Tenet Healthcare Corp (THC) 2017 Q1 法說會逐字稿

Good day, everyone, and welcome to the First Quarter 2017 Tenet Healthcare Earnings Conference Call. My name is Dana, and I'll be your operator for today's call. (Operator Instructions) The slides referred to in today's call are posted on the company's website. Please note the cautionary statement on forward-looking information included in the slides.

I would now like to turn the call over to Trevor Fetter, Tenet's Chairman and Chief -- I'm sorry, Chief Executive Officer. Mr. Fetter, you may begin.

Great. Thanks, operator, and good morning, everyone. Thank you for joining us today. We've accomplished a lot in the past few months. In addition to generating solid first quarter operating results, we took a number of important actions to improve the performance of our business and reduce complexity across the enterprise. I'd like to walk you through some of those initiatives and accomplishments, which are outlined on Slide 3.

The most notable actions we announced are our new agreement with Humana, the purchase of an additional interest in USPI and a definitive agreement to sell our Houston hospitals to HCA. We're committed to increasing growth in earnings and margins and decreasing leverage and complexity, and these actions are tangible evidence of that commitment.

Beginning with the first quarter results as outlined on Slide 4, our performance in the quarter demonstrates our ability to deliver strong financial results in a soft-volume environment. Adjusted EBITDA of $527 million was at the top end of the outlook range that we provided in February. Our Ambulatory and Conifer segments delivered solid results. This includes same-facility system-wide revenue growth of more than 6% in our Ambulatory business and third-party revenue growth of more than 11% at Conifer.

Our hospitals maintained strict cost control in the face of weak volumes, which enabled us to deliver our overall EBITDA results. Active expense management has long been a core skill for Tenet. We know how to do it and we know how to do it well. This is not only a priority for our hospital operators but also at USPI and Conifer.

Obviously, we are disappointed with our volume performance. However, we believe the weakness is temporary and we have strategies and initiatives in place that make it possible for us to meet our expectations for volumes for the year. These include the service line investments that we are making across our network and the expansion of access points in the communities that we serve.

I'd also like to note that we faced a difficult comparison to last year, in part because of the impact of our out-of-network status with Humana. We are pleased to have entered into a new contract that is in the best interest of both companies and our shared customers. The new 3-year agreement includes all of our hospitals, outpatient centers and employed physicians, which will become in-network providers with Humana during a phased-in process beginning June 1. By October 1, this process will be complete.

Our strategy at Tenet has always been to maintain collaborative relationships with commercial customers and to be in as many networks as possible to ensure access to our facilities. This has created a strong managed care book of business, but we may go out of network from time to time if we can't reach acceptable agreements. The recent situation was very unusual, and I'm glad to have resolved it.

Overall, we have contracts covering 97% of our expected commercial revenue for 2017 and 82% for 2018.

As we work to create value in our business, we also want to simplify the Tenet enterprise. Over the last few years, we completed several strategic transactions that align our business with industry trends, strengthen our growth prospects and improve the long-term economics of our company. These include the acquisitions of Vanguard and a majority stake in USPI as well as a series of joint venture transactions and divestitures. We have every confidence that these actions were the right ones for Tenet but also recognize that some of them have created additional complexity. I want you to know that we are committed to reducing that complexity and also reducing risk across the enterprise.

As part of this strategy, we are continuing to divest operations that are no longer core to our business. Our exit of the health plan business is nearing completion, with the divestitures of our health plans in Arizona and Michigan and the wind-down of additional operations. We've also completed the sale of most of our home health and hospice businesses that we planned to sell this year. We also signed a definitive agreement for the sale of our hospitals in Houston, which we anticipate completing this summer. Beyond these announcements, we made tangible progress on hospital divestitures in certain other markets, but in keeping with our practice of announcing definitive agreements, we aren't in a position to announce any additional hospital transactions today. However, to set expectations, these other transactions are smaller in the aggregate than what we are realizing through the sale of Houston.

Turning to USPI. As you know, we benefited from the remarkable growth that our Ambulatory business has achieved since we acquired the majority stake 2 years ago. The statistics on Slides 11 and 12 provide a great snapshot of USPI's performance, and you can see not only the strength but also the consistency of those results, including 9 consecutive quarters of growth in revenue, EBITDA and EBITDA less NCI. Not only is the Ambulatory business well aligned with consumer trends, it has less exposure to government programs and uninsured patients than our acute care business. Its margins are higher and it requires less capital, yet the synergies with our acute care business make the 2 very complementary. These are among the reasons that we are so pleased to have reached an agreement with Welsh Carson to accelerate our purchase of USPI. You can read more about the terms of the agreement in our earnings materials, but I wanted to take this opportunity to highlight a few key points, which are summarized on Slide 5.

Under the terms of the restructured agreement, we will increase our ownership in USPI to 80% by July 3. This is an NPV-positive transaction that we expect to fund with available liquidity.

