Tenet Healthcare Corp (THC) 2014 Q3 法說會逐字稿

Welcome to the Q3 2014 Tenet Healthcare Earnings conference call. My name is Christine, 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.

I will now turn the call over to Trevor Fetter, Tenet's President and CEO. You may begin.

Thank you, operator, and good morning, everyone.

Last evening, we reported Tenet's best quarter in more than a dozen years. We generated growth in patient volumes that led the industry. And a major portion of that, approximately 60%, is independent of the Affordable Care Act. That non-ACA core growth alone would make Q3 one of the strongest volume quarters that I can remember. The growth was also broad-based, including in-patient admissions, commercial admissions, outpatient visits, surgeries, and emergency department visits. Beyond our hospitals, the rest of our businesses are performing well, and the acquisition and development landscape has never looked better.

There are a number of highlights on slides 2 and 3 in the presentation that we posted to our website yesterday evening. It was a strong quarter across the board, but I'd like to focus my comments this morning on our outpatient business, our strategic use of joint ventures, and Conifer. Each of these elements of our overall strategy are performing exceptionally well, and probably getting less attention than they deserve. Let me start with outpatient. In the Volume section on slide 3, you can see that we drove 8.5% growth in total outpatient visits in the third quarter, of which nearly 90% was organic. Outpatient surgery growth was particularly strong, increasing by 14.7%.

I'd like to go now from reporting the headline numbers toward a deeper dive into the strategy that we've been implementing for the past five years, as summarized at the bottom of slide 4. Our outpatient team has done an outstanding job in creating this business. In 2010, we earmarked $400 million to develop or acquire outpatient centers, and set an objective of generating EBITDA of $70 million from this initiative in 2014. I'm pleased to report that on an investment of just $306 million, we expect to earn $87 million in EBITDA this year. In other words, we generated 25% more EBITDA than we planned on an investment that was 25% less.

Slide 5 shows the growth in the number of centers we operate. In October, we opened our 200th outpatient facility, more than tripling the number we had six years ago. As you can see from the graph, the additions include urgent care centers and free-standing emergency departments. Which are consumer-oriented facilities that offer new access points to our care network for patients. As well as ambulatory surgery centers, which offer convenience and partnerships with physicians that improve performance. The growth in outpatient visits from this initiative has been substantial. We now generate from 5 to 12 times the number of visits, depending on the type of center, compared to what we had when we started.

Slide 6 summarizes the typical economics of newly developed outpatient centers. As you can see, ambulatory surgery centers can be developed on an investment of about $5 million to $8 million, reach break-even in about 18 months, and are typically generating margins of 20% to 30% in two or three years. Mature margins are averaging 30% to 35% on revenues of $5 million to $8 million. When we acquire them, the valuations can be around 11 times EBITDA. But after synergies and with the volume growth we're driving, the effective multiple is down to around half of that within one to two years. We now have 54 ASCs, more than doubling the number in the last three years.

Looking at the columns to the right, while our ASCs have the best economics, you can see there are comparable opportunities across the ambulatory sector. About 30% of our outpatient facilities are joint ventures. This includes virtually all of our ambulatory surgery centers. Our successful track record with JVs is built on their highly efficient use of capital, plus the operating strategies we implement with our physician partners. Of which there are currently nearly 600. And while most of our outpatient development has been centered on our existing markets, we've had good results in new markets in our existing states.

Already, the outpatient business is emerging as an important factor in our effort to become a preferred partner for hospitals and healthcare systems considering acquisition or joint venture arrangements. In discussions with potential partners, our capabilities in developing and operating outpatient facilities, along with Conifer, have been cited as a distinguishing feature for Tenet.

We're using joint ventures as a growth vehicle in other parts of our business as well. Several prominent examples are shown on the map on slide 7. Our partnership with John Muir Health in Northern California is producing accelerating volume growth, meaningful shifts in market share, and enhanced profitability for our formerly solely owned hospital. Proving that owning a smaller piece of a larger market can be a smart strategy. We're also developing an exciting JV in Tucson that intends to acquire the Carondelet Health Network in a joint venture with two leading Catholic health systems, Dignity and Ascension. This transaction will add to our strategic position in Arizona, which already includes a collaborative partnership with Dignity in Phoenix.

