Tenet Healthcare Corp (THC) 2016 Q1 法說會逐字稿

Good day everyone and welcome to the first quarter 2016 Tenet Healthcare earnings conference call. My name is Dana and I will be your operator for today.

(Operator Instructions).

The slides refered to in today's call are posted on the company's website. Please note the cautionary statement on forward looking information included in the slides. I would now like turn the call over to Trevor Fetter, Tenet's Chairman and CEO. Mr. Fetter please go ahead, sir.

Thank you operator and good morning everyone. Results for the first quarter make it one of the best I can remember. We're off to a stronger than expected start to 2016, driven by solid results across the enterprise. In addition to strong operating performance, the acquisitions divestitures, joint ventures and other strategic moves that we've completed the last year, have improved our business, delivering solid results and they've positioned us well for the future.

As you can see on slide 3, EBITDA was $613 million above the high end of our outlook for the first quarter. The upside relative to our expectations was driven by great results across all three businesses, with exceptional performance coming from our ambulatory segment. Performance, continued to be strong in our hospital segment were same hospital patient revenue grew 6% with a 2.2% increase in adjusted admissions plus a 3.7% increase in revenue per adjusted admission.

Our strategy of pursue higher acuity inpatient admissions; such as, orthopedic surgery, cardio thoracic surgery and trauma continues to help us drive both volume growth and improvement in our revenue per adjusted admission. Our ambulatory segment performed very well this quarter and continues to deliver strong same facility growth. Same facility system wide revenue increased 11% on a pro forma basis driven by a 8.6% increase in cases and a 2.2% increase in revenue per case.

It is clear consumers and payers have a preference for healthcare services that are offered and lower-priced, more convenient settings. We believe this trend will continue, so we will keep making disciplined investments in our ambulatory segment.

This will include acquisitions of new centers construction of new outpatient facilities and investing to increase our ownership of USPI over the next four years. To that last point, in April we invested $127 million to buy a little more than 6% of USPI increasing our ownership to 56.3%.

Conifer also delivered solid results this quarter with a 20% increase in revenue from third-party customers. EBITDA was $63 million, which was slightly ahead of our expectations. Conifer faced a very difficult comparison this quarter, following the exceptionally strong results in the first quarter 2015, due to the nonrecurring income related to the extension and expansion of the Catholic Health Initiatives contract. Conifer remains on track to deliver the results we outlined earlier this year.

Turning to cash flow, we've been very focused on increasing our cash generation over the past several years. And also and communicating with investors, exactly how we will accomplish that. Adjusted free cash flow improved by more than $200 million, compared to the first quarter 2015 and our results this quarter were the strongest first-quarter results in a decade. For all of the reasons we discuss our last earnings call, we expect to grow free cash flow in 2016 and have outlined a path to meaningful improvement again, in 2017.

Reflecting on our accomplishments on our first quarter call last year, we discussed a number of actions that we were taking to align tenet with the major trends impacting the delivery of healthcare. We emphasized our plan to shift our portfolio toward faster growing, more profitable and less capital intensive businesses, including, increasing our outpatient services offerings through our partnership with USPI.

We said we intended to develop scale in our local markets and were willing to exit markets we believe the hospitals would be better positioned under another operator. We also shared our goal of being the partner and service provider of choice for not- for- profit health systems. In the quarters that followed, we delivered on these objectives culminating with the sale of our Atlanta facility to WellStar, in March 31.

We intended to continue pursuing -- we intend to continue pursuing outpatient acquisitions and while we're always considering other acquisitions and divestitures to better position our hospital networks and enhance our service offerings, the transformation of our portfolio is largely complete. Our results this quarter reflect the benefit of our diversified strategy and I think this'll become increasingly evident as each quarter passes.

We announced in January that we've commenced negotiations Department of Justice, in order to try to resolve the Clinica de la Mama investigation. Although as of today it remains unresolved, we believe we have made significant progress toward reaching an agreement in principle on the monetary terms of a global resolution, meaning a settlement both the criminal investigation and the civil key tam investigation.

Last week, we made a global offer of $407 million and because of that offer we raised our reserve. As a reminder, the governments allegations is that the contract between four hospitals, three of our former Atlanta hospitals and our Hilton Head hospital in South Carolina and Clinica de la Mama, an unaffiliated company that operated prenatal clinics violated the anti kickback statute at various times, beginning in early 2000 through 2013. In addition, to providing prenatal care to predominantly undocumented and non-English speaking mothers, some of whom delivered babies at our hospitals, Clinica de la Mama provided translation, marketing, management, and Medicaid eligibility services for the hospitals.