Our $711 million payment to Welsh Carson will reduce the redeemable noncontrolling interest on our balance sheet by a similar amount. I know that some of you view redeemable NCI as a form of debt when calculating our enterprise value, so this reduction is roughly $7 per share. By deploying capital to fund this payment now, we are spending less to acquire USPI than we otherwise would. We're capturing earlier the value for Tenet shareholders that's created by the below-market multiple we're paying for USPI, and we're taking away what some of you have viewed as an overhang in the form of a precommitted use of capital.

Establishing an 80% ownership position also creates value by enabling us to utilize our NOLs to reduce USPI's federal income taxes, which will help improve cash flow by roughly $50 million over the next 2 years. We will continue to use internally generated cash to allocate approximately $100 million to $150 million per year toward acquisition opportunities at USPI. By owning more of USPI, as that business segment grows organically and through acquisitions, more of the benefits of that growth will accrue sooner to our shareholders.

Looking ahead, we expect that we will complete our purchase of Welsh Carson's interest in USPI by July 2019. Our agreement provides us with the ability to buy the remainder in equal tranches over the next 2 years, with 7.5% in 2018 and another 7.5% in 2019. The remaining 5% is owned by Baylor.

As you think about the changes we're making to simplify Tenet, I want you to know that we remain committed to reducing our leverage and continue to target a debt-to-EBITDA ratio of 5x or less by the end of 2019. Our decision to accelerate our ownership stake in USPI, after taking into account the reduction in NCI and the tax benefit, advances those objectives.

In addition to Houston and the sale of our health plans in home health and hospice businesses, we've made good progress toward the sale of additional hospital markets. We feel very comfortable that these activities, once completed, combined with continued EBITDA growth, will enable us to drive down our leverage.

Stepping back from the details for a moment. For the past several years, we've pursued a strategy that included several basic elements. The first element is to improve our hospital portfolio so that it contains a higher proportion of #1 and #2 market positions. That strategy drove our 2013 acquisition of Vanguard and the formation of joint ventures in Tucson and Birmingham. Today, the number and percentage of our markets where we're #1 or #2 has never been higher, at around 75%, and we expect to be nearly 80% by this time next year. In other words, our hospital portfolio is stronger than ever.

The second element of our strategy has been to diversify Tenet into the ambulatory and business services segments to focused investments. Today, we've built leadership positions with USPI and Conifer.

Another way of looking at this is that the company generated nearly 100% of its revenues and nearly 90% of its EBITDA from acute care hospitals as recently as 5 years ago. Today, the story is very different. In the last 12 months, our nonacute care hospital businesses represented roughly 15% of Tenet's revenues but nearly 40% of EBITDA.

As you know, while we've strategically repositioned the company's business portfolio, the complexity of the business model increased and so did the leverage ratio. We're clearly focused on reducing both complexity and leverage, while executing on our growth objectives within the businesses. Today's announcement demonstrates that focus.

And with that, I'll turn it over to Dan Cancelmi, our Chief Financial Officer. Dan?

Thank you, Trevor, and good morning, everyone. I'll start with a high-level summary of our financial results.

We generated adjusted EBITDA of $527 million in the quarter, which was at the high end of our outlook range. Adjusted EPS was a loss of $0.27. Same-hospital revenue per adjusted admission was up 3% on an apples-to-apples basis after adjusting for the California Provider Fee revenue. Adjusted EBITDA in our hospital segment was $309 million. Revenue in the Ambulatory segment increased 6.1% on a same-facility system-wide basis. And adjusted EBITDA less facility-level NCI increased 11.1% to $100 million.

Conifer's EBITDA increased 3.2% to $65 million and adjusted free cash flow was $9 million.

Turning to volume, which is summarized on Slide 8. Adjusted admissions decreased 2.5% on a same-hospital basis and were down 0.8% excluding patients insured by Humana in both periods and were about flat excluding the leap year impact. Regardless, it's clear that we faced a challenging volume environment in the hospital business this quarter. However, we expect improvement later in the year tied to our business strategies, recent capital investments and returning to an in-network status with Humana.

I also want to spend a minute on the California Provider Fee program. In March, the state sent its application to CMS for their review and we continue to anticipate approval of the program by CMS in the fourth quarter of this year.

If you would like to understand how the California Provider Fee affected our growth rates and margins in Q1, simply add $57 million of revenue to our result in the first quarter. And as an example, if you do this math, revenue per adjusted admission is up 3% and our EBITDA margins would have been 100 basis points higher in the first quarter.

Slide 9 shows the calculation of our same-hospital revenue growth and revenue per adjusted admission growth after normalizing for the differences in the California Provider Fee revenues.

Turning to cost. Total hospital segment cost per adjusted admission only increased 1.9%, which was below our full year outlook range of 2.5% to 3.5%. We manage expense as well in response to the soft-volume environment.

