Tenet Healthcare Corp (THC) 2014 Q4 法說會逐字稿

Welcome to the fourth-quarter 2014 Tenet Healthcare earnings conference call. My name is Dana, and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

The slides referred to in today's call are posted on the Company's website. Please note the cautionary statements on forward-looking information included in the slides. I would now like to turn the call over to Trevor Fetter, Tenet's President and CEO. Mr. Fetter, you may begin.

Great. Thank you, Operator, and good morning, everyone. Last evening, we reported Tenet's strongest quarterly EBITDA in more than 10 years. We generated admissions growth that was among the highest in the industry, as well as strong growth in adjusted admissions. Approximately 70% of our volume improvement had little or nothing to do with health reform, demonstrating the underlying strength of our business. This non-ACA core volume growth alone is the strongest in five years for Tenet, and came from across the spectrum, including inpatient administrations, commercial admissions, outpatient visits, surgeries, and emergency department visits.

With regard to our strategy to maximize our opportunity under the ACA, the path to health program, we launched in 2013 remained active for the second open enrollment period. Program utilizes Conifer's financial counselors, direct mail marketing programs, hospital-based enrollment activities, and community events.

We held nearly 800 outreach and enrollment events reaching tens of thousands of people in our priority markets. I'm very pleased that our daily enrollments have increased by more than 60% during this enrollment period, and we estimate that we will exceed the number of exchange enrollments that we achieved last year, even though the enrollment period is shorter. This will include a combination of renewals and newly insured individuals.

We negotiated and renewed a number of contracts with key national and regional payers in the fourth quarter. At this point, we've completed contracts covering more than 90% of our expected commercial revenue for 2015. I'm pleased that we continued to be very well positioned in the networks of many of the most cost-effective and popular plans offered on the exchanges.

This year, we are contracted with over 83% of the lowest cost plans on the silver level. That's an excellent number and should provide a competitive advantage to us yet again as we gain share in this important new market.

We also continued to advance our efforts at new care models. We now have ACOs in more than 50% of our markets and have plans to develop several additional ACOs this year to further accelerate our movement from volume to value.

Our outpatient business is thriving, continues to be a great success story for Tenet. Visits to our outpatient centers increased significantly during the quarter and almost all of the growth was organic. We had a growing network of 210 facilities at the end of the year, up from 183 at the end of 2013. We also acquired two new surgery centers and opened two MedPost urgent care centers just in the first two months of this year.

Our outpatient centers continue to attract consumers who want quality care at a lower cost, as well as potential partners looking to leverage our development and operational capabilities. As healthcare delivery evolves and consumers shop for more affordable solutions, Tenet is strategically positioned to capture the benefits of this fundamental shift. We see many opportunities to continue this growth, both within and apart from our acute care hospital markets.

Conifer also reported an outstanding quarter, with a 24% increase in revenues. Its annualized revenue run rate now exceeds $1.3 billion. Conifer generated $64 million in EBITDA during the quarter, which is a 78% increase over the fourth quarter of last year, and reflects consolidation of the Vanguard business and the continuing increase in margin on our business with Catholic Health initiatives. On an annualized basis, Conifer is delivering roughly $0.25 billion in EBITDA.

In January, Catholic Health initiatives and Conifer announced an expansion of their partnership through 2032. Conifer will provide patient access, revenue integrity, and patient financial services to more than 90 CHI hospitals. This is a significant milestone in the Conifer-CHI relationship which underscores Conifer's industry-leading capabilities and the meaningful value it brings to integrated systems like CHI.

CHI has more than delivered upon its initial commitment to our Conifer partnership and now owns 24% of Conifer, as was anticipated when we formed the relationship in 2012. Conifer also continues to gain recognition as a leader in the industry. In December, the black book 2014 user survey ranked Conifer number one in both revenue cycle and value-based care services.

Slide 3 summarizes some of the actions we are taking to optimize our hospital portfolio. As we've shared with you in the past, we are committed to building leadership positions in the markets in which we compete. Our objective is to be either number one or number two, and we currently hold these positions in 21 of our 31 markets.

Increasingly, we see partnerships with an attractive vehicle to improve our position where we already have a presence or expand our footprint to new geographies. Partnerships can have all the strategic benefits of an acquisition, but with a much lower capital commitment.

In December, we signed a letter of intent to create a new joint venture with Baptist Health System in Birmingham, Alabama. The partnership will build upon the strength of both Baptist and our Brookwood medical center.

We will enhance our collective ability to provide higher quality, lower cost, more convenient care to a larger geographic area. The combined network will be a competitive, market-leading system with 5 hospitals, 77 primary and specialty care locations, and 1,500 affiliated physicians. It will also give us the capability to pursue new care and payment models. We see this as a win for all parties with a wide array of benefits to the community, our patients, our new partner, our employees, and our shareholders.

