Tenet Healthcare Corp (THC) 2014 Q2 法說會逐字稿

Welcome to the second-quarter 2014 Tenet Healthcare earnings conference call. My name is Shannon, and I will be your Operator for today's call.

(Operator Instructions)

The slides referred to in today's call are posted on the Company's website. Please note the cautionary statement on forward-looking information included in the slides.

Please note this conference is being recorded.

I will now turn the call over to Mr. Trevor Fetter, President and CEO. You may begin, sir.

Good morning, everyone.

I couldn't be more pleased with Tenet's second-quarter results. We had great performance in virtually every key metric. We drove the strongest growth in commercial volumes in more than a decade, and we achieved rates of growth in admissions, outpatient visits, surgeries and emergency department visits that are among the best I can remember.

Net of the normalizing items provided in our slide deck, we delivered EBITDA growth of 13% year over year. For nearly two years, our teams in Tenet Hospitals and at our headquarters in departments including Managed Care, government relations, and at Conifer have worked very hard on two key strategies to prepare to grow our business with the implementation of the Affordable Care Act.

Early on, we pushed hard to be contracted with as many exchange plans as possible. We did this well before most of our local market competitors.

As a result, when we entered the open enrollment period last year, 97% of our hospitals were contracted in at lost one exchange plan in every metal type, and 86% of our hospitals were contracted with the lowest or second lowest priced silver plan in their markets. We were well positioned, and as a result, we're confident that we have gained market share in these important commercial insurance products.

Our second ACA related strategy was to conduct a campaign to educate people in our communities about the new coverage options they might have. This included more than 350 events across our markets, and we produced nearly 1 million pieces of print material. Our website, www.pathtohealth.com, is still active, and we are now gearing up for the next open enrollment period.

This campaign was very effective in enrolling people in exchange products and Medicaid. Coordinating with our well-established medical eligibility program at Conifer, we are confident that at least 16,000 people enrolled in exchange based products and tens of thousands more enrolled in Medicaid as a result of our efforts.

Conifer is now enrolling 250,000 patients per year in Medicaid programs. We have developed a real expertise in enrollment and believe these efforts have positioned our hospitals as trusted providers of choice with many of the newly insured individuals and families.

Our best estimate is that ACA-related factors added just under one quarter of our EBITDA growth and about one third of adjusted admissions growth. It's still early in the implementation of this new law, so projecting the effect for the rest of the year is difficult at best.

While the ACA has augmented our growth, I'd like to focus my comments on the other three quarters of our growth story. As you can see, our growth in volumes ex-ACA exceeded our expectations by a wide margin.

We believe this is the result of our successful execution of the strategies that we've been putting in place for a number of years. These include targeted investments in key service lines, a substantial expansion of our outpatient network, our performance excellence initiatives, investment in advanced clinical systems and a focus on physician alignment and clinical integration among other things.

We've got a lot of momentum right now that is completely unrelated to the ACA. For example, last week, we cut the ribbon to open the new Heart Hospital at Detroit Medical Center. This new service line-specific hospital is attached to our Harper University Hospital. Harper, by the way, led our entire Company in volume growth in Q2.

In Northwest Detroit, we opened a large new emergency room at Sinai Grace Hospital a few months ago. It was the largest investment in that sector of the city in over a decade, and in Q2 our inpatient admissions at Sinai Grace grew by 6%.

Speaking of the Detroit Medical Center, I'm very pleased with our operations there. I'm confident that we have a bright future in Detroit and that the return on the investments we're making will be strong. The mayor and the civic and business leaders in Detroit are doing a great job in turning the city around, and I'm proud that Tenet, as the largest employer in the city, is an important part of it.

It?s been a very busy season for us. In early June, we acquired Texas Regional Medical Center near Dallas. Three weeks later we opened our 79th hospital, Resolute Health, in New Braunfels, Texas. Resolute is an innovative healthcare network in a fast-growing community.

In a poll we conducted, it was rated by consumers as the top hospital in New Braunfels even before it was open. On Friday of last week, at long last, we completed the acquisition of our 80th hospital, Emmanuel Medical Center in Turlock, California. And in two weeks, we will break ground on a new hospital on the west side of El Paso, Texas.

We made an announcement last week regarding a new contract with United Healthcare. We now have completed new contract negotiations with all major national commercial payers to include every former Vanguard facility and employed physician. I'm very pleased that we reached agreement with United and want to thank our Managed Care team for doing a great job.

Conifer is gaining recognition as the leader in its sector, and its earnings are growing as it completes the integration of some major revenue cycle clients. Two weeks ago, a survey by Black Book Rankings of over 1000 executives and users ranked Conifer as the number one provider of value-based care solutions. Last week Conifer announced that the Yale New Haven Health System has engaged its value based care team to help them redesign their clinical networks to set the stage for comprehensive population health management strategy which will optimize quality, safety and patient satisfaction across their system.

