Tenet Healthcare Corp (THC) 2015 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the first quarter 2015 Tenet Healthcare earnings conference call.

(Operator Instructions)

I will you now turn the call over to Trevor Fetter, Tenet's President and CEO. Mr. Fetter, please go ahead, Sir.

Thank you, Operator and good morning, everyone.

During the first quarter we made great progress advancing our long-term strategy and strengthening our position in the evolving healthcare landscape. The transformative agreement we announced with Welsh Carson in March creates a joint venture between Tenet and United Surgical Partners International that will establish us as the leader in the ambulatory surgery market.

This further aligns Tenet with the major trends impacting the delivery of healthcare, and shifts the balance of our business toward faster growing, more profitable and less capital intensive businesses. Also in March, we announced a joint venture with Baylor Scott & White Health.

This transaction is the latest example of how we're able to partner with leading, not for profit healthcare providers, to enhance our market presence without the risk and capital required for full-fledged acquisitions. I'll discuss these in a few minutes, but I'll first give you some highlights of our financial results for the quarter.

We achieved adjusted EBITDA of $529 million during the quarter, which was slightly above the high end of our guidance, and represented an increase of 37% over the same period last year. Our strong volume performance in the second half of last year continued into 2015, and that growth extended across most of our markets.

There were a number of factors that contributed to this lift including growth in admissions, outpatient visits, surgeries and emergency department visits. While we continue to benefit from additional volume from newly insured patients, we estimate that roughly two-thirds of our growth was related to targeted investments, in service line development, and quality improvements.

Beyond our hospitals and outpatient centers, Conifer had an exceptional quarter with revenue and EBITDA growth that exceeded our expectations. This performance underscores the strength of Conifer's core business and we remain very excited about its near and long-term prospects.

We continue to focus on building leading positions for our hospital operations, including broadening our networks in existing markets, and expanding to new geographies where we see a clear path to establish a meaningful and relevant presence. The success of our acute care hospitals rests on having scale within a market to deploy integrated care strategies, assume risk, improve outcomes and offer differentiated services.

I'll walk you through just a few of the important actions that we've taken in recent months to improve our portfolio. As I've noted before, we believe that building such a position through partnering with not for profit health systems, can be a much better alternative than traditional acquisitions. Our Vice Chairman, Keith Pitts, has done an incredible job leading this effort and helping us form relationships with prominent organizations that share our commitment to care delivery that is patient centric, high quality and cost effective.

In March, we announced plans to form the joint venture with Baylor Scott & White Health, which is the largest not for profit system in Texas. We have great respect for Baylor and its leadership, and believe the partnership is a strategic opportunity for both organizations to advance population health and coordinate top quality care. The joint venture will include Tenet's four hospitals in north Texas, as well as one Baylor hospital in a suburb of Dallas.

As we've noted in the past, there are markets where we don't see a path either by acquisition or partnership, to develop the scale we believe will be necessary as healthcare delivery continues to evolve. In those markets, we believe our hospitals would be better positioned under another operator. For example, we continue to pursue strategic alternatives for our hospitals in Georgia and North Carolina, and expect this process will likely result in sales of those facilities.

We also reached a definitive agreement on a long-term lease, under which Tenet will operate High Desert Medical Center in Joshua Tree, California. This transaction builds on our strong presence and years of experience in the neighboring Coachella Valley, where we have successfully operated Desert Regional Medical Center in Palm Springs for two decades. We believe this transaction will be completed by the end of the third quarter.

We delivered strong results in our outpatient business during the quarter, increasing visits by 7.6%. Approximately 90% of this growth was organic. Our outpatient team has done an outstanding job building this business creating tremendous value, and putting us in a position to pursue additional growth prospects to realize its potential.

The innovative USPI joint venture will significantly accelerate our outpatient strategy, and create the market leader in short stay surgeries, with the largest footprint and scale in the ambulatory surgery industry. It also provides the foundation for a new services platform where we can offer strategic ambulatory solutions for health systems.

As you can see, we're positioning Tenet through Conifer, USPI and our JV strategy to be the partner and service provider of choice for leading not for profit healthcare systems. USPI has now spoken with each of their 50 health system partners about our relationship and the overall feedback has been positive. Our expectation is that each of these partnerships will remain in place, and that the JV will continue to form new relationships.