Our partnership with the Yale New Haven health system in Connecticut is another example of how we're using JVs to drive new sources of growth by aligning with a highly respected partner. And of course, the biggest example of our strategy is our Conifer partnership with Catholic Health Initiatives. The bottom line is that joint ventures and partnerships with not-for-profit systems and physicians are an essential element of our development and growth strategy, and we are positioning Tenet as a preferred partner for high quality, not-for-profit healthcare providers.

Continuing on this theme of driving growth and margin expansion in capital efficient businesses, let's turn to Conifer, which had another great quarter. It wasn't that long ago that $1 billion in revenue was a stretch goal for Conifer. But with $296 million in third quarter revenues, Conifer is already performing at a $1.2 billion annualized pace. Conifer's strong revenue growth is matched by comparably strong EBITDA growth. Conifer grew both revenues and EBITDA by more than 30% since last year's third quarter.

We're adding to Conifer's capabilities and growth with the acquisition of SPi Healthcare, which closed on October 1. SPi expands Conifer's revenue cycle management services into physician practices. With the addition of SPi, Conifer now processes an additional $1.2 billion in net patient revenues, and interacts with an additional 1 million individuals on an annual basis. SPi, along with Conifer value-based care, gives us the capability to manage the fee for service business of client physicians, as well as to enable them to participate in value-based care arrangements, including full risk.

Conifer has now extended its scale to process $26 billion in patient revenues, and touch more than 20 million patients. The insights Conifer is gaining from these millions of interactions, positions the Company to drive real value in a world where consumer-driven value-based care becomes more prevalent. I hope it's apparent that between the outpatient strategy, the JV strategy, and our services strategy, we intend for Tenet to be a comprehensive partner with not-for-profit systems. Offering solutions to some of the most important opportunities that they confront.

Turning to last year's acquisition of Vanguard, our integration is going extremely well. On our second quarter call, we increased the estimate of acquisition-related synergies for the second time. In the third quarter, we outperformed our objectives by $5 million. The value of all of the synergies and operational effectiveness of the integration has exceeded all of my expectations. And before I leave the topic of Vanguard, I want to mention that once again, our single fastest-growing hospital and 3 of our 10 fastest-growing hospitals in Q3 are in Detroit. Keith's and Charlie's decision to purchase the Detroit Medical Center was clearly very smart, and we are proud to be a major economic engine in the revitalization of the motor city.

You've heard me talk in the past about how we're transforming Tenet from a regional hospital operator to a national diversified healthcare services Company. I hope that my comments this morning have been helpful for you in gaining a deeper understanding of some of the strategies that we've been pursuing,

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

Thank you, Trevor, and good morning, everyone.

It was a great quarter from a volume, pricing, and cost perspective. Slide 3 provides a high-level summary of the quarter. We generated adjusted EBITDA of $459 million, which was stronger than our guidance for the third quarter. Also, our volume growth in the quarter was stronger than we anticipated, as we generated adjusted admissions growth of 4.9%. We estimate about 60% of our volume growth was unrelated to the growth we're generating from the Affordable Care Act. Our volume trends are increasingly broad-based, as we drove increases in adjusted admissions in all of the 14 states in which we operate hospitals.

Our in-patient volumes continued to strengthen, as we achieved admissions growth of 3.9%. Our outpatient business was even stronger, with visit growth of 8.5%. While our outpatient development and acquisition program contributed to the success, 89% of the growth was organic. It is also important to note that both inpatient and outpatient growth rates in the third quarter improved compared to our solid second quarter performance. Indicating our volume initiatives are building momentum.

We also continued to achieve incremental commercial volumes. Both inpatient and outpatient commercial growth in the third quarter exceeded our strong performance in the second quarter. Our commercial admissions trends are the strongest we've generated in more than a decade. Most of our volume growth was driven by our well-defined strategies, including key service line investments, enhanced physician alignment, and solid relationships with well positioned payer networks. However, it's also clear that the Affordable Care Act is providing additional support, as about 40% of our volume growth in the quarter was attributable to the ACA.

Turning to slide 9, we've normalized our results for a number of significant items that impacted our year-over-year third-quarter comparison. Most of these items are self-explanatory, but let me draw your attention to several important points. This year's third quarter had an unfavorable variance of $19 million 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 third quarter. The delay in approving the program appears to be related to additional information requests created by California's expansion of Medicaid. Although we cannot predict exactly when CMS will approve the program, we are confident that the program will ultimately be approved.