On Slide 10, our total cost for uncompensated care increased to 21.8%, which is where we were in the first quarter of 2015 and up from 20.6% in the first quarter last year. The primary driver was a $34 million increase in self-pay revenue.

Moving to our Ambulatory business on Slide 11. We delivered 6.1% same-facility system-wide revenue growth, with cases up 50 basis points and revenue per case up 5.6%. If we exclude patients that were insured by Humana in both periods, case growth would have been 2.4%. Importantly, all of USPI's facilities will be back in network with Humana on June 1.

On Slide 12, adjusted EBITDA less facility-level NCI increased 11.1%, which was in line with the growth that we are targeting this year. The results in the Ambulatory segment continue to benefit from strong organic growth and acquisitions. USPI is working on a robust list of de novo developments and potential acquisitions this year, and we continue to anticipate deploying $100 million to $150 million this year on these opportunities.

As you can see on Slide 13, Conifer grew its revenue 4.4% and revenue from third parties was up 11.5%. EBITDA for the quarter was $65 million. Similar to last year, we anticipate Conifer's EBITDA being higher in the second half of the year relative to the first half due to performance-based incentive payments that Conifer can earn.

Slides 14 and 15 provide the details of our outlook.

We are making a technical adjustment to our outlook to reflect the change in accounting for pension expense. This change has no effect on EPS, but it moves roughly $25 million out of SW&B expense and places it into the other nonoperating expense line.

For the second quarter, we expect adjusted EBITDA of $550 million to $600 million and adjusted loss of $0.10 to $0.20 per share. Keep in mind that our EPS will be heavily weighted towards the fourth quarter due to the anticipated timing of the recognition of our 2017 California Provider Fee revenues.

As Trevor discussed, we announced 2 meaningful transactions yesterday. Starting with Houston, we anticipate receiving net sales proceeds of approximately $725 million. I thought you might find it helpful to know that these hospitals generated $575 million of revenue after bad debt last year, with an EBITDA margin of approximately 14%. Our tax basis in Houston is around $250 million, so we will use roughly $500 million of our $1.7 billion NOL carryforward to offset most of the taxable gain. And we expect to complete this sale during the third quarter.

Moving to our accelerated buy-up of USPI. We are now going to own 80% in July of this year and expect to be at 95% in July 2019. By increasing our ownership stake to 80%, up from 56.3% today, our noncontrolling interest expense will be reduced by approximately $30 million over the 12 months following the change.

In the second half of this year, our noncontrolling interest expense will be approximately $10 million lower than our prior expectations, but this will be partially offset by higher NCI expense in the second quarter, so the effect in 2017 is around $5 million of a reduction in the NCI expense. Keep in mind that our outlook in the second half of the year had already incorporated the lower NCI expense from moving from 56.3% ownership to 69%, so the $10 million is the incremental reduction in NCI as a result of increasing our ownership to 80%.

Also, our balance sheet NCI will be reduced by about $700 million when we increase our USPI ownership to 80%. The payment this year to increase our USPI interest to 80% will be $711 million. In 2018 and 2019, we expect the payments to be approximately $275 million to $325 million each year.

More information on the USPI buy-up is provided on Slide 5. The impact of both of these transactions will be reflected in the updated outlook that we plan on providing in our second quarter earnings release.

To summarize, our hospital operators performed well in the face of a tough-volume environment and did a great job managing cost. The results at our Ambulatory segment continue to be very strong and we are pleased with Conifer's results as well. We remain on target to reduce leverage to 5x debt-to-EBITDA by the end of 2019, and yesterday's announcement regarding Houston and USPI should help us achieve this goal.

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

(Operator Instructions) And we'll take our first question from Whit Mayo from Robert Baird.

Maybe just first starting with USPI, I think we totally get the decision to accelerate the ownership. But can you talk about why renegotiate the contract with Welsh versus just buying the rollover piece from last year and calling all of the equity next year at 9.5x? Just kind of wondering how you balance all of the options?

Yes, I'll ask Keith to address that. Keith?

We looked at several things. One is, they're buying today, given the growth that we've seen in the last few years and our growth guidance this year as well, we think in the early ownership, it would be better if we were able to start shouldering their taxes. We're also sort of trying to reduce some of the overhang on the allocation of free cash flow in '18 through '20, which we've done a significant amount here. Also, we were able to kind of lock in the dates, the times and the method of payments to be at our choice fully, whether it was a put or a call. And so there's a whole combination of factors there. And we were able to negotiate a good way where Welsh Carson continued to stay in some, but we're able to accelerate earlier the ownership.

That makes sense. And maybe my second question, just around the development opportunities within the Ambulatory division, I don't know if Bill's on or not. And I think Dan mentioned that there's been maybe a pickup in some de novo activities. Is there anything driving that? Or are these deals with existing hospital partners? Are these new markets? Just any color around sort of like what you're seeing in the pipeline would be helpful.