Conifer is on track to generate more than $1 billion of revenue this year. Through Conifer value based care, the Company is strongly positioned for the opportunities arising from population health management, risk-based contracting and health plan operations. As of today, with 6 health plans in our 12 accountable care organizations, Tenet is bigger and more experienced in risk-based models than most other provider organizations.

Our outpatient group continues to build a great business with higher margins and returns on capital, augmenting our hospital business and improving the economics of our Company. The fact that 85% of our very strong outpatient growth was organic is proof of the great job that they're doing in managing our outpatient business.

Tenet is a very different Company today than it was just a short time ago. In terms of our size, scope and diversity of our business segments, Tenet is a transformed Company.

In 2008, the year that we launched Conifer, Tenet operated 50 hospitals serving 24 markets in 12 states. In addition, we had a portfolio of 63 outpatient centers consisting almost entirely of ambulatory surgery centers and diagnostic imaging centers. In total, we had about 60,000 employees including 372 physicians.

Fast forward to 2014, and we are now operating 80 hospitals serving 31 markets in 14 states. We operate more than 190 outpatient centers, including 42 urgent care centers and 14 satellite emergency rooms, facilities that are filling gaps in primary care, meeting consumer demands for convenient access, and providing new channels for our hospitals. We have more than 105,000 employees including almost 1900 employed physicians.

Tenet has also become an attractive acquirer for hospitals seeking to become part of a larger system, as evidenced by the acquisitions that I already mentioned as well as the steady progress in our effort to acquire five hospitals and form a new network in Connecticut in partnership with the Yale New Haven Health System. There are currently significant value creation opportunities to be captured through participating in the consolidation that's taking place in many markets. Tenet is being invited into many discussions, giving us the ability to be selective in deciding which transactions will create the most value over the long term.

I'm also very excited about the new types of partnership opportunities we are creating. This began with our joint venture of San Ramon Regional Medical Center with John Muir Health System in 2013, and we have said on these calls we would see more opportunities like that in the future.

Now, largely due to the reputation and track record that Keith Pitts developed at Vanguard and Tenet's history of being a good partner and steward of acquired and partnered hospitals, we have a partnership with Yale New Haven Health System in Connecticut, and just last week we announced we signed an LOI with Ascension Health to create a joint venture with Ascension and Dignity to acquire three hospitals in the Tucson area. That arrangement would build upon our existing ACO partnership with Dignity in Phoenix and expand our Arizona network.

In short, we are taking action and have momentum in our strategic transformation to a national diversified healthcare services company. In the acute care business, the opportunities we select will continue to be characterized by their potential to drive stronger market positions in our chosen markets. The leveraging of these competitive positions will integrate our hospitals with a robust ambulatory presence and greater alignment with our affiliated physicians.

Our integration of Vanguard is going extremely well. From the hospitals we acquired to the outstanding people who joined us to the management techniques that we have adopted from Vanguard, the acquisition is exceeding my expectations in every respect. We have now increased our estimate of acquisition-related synergies for the second time.

Finally, you may have noticed that our earnings release and slide deck have a new look. We've refreshed our branded identity to be more progressive and to reinforce the continuing strategic transformation. We've also launched a new website, which we believe will provide additional momentum to our efforts to distinguish ourselves as an employer of choice, a provider of choice, and a partner of choice in the health industry.

With that, let me turn it over to Dan Cancelmi for more color on the quarter. Dan?

Thank you, Trevor, and good morning, everyone. Overall, we were very pleased with our second-quarter results.

Volumes came in a lot stronger than we anticipated and were converted into solid EBITDA growth. Our volume growth was broad based as we generated increases in adjusted admissions, in virtually every state in which we operate. As a result of our performance in the first half of the year, we are raising our 2014 EBITDA outlook by $50 million to a new range of $1.85 billion to $1.95 billion.

Slide 3 provides a high-level summary of the quarter. Starting with volumes, we generated a 4% increase in adjusted admissions. This increase included a 2.8% increase in admissions and growth in outpatient visits of 7.1%, 85% of which was organic.

We also generated another strong quarter of surgical volumes with an 8.3% increase. We estimate 35% of our volume growth was related to reform with a majority of our volume increases driven by our well-defined growth strategies, including key service line investments and our relationships with well-positioned payer networks. From a tactical standpoint, our strategies are fine tuned to the specific opportunities we see in each market, and this tailored approach has been responsible for our broad based success.