Our outlook for the fourth quarter includes $140 million of revenue from the program, based on the assumption that approval will occur before the end of this year. There was also an unfavorable variance of $25 million in net supplemental Medicaid funding related to our South Texas hospitals, just due to the timing of the funding approval last year. And a third unfavorable variance in healthcare information technology incentives, which were $12 million lower in this year's third quarter. This is simply a timing issue, based on when our hospitals achieve the meaningful use criteria. We do expect to recognize about $30 million of HIT incentives in the fourth quarter of this year.

Netting the items on slide 9, we achieved normalized third quarter EBITDA growth of $115 million, or 28%. This normalized growth includes $30 million of Vanguard synergies, and a $35 million contribution from the impact of the Affordable Care Act. Both of these benefits were $5 million stronger than the third-quarter outlook we shared with you in August. The ACA benefits were partially offset by $10 million of incremental Medicare cuts imposed by the ACA. Excluding the benefits from both Vanguard synergies and the ACA, we still drove core EBITDA growth of $60 million, or 15%.

Slides 10, 11 and 12 provide insights into the evolving impact of healthcare reform on our volume and payer mix. These slides make the following four points with regard to reform. First, we are achieving our aggressive objectives to drive significant declines in uninsured volumes, and strong growth in our Medicaid business, as you can see on slide 10. Second, as slide 11 shows, the favorable impact from the Affordable Care Act continued to build in the third quarter, even compared to a strong Q2.

Slide 11 highlights the success of our Path to Health outreach program. In particular, please note that we generated incremental exchange admissions and outpatient visits of 23% and 24% respectively in the third quarter compared to the second quarter. Third, slide 12 makes a point that the growth in our Medicaid volumes continued to build in the third quarter in the expansion states. And fourth, since there was a lot of interest in Detroit's Medicaid expansion that went into effect April 1, we provided additional detail on slide 13. The Detroit data shows a similar pattern. We're generating a significant decline in uninsured volumes and strong Medicaid growth.

Turning to our outlook, we are raising the midpoint of our 2014 EBITDA outlook by $25 million to $1.925 billion. The major growth drivers in the fourth quarter remain the same as we discussed on our second quarter call. However, there are a couple of emerging pressure points. We now expect a $30 million annual headwind related to Medicaid DSH, and other supplemental funding relative to what our Detroit market has received in prior years. We are mitigating this lower level of Medicaid reimbursement with cost efficiencies, along with strong volume growth we've been achieving in Detroit. Due to our strategic investments in this market over the past several years. The incremental volume for Medicaid expansion that we are driving will also help to sustain Detroit's performance improvement.

Second, we could face an unanticipated headwind approaching $10 million, reflecting recent levels of interest rates used to discount certain liabilities. As you know, interest rates have declined since September 30. Despite these unanticipated pressure points, we expect to achieve roughly the same level of fourth-quarter EBITDA we discussed on our last earnings call.

Since we've been trending ahead of our expectations this year, we do remain cautious about assuming the recent historically strong volume growth rates continue indefinitely. While we will focus on driving further performance improvements, it is reasonable to expect some moderation. In addition, similar to other providers, we will face related challenges on labor utilization, as we sometimes need to staff for significant volume increases with higher cost contract labor or premium pay. In summary, we are driving strong growth across all of our major business lines. We reported a very strong third quarter, and we have implemented business strategies that are working and can be expected to generate attractive growth going forward.

As we head into Q&A, we want to be mindful that another company has scheduled its call to begin at the top of the hour. To accommodate that schedule, please limit yourself to one question, with minimal follow-up so we can get to as many of you as possible in the next half hour. I'll now ask the operator to assemble the queue for our Q&A session. Operator?

Thank you.

(Operator Instructions)

Our first question is from Justin Lake of JPMorgan. Please go ahead.

Thanks. Good morning. Lot of detail on 3Q and into 4Q.

So I want to look ahead and think about it. I know it's early to talk about 2015 on specifics. But Trevor, Dan, maybe you can give us some color around how we should think about headwinds and tailwinds going into 2015 around ramp and reform?

How to think about core utilization going forward, et cetera? What the core growth rate is? Just some of the moving parts we should keep in mind.

Good morning, Justin. This is Dan. Let me address that.