As I mentioned, we're working with the government to settle the matter, but it's important to stress we cannot predict the timing or whether we will reach a resolution at all. As a practical matter as we think about allocating capital-to-debt retirement and share repurchases, we will need to factor in the potential outcome of this matter, as long as it remains unresolved. Because our negotiations are ongoing, we will not take any questions on the topic and refer you to disclosure language in the 10-Q.

Finally, we are reiterating our outlook for 2016, that we originally issued in conjunction with our fourth-quarter results in February. We clearly had a strong start to the year; however, it's still early in the year. We believe it's prudent to maintain our outlook at this time. Having exceeded the high end of our range for Q1 we're obviously gaining comfort in the upper half of our full-year range, since our outlook is not fundamentally changed in the past three months.

Before I turn the call over to Dan Cancelmi, I'd first like to introduce Eric Evans. Who we promoted to President of Hospital Operations, in March. Eric is an extremely talented executive and hospital operator who has consistently demonstrated leadership skills and strategic talent needed to drive profitable growth in our hospital business.

Eric joined Tenet 12 years ago. Since then he's been the CEO of two individual hospitals. The CEO of our El Paso market and more recently the CEO Texas region.

He also spent two years in a management role at our headquarters. Giving him insight into how our centralized functions most efficiently and effectively support our hospital operations. I'm grateful to Bret Reynolds for his contributions and wish him well in his new company and I like to point out also, that we have a strong bench in operations. We are able to fill a position immediately without conducting a search. I'm delighted to have Eric this role, I think you'll agree as you get to know him overtime. Eric?

Thank you Trevor. I'm honored to have the opportunity to serve as President of Tenet Hospital Operations. I am very excited about the opportunity we have in front of us. Having spent the majority of my career in Tenet hospitals. I've a deep understanding of the needs of our patients and our markets. I have worked with and know the talented operational leaders across the enterprise. With a clearly defined strategy and positive momentum, I believe that our hospital operations segment is poised to sustained success.

In my new role, I have four focus areas. Exceptional for quality care, high acuity growth, our continuum of care and operational excellence.

First and foremost, exceptional quality care. We will continue to focus on providing high-quality care for our patients and supportive and positive environment for our team members and clinician partners.

Second, high acuity growth. I'll be driving our strategy to focus our hospitals on high acuity service lines that differentiate us, from our markets. As Trevor mentioned earlier, smart investments and key service lines drove growth and higher acuity admissions this quarter.

Third, continuum of care. Working with Bill Wilcox and his team at USPI, legal enhance the alignment of collaboration between our hospitals and ambulatory centers and affiliated physicians. This remains a great opportunity for Tenet. We know we can expand and better unify the continuum of care of our local healthcare networks and believe this will accelerate our volume growth.

In collaboration with Steven Mooney, in Conifer. We are also identifying ways to make it easier and more attractive for patients to stay within a Tenet family once they've chosen to seek care at one our access points. Our focus is to provide our patients with an enhanced service experience and improved care coordination. When we do, our expectation is they will return to us with their future healthcare needs.

Fourth, operational excellence. We are building on an accelerated operational scale advantages we have to drive cost efficiency and growth. Expense management was solid in the first quarter, but we can always do more.

Our scale provides us the opportunity to quickly turn pockets of excellence into standards of excellence and to drive operational improvement. This is an exciting time. We have the right platform and the right strategies. With a keen focus on exceptional execution. I'm confident we will deliver on our goals for 2016 and beyond.

I look forward to engaging with you, will be happy to answer any questions during the Q&A session. I'd like to now turn the call over to Dan Cancelmi, Tenet's CFO.

Thank you Eric and good morning everyone. I'd like to start with a high-level summary of our financial results for the quarter.

We generated adjusted EBITDA of $613 million, that was above the high end of our outlook range, which is a great start to the year. Adjusted free cash flow improved by $215 million. We produced adjusted admissions growth of 2.2% and we continue to grow key higher acuity hospital service lines.

Our ambulatory segment had an excellent quarter, with incredibly strong same facility system wide growth. Conifer's revenues increased 13% and its earnings or slightly head of our expectations. Finally, based on our strong results in the quarter, we're more optimistic about the 2016 outlook we provided in February.

With that overview our now provide some additional color on our results. As you can see, on slide 4 we grew adjusted admissions by 2.2%. We combined with 3.7% increase in revenue per adjusted admission. We delivered 6% growth in the same hospital patient revenue. Total admissions were essentially flat in the quarter down 0.1%, which we anticipated given the less severe flu season and a tough year-over-year comp as Q1 2015 admissions were up 4.9%.