Turning to our revenue metrics, net of bad debt expense and excluding the year-over-year variance related to the California Provider Fee program, patient revenue per adjusted admission increased by 2.5% on a same hospital basis and 1.9% on a pro forma basis. We generated a 7% increase in commercial Managed Care revenue per admission and 2.9% growth per outpatient visit.

Strong revenue metrics and an enhanced payer mix, including the incremental commercial business we generated in the quarter produced a 2.6% increase in net operating revenues after bad debt expense. We achieved a 6.7% increase in revenues after bad debts, excluding an $87 million decline in our health plan revenues on a year-over-year basis and the California Provider Fee revenues we recognized last year.

We demonstrated another quarter of tight cost control. Our performance excellence program initiatives enabled us to control the increase in selected operating expenses of our hospitals to just 0.7% per adjusted admission. Excluding the impact of incremental physician employment, we drove a decline in this cost metric of 0.3%.

Bad debt expense declined $71 million to $320 million in the second quarter. Bad debt expense as a percent of revenue declined to 7.3%, a decrease of 170 basis points. The reduction of bad debt expense is primarily due to a $78 million decline in uninsured revenues as a result of the benefits we are realizing from the ACA, as well as our Conifer revenue cycle team continuing to do a good job managing our bad debt levels.

Turning to cash flows, adjusted cash provided by operating activities from our continuing operations was $318 million in the quarter compared to $174 million in the second quarter of last year. Adjusted free cash flow from continuing operations, which is after our capital expenditure spend was $76 million in the quarter compared to $51 million in last year's second quarter.

Our cash flows in the quarter were enhanced by $69 million reduction in the net amounts we are owed under the Texas Medicaid Dish and 1115 waiver programs. Since we are past our higher seasonal working capital requirements, we expect our adjusted free cash flow to grow during the remainder of the year.

Turning to slide 4, it's important to note that a number of favorable items in last year's second quarter created a challenging year-over-year comparison. Making the appropriate adjustments to normalize for these items, we drove a $65 million or 13% increase in EBITDA.

The largest item was $66 million of revenue we recognized last year related to the California Provider Fee program. Since the new program, which started on January 1, has yet to be approved by CMS, we did not recognize any revenue from the program in this year's second quarter.

By way of background, the State of California submitted its Medicaid plan amendment for the new three-year program to CMS on March 28. Generally, a state plan amendment is approved within 90 days; however the approval process can be extended if CMS requests additional information.

Not surprising, given the complexity created by California's expansion of Medicaid, CMS has in fact requested additional information. Although we cannot predict with precision when CMS will approve the program, we are confident that the plan will be approved, and our fourth-quarter outlook includes $140 million of revenue on the assumption that approval will come before the end of this year.

The next normalizing item was Vanguard's recognition of a $15 million gain last year related to the sale of lab assets. There was a $13 million earnings decline in our health plan business compared to last year, primarily related to the non-renewal of the Arizona Medicaid contract with uncapped lives. We incurred $8 million of additional expense in the second quarter this year related to pre-opening costs at our new hospital in New Braunfels, Texas, which opened in June.

Next, we normalized for the $58 million of HIT incentives in the quarter that reflect our continued success in achieving the required meaningful use criteria. This was a $17 million favorable variance compared to last year's second quarter. Finally, we faced an $11 million headwind from the impact of lower interest rates that increased the balances of our discounted malpractice and Workers Compensation liabilities.

As you can see on slides 5a and 6, the impact of healthcare reform on our volume and payer mix was pronounced. In our five states that expanded Medicaid in 2014, we benefited from a significant migration of patients from uninsured into Medicaid with a 54% decline in uninsured admissions and a 27% decline in uninsured outpatient visits.

Including the states in which we operate that have not expanded their Medicaid programs, we achieved a 22% decline in uninsured admissions and drove a 13% decline in uninsured outpatient visits. Because we only assumed a 15% decline in total Company uninsured volume in our initial outlook for 2014, this favorable variance was a key driver behind our refined assumptions of the positive impact from the Affordable Care Act that we expect to realize this year.

The incremental impact for Michigan expanding its Medicaid program effective April 1 as shown on slide 7 also exceeded our initial expectations. While it is tempting to extrapolate the great volumes and payer mix of the second quarter into future quarters, we want to evaluate our growth in this new environment for a few more quarters before incorporating more bullish views into the outlook.

Slide 8 shows how we refined a number of our full-year outlook assumptions. We raised our midpoint estimate for the impact from the ACA before Medicare cuts from $75 million to $100 million. We also raised the midpoint estimate of synergies from the Vanguard integration from $75 million to $85 million.

Turning to the third quarter, our EBITDA outlook range is $400 million to $450 million. The walk forward from the $460 million of EBITDA in Q2 to our third quarter outlook is provided on Slide 9.