We announced plans to expand our presence in Arizona through a joint venture with Dignity Health and Ascension, which are both highly respected nonprofit health systems. Under the terms of the JV, Tenet will become the majority partner with management responsibility for all operations of the three-hospital Carondelet health network in Tucson. This transaction will connect Carondelet to a much larger statewide healthcare system, including the growing accountable care organization that we currently have with Dignity. From our perspective, this is a unique opportunity to extend our presence beyond Phoenix into the attractive Tucson market, and it's consistent with our strategy to create new, innovative models for patient care.

Also, in the last few weeks, you may have seen media reports indicating Tenet's exploration strategic option for hospitals in Atlanta and North Carolina. We are actively looking at various attractive alternatives and are pleased with the level of interest.

Finally, we terminated our discussions to acquire five hospitals in Connecticut in partnership with Yale New Haven health system. While this was a disappointing outcome after more than two years of hard work, conditions proposed by state regulators would have impeded our ability to restore the hospital's long-term operational and financial stability. Moreover, we were unable to achieve any level of certainty regarding either the timing or outcome of the regulatory process if we had continued to pursue the acquisition.

In summary, we are making great progress on a number of fronts. We remain focused on the core strategies that are driving performance, implementing value-based healthcare solutions, building leading positions in our markets, investing in faster-growing, higher-margin businesses, and innovating with new care models. Our results in the fourth quarter and for all of 2014 provide tangible evidence of our progress.

We are entering 2015 on a solid foundation with projected top line and bottom line improvements and are optimistic about the opportunities ahead. With that overview, let me turn it to Dan Cancelmi for more color on the quarter and our outlook for the year. Dan?

Thank you, Trevor. Good morning, everyone. Let's turn to slide 4 to take a closer look at the underlying drivers of our earnings growth. We generated $646 million of adjusted EBITDA in the fourth quarter, which was at the top of our outlook and compares favorably to $444 million last year. Slide 4 shows that even after adjusting for a few large items that had a net positive impact on the quarter, we drove normalized EBITDA growth of $86 million, or 19%.

To compute our core EBITDA growth for the quarter, we also backed out the benefits that we generated from Vanguard synergies and the Affordable Care Act. These items are very real, and the lift we captured from them is expected to be sustained. However, if we exclude them, as well as the related Medicare cuts, we still drove an impressive core EBITDA growth of 9%.

The quarter capped off a strong year for us. We grew EBITDA by $176 million in 2014 on a pro forma basis, or an increase of 10%. Slide 5 shows that if we make the same type of adjustments, we increased normalized EBITDA by 14% and generated core EBITDA growth of 6% in 2014.

Slide 6 summarizes some of the highlights of the quarter. We generated strong volume growth, achieving a 4% increase in same-hospital admissions, and a 4.5% increase in adjusted admissions. About 70% of the increase in our same-hospital adjusted admissions was core growth and unrelated to the growth we're generating from the ACA. Our volume trends were broad-based, as we drove increases in adjusted admissions in 12 of the 14 states in which we operate hospitals.

We also drove strong volume growth in our commercial business, which is our most profitable. Our commercial admissions trends in 2014 were the strongest we've generated in more than a decade.

Growth in outpatient visits remained very strong, increasing 9.6%, 92% of this outpatient growth was organic. Completing the volume picture, we grew surgeries by 7.5% and increased emergency department visits by 7.2%. In summary, we're very pleased with the strength of the volume growth we delivered.

The combination of strong volumes, the improved commercial pricing, and the California provider fees resulted in strong revenue growth in the quarter. We generated a $583 million increase in net operating revenues after bad debts, which is an increase of 15%. Excluding the revenue contribution from the California provider fees related to prior quarters, we increased patient revenue net of bad debts per adjusted admission by 4.9%.

We also delivered very favorable growth in commercial managed care revenue with revenue per commercial admission increasing 6.7%. The commercial pricing on the outpatient side was more modest, increasing by 0.9% per visit. This reflects the impact of the growth we are driving in new outpatient access points, including urgent care centers.

Bad debt expense declined as a percentage of revenue by 80 basis points to 7.4% in the quarter. The improved bad debt performance is primarily due to a $27 million decline in same-hospital uninsured and charity revenues as a result of the expansion of insurance coverage under the ACA. For the full-year 2014, bad debt expense declined 150 basis points on a pro forma basis to 7.3% of revenue, down from 8.8% of revenue in 2013. In 2015, the midpoint of our guidance for bad debt expense anticipates an additional 30 basis points decline, with a range of 6.75% to 7.25% as a result of the benefits we anticipate capturing from the ACA.

