Tenet Healthcare Corp (THC) 2017 Q2 法說會逐字稿

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

I will now turn the call over to Trevor Fetter, Tenet's Chairman and Chief Executive Officer. Mr. Fetter, please go ahead.

Good morning, everyone, and thank you for joining us today. I'd like to begin today's call with a summary of our financial results for the second quarter and our perspectives on some of the trends we're seeing in our business. Then turn to an update on recent developments and our revised outlook for the remainder of the year.

Beginning with Slide 3. We generated adjusted EBITDA of $570 million and net operating revenues of $4.8 billion in the second quarter. EBITDA was positively impacted by a $23 million gain primarily related to the sale of home health and hospice assets.

In our hospitals and outpatient centers, we experienced the same soft volume that affected other companies in our industry. Our teams responded well with solid performance on cost control mitigating most of the impact on EBITDA during the quarter. The volume pressure was attributable in part to our temporary out-of-network status with Humana. If you exclude Humana volumes from the second quarters of both 2016 and 2017, adjusted admissions were essentially flat and case growth in our ambulatory segment was up 1.3%. As a reminder, all of our facilities and physicians are back in network with Humana as of June 1. Our operators and marketing teams have been working to win back the volume that was diverted while we were out of network. For the latter half of the year, we expect volumes to be helped from being back in network with Humana as well as from our 4 major hospital projects, which have all come online. These include our new patient towers in Delray Beach, Florida and Detroit, Michigan, both of which just opened and began serving patients in July. The new towers not only create expanded high-acuity capacity, they advance our service line strategies by adding specific features to support key programs.

At Delray, for example, our recent investments improve our ability to deliver high-end cardiac and trauma services for the surrounding community and add capacity at one of our busiest hospitals. The new tower includes a significant expansion of the hospital's cardiac program and a new helipad, which augments our trauma capabilities.

Our emphasis on trauma services company-wide resulted in year-over-year growth of more than 10% in trauma admissions in the quarter. We've been making investments in trauma across the country because the need for these services is growing and will continue to be provided in an inpatient setting.

We expect that the 2 towers combined with our new teaching hospital in El Paso and our new orthopedic institute in San Antonio, will strengthen our positions in these 4 key markets.

Beyond these facility enhancements, we continue to improve our portfolio by exiting nonstrategic business lines and markets. Last week, we completed the sale of our Houston-based hospitals and related operations to HCA. We received proceeds of approximately $750 million and used it to repay the borrowings we had on the revolver in July to fund our increased ownership position in USPI. As we discussed with you last quarter, we now own 80% of USPI.

In our ambulatory care segment, we are pleased with the improvements we drove on adjusted EBITDA and adjusted EBITDA less NCI of 18% and nearly 21%, respectively. Building out our ambulatory platform remains a primary focus for us and we continue to target $100 million to $150 million in acquisition opportunities every year. And we've invested about half that of amount as of this point in 2017.

Last week, we acquired a minority position in a new short-stay surgical hospital in Tyler, Texas, which is an expansion of our long-standing partnership with Baylor Scott & White Health. The surgical hospital specializes in musculoskeletal services and is a highly regarded facility, one of only 19 in the country with 5 CMS stars for patient satisfaction and overall quality.

As you may know, surgical hospitals perform inpatient and outpatient surgeries, are typically much larger than an average surgery center and have higher revenues per case. It's a great business model and with this addition, we now have 21 surgical hospitals in our portfolio.

At Conifer, revenues were up over 3.5%, while adjusted EBITDA of $60 million was slightly below our expectations. Conifer saw soft revenues in its hospital client base, leading to top and bottom line pressure. Reducing AR days has been a primary focus for Conifer and have been investing resources on different performance-improvement initiatives as part of that effort. Of course, this investment has had an impact on the bottom line, but we have started to see an improvement in AR days on a more consistent basis in both the first and second quarters of the year. We are pleased with the initial results, but there's more work to do, and we are very focused on it.

