Tenet Healthcare Corp (THC) 2013 Q4 法說會逐字稿

Welcome to the Q4 2013 Tenet Healthcare earnings conference call. My name is Brandon and I will be the operator for today's call.

(Operator Instructions)

Please note, this conference is being recorded.

I will now turn it over to Mr. Thomas Rice, Senior Vice President of Investor Relations. You may begin, sir.

Thank you, operator. And good morning, everyone.

Tenet's Management will be making forward-looking statements on this call. These statements are qualified by the cautionary note on forward-looking statements contained in our annual report on Form 10-K.

During the question and answer portion of the call, callers are requested to limit themselves to one question and one follow-up question.

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

Thank you, Tom and good morning, everyone.

We ended 2013 on a strong note, reporting $444 million in adjusted EBITDA for the quarter, and $1.342 billion for the year. Earnings for both the quarter and the year were toward the high end of our outlook range.

While admissions headwinds persisted throughout the year, our in-patient trend strengthened in the fourth quarter. In fact, we reported a stronger admissions trend in each sequential quarter as the year progressed. While inpatient admissions were disappointing for the year, we achieved many key performance milestones and exceeded our targeted objectives in other areas.

Our emergency departments and outpatient businesses generated solid growth throughout the year. We accomplished our pricing objectives and our cost control was better than we expected.

Conifer also had a great 2013, and is well positioned to have even stronger years in 2014 and 2015. The integration of Vanguard is proceeding smoothly and the synergies we have identified should become increasingly visible in our results as we move through 2014.

It is still early, but I'm very pleased with the opportunities that we have created through the combination with Vanguard. This is a transformational acquisition that strengthens our positioning in the market by, among other things, increasing our scale, broadening our geographic footprint into attractive markets, creating a larger platform for Conifer, and adding a new health plan business line.

We also gained some very talented people at all levels in the organization, and some innovative programs that are already enhancing our overall operations. With that as a quick introduction, let's take a closer look at the key elements driving our earnings growth. This analysis is summarized on slide 3.

We held the decline in same hospital adjusted admissions to just 50 basis points in the fourth quarter. This was comprised of 3.3% growth in outpatient visits, and a decline of 230 basis points in inpatient admissions. The combined impact of fewer one-day stays and a lighter flu season, accounted for about 80 basis points or one-third of the decline in inpatient admissions.

We also continue to drive strong growth through our emergency departments, which resulted in a 1% increase in same hospital ED visits. While many forms of healthcare utilization have been adversely impacted by the increases in co-pays and deductibles, when patients truly need emergency care, Tenet's facilities are continuing to capture volume growth.

Turning to pricing, we achieved solid commercial pricing growth with same hospital commercial managed care revenue per admission increasing by 5.2%. We drove this growth through a combination of enhanced commercial contracts and incremental strengthening in commercial acuity.

Speaking of our contracts with insurers, you may have already seen our announcement yesterday, but I wanted to say how pleased I am that we were able to reach a new multi-year agreement with Aetna, our largest commercial customer, that covers all of our hospitals, outpatient centers and physicians.

I am very pleased with the 3.3% growth in outpatient visits in the fourth quarter, 40% of which was organic. Outpatient growth was strong throughout the year, providing further evidence of the success of our outpatient development initiative. This growth was driven by a combination of centers we have built from the ground up and centers we have purchased.

In 2010, we initiated an outpatient acquisition strategy with a goal of generating $65 million in 2013 EBITDA. We earmarked annual capital investments of $100 million for acquisitions to help us achieve this goal. I am very pleased that we more than met our earnings goal on a much smaller investment.

From 2010 through 2013, we invested just $264 million to acquire a portfolio of outpatient assets which produced $72 million of EBITDA last year. In other words, we produced a return that exceeded our EBITDA target by more than 10% on an investment that was a third smaller.

Today, we have more than tripled the number of centers we had when we launched the initiative. More importantly, Tenet now has a very strong competency in designing, building, buying and operating outpatient centers of all types.

Before I leave the subject of revenue, I should point out they that our aggregate pricing was favorably impacted by the $7 million increase we recognized from the California Provider Fee program. More importantly, we expect the amount that we will receive from this program to increase substantially under the new program that was enacted by the state last fall.

This increase is expected to total approximately $475 million over the next three years. We are also pleased to note that there is now a legal framework in place to extend this program for at least three additional years beyond 2016.

Turning to costs, we reported another great quarter of tight cost control. We held the increase in selected operating expenses per adjusted admission in our hospitals to 3.7%.

Excluding the growth in physician employment, this increase was only 2%. We limited the growth in supplies expense for adjusted admission to 2.9%. A portion of this increase reflects the growth that we have driven in higher acuity procedures.

Conifer helped drive our bad debt expense for the quarter down by 20 basis points, to 7.7% on a same hospital basis. Speaking more broadly about Conifer, its EBITDA was $36 million in the quarter, an increase of more than 16% compared to a year ago. Conifer's revenues were $264 million in the quarter, an increase of almost 75%, and exceeding $1 billion on an annualized basis.

Adjusted cash provided by operating activities from our Continuing Operations was $343 million in the quarter, compared to $279 million in the fourth quarter of 2012. We invested $100 million in the quarter to repurchase 2.4 million shares, completing our existing authorization.

Since 2011, we invested $1.2 billion to repurchase 46 million shares, or approximately 34% of our outstanding shares. The average cost per share was just under $26.

With that as an overview of the quarter and the year, I will now ask Dan Cancelmi to provide some additional color on our outlook for 2014, and then I'll return to provide some comments on the opportunities in front of us. Dan?

Thank you, Trevor, and good morning, everyone.

I will spend the next few minutes reviewing our 2014 outlook, including some color on the anticipated impact from the Affordable Care Act.