So as we look into 2015, there's obviously a number of growth opportunities that we're going to continue to pursue and execute on. As you know, we're not completed with our 2015 planning at this point. But let me just try to give you just a couple of maybe the more notable items, so you just have a sense what we're thinking about 2015.

So when we look ahead to the next year, certainly the synergies that we've been capturing and realizing from the Vanguard integration. We will continue to build on those and continue to grow those as we move through next year.

As we've mentioned a number of different times. We're very optimistic that over the longer term, we're going to exceed our synergy range, the high end of $200 million over the longer term. So you should expect us to see continuing synergies in 2015.

How we look at healthcare reform at this point, obviously, the open enrollment period for the exchange business will be opening up here pretty soon, a few weeks. So we don't have complete visibility into that yet. So that's one of the reasons obviously we're not done with our planning yet. We'll see how that plays out.

From a Medicaid expansion perspective, I would say that other than the Commonwealth of Pennsylvania, there's likely to be no other state that expands Medicaid than the states that we operate in. And Pennsylvania's a pretty small state for us.

And one of our facilities up there is a children's facility, which generally speaking, a large portion of the children are already covered by some funding. So the impact from Medicaid expansion in Pennsylvania won't be material.

Obviously, we will continue to drive performance improvement from our performance excellence program, and it's been a very successful program. Our outpatient development program has also been incredibly successful, as Trevor mentioned in his remarks. And so we're going to continue to build on many of the things we've been focusing on the past several years.

Now, in terms of some headwinds, just point out a few that -- everyone's aware of them. So we will encounter some headwinds related to the HIT incentives. The number is probably say in the $50 million territory of a headwind compared to 2014 versus 2015.

As I mentioned in my remarks, there's about $30 million of Medicaid headwinds in Detroit to think about. And then just as a reminder, the incremental Medicare cuts under the Affordable Care Act, it's billed in 2015, and there's about roughly $80 million of incremental Medicare cuts next year. So obviously those are some of the more notable items that we're thinking about, and as we wrap up our business plan in the next several months.

Okay. One quick follow-up, Dan. You mentioned exchanges.

Can you just give us an idea of the benefit of reform you had in the third quarter, let's say? Can you break it down exchanges verse Medicaid, just rough percentages? Is it 80% Medicaid, 20% exchanges, or how should we think about that?

Sure, Justin. And it's about two-thirds exchange.

Great, thanks.

In terms of from an earnings perspective.

Thank you. Our next question is from Brian Zimmerman of Goldman Sachs. Please go ahead.

Hello, thanks, and good morning. I appreciate the detail you gave us around the growth initiatives in the outpatient services.

I was curious what you see in terms of continued runway, and which areas seem to be a bit more attractive in terms of growth going forward? Just any idea on how we can size up future opportunities there?

Well, so thanks, Brian. This is Trevor.

This is an area where I'm often asked how much opportunity, how much capital deployment opportunity is there at outpatient. And as you can see, we're doing it in a wide variety of types of centers. And we're really deploying as much capital as we can to it, because it aligns with trends in consumer-driven healthcare. Consumers want more convenience.

We're able to offer services at a better price point. Because we don't have all the high-cost infrastructure of a hospital, and we don't have the 24/7 operations, and the emergency departments taking all comers, et cetera. And as we broke out for you, the economics are terrific.

So we were handed a great opportunity in the Vanguard acquisition because Vanguard was a little bit less far along in developing outpatient in its markets. So we have still continued in market opportunities. There are always acquisitions that we're looking for in outpatient development opportunities, these new types of centers.

We've had very good success with the free-standing emergency departments. And we see the emerging business of urgent care as one that's very appealing, even though it's smaller dollars and a slower ramp-up.

So we'll continue to be very active in this. And I really wanted to call it out, because it's something that often just gets sort of blended into the hospital results. And it's a great success story for Tenet.

That's helpful. And then I guess my follow-up is around the commercial volumes. Very strong this quarter.

Obviously, reform is playing a part of that. But if you strip apart reform, how should we be thinking about the commercial volume growth? And what's driving that increase?

Good morning. This is Dan.

As we mentioned in our remarks, we're realizing and generating the most favorable trends that we've seen from a commercial inpatient perspective in about a decade. And really, it's -- certainly, the exchange is contributing to that. But the lion's share, when you think about our investments in strategy and focus over the past several years, has really been to drive incremental business in these attractive service lines. And we're seeing the benefits from that.