Turning to our outlook. We're lowering the midpoint of our outlook range for 2017 adjusted EBITDA by $75 million. This reflects a $30 million reduction related to the sale of our hospitals in Houston and our expectations for a softer volume in payer mix environment. Excluding Houston, the EBITDA revision amounts to a reduction of 1.7%.

Clearly, the operating environment for health care providers this year has been challenging and volatile. We are responding by reducing complexity, focusing on reducing leverage, managing pricing and costs well and successfully integrating our recent acquisitions. We are also taking the right actions for our business by expanding access points for patients and investing in key service lines. We believe these actions will help our hospitals grow their market share for both inpatient and outpatient services over the long term. In addition, our facility portfolio has continued to evolve in step with the trends for an increased consumerism, including smart investments to build out our ambulatory platform. And we are pleased that with the greater ownership stake in USPI, Tenet shareholders now benefit even more from the strong growth fundamentals of that business. The combination of our hospitals, USPI and Conifer, and the way that it has diversified our company, remains a strategic differentiator for Tenet. We're confident in our strategy, and we believe that we are well positioned for the future.

And with that, I'll turn it over to Dan Cancelmi, our CFO.

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

We generated adjusted EBITDA of $570 million in the quarter. EBITDA included a $23 million gain primarily from the sale of home health and hospice assets and a $27 million year-over-year increase in malpractice expense. These 2 items were not included in our second quarter guidance.

Adjusted EPS was a loss of $0.17. Same-hospital revenue per adjusted admission was up 3.3% on an apples-to-apples basis after adjusting for the California Provider Fee revenue.

Adjusted EBITDA in our hospital segment was $346 million.

Revenue in the ambulatory segment increased 3.8% on a same-facility system-wide basis.

Adjusted EBITDA, less facility-level NCI, increased 20.7% to $105 million.

Conifer's EBITDA was $60 million and adjusted free cash flow was $108 million for the quarter.

With that overview, I will explain our results in more detail starting with EBITDA. Slide 5 provides an overview of our EBITDA by segment. Our hospital and Conifer segments performed slightly below our expectations, while our ambulatory segment performed in line with relatively high expectations that we have for that business.

In our hospitals, volumes have been softer than anticipated and an increase in uninsured revenue has resulted in upward pressure on uncompensated care expense. The shortfall in revenue in the hospitals also impacts Conifer's revenue. At the same time, Conifer is making investments to improve performance for their clients, which has increased their expenses. A significant portion of these investments are related to initiatives that are showing measurable progress in reducing Tenet's days in AR, which improved to 53.6 this quarter.

Turning to volumes, which are summarized on Slide 7. Adjusted admissions decreased 1.4% on a same-hospital basis and were up 10 basis points excluding patients insured by Humana in both periods. Even with this adjustment, our volume growth for the first half of the year has been lower than we originally anticipated.

Turning to costs. Total hospital segment expenses per adjusted admission only increased 2.3% in the quarter and 2.1% for the first half of the year, which is below the low end of our outlook range for the year of 2.5% to 3.5%. We were pleased with our expense management this quarter, especially given the soft-volume environment.

On Slide 9, our total uncompensated care was 22.3% of revenue, up sequentially and year-over-year, primarily due to an increase in uninsured revenues.

Moving to our ambulatory business on Slide 10. We delivered 3.8% same-facility system-wide revenue growth. Cases were down 50 basis points and revenue per case was up 4.3%, including some benefit from increased acuity. Excluding patients who were insured by Humana in both periods, case growth was up 1.3%.

On Slide 11, adjusted EBITDA, less facility-level NCI, increased 20.7%. You may recall that in the second quarter of last year, the results from our ambulatory segment were adversely affected by the restructuring of USPI's bariatrics business. After adjusting for this, our growth would have been 11%.

As you can see on Slide 12, Conifer grew its revenue 3.6% and revenue from third-party customers was up 9.4%. EBITDA for the quarter was $60 million, and we anticipate a seasonal uptick in Conifer's EBITDA in the second half of the year.