In terms of next steps, the regulatory reviews are in process and we believe that we're still on track to close by the third quarter and possibly sooner. Leveraging the strong culture of integration we established when we acquired Vanguard, I'm confident that we'll have a seamless transition following the close.

Our acquisition of Aspen Healthcare creates an entry into the attractive UK private healthcare market. Aspen has nine high quality, well-capitalized private facilities and we expect strong growth from this portfolio. Aspen will be managed under USPI.

In summary, we made great progress on the execution of our strategy, delivered results that exceeded our outlook for the quarter, and remain on track to deliver our goals in 2015. We believe that we have the right strategies in place to become even stronger and more competitive.

We are making tangible progress, strengthening our business, positioning Tenet to capture benefits from the powerful trends that are shaping healthcare, and enhancing our ability to deliver value creation for our shareholders over the long-term.

With that, let me turn it over to Dan Cancelmi for more specifics on our performance in the first quarter. Dan.

Thank you, Trevor and good morning, everyone. As Trevor noted, we are pleased with our results for the quarter. Our inpatient volumes continue to grow due to our service line development initiatives, targeted capital investments, and increasing numbers of patients with insurance coverage.

EBITDA was $529 million in the quarter, above the high end of our outlook. We generated EBITDA growth of $142 million, or 37% compared to last year's first quarter.

This performance was driven by continued strong volume trends, favorable commercial pricing, and the recognition of $46 million of revenues under the California Provider Fee program. As a reminder, we recognized all the California Provider Fee revenue for 2014 in the fourth quarter, since the current program was not approved until December. If we assume an apples-to-apples comparison and exclude the $46 million from the first quarter of 2015, we generated EBITDA growth of $96 million or 25%.

We had some other puts and takes in the quarter, including a $25 million increase in malpractice expense related to recent settlements, but this was substantially offset by $23 million of incremental prior period Texas Medicaid dish revenue, based on the recently finalized 2014 funding determination.

Slide 4 summarizes some of the highlights of the quarter. We generated strong volume growth, achieving a 4.9% increase in same hospital admissions, and a 5.9% increase in adjusted admissions. This continues a strong growth we drove over the prior three quarters.

Our volume trends were broad-based as we generated adjusted admissions growth in 13 of the 14 states in which we operate hospitals. About two-thirds of our volume growth was core growth, and roughly one-third related to newly insured patients.

Our surgical growth remains strong, increasing 7.1% on a same hospital basis. Inpatient surgeries increased 2.4%, and outpatient surgeries increased 9.3%. We grew ER visits 7.2%, reflecting our focus on building our emergency room volumes.

The combination of strong volumes, favorable commercial rate increases, and the California Provider Fee revenue resulted in robust revenue growth. We generated a $502 million increase in total net operating revenues after bad debts, an increase of 13%.

Our revenue growth was driven by a 5.9% increase in same hospital adjusted admissions, a 2.7% increase in same hospital revenue per adjusted admission, and a $37 million increase in Conifer's revenue from non-Tenet hospitals, representing a growth rate of 26%.

Bad debt expense was 7.6% of revenue, down 120 basis points from last year's first quarter, as a result of benefits we're realizing from growth in newly insured patients, and Conifer's billing and collection efforts. The bad debt expense that we reported on the income statement was a little higher than we expected this quarter, although our total uncompensated care trends were in line with our expectations.

Slide 5 contains new disclosures that we are providing to help you better understand our uncompensated care trends. When we add charity care write-offs to bad debt expense, our aggregate uncompensated care was 10.8% of revenue in the first quarter, down from 13.3% in last year's first quarter, and 11.3% in Q4. As you can see on the slide, some dollars shifted from charity into bad debt expense this quarter, which impacts the reported bad debt expense on the income statement, but has minimal impact on EBITDA.

Turning back to slide 4, total Company selected operating expenses increased just 1.5% on a per adjusted admission basis. Our full-year guidance for this metric is growth of 1.5% to 2.5%, so our cost management remains on target.

Turning to cash flows, we remain on track to achieve our adjusted free cash flow guidance for the full-year of $150 million to $350 million. Our adjusted free cash flow improved $52 million, compared to last year's first quarter.

It should be noted that we reduced our capital expenditures by $97 million compared to last year. This was partially offset by certain working capital items, including the timing of cash receipts related to California and Texas supplemental Medicaid funding. Also, I'd like to he remind you that we typically use more cash in the first quarter, due to the timing of our annual employee 401-K matching contributions, annual incentive compensation payments, and the resetting of payroll taxes.