As you can see, we have not assumed any revenue from the California Provider Fee program in the third quarter outlook. We have, however, reflected the growing contributions we expect from Vanguard synergies, our performance excellence program, and the ACA.

We expect to recognize only $5 million of HIT incentives in the third quarter, a sequential decline of $53 million. This decline merely reflects the timing of a large number of our hospitals achieving meaningful use criteria in the second quarter. Recently signed Managed Care contracts and escalators in existing contracts are also expected to contribute to sequential EBITDA growth.

The last item I wanted to point out on Slide 9 is that we are assuming a volume decline compared to the second quarter. The third quarter is typically our weakest seasonal quarter as many physicians and patients take vacation. This is one reason for the negative $22 million shown on line item 9.

Slide 10 provides several key earnings variances when comparing our third quarter outlook to last year's third quarter. After adjusting for the items on Slide 10, we anticipate producing normalized EBITDA growth of 19%. Since we've provided both a third-quarter and a full-year 2014 outlook, the arithmetic is fairly straightforward to compute our implied Q4 EBITDA outlook.

Slide 11 presents the key drivers of growth to walk forward our Q3 to Q4 EBITDA. As you can see on Slide 12, we are projecting solid year-over-year normalized EBITDA growth in the high teens in the fourth quarter.

In summary, our growth strategies are working. We reported a very strong second quarter, and we have implemented business strategies that are building momentum, generating attractive growth and are expected to be increasingly visible in the second half of the year.

I will now ask the operator to assemble the queue for a Q&A session. Operator?

Thank you.

(Operator Instructions)

Our first question comes from A.J. Rice from UBS.

Thanks, hello, everybody. Congratulations on a great quarter. Maybe just to ask about the volume growth, when you look at the pick up you've seen and you're attributing some of that to ACA related pick up, can you -- is there any way to parse out whether you're getting market share gains or whether you're actually seeing people consume more services now because they have coverage? And if it's the latter, what services are they consuming if you have any view on that?

Sure, A.J., thank you. Thanks for the comment about the quarter. I'm going to ask Britt Reynolds to cover that question.

As you can imagine, some of the market share data is hard to get on a realtime basis, but we're attributing the statement that we believe we gained market share to the fact that we?re not seeing volume growth of this nature from any of our local market competitors. So Britt?

Absolutely, thanks, A.J. When we take a look at our market share, again as Trevor caveated there, we're seeing about 60% of our key markets, the 30 key markets that we are number one and number two position in with market share gains.

So we're seeing movement in key service lines for us there, and the vast majority of the balance of that is really a flat. So no degradation with rare, rare exception and an isolated case and maybe an isolated state. And not a specific statement there about a problem, just more of a market dynamic.

I would tell you our focus to your latter question is demand, and we are really seeing good volume growth across all of our previously discussed TGI initiatives. So when you look in types of services, they are following those TGI service lines that we mentioned previously, open heart services, orthopaedic surgeries, neurosurgical services, neurology medicine, vascular surgery, as well as the basic medicine services.

So it's a lot of work in 2013 and a lot of continued work on growing the service lines. So it's a combination of both, quite candidly.

Maybe if I could slip in a follow-up on your Managed Care recontracting, you came into the year with some big contracts. Obviously, the last one was United to get done. Often when you're recontracting or when providers are recontracting, they are actually looking at maybe some pressure on pricing. But it seems like you guys are actually looking for increases in the back half, if I'm reading your walk forwards right.

Can you give us some color there? You're actually coming out of these contracts assuming that almost immediately you're getting some benefit from them. Is that right?

That is right. I will ask Clint Hailey, who runs Managed Care for us, to comment. And A.J., keep in mind one thing with respect to Managed Care is that our starting position continues to be a value play relative to our local market competitors.

So as Clint enters these negotiations, he's starting from a position of strength in terms of value plus the integration of Vanguard. I may have stolen some of your thunder there, Clint, but go ahead and give some color to the process we've been going through this year.

Thank you for the question. That's exactly right. We are -- the big contracts that we've done this year integrating the Vanguard facilities into those contracts have been all about getting prices up more towards market, if you will. We had some facilities that were quite low and needed some market adjustments, so we've achieved that in those negotiations.

Okay, great.

Our next question comes from Josh Raskin from Barclays.

Hi, thanks. Question relates to your commercial Managed Care volumes. I was wondering if you could give us an update on what the actual same-store growth in commercial admits was. And then if you had a comparable number for the first quarter, that would be helpful as well.

Well Josh, we haven't been disclosing the actual numbers for a long time. This was the best rate of improvement in over 10 years.