Selected operating expenses per adjusted admission increased by 3.8% in the quarter on a same-hospital basis. The increase was 2.6% excluding physician employment growth. On a full-year pro forma basis, our costs only increased 1.4%. In 2015, we expect to do a little better with growth in selected operating expenses per adjusted admission of zero to 1%.

Turning to cash flows, adjusted cash flows from operations in the quarter was $279 million. Net of capital expenditures of $199 million, adjusted free cash flow was $80 million. As we noted in our earnings release, our cash flows have been impacted by the fact that California and Texas owed us about $300 million in aggregate as of December 31 related to the California Provider Fee program, Texas DISH, and Texas uncompensated care 1115 waiver revenues.

Cash flows were also negatively impacted by temporary buildup in receivables at certain hospitals acquired from Vanguard due to our implementation of a new billing system at these hospitals. While this slowed down cash flows in the second half of the year by about $80 million, the system change will enhance the future performance of these hospitals.

The temporary buildup in the receivables caused by this system conversion has already started to come down this year. Likewise, we anticipate the $300 million of receivables from the California and Texas Medicaid programs to begin declining in 2015.

Turning to our services business, Conifer had another great quarter, driving a 78% increase in EBITDA to $64 million. Conifer's revenues increased by 24% to $327 million, or an annualized run rate of about $1.3 billion. Keep in mind that the fourth quarter tends to be seasonally strong for Conifer. We anticipate Conifer's EBITDA to be about $240 million in 2015.

In early January, we provided our 2015 outlook for adjusted EBITDA. Slide 7 summarizes the key assumptions included in our outlook. I'll simply note in terms of volumes that the 2015 growth rates are assumed to moderate compared to our 2014 growth. Our outlook assumes admissions growth of 1.5% to 2.5% and adjusted admissions growth of 2.5% to 3.5%.

We expect to grow our exchange volumes 60% to 80% over our 2014 volumes. Given the way we grew exchange volumes throughout 2014, the growth we anticipate this year annualizes the exchange volumes we generated in the fourth quarter, plus some additional growth from uninsured individuals who signed up during the recent open enrollment period.

In terms of pricing, we are projecting an increase in total net revenues per adjusted admission of 1% to 2%. We anticipate mid-single-digit percentage growth from improved terms in our commercial managed care contracts, which will be partially offset by anticipated growth in government volumes and our urgent care business, both of which have lower reimbursement levels.

We expect our bad debt ratio to be in a range of 6.75% to 7.25% compared to 7.3% in 2014. Here, we are anticipating the uninsured and underinsured book of business will continue to gain incremental coverage under the ACA. On the cost side, we continue to expect growth in controllable operating expenses per adjusted admission on a same hospital basis to be in the zero to 1% range this year. On a total Company basis, including cost growth that is not directly tied to volume growth, such as the growth at Conifer, which is related to new business, we expect expenses per adjusted admission to increase 1.5% to 2.5%.

We expect to achieve EBITDA growth in 2015 of approximately 8% as shown on slide 8. This includes absorbing about [$50] million associated with the decline in HIT incentives net of costs. This outlook includes normalized EBITDA growth of 10% and core growth of about 6%, which excludes the contributions from incremental Vanguard synergies and the ACA.

Finally, we expect to deliver adjusted EBITDA of $475 million to $525 million in the first quarter of this year. I want to mention a few things to consider as you think about our quarterly progression of EBITDA in 2015. Volumes and bad debt expense continue to be influenced by a shift to higher deductible health plans, which may push more volumes into the fourth quarter and could cause bad debt expense to move higher in the first quarter due to the reset of deductibles. In addition, it may take some time for the newly insured to seek inpatient and outpatient services so the volume benefit from increased exchange enrollment will likely be weighted toward the second half of the year.

As for the California Provider Fee program, for the first time in a while, revenue should be fairly predictable each quarter this year at a little more than $40 million and closer to $170 million for the full year. The synergies that we are achieving from Vanguard, as well as other cost initiatives should continue to ramp throughout the year, and HIT incentives will only be about $5 million in the first quarter compared to $65 million for the full year.

Turning to slide 9, in summary, we are driving strong growth across all of our major business lines. We are well advanced in our transformation from a regional operator of hospitals to a diversified healthcare services Company with broad geographic reach. We achieved strong results in the fourth quarter and for the full year, and we have implemented business strategies that are building solid momentum and driving year-over-year growth. These growth drivers are expected to be supplemented by incremental contributions we'll realize from Vanguard synergies and the ACA, all of which can be expected to generate attractive growth going forward.