Slides 13 and 14 provide the details of our revised outlook, including the changes to the underlying assumptions. We lowered the midpoint of our revenue outlook by $650 million to reflect the sale of our Houston hospitals last week and the softer volume environment. We now anticipate adjusted admissions to be flat to down 2% this year, below our prior expectations of up 1% to down 1%. Adjusted EBITDA is moving $75 million lower to a new range of $2.450 billion to $2.550 billion. $30 million of this reduction is related to Houston. $35 million is related to lower expectations for our hospitals. And $15 million is due to a reduction in our outlook for Conifer.

For the ambulatory segment, we have increased our outlook by $5 million.

We are now targeting adjusted free cash flow of $525 million to $725 million, which is $75 million lower than our prior expectations. A substantial portion of this cash will be used to fund up to $300 million of cash NCI distributions, acquisitions in USPI and cash payments for restructuring and other items, which totaled $62 million through June 30. Beyond that, our priority for excess cash is debt repayment.

Looking at a few of the other assumptions on this slide, we increased our expectations for bad debt to reflect our experience in the first half of the year. We also lowered our G&A estimate to reflect the Houston divestiture. And we lowered our assumption for interest expense and NCI expense to reflect our recent refinancing and increased ownership of USPI.

Slide 14 provides an updated view for each of our segments. Looking at our hospital segment, after the $30 million reduction for Houston, the remaining $35 million reflects our updated volume expectations and an increase in bad debts. After making these changes, we now anticipate EBITDA in the hospital segment of $1.485 billion to $1.555 billion, which represents a year-over-year change of down 1% to up 4% after normalizing for divestitures, health plan losses, change in HIT incentives and the change in pension expense accounting that I discussed last quarter.

The lower revenue expectations for our hospitals including the sale of Houston has a follow-on impact on Conifer's revenue. When combined with the investments that Conifer is making to improve cash collections for our hospitals and other customers, we now expect Conifer's EBITDA to be in the range of $265 million to $275 million, $15 million lower than our prior expectations.

Finally, in the ambulatory segment, our volume expectations have come down a little but we expect this to be offset by stronger growth in net revenue per case. And we anticipate the EBITDA and EBITDA less NCI in this business to be a little stronger than our previous expectations.

Before I conclude, I want to briefly comment on our recent refinancing. Details are provided on Slide 4.

We took advantage of the favorable interest rate environment in June and refinanced nearly 25% of our debt. We extended various maturities to 2024 and 2025 and lowered our annual cash interest expense by approximately $9 million. And we have the opportunity to further lower our interest expense by retiring debt. At this point, we have no near-term maturities and only $500 million maturing before 2020. And all of our notes now have a fixed interest rate.

To summarize, we've made solid progress strategically and positioned the company well for the future. We are pleased with the results of our recent refinancing. We completed a number of transactions that are designed to simplify and derisk our business. We increased our ownership interest in USPI to 80%. We divested our hospitals in Houston and reallocated the capital toward our ambulatory segment. And we sold home health and hospice assets as well as various health plan businesses.

The volume environment has softened and our operators are responding with rigorous expense management. Swift and deliberate response to changing economic environments is not new to us. We have a long history of strong expense management, and we expect this to continue.

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 today from Whit Mayo with Robert W. Baird.

I don't really like guidance questions, but I'll ask anyway. Just looking at the implied fourth quarter ramp, it does appear to be pretty steep on the surface and obviously the California Provider Fee is a big swing factor, obviously the Houston divestiture. But just can you help us think through what the apples-to-apples core growth is to make sense of the fourth quarter just that seemed to imply a pretty big acute care quarter?