As we mentioned in our Earnings Release, our 2014 outlook for adjusted EBITDA is $1.8 billion to $1.9 billion. Our first quarter 2014 outlook for adjusted EBITDA is a range of $350 million to $400 million.

There are a large number of items impacting our outlook for 2014 EBITDA growth. In addition to the Affordable Care Act, other important items include: Vanguard synergies, the California Provider Fee program, Health Information Technology incentives, net of program cost, our Performance Excellence program, outpatient acquisitions and de novo development, and Conifer's growth, including the continuing integration of our Catholic Health Initiatives business.

Slide 4 summarizes the assumed impact on 2014 for each of these items. Let us discuss them one at a time.

The first phase of Vanguard synergies will make an important contribution to EBITDA growth in 2014. When the transaction was announced last June, we estimated the synergies in a range of $100 million to $200 million over a two-year period.

We expect $50 million to $100 million of this aggregate target to be realized in 2014. The Vanguard integration is proceeding smoothly, and we are increasingly confident that the synergies ultimately generated by us over the long term will exceed our initial estimates.

Conifer has already taken control of the revenue cycle operations, the legacy Vanguard facilities, and our Performance Excellence teams are deployed in Vanguard's hospitals. The results of these efforts will become increasingly visible in the second half of the year, and into 2015. We did not assume any material contributions from Vanguard synergies in our first-quarter outlook.

Turning to the California Provider Fee program, we expect to record $140 million of revenue in 2014, once the new program is approved by CMS. This is a $25 million increase compared to the $115 million of revenue we recognized in 2013.

While this program is increasingly well-established and can be viewed as a sustainable part of our earnings, given the approval delays we have historically experienced with this program, we did not assume any EBITDA contribution from this program in the first quarter of 2014, since the program has not yet been approved by CMS.

Health IT will be a headwind of approximately $20 million on 2014 EBITDA growth. I am pleased to report that we remain on target with legacy Tenet incentives and implementation costs.

The drag in 2014 is related to ongoing implementation of HIT at certain legacy Vanguard facilities. Unlike legacy Tenet hospitals, which had an unusually fast start on implementing their HIT initiatives, and have most of their implementation costs behind them, certain of our new hospitals are in the higher-cost phase of their implementation program.

Our 2014 outlook includes an incremental contribution from our Performance Excellence program of $50 million. This amount only represents the impact related to the legacy Tenet facilities. While we have targeted significant Performance Excellence savings at the legacy Vanguard facilities, these cost efficiencies are already included in the $50 million to $100 million of Vanguard synergies I just mentioned.

Our outpatient acquisition and de novo development program, also is expected to have another strong year. These initiatives should contribute an additional $10 million of EBITDA in 2014. This growth relates to the outpatient facilities we expect to open or acquire this year.

Turning to our fast-growing Conifer services business, we expect an incremental EBITDA contribution from Conifer in 2014. This growth is largely related to the ongoing Catholic Health Initiatives integration, which should add about $10 million of EBITDA in 2014.

It is important to note that Conifer will generate revenue cycle synergies from integrating the legacy Vanguard operations, but I have excluded them from the Conifer growth, as they are already included in our Vanguard synergies.

Also, we have one hospital currently under construction that will open in mid-2014. This hospital is in New Braunfels, Texas, and similar to most new hospitals, it will generate negative EBITDA during its pre-opening phase and initially after it opens.

We are including a negative $20 million EBITDA impact in 2014 related to this new hospital. However, we believe this is an attractive market for us, and we are excited about the future prospects of this facility.

As I mentioned earlier, we also have modeled in our 2014 outlook, the unfavorable impact from the expected government reimbursement reductions under the Affordable Care Act related to Medicare disproportionate share revenue cuts, and continuing Medicare market basket rate reductions that we have been absorbing over the past several years. These reductions are anticipated to have an incremental negative impact on 2014 EBITDA of about $50 million.

We will also absorb a full year of the Medicare 2% sequestration cuts, compared to nine months in 2013, since the cuts did not begin until April 1 last year. These cuts will create about a $25 million headwind against EBITDA in 2014, compared to last year on a total Company pro forma basis.

In addition, we anticipate inpatient volume and EBITDA headwinds related to Medicare's two-midnight rule. It is difficult to estimate the negative impact of the rule with any precision. However, the impact could be significant.

We have run our models using a possible mid-range impact of negative $25 million. Both our full year and first quarter outlooks reflect our assumption that there will be no meaningful relief from inpatient volume headwinds that have been impacting our industry.

Our 2014 outlook assumes same hospital pro forma inpatient admissions in a range of negative 200 basis points to flat. And we are assuming that 2014 same hospital pro forma adjusted admissions will range from negative 100 basis points to positive 100 basis points.

Turning to pricing, as Trevor mentioned, we are very pleased to have recently expanded our agreement with our largest commercial customer, Aetna, to include the former Vanguard hospitals, physicians and outpatient centers. Additionally, we have other smaller contracts we have also renewed recently, and we have several other negotiations in process that should be completed soon.

With all of this recent activity, we have confidence that we can achieve commercial pricing increases of approximately 5% in 2014. All of that said, we do anticipate that we could be out of network with a notable health plan later this year.

Let us now turn to our assumptions regarding the Affordable Care Act and its impact on our 2014 EBITDA outlook. These assumptions are summarized on slide 5.

As a result of the coordinated and effective roll-out of our strategies, we believe we are well positioned to generate meaningful growth as the Affordable Care Act impacts patient, payer and physician behaviors over the next few years. Estimating how much of this longer-term benefit can be captured in 2014, however, is a challenge.

To address these unknowns, we have made the following assumptions. We assumed about a 15% reduction in our uninsured volumes, with 10% of our current uninsured volume moving to Medicaid, and 5% moving to coverage under the exchanges.

These assumptions are based on recently published estimates from the Congressional Budget Office, which estimated a 23% reduction in the uninsured nationwide in 2014. We have adjusted these estimates to reflect the adoption or lack of Medicaid expansion in our markets on a state-by-state basis, as well as other factors.