Commercial ex the exchanges had been negative for a long time, and so that was abating and you also had the exchange business coming in. So sorry to disappoint on not quoting the statistic, but it is far and away the best that we've seen in over 10 years.

Right. That's sort of why I was trying to drill on it. I guess excluding -- maybe I can ask it a different way, Trevor. Excluding the -- I think it was 2,700 admits for the exchanges, would the commercial admissions -- would they have been up on a year-over-year basis excluding the exchanges?

No, they would have been down but a lot, by much narrower larger, much closer to flat than had been the case over 10 years. You still have in pure commercial, excluding exchanges, you still have a bit of a problem of a shrinking pie, and that you well know because you follow the Managed Care industry and see the enrollment stats there. But anyway, we're very pleased with the way that total commercial book has shaped up, and the exchanges are an important part of that.

Okay, and then just a follow-up on the guidance. I understand the seasonality of volumes being a drag as you go into Q3, but obviously that should pick up in Q4. But it looks like the guidance for adjusted admissions is implying a pretty noticeable reduction in that same-store growth on a year-over-year basis.

So I'm just curious what -- is this just healthy level conservatism, not exactly sure what drove the -- all of the upside in the second quarter and maybe some of these exchange members lose coverage? Or is there something more to it that would create difficult or worse comps in the second half than what we saw in the second quarter?

Good morning, Josh. This is Dan. How are you? Let me try to address that.

In terms of our volume that we saw and generated in the second quarter compared to the third quarter, obviously we are very pleased with what we were able to drive to in the second quarter. When we look out into the second half of the year, we are optimistic that the volume trends that we're seeing will continue to hold. In fact, when you look at our inpatient volume in the month of July, it's consistent with our second quarter volume.

But listen, this is a new environment we're operating in, and as we look into down the road, we think it's appropriate to get some more experience under our belt before we incorporate more positive or optimistic assumptions about volume growth into the second half of the year. But obviously very pleased, and we're obviously driving toward continuing to maintain that volume level that we saw in the second quarter.

Got it, thanks, Dan.

Our next question comes from Brian Zimmerman from Goldman Sachs.

Hi, thanks and good morning. Just to follow-up with a volume question. Can you give us any idea on how volumes progressed throughout the quarter? And you mentioned July seems to be somewhat consistent both for the commercial business and maybe on the exchanges?

Hi, Brian this is Dan. I will address that one. Yes, as we move through the quarter, the volume improved sequentially from month to month, in terms of our aggregate volume.

So April was solid growth, a little bit better in May, and June was even a little bit more so, even after you normalize for the extra day between May and June. Exchange volume tracked pretty much the same except in June it leveled off in terms of compared to the month of May. But there was incremental growth from March to April, April to May. So obviously and as we moved into July, as I mentioned, the volume in the month of July is relatively consistent with the quarter, so the trend looks pretty good.

Okay that's helpful. And then you mentioned in your prepared remarks briefly just a significant growth that you've seen in ASCs and urgent care centers and freestanding EDs. I was hoping to get a bit more granularity into what trends you're seeing there and any comments you could make on the MedPost Urgent Care development we're seeing?

Sure. The strategy to invest in a variety of types of outpatient centers has been a real cornerstone of our transformation, because we started at a point where we were underrepresented in outpatient and we're trying to seek a point where we are probably overrepresented in outpatient. It's a higher return on capital business. It's higher margins. It's less complex. It's a great way of building channels in a local market into the hospital. So that's why you heard me talking about all those different types of outpatient centers. And we're having great success with different models, whether it's urgent care or the freestanding emergency departments, and we're going to continue to make that a real point of emphasis.

Specifically on the urgent care business, after a lot of consideration, it was our conclusion that it would be best to operate that business as a separate line of business, as a separate brand identity. And so that's what (technical difficulty) this MedPost label.

And urgent cares to some extent are acting as a substitute for physician offices. They are certainly a substitute for emergency services. But they are very effective in a community in building attachment to the hospitals.

And so just one small anecdotal piece of evidence, but I mentioned the opening of our Resolute Hospital in New Braunfels. Well by the time the hospital opened, the first patient to arrive in hospital who was in an emergency situation being brought there in an ambulance was somebody who had visited the urgent care that we had opened in the same market earlier. And so they had records on that patient that was in the EMR that were used for the whole network. And so it was an example of that benefit of that channel strategy.

Our next question comes from Kevin Fischbeck from Bank of America Merrill Lynch.

Good morning. This is actually Joanna Gajuk filling in for Kevin today. So in terms of the color you gave on your revised guidance for reform benefits -- what you said that now you expect a reduction uninsured to be higher.

But is there any other change in your view for the full year around the reform, and specifically can you also comment about acuity of this newly insured population that you're seeing? Is it higher than expected? Any comment you can make around that will be helpful, thank you.