Finally, before we open the call for questions, I want to share with you that Tom Rice has decided to retire and spend more time with his family. Tom has led Tenet's Investor Relations effort for nearly 12 years, during which time he has worked tirelessly to be responsive to the needs of the investment community. We're very grateful to Tom for his hard work and dedication and for providing continuity over a period of significant change for both our Company and the industry.

As part of this news, we are also pleased to announce the promotion of Brendan Strong into the role of Vice President of Investor Relations. Brendan joined Tenet in September in our Northeast region, where he has been working on strategic and operational initiatives. Many of you might remember him from his time working in the equity research departments of Lehman Brothers and Barclays, where he focused on the healthcare sector. Tom plans to retire at the end of March, and he and Brendan will be working closely over the next month to ensure a seamless transition. I'll now ask the operator to assemble the queue for a Q&A session. Operator?

(Operator Instructions)

And we'll take our first question from Ralph Giacobbe with Credit Suisse.

Thanks. Good morning. First one, I guess: do you guys have an estimate of what percentage of your exchange book was previously uninsured?

Ralph, this is Dan. Good morning. How are you?

Good, thanks.

Based on the information where we have good visibility into the patient's prior insurance status, we estimate it's roughly a third was previously uninsured.

All right. That's helpful.

And then, there has been a lot recently on the move to value-based models. Government and HHS has put out release on targets, and increasing those targets on the coming years. Maybe it would be helpful just to get your thoughts on that release, how it impacts you, and maybe how you're positioned for the changes? Thanks.

Good morning, Ralph. I think we're positioned incredibly well. For a very long time, we have placed a great emphasis on high standards of clinical quality in the metrics that are being measured and most likely driving the value-based programs that the government talked about in that release. We have performed well better than the industry averages. So, I think, to the extent that either the government payers or private payers begin to seek greater value, directing -- either directing patients to the highest value providers in markets or providing incentives or penalties to providers for delivering value -- that gives us a competitive advantage.

Okay. Great. Thank you.

And we'll go next to Darren Lehrich with Deutsche Bank.

Thanks. Good morning, everybody. And, best wishes to you, Tom. Thanks for all your help over the years.

I wanted to maybe focus a little bit on the Vanguard synergies. It looks like they have just leveled out a little bit sequentially; but when we think about the guidance for 2015, there's really not a lot of incremental improvement, given how it ramped in the first half of 2014.

So, I guess the question here is: When you think about Vanguard synergies, what are the key areas of improvement? And should we be expecting about $10 million or so incremental stepping up in Q1 versus Q4, or does it build in a different way throughout the year? Thanks.

Good morning, Darren. This is Dan. The Vanguard integration has continued to go extremely well, and we continue to meet or exceed our targets in the various areas that we've been focusing on. Just some -- the broad areas that we're really focusing on, and have been focusing on, is obviously evaluating opportunities from a cost perspective in terms of taking the best practices of both the Organizations and then implementing them across the portfolio. Conifer's integration of the Vanguard hospitals is continuing, and we anticipate the benefits that we're going to realize from the Conifer integration will continue to build as we move through the year and really beyond 2015.

As well as the -- from a contracting perspective, we have been making progress there, and we anticipate that we'll continue to be able to capture opportunities there as we continue to integrate both Organizations together. The synergies that we anticipate -- that we have in our guidance for 2015 -- are about $75 million, on top of what we captured in 2014, and yes, they will build as we move through the year and as we continue to execute on our game plan. And as we've talked about in the past, the original target of synergies of $100 million to $200 million, we think over the longer term we will be able to exceed the $200-million target as we get into 2016 and beyond.

That's helpful. If I could just clarify one thing: As it relates to the divestitures, it doesn't appear that you've put them in discontinued ops. Is that going to occur in the first quarter? And can you just help us think about the impact of that?

You're right: Those assets have not been placed into discontinued operations at this time. We'll certainly be evaluating where we stand with the future plans related to those hospitals; and at that time, we'll make a judgment as to when it should be included in discontinued operations.

They have changed the accounting rules a little bit, just so you know. So, it's a little bit different than the previous accounting rules. But, at this point, we'll see when we get to the end of the first quarter, and see if it makes sense at that point or not.

Okay. Thanks a lot.

We'll take our next question from Kevin Fischbeck with Bank of America Merrill Lynch.

Okay, great. Thanks. Just wanted to maybe follow up on that line: I guess this whole portfolio rationalization and looking to gain scale at the local level is interesting. I think, Trevor, you made a comment that JVs get you that local scale without the capital commitment. Yet, just conceptually from the outside, it feels like it might -- a JV might be better than where you were, but not as good as owning the assets. Could you comment a little bit about saying that you can get there without actually putting the capital in place?