Also, we are not assuming incremental utilization by patients who attain insurance coverage under the ACA. Additionally, we assumed 5% of our existing commercial patient volume migrates to the exchanges.

This migration would result from employers dropping their existing benefit coverage, or patients currently with individual or non-group coverage transitioning to coverage under an exchange product. And payment rights under exchange products are assumed within 10% of our existing commercial rights.

All of these assumptions translate into a contribution to 2014 EBITDA of about $75 million from the ACA. However, this $75 million of incremental EBITDA is before the offset of $50 million I mentioned earlier, related to additional Medicare reimbursement reductions under the ACA that we expect in 2014.

Other key assumptions in our 2014 outlook are summarized on slide 6, including growth in selected operating expenses for our hospital operations on a per adjusted admission basis of 1.5% to 2.5%. This metric excludes Conifer, our health plans, and our provider network in Southern California, and we are assuming a bad debt ratio in the range of 7.5% to 8.5%.

Depreciation and amortization in 2014 are expected to be in a range of approximately $800 million to $850 million, and interest expense is projected to be in a range of $730 million to $760 million.

You will note we assumed our effective tax rate will be approximately 40%. This higher tax rate includes the adverse tax treatment the ACA imposes on the deductibility of compensation expense over certain levels, as a result of a Company operating health plans.

We estimate our share count will be about 100 million shares, and our outlook for fully diluted normalized earnings per share is projected in a range of $0.49 to $1.67 per share. Based on our outlook range for EBITDA, we expect adjusted cash flows from operations to be in a range of $1.05 billion to $1.1 billion.

We have attractive opportunities to invest $900 million to $1 billion in capital expenditures during 2014 to further grow our Business. Our 2014 outlook for adjusted free cash flow is in a range of $50 million to $200 million.

Before closing, I want to quickly run through some of the items that will impact our EBITDA in the first quarter of 2014. These items are summarized on slide 7.

As I mentioned earlier, we have not assumed any material impact from Vanguard synergies or any California Provider Fee revenue in our first quarter 2014 EBITDA outlook of $350 million to $400 million. We did recognize $19 million of California Provider Fee revenue in the fourth quarter of 2013.

Also, we assume recognizing only $10 million of HIT incentive payments in the first quarter, compared to $48 million in Q4 2013. And we factored in a $15 million adverse EBITDA impact, compared to the fourth quarter, as a result of the decline in interest rates so far in 2014. As we have mentioned before, the seven-year Treasury rate at quarter end is used to estimate our malpractice and workers' compensation actuarial liabilities.

As we progress through the year, we expect to record revenue from the California Provider Fee program once it is approved by CMS, and capture the benefits from the Affordable Care Act. Also, we expect to realize the growing favorable impact from Vanguard synergies, our Performance Excellence program, and continued growth from our outpatient initiatives.

This implies a meaningful ramp in earnings, especially in the second half of the year. Clearly, we have an active and exciting year in front of us. We are pleased that our strategies leave us well positioned to generate attractive growth in the next 12 months.

Now, I am going to turn the call back to Trevor for some comments on the opportunities ahead of us. Trevor?

Thanks, Dan.

On slide 8, we have summarized the strategies that we believe have placed us in a very advantageous position for healthcare reform.

We conceived and executed these strategies around three sets of initiatives. Exchange contracting, outreach, and enhanced effectiveness in engaging the consumer.

From day one, we embraced the idea of the exchanges and have succeeded in positioning our hospitals to gain market share. 100% of our hospitals are now networks of every metal type in their markets, and more importantly, 97% of our hospitals are in the networks of at least one of the two lowest-cost silver plans in their markets.

As you probably know, HHS has reported that more than 60% of people buying insurance on the exchanges are choosing silver plans. Because the young invincibles will often buy a bronze plan, the silver plans are also more heavily weighted with high utilizers.

We are very pleased with this position, and I want to thank our managed care team for working very hard over the last year to get this done. We believe we have created a first mover advantage that gives us a strong position in our markets, and expect this to result in incremental insured patients at attractive price points. As we have shared with you in the past, we have been successful in having the value of our hospitals properly reflected in our exchange pricing, which is within 10% of our commercial rates.

The second part of our strategy is an active outreach program. This is a joint effort between Conifer, our hospitals, and more than 300 local community groups and navigator organizations in our markets.

This program, which operates under the branded name Path to Health, is educating newly eligible individuals with information about the exchange and Medicaid coverage opportunities. It also provides enrollment assistance through Conifer's hospital-based medical eligibility counselors and our navigator partners.

We have seen a significant ramp-up in enrollments over the past 2 months, and over the remaining five weeks of the enrollment period, we are accelerating our direct mail and other efforts, that are specifically targeting uninsured individuals who have utilized our hospitals in the last 12 months.

The third part of our ACA strategy has been to invest in Conifer's capabilities to engage directly with the consumer, from outreach, to scheduling, to counseling, to a smoother collections experience. The bottom line, is that the ACA shifts a lot of the customer relationship for hospitals to the consumer, and we are well-prepared and well-positioned for it.

Turning to slide 9, we are also well positioned relative to other important trends emerging across our industry. We were early adopters of strategies to improve clinical quality, implement advanced clinical systems and create accountable care organizations.

When you look at the industry's reaction to the opportunity offered by these forward-looking structures, you will note that Tenet is already well ahead of many of our competitors, and is actively engaged across the full range of activity in our facilities and Conifer. Included among these strengths, is our Conifer value-based care business, which has a 20 year history of providing high value services to healthcare providers in risk-based contracts.

These services are built around sophisticated skill-sets, including: patient population management, authorization management, and patient care reporting. These capabilities are critical value drivers in the creation and management of integrated care networks, including ACOs and CIOs, and they have the ability to drive lower healthcare costs while improving quality and outcomes. Conifer Value-based Care is already managing arrangements that cover more than 4 million lives, and in the post ACA environment, the customer base and demand for these services is expected to grow rapidly.