Even -- let me just add that even excluding the exchanges, the trend in commercial has continued to improve over, I don't know, five quarters. Britt, you might elaborate on this.

If you looked at that as a book of business that was under very significant pressure at most times throughout the last decade, both through an improvement in the enrollment trend at the payer level. And also through our strategies, we've really been able to bring that trend much closer to flat in growth.

Sure, Trevor. Yes, Brian.

The trends I think that Trevor was speaking to actually go back maybe more like eight-plus quarters of improvement sequentially quarter-over-quarter. What we're really seeing now and proud of what we're seeing, is the consistent investment in core service lines that lend themselves to commercial enrollees.

And across the broader portfolio now, we are seeing that service line deployment really take hold in very key markets for us. And that particular service line growth and high acuity, high TGI, historically defined areas, are really paying dividends.

The reason I am excited about that is because there is no reason to believe that's going to change going forward. Our market share position in those are solid, and our continued development in that will increase in those markets where we're strong. And we're learning and demonstrating best practices across the country where we are strong in markets, and replicating that across others where we have the same opportunity.

Thank you. Our next question is from A.J. Rice of UBS Uniform. Please go ahead.

Hey, everyone. Thanks for taking the question. Just my broad question would be on the capital deployment. I guess two areas of big spending for you guys.

New Braunfels, which you've got as a $12 million drag this quarter. I assume that's about the worst you'll see, and it should turn positive over time. Can you give us some sense of that?

And also, when you did Vanguard, you inherited some significant capital commitments in Detroit. Where are you at on those? When do those start to phase down to a more normalized level? And when do you expect to see the contribution from those kick in?

So let me make a brief comment, A.J. I'm going to hand it over to Dan for New Braunfels. And then, I'd like Keith to talk a little bit about the portfolio optimization strategy that we're pursuing.

On the -- the only thing I'd like to say on the capital piece overall. Is with respect to Detroit, yes, we inherited a large commitment. But we're really seeing the benefit of these investments that Vanguard had made.

I'd pointed out, and the reason I did it in my script is that the fastest growing hospital in 3 of the top 10 fastest growing in Detroit, it's not just because of Medicaid expansion. It was happening even before that occurred. It's because we've made these investments that are very strategic in that market, and the market is a good, solid market. It's rebounding. We've been taking market share.

So, we like what we're seeing from the investments, both that Vanguard made. The continued commitment that we have is less than half of the total Vanguard commitment in Detroit, but we're investing it smartly in things that we want to do, as opposed to anything that we feel we have to do. And I'm very optimistic about our performance in Detroit.

New Braunfels is an interesting story, because it's a large, high profile startup hospital. We've done that five times in the last decade at Tenet, but, Dan, you might want to answer A.J.'s question. Then I'd like Keith to comment on the overall landscape in acquisitions and portfolio management.

Good morning, A.J.

On the new New Braunfels market, we're very optimistic. We view it as a significant growth market, and we really like the opportunities that we see down the road.

The results in the third quarter that are outlined on our slides, the pressure point there really relates just to the timing of when the joint commission completed the survey. Which triggers the Medicare provider number and certification date. And there was just -- they completed the survey within the allotted timeframe that they have, but it was a little bit longer than we had hoped.

So what that results in, due to the delay in the survey, was just we don't necessarily have the provider number at this point. And what that does is it delays being able to bill Medicare. Now Medicare, you can go back and bill back to the survey date. But Medicaid and certain other payers, you have to have the Medicare provider number before you can bill those payers.

Thanks, Dan.

And just to add a couple things, A.J. First on Detroit, the heart hospital opened earlier this year. And we've actually with some expansion space in our service -- we have a few service lines growing pretty fast there, so we're continuing to invest in that.

The last of the large projects that were part of the $500 million is the Children's Tower. Which has been right-sized to where we see the future of children's business.

And I will say we have under construction today a free-standing emergency department and day hospital, but a 24/7 for emergency in Troy, Michigan off of Big Beaver Road right in a great location in Oakland county. And as a result of that, we've really moved our project downtown to more intensive care, more things that we would expect to see in a real high acuity hospital. That project will start construction soon, and will go through the end of 2016 and expect to be open in 2017.