Moving to our services business. Conifer had another great quarter, producing EBITDA of $82 million, up from $48 million in the first quarter of last year, and $64 million in the fourth quarter. Roughly $10 million of Conifer's EBITDA this quarter was driven by performance incentives that we do not expect to repeat every quarter. At this point, we expect Conifer to deliver at least $260 million of EBITDA for the full-year, up from our earlier outlook of $240 million.

Slide 6 contains the key components of our outlook for 2015, which remain unchanged from the outlook that we provided in February. Assuming we close on our joint venture with USPI before the end of July, we plan on incorporating the impact of the transaction into our outlook when we report our second quarter results in August.

Also, we are getting closer to announcing definitive agreements to sell several of our hospitals, and we expect at least one announcement, if not more, between now and our next earnings call. We expect these divestitures, if completed, to generate substantial cash proceeds that we can redeploy elsewhere in the business.

Moving to our view on the second quarter, we expect to deliver adjusted EBITDA in a range of $500 million to $550 million. This includes $35 million of high tech incentives that we expect to recognize in Q2, which is consistent with our outlook at the start of the year. As a reminder, we anticipate recognizing about $65 million of high tech incentives this year.

In summary, we are pleased with our solid start to the year. We continue to take steps to position the Company to generate faster growth, higher margins, and greater amounts of free cash flow, and are looking forward to completing our USPI joint venture and working with our current and future health system partners.

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

Thank you.

(Operator Instructions)

We'll go first today to Ralph Giacobbe with Credit Suisse.

Thanks. Good morning. Obviously a strong Q1 and the Q2 guidance came in ahead of consensus numbers. Maybe just talk about the dynamics and the context of keeping guidance the same at this point in the year?

Good morning, Ralph, how are you? We're off to certainly a solid start. We were pleased with our performance in the quarter. Right now we think the guidance that we have out there is appropriate at this time. Obviously, it's early in the year and depending on the timing of the transactions related to some of our divestiture initiatives as well as the USPI transaction, the earliest that we'll likely update our guidance is on the August earnings call.

Okay. Alright. And then is there a change in how you're considering classifying bad debt versus charity care? Are you running more through the bad debt through the P&L in the hope of collection versus the write-up upfront on the charity? Is that the way to think about it?

Not at all. It's just there's movement typically between quarter-to-quarter. We just wanted to highlight the trends for both bad debt and charity care, just to give total picture of our uncompensated care trends which have been coming down nicely.

Okay. Thank you.

And we'll take our next question from Josh Raskin with Barclays.

Hi, thanks. Question around the USPI strategy where USPI has one of their 50 relationships in a market that overlaps with one of the Tenet acute care facilities and maybe any thoughts on that?

We have a handful of those markets, some of which we already have relationships in place, Josh, with the hospitals that were there coincidentally before the USPI deal. We see very little issue with that. In fact, USPI has actually talked to virtually all their partners now with a very positive reaction. So I think we feel like there's not really any conflict and if there was a potential conflict, we've already solved those conflicts.

Okay. And it sounded like you've already had those conversations and I think Trevor mentioned in the beginning that you'd expect all 50 of those relationships to remain in place?

Yes.

Okay. And then just a second question on the exchange members, you guys gave some data in the press release. Any reason you think that the exchange lives are using -- you're seeing less growth I guess on the outpatient side. I guess that's a little surprising than inpatient. Is that just sort of pent-up demand for inpatient services or why do you think they're not using outpatient services at the same sort of velocity as the inpatient?

This is Dan. In terms of our exchange, our book of business, we were pleased with the growth in the quarter sequentially. It actually exceeded our expectations. In terms of the mix between inpatient and outpatient, we don't see any specific trends there that need to call out at this point in time. We continue to build our book of business. We're well-positioned from a contracting strategy that we focused on early on and we're capturing our fair share of that business.

I guess, Dan, specifically I was just talking about in the press release where you talked about exchange admissions up 17.6% and outpatient visits up 11.2%. I was just wondering if there was any difference in services? I don't know, I would have guessed that outpatient would have been a stronger growth than inpatient. But I guess maybe it's just it's a small book, it's not that big a difference.

Nothing unusual. On the Medicaid business, the outpatient volumes are up as well, tracking with the growth in the inpatient too. So we're pleased with the benefits that we're realizing from the additional patients with insurance and it's tracking with our expectations.