Why don't I -- I'll just give you a second on it, and then turn it over to Keith who is really the expert in doing these. My perspective is: If you want to buy troubled turn-around assets, you can do that all day long and own them 100%. If you want to end up owning either a piece or the majority of really high-quality assets that are going to be transformative in a market, that's going to increasingly require a JV approach. And we, really through the benefit of the reputation that Keith and the team at Vanguard had created, now are seen as a preferred partner in our markets to do that.

So, something like the Birmingham example that I gave you -- those hospitals were not available for purchase. This was -- joint venture was the only structure that they would have contemplated.

So, Keith, why don't you just talk a little more generally about this, because I think it's an emerging theme, and I do want people to understand that the turn-around acquisition business market is still very much there. But the ability to get into high-quality, successful assets really requires a more creative approach.

Well, thanks, Trevor. That's exactly right. We actually have probably a dozen of our markets that we have various discussions, and it's really all about putting our assets into a system, if you will -- whether it's owned or joint ventured -- where we're in a number-one or number-two position, and we're well positioned for the future.

So, when you think about that kind of concept, sometimes who you'd want to partner with could be a high-quality system that you can't acquire. The other option for us is to do joint ventures with those systems. These are things that are not in banker books. They are not on the market. And these are discussions that are much more strategic about putting together a broader system to have more geographic reach in a market.

And so, it gives us the optionality when you're in a market and you're in a smaller position is -- you do a joint venture, get into a larger position, or you have either -- you divest or you can acquire. The issue is if someone doesn't want to be acquired, and they want to stay in the business, then you do the joint venture. And most of the joint ventures with the not-for-profit systems, over time, we've allowed them, if they prefer, to move into a non-active role, and more into a foundation role in the market, they can over time sometimes exit that investment. So, and then, we could be a full owner. And that's happened over the last 10 or 15 years a couple of times in joint ventures we've done -- (multiple speakers)

That just happened recently.

And it just happened -- our Valley Baptist joint venture -- we just -- they just exercised their put rights, which they had after three years of the venture. And they are very comfortable, very happy with the progression of the health system, very happy with our stewardship. They say we would like to take our money and do other things in the community. This happens a lot of times with these partnerships, which are mostly with not-for-profits. But, again, we believe it's all about advancing the strategic position, and hopefully the operating results of the system of the hospitals that we have today.

And I'll just add one thing, Kevin. There are also elements of these joint ventures that -- they don't occur every time, but they could be very attractive to us, like management fees where we are managing the operation, or even the opportunity for Conifer to sell services into a hospital that we otherwise did not own, where that can generate fee income as well.

Okay. In relationship to the Connecticut announcement -- my understanding was that part of the reason why you wanted to do the Connecticut assets was to maybe create a regional structure with your assets in Massachusetts. Do you feel like something still needs to happen in Massachusetts to make those facilities appropriate? And now that you have cash that was earmarked towards Connecticut, do you view that as available to buy other places, or do you view that as: Okay, we'll just lower our leverage in the meantime?

Well, first of all, just in terms of Massachusetts and Connecticut, they are very different markets. We have a very good relationship with all of the political officials in Massachusetts, and have been a very good citizen in Massachusetts, and have no -- see no regulatory headwinds really for us in Massachusetts. And we like our position there, particularly in Worcester, where we're in a significant and a very successful number-two position as a value-based provider in central Massachusetts.

And so, the Connecticut deal really was about our partnership with Yale-New Haven, and about putting together a statewide network in Connecticut, some of which may have lapped over borders, but it would have been more, for example, western Massachusetts where we're not currently a provider. So, when you think about that, that really stood alone in terms of the strategy with Yale-New Haven for a statewide value-based network. So, really no impact on Massachusetts.

We, obviously, as Trevor said earlier, are disappointed that we couldn't get the regulatory process there to work out. But in terms of money, we are very focused strategically on our portfolio. So, it's not a question of going and finding something else to buy. We are more focused on both moving our strategic positions into a better position, or in some cases, some divestiture, as Trevor mentioned before. So, for us, we're going to continue along our strategic path with no change, regardless of really what the outcome in Connecticut was.

Okay, great. Thanks.

And we'll go next to Gary Lieberman with Wells Fargo.

Good morning. Thanks for taking the question. And, Tom, good luck; thanks for all the help through all the years.

Could you give us some sense of what you're including in guidance for Texas uncompensated care waiver payments?

Good morning, Gary. This is Dan. In terms of the 1115 waiver monies, really in terms of our guidance for 2015 compared to what we saw in 2014, there's really no substantive change in terms of the aggregate benefits of the program.

Okay.

We -- (multiple speakers)

What was the total amount last year?

It was -- a little bit less than [$60] million.