That was -- if you recall, we had a two-year grace, if you will, on our five-year commitment. And then our routine commitment, we will be completed with that and finalize all the projects with that through 2015.

So we really are nearing the end of those projects. And in addition to that, as Trevor said, we're seeing really nice growth and results from the investments.

On the portfolio optimization side, we've spent a good bit of efforts strategically this year across the Company. We think we have a very good game plan. We are very aggressively moving in the areas where we think we can move more quickly to reshape the portfolio.

We have some areas where we are very much under way, and have been for a while. But are just on a little slower track due to limited potential strategic partners in those cases, in some cases, as well as just some of the existing relationships that we already have.

So we feel very good that we will make significant progress over the next 90 to 180 days on the portfolio optimization, and we'll see a lot of things change here going forward. So just a little color on that.

That's great. Dan, just real quick, on your $30 million Medicaid headwind in Detroit, it wasn't clear. Is that a quarterly number, or is that a full-year number?

That's an annual number, A.J.

Okay. All right. Thanks a lot.

Thank you. Our next question is from Andrew Schenker of Morgan Stanley. Please go ahead.

Great, thanks.

Following up on some of your comments on the contribution from exchanges there. Looking into next year, any updates you can provide as we head into open enrollment here about changes towards your approach towards network contracting? Are you in more or less narrow network products?

And then similarly, any lessons you learned about helping enroll uninsured into the exchanges, and what is your expectation for next year? Are you going to be able to drive incremental people into programs? Thanks.

Sure. Thank you, Andy. I'll make a brief opening comment, then ask Clint Hailey to talk about the landscape on contracting. Because it actually has changed a lot as these exchanges have become better established, and many new insurers have appeared on the scenes and their new products, et cetera.

From going back to probably the last 18 months, I think a real strong point of Tenet's Affordable Care Act strategy was to, first of all, position our hospitals very effectively within the exchange networks, particularly those that were offered at the lowest price points in the silver category. And then a completely separate effort, which was oriented toward driving exchange enrollment, but also Medicaid enrollment that we call Path to Health.

We did that in conjunction with Conifer, and it's very well established throughout our system. We have had an 800 number, physical counselors on site in hospitals, and online ability to do this, really tagged onto a lot of capabilities Conifer already had.

And it's impossible to know how many actual enrollments we drove into that. But it's in the tens of thousands, and we think that positioned our hospitals as trusted places to go to find information about what insurance products may be available to you. That's all still in place.

We haven't stopped doing it at all. In fact, we're getting ready to really gear up here for the next open enrollment that starts within a matter of a week or so. And we think that's going to be equally effective.

I'll ask Clint now to talk a bit about how we're positioned with the exchange marketplaces. And what you're seeing in terms of contracting, and there's been a lot of talk about narrow networks and what does that mean exactly, et cetera. Thanks, Clint.

Sure. Thanks for the question.

Just to get everybody on the same page, for 2014, we're in about 80% of the health plan offerings on exchange today, and 86% of the two lowest cost silver plans. And so -- which we consider to be the sweet spot in terms of enrollment. And our desire for 2015 is to be positioned comparably.

That said, there's quite a bit more activity for 2015 than there was for 2014. Amongst both insurers, more insurers in the market, as well as existing insurers having more options that they're offering, as well as more provider interest. There are providers who dabbled in it a little bit in 2014 that are going bigger in 2015, and then there are providers that sat on the sidelines entirely in 2014 who are participating in 2015.

So it's going to be real interesting to see once we have public -- once it becomes public here in the next week or so, what exactly is going to be offered in each of our markets. That said, I think there's going to be substantially more available to consumers. Which is, to Trevor's earlier point, an indicator of how viable or even strong the market has been, and what an opportunity from a channel perspective this represents for Tenet.

All that said, I think we're well positioned for 2015 for the states that there have been public information on. We've been positioned well. And we believe we'll be positioned well in the other states that are not public today, but we just won't know for another week or so.

And I think the managed care ex-exchanges, the managed care contracting is going incredibly well. We have a lot of visibility into pricing for 2015 and 2016 as well. So all around, I think a good story on managed care.

And maybe just a quick little follow-up here. How have collection rates actually been on the exchange products for deductibles and copays? Is it trending closer to commercial? Are you seeing higher non-collections rates?

Hey, Andy, this is Dan. Good morning.