Okay. Whit, this is Bill. We've seen, as we talked a little bit about last time, a big change in the amount of de novo opportunities, and I think it's driven in part by the health system partner strategies, but also based on the fact that we have national relationships with managed care payers that we never had until we had the relationship with Tenet. Combining those factors with just the market movements towards ambulatory has really created several opportunities. And the acquisition pipeline also continues to be quite robust.

And I would just add, Whit, that we at Tenet are also driving a very aggressive ambulatory strategy in our hospital markets as we've been doing since 2008 and find that the USPI platform is outstanding for developing everything from urgent care centers to surgery centers. And then, we're also -- we have a robust program of developing freestanding emergency departments, micro hospitals, et cetera.

I should have mentioned that.

And we'll take our next question from A.J. Rice with UBS.

Just to start off with obviously one of the areas of your outperformance. As you mentioned, Dan, with the growth, the moderate growth in controllable expenses, the 1.9% versus your target for the full year of 2.5% to 3.5%. When you step back and look at that, is there anything in the underlying cost trend that is improving and allowed you to obtain that? Is this mostly just the company saw that they have the out-of-network situation of Humana and the leap day and really ratcheted the cost? And does it make you think that you might be able to come in better than the 2.5% to 3.5% for the full year?

A.J., this is Dan. We were certainly pleased with our cost performance. Our hospital teams did a really nice job responding to the softer-volume environment. And really, I will go through a few things and ask Eric to also weigh in. It's pretty much across the board. We have various labor improvement initiatives that we've been focusing on, obviously, for several years, but we continue to look at consistent labor practices, premium pay. So we've done a really nice job managing labor. We've also been really focused on our other operating expense spend and looking for opportunities to rationalize some of that spend, leverage the company's size and just continue to look for cost efficiencies. We've obviously completed some transactions in recent years. Certainly, the Vanguard transaction, the synergies we obtained there were very strong. And we continue to capture synergies related to our most recent acquisitions in Birmingham and Tucson. So that's working really well. And from a supply chain perspective, our transition last year, bringing our procurement functions in-house as well as transitioning to the HPG-GPO relationship has really gone very well. So we're certainly pleased. They helped us overcome some of the volume challenges that we saw in the quarter, and we're optimistic that we're going to continue to be able to drive efficiencies.

Yes, thanks, Dan and A.J. That would -- meant a lot that Dan covered a bunch. But on the labor side, we continue to really, I think, drive our Tenet operating system across the hospitals in a more concise way than we ever had. So we see standardization is a big opportunity, top of license work, et cetera, in our hospitals, which is driving value. Supply chain, the GPO integration continues to mature, and we continue to find savings there. We think there's still opportunity in our run rate to work on our supply chain cost. I'd point out and highlight a couple of areas. Pharmacy is an area where we've really made great gains compared to prior years, with some of the initiatives we've put in place at our hospitals, standardizing formularies, et cetera. So I'm really proud of the operators. We think all of these changes, obviously, help with our cost structure, going forward, when we expect that volumes will begin to strengthen.

Okay. And if I just might ask one follow-up on some of the investments that Dan referenced in the prepared remarks, the investment of new extending service lines, new service lines. Can you give us a sense of the order of magnitude of that? I know there has been particular investment in building up a Children's Hospital in Texas as well as in Detroit. Any update on -- so how these service lines -- different things you're doing and how they might impact your results over the remainder of the year?

Sure. So we have a number of pretty large investments that are coming online this year. I'd start with the hospital in my adopted city of El Paso that we opened in January. The Transmountain Campus is off to a good start. Obviously, initially, that will be a little bit of a cash burn, but we expect later in the year that, that's going to turn positive for us. We have 3 other major projects coming online between now and the end of the year, a new tower at Delray Medical Center, which is one of our busier hospitals at a full-occupancy rate in South Florida; a new tower at our Children's Hospital in Michigan; and then we had a third tower that actually opened towards the end of last year at North Central Baptist in San Antonio. So those are all pretty large investments that we expect will certainly strengthen those markets' position. The other thing I would say on the access point side, we had talked last quarter about the 15 freestanding EDs or micro hospitals we planned at over the next 18 to 24 months. We're also adding urgent care centers. And so those continue to come online over the next year or so. We had some already in the pipeline. So all of those we expect to help us as the year progresses in strengthening our volume performance.

We'll take our next question from Sheryl Skolnick with Mizuho.

Can we focus on the noncontrolling interest, please? It's confusing me, and I think probably some others. If we look at just the Ambulatory Care segment financials, so there's -- it's a 2-part question. One is about the growth rate. So why is it that the noncontrolling interest net income seems to grow faster than the EBITDA? And I understand the difference in the size of the denominators, but I'm wondering whether there's something to do with the tax rates or something there that's causing that disconnect. And second, because just if the ownership levels are constant, I'm not quite sure why one should grow faster than the other. And then second, can you just walk us through how the Welsh Carson NCI will work, giving us actual numbers? Because I think it's very important for us to understand what that implicitly puts back into the Tenet shareholder pool and comes out of the Welsh Carson ownership pool?