However, we drove increases in our higher-margin complex cases. Our strong acuity contributed to a 4.7% increase in same hospital inpatient revenue per admission. Expansion of our hospital outpatient business remains an area of focus and we continue to produce strong results with a 5.2% increase in hospital outpatient visits.

Also the number of patients we treated that had exchange coverage increased significantly. With our inpatient admissions up 28% and outpatient up 46%. All this contributed to approximately 8% EBITDA growth in our hospital segment this quarter after adjusting for acquisitions divestitures and HIT incentives.

Turning to costs, we continue to effectively managed our expenses. On the total hospital basis, our cost per adjusted admission increased 2.5% in the quarter, which is consistent with our expectation of 2% to 3% growth this year. We will look at our income statement, you'll notice WSB and other operating expenses declined as a percentage of revenue.

Our labor cost were only 1.7% higher on a per adjusted admission basis. We continue to realize labor efficiencies from various initiatives including enhanced productivity standards, being implemented across our hospitals and minimizing premium pay.

We did see a 60 basis point increase in supply expense. This growth was primarily driven by our mix including strong growth in both hospital and ambulatory surgeries. Pharmaceutical companies continue to raise prices, which also played some upward pressure on our supply expense.

Moving to bad debt, as you can see on slide 5. Bad debt expense was 6.9% of revenue in the quarter, down 70 basis points from the first quarter last year. Uncompensated care was a percentage of adjusted revenue was 20.6%, down 120 basis points year-over-year. Part of this improvement was related to a decline in uninsured and charity admissions, which decreased 5.4% on a total hospital basis and 3.8% on a same hospital basis.

Turning to slide 6, our ambulatory segment growth continues to be extremely impressive. We added new details to the slide this quarter to provide you with additional visibility into the components of our volume growth. As you can see surgical cases grew 9% and our imaging and urgent care cases were up 8.1%.

Slide 7 illustrates the solid historical performance of our ambulatory segment across a number of key metrics. For the quarter, the segment generated pro forma EBITDA growth of 44.7%. Growth in EBITDA less NCI was equally impressive at 34.3% and half of this growth was organic.

As you can see, on slide 8 conifer generated adjusted EBITDA of $63 million, which was slightly head of our expectations for the quarter. We may recall from previous disclosures that conifer faced a very difficult comparison this quarter, given the incremental revenue we realized in the first quarter of last year, from the extension and expansion of our contract with Catholic health initiatives. Also conifer's making targeted investments this year to further position itself for additional growth.

Turning to cash flows. We generated $11 million of adjusted free cash flow this quarter, a $215 million improvement. On adjusted free cash flow on a GAAP basis, also improved significantly, up $180 million. Earnings growth our strong cash flow generating ambulatory business and improved working capital contributed to the year-over-year cash growth.

We continue to make strategic capital investments. With $208 million of capital expenditures this quarter, up from $184 million in the first quarter last year.

Looking out to next year, as we discussed in our last earnings call, we expect capital expenditures to decline by approximately $150 million as we complete several large construction projects. And anticipate a corresponding improvement in free cash flow.

In summary, we continue to realize the benefits our diversified strategy. One of the most important takeaway I hope you have this quarter, is that we are delivering on the commitments that we made to reposition our portfolio for improved financial performance. This was clearly evident in the quarter with our adjusted free cash flow generation. We're off to a strong start and are well-positioned to achieve our outlook for the year.

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

(Operator Instructions)

Thank you operator. Before we start the Q&A, we recognize all of you have three earnings calls back to back this morning. We intend to end ours by about 10:55 Eastern time. Would like to take questions from as many people as possible, so if you could limit yourself to one question and one follow-up question we would appreciate it.

We will take our first question from, A.J. Rice, with UBS.

Thanks. Hi, everybody.

You continue to very well managing the costs for full admission and keeping it under control. One of the things for this year was going to be the benefit of moving the purchasing over to HPG. Have realized benefit there or is that still in front of you? Is there anything else to highlight beyond the prepared remarks on particular areas of success on the cost side?

Good morning AJ.

We did insourcing our purchasing functions as we talked about on the earnings call in February, at the beginning of February. We transition to our new GPO arrangement with HPG in February, as well. We're off to a good start. Transition has gone very well.

We've begun to realize some efficiencies already from that arrangement and we anticipate as we move through the year and over the next several years that we're going to continue to realize incremental benefits from that arrangement. In terms of our overall cost, very strong effectively managing the quarter. Labor continues to the well-managed by our operators. We did say, as I put in my prepared remarks, some pressure on the supply-side. But a lot of that was driven by our strong surgical growth in the quarter.

Okay. And quickly on the -- obviously one of things you been working on in the last year, and it has started to show the momentum here, as been the portfolio rationalization and redeployment of capital into the higher growth high-margin areas. I know there's been some discussion that there might be some additional things you could do.