The collection trends so far are tracking relatively consistent. I would say the only notable difference at this point really is just the timing of the payments. They're just -- some of the payments are just coming in a little bit slower. But at this point, we believe the collection experience will be comparable.

Thank you. Our next question is from Josh Raskin of Barclays. Please go ahead.

Hello. Thanks.

Just want to clarify some of the comments, Dan, you made about 2015. I think you outlined you quantified specifically $160 million of EBITDA headwinds for next year. So that's just over 8% of the 2014 guidance.

And then you spoke about the synergies and the Medicaid expansion in Pennsylvania. Obviously the improvement in the ACA, and then the performance excellence. Are those comparable in magnitude? Just trying to figure out headwinds, tailwinds. Are you implying potential for flattish EBITDA next year? Or what exactly was the message with quantifying the headwinds?

Good morning, Josh. Obviously, we don't -- we haven't issued the guidance yet.

No, listen, we're going to generate growth. But I just wanted to point out that when we're thinking about the pluses, that there are a few headwinds we just need to take into consideration.

Okay, okay. So you're still confident in both.

And then just on the accounts receivable, maybe related to the last question. You're seeing an increase there. I think you may have suggested that was timing-related. Is that copays and deductibles? Or what's driving the increase in the AR?

From the exchange, it's really just the timing of the payments, just a little bit slower. It's not material or a huge number in terms of the AR -- in terms of the AR growth.

But the overall AR, forgetting just the exchanges. What's the uptick there?

Well actually, we're doing very well on AR performance. Our days in AR are essentially flat over the past several quarters.

Okay. So maybe it's just the growth [would be appropriate].

Yes, if you go back, if you're looking back to like last year, obviously we have a bigger platform now with the Vanguard acquisition and couple of the other acquisitions.

Okay. All right. Perfect. Thanks.

Thank you. Our next question is from Kevin Fischbeck of Bank of America. Please go ahead.

Great, thanks. Just wanted to go back into the volume number, because that was a very good number this quarter. And I hear what you're saying as far as not wanting to assume the number like this progresses. But to the extent that you're growing I guess you say 60% of it's organic, so let's say 3% volume growth.

Is there anything about the timing of the investment that you've done that would say the number should tail off, anything big that we should think about? Because it sounds to me like when you're opening up a new heart hospital, children's hospital, New Braunfels, it feels like the organic number actually should be elevated for a little while. So I just wanted to see if there's anything we should be thinking about there as far as the timing of investments coming on.

Well, I'll make a couple of comments to start, and then I'll ask Britt to fill in with some of our business development strategies.

But look, we're really pleased with this momentum we've had on volume. Now, part of it this year is easy comparisons. The comparisons get tougher as we go into 2015.

But we're seeing this great strong across-the-board growth. And some of the best growth corresponds with some of the places where we've made these very targeted investments. And it's not just capital investing for growth, it's also focusing on developing service lines that are growing, focusing on certain physicians.

We've had a dramatic improvement in our physician alignment strategy. And I don't know, Britt, do you have a couple examples? Do you want to give some flavor? Because this is sustainable stuff that has strong momentum behind it, and I think it's just a different trajectory that we're on than we have been on in some prior years.

Sure. Thanks for the question, Kevin.

As we looked and communicated, 60% of our growth is core growth. And as Trevor mentioned, our investments in service lines over a number of years, not just simply in 2014, in the areas like cardiology, neurosurgery, are paying big dividends. And I'll single out a couple of areas in our Florida region, for example, extremely solid growth rates there in those high acuity, high intensity service lines.

And that is a function, as Trevor mentioned, of recruitment of very talented physicians into that marketplace. The development of services around there that is both technology-based, as well as competency and service-based.

And then as you look at a market like Detroit, we are seeing and able to measure bona fide market share gains in Detroit overall. And those, again, very highly complex, acute services where it's the investment in these types of services. That for the foreseeable future is, to me, a very sustainable growth model. And that's 60% of our business.

The last piece, or the corresponding piece in our ACA Medicaid and exchange volume being the 40%, as we've already discussed this morning, and I won't elaborate much further. Is we have very strong confidences that in those areas we're going to continue to see the kind of growth because we're positioning it and addressing it as directly and aggressively as we have in the last 18 months.

Okay. And maybe last question, the stocks are kind of weak today. And I think you and your competitor who reported last night had a pretty good quarter.