This is Jason Cagle from USPI. I'll take the first one. The -- you're right, the ownership levels don't change that dramatically, so that doesn't drive it. But what does happen is so many of our facilities, about 300 of them, about 2/3 of those are unconsolidated, the rest are consolidated. In a given month or quarter, there's going to be variation which ones outperform versus which ones underperform. And this quarter, in particular, you can probably tell, when you look at the system-wide revenue growth of 6.1% and consolidated revenue growth of 6.1% but the earnings, overall, growing at a rate faster than that, combined with the fact that the equity in earnings, which represents the unconsolidated facilities, is growing at a rate slower than that, at about 8% that, in this particular quarter, the consolidated facilities just outperformed the [NAV] of the NCI. And that's something that -- quarter-by-quarter, we are going to have our outperformers and our underperformers, and that's why you'll see some disparity between those 2.

Sheryl, it's Dan. And on your second question, let me give you some numbers and hopefully make it clear. So as a result of buying up to 80%, beginning in July and for the next 12 months, this will result in a reduction of NCI expense of about $30 million. So that 12-month period, June or July of this year through June next year. So about a $30 million reduction in NCI expense over the next 12 months, starting in the third quarter. So let's start off with that. In terms of the numbers that we've -- that I talked about in my prepared remarks as well as what we had in our press release, by buying up to 80% in July, what that does is it results in incremental reduction in NCI expense of $10 million compared to our previous guidance. So we had always anticipated going up to 69% in the second quarter, okay? Now we're going up another 11% to 80%. That results in about a $10 million reduction in NCI expense in the back half of this year relative to our prior expectations. Now we also talked about this $5 million. So where is that coming from? Take -- think of it this way. That $10 million is reduced by the fact that we didn't buy up in April, which was our initial guidance this year. So a little bit extra NCI expense in the second quarter, but we have $10 million reduction in NCI expense in the last 2 quarters of the year. So again, $30 million on an annual basis roughly, $10 million additional reduction in the back half of this year.

Okay. That's helpful. But let me start at the beginning. What's the total NCI for Welsh Carson before you go to 69%? What is it today at the 56.3% ownership by Tenet?

It's roughly $45 million.

Okay. It's confusing for people why that's such a short small number relative to the performance of USPI. That's part one. Part two, so what you're saying is that we should raise our expectations by $5 million for the second quarter, but lower them by $10 million for the third and fourth quarter, right?

You should -- the opposite, Sheryl. You should reduce NCI expense by $10 million in the back half of the year compared to...

Yes, lower it in the third and fourth quarter, raise it in the second quarter because you are not going up to the 69% in the second quarter?

That's correct.

Okay. All right. And can we just go through why it's only $45 million if they own 39% of such an attractive enterprise?

Well, when you go through -- and first of all, that's on an after-tax basis. And the NCI at the facility level, that, we don't pay taxes on that. So when you just go through the math, that's how you get to the net earnings that we pay taxes on. And as we pointed out, going to 80%, we are now going to be able to consolidate USPI's results in our consolidated federal tax return, which will reduce our cash tax payments.

Okay, that's kind of what I thought. That's great. It's an interesting transaction, an interesting way to create some value. If you weren't going to pay down debt, investing in your fastest-growing, highest-margin portfolios seems like the right thing to do.

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

I just wanted to confirm, on the $100 million to $150 million of growth investment for USPI, I just want to make sure of the timing. It sounded like no impact on timing from some of these Welsh Carson payments. Should we assume that those would be ratable? And then, it sounded like there may be some opportunities to invest with health plans as opposed to health systems, and I wanted to just know if that's sort of a new initiative there as well.

Josh, this is Bill. It's very difficult for us to predict the timing of the acquisition. So as I said earlier that we've got a nice pipeline, and the transaction with Welsh Carson won't impact that at all. And as it relates to any major change in our strategy, we don't have that. We've got plenty of opportunities within the Tenet enterprise and also with our other health system partners.

Okay. And then, maybe more broadly on the outpatient, are you seeing more competition in your acute care hospital markets? Are you seeing competitors come in with new outpatient facilities? And maybe, specifically, what types of those facilities are you seeing most often?

Josh, yes, this is Eric. That depends by market. I would say, certainly, in Texas and Arizona, we have seen increasing amount of providers and urgent cares and freestanding ERs. With that said, we have our own strategies there that we think are going to be quite effective. And so we do see some increased competition. One of the things you see more and more is the lower-level ER visits are dropping and the higher-level are increasing, which is kind of more aligned with our strategies. And our expectation is that in our core markets, we will be prepared to treat patients with the right care, at the right place and the right price.

And we'll take our next question from Chris Rigg with Deutsche Bank.