Okay. Thanks.

And we'll take our next question from AJ Rice with UBS. Please check your mute button. We're unable to hear you.

Thanks. Hi, everybody. First, on the expense, you guys highlighted that your control over expenses were up 1.5% as a relative to admissions and that's a low end of your targeted range. Is that mostly the leverage you're getting from the better volume or there anything to call out there on the expense side that's worth highlighting?

Good morning, AJ, this is Dan. It's certainly part of our leverage as we're growing our volume, we're able to spread certainly fixed costs over the additional volume. But we've been working on a number of different initiatives from also related to premium pay practices, contract labor management, our mix of fixed versus variable staffing, implementation of refined and enhanced labor standards, and we're utilizing and building additional market labor pools.

And then when you go into some of our other operating expense categories, we've been certainly renegotiating various contracts in terms of integrating the two organizations. As an example, food and nutrition, environmental contracts, dialysis, security and driving substantial cost savings in those areas. As we looked at the various vendors across the two organizations, we've been rationalizing some of those vendors and having conversations, building in additional performance incentives to drive performance on their part. So it's a broad package of various initiatives that we've been focusing on to appropriately manage our costs.

Okay. And maybe as a little follow-up question, to switch gears. I think Trevor, in your comments you mentioned the two portfolio restructuring, Georgia and North Carolina. Sounds like they're now moving to sale as opposed to any kind of JV structure and then you've got I think from the Baylor JV you're going to be getting cash out of that. I know you might not want to talk to each specific transaction how much cash you're going to get.

Can you give us some order of magnitude in terms of the total amount of cash and maybe even a range or something that the Company is likely to see in the back half of the year? And will that be targeted for debt paydown or give us a little more flavor what you're going to do with that cash?

Thanks, AJ. It's a great question. I think it's a little early to give that flavor because we're in a process in Georgia and North Carolina (technical difficulty) and with respect to the Baylor transaction, the terms weren't disclosed. I wish I could give you a range or an estimate to help with your modeling. But it's enough cash that it will be meaningful. We do have some debt maturities coming up here in the near-term and the opportunity to do some calls and that's the most likely application of the proceeds.

Okay. All right. Thanks a lot.

And we'll go next to Andrew Schenker with Morgan Stanley.

Good morning. I just want to talk about your managed care admissions. Obviously very strong year-over-year as a percentage of your mix, right up I think 420 basis points. By my math, exchanges may have contributed roughly about a percent of that. Maybe if you could just talk about really the strength you're seeing in managed care and how those trends have developed following on last year where you kept citing the strongest commercial volumes you'd seen in a decade. Thanks.

Yes, sure. And they are very strong. I'm glad you're pointing it out. I would just like to say again, and thank our managed care team who help us implement a strategy beginning more than two years ago to make sure that we were really well-positioned in these exchange networks. And so we were an early adopter of the exchanges. We entered into contracts with, you heard us quote the statistic all last year, with a very high percentage of the plans that were offered in all of our markets and that is what is really driving that business.

So we've been first movers. We have a competitive advantage due to the pricing that we have and the level of clinical quality and reputation of our hospitals in these markets and that's what's really driving that business. The numbers will move around a little bit because you did start with a very small base. It's growing very rapidly. But it's a great story for us with a new market that's substantial. It's profitable. And we're providing good service to people who are utilizing our hospitals within those.

Okay. And then maybe just a follow-up on that a little bit. Are you seeing any changes in collection rates amongst the MCOs. High deductible plans are obviously increasing. Maybe could some of those problems you saw or concerns you saw around bad debt in the first quarter be related to lower collection rates on bad debt for those with insurance? Thanks.

You know, on that question we heard that that was asked to another Company that expressed some concern about it. Steve Mooney, our CEO of Conifer, which obviously handles the revenue cycle for all of our business including the exchange business, is here. Do you want to comment, Steve, on the trends you're seeing?

Sure. Hey, Andrew, it's Steve. When we first saw the exchange volume come onboard we saw some degradation in some of the rates from both the self pay sides as well as the administrative side of the actual plans. That was more due a process when we found out in phone calls with them it was their kind of lack of expectation or the volume levels. That has tapered off significantly. We're seeing that now reimburse at the same levels we're seeing our typical match care volume. And we're also seeing the self pay portion perform as we see the rest of the portfolio. We're seeing a lot of consistency across the population, as you mentioned there. We're obviously seeing a larger volume of high deductible plans globally. So that's obviously an area that we keep an awful close eye on. For as you know, we put a lot of process in place around our automation, around our segmentation modeling that has driven what we believe is the right returns.

Thanks.

We'll take our next question from -- I'm sorry, go ahead.

Please, next question. Thank you.

Thank you. We'll go next to Sheryl Skolnick with Mizuho.

Thank you very much. This was a fabulous job, guys. Congratulations to everyone.

Thank you.

You're welcome. Took an awful lot of work to not only deal with all those demands but to then put it on the margin line as well as into the business the way you did. So forgive me if I pick a couple of knits here but I am curious about a couple of things. The first thing is, when you say you have organic growth driving the majority of the growth in the quarter, it sounds like a simple question but it may have more subtlety to it, could you please define what you mean by organic? Do you mean --?

Dan, why don't you explain how we make that determination.

Good morning, Sheryl. How are you?

Fine, thanks.

When we think about our volume trends in the quarter, we look across our inpatient book of business that we were able to generate. When we look at in terms of the drivers from our core initiatives, whether that's targeted service line development or targeted capital investments, we have very good visibility by service line in terms of the incremental volume that we're driving. We spend a lot of time analyzing what we believe the incremental volume is related to the newly insured. It's not 100% accurate, but we think it's pretty close to what the aggregate trends are from the additional uninsured or the additional insured individuals. We look at Medicaid book of business very closely, compared to historical trends.

And then the exchange business where we have visibility in terms of their previous insurance status, we're estimating roughly a third were previously uninsured. We take those factors into consideration when we're estimating, when we're coming up with this two-thirds that we believe relates to our core growth. We don't have visibility into all the exchange patients because we may not have seen all of them in the past. But our experience seems to be consistent with some other studies on that as well. So we feel pretty good about our split between organic so-to-speak and the growth due to the newly insured.

Okay. That's what I was getting at, that it was -- that the core may also include some service line expansions and the like in your markets, but you're really, when you're saying core organic, it's really trying to give us a sense of what is due to the ACA. So that's very helpful. Thank you.

We're just trying to -- we're trying to isolate the ACA out.

Okay. Good. Because it could also be organic versus acquisitions, and you're going to have a lot of acquisitions coming in, so I don't want the terminology to get too confusing here. Because there's going to be lots of new growth from these other opportunities you have versus the core, versus the ACA, and it's a high class problem but I want to make sure I understand what the pockets of growth that you talk about are. That's why I asked the question. I appreciate that.

Admittedly, it will become very difficult to continue to split this out in this way as the portfolio changes.

Right. Got it. And then the trends in your volume, I gather from conversation that 13 of the 14 markets, the majority of the markets had growth. We can understand that two stories worth of snow kind of can be a barrier to getting your healthcare done in Massachusetts. Got that. But in terms of the way the volume presented itself during the quarter, A, did it build? And B, can you give us a sense of two things? One, within the markets that improved where you saw geographic strength? Did it have to do with population growth? Employment growth? Shifts in population from north to south? And did it continue beyond the March 31, date?

Okay. Britt, why don't you speak to the trend throughout the quarter. And Sheryl, if you were suggesting that the one market not growing was in the Northeast where they had snow, you're right. That's what drove it.

That's exactly right, Sheryl. Good morning. Our volume trends, Sheryl, did grow consecutively. To your question, regarding geography, we have really strong growth in Florida, that continues. That's been on actually a multi-year run now and we're seeing that primarily due to our service line investments as well as initiatives there and just couldn't be prouder of what we're doing there. So we're seeing that in Florida. Detroit's making good market share gains progress and that's very pleasing to us when we look to our competitors there. And then in a significant portion of our California market, we're seeing good market share shift as well there. So we're pleased that there's a dispersion across geographies.

Okay. Great. And then the final question is, you got a lot on your plate. Obviously you're going to have financing needs. You addressed that in AJ's question, thank you for that, as well as you could rights now. I'll ask the question a different way which is, from a people and management perspective, given that I suspect that Keith probably has a list that's very broad and very deep and very rich of new deals that he wants to get done, how many more can you realistically take on and be confident that you can execute well?

Two points to that. Let's look at the experience we had with Vanguard and I'd say compared to mergers I've seen, experienced and that are taking place in other industries, we've done exceptionally well in having a very rapid and pretty seamless integration. If you were to visit hospitals that were formerly part of the Vanguard portfolio or the Tenet portfolio today, you would see evidence of techniques and strategies from both predecessor companies at work in those companies and people talk about this as one Company today. So we have that.