Slide 10 summarizes the exciting year that we see in 2014. We expect to capitalize on the new opportunities we have with the ACA and the Vanguard acquisition, and leverage the organic growth strategies that we have had at Tenet for a long time, including, notably, the growth of our outpatient and Conifer businesses. Beyond 2014, we will expect continued growth from the ACA, and further synergies from the Vanguard acquisition.

We also plan to achieve additional value creation through active portfolio management. We have some very exciting development activities in our pipeline.

We will continue to build Conifer, drive incremental growth in our outpatient businesses and further develop our new health plan business and our innovative value based care business models.

With that, I would like to ask the operator to assemble the queue for questions.

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

(Operator Instructions).

And from Deutsche Bank, we have Darren Lehrich on the line. Please go ahead.

Thanks. Good morning, everybody.

I guess when we look at your ACA guidance it strikes us as somewhat conservative, but I guess not surprising, given all the uncertainties early on here. I think the question is just with respect to your Medicaid conversion assumption, and we would like to just get your thoughts on why it wouldn't be higher, given your footprint and some of the expansion states.

And then if I could, Dan, maybe just get some numbers from you or some ranges on just the total number of uninsured admissions and the total number of uninsured ED visits for the combined Company, those were numbers not found in your 10-K.

Okay, Dan, want to take that.

Good morning, Darren. How are you?

Let me go through a couple of your points. In terms of the Medicaid conversion we outlined on the slides, what we did, Darren, was go through state by state where there is expansion already, notably California, and modeled it based on when we anticipate a state will actually expand its Medicaid programs.

So, for example, in Michigan they are going to expand their Medicaid program but that does not come online until April 1st. So there is a little bit of a delay there. But literally, we went through hospital by hospital, state by state, and that is how we also ended up with that estimate.

Now, we also took into consideration, we looked at some of the guidance that was in the CBO, most recent report, and also used that as a benchmark to look at as well. So, we think we have been fairly deliberate here and comprehensive, in terms of looking at the Medicaid volume that is going to convert from uninsured.

And listen, that volume is going to continue to grow as you move through the year, even states where they have already expanded. So, one thing so far in 2014, probably wouldn't surprise anyone, California is probably ahead of most states, and we are seeing that so far, at least 1.5 months into the year.

Now, your question about the total number of uninsured, if you give me one second here I can grab that for you. It is approximately -- admission is about 40 -- I would say about 40 -- about 50,000 admissions on a full-year, annual basis. And in terms of visits, again, that was on combined Company.

Right. We are estimating 575,000 ED visits uninsured, is that in the ballpark?

Total visits are approximately 675,000 on an annual basis. Again, that is legacy Tenet, legacy Vanguard.

And that is for ED or is that --

That is total.

That's total? Okay.

All right, I will let someone else ask a question. Thank you.

From JPMorgan, we have Justin Lake online. Please go ahead.

Thanks. Good morning.

First question on 2014 guidance. Looking at all the moving parts, 2013 run rate plus your headwinds, tailwinds that you laid out there, it doesn't appear like there is -- I'm having a hard time, I guess, backing into the -- what your organic growth assumption is for EBITDA, the combined Company. Can you kind of lay out for us what you think the underlying growth rate of this business is, ex, all the moving parts that you talked about here in?

Sure, Justin, this is Dan. Good morning, how are you in.

Good.

If you go to the slide where we outline some of the key items impacting our earnings in 2014, if you take the midpoint, it is a little bit north of $100 million, say $110 million. In terms of the base earnings of the Company, a lot of people, in terms of that number they were taking the midpoint of our guidance in the fourth quarter, about $425 million.

So, if you take that and annualize it, you get -- if you say $1.7 billion, just as a starting point. So you got $1.7 billion, and if you take the midpoint of some of those items -- or the aggregation of those items, you are $100 million or so. So you are at about $1.8 billion, roughly. And then one way to look at it would be to get to the $1.85 billion, the midpoint of our guidance, another $40 million, $50 million.

Now, I would point out, Justin, that when you think about some of those items on that slide, some of them are fundamental operating business practices that we have been deploying for years, such as the Performance Excellence program. So you know, if you added the $50 million for -- related to the Performance Excellence program, to the $40 million number, that I just mentioned, you are probably in the neighborhood of $80 million, $90 million. So it is a little bit more robust.

If you exclude the performance excellence program, we don't think you should, I mean, that is fundamental, that has been engrained into our DNA, and our operators have been doing it day in and day out. Listen, 2014 from an organic growth perspective, there is obviously pressure on that organic growth.

As we mentioned in our assumptions, we are assuming negative inpatient volume headwinds of about 2% to flat. So that obviously, is a pretty big headwind against organic growth, and if there is some -- if that alleviates, obviously, that will certainly help drive incremental growth in our core business.

Okay. But is it also fair to think about Medicare rates?

You mentioned the ACA rates as a call-out as well. Is it reasonable to think that Medicare rates are likely you to be in this flat to up slightly range, going forward, regardless of how we get there, or do you feel -- 2% to 3% at some point.

There clearly is -- they have outlined some of the estimates for going forward. Listen, you are going to see continued pressure on some of the elements within the market basket numbers that they ultimately come up with.

Based on what we are looking at right now, that is the assumption. There is a $50 million of incremental Medicare rate pressure this year, as well as the rate pressure related to another quarter of the sequestration cuts that we didn't see in 2013, because it wasn't implemented until April 1st.

Okay. And then just my follow-up is on -- one of your guidance points for reform was that about -- I think you assumed there that 5% of existing commercial admissions move into the exchange.

If I think there's about 150 million people insured commercially in 2013, that would be about 7.5 million people moving into exchange products, in addition to whatever the uninsured moved in. That just seems like a big number.