I just wanted to get your big picture view, and not necessarily on the passage of a repeal and replace bill, but there's certainly this dynamic in the market whereas the news sort of ebbs and flows that hospital stocks get whipped around. But then you step back, you sort of see smart buyers coming into buy hospital assets. And so I guess I just would love to get your sense for based upon what the current bill looks like, and it's still evolving, how you would think about that impacting your business over the short term, but then more importantly, post 2020.

Chris, this is Trevor. We have noticed the phenomenon that you are speaking about, wherein there's a lot of speculation, obviously, that takes place, and that's evidenced by the volume of trading in some of the companies, et cetera, based on news flow. I think the distinction that you're drawing is between short-term perspective based on news or rumors and those of us who are operating the business, who have a very long-term perspective and, probably, I speak for many in the industry, we have a perspective about these businesses having a very permanent place in the health care system in the United States, probably an outcome of the legislative attempts and political rhetoric that is not as bad as many investors fear, and that it will take some time for that dust to settle. Here we are now in May, and we still have not experienced the repeal, or the repeal and replace. There may be a vote in the House this week. We think that the efforts in the House to obtain more support from the right, potentially had been offset by losing support of moderates. But I don't want to make a prediction about where the legislation will go. Our industry has a particularly effective grassroots advocacy program, and while we're not advocating in favor or against any particular bill or legislation, we just tend to remind legislators of the importance of acute care hospitals to their communities and districts, not only for providing vital emergency services and health care, but also as a source -- significant source of employment, job creation; let's not forget, through the last recession, health care jobs and education jobs were the only ones that were really resilient through that recession; and also, a significant source of capital spending. Eric mentioned the large capital projects that we've been undertaking. I would tell you that in response to the current uncertainty in the environment, we have scaled back our program of large long-tailed capital investments, I've been speaking about this for 1.5 years on these calls. We've shortened our planning horizon and we've redirected our efforts into other things other than large new towers, new hospital construction. That, ultimately, is not great for the economy, and I think that there are many in Washington who appreciate that.

Great. And then just one follow-up here, and hopefully it's quick. But when you talk about market share being #1 or #2 and seeing 75% now going to 80% by this time next year, should we think about that as just the acute care business, or acute care hospitals or does USPN -- USPI also factor into the market share equation?

Thank you for asking that clarifying question, because when we speak about that, we really are talking about the acute care market. In many of USPI markets, they will have a #1 position in the ambulatory business by virtue of partnering with the leading not-for-profit health system partners in those markets. It's been the core strategy of USPI since its inception. So -- but in order to simplify the dialogue and reduce it to something that everybody, I think, can understand and also measure because the statistics are readily available, when we refer to those #1 and #2 positions, we're really just talking about hospital markets.

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

I just wanted to see if I'd get more color on what do you think about as kind of core hospital volume growth in Q1. I guess, obviously, down 80 basis points, adjusting for Humana, and then you've got leap year. And how much did flu add to the quarter? And then, if you kind of add all that together, what would the core volume growth look like? And what was growing faster, what was growing slower?

So this is Eric, I would answer that question a couple of ways. Obviously, if you want to address the quarter, I would take, if you adjust for Humana and leap year, you're basically at flat inpatient admissions, it's basically where it was. You're 1.8% adjusted for Humana, down somewhere around flat, still not where we want to be obviously. If you think going forward, we do expect improvement, we're seeing improvement and expect throughout the course of the year, we will strengthen, with the fourth quarter being the strongest based on the stuff I talked about earlier coming online. Also, Humana coming back in network, all of those things will be contributors, going forward. But the core growth, we do expect to improve over the course of the year. And when you adjust it for the first year, it's flattish, adjusting for both Humana and leap year. With regards to flu, flu was up a bit, although just to put that in perspective, that's a fraction of the impact that the leap year day had on us, it was not really meaningful. So it was up, but nothing that would actually be significant to talk about.

Okay. And I guess, the other thing that looked a little weird in the volume is you're getting short volume, the different trends going on, on the uninsured inpatient volume versus the outpatient volume. Is there anything that you would point to that would explain why outpatient uninsured volume was down while inpatient was up?

Yes, it is a confusing trend. I think with the outpatient dropping and the inpatient going up, I would say we have had periods of time across past several years where certain markets would increase or decrease on the uninsured volume. We saw a particular increase in Texas, and we're not alone in that. Certainly, that's something that we're working to address. There's only so much you can do, obviously, on that, but we want to make sure that we're providing the right care in the right place for those patients. The uninsured volume drop, I mean, I think that on the outpatient side, I think some of that is probably due to lack of coverage and other issues they're facing, and so you end up with more inpatient admissions at a sicker state. And this goes back to kind of the whole idea of coverage and why we, as an industry, have been so focused on making sure people have coverage so that we don't end up in situations where the only place they can access care is when they're really sick at the most expensive option.