Whit, this is Dan. A couple of things I'd point out in terms of the fourth quarter. One is as you pointed out, we will be -- we anticipate recognizing the California Provider Fee revenue in the fourth quarter. We still anticipate that program to be approved by year-end. So obviously, that's $225 million in the fourth quarter. As you know, the ambulatory business, from a seasonal perspective, is very, very strong in the fourth quarter. So that's going to drive a lot of growth from a first half versus second half type of perspective and sequentially as well, as well as year-over-year growth, Q4 last year versus this year. In terms of the hospital business, let me point out a couple of things there. I would remind everyone, that in the fourth quarter of last year we went out of network with Humana beginning October 1, so that was certainly a headwind in last year's fourth quarter. We're back in network now. Fourth quarter of last year, we also absorbed the impact of Hurricane Matthew, which had an impact on a number of our facilities. So when you take all that into consideration as well as in Conifer we anticipate a seasonal uptick there in the fourth quarter, Conifer typically has the opportunity to earn customer incentives from customers based on the contracts.

Do you have visibility into the Florida LIP money yet?

Not yet, Whit. It's -- they're still working through the numbers. They have not released a full model of what the ultimate impact will be to our hospitals at this point.

Okay. And really my second question just maybe for Bill or Jason. With CMS now reevaluating the total knees/hips on the inpatient-only list. can you frame up maybe the opportunity and do you need to spend any capital, make any investments if CMS does move forward with this, just any color would be helpful?

Whit, this is Bill. As you probably know, the bulk of the conversation is around allowing joints -- Medicare joints to be done in an HOPD, very little on the ASC front. And from a commercial perspective, it's different though, and we're seeing more and more interest in doing total joints on an outpatient basis in an ASC. So we're really well positioned as an enterprise to cover any level, the bulk of these will continue to be done inpatient. We are seeing a trend towards hospital outpatient departments. And there is a select group of patients that qualify for a true outpatient total joint at an ASC, in spite of the fact that CMS doesn't pay for that. I think it's going to be several years before that happens. And even if that does happen, there's a relatively small percentage of Medicare aged patients that qualify for a true ASC total joint. So I think we are really well positioned. Not a lot of expense required on our upfront. We are actively standing up programs with great doctors and nursing teams in probably 1/3 to a half of our ASCs, but not a lot of CapEx to accommodate that.

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

First question maybe, just when you think about the volumes we saw in the quarter and where you're making your adjustment for the back half of the year on the acute side, would you say you can concentrate that on any particular service line or geography? Does it have anything to do with some of the projects you are bringing on impacting volumes? Any color you can give us would be helpful.

Sure, A.J. This is Eric. A couple of points on the volume. Obviously as we mentioned, it's been a little softer than we anticipated. I would point to a few things that you think -- a few points of things we would anticipate -- or have had an impact on that. One is higher deductibles, you've heard a lot of talk about this. Within the last couple of years deductibles in many cases have risen by as much as 30% and that is changing how people access care at least in the short run, and we think it actually changes seasonality a bit as well. A couple of other things impacting us, the birthrate across the country has dropped and that affects a couple of things. It affects our surgeries a bit because that does change our C-section numbers and certainly that's something we've seen nationally. I would also point to the fact that Humana had some impact on the first half of the year, a little bit coming back in the last month of the quarter. So there's a number of things that I think are affecting that volume from a softness standpoint. As far as the second half of the year being a little stronger than the first half, we certainly do point to those 4 projects that Trevor mentioned as these being projects that position us well in the key service lines we are focused on. And we expect that those will certainly help us in the second half of the year, but in the context of what is, obviously, a little bit slower volume growth environment than we talked about previously. On the service line side, what I would say is kind of backing up the point that deductibles are having an impact. The more nonelective procedures -- so if you think about service lines like cardiovascular and neurology, those service lines are showing growth year-over-year. The more elective procedures, things like orthopedics, we see the softness. So we think that does play into the story of deductibles rising and changing behaviors. But ultimately, we -- we're very well positioned, we feel, when those folks need to find service that they will be choosing us.

Okay, great. And then on the status on the surgery center business briefly. There has been some changes to the competitive landscape in the last year. You've got, obviously, United, bought Surgical Care Affiliates. You guys