One, why do you think that? And two, could you tell me what the headwind from that is?

When you think about some of the estimates that the CBO has out there, that migration ramps up over time. And when we looked at it, and we modeled it a number of different ways, we landed on that there could be a migration of up to 5% this year.

Now, one good thing is that our managed care team, led by Clint Hailey, has done a very good job negotiating pricing that is essentially consistent with our existing commercial rights within 10%. So if someone does migrate from an existing commercial product to an exchange product, the delta between the rates may be nominal or even potentially up to 10%.

Now, one thing, it all depends, as well, is what type of commercial coverage did they have in the past? If they had one of the -- they were referred to many times as mini-med plans.

They may have had very high deductibles, and they are moving into a better insurance product. We would be very pleased to see that type of patient migrate to an exchange product.

Great. Thanks for all the color.

From Barclays, we have Joshua Raskin online. Please go ahead.

A quick clarification on 2014. Is a manual in the guidance, or are you guys waiting for that to close?

Good morning, this is Dan. There is a small element in our guidance for a manual, but it is insignificant.

Okay. And what about the Connecticut hospitals that Vanguard was looking at?

No, we have not included in the outlook anything that related to the Connecticut hospitals.

Okay, got you. You mentioned in your prepared remarks that you might be out of network with a large health plan later this year.

Is that a national plan or is that just a significant blue? Any way to, sort of, size the potential impact there if that were to occur, and maybe when does your contract expire, et cetera?

This is Trevor. We have signaled that because we are in a process of a lot of renegotiation, as you can imagine, integrating Vanguard and Tenet together. And we have assumed, because it is in early stages, that it is a national plan that we could be out of network for some period during the year.

And Trevor, when does that potentially occur?

In the second half.

Okay. So we have got some time on that one.

And then just last clarification, Vanguard used to break out the health plan premiums and expenses, I know it is not a significant an item, obviously, as it used to be, nor is it for the overall combined entity. Maybe, where are you putting those revenues, those premiums and those expenses? And then, any expectation, in terms of the combined -- I am sorry, the EBITDA impact in 2014 from the health plan?

This is Dan. The revenues are included in, I will call -- I will refer to as, our other revenue category. They are not included in patient revenue.

And then, in the expenses, would be in their natural element, for the employees, obviously, in SWMB. Claim payments would be in other operating expenses, you know, those categories.

In terms of -- you mentioned about -- Vanguard did used to break it out. The health plan business is not as material to the combined Company.

But I will say, and I mentioned this on our call in November, the contract with the state of Arizona, that expired on September 30th of 2013, our book of business under that contract is now about half of what it was. So there's about $10 million to $15 million of earnings pressure on a quarterly basis compared to Vanguard's former earnings run rate.

Right. Okay.

That is helpful. Thanks you.

From UBS, we have A.J. Rice on the line. Please go ahead.

Thank you. Hi, everybody.

First, just to ask about beyond just the health plan, you have now had Vanguard for a little while. Surprises? Non-surprise?

I know you got a cash flow estimate for the entire Company, Vanguard was going to be negative. So it is good to see that you can, with the combined entity, be positive cash flow.

Is there any change to the timing or anything on the capital commitments at Vanguard, as well? Just an update on the Vanguard from your perspective.

I will give you a you few thoughts, AJ, it is Trevor, and the I will ask Dan, and also Keith, to comment. I am very pleased.

I think if there is a big surprise, it is that there are so few surprises. And one of the very pleasant surprises, as I mentioned in my prepared remarks, is that we have really been able to retain so much talent within Vanguard at all levels of the Company.

So you go into the hospitals, you have some really innovative programs going on in lean daily management. They are very complementary, but also augment what we have been working on for a long time in Performance Excellence.

In the area of clinical quality, the trajectory in Vanguard is very strong. Same thing for health IT and some of the larger markets. And in some of the smaller markets, we have an opportunity to really conform to what we have been doing in health IT, and I am very pleased about that.

Some of the talent that we have obtained on a regional operator level is outstanding. And we are very pleased to have that added to the DNA here, within the Company.

I can't say enough about the development pipeline, so I am going to ask Keith to comment on that. And I guess I will go in order of this. I will stop. Keith, I will ask you to comment on some of the exciting opportunities we have in development. And then Dan, you can pick it up to what A.J. was really getting to, which is, what about on the financial side?

Thanks, Trevor. A couple things, AJ.

We have, obviously, continue to have a strong pipeline on the M&A side. We also are involved on a Company-wide basis in actively looking strategically at our portfolio and optimizing that. So, I think, we will see some things happen this year.

On the capital projects, you mentioned, I will say, and Dan mentioned it before, the new Brownfields Hospital that was under construction, will open this summer. That is a terrific market, one of the fastest -- the fastest growing in Texas, and one of the fastest growing in the country, in that corridor between San Antonio and Austin.

So we are really excited about it. That is the largest project that was under way at Vanguard.

In addition to that, the large ED expansion, the first phase of that, opened the new ED at Sinai-Grace a few weeks ago, in Detroit. The heart hospital, if you will, is on track for this summer. And really, we are you now in the phase where these things will start opening during 2014 into early 2015. And we are you now in the final planning phases for the Children's Hospital tower, which will start -- probably run from 2015 to 2017, because it will have to be phased because of just the logistics of that.

All of those things, I think, are very positive and on track. And on the M&A side, we see a lot of opportunities the to continue to upgrade our market positions and upgrade the whole portfolio in general.

AJ, this is Dan. Good morning.

In terms of assessing the underlying operations, several months after the transaction was consummated, to Trevor's point, no major surprises, which is sometimes a surprise in theses type of transactions. So incredibly pleased there.

As we continue to really dive deeper and deeper into the operations and assessing operational improvements, cost efficiencies, synergies, whatever the right buzz word is, we are becoming increasingly confident that over time, as we mentioned in our remarks, that we will be able to achieve and exceed those synergy estimates that we put out there.

So a lot of work going on there. We couldn't be more pleased with how that is proceeding.

To your point about the free cash flow, we have talked about this before. In 2014, as Keith mentioned, there is a number of projects that will start winding down and some of those assets will start coming online.

It is not only done in New Brownsfields and in Detroit, but also in San Antonio as well. Some very nice projects. We, obviously, focus on free cash flow and it is going to be a continued focus. And we expect that to grow as we move through 2014 and, certainly, as we get into 2015, when some of the CapEx levels will start coming down somewhat.

Okay. All right.

Thanks a lot. That is great.

From Morgan Stanley, we have Andy Schenker online. Please go ahead.

Hey, thanks for the question, guys. Real quick, on admissions and adjusted admissions growth going forward, obviously, you gave same hospital growth. When we think about Vanguard's contribution, are they going to see growth similar to those ranges?

Yes, those are ranges for the combined Company on a same hospital basis.

Just to be clear, when we refer to -- when we use the phrase same hospital, referring to 2014, it is the whole Company as though it had been combined for the entire year. Same hospital in Q4 is a different story.

Okay. That is helpful.

And then, thinking about 4Q here specifically, obviously, net patient revenue per adjusted admission for the whole Company was much lower than same store, implying much lower value for Vanguard. Can you talk about the moving pieces in there?

How much is payer mix, acuity, and versus simply, Vanguard's rates with commercial payers being below yours. And if that is part of the case, what is the opportunity there? Obviously, you guys highlighted the Aetna relationship, but as these other contracts come up for renewal, is there really an opportunity to lift those rates with Vanguard?

Thanks.

Yes, in terms of our pricing, actually, we couldn't be really more pleased with our negotiations to date. We were pleased with our realization in the fourth quarter, and it was in line with our expectation.

As you mentioned, there is some pressure from the mix and the inpatient volume headwinds, obviously, have an impact on that metric. So that puts pressure when you are looking at year-over-year type of revenue per adjusted admission.

So what that certainly had a part in it. But listen, our overall acuity was pretty strong, and so, we were happy to see that in the quarter.

Operator?

Thank you. From CRT Capital Group, we have Sheryl Skolnick online. Please go ahead.

Good morning, gentlemen.

First, I will just clarify for the record that your guidances and your budget are approximately equal at the midpoint of your guidance range. That is the first clarification. That is correct, right, Dan?

That is correct. Good morning, Cheryl.

Good morning. Okay.

For the record, so there was an error in my report this morning, just for the record. Moving on, though, if we could discuss a little bit about what is happening with your margins. We have talked about the top line and how you are going to drive top line and the pressures thereon.

But as I look at the way -- the helpful slide that you have given with the things that are in and out of 2014, it looks to me like 2014 could be well be a year in which the cost, not on a per adjusted admission basis per se, but where the costs are rising about as fast, or perhaps even a little bit faster, than your anticipated revenue on a same store basis is growing. Not real surprising when you've got a lot of reimbursement pressure.

I would like to have an understanding of what is in that selected other operating expense line item that you call out, that appears to be rising a little bit faster than your same store revenue, assuming the midpoint of the adjusted admission guidance and the midpoint of the net revenue per adjusted admission growth guidance.

This is Dan. I will take that one.

In terms of -- so our assumptions are 1.5% to 2.5% growth on adjusted -- revenue per adjusted admission, and in costs, the same range. When you look at -- one of the things, when you look at our absolute cost on our income statement, there are rising costs, and when you are looking at year-over-year, large part of that relates to the Conifer business is continuing to grow.

That drives costs up, but doesn't necessarily add anything to your volume statistics. So what we do is we exclude -- when we provide this cost metric--

Only hospital operations.

Your fundamental hospital operation. It excludes like the health plans, it excludes Conifer.

So when we think about the cost as we move into next year, obviously, we would have traditional type of compensation increases, but our Performance Excellence program is continuing to drive favorable labor management practices, and we continue to achieve savings on the supply chain. And so one of the -- obviously, the key variables is, as your volume goes up or down, it has a pretty big impact on that metric. And so, if we are in the 2% negative range, that is obviously going to have an unfavorable effect.

I understand. But that's why I asked the question at the midpoint, Dan. Because --

We think we can -- we feel very confident that we can manage our costs appropriately to drive the growth that is in our guidance for 2014, despite the various headwinds that we tried to lay out in fairly large detail.

Okay. Because I mean, I am struggling with two concepts. One, if I take your 2013 performance and try to make it apples-to-apples the way you have done, one way is to look at the fourth quarter as a proxy. But we know that, that has got some items in it that are lumpy and may have occurred in the quarter that may represent -- that may not occur in every other quarter, provider fees, the HER income is going to be different, et cetera. So it is really hard to get a run rate for the Company right now.

But if I think about it from the perspective of trying to do a pro forma for the prior 12 months, and compare that to the pro forma -- to the estimates for the forward 12 months, I keep coming up with an EBITDA for the Company that was in the neighborhood of $1.77 billion. And if I am in that neighborhood, and I am getting to $1.8 billion to $1.9 billion, I am really not understanding where there is growth here. And that is my concern.

So that is why I am asking, is it margin pressure, because your costs are rising as fast as your revenues, because you are not getting a full-year impact of the positives? Is it that it is going to take several more years before reform actually is accretive? Is it that it's going to take several more years that Vanguard is accretive and all those things are happening at the same time? Is that what is going on here?

Well, one thing, when you look at -- and I mentioned this a little bit earlier. But when you look at Vanguard's previously reported results, the two most recent ones were in the June quarter and the March quarter, you have to adjust those results at least $10 million to $15 million per quarter and --

Right.

And take that out of the run rate.

For the health plan.

For the health plan, the fact that it is a different contract now.

And so when you think about it from an operating basis, if you use $425 million as a midpoint, and you annualize that, and you get around roughly around $1.7 billion, when you take those items that we have outlined on the slide, they give you about $110 million if you just pick the midpoint. And so you get a little bit of $1.8 billion, and then, arguably, you add on some additional core organic growth.

Now, as I mentioned earlier, as well, I think the PEP, our Performance Excellence program, cost initiatives, are part of your organic growth. So we look at it as there is some organic growth, and we are fighting the headwinds of a pretty tough inpatient volume environment. And when we have to assume that there's going to be inpatient volume trends in negative 2% to flat, that puts pressure on our operation.

Right. Okay.

So -- but we are in the same ballpark in the way we think about the trailing 12 months as somewhere in that $1.7 billion-ish range.

I think that is fair.

As a base to compare your performance in 2014 to, and then evaluate it however we are going to evaluate it on the growth. Okay.

That is fair enough. And the share count that you are using for the full year is going to be 100 million shares?

Yes.

Okay. Very good. Thank you.

From Bank of America-Merrill Lynch, we have Kevin Fischbeck online. Please go ahead.

Great. Thanks.

Just wanted to dig into your assumption around the reduction of insured in your markets. It sounds like, to me, that you are assuming that the reduction on insured volumes will relatively match the reduction on the uninsured in your markets.

How do you guys think about the concept of the people who are sickest getting coverage and potentially representing a bigger part of your existing volume? Sounds like you are specifically targeting people who have been to your hospital in the past, and wanted to see how you thought about that dynamic potentially making a bigger impact.

Good morning. This is Dan.

Listen, we have modeled this hundreds of different ways. Certainly, we literally go into a particular service area that a hospital is in, and we try to make a judgment as to the current uninsured book of business.

And Conifer provides an incredible amount of assistance and help here, with the level of detail that they have through years and years of managing our revenue cycle business. And so we have a lot of visibility into overall uninsured trends that we have been seeing historically, and that we are seeing currently.

And so we have not -- admittedly, we pointed out on the slides, we have not assumed any incremental utilization from the individuals who do convert. But to -- we literally tried to go through -- based on our knowledge that we have gained through the years of our uninsured population, as well as the opportunities that are out there in the markets, whether a state has expanded its Medicaid program or not.

And then, also looked at some of the assumptions that the Congressional Budget Office just outlined, I believe, two or three weeks ago. So we took that all into consideration in developing our -- basically our conversion percentages.

Okay. So, but it is basically the way I framed it that? It is kind of a straight one for one. You are not assuming that these are the people who come to your site disproportionately getting coverage.

Well, I would say one thing, because we have been asked periodically, in terms of the frequent fliers and what extent or what extent or what level do we see typically in our portfolio. Now, it varies by hospital, as you can imagine.

Some hospitals, it is not necessarily real a large portion, but other hospitals, it is fairly significant. If you had to aggregate it in total, the frequent fliers may be in the 40% to 50% range of our uninsured on a book of business.

Kevin, Dan mentioned that we have all these insights through Conifer. Steve Mooney, the CEO of Conifer is here with us.

Why don't you, Steve, just talk briefly, because it is a topic of interest to everybody, about what you are doing in order to help us identify those people, reach out to them, get them the information they need, get them qualified, and then work with the hospitals on, basically, a development strategy for that population.

Sure, Trevor. Kevin, this is Steve.

So as Dan was saying, clearly, we have had a program, it is called our medical eligibility and counseling services program for years, within Tenet. That program has been extended pretty heavily since we developed Conifer back in 2008.

The point now, we have about 625 advocates around the country operating that program in about, I think it is, 22 states, of which 400 of those are certified application counselors. Trevor mentioned some of the items in his brief remarks.

We are generating programs to outreach. We have patients, we have individuals on-site to help educate them on the programs that are existing. We have, obviously, a lot of data pools we can pull, about who was in our hospitals before that were not insured, were in for a certain service, to reach back out to them and understand how we can get them to qualify for an exchange program.

We are, obviously, doing outreach programs through the health program and have the inbound traffic from that with our call center to help individuals to get qualified for the programs, and starting to quantify where that is coming from. And now we do further outreach in those particular communities to help those patients.

So a lot of significant data analyzing analytics driving some of our activity to hopefully get a greater level of flow from not only individuals that were coming into our hospitals from the exchanges, but who was in our hospitals before that might be ill, or others in those particular locations that we could start driving that traffic back in.

That is very helpful. I guess just last question then on the ramp-up assumed in the guidance, when we think about sounds like both synergy number and the ACA impact is going to ramp through the year without much impact in Q1.

Sounds like, to me, that you are thinking that by Q4 you are going to probably have a run rate number for both of those of at least $100 million, more like $125 million exiting the year, before you can build on that for 2015. Is that the right way to think about it?

This is Dan. Those things will certainly grow as we move throughout the year. Let me just give you a couple examples of why they build.

So for example, when Steve and his Conifer colleagues go into and start assessing the revenue cycle operations of the former Vanguards facilities, you don't necessarily go into that revenue cycle unit, flip the switch day one, convert all the systems, drop all your people in there and start employing your best practices that you have built up over 10, 20, 30 years. That is a gradual process, and as you capture synergies incremental as you move along through -- as we will move along through the year -- keep staying on the revenue cycle for example, even when we get to the end of 2014, we won't be done. That is going to be an ongoing, continuing effort as we move through 2015 and even into 2016, as we continue to convert certain practices and systems that the Vanguard facilities had under the Conifer umbrella.

Same thing in supply chain and Performance Excellence. You go in, you are evaluating practices there. We are learning from the Vanguard colleagues of ours a lot of great practices that we are taking, we are going to apply and have been applying in our facilities.

They are doing the same with some of our practices. But again, they, as you move through time, they continue to build as you continue to look for benchmarks and best practices to most efficiently manage your cost structure.

Great. Thanks.

From Credit Suisse we have Ralph Giacobbe online. Please go ahead.

Thanks. Good morning.

First, just wanted to clarify that, did you say guidance assumes that you do go out of network with that large plan you mentioned? And if that is true, I just want to make sure, would that be a meaningful swing if you did come to an agreement?

This is Dan. Good morning.

Certainly, when we assessed our guidance for 2014, we took that into consideration. It is an evolving situation.

We are not necessarily going to get into all the details and which payer it is. But it is certainly the possibility of that was considered when we built our guidance. I am not going to sit here and say specifically there is an X amount of dollars in the guidance for that.

But I think you could, we have assigned a probability.

There is a probability that we have put into our range.

Okay. All right. That is fine.

And then, I guess, maybe, on switching topics here, what has been your -- can you give us a sense of what your historical rate has been in signing people up for Medicaid that were previously eligible? And also if you had the stat of what percentage of your self-pay volume is in Medicaid expansion states.

Steve Mooney can speak to the success rates in signing people up, and while he is doing that somebody will dig for the second part to your question.

The success rate when individuals are -- actually, we qualify them for the program, we do a screening process. We have a pretty robust tool, helps us determine linkage, which over the years I have attended. We have actually seen a significant ramp-up from our old days to now; just gives us levels in modeling what programs they qualify for, what state or local county programs.

When we qualify them through our program, we can actually get them linked, because we know sometimes, individuals don't meet the spend down requirements, they cannot be co-operative, things of that nature. We are typically in the range of around 90%.

90?

Yes, 90.

And then just the -- if you had the self pay volume in Medicaid expansion states.

We are going to have to get back to you on that one.

I don't have the exact number in front of me. Certainly, California, there is a large percentage of the uninsured in the State of California.

Keep in mind, as we have mentioned you through the years, the uninsured populations in Florida and Texas, two states that are not expanding, are sizable.

Okay. Thank you.

From Wells Fargo we have Gary Lieberman online. Please go ahead.

Thank you, good morning. This is Ryan Halstead on for Gary.

One quick one on guidance. The selected item, the $50 million headwind on the two-midnight rule, I guess I just wanted to clarify, is that based on when it goes into effect in 4Q, or is that assuming some continuation of a trend in the shift away from one-day stays?

This is Dan. Good morning.

Let me try to clarify one comment you made. The two-midnight rule is in effect. What the recent discussion that you have probably noticed, that came out a week or so ago, simply addressed when the recovery audit contractors, or the RACs, will be actually going in and assessing those claims and potentially issuing denials related to that.

But the two-midnight rule, it is in effect right now. And there is various protocols that have to occur for admission to qualify under the Medicare program and that went into effect October 1, 2013. And we are, certainly, complying with that, and it is going to continue as we move through the year.

Okay. That is helpful.

And then I guess on -- I was hoping you might be able to share some of your initial experiences, successes with the ACA enrollment, especially California, which has had some early success. I thought maybe you might be able to share some of your experience.

Yes, we have obviously -- this is Dan again. We have been analyzing that, basically, on a daily basis.

What we have seen so far in California is very encouraging, in terms of when we look at growth in the individuals who are eligible and we are actually seeing in our facilities. And as Steve mentioned, his medical eligibility unit is on top of this 24/7, and we are seeing increased activity and increased success in getting people qualified for the MediCal program out there.

Thank you.

And our last question is from John Ransom from Raymond James. Please go ahead.

Most of my questions have been answered. But maybe Keith, could you talk about what pricing looks like these days for hospitals as a percent of revenue or however you want to look at it?

Sure. I think, John, really it is all over the map on pricing. We really continue to look at the same kind of models that we always have, in the sense that we look to get to enterprise value accretion within 1 year to 18 months on anything, strategic even.

So that could translate into a higher or lower percentage of revenues, but I don't think you can take -- because markets are so different in terms of mix, pricing, you go down the list, you can't really assume that $1 of revenue has the same value across multiple geographies. So it will be all over the map still.

And do you see more opportunity as a result of the ACA? Is it going to sharpen the winners and losers in these urban markets so models that could have competed five years ago could no longer compete?

I think that is very much true. I think, clearly, folks are looking at how we get paid evolving over the next several years, into more, either, bundled, or as it moves towards a more risk for the providers than just what we see today in value-based purchasing, which is a risk that we all have today.

I think you are going to see folks looking for the ability to access larger blocks of lives to take that responsibility on for, and to do that, there is going to be some consolidation, particularly in urban markets, and, I think, there will be winners and losers. You are already seeing some of the networks pull together in certain markets. So that is a sign that you will have networks competing with networks, which by itself will draw people into, either, completely economically integrated relationships, like an acquisitions or mergers, or, potentially, partnerships, where the parties are very economically aligned around taking care of patients as a group of -- population group, if you will.

So I think there is a lot of different arrangements you will see, but clearly, the trends that we see towards accountable care, strategically, and the different organizational structures that are put together for that, will drive some more consolidation in markets that are particularly fragmented today.

And then just finally, this is maybe for Dan. Dan, all the spending in the ACA is driving up D&A costs. Can you give us an idea of what peak D&A might look like in the out years when you are finished with all the spending in?

John, good morning, this is Dan.

We obviously aligned our depreciation and amortization guidance for next year. And one of the things, if you compare to our previous run rate of the two organizations, it is higher. But certainly, that is attributable to the various projects that are coming online this year, and -- either in the earlier part of the year, or in the latter half of the year, as well. There isn't a ramp there to some degree.

As Vanguard had close to $400 million to $500 million of projects on their books, good projects, that are going to eventually come online here in the next year or so. And so, as those projects come online, although we haven't, obviously, put guidance out for 2015, you should expect depreciation to have an uptick as those type of projects eventually are closed out, and they are operating on a day-to-day basis.

Okay. Thanks a lot.

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