Are there other things on the table? I don't know if you want to be specific about individual hospitals, but are you still looking at other things? How many see that unfold over the next year or two?

AJ it's Keith, we continue to work on strengthening our markets through acquisitions JV and ambulatory development and also potentially divestitures. So we are working on things -- continue to work on things in a few places, but nothing that at this point in time is specific enough to mention.

Okay thank you.

We will take our next question from, Josh Raskin, with Barclays.

Thanks, good morning. I want to talk a little about the capital deployment. I'm curious if you could roll us forward from the end of the first quarter to where we are. Were there any additional proceeds? It sounds like you spent $127 million on the USPI portion of that getting acquired.

And then where there any other uses? I'm just trying to figure out free cash flow as we go through the year and my guess is CapEx starts to ramp down a little bit, as well right?

Good morning Josh. This is Dan.

We're off to a strong start to the year with cash flow performance. That we were able to deliver in the quarter.

As we move through the year, our guidance at this point is unchanged, we anticipate adjusted free cash flow of about $500 million this year. We will continue to make strategic investments in the ambulatory business of approximately $125 million this year. Our capital expenditures spend for the year is in the $850 million to $900 million range. We anticipate our free cash flow to grow as a move through the year, and as I mentioned earlier, when we look out to 2017, just starting off we anticipate improvement of $150 million in some of these larger strategic investments we've been making and our hospital businesses start to wind down.

Okay.

And a quick follow-up on ASC business. At USPI are you -- you been very successful with the new partnerships on the health systems side? Are you looking relationships with large medical groups, or even health plans that are looking for obvious cost savings for their surgery component?

This is Bill Wilcox. We are primarily sticking with our historic strategy, in large part because there so much opportunity within our existing Tenet markets. We will continue to expand relationships with our current health system partners, we'll selectively add new health systems, and will spend a lot of time working within our Tenet markets. That being said, as we take that strategy underway oftentimes that involves groups like you just referenced. So by know means, leaving those out. It's always a market specific approach on a strategic basis.

Great thanks.

We will take our next question from, Whit Mayo, with Robert Baird.

Thanks. For Bill, broadly speaking, I think we've seen strong outpatient surgical growth for the sector. You have got your finger on the pulse with many health system partners. Do you have any theories on why the sudden increase in demand and how sustainable you think this is? I get the physician, the patient, the payer preference, but that's been the case for long time. Just didn't know if you see any other trends that play here supporting the growth trajectory?

I think that the current growth we have certainly exceeded my expectations, but I do think it's a combination of tailwind that are driving the growth. We are starting to see -- is a different change, we are starting to see deliberate migration of cases to the outpatient setting, both from the payers and the patients, as the patients become more and more of a consumer.

Secondly, a new change is the diminished competition from out-of-network players and some of our major markets. That's bolsters our growth. And then we've done some things internally that we're proud of and I think that is starting to come into play. I do think as these things anniversary that we will get back to a more normal growth rate, although we will continue to benefit from that migration.

My follow-up would just be around de novos. Was curious how many centers you have under construction with or without health plan partners, or is the focused primarily on market acquisition?

That's a good question. We are seeing more de novo opportunities now, than we've seen probably within the last 10 years. There has been a nice array, and they are not in any specific market. But we've got a pretty broad pipeline of de novos.

Great thanks.

We will take our next question from, Sheryl Skolnick, with Mizuho Securities

Good morning gentlemen and a nice job against a very tough comp with new businesses, and nice new strategy. I want to follow up on something you said, Trevor and I am not going to ask directly about, Clinica de la Mama for obvious reasons but you did mention it could affect, how you think about capital deployment. I want to tie that to free cash flow, as opposed to adjusted.

Obviously you've got a bit more than you thought you did last quarter and potential cash settlement amount. And it's the some is a nontrivial amount of $407 million you might end up having to pay, and maybe it's this year over the next 12 months, or something like that.

To the extent that you have just gotten $575 million in cash that we thought might get deployed to either deliver or grow the business. It sounds like you're going to be a little bit cautious about doing that. Can you give us understanding of how you're thinking has changed and if we don't adjusted free cash flow, what impact you might see on the business? I guess what I'm worried about is going to use of cash, and that might actually make the actual free cash flow, rather than the adjusted free cash flow, the amount you could spend, be a little tighter this year than we might like.

Obviously, I cannot say much more about the process that we've been engaged in. But what I was trying to convey, is that while this matter remains unresolved, we have been cautious with deployment of our capital resources so that we would be in a position to reach a settlement and fund a settlement should we be able to do so.

And without commenting on the structure of the potential settlement or the amount. It was just -- all I was meaning to convey is, to the extent that you had anticipated other uses of capital, here is a use of capital. We have given you our best estimate of the value of it by establishing our reserve. But we have had a cautious capital deployment posture, while we have had this matter under negotiation.

Said differently, is there an opportunity cost metric, or something that we can think about? Obviously we can all do the math, but I want to make sure we're thinking about this in the right context of having an unexpected cash outflow relative to street expectations, I'm sure you're all on top of it, might affect our thoughts about growth rate or the like.

I'm a little bit concerned here because of the difference between -- people tend to think adjusted free cash flow is what you really have to spend, and $400 million difference between adjusted free cash flow and real free cash flow could affect our estimates of growth rate. Can you guide us in anyway?

No. I really can't.

The business is performing better than you expected, so there is more cash being generated by the business. Our portfolio of businesses is stronger and there is a potential use of cash, which will produce no return. And so I think you have to factor all of those issues into account as you think about the future and the value of the Company.

All I can say is it's very clear that the business is performing excellently. And that is certainly good from many respects, and not the least of which is having the cash generation to pay what you have to pay, not just this item. Thank you very much for trying to help me. I appreciate it.

We will take our next question from, Kevin Fischbeck, with Bank of America.

Great thanks.

Volumes improved nicely this quarter versus last quarter. Anything that you would highlight there as kind of the sequential change? Usually you have thought that Q1 would be a little weaker. Is it just leap year and mild weather season that helped the higher acuity stuff come through, or is there something else you would point to?

Thanks for the question. This is Eric.

I would say that really it's the core things we been investing in around our higher acuity service line. We've seen those continue to pay dividends. We have had very focused investments really nothing flu or seasonal- related as far as the volumes. The 2.2 strong performance on adjusted emissions. Do appreciate you highlighting that. And we continue to see the programs we've invested in several of our markets performed really, really well.

Okay, you have talked about repositioning the portfolio. Is there any evidence that, that's really starting to change the growth profile of the company? Is there any way to say things that you've done to get bigger local markets those markets have outperformed? Or grown X versus Y somewhere else?

Obviously it's pretty early in the process, but certainly we do believe as we exit markets where we are not don't have as big a presence and we're in markets where we have a broader continuous care that will translate into being able to provide more services and better service to those communities. We see that playing out over time. It is early to put too much into that.

Okay thank you.

We will take our next call from Chris Rigg, with Susquehanna Financial Group.

Good morning. Thank you for taking my question. I want to come back to the supplies expense. When we think about this going forward, is it primarily going to be driven by business mix? The bigger the ambulatory segment that more that will rise? Or do think we're going to begin to see some progression in the group purchasing side to start to flatline here? Thanks.

Good morning Chris. This is Dan.

It certainly -- as we continue to grow our ambulatory surgical volumes, and also our hospital surgical volumes, which we have been doing that we've been demonstrated that here over the past year -- that certainly places some emphasis on the supply line. However, it's generating very strong revenue growth.

It's more than offset by revenue growth. But in terms I would say, we are very comfortable with our cost growth assumptions for the year between 2% to 3%. We will realizing additional efficiencies, not only from the new group purchasing arrangement with HPG, but also we've in-sourced our purchasing functions. You'll see a growing benefit from that as we move through not only this year, but over the next several years. We feel comfortable that we will continue to be able to effectively manage our costs.

Great.

Another one on labor. Obviously trends in the quarter were very good. I guess in some ways so good that I'm wondering is this something you feel is sustainable? That you can continue to squeeze efficiencies out of that? As your giving the people the right wage increases and you think this is in check for the foreseeable future? Thanks a lot.

This is Eric. I'll answer your question on labor.

We're very happy with our SW&B performance in the first quarter, up 1.7%. We actually feel that there's still additional things we can execute on. We have not fully implemented everything we want to do on our SW&b platform. Our PMI you heard us talk about in the past, continues to be very focused in that area and it is a place where we are confident we can continue to manage cost effectively.

Great thanks a lot.

We will take our next question from Brian Tanquilut, with Jefferies LLC.

Hello. Good morning.

A question on the volumes as a follow up on that last one. The same-store comps eased after Q1. Should we think of that as an opportunity for accelerating same-store performance? And we think about the seasonality factor? Does that change this year from say two years ago before we had exchange plans in the market?

Good morning Brian. This is Dan. Let me address that one.

When we think about our volumes this year we're obviously off to a pretty good start in terms of volume growth outpatient over 5% growth. And inpatient was essentially flat, which I mentioned in my remarks. But we anticipated that. Again, the tough comp, as well as the less severe flu season. However, I want to reemphasize we are growing the higher end patient cases that we've really been focused on and we anticipate that continuing throughout the year.

And in terms of from a modeling perspective, at this point for the full-year we are still targeting inpatient admissions in aggregate. We haven't really changed our guidance there. Essentially flat for the year. And we will obviously evaluate our guidance after the second quarter.

Okay. And on Conifer. Do you mind just sharing some thoughts on what the sales pipeline looks like and if you're getting any new leads and new looks from larger hospital systems?

It's Steve Mooney. How are you?

The pipeline is still looking very strong and we continue to add to. We are increasing our over all trajectory, as far as that's concerned. We have seen a lot of singles and doubles hit across the organization on all three areas of our business lines.

Our value-based Care Business, our Hospital revenues cycle business, as well as physician services business. As we have discussed before, the hospital revenue cycle business, this is our largest one by far, and has our largest sized deals, is still rather lumpy. We get deals and we go for a period of time without deals, and we get another big deal. So right now we're still absorbing a lot that we have done in 2015.

The Dartmouth Hitchcock Contract, which was, obviously, very large for us and then the renegotiation of the CHI contract and added 20 more hospitals in the portfolio. We've installed about 17 in the last year and the remainder of those, one more goes in this year and the remainder of those are still in planning discussions. We're still continuing, like I said, to add to that pipeline. It is growing overall. Like I've said, we're doing a lot of singles and doubles right now and things are looking good.

Already got it. Thanks.

Will go next to Matthew Borsch, with Goldman Sachs.

Hi good morning.

I was hoping maybe you could comment on the payer mix that you saw in the quarter. Obviously, I'm looking at it ratio wise year-over-year, a lot of strength in managed care. And they declined in Medicare, Medicaid. Can put some context around that, if you have any?

This is Dan let me address that.

Our payer mix did improve in the quarter. We saw a decline in our uninsured volumes, as well as, you pointed out in the release, I wanted to make sure you noticed it, that our exchange volume increased significantly year-over-year, which helped our payer mix. The inpatient exchange business was up close to 30%, and the outpatient was up over 40%. That contributed to the improved payer mix. As well as, keep going back, not to keep reemphasizing it, but the focus we have had on growing higher-margin, higher acuity cases typically has a very attractive payer mix associated with it.

So growth in those service lines, obviously, has a beneficial impact on our payer mix. We obviously were satisfied with the growth we saw in the quarter and some of the service lines, which helped our payer mix.

And one follow-up question. When you look geographically, is there anything you can spike out in terms of areas of particular strength geographically, whether from your own efforts, or organic trends in the industry or some combination of both.

I don't think there's anything specifically would call out. In general we have across our geographies and regions we have places that are up and out any given quarter. But there's nothing to highlight in particular that would be of significance.

All right thank you.

We will go next to Sarah James, with Wedbush Securities.

Thank you.

In the past you been able to shed some light on the acuity ramp by spiking out growth levels in categories like joint replacement or neuro. Can you speak to growth in a major surgical categories?

I can speak to a little bit of that. As we mentioned earlier, cardiothoracic, orthopedics, trauma, those are all areas that are up. I don't have all of the figures in front of me. I would tell you from an-orthopedic standpoint on the inpatient side, it was around 5%. We've had strong growth in trauma and cardiothoracic, too. Again it's been a common thing for us, where we have invested we've seen growth in those service lines. And we expected to continue to see that.

This is Dan, just want to follow up on that. Our acuity was very strong, which drove very strong pricing and realization for the quarter. Up close to 4%.

Thank you.

And then when you're talking about the payer mix in the previous question. I don't think we got directly to surgical trends in Medicare, because some of your peers have talked about Medicare surgeries coming up. It sounded like when you were laying out the land, that it was more on the managed care, possibly the commercial side with consumers on coming in driving up surgeries. I understand better how that is trending in managed care versus medicare.

I would say that we're seeing the higher acuity surgical growth in all parts of our business, as much as managed care. Certainly Medicare is a big part of that. Our Medicare was slightly up for the quarter, but in general that's not, certainly, confined to just commercial. It is in the Medicare business, as well.

Thank you

We will go next to, Ralph Giacobbe, with Citigroup.

Thank you. Good morning.

Can you talk about network designing in your markets? Are you seeing more now or networks that maybe you are included in that some your competition is getting squeezed out of? Or is it that not really happening? The question is broader, not just in the context of the exchange business.

Clint Hailey, our head of managed care is here with us. He will take that question.