Sure, this is Dan. I will address that. Let me hit the acuity question first.

In terms of what we're seeing, and so far this year, from a Medicaid perspective, the Medicaid volume we're seeing is -- the acuity is higher than the traditional Medicaid volume that we typically treated. From an exchange perspective, the exchange patients that we're seeing, the acuity there is about 8% higher than I will call it our traditional commercial book of business. So yes, the acuity is up a little bit, at least so far what we're seeing from an exchange perspective.

In terms of the overall revisions and upward revision to our overall reform guidance for the year, what we say in terms of the conversion and migration of individuals who were previously uninsured, either into coverage under a state Medicaid program or under an exchange product, is tracking a little bit better than what we had anticipated at the beginning of the year. And exchange volume grew nicely in the second quarter especially compared to the first quarter, which wasn't entirely unexpected given how the enrollment ramped up as the first quarter progressed. So all-in, we're more optimistic based on what we've seen so far in our facilities from the ACA, and so accordingly we made the adjustments.

Our next question comes from Andrew Schenker from Morgan Stanley.

Just a follow-up on the volumes here. When I look at your Medicaid volume specific on the outpatient side, it's almost 3 times the decline you saw in the uninsured charity care. And in addition by my math it's about two thirds the total increase in outpatient visits came from the Medicaid side when you account for the uninsured and charity and granted that you attribute about 85% of this to organic growth.

Maybe if you could just talk about some of the dynamics that were really driving that Medicaid volume growth above and beyond the declines in uninsured and charity care. So are these average historic Medicaid patients using more? Is it previously uninsured using more? Maybe just talk about that dynamic a little bit more.

Sure. We have obviously limited insights into why they're coming to the hospitals. But we know who is coming to the hospitals. So I will ask Britt to comment a little bit on the Medicaid population and what we think we know in relation to what's driving it.

Sure, thank you, good morning, Andrew. As far as the Medicaid population goes, you nailed the stats correctly in terms of the percentage of volume growth. What we're seeing on inpatient and outpatient utilization, you focused a lot of that on the outpatient question.

We're seeing those folks, as I mentioned earlier, from a service line standpoint be heavy utilizers on the inpatient side of those key high acuity service lines, neurosurgery, trauma, open heart, orthopedic cases. So whatever, as Trevor alluded to, the driver of that, we do know that they are utilizing now that they are on the insurance rolls through the ACA, they are utilizing high acuity services which would I think imply some degree of pent-up demand.

On the outpatient side, I think it's just a furtherance of our continued investment in that strategy. We are physically in more places, we are integrated in our market approach and we have higher access and better price points. And I think it's just a place they are naturally going to go, especially if they are entering the newly insured market.

I'd just like to go back to something I said in the opening comments. We actively welcomed the newly insured and newly enrolled in Medicaid.

We undertook this very serious campaign to attract these patients to our hospitals and have them understand that we were trusted sources of information about how to enroll. So it does not surprise me that they are using us in such high percentages and in our outpatient centers, because those are the most accessible points of access.

Our next question comes from Darren Lehrich from Deutsche Bank.

Nice job in the quarter, guys.

Thank you, Darren.

Nice job on the quarter guys. I wanted to first ask about M&A. You've got a lot going on. Obviously, there's been a number of news items out of Connecticut, and you mentioned the Tucson opportunity.

I guess just maybe stepping back, Trevor, maybe Keith, can you help us think about in the next year or two what you think the developments in Connecticut might look like, what that network looks like, how it fits in? And then wasn't totally clear to us, just relative to the Ascension JV, is how your broader Arizona and Phoenix presence fits into that announcement. So maybe if you wouldn't mind just giving us some color on that, thanks.

Yes, sure. Keith is here and he will cover that.

Darren a couple things. On Connecticut obviously, the regulatory issues there which have been mostly at the state level, not certainly in the communities have been very welcoming to us in Connecticut. We've been on the ground there for quite a while.

What we see there is really a network forming together with the Yale New Haven Health System to create a value based care, if you will, network that covers frankly the state and the bordering areas. As you may know, our Worcester Hospital is 45 or 50 minutes from the Eastern most hospital up the I84 corridor that we have under contract. So we?re really -- it's sort of a natural extension in New England we think, ultimately, because we have in many cases of -- taking Worcester as an example -- our employees there live in five states, so it's really a pretty small geographic region. So it's just part of building a network. And the other part is really the partnership strategy that Trevor mentioned earlier in this comments, which we see a lot of opportunities in our existing markets as well as potentially new markets to partner with others to be able to create pretty strong networks that we can offer to purchasers of care, which gets me to Arizona a little bit.