Kevin, it's Dan. The decline in the uninsured on the outpatient side was predominantly in states that expanded their Medicaid programs.

Okay. So they have a coverage issue but on the inpatient side. I guess would there have been a similar decline in inpatient volume in those states as well? I guess, does that mean that the state will expand just on...

Yes, on the inpatient side, the expansion states, the uninsured volumes were down. But on the inpatient side, the non-expansion states, particularly at Florida and Texas, those volumes were up.

We'll take our next question from Ralph Giacobbe with Citi.

I was hoping you could talk a little about payer mix, maybe help us on the pure commercial mix in terms of how that's trending. I think your stats include Medicare Advantage and Managed Medicaid in there, so hoping you can strip down and at least sort of directionally point to what's going on with the pure commercial?

Ralph, it's Dan. I would tell you, when we look at our volume, volumes in the quarter as well as the mix, the key trend from a mix perspective, it was the growth in the inpatient uninsured that, which as we mentioned in our remarks, that drove a $34 million increase in uninsured revenue. That should be the key takeaway. As far as the mix of the other payers, nothing -- no significant changes in those trends.

Okay. And then maybe can you help on the pricing yield, just normalizing for the California Provider Fee? You mentioned you'd be about 3%. You've been in that sort of 3% to 4% level for a bit now. Maybe just help us, remind us what some of the drivers are. As we know, government reimbursement is flat or up slightly. So what rates are you getting on managed care? And maybe talk about acuity mix, perhaps, pushing that up as well.

Yes, on so the pricing side, so in aggregate, after you'd normalize for California, it was up 3% per adjusted admission basis, which is right in the middle of our range for the year of 2.5% to 3.5%. So on revenue yield, it was good. Commercial yield is still solid. I mean, as we've talked about in the past, mid-single-digits is what we're targeting from a commercial perspective, from a pricing point of view. And so we continue to be optimistic that we'll continue to be able to drive those type of yields. In terms of, from an acuity perspective, I would say acuity was softer than recent quarters, particularly if you look back to last year. But obviously, we've been focusing on growing our higher complexity type of cases and service lines. So we expect that to grow as we move through the year and as well as into next year.

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

First question for me. How are you guys thinking about the potential benefit for the Florida LIP for this year, or yes, for next year as well?

This is Dan. Certainly, we were pleased to see the additional funding that's planned. And so we should see some benefit from it. It won't be finalized until probably the summertime, so we'll see how it plays out. But obviously, we're optimistic that we'll see a benefit from that.

And then just to clarify, that's not in the guidance right now, right?

That's correct.

Okay. And then second question, a follow-up for me, as we think about cash flows, you basically gave your guidance for cash flows. But as you think about DSOs flattish for the quarter. But qualitatively, anything you can share in terms of the progress that you're making in terms of trying to bring that down and drive cash flows for the rest of the year?

We did make some progress, Conifer made some progress. The DSOs were down about half a day. We've put 2 metrics out there. We normalized the calculation for the fact we don't have California Provider Fee revenues in the first quarter, but we did in last year's numbers. So we did make some improvement in the first quarter. And in April, we also made improvement as well. So we're going to get it back. We're not there yet, and we still have more work to do, but we'll be working to get that back by the end of the year.

We'll go next to Gary Lieberman with Wells Fargo.

Can you tell us what market share position your hospitals in Houston were?

Yes, Gary, they were just at a fourth or fifth, depending on how you want to count it, not close enough together to constitute a real network. Very fine hospitals, by the way. Obviously, HCA has a very strong network there.

Got it. And so the implied multiple's around 9x, which is great for you guys, I assume that on a pro forma basis, HCA expects to get some revenue or cost synergies that'll drive the pro forma multiple down for them. Are there other situations like that? I know you said that there probably aren't any other big deals, mostly the others are going to be smaller. But I'd just be interested to understand if there are other markets where that kind of dynamic might exist?

Keith, do you want to speak to that?

Sure. Thanks, Gary. First of all, we do have some other -- we are still working on other opportunities where we have a few -- several hospitals under LOI and some in negotiation. There will -- there always will be a handful of markets where you have situations like that, where there's a strategic buyer versus a financial buyer that has synergies. And so the real question is, do they match up with the markets that we don't see the long-term opportunity in? And so -- but there are situations that's still similar to that in other places.

We'll go next to Justin Lake with Wolfe Research.

I just wanted to follow up on that question there in terms of strategy. Trevor, you mentioned that there are -- that you still see some opportunities in terms of your hospital business and divesting some facilities that might make sense, but that there are -- but it's a smaller opportunity than what you just saw on the HCA sale. Can you give us some thoughts about when you say it's smaller, is it smaller in revenues, is it smaller in EBITDA in terms of what you're selling? Or is it just smaller in terms of divestiture dollars that you would expect to get in? And maybe you could talk about, are there still any more JVs to do? Or beyond that, do you feel like this is your hospital business going forward?

