical volume nicely. The outpatient volume levels, from a visit perspective, it's about half and half organic. The other half through the various assets that we've been able to acquire over the past year, nice results in terms of from a volume and earnings perspective. We expect that to continue to grow.

Okay. If I could squeeze in just one more? Can you talk a little bit more about your strategy around employing physicians? Obviously, it's causing an increase on the cost side. When or if you expect pressures to abate, maybe what percentage you currently employ today and where that can get up to? The last piece of that is I think you had talked about insourcing. I wanted to get clarifications exactly where and what specialties you're insourcing? Thanks.

I'll ask Britt Reynolds to address those two questions. Be very concise. We had promised HCA we'd be done by now, and apologize to everybody who has further questions. You can call us to follow up. Britt, really quick.

Thanks, Ralph. In terms of insourcing, just to be very clear, the insourcing is relative to our management oversight and recruitment functions for both recruitments, relocations, and employment. It's not an insourcing of physicians, but an insourcing of our entire program where it was contracted in the past, which gives us a greater control and autonomy over that. Secondly, in terms of the headwinds on that, I think it's a convergence of a perfect storm in the sense that we have made decisions to constantly reinvest and double down in our physician alignment activities, including employment. In the third quarter, we have employed more physicians and recruited and relocated more physicians in both of those categories than in the first and second quarter combined. I made a conscious decision to redouble our efforts and push that. We're seeing the fruits of that at a perfect storm time right now when we're seeing an increase in cost. That is the right strategy for the long-term. We still believe that that's the right strategy going forward. But it is going to be a drag for the next little bit.

Okay, thanks, everybody. This concludes the call.

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