So you may have read that Banner, the largest player in Arizona, recently signed a deal to buy the University system in Tucson. So our ACN partnership which is the Arizona Care Network which is a partnership between us and Dignity Health in Phoenix, we see the need and we desire to kind of also be in the other large population center which is Tucson to be able to compete on more of a statewide basis with the Banner network.

And that was one of the drivers for us putting together this partnership which we were originally going to have as an 80/20 partnership, and then the ? Ascension, who currently sponsors that organization is going to remain a partner at about that same level as Dignity in the market. So for some continuity purposes, so we see again along the same lines moving to more of a statewide network over time in Arizona.

Our next question comes from Ralph Giacobbe from Credit Suisse.

Thanks, good morning. Was wondering if you could help us in terms of what percentage of the exchange book was previously uninsured as far as you can tell? And maybe more broadly on the exchange, how good is the data around capturing the reform benefit against specifically on the exchange?

Good morning, Ralph, this is Dan. We estimate that the exchange book of business that we're seeing, that roughly 37% of that was previously uninsured. And so the remaining 60%, 65% either had commercial coverage or some other form of coverage whether it was Medicaid or some other payer.

So I would tell you we can't validate that for every single exchange patient, because we may not have seen an exchange patient in previous years. But we have pretty good visibility, and we believe it's a pretty good estimate of the portion of the exchange business that was previously uninsured.

Our next question comes from Gary Lieberman from Wells Fargo.

Good morning, thanks for taking the question. I guess maybe to talk about the continuation of the outreach, are you continuing to do more of that or has that subsided and will pick up again going into next year?

Yes, let me ask Dan Waldmann, our Head of Public Affairs, to comment on that. He's running this program.

Yes, thanks. As Trevor mentioned, we have kept the Path to Health website going. We are continuing to work with Conifer, which through their patient communications and enrollment eligibility personnel continued to provide counseling and information to collect leads of patients who did not enroll during the last period but who are interested in enrolling in the next period.

So we are actually looking at reengaging as we get into the fall. As you probably know the enrollment period is starting a little bit later this year in November. So we are going to start gearing up with our hospitals.

And along the same lines that we did last year really using trusted community groups that we formed partnerships with, more than 350 of them in our key markets, to get education out and then holding enrollment events in our hospitals using Conifer personnel to make sure that we can get as many people enrolled as possible. We actually have a lot of high hope for next year because we think a lot of problems we experienced last year with the various websites are going to be smoothed out this year.

Our next question comes from Frank Morgan from RBC Capital Markets.

Good morning, two questions. I was curious if you have any commentary around the actual growth in the surgical volume by service line, and can you attribute much of this to the newly insured population?

And secondly, you referenced the Dish payments and the 1115 waivers. Was there any prior period catch ups included in your results as a result of Texas Dish, and if so how much?

Let's have Dan Cancelmi take the 1115 and Dish question, and then Britt will fill in on the surgery volumes.

Good morning, Frank, this is Dan. In terms of the 1115 waiver adjustments, it was negligible. It was actually a little less than $2 million, so we do not have any significant adjustment in the second quarter.

Good morning, Frank, this is Britt. On the surgical volumes, let me give you a couple of points here. In a year-over-year basis the surgery growth has been in the vast majority of our surgical areas, Thoracic Surgery, trauma, orthopedics, open heart which we would count as a surgery, general surgery, cardiovascular medicine. All those are showing growth not only overall, but in our expanded coverage areas particularly on the exchange, which is a high point for really I think for us in terms of what we're seeing in the exchange patient.

It's really in the high acuity arena. I will step just away for a quick second because you asked specifically about surgery, but we're also seeing other high acuity areas like NICU as well, being growth in that exchange population.

And then another I think positive telling story is a sequential growth look from Q1 to Q2 on the surgical side of the equation. And quite candidly, we saw growth in surgery Q1 to Q2, which is a little counter intuitive from a seasonality standpoint, but we saw growth Q1 to Q2 in every surgical category with the exception of Thoracic Surgery. So we see that's a positive.

Our next question comes from Gary Taylor from Citigroup.

Hi, good morning. Couple questions. First, maybe for Trevor or for Clint.

We've just been trying to track through the quarter the last couple months all of the health plan contract renewals and expansions that you've been highlighting, and it's been a little difficult to discern which ones are significantly expanding potential patient populations, which ones are renewals. Are there any of those large ones you've announced United, Humana, Cigna, Aetna, any of those that are particularly expanded with the potential to bring material new patient populations into Tenet facilities?

Hi, Clint, you want to address that?

Thanks for the question. In terms of the major commercial contracts we've done, all of the facilities were in all of those networks.