Thanks for the question. We've seen [narrow] network growth over the last three years in both broad judicial commercial category, as well as, obviously in the exchange business. The way we look at it before pre-exchange we were running about 5% of our inpatient admission volume through a narrow network. On top of arrangement, and with the advent of exchanges going live, where we have about 50% to 60% of our inpatient admission volume coming through a narrow network, it pushed our overall narrow network volume of to about 11%. We've seen significant growth. But it's still relatively small piece of the business in aggregate.

All right that is helpful.

Separately can you talk about the equity and earnings of affiliates line? It kind of came down meaningfully from the fourth quarter. And seemed to maybe even hold back a better EBITDA performance in the quarter. I didn't see a change in guidance in that, so I'm wondering if it's a seasonal thing, or something else I need to consider?

Good morning Ralph this is Dan.

I wouldn't say at all that our earnings were held back. USPI had a great quarter. The really knocked it out of the park.

What you see happening on that line is the transition of earnings accounted for on the equity method. Where we have had some centers that we do not have a majority interest in and now we completed some strategic investments to acquire majority interest in the centers. When that happens we begin to consolidate all of the revenues, all the expenses. Yes business has incredible results in the quarter, well a head of our expectations. So it did not hold back our earnings whatsoever.

Okay could you help us on the seasonality again. Fourth quarter was closer to $50 million and down to $24 million and guidance is for a big step up, again, unless I'm looking at it wrong.

This is Jason from USPI. I think if you look at the seasonality from Q4 to Q1 last year in that line it's roughly the same proportion. As you know, our business really spikes in the fourth quarter. So I think you are to seeing the expected decline from Q4 to Q1 because of seasonality of our business and then the consolidations that Dan mentioned.

Okay thank you.

We will go next to Ana Gupte, with Leerink Partners

Thanks good morning.

I wanted to follow up on the payer mix and the bad debt. You reported, as far as I can see, on the blended basis across hospitals and the ambulatory segment. To what extent are you seeing -- it seems like this quarter has been pretty good for everyone on bad debt -- this improvement, but you haven't really seen a spike, even last year in the fourth quarter. Because this prior authorization in the [amsertz] side of it, versus this exchange enrollment and your payer mix is actually improving.

Good morning. This is Dan, let me address that.

This number of factors impacting our improvement in our uncompensated care trends. One, we're going our higher acuity business, which creates additional revenues. We have very strong improvement, and our revenue per yield , on a per case basis, which is driving very strong revenue growth.

Two, as I mentioned, our uninsured volumes were down 3.8% in the quarter, which certainly improves the mix, and reduces the levels of bad debt expense. The other thing I think it's important to keep in mind, as we continue our diversification strategy and grow our inventory business, as you know, those businesses have very low levels of bad debt expense. So, as those businesses continue to grow, it has, obviously, a positive impact on our bad debt levels.

Okay. The follow-up on that, then, is there any color you can give us on what this looks like on the hospital side on its own? And, you have been conservative, which is great, on your guidance for your bad debt, base on where you came out in the in the first quarter. What might you expect going forward, particularly into the second half of the year on the hospital business for you, which is not the only driver, obviously. I am just trying to give color for the broader sector, as well.

Let me frame this. Our total full-year guidance for bad debt on a consolidated basis is in the 7% to 7.5% range for the full year. We will re-evaluate that after the second quarter. For the first quarter we came in at 6.9%, which was down about 70 basis points, compared to last year. So, nice trend there. Specifically on the hospital side as we continue to grow our hospital business, and what we've been seeing is uninsured levels and various of our markets declining.

As I pointed out, our exchange business has improved significantly year-over-year. Our exchange business in Florida and Texas in particular has been very strong, which is helping drive down our uninsured levels. Steve and his conifer team continue to do a good job managing our revenue cycle operations, and there's more room for improvement there.

This is Steve from Conifer.

A couple areas we've put a lot of focus on the revenue side is patient responsibility in point of service cash collection, a big area we have actually had our highest collection rates in the last two years, as we do our trending on that. We are still seeing great results from eligibility programs, getting patients converted from uninsured into federally [rated] programs, as far as that is concerned. We saw [a wall] cash dollars up year over year about $9.3 million. There is a lot of focus on the areas around patient responsibility, cash collections.

We will take our next question from, Gary Taylor, with JPMorgan.

Good morning. First question is a yes or no, so hopefully I it won't count against me. Was the DMC class action settlement, was that reflected in the legal settlement of cash amounts this quarter? Was that done with?

Yes.

Good.

And then my real question is on CapEx. Thinking about your guidance into next year, stepping down $100 million or so, presumably that includes de novo spend in the USPI side. Or, not necessarily.

Our guidance next year for capital, we refer to the one $150 million decline in capital expenditures. That does not include the $125 million were projecting to invest this year. If you look at our cash flow statements on a separate line, the capital we've been referring to, whether it's going to be $150 million step down, is the traditional capital we invest in your business outside of acquisitions.

This is Bill.

Let me per for my comments on de novo. I don't set to high of-expectations. These are very small projects with very little capital requirements, the de novos. And we still are excited about the acquisition opportunities, which we highlighted of you $125 million.

Got it. So the question is, when I look at CapEx as going from $850 million to $900 hundred million this year, down $150 million next year, even just on your legacy hospital net revenue that's mid four percentage point range, historically looks like that's been, for most of the industry 6% to 7% of revenues on CapEx for a couple of decades. Any of the environment we're seeing nonprofit CapEx picking up. Do you feel the number to hold or gain market share, just because a number of the assets, in particular, destroyed are newer and don't need the same level of maintenance CapEx? It is looks like that per cent of CapEx is a historically a low number heading into next year.

Gary, I think you've hit the nail on the head by referencing Detroit as an example. We are coming off a sustained period of time of relatively high capital spending in the previous Vanguard markets, where they were large capital commitments, new hospitals constructed, new towers continuing to be under construction. And in the Tenet market, such as El Paso, where we have a new hospital continue to be under construction, a major reinvestment in two existing hospitals, a third relatively new hospital being expanded for the third time.

We had pre-capitalized a lot of our markets, if you want to think of it that way, and we conveyed in the last quarter was that many of those extraordinarily expenditures including new hospital construction, the towers, et cetera, would naturally reach a point of conclusion

Our final question today will be from, Andrew Schenker, with Morgan Stanley

Thank you for the question.

First a quick one here. Exchanges, obviously, you've highlighted a few times the magnitude of the growth was in excess of what we were expecting here. Was there any changes in your network participation, or visage positioning of your managed care partners that may have driven that. And then related to that, there's been a lot of investor concern around the sustained ability of exchanges, particularly around United's comments about exiting markets. Have you think about the sustainability and the health plan participation within your markets?

I will make it quick comment and asked Clint Haley to fill in.

We've done very well on the exchanges. We are well-positioned. And of course our perspective on this question is completely different from the perspective of the insurers. What we really care about is people having insurance coverage, having lots of choices in a competitive market. In the markets that we serve that has been the case. The have been willing significant participants namely in the form of the Blue Cross insurers that have created robust markets in the places that we operate.

I would just add that I think it's important to acknowledge that the exchange enrollment growth in our states was actually higher than the national average by a little bit. It was about 13% in our states. So that was -- obviously played a role in the volume growth we saw.

That said, we also improved our position on the lowest cost silver plans, which is where the majority of enrollment is on exchanges. We are in 88% of the lowest cost silver plans in our markets. And last year we were in 83%; in the first year a change were at 79%. That continues improvement in our positioning, I think, has helped us, as well.

In addition, I mentioned earlier 30% to 60% of our volume on exchanges coming through narrow networks, there is no doubt narrow networks have helped us. One final thing I would add is, we looked at, with all of United's states that they exiting, what the impact on that would be for us, and overall markets were in 77% of all the exchange options in our markets across the country. If United was out of -- was gone today, we would be 80% of all the options and exchanges. We have not been positioned as well with United as some of the other plans.

And maybe squeeze one last question, to end it on. You obviously outperformed in the quarter. I understand you don't want to give up updating guidance until the second quarter. But maybe as an ending summary if you could remind us or summarize for us all of the points where you outperformed in the first quarter. Sound like surgery, bad debt, and Conifer, to name a few. How those factors are likely to trend going forward? Is there any reason those factors where you outperformed really would be one-time?

It's Dan. Let me hit that.

The outperformance was across the entire portfolio. All three of our business segments outperformed our expectations. The hospital business 8% EBITDA growth, after you normalize for the acquisitions and divestitures. Very strong growth. Strong acuity. Sold adjusted admissions growth in the right service lines, as well.

USPI one of our other segments, just knocked it out of the park as I mentioned. Almost 9% surgical growth. Their imaging business continues to grow in the same type of levels. The urgent care business is growing nicely. USPI had EBITDA minus NCI growth of 34%. Half of it was organic. That segment just really killed it.

Conifer had a very good quarter, too. Ahead our expectations. Grew its revenue in total 13%. One thing, I want to point out, the revenues from third-parties increased 20%. We continue to provide additional services to Catholic Health. At Dartmouth Hitchcock, the arrangement continues to go very well, which we just started providing services in the second half of last year.

All three of our business units did very well. We're off to a good start. We're obviously optimistic about the rest of the year. But it is early, and we will reevaluate our guidance after Q2.

Thank you ladies and gentlemen. This does conclude today's conference. Thank you for participating and you may now disconnect.