Okay, and is there -- is there a range around that for 2015? I guess HCA decided not to include it in their guidance just because there was some uncertainty about the range of payments that they could get.

No, the issue that came up in the fourth quarter didn't impact any of our markets. We did not have to deal with that. And so, the program is in place through 2016, and there's -- the cash flows have obviously been delayed to some degree during 2014. And we are -- we're owed some monies at the end of last year. But payments started coming in, in the fourth quarter. So, we don't see any real exposure in terms of 2015 on those revenues.

Okay. And then, in guidance, what are you assuming, if any, for additional states to expand Medicaid?

The only state of ours that is expanding Medicaid at this point is Pennsylvania. And there's -- the impact there is -- it's less than $10 million.

Okay. So, the guidance doesn't assume that any additional states beyond Pennsylvania expand Medicaid?

That's correct.

Okay, great. Thanks a lot.

We'll go next to Josh Raskin with Barclays.

Hi, thanks. Good morning. Good luck and congrats both to Tom and Brendan.

Question just on the outpatient growth: I think I heard Trevor say 210 facilities. It sounds like there was 10 additions in the fourth quarter. I'm curious what that growth looks like into 2015? And should we think about it more as ASCs, or what sort of facilities do you plan on building there?

And then, maybe help us understand that growth. How does that play into your CapEx and/or your investments? How much of that actually goes to the income statement versus gets capitalized on the balance sheet?

Okay, Josh. Thanks. We had a little trouble hearing part of that question.

But I think the part that related to our strategy for growth in outpatient was -- yes, we continued to expand rapidly through 2014. The sites that we have added the most of are surgery centers. We built a number of free-standing emergency departments or satellite emergency departments, as they are called, and urgent care. That's really where our emphasis has been in those three types of models.

And going forward into 2015, we will continue to emphasize those same models, probably in order of number of facilities it would be the urgent care first, surgery centers second -- although the surgery centers are much bigger, each site, than urgent care -- and the satellite EDs third. It has been a very successful initiative for us.

We find that the synergies that we bring to the acquisitions of ASCs are significant. And through our management of them, we're driving growth on a same-center basis that exceeds anything that they have generated on their own in recent years. So, just a great success story for us.

Got you. That's helpful.

Then, just a second question on the cash flow: Dan mentioned two items -- the $300 million from California and Texas, and then the AR build as the Vanguard new billing system transitioned over. So, would those all reverse in 2015? Why -- I think you said they would -- the $300 million would come down, but what are those disputes about? Why are those not going to be settled in 2015?

Good morning, Josh. This is Dan. Let me just point out: They are not disputes whatsoever. It's just really the timing of the various Medicaid programs -- processing the payments. So, no disputes whatsoever.

The AR buildup that I mentioned in my prepared remarks has already started to come down. And that will work itself off as we move through 2015.

In terms of the monies that are owed from the California and Texas programs, those balances will also start declining as we move through 2015. Obviously, the California program has now been approved, and there is some preliminary timelines of when payments will be made. But as we move through the year, we'll have obviously better information in terms of the exact amounts that will be paid during the year.

I would anticipate there will be balances outstanding at the end of December of 2015. It seems to be that's historically, at the end of the year, they are not necessarily fully paid up by the end of the calendar year. We'll see. We'll obviously be providing everyone updates as we move through this year.

Okay. That's helpful. Thanks.

And we'll go next to AJ Rice with UBS.

Thanks. Hi, everybody. First off, on the exchange growth sequentially from third to fourth quarter, you showed good volume growth, both inpatient and outpatient. I'm curious: Do you attribute that to people just learning how to use their coverage? Or is there the phenomenon that you see in the traditional commercial side where people hit deductibles, and then step up their utilization? Any color on that?

Good morning, AJ. It's Dan. We did see sequential growth from exchange -- on the exchange business. Obviously, we believe we're very well positioned from a contracting perspective. 80%-plus of our hospitals have contracts with the two most affordable plans in our markets, so we think we're attractive option for patients who have this coverage.

In terms of the sequential growth throughout the year, obviously the first quarter was a slow start due to the enrollment issues. But we built the exchange business as we moved throughout the year.

And when you think about Q4 maybe versus Q3, some of that could have to do with people meeting their deductibles, and having a little bit more -- feeling as if they -- utilizing the services since they maybe don't have a deductible burden. That's a trend that at least we've seen with our employee population related to some of our health plans. So, we are obviously happy to be able to generate the incremental business, and we think we can build on that as we go through this year.

Okay. Asking more broadly about the guidance around health reform for 2015, I think you guided incremental $90 million to $110 million. You commented on the Pennsylvania Medicaid expansion. You got a full year of Detroit. You've got the maturing of both the Medicaid expansion from 2014, as well as the exchange population, and then any new exchange enrollees. Can you break out between those different buckets, at least at a high level, some sense of what your -- where you're getting that incremental dollars from reform for 2015?

Yes, as I mentioned a little bit earlier, the lift in Pennsylvania won't necessarily be that material. We just have two hospitals in Philadelphia. One of them is a children's hospital; and generally speaking, most of the children's population was previously covered. So, it's certainly less than $10 million -- probably $5 million or less.

But when we think globally about 2015 in terms of the incremental benefits from healthcare reform, a large component of that, we believe, is going to be attributable to exchange growth as we move through the year, with a somewhat smaller -- a smaller component related to the Medicaid book of business. We do -- I think you're right, we'll have a little bit of a lift from the fact that Detroit will have a full year from Medicaid expansion in Michigan.

But what we're seeing so far in 2015 is: The Medicaid business continues to grow. And we anticipate Medicaid volumes to build in 2015, even in our -- the five expansion states. So, if you want to think about it from a modeling perspective -- maybe roughly three-fourths or more, maybe weighted towards exchange. And then, maybe the other 25% or so related to incremental Medicaid business we've been capturing.

Okay. Tom, good luck in the future. Best wishes on your future endeavors.

Our next question from Andrew Schenker with Morgan Stanley.

Good morning. So, commercial volumes you continue to highlight as being particularly strong [in the decade]. Maybe if you could follow up on your last quarter's comments on just some of the color on the potential sources of strength? And maybe a little bit more on what's driving between exchange positioning, product line extensions, and the economy? And then, thinking about 2015, what are your expectations for commercial volume growth within the total volume growth, given the more difficult comps for that segment specifically? Thanks.

Andrew, it's Dan. Good morning. So, we're obviously very pleased that we've been able to continue to build our commercial book of business, including our exchange business. As we moved through the year, it grew, and it became more consistent across our portfolio, which is certainly nice to see. It wasn't like it was an aberration in one or two markets that were driving it.

The exchange business -- we were just talking a few minutes ago about the exchange business and what portion of it was previously uninsured. We've been -- based on the information we have access to, in terms of the patients' prior insurance status, we think at least 50% of that exchange business was -- previously had some form of commercial coverage. It's the transition or a migration from one form of coverage to another type of coverage.

When we think about this year, we anticipate being able to grow that book of business. We are well positioned from a contracting perspective. As I mentioned in my prepared remarks, based on the fact that we have over 90% of our revenues already under contract in 2015, we have very good visibility into our pricing this year, and we'll be in the mid-single digits. So, we're going to be able to drive incremental yield, as well as we think we're going to be able to build our volumes, based on our service line investments and initiatives we've been focusing on the past several years.

Okay. That's helpful.

Maybe just a real quick follow-up on a past question -- on the capital deployment -- the $900 million to $1 billion. Could you just remind us what are the major projects that are still undergoing driving that? And how much of that -- what's the tail on that? What are your major capital commitments beyond just 2015? Thanks.

This is Dan again. So, our capital in 2015 -- we have a target of $950 million for the year. We obviously are working on -- we're developing a new facility in west El Paso under a new joint venture with Texas Tech University. So, we'll be making investments there. We're really excited about the growth opportunities in that part of the city.

We also are making some investments in our existing El Paso facilities where they have just been performing incredibly well, and we're expanding our capacity. Very strong returns in that market, and we have very good experience in terms of generating returns in that market. So, we're making investments in El Paso.

We also -- when we think about some of our service lines, and we've been focusing on -- whether it's in key markets, whether it's Florida or San Antonio -- making key investments in service lines that attract commercial business and to continue to drive the growth that we want to drive here.

Thank you.

And we'll take our next question from Justin Lake with JPMorgan.

Thanks. Good morning. Want to touch on cash flow for a second -- can you talk a little bit about free cash flow this year? It looks like it was down or negative. Can you give us some of the drivers there relative to -- I think you were looking for positive $100 million, give or take?

Good morning, Justin. This is Dan. How are you?

Two key components of that, and I mentioned them earlier. We did have this temporary buildup in receivables related to the conversion that we decided made all the sense in the world. It did have some slowdown in cash flows, but it's going to drive improved performance at those facilities, this year and beyond. A temporary blip just from a timing of cash flows, but it's going to pay nice dividends down the road.

And the other large component relates to merely the timing of the receipts related to the California and Texas Medicaid programs. But, as I mentioned, we do anticipate those balances to start coming down as we move through this year.

Will both of those impacts reverse themselves in 2015?

The temporary buildup in receivables -- that will reverse itself. It's hard to say; we have not assumed that the entire $300 million reverses itself. And that's the amount that's owed from Texas and California. We're assuming that there will be some balances outstanding, just based on history.

And is that in the free cash flow number that you provided, in terms of guidance, or would that be in addition to that number?

Well, if the entire $300 million worked itself down, and there wasn't really any amounts outstanding at the end of the year, that would be over and above what's in our guidance. (multiple speakers) We have not assumed that the entire [$300 million] goes away.

Okay. How much are you assuming goes away? How much comes back to you this year in that free cash flow number?

Obviously, there's a range. We anticipate that the 2014 amounts owed from the state of California work themselves off and get paid down. How much of the 2015 -- we just don't have complete visibility into this point. So, we have some money in there for 2015, but we do anticipate there will be balances out there. We'll have more information on that hopefully as we get to the middle part of the year.

As far as the Texas programs, we have -- there's some information in terms of how cash flows will work itself, at least maybe for the first half. But it's -- we just don't have complete visibility in terms of exactly what will be paid this year.

And we'll take our final question today from Whit Mayo with Robert Baird.

Thanks for sneaking me in. I actually have a question on Conifer. And I was curious, Trevor, what does ICD-10 mean for Conifer this year? Shouldn't that be a decent catalyst?

Let me ask Steve Mooney to answer that. He's right here with us.

Whit, how are you doing? Steve.

Good.

As you know, they are still proposing that it's going to move forward at the end of this year. There is still some speculation whether or not that will happen or not. It's the position that the organization's lobby groups are pushing pretty hard against it. From their standpoint, it's a rather large increase in cost for their organizations. But we are still planning on that moving forward.

A lot of our clients, with the pushback of the year, have really jumped on board, and moving forward with all their plans on that implementing in 2015. That has improved our operations on the side of our HIM activities surrounding readiness assessments for IC-10, as well as the coding resources. As you probably know, there's supposed to be a slowdown in number of accounts actually coded on an hourly basis by these encoders.

So, some of it's really around kind of anticipated additional resources that are going to be required in late 2015, into 2016, that we are gearing up for, from the standpoint of being able to meet those demands. We think that will be an uptick in our model. Like I said, we're not getting those on the sidelines through alternate resources because we don't want to incur those costs until we get more visibility that that is actually going to go forward 100%.

I'll just add, Whit, on the Tenet side, we are very well prepared for the conversion, and are assuming it will happen, and actually want it to happen and get it over with.

That's helpful. I wanted to talk just for a second about the enrollment data. We've seen what I think is a material surge in sign-ups in Florida, and specifically in Miami. Can you just talk about the experience in 2014 within Florida, and what does this data mean to you? Is there any feedback you can share from your operators in Miami? The numbers just seem so big if you use your assumption that a third were uninsured. So, curious if you have any anecdotal comments.

Hi, Whit. This is Dan. Good morning.

Our experience so far in Florida has been very positive. We've been generating a nice exchange volume growth in Florida, and it built as we moved through the year. And so, we are very optimistic. Again, from a contracting perspective, we think we're in a nice position there as well. And so, we've been capturing that business. We think we're going to continue to capture and build on it.

So, if your exchange admissions represent about -- whatever it is -- 1.9% of total admissions, is it safe to say that, as a group of assets, Florida is above that? And is there any way to maybe frame up how far above that they are?

Well, Florida, I would say -- it might be a data point for you, at least in the fourth quarter. Florida, roughly, say about 30% of our exchange business.

Okay.

Just generally, Whit, [calls] all through last year, I kept commenting on how three of our fastest-growing hospitals all year were in Detroit. As a region of the Company, Florida really hit the ball out of the park, and the growth in Florida is very, very nice to see after several years -- going back 10 years ago when the state was hit very hard by hurricanes and then the financial crisis and the recession. Florida is really coming back very strong. And we are thrilled with the performance in Florida.

And I've got maybe one clarifying question. Dan, if I look at your 10-K, it looks like you had a $57-million unfavorable prior-period development with Med Mal this year. So, isn't it logical to maybe add that back to the core growth number? It seems like that would be more like a 9% core growth number in 2014, not 6%. I'm just curious if there are any flaws in that logic?

No. We did, as I think we mentioned, we talked about in the second quarter, there was a few cases that we settled for, to avoid protracted litigation, that resulted in an increase in our medical malpractice costs during the year. And so, we've been very successful in this area, and based on our clinical quality initiatives. But in some cases, they are from prior years, and they work their way up, and we thought it was appropriate to resolve them. And that did result in an increase in our malpractice costs this year -- or last year -- that would have obviously had an impact on our core EBITDA growth.

Okay. Thanks a lot.

Thank you, everyone. This concludes our fourth-quarter earnings call, and we'll be on the next call in a couple of months.

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