So my sense is that it's related to some of the sentiment around either the elections, and the potential for Republicans to gain more share, or, and/or the Supreme Court challenge to subsidies. Do you have any thoughts about if the political winds change a little bit with this election, whether that's going to have any meaningful impact on where reform may ultimately end up, based upon your conversations with DC?

And have you done any initial conversations in the case about what would happen if this -- how the ruling could go the opposite way, whether there's a plan B at the state level?

I was really just thinking as you started that question that I should be asking you the question. We're just reporting -- we're reporting the best quarter ever. The business is stronger than it's ever been across the board, more fundamental, and I can't imagine why the stocks are getting hammered this morning.

But, on the topics you raised about politics, there are probably all sorts of fear factors. I think the reality is with respect to the Republican control of the Senate, the ACA marketplaces and benefits are so deeply established across so much of the country now, it's really hard to imagine taking that on as a fight and trying to dismantle it.

Tweaking it, fine. We could expect that. But keep in mind at least for us, we've generated these results with no expansion in Florida and Texas, two of our largest states, Texas being our largest state in which we operate.

As far as the Supreme Court ruling, there's no conceivable way to predict what's going to happen there, whether they're going to take it up at all. It will play out over the next few weeks.

But again, you've got millions of people now enjoying the ability to purchase health insurance in an individual market with subsidies, and that's something that's becoming really important to them. You've had employers also modify behavior accordingly.

So I think this train has left the station big time on both the Medicaid front and on the commercial front. And if that's what's driving volatilities in the stock, it's probably creating a terrific opportunity for people who look through that to the fundamentals. And particularly in our case, broad-based growth across business lines, outpatient performing exceptionally well, Conifer really terrific, and couldn't be more pleased with the opportunities that we have in front of us in all of our business segments.

Great. Thanks.

Thank you. Our last question is from Darren Lehrich of Deutsche Bank. Please go ahead.

Okay, thanks. Good morning, everybody. So we appreciate the fact that you're calling out a number of the headwinds, and frankly, many of them have largely been known.

So I guess I just wanted to flesh out a little bit whether you're seeing something in the business into the fourth quarter that makes you just want to call that out a little bit more? Or if there's something in terms of how your cost initiatives might play out in 2015 that makes you less confident that you'll be able to offset some of those things like you have in the past? I just want to flesh it out a bit more here.

Hey, Darren. This is Dan. Good morning.

No, listen, we really like what we're seeing from our trends so far in October. Our volumes are generally consistent with what we saw in the second and third quarters. So that's nice to see.

So we're continuing to execute on all our various strategies, and we're going to generate incremental growth. You're right, in terms of the headwinds we talked about. Other than really the Detroit $30 million, the other items were known and there's no surprises there.

It was just talking about some of the things that have been out there just as a reminder. But when we look at it down the road with the incremental benefits from healthcare reform, our outpatient development, our performance excellence program, the benefits from our outpatient in tandem with our Conifer business, we really like what we see ahead.

Okay. That's helpful.

If I could just follow up. As it relates to the cost side of the equation, this is a really good quarter for that. Can you help just parse out a little bit more of where you're getting the most traction, and maybe how some of those initiatives might carry forward into the out year?

Yes, we are really satisfied with our cost performance really across the board, not only from a labor, but also from other purchase of services spend. And what we're doing -- and one of the things with the Vanguard integration, it's not just applying Tenet's best practices to the Vanguard facilities. It's also the best practices that Vanguard had.

And we're applying them to the legacy Tenet platform. So we're generating incremental efficiencies really broadly across the platform, and we have a team that's focused on this day in and day out. And we're generating a lot of growth in our earnings from that, and we expect that to continue as we move into 2015 and beyond.

I think you've -- on specific areas. It's medical devices, it's pharmaceuticals, it's food and nutrition, outsourced purchased services. The guys are digging deep into every line item basically in the business, and finding great opportunities across the board.

Very good. Okay. Thanks.

Thank you. I will now turn the call back over to Trevor Fetter.

Thank you, operator. And we have no further comments.

I wanted to finish early so you have a chance to dial into the next call. And we'll see you all in a matter of a few months. Bye.

Thank you. And thank you, ladies and gentlemen. This concludes today's conference.

Thank you for participating. You may now disconnect.