As components or sub components of some of those renewals, we did have exchange networks we were not in that we joined in some cases. And we tried to highlight some of those more significant ones, but that's really the only incremental areas. We do have some things in the works on that front for other smaller contracts, but the major national plans we renewed.

You also had networks, so you had tiers that we were not in that we became in as a result of a -- so you're right, Gary. It's hard from the outside to discern that because there will often be special networks, and it might be something that they were just setting up or there's a particular employer that the network has formed around.

But I think it's safe to say Clint that in every case of these major national negotiations that the new contract offers access to an expanded population compared to the prior contract. It might be small, in some cases or it might be larger, but we have not ever renewed any of them where we've gone backwards in terms of the accessible patient population.

It's definitely fair to say that.

Our next question comes from John Ransom from Raymond James.

Hi. I'm sorry if I missed this, but could you reset what the revenue differential is for you between incremental new Medicaid patients and incremental new commercial patients coming off the exchange?

John this is Dan, good morning. In terms of when you think about the pricing difference for commercial versus Medicaid patient, and in particular as it relates to an exchange, like I said, the acuity was slightly higher on the Medicaid side, so when you think about a Medicaid incremental admission, depending on the service, depending on the area, you could be say $6,000 to $7,000 a case. And commercial obviously is probably depending again on the service about 3 times that, give or take.

My second question is as you approach the exchanges for 2015, what might you do the same, what might you do differently, and what were the biggest surprises, kind of both positive and negatives with your experience this year?

Sure, Clint do you want to take that?

Yes, sure. The biggest surprise for me was probably Humana frankly.

They were very aggressively priced in many of our markets and were a pleasant surprise, frankly, in my opinion, because I think having attractive premiums on exchanges is very important to the success of the exchanges. Beyond that, the -- in terms of things that I would have expected that we saw, the Blues were priced very aggressively and -- to try to retain their membership. And they were very successful capturing a lot of lives, obviously.

I think you will see that again in 2015. I think the Blues will continue to be aggressive, based on the little bit of information we've been able to see so far. There are some new entrants, and so that's kind of exciting.

I've been very pleased to see Centene be positioned -- improving their positioning, Molina as well. So I think all of that's good to ensure the competitive environment we sought.

Our final question comes from Whit Mayo from Robert Baird.

Hey Whit, you've got to ask something about Conifer.

Okay, would you like to discuss Conifer, Trevor?

(laughter) I mean you could ask more than one question because you're the final question, but at least one has to be about Conifer.

Okay, well let me first start on my original question. Just wanted to get an update on the Phoenix Health Plan, just any new developments on the cap contract or general thoughts going forward?

Yes, Phil Roe is here with us and I will ask him to address that.

As far as new developments, we continue to be actively engaged with the State there. There's no new news but continuing to keep the dialogue open with the State, be a responsible partner to those Medicaid members. Our patient quality scores, our consumer satisfaction scores continue to be very high, and we're dedicated to taking care of the population and demonstrating to the State we want to be a responsible member out there.

And then what is it you wanted to know about Conifer?

Sorry, maybe just an update about the Catholic Health integration and how that's playing out at this point?

So glad you asked. Steve Mooney is here to address that.

Thanks for asking that spontaneous question. So it's going well. I mean I think it's good to know about the CHI and that arrangement, which has turned out to be I think even better than we originally expected, is to understand how that organization has grown.

So it's clearly really important for us not to only get contracts but get them with winners in the marketplace, and they are clearly emerging as one of those. So just from some stats perspective, so when we redid the deal and where we're at right now, because of all of their acquisitions, have grown their portfolio that's under management by about 70%.

So whatever they did, they were 170% of the size they originally were, of which we have only taken in from that standpoint so far. We have under contract clearly the original core amount, and then we?ve added another 30% to that original core amount that's under contract.

And there's still another 40% that's under the original amount to go, and that's because what we?re doing. We're going through due diligence on those assets, understanding what the roll in schedule will be. CHI constantly when -- every time they make an acquisition, moves their schedule around. They might see an opportunity with a particular asset from one of the new acquisitions they didn't have before, so they will move that further up into the schedule.

So a lot going on there. Clearly things are going great from an implementation standpoint. The client's incredibly cooperative across all the IT platforms. And then our original deal was based around revenue cycle management. And now because of our other core service around value based care and patient communications engagement, we are now rolling out applications on the VBC side of the fence, including helping them with their ACOs.

And on the PC&E side, moving some services around scheduling activities and to help out with consumer engagement and those type of activities. So lots going on with CHI, going well and a lot more to come, and we don't think that train is stopping.

Okay, thanks, Steve, thanks for that. And I understand there are no more questions in queue, so thank everybody for listening in today. We will see you again in another three months.

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