But part of that strategy was also to retain great people in the target organization. In fact, to do a merger in that case with an organization that had outstanding people to begin with and then to attempt to retain them. As you know, we were successful in retaining I think all but one of the regional leads in Vanguard. And in the case of USPI, we're retaining the entire management team. You start with a Company that has outstanding management and they're staying and that makes the integration job that much easier.

So I think Cheryl, let's make a distinction. We're not acquiring assets that are really troubled with bad management and require total turnarounds. Quite the opposite. Outstanding companies, great management, not requiring a turnaround and so, what we're working on is really integration, retention and putting cultures together as opposed to any sort of other type of activity. And that's so much easier to do, so much more successful and can be done so much faster.

And we'll take our next question from Matthew Borsch with Goldman Sachs.

Yes. Hi, good morning. Maybe if I could just come back to the volume question and just a little better understand when you talk about organic growth and two-thirds of your volume growth related to investments in service line development and targeted capital investment? So correct me if I'm wrong here. I hear you guys saying that the volume, two-thirds of the volume growth, is related to things that you have done as opposed to the environment.

And my issue with that, even though I recognize that even compared to the other hospital company results, yours are a notch better. They're still in the same directional ballpark as what we're seeing from the others. So it just seems hard to understand that everybody's volumes are going up that much because of things that they are doing company-specific.

Let me -- I think it's best explained by way of example. So first of all, I would suggest the experience so far in the investor run sector is not all the same. It's very differentiated between the two companies and it's also quite likely that the companies that are performing very well in building volumes are doing some of these same things in order to drive it. We also, within the investor owned sector, are outperforming the public sector than the not for profits in terms of volume growth. So you've got to remember it's an industry that's five times as big as the companies that everybody pays so much attention to. That would be my first point.

Second point is, the answer as to where the volume growth is coming from and what we really mean we're talking about service lines and so forth, it's market specific. And I'll contrast two different markets. Detroit, for example. Detroit has been a fast growing market. We talked about it all last year. It's a very capital driven strategy. Goes back to Vanguard's original acquisition of Detroit and the capital investments they made. But those capital investments that were made over a period of years that we are now in the process of continuing and completing are generating volume growth in that market. It's been very successful.

A different example is Florida. Our historic Florida market, which is generating volume growth through service line development, and specifically, Britt, alluded to this. But they decided to focus on four particular service lines, surgical oncology, cardiovascular disease including surgery, interventional neurology and neurosurgery, by recruiting and building service lines around specific physicians who had very distinguished backgrounds and programs in this. Who then in turn, built those services within the hospital network.

Not so capital intensive, much more people focused, obviously assisted by the intense investment we've made in advanced clinical systems. But that's really the example of what we're talking about when we're talking about organic growth, unrelated to the ACA involving service lines, et cetera. Hope those examples help illustrate the point.

That's very helpful. Thank you for that. And if I could just switch topics and maybe this is not a fair one to lob at you, but Tenet's stock's down 2% today and still down somewhat for the year. This clearly was a very strong high-quality quarter. What do you think investors are reacting to here? Is the revenue per unit concern and what do you think people are missing? Or is it something else?

I would start you by saying you have to ask your own clients that. I'm the wrong person to ask. Just on the fundamentals, this is the latest in a string of very solid quarters where we have exceeded expectations, driven organic growth, driven it in the right way, which is what increase in the number of customers we are serving, and good metrics, solid metrics on pricing and cost control. And so to my way of thinking about it, we are creating value in the enterprise that should be reflected in the market. But, I've also learned over time to keep doing what we do and what's within our control and not become too obsessed with short-term fluctuations in the share price.

Do you think the revenue per unit, I mean, that is something, it's not a concern that we raise particularly, but that's in the backdrop there. What do you think that people are overly apprehensive about there relative to what you're doing?

I wouldn't be apprehensive or concerned about it. We've been signaling for a long time that the pricing environment within the hospital sector for managed care would be more challenging beginning last year, through this year, et cetera. That's playing out very much in line with our expectations. And there are changes going on within the mix of business that we are and services we're providing to patients, both the existing patients and newly insured patients. But when you're reporting the kind of growth in patient volumes that we are that are by any kind of historical basis above the high end of historical trends, it's a very high class problem to have.

We'll take our next question from Darren Lehrich with Deutsche Bank.

Good morning, everybody. This is Josh Kalenderian for Darren. I just wanted to ask you a little about Detroit and what you're seeing in that market? You made a lot of capital investments there and I'm just wondering how much of the original Vanguard commitment is left?

Keith, do you know offhand how much of the original commitment is left?

The routine capital commitment, it will be through this year in 2015, and we'll have probably about 100 -- low to mid-100s left on the extended last dig of the $500 million of projects. And so virtually everything is open. The last large project is the Children's, the major Children's downtown renovation. As you may recall, we also have a Children's free-standing ED and large ambulatory center opening in Oakland County in Troy at the end of this calendar year. The only thing that won't be left open at the end of 2015 if the inpatient high acuity expansion of the Children's Hospital downtown.

However, you should note that the renovations of the old space as well as the ambulatory space has been open for a while. Children's has had a lot of -- some improvements but it will be a couple more years before that project is completed. And we've been very pleased with the response and the reaction the projects have generated, volumes in excess as they've opened in excess of what we originally expected. So we've seen nice gains in market share in the Detroit market over the last few years.

It's one of the few markets where we have -- as you know, when you have organic growth some of it's going to be market share, some of it's going to be the environment, i.e, is the market overall already up for other regions whether it's a flu outbreak or whether it's some other reason that the market might be up. And we have good visibility in Detroit early on based on data reporting in that state. So we know that we have been successful over the last few years in moving market share which was the whole reason for the capital investment.

And we'll take our next question from Brian Tanquilut with Jefferies.

Hey, good morning, guys. Trevor, just a follow-up to Matt Borsch's question on the drivers of the growth. If you don't mind just giving us some views on how much runway you have left? As you look throughout the portfolio, what inning are we in in terms of the service line expansions and capital deployment on putting the growth initiatives in place?

Well, unfortunately, you've got 30 markets and 30 stories and one of them is negative and it involves an epic snowfall. So it's different across every market. In California, they're doing innovative strategies with physician groups. In Florida, it's the service lines I mentioned. It's just really different. And that by definition tells you you're not in any particular inning because it's not one game. And so, I think this is a core job of management is to continually come up with strategies and Britt and our regional leaders are fond of saying as long as there are any patients being served by a competing hospital, there's opportunity for growth.

Got it. And then second question from me, as we think about Conifer, obviously you've had really good success with CHI. So as you look at the pipeline, it's growing quite strong but how would you characterize the hospitals that are in the pipeline today and are we expecting to see some big systems come online let's just say the next 12 months?

Steve Mooney, you want to address the -- by the way, he cannot answer the question but give some color as to what the pipeline looks like.

Thanks, Trevor. Hey, Brian. The market and revenue cycle outsourcing space is still pretty nascent. You can see kind of who our competitors are out there. You can see what transactions are being done on an annual basis. They're still pretty far and few between and pretty lumpy. I will tell you in the conversations over the course of the last several years there's a lots more of them. The pipeline is growing stronger by quarter. I believe we've got contracts right now that we are in final negotiation with. So you'll see, I think this year in 2015, additional hospital systems sign up for outsourcing and definitely under the Conifer banner. So it's a marketplace that is evolving, it's growing.

And we believe, and this is why we're in the business, that we think ultimately that hospitals are going to realize that their core is to provide quality care in the communities they serve. And another strategy they need to do around driving value based care and it's our strategy to deal with the revenue cycle portion of their business. And more and more of them are realizing they've got management bandwidths. It's not where they should be spending their time and attention. We believe it's a market that's going to continue to expand and we're going to be there to capture it. And we're continuing to develop internal capabilities to make sure we stay best in breed in the marketplace.

We'll take our next question from Frank Morgan with RBC Capital Markets.

Good morning. A couple random ones here. You mentioned Joshua Tree, that acquisition, that you'd be walking into a lease or assuming a lease there. I'm curious, I get asked this question a lot by investors about why don't hospitals lease more assets? If you could just tell us a little about your strategy around financing, particularly lease financing, is this something you would consider in the future or is this sort of a one-off?

I think this is a little bit one-off because it's a district hospital. It's consistent with most of the methods of which we've done district hospital deals in the past. So I'd say this is a little bit one-off. I think the answer to the second part of the question is, it really depends on the nature of the facility and where it is and some facilities are more -- are easier for us to look at lease structures versus other facilities. MOBs are a great example of that.

Okay. And then one more. Certainly a lot of press accounts out today about the savings generated by some of these pioneer ACOs. I'm just curious, I believe DMC participated in those. But I'm just curious, was your experience there similar and how do you view that going forward? Thanks.

I think DMC was actually, if you look at the charts in the independent report that was done, DMC was like in the top five, maybe number three, depending how you measure it in terms of savings generated. So been very, very -- it's been a very successful in years that have been reported to date on pioneer ACO.

We'll take our next question from Gary Lieberman with Wells Fargo.

Thanks. Good morning. It's Ryan Halsted on for Gary. A question on the UK entry. Just curious, it sounded like you said you expect USPI to operate the facilities? I'm just curious why wouldn't you be operating them? And what do you see in terms of growth opportunity there? Do you see that being an active acquisition environment?

Keep in mind, it was part of USPI until very recently. Bill Wilcox, the CEO of USPI, was the Chairman of the Board that holds the Company there. And so, it's a natural thing to keep that reporting basically in place. It will be part of our whole Company but as a practical matter it will report into USPI. And what's nice about the UK is that they are encouraging private hospitals and private capital to take some of the pressure off of the national health service. We do see it not only as a great Company with well capitalized and fast growing assets but also as a platform for growth.

Okay. Thanks. And just one more on your cash flow. You mentioned last quarter some holdup in receipts from California and Texas, just any update on that? You maintained your cash flow guidance. How confident are you in being able to achieve that in the next three quarters?

Ryan, this is Dan. Yes, we are on track to achieve our cash flow guidance for the full-year of $150 million to $350 million for adjusted free cash flow. Our cash flow performance in the quarter was consistent with our expectations, maybe actually slightly ahead. The first quarter is typically our softest cash flow generation quarter, just due to the timing of various working capital items as I mentioned in my prepared remarks. In terms of the receipts related to the California and Texas supplemental Medicaid funding, those net receipts will pick up as we move through the year and what we saw in the first quarter was consistent with our expectations.

And we'll take our next question from Ana Gupte with Leerink Partners.

Yes, thanks. Good morning. Just back on the receivables from Texas for the Q2, the $500 million to $550 million, is anything contemplated in that at all on the Texas Medicaid payments?

Good morning, Ana. This is Dan. Yes, in terms of as we move through the year as I mentioned, we will start seeing incremental net cash flows from both the California Medicaid supplemental funding as well as the Texas supplemental funding as well.

So it is in the guidance then already is what you're saying? (Multiple speakers). Is it in full-year?

No change in our outlook for the year.

Okay. And then on the Medicare admissions, one of the managed care companies which is pretty prominent has been talking about an uptick of low acuity admissions that are related to respiratory and blood disorders. Anything that you're observing? They're saying they're seeing this come through from a managed care perspective in claims in late March and early April. Your admissions in Medicare look like they've gone up.

This is Dan. We're not going to comment on some of the comments that the other Company made.

And our last question of the day comes from Kevin Fischbeck with Bank of America.

Thank you. This is actually (Inaudible) in for Kevin. Thanks for taking the question here. In terms of the reform benefit as you quantify them to an amount to about $35 million in the quarter which is comparable to fourth quarter and I guess third quarter as well. But at the same time on the disclosure here in the press release it says there was an 18% increase sequentially in exchange admissions and 11% in outpatient visits. And also, there seems to have been also a little bit fewer uninsured volumes versus Q4. So why you feel like sort of the benefit was same as in Q4 while it seems like at least from these exchange numbers we saw in the self pay volumes there was -- it should have been a little bit more of a lift Q1 versus Q4. So any comment there?

Good morning, this is Dan. Actually, the $35 million is the incremental lift over the first quarter of last year.

Okay.

So we did see sequential improvement as I mentioned in my remarks. We continue to capture incremental Medicaid business and our exchange book of business is building as well.

So can you remind me what was it in Q1 of last year, the benefit?

$10 million.

$10 million?

Before the impact of the reimbursement rate adjustment.

So to think about it's $45 million versus $35 million in fourth quarter?

That's correct.

Alright.

Thank you. That concludes today's question-and-answer session. I'll turn the call back to the speakers for any additional or closing remarks.

Great. Thanks. We know everybody wants to get on the next call so thank you. We'll see you again in August.

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