Thank you, Justin. This -- I wasn't trying to convey any kind of specific guidance, except -- this is not news. So we have discussed for a long time a divestiture program. It's just that because we don't announce actual transactions until we have a definitive agreement, I can tell you, and I did in the prepared remarks, that we have made good progress on several other divestitures. But in the aggregate, the amount is smaller than the Houston proceeds. I'd rather not go farther than that or be more specific on the nature or identity of the transaction. It just doesn't serve anyone's purpose.

Got it. And then, secondly, in terms of cash flow. Now that you have these proceeds and you're actually spending a little bit more -- you're spending materially more on the USPI, but can you tell us where you expect to end the year from a cash position?

Justin, this is Dan. One thing I'd point out, this is just merely an acceleration of the amount that we're paying to buy up USPI. It was always in our longer-term plans. What I would say with that, not to dodge the question, but I'm not going to necessarily provide a spot estimate for our cash balance. But I would tell you that we're still on track to generate adjusted free cash flow at $700 million at the midpoint. And our plan is also to get our leverage down to 5x by the end of '19.

We'll go next to Gary Taylor with JPMorgan.

I just wanted to come back, sorry to beat this to death, but just for modeling, making sure we've got the NCI correct. And I guess I wanted to understand it from the perspective of, for the year, you've guided midpoint about 400 of P&L NCI. I think you'd contemplated roughly 2/3 of that would be actually cash distribution. Is that about right?

That's correct.

And so if we pro forma this whole transaction to, you've now fully bought out Welsh Carson, you own 95% of USPI, the P&L NCI would go down by $45 million and the cash distribution would be unchanged because Welsh Carson wasn't taking cash. Is that all correct?

That's correct.

Okay. And then, just my one other question, just going back to the hospital side. Excluding the California Provider tax year-over-year change, which clearly is operational, where did you peg your same-store EBITDA growth or decline for 1Q of '17 versus 1Q of '16? And what's implied for same-store EBITDA in the hospital segment for the full year?

Yes. So in terms of the -- our guidance for the first quarter for the hospital business, I would tell you that our hospitals' performance turned in better results than we anticipated. Again, cost control was very strong and our revenue yield was solid as well. So that enabled us to achieve the high end of our outlook range. So certainly, there was a number of factors that impact the year-over-year comparison, whether it's the California Provider Fee, revenue of $57 million, we had $25 million in Q1 last year related to our Georgia hospital that we sold at the end of the first quarter last year. And as Eric mentioned, we had some losses related to the new hospital that we opened in El Paso in January.

I guess, if I could just do one follow-up. I mean, obviously, I mean to us, it looks like same-store EBITDA was down and that includes, obviously, the adverse self-pay mix. But for the full year of '17, do you contemplate positive same-store EBITDA growth from the hospital segment? Is that embedded in the guidance, given all the moving parts?

Yes. So our guidance, we haven't moved off our guidance for the year in terms of -- we increased it by $25 million for the pension change, but there has been no change to our guidance.

I understand that. But did you ever tell us what your hospital same-store EBITDA growth expectation was, I guess, is what I'm just trying to clarify and maybe you just never provided that.

Not necessarily for the current year, but we're targeting, on a long-term basis, it's 3% to 5% growth in our hospital business. That's how you should be thinking of it. The issue with this year, obviously, is we had a couple of transactions that impacted the year-over-year comparison.

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

I was -- just one question I had was about USPI, and it makes a lot of sense what you're doing with all the secular trends on volumes going out of site the hospital setting. But as you think about and compare this business that you're going to get the full ownership stake in that's maybe like in OptumCare, and their business model is slightly different because they also get paid on the underwriting margin and then their balance sheet and cash flows conceal a lot of de novo. How do you think about the long term? Do you think also, and I'd love to know, is it still driving some ED, freestanding ED in the urgent care if you're getting volumes in your inpatient sites? Is that kind of an earning synergy? And then, long term, is it better for this to reside under a hospital multiple or under a health line model?

Okay, thank you. And I want to be respectful of time because HCA is beginning their call within a minute. So the -- so let me just briefly say, obviously, there are major business model differences between United Health Care and Tenet Healthcare. The part about underwriting risk, we have a risk business with ACOs and other risk oriented contracts that's very small. For us, the synergies between the ambulatory sector and the segment -- and the hospital segment are very significant access point synergies in contracting, both for revenues and for cost. And the -- to a greater extent in the future, integration of the physician experience across the platform, as Eric said, right care at the right place, at the right price for the consumer. And we think it's a smart strategy. We think it is a way that health care is going. It may differ from, say, United's strategy with Optum for very important reasons, given the nature of the parent companies. But we think ours makes a lot of sense for us.

And thank you, everybody, for participating in the call. Given that we've gone a little bit over time, we'll just say goodbye and look forward to seeing you on the next one.

Thank you, ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect.