Tenet Healthcare Corp (THC) 2014 Q1 法說會逐字稿

Welcome to the Q1 2014 Tenet Healthcare Earnings Conference Call. My name is Richard and I'll be your operator for today's call.

(Operator Instructions)

Please note that this conference is being recorded.

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

Thank you, operator, and good morning, everyone.

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

I'd like to begin by referring you to slide 3 of the presentation that we posted on our website last evening. I am very pleased to report a solid start to 2014. We achieved adjusted EBITDA of $387 million, which approaches the top quartile of our outlook range for the first quarter and keeps us on our planned earnings trajectory for the year.

Making certain adjustments to get to an apples-to-apples comparison, which our Chief Financial Officer, Dan Cancelmi, will discuss in detail, we drove 9% growth in EBITDA year over year. We drove admissions trends that were better than we expected. This performance was despite widespread challenges presented by the severe weather events in all of our markets, except California, Arizona, and Florida.

Our success on the inpatient side included the best quarter in same hospital commercial admissions that we've achieved in more than six years. Commercial admissions, which have been down in the mid-single digits for a long time, were virtually flat on a pro forma basis, establishing a four quarter pattern of improvement and providing solid evidence that we are well-positioned relative to the most popular exchange products in our markets.

I should mention that over the next two quarters, when we refer to pro forma metrics, it reflects the performance of our portfolio as if we owned the Vanguard hospitals in the prior reporting period. Same hospital refers to the legacy Tenet hospitals only. Outpatient growth was more materially impacted by the severe weather events in our markets, but we still achieved a 4.6% pro forma increase, nearly 45% of which was organic growth.

Our first-quarter results demonstrate that the impact of healthcare reform is materializing much like we had anticipated. Through our Path to Health campaign, we invested millions of dollars over many months distributing printed guides to enrollment, fliers, our website, and other materials. We worked with community groups on outreach programs and trained members of Conifer's staff to be certified to assist people in enrolling for insurance coverage.

We also invested in finding those patients in our markets who are uninsured and likely to use hospital services and getting them covered. We're now beginning to see the benefit of these investments and we are continuing our efforts in driving Medicaid enrollment while we prepare for the next open enrollment period for the exchanges. The changes in payer mix were dramatic in the four states that expanded Medicaid.

In those states, Medicaid admissions increased by 17%, while uninsured plus charity admissions declined by 33%. The trends in outpatient visits were remarkably similar to the inpatient mix change. In Q1, the EBITDA impact from these favorable mix changes was offset by the ACA-related cuts to Medicare. I don't need to remind you that we've taken cuts in Medicare payments for the last 3.5 years to help pay for the ACA.

Finally, in 2014, we're starting to see a benefit from coverage expansion. It was slow in the beginning of Q1, but ramped up toward the end of the quarter, and we expect to capture a significant net benefit from the impact of healthcare reform in the remainder of the year. These expectations are built into our existing 2014 EBITDA outlook.

We produced further evidence in the quarter that our key growth strategies are working effectively. the foundation of our strategy is our commitment to quality and clinical excellence. Turning to slide 4, I'm pleased to report that we recently received our Leapfrog Hospital Safety scores, which extended our record of leadership in this area. When you convert the Leapfrog letter scores to a grade point average, Tenet has the best GPA among our peer companies.

We also made solid progress on our strategy to build those business segments that have higher margins, are faster growing, and are less capital intensive than our core acute care hospitals. Our outpatient and acquisition and development strategy and all three of Conifer's business lines drove significant growth in the quarter. We added seven new outpatient facilities since year end and now have 190 centers.

This strategy is important because it creates access points beyond the hospital where we can directly engage our patients at a dramatically lower capital cost and with higher margin potential. By design, our outpatient strategy will deliberately cannibalize some of our existing inpatient business, but this is what consumers want; convenience at a lower cost.

Our outpatient strategy is also more aligned with the preferences of payers and physicians. Conifer achieved significant growth, reporting $48 million in EBITDA for the quarter on revenues of $285 million for a margin of 17%. This performance represents increases of 50% and 35% for EBITDA and revenue growth, respectively.

This growth includes contributions from both the Catholic Health Initiatives and Vanguard integrations. As anticipated, the margin contribution from CHI to date has not been material, due to the up front costs of integrating the CHI revenue cycle operations with Conifer.

As we enter 2015, the contribution will become more meaningful. This, along with other growth opportunities, keeps us very excited about both the near- and longer term prospects for Conifer.

We also continued to do very well in capturing synergies related to Vanguard. You will recall that we identified $100 million to $200 million of synergies. Of this total, we expect to capture $50 million to $100 million in 2014. We feel increasingly confident that we will exceed the range of synergies over the longer term.

From an operational perspective, the integration is well advanced. One indication is that the volume weakness in the Vanguard portfolio that was evident in the last half of 2013 has now abated. And the performance across our total portfolio has improved and has become more similar among hospitals that were part of either Tenet or Vanguard historically.

With Conifer's accelerating growth, our continued success at developing our outpatient channel, and our progress toward integrating the Vanguard assets, we've done a lot to advance our transformation from a regional operator of hospitals to a national diversified healthcare services company. In summary, we had a great start to the year.

We generated EBITDA approaching the top quartile of our outlook range and 9% growth on an apples-to-apples basis. Volume trends continue to strengthen and are running ahead of our expectations, in spite of severe weather in many of our markets. Healthcare reform-related benefits are tracking as expected with significant growth in Medicaid volumes in those states that expanded their programs on January 1.

Our strategy of driving growth in higher margin, faster growing, capital-light businesses is paying dividends with strong performances in outpatient and Conifer. The Vanguard integration is proceeding smoothly and we are increasingly confident that our acquisition synergies over the longer term will exceed our $100 million to $200 million range.

Based on these successes, we are reaffirming our 2014 outlook for adjusted EBITDA in a range of $1.8 billion to $1.9 billion.

I'll now ask Dan Cancelmi to provide some additional color on the quarter and our outlook for the balance of 2014. Dan?

Thank you, Trevor, and good morning, everyone.

Overall, we were pleased with our first-quarter results, as we generated adjusted EBITDA of $387 million in the quarter. On an apples-to-apples basis, that's an increase of 9%. This 9% growth rate reflects a $76 million headwind we've described on slide 5.

Let me provide some color on these items. There was a $25 million adverse impact from Medicare sequestration in the first quarter of 2014, as the 2% cuts did not begin until the second quarter of last year. We had no revenue from the California Provider Fee program since the current year program has not been approved by CMS, compared to $12 million of revenue in last year's first quarter.

We had a $10 million gain last year related to the consolidation of an outpatient center for the first time. There way as $22 million earnings decline in our health plan business, primarily related to the non-renewal of the Arizona Medicaid contract with uncapped lives. We incurred $3 million of incremental expense in this year's first quarter related to our new hospital under construction in New Braunfels, Texas.

The severe weather events in this year's first quarter that we estimated had an impact of at least $10 million. And we experienced a $5 million unfavorable impact related to the Two Midnight Rule. Absent the impact of these items, we drove pro forma EBITDA growth of about 9% compared to last year's first quarter.

Slide 6 provides a high level summary of the quarter. As Trevor mentioned, we were pleased with our continuing success at driving improving volume trends.

On a pro forma basis, we generated a 0.3% increase in adjusted admissions. This increase included a 4.6% pro forma growth in outpatient visits, partially offset by a 0.9% pro forma decline in admissions. Our same hospital total admissions declined 1.2% in the quarter and total admissions in the legacy Vanguard markets declined 0.5%.

While our outpatient growth was helped by acquisitions, 44% of this growth was organic. We also generated another strong quarter of surgical volume, which resulted in a 7.7% increase in surgeries on a pro forma basis.

Severe weather in the quarter had a negative impact on our volumes, especially outpatient visits. While some of these visits were successfully rescheduled later in the quarter, we estimate the weather events reduced our growth in outpatient visits by 160 basis points.

A particularly notable achievement for us was the best quarterly volume trends in our commercial managed care book of business that we've achieved in more than six years. While these trends were enhanced by volumes from the exchanges, the improved commercial volumes provide further evidence that our growth strategies, including our targeted growth initiatives and physician alignment, are generating incremental business and addressing the needs of the commercial market.

As you can see on slide 7, the impact of healthcare reform on our volume and payer mix was pronounced. In our four states of expanded Medicaid effective January 1, there was a significant migration of patients from uninsured into Medicaid.

On the inpatient side, Medicaid admissions rose by 17%, while uninsured plus charity admissions declined by 33%. The outpatient payer shifts were similar with an identical 17% increase in Medicaid outpatient visits and a 24% decline in uninsured plus charity visits in these four Medicaid expansion states.

Slide 8 adds the volume data for non-expansion states to highlight the contrast with the states that expanded Medicaid on January 1. In the far right columns of the slide, we provided the aggregate picture. You'll recall that our initial outlook for 2014 we shared with you in February assumed a 15% uninsured decline in volumes with two-thirds of the volume, or 10% of the aggregate, converting to Medicaid and the other one-third, or 5% of the aggregate, going to the exchanges.

Slide 8 provides some visibility into our progress relative to those assumptions and the conclusion is, we're doing rather well. The total decline in uninsured outpatient visits in Q1 was 14%, which is already quite close to our 15% assumption. In terms of admissions, the uninsured decline was 5%, so we've got some ground to cover yet, but there are at least two significant factors that are likely to improve our reform experience during the balance of the year.

The first is that Michigan expanded its Medicaid program, effective April 1. We are optimistic that we will realize significant benefits in Michigan for Medicaid expansion.

The second factor is the ramp up we've seen in exchange volumes over the last few months. Exchange volumes grew sequentially as we moved through the quarter and that trend continued in April.

As a sidebar comment, where our previous patient encounters give us visibility into their prior insurance status, approximately 30% of these exchange patients we treated in the quarter were uninsured in 2013. In our conversations with investors over the last few months, we've received many questions on our ability to help uninsured patients sign up for insurance who have presented at our facilities on multiple occasions in the past.

This focus is of special interest as this patient population generates about 40% of our bad debt expense in any given year. Slide 9 provides a helpful perspective of finding this patient population and shows how this population evolves over time.

In calendar 2012, approximately 109,000 uninsured patients presented in our facilities for two or more episodes of care. In 2013, only 17% of these uninsured patients presented to one of our facilities again.

The takeaway point is that while this population creates a significant and readily identifiable cost burden, our ability to fully address the problem is limited by the significant annual turnover of this population. Slide 10 shows the progress we've made with those who presented in the first quarter of 2014. 25,000 of the 106,000 uninsured patients presenting multiple times through our facilities in 2013, presented again in the first quarter.

As you can see, Conifer successfully enrolled 22% of these patients in Medicaid. This success rate was diluted by those states which have currently elected not to expand their Medicaid program.

Returning to our summary on slide 6, we achieved solid pricing growth, including a 5.5% pro forma increase in commercial managed care revenue per admission. We generated this growth through a combination of enhanced commercial contracts and stronger commercial acuity.

This strong pricing offset the soft inpatient volume environment to help drive a 1% pro forma increase in net operating revenues. We achieved a 2.4% pro forma increase in patient revenue and a 3% increase in aggregate pro forma revenues, excluding a $75 million decline in our health plan revenues.

Turning to costs, we demonstrated another quarter of tight cost control. We held the pro forma increase in selected operating expenses per adjusted admission in our hospitals to 1.5%, which includes the growth in our physician employment.

Bad debt expense as a percent of revenue rose 30 basis points on a pro forma basis. This change was primarily attributable to a temporary increase in our receivables, due to timing issues and an increase in uninsured revenues compared to last year's first quarter.

We expect to reverse this temporary build up in AR as we move through the year. Adjusted cash provided by operating activities from our continuing operations was $25 million in the quarter, compared to adjusted cash used by operating activities of $20 million in the first quarter of 2013. Our CapEx was $281 million in the first quarter, which resulted in adjusted free cash flow of negative $256 million.

Our cash flows were adversely impacted by the fact that we are owed approximately $210 million related to the California Provider Fee program, Texas Medicaid DSH funds and the Texas 1115 Waiver program, which we expect to substantially collect as we move through the year.

Cash was also adversely affected by the timing of various working capital items we've talked about in prior years, including the annual match of our employees' 401(k) contributions, our employee incentive compensation payment timing, and certain payroll and property taxes. Since we are past some of our seasonal working capital requirements, we expect our adjusted free cash flow to grow during the remainder of 2014.

In terms of our outlook, we are very pleased with our progress in the first quarter. We executed on a number of critical tasks better than we had initially anticipated.

The areas of improving performance on which we will build in the second quarter include: incremental year-over-year strengthening in our inpatient volume; favorable momentum related to the impact from the Affordable Care Act; continuing tail winds from our growing Conifer services business; and a continuously improving longer-term picture related to the Vanguard integration. As a result, we are comfortable reaffirming our 2014 adjusted EBITDA outlook in a range of $1.8 billion to $1.9 billion.

Slide 11 provides detail on our second-quarter outlook for adjusted EBITDA. Our outlook range for the second quarter is $375 million to $425 million. Please note that we have not assumed any revenue from the California Provider Fee program in our outlook range for the second quarter.

However, if CMS approves the term program by June 30, we will recognize $70 million of revenue under the program in the second quarter, which would be additive to our $375 million to $425 million outlook range for the second quarter. We remain confident that CMS will approve the program before year end, and that the $140 million of revenues expected from this program for the full year that's in our 2014 outlook will be recognized before year end.

Slide 11 also lists a number of the other assumptions we've included in our second-quarter outlook. As you can see, we expect growing contributions from Vanguard synergies, our performance excellence program, and healthcare reform. Sequentially, the second quarter will also benefit from the absence of the severe weather-related impact we incurred in Q1 and an expected $40 million benefit from health IT incentives.

These growth drivers are expected to be partially offset by the loss of $5 million of earnings from transactions that will not routinely occur that contributed to Conifer's Q1 performance, and the adverse impact from a 4% volume decline we typically see in the second quarter compared to the first quarter. Building on the middle of our outlook range in Q2, we still require a noteworthy earnings ramp in the second half of the year in order to achieve our full year outlook.

On slide 12, we've listed the initiatives and other opportunities that we expect will drive our second half performance. In the interest of time, I'll leave them for you to read. However, it should be clear that these are well-defined and quantifiable initiatives.

Last week, CMS released the proposed Medicare hospital inpatient payment and policy changes for federal fiscal year 2015 that begins on October 1. According to CMS' estimates, the impact of all proposed changes to Medicare inpatient payment rates is a reduction of approximately 1%.

This reduction, which includes an expected decline in Medicare disproportionate share reimbursement, due to a projected decline in the uninsured population, is generally in line with the Q4 assumptions in our existing 2014 guidance. The final rule will be released in Q3 and it could include changes to the proposed payment rates and policies.

In summary, we have an active and exciting year in front of us. We are pleased that our growth strategies are working and leave us well-positioned to generate attractive growth for the balance of the year and beyond.

I'll now ask the Operator to assemble the queue for our Q&A. Operator?

(Operator Instructions)

Justin Lake, JPMorgan.

This is actually Mike Newshel in for Justin this morning. My question to start off is on how you're thinking about your reform benefit guidance since coverage expansion came in better than expected? You had a strong start and Michigan Medicaid expansion is starting off fairly strong as well.

Do you think there's any potential upside to your reform guidance? Would you be in a position to update it by the second quarter?

This is Dan. Thanks for the question.

Certainly, we were pleased with the trends that we saw in the first quarter. In our expansion states, we saw a significant growth in our Medicaid book of business, which we've discussed in our prepared remarks and which we anticipated. We also saw a corresponding decline in the uninsured volume in those states as well.

As we mentioned, our exchange volumes picked up sequentially each month as we moved through the quarter. And that has continued into the month of April, as well, so that is nice to see and that book of business is growing. As you mentioned, Michigan has expanded its Medicaid program April 1 and based on what we saw in Michigan in the month of April, it's tracking consistently with the other states, so nice to see there.

In terms of the aggregate or overall guidance for the full year 2014, we think it's a little premature at this point to make any revisions to our guidance for healthcare reform. We'll certainly be monitoring the progress in the second quarter and we'll provide full update at that point and make any revisions if it makes sense.

AJ Rice, UBS.

Just to maybe flush out a little bit more in the Medicaid, I don't want to beat this to death, but is the experience in each state similar? I know those are big numbers, but I wondered if the experience in each state was similar or does it vary quite a bit of these four expansion states?

Obviously, April 1 Michigan is expanding and that's a big state for you guys. What about the characteristics of your Medicaid population there? I'm assuming it's a more significant state in terms of what it can do. Any reason to think that you wouldn't see the similar trends in Michigan that you've seen in the other four states?

Good morning, AJ, this is Dan. In terms of our experience in the four Medicaid expansion states in the quarter and even into April, the growth in terms of the Medicaid book of business is fairly comparable among all of the four states.

There are some states that stand out above others, particularly California, but all the states had double-digit growth. As you could imagine, California has certainly been the most significant in terms of progress, in terms of expansion. If you had to rank order them, I would certainly put California at the top, but the other three states are doing quite well, as well.

In terms of Detroit, yes. Detroit represents over 10% of our uninsured patients that we typically see in a given year and we do anticipate significant benefits there. What we've seen so far in April is good, in terms of the Medicaid volumes and the decline the uninsured admissions there.

On the Vanguard synergies, you reiterated that you're confident with them and long-term, you might actually be at the high end or exceed, what are sort of the gating factors you've got in your build up to Q2? A step up and then obviously, further step up in the back half of the year.

What are some of the things that still remain to be done to be able to realize that? How much of that do you have in the bag and time just has to play out just to capture it?

Let me address several the broad categories, AJ, and maybe that will help sort of frame it. Certainly, in terms of cost efficiencies and purchase services spend, that category is going very well. There are certainly processes that take some time to implement and it's not necessarily something you can flip the switch, so to speak, and you capture all those synergies on day one.

There's alignment of relationships, vendors, assessment of the spend across the entire portfolio of the Company. As we move through the next year or so, we'll continue to build on the opportunities and the supply spend and the purchase services category.

From labor management, it's somewhat similar, we're getting, we have been and continue to fully evaluate our SW&D in all the markets. And with our performance excellence program, which I think, as you know, has performed very well over the past three or four years, as we deploy all the skill sets and capabilities we have in that area over time, we're going to continue to capture efficiencies there as well.

Revenue cycle management, Steve Mooney is here, he leads up our Conifer business. We've been in the process of integrating the various legacy Vanguard facilities into Conifer's revenue cycle operations. That does take a little bit of time. You don't necessarily convert all of those systems on day one.

We have a very established plan of how we're going to convert the system when they're rolling in fully under Conifer. That's going very well.

Those type of revenue cycle synergies will build over time. There's a multi-pronged approach there.

In addition to integrating the revenue cycle operations under Conifer, it's also in terms of Medicaid approval process, follow-up collections on uninsured accounts. The broad spectrum of revenue cycle management opportunities that will build over the next several years, to be quite frank with you, as the implementation and the integration of the revenue cycle operations under Conifer continues. We feel real good about where we're at this point.

Okay, thanks a lot.

Joshua Raskin, Barclays.

On the pro forma numbers, and I could take this off line, Dan, if it's a little bit more complex than it sounds. But I'm just adding the up the admit numbers for Tenet in the first quarter of last year and then Vanguard's March quarter of last year. When I compare that to the pro forma numbers that you gave for the first quarter of 2014, I'm getting an admit number down 1.6%, but I think you said it was up 0.3%.

On adjusted admissions, there's a similar difference, a little bit lower of a difference, but there's still a difference. I'm just curious, were there some divestitures or some movements in that pro forma? It worked last quarter, the calculations, so I don't know what changed into the first quarter.

Josh, good morning, this is Dan. You might be picking up the fact that Vanguard used to report discharge as not necessarily admissions, but we've been consistent. There could be some miscellaneous timing differences between an admission and a discharge. But the Vanguard book of business and from an inpatient perspective, there was a nice improvement in the quarter, which helped drive the 0.3% aggregate total Company portfolio increase in adjusted admissions.

Okay. So you guys are definitively seeing legacy Vanguard trending slightly better than same-store Tenet at this point?

Slightly better, yes, which was nice to see, which was a little bit different in the fourth quarter.

Yes, absolutely. It seems like the ED visits, when I look at the new Medicaid population in the four states that expanded, the ED visits were the strongest of the improved metrics. I'm curious, there was lower acuity that came in with those visits?

I'm asking, is it just that's the mechanism by which these individuals have access to healthcare system, previously. And so do you think, as they sort of learn more about the system, that tails over time or as they get enrolled in managed care, it tails over time? Or do you feel like the acuity was similar and it just happens to be a population that uses ED visits more frequently?

I think, Josh, as reform becomes more ingrained in the culture and our markets, I think, for many individuals utilizing the ED is probably maybe one of the first areas where they might enter our facilities. Probably over time, there will be maybe some moderation of that. But we were pleased with our ED volumes overall in the quarter. We've continued to drive growth in ED volumes.

Listen, it's the first quarter under reform so it's a little early to draw any specific conclusions in terms of what reform means to ED volume over the longer term. But as we mentioned, we like what we're seeing so far.

Okay. California Provider Fee, is there a scheduled update or time frame where the next catalyst for the next meeting or the next decision point or are you just simply waiting on this state?

We work with state officials in terms of where the program stands. It's going to be approved. That's not the concern. It's just really the timing of having all the -- essentially the paperwork processed, being evaluated by CMS.

We just don't have enough visibility at this point to conclude that it will be definitely approved by the end of June, so we do not believe it was prudent to put it in the guidance for the second quarter. But it's going to be approved and we'll certainly keep everyone up-to-date on this as it moves through the next several months.

Historically, there have been approvals in June. Many of the hospitals in the State of California have June fiscal year ends, so we'll see. We'll certainly let you know in terms of what we're hearing.

Okay, thanks.

Andrew Schenker, Morgan Stanley.

I just wanted to dig a little bit more into the patients with multiple care episodes information you shared, which was really helpful. Out of curiosity, what percentage are these PMC patients as a percentage of total patients? Because it seems like you had a disproportionate reduction in there.

Maybe just a little bit more detail on how you managed to see 25% of those patients again in the first quarter of 2014 when you only saw 17, I guess, in all of 2013. As exchanges ramp and as Medicaid ramps in states like Michigan, should we see a continued disproportionate impact on that population? Thanks.

Good morning, this is Dan. Yes, the data is interesting.

We've certainly been tracking it for a number of years in terms of patients with multiple episodes of care. What we saw, and when you look at 2012 versus 2013, as we outlined on the slide, it's not necessarily the exact same patients that repeat multiple times again in the subsequent year.

In first quarter so far, we did see 25,000 of the 2013 patients, but that doesn't necessarily mean every single one of those 25,000 patients were in our facilities twice in the quarter. The population evolves and our Conifer team has an incredible amount of experience doing this for several decades, tracking this, getting people enrolled in various government programs. And we certainly expect that success to continue and that's what we saw in the first quarter.

What percentage, would you argue, of the uninsured are these multiple care or repeat utilizers as a percentage of the total uninsured volumes?

Andy, this is Trevor. I think just to be really clear, the point of putting this slide in was, we had received, at an investor conference a couple of months ago, a very significant number of questions about this population who the analyst investors referred to as frequent fliers. The chart here is supposed to help everybody understand that this is not as big an issue as they might have thought because that population is transient.

I think Dan does have an answer to the question, but I'd just think to put that in context, it's really a different kind of issue, which is understanding the uninsured population. Using the tools that we have within Conifer and the staff to enroll them where it's appropriate as opposed to identifying some small group of people who are habitual uninsured users of our services. It doesn't seem that is so much a factor.

Kevin Fischbeck, Bank of America.

Just wanted to go back to a comment, I think, Trevor, that you made around the commercial volumes being strongest they've been in the last six years. I think you said that the fact that it was as strong as it was, was evident that you're positioned well in the most popular exchange products. Are you seeing specifically that gap narrowing because of exchange volume already?

Yes, you could conclude that. I think there are other factors at work, but the exchange volumes and the ramp, particularly within the quarter, which has continued beyond the quarter, is very encouraging.

If I go back to what we started talking about at the beginning of last year, we made a strategic decision to embrace the exchanges as an important new channel of commercially insured patients. We were very active in engaging with insurance companies and negotiating contracts with insurers all over the country in our markets in order to make sure that we were well-positioned.

Maybe we got a little bit lucky in that the plans that we entered into contracts with ended up being very well-positioned. We've used this stat many times before, but approximately 90% of our hospitals are in the two lowest costs or one of the two lowest cost silver plans in their markets. And we're very well represented across all metal types in all of our markets with our hospitals.

To the extent, then, subsequently you've seen the enrollment data that the majority of people enrolling in the exchange products, over 60% had signed up for silver plans. To the extent they're signing up for silver plans and choosing one of the two lowest cost ones, we're there in those networks.

And so we feel very good about the way we're positioned. I should mention that, as we predicted over a year ago, the pricing has been very similar to commercial. This is an important new source of commercially insured patients. It's playing out that way and we're very pleased with how our hospitals are represented.

Okay, because that brings me to my follow-up question, which is I guess I don't really fully understand the sequential commentary around the reform pick up. Because if I look at enrollment, the surge obviously happened in March and April and obviously, if you sign up March 15, it's effective May 1. If you take the weighted average enrollment nationally, it's about 3.1 million people moving to 7 million people on average in Q2 and then moving to 8 million people on average in Q3. So there's 125% increase in enrollment from Q1 to Q2.

If you look at where the surge happened, Texas up 150%, Florida up 125% from February to April, it seems like there's a really big ramp in this dynamic, which you're already seeing in Q1 when enrollment wasn't really that high. Just trying to understand why there isn't more of a sequential lift, particularly when you throw in Michigan on top of everything else, it really feels like 5 million sequential improvement is low. If it is low in Q2, it seems like you're assuming an even bigger increase in Q3 and Q4 when I would think sequentially, the biggest increase night be between Q1 and Q2?

I'm not going to speak to the national enrollment numbers, but in terms of what we are actually seeing in our hospitals, the ramp has been quite steep. We've mentioned that in our prepared remarks and the volume and exchange volume in April was over 80% of the entire exchange volume for the first quarter, so there is this steep ramp out there.

But it is too early to tell exactly where that's going, what that means, how that translates into earnings and everything else. So I would remain very optimistic about it, but too early to make strong predictions about where exactly that's going. Remember, we're dealing with an entirely new marketplace, new technology, and newly insured, in most cases, people and we don't have lots of experience with how they behave and how those products will behave.

So you're just saying that the longer you go out, the more confidence you have, so that by Q3/Q4, you feel like it could happen in Q2, but by Q3 and Q4, it should all be there so you're more comfortable -- saying that?

Yes, so we'll be more comfortable about what we're seeing in 2014. Then of course, it remains to be seen exactly what the pricing will be for 2015. Let's put a pin in this, so to speak, and catch up again when we next report earnings and the time after that and we'll have a lot more experience with this.

Sheryl Skolnick, CRT Capital Group.

It couldn't have been a better segue, actually, to the question that I'd like to ask, because I think you've been beaten up enough on the sequential delta of only $5 million in the reform guide, which I would echo the sentiment seems a little bit light. But I won't bash you too much for trying to be conservative.

Let's talk a little bit and focus a little bit about managed care pricing if we could. There's a couple of different aspects that I think we need to explore or I'd be curious in hearing your thoughts on.

First, with respect to Vanguard and bringing in Vanguard properties under your commercial managed care contracting, is there much of a difference in the pricing? Is Tenet's higher or lower? When do you think that the alignment of the Vanguard facilities and the Tenet facilities under your national and strong contracting capabilities will be completed? That's question part 1a.

Part 1b is, as you think about the managed care contracting that you've done already to date, you mentioned that the pricing is not complete for 2015. If you could walk through for us how much of it is done for 2014 versus how much is done for 2015 and out years beyond that. And whether you're seeing early indications of pushback on exchange pricing that might be different from your other commercial pricing or any other differences in trends?

The third question I have is, in particular, with respect to treating the exchanges as commercial managed care, especially in Texas and Florida, if you could comment on the build in those states and what you might be seeing? Because I think it's really critical for all hospitals, but for Tenet, in particular that build get some traction there, particularly where you are in your markets and the demographics around them. Thank you.

Okay, so I'll start off and ask Clint Hailey to fill in. The first part of your question relates to our contracting approach and integrating the Vanguard portfolio.

And yes, I know you know this Sheryl, but for the benefit of the full audience, we do approach managed care relationships differently. We do it on a centralized basis, where Vanguard has been done more on a regional basis. We do insist that either all of our hospitals are in network or all of our hospitals are out of network.

In addition to the Vanguard transaction, there were some other important things going on within the managed care area last year; for example, Aetna's acquisition of Coventry. So not only did we have a need to engage in negotiations to integrate our acquisition, but at least in that case, Aetna did as well. We were pleased to have reached agreement, a new national contract with Aetna as of a month or so ago, and very satisfied with the results there.

I'll ask Clint to talk about the climate a little bit more, but he and his team are working payer by payer, going through and trying to reach a conclusion that is fair for both parties. I don't think you should have the impression that in every case, there is some disconnect between the Vanguard pricing and Tenet pricing. The disconnects are probably not as great as anybody would imagine, but it's still an important source for us of synergy. It's important for us to have stable national contract portfolios we've had for many years.

Clint, you want to add a little bit to that, if I left you any room to add there, about how you're doing? And also address this question that Sheryl has with respect to pushback, the degree to which we're contracted in 2014 and 2015 and then, specifically Texas and Florida?

Why don't I start with the numbers, Trevor, to answer a question that she had about percent complete from a contracting perspective. We're 70% completed contracting for 2014 and 54% for 2015.

Trevor mentioned the Aetna contract, which we completed a few months ago and announced. We've got a couple of other rather large plans, some of whom are getting close to complete.

When we complete all of those, it's actually four health plans that we're working on pretty diligently right now, the 70% would go to 93% complete and the 54% would go to 80% complete. Of course, they've got to be finished to be able to get to those levels of being contracted, but that's kind of what we're on the path to get done in the next few months.

As it relates to one other thing you asked about on exchange pricing trends, it's very interesting to see how inactive the health plans are as it relates to 2015. They're all in a wait-and-see mode right now. And it's unfortunate that the deadline for filing the 2015 exchange products is June 27, because the health plans aren't going to really have a lot of good data to rely on in terms of how the performance of their exchange products is going for the first part of this year.

It's a little bit unfortunate and I sympathize with them because it's hard for them to draw any conclusions about what they want to do different for 2015. But hopefully, we'll see pricing hold and not have dramatic changes. We'll see a few health plans expand in new geographies, but the trends that we're getting on that business is not out of line with what we get on commercial business.

What about Texas and Florida? She asked about exchange volume trends, that sort of thing, in Texas and Florida.

I think it's early, Trevor, to draw conclusions about what kind of volume trends we're seeing. I don't recall, off the top of my head, what Florida and Texas look like versus some of the other markets for exchange volume.

Britt, do you have that data?

Yes, I do. Sheryl, I think your intuition was spot on. As we look at our commercial business overall in Texas and Florida, those were strong growth areas for us and significantly the higher areas of growth in our company. As you drill that more into the exchange categories, Florida was really strong on the exchange side of the equation and Texas, as well, followed suit more globally with our overall commercial trends.

I'll just put in a plug here for Blue Cross of Texas who was a great partner in driving enrollment. They had a very comprehensive network, reasonably priced plans. And then once people were signed up, they were very active about calling them and informing them of their benefits; in particular, the ability to go have a free check up. We're having a lot of success in that relationship in Texas.

Miles Highsmith, RBC.

This is Saurabh Prasad for Miles Highsmith. Could you let us know what were the expenses related to the $9 million high-tech revenue in the quarter?

Yes, this is Dan. As we did disclose, we had roughly about $10 million in health IT incentives.

So you don't disclose the expenses that were related to that?

No, we have not separately disclosed that, although I would tell you, it is in excess of that number. It's about three times that number.

Colleen Lang, FBR.

I was just wondering if you have any update on your plans to acquire those facilities in Connecticut? Any color you can provide on the agreement you signed with the Yale New Haven health system?

Sure, Keith Pitts will answer that one.

We're still working through some legislation issues in Connecticut. The session does close towards the end of this week, so I think over the next 30 days to 45 days we'll have more clarity on that, as well as how our Yale New Haven partnership unfolds.

Okay, great. Thank you.

Ralph Giacobbe, Credit Suisse.

It's actually Jonathan Chan on for Ralph. Obviously, strong Medicaid volume growth in your expansion states.

Just wanted to clarify how you were thinking about this volume growth that outpaced the decline in uninsured volumes. How much would you say is actually incremental volumes versus dumping from other payers, just on that piece that's above the uninsured decline?

Jon, this is Dan. In terms of our uninsured decline, as you can see on the slide, the decline in the uninsured is in excess or it's below the level of the incremental Medicaid volume that's migrating into the exchanges. We think we're picking up a nice share of the growing Medicaid book of business in the states that have expanded their Medicaid programs.

Darren Lehrich, Deutsche Bank.

Thanks for the helpful bridges relative to guidance and the underlying EBITDA growth in the quarter. That was helpful.

First, is a clarification on something you said, Dan, about the reversal of accounts receivable build up. Can you just quantify for us what that was? I presume we're going to see that come back through the P&L, so can you give us a sense for when the timing is on that?

Good morning, Darren, this is Dan. In terms of the temporary build up in receivables, if you look at our slide 12 in the second half compared to the first half, we have assumed that there would be about a $20 million recapture of some incremental expense in the first half of the year related to the temporary build up.

The receivables are good. It's just there's been some temporary slowdowns with our Medicare claims processor just due to some processing and system issues.

Then, with several payers, there's been temporary build up there. One example would be if you have a new contract and the rates aren't necessarily loaded exactly in the timeframe that we initially anticipated.

But Conifer's been doing a very nice job managing and controlling our receivables and bad debt. I'd like to turn it over to Steve Mooney, who heads up our Conifer business, and maybe just provide some further insight and color.

Thanks, Dan. Yes, there's a few things. Dan kind of mentioned a couple of them.

One is, we tend to talk about a renegotiated contract, so when that happens the payer's loading in their new rates. So rather than process those claims and have to reprocess them when the new rates go in, they're put on hold until that time. That actually is happening now, so those claims are getting paid and we expect that to clear out in the second quarter.

The next piece Dan mentioned, there was a slight increase in our Medicare receivables due to primary MAC, which supports most of Tenet Hospitals, except for some of the new Vanguard hospitals, which are different MACs except for the San Antonio market, which is the Medicare Administrative Contractor. We, obviously, are on the phone with them quite often about what the challenges are, although we're actually having a full day meeting coming with them, to go through all of the delays we've been seeing more recently. But that isn't scheduled until early June, so that might actually creep itself into the third quarter from that standpoint.

The good news is the exchanges we're talking, about a lot of volume, but that increased over the period of the quarter. As a result, we had some build up in AR. We've seen that payment increase dramatically. Matter of fact, all of the payments we received in the first quarter, we saw that exact same amount paid in the month of April alone.

We're starting to see that reduce itself down as well and expect that to continue over the course of the second quarter and into the third. Finally, there was some delays in some of the national payers that also exchange products and them not having enough staff to process all of the claims on the commercial side. There was some degradation in that AR and we've been working very closely with the plans on their staffing levels.

As you can imagine, we have a lot of clout because they're not only the claims we process for Tenet, we do for other clients. They're assuring us they are getting the appropriate staffing levels in play to get the receivables down. Whether that will all take place in the second quarter, we don't know, but we definitely expect that to be coming down over the course of the year, so that's the primary items.

That's helpful. Related to DSH cuts, obviously those kick in FY15. Dan, I think you mentioned that everything was in the IPPS rule was consistent with how you guided along those lines, but can you just confirm for us, is the DSH cut going to work out to be roughly $25 million a quarter? Is that a good estimate or is that too high?

Darren, that's too high. In terms of the reduction in the DSH payments, when we look all-in on the Medicare role compared to what we had assumed that the role in aggregate is pretty much in line with what we thought. The DSH reductions are actually slightly less than what we had assumed in our Q4 guidance.

Okay.

John Ransom, Raymond James.

A question for Steve, on Conifer, I'm just curious how much progress you think you might be making hitting some singles and doubles in terms of signing up hospitals. You've got some big wins, obviously, but how's the pipeline for singles and doubles?

John, it's Steve. Thanks for the question. It's a good question.

Everybody wants to talk about the home runs, never wants to talk about the singles and doubles. I think, as you know, we've got three primary business lines. One is our revenue cycle line, one is our value-based care line of business, which helps those organizations transfer from fee to value. And a third is our kind of our patient communication engagement line of business, which is talking about the patient experience.

Just to give you an example, for the first quarter, we actually signed 40 new deals: five of those were in the revenue cycle space and those deals varied in size. But as we talked in the past, those deals usually were lumpy when they come in. We get them and then it slows down and we get them again. But in the patient communication engagement line of business, we saw 19 new transactions and the value-based care line of business, we signed 16 new transactions, to get you to a total of 40.

Why we think this is so important, it's really around increasing the brand of our business. It's not just about now getting a revenue cycle deal, but it's getting our name on the street with the healthcare systems in the marketplace, both as individual hospitals and those systems about understanding who Conifer is and the value we can provide to them, as they move from where they're at today from a standalone system to an overall system of integrated system delivery.

Things are going well, so lots of singles are happening and we're getting some doubles out there. But I would still expect, we are obviously doing our forecast of the year, things are still looking very solid for the balance of 2014.

Just remind me, once you fully integrate Vanguard and once you account for some of the singles and doubles that you mentioned, what is your mix of in-house versus third party revenue look like?

In-house versus third party, we're sitting right around --

Notice I didn't say outhouse.

Yes, so 75% is about what's coming from the Tenet organization and the rest is external. As you know, we were reducing our concentration on Tenet until the Vanguard deal got done, so it's great from our standpoint of growth of our business, but obviously put more pressure on that side.

Catholic Health Initiative has been growing, also. So we have the high class problem, John, of the two largest customers out pacing the growth of all other customers combined, in order to create that high concentration. If you add Catholic Health and Tenet together, it's well over 80% of Conifer's revenues coming from us. But like I said, it's a great high class problem to have.

My other question for Dan is, if you think about the healthcare reform contribution for 2014, how much of that is approximately coming from Medicaid versus coming from exchanges? What are you realizing in terms of revenue per adjusted admission on your Medicaid accounting for the Michigan expansion? What's a good number to use for that?

John, good morning. In terms of one of the key assumptions that we use to build our healthcare reform assumptions for the year was that we assumed that about 2/3 of our uninsured would migrate into a Medicaid program and the other 1/3 would migrate into an exchange product.

As you know, obviously, the pricing for an exchange product is more attractive than from a Medicaid perspective, but it sort of gives you a rough sense of where it's apportioned. Somewhere maybe 50/50 or so, it just depends on the mix and the types of service.

2/3, 1/3 but 50% of revenue from either?

Yes, I think for modeling purposes, you want to look at it like that. That's not the exact precise number, but just generally speaking, it all depends on the mix. Right now, the mix is certainly very strong on Medicaid, but we like what we're seeing there and that's okay.

Whit Mayo, Robert W. Baird.

Dan, I'm struggling to reconcile the comments you made on the IPPS rule. I think you said that the roughly 1% cut is in line with your estimate and your 10-Q has a $20 million impact cited. But you do also seem to do considerably better on readmission penalties, value-based purchasing, the overall majority of the quality programs and DSH really isn't a big deal for you from what I can tell. What am I missing kind of versus our estimates?

Good morning, Whit, this is Dan. I don't think you're missing anything. What we've built into our guidance for the fourth quarter is essentially in line with what we had projected.

As I mentioned, we did a little better than what we thought on the DSH side. The reduction was not as pronounced as we thought. We had some benefit compared to our projection on the wage index impact for next year.

I would tell you the one category where this would be a head wind would be with the outlier threshold increasing, that went the other way. That's probably the most noteworthy. You're right, on the readmission and the hospital-acquired conditions, those came in a little bit better than when you look at the national stats.

Yes, so I guess my point is putting the fourth quarter implied impact, putting that aside. If the overall industry is anticipated to see roughly a 1% cut, is it fair to conclude that you can do better than that based off of your initial assessment of the proposed rule?

Yes.

Okay, fair. My last question, just on free cash flow, I recognize a lot of the working capital needs in the first quarter and you anticipate seeing a ramp over the course of the year. You did sell another senior note since the last conference call and collections have deteriorated a little bit.

You have this MAC issue now, but I think I hear Steve saying that a lot of this should reverse itself over the course of the year. The question is, do you still feel good about hitting your free cash flow guidance or should we just view that as a stale number for now?

Absolutely not, no. We still feel good about it. Steve mentioned we think a temporary build up is going to work its way down as we move through the year.

The point about, that we have it in the release, it was in our remarks, too, there is a substantial amount of money from the various Medicaid supplemental programs in Texas. And we're also some money related to California Provider Fee Program. It's over $200 million and we expect to collect a large portion of that as we move through the year.

Gary Taylor, Citibank.

On slide 5, where you cite the $10 million year-over-year ACA impact, is that just the DSH reductions that are being reflected there or are you also counting some of the market basket changes?

Gary, this is Dan. The Medicare cuts, that's all the various adjustments in the Medicare payment rights related to ACA.

Okay, the other number I was really struggling to understand was slide 11 where you talk about the typical 40 -- seasonal decline sequentially from 1Q to 2Q, you cite the $48 million seasonal or sequential seasonal impact. That's about a 12% sequential reduction in EBITDA.

As we kind of look back historically, it looked like typically your EBITDA might be down 5% or 6% sequentially, so it seems like a really sizeable sequential reduction for seasonality reflected in that $48 million. You also have the comment there on payer mix, which we actually presume would be improving over that period. So can you help us understand just the magnitude of that $48 million?

Yes, Gary that $48 million if you go back and look at our historical volumes and again, there's a lot of puts and takes in terms of quarter-to-quarter growth and efficiencies related to our performance excellence program, revenue cycle management, outpatient growth, et cetera. But if you just carve out just the historical change in volumes between Q1 and Q2, it's roughly about 4% decline. Just the absolute volume numbers between Q1 and Q2 and when you price out that volume, it's pretty much in that ballpark of that number and so that's all that represents.

Thank you. We have no further questions at this time. I would now like to turn the call over to Mr. Rice for closing remarks.

Actually, I'll just jump in. We have no further closing remarks. Thank you, everyone.

Sorry we went a little bit over time and as always, we're here available for follow-up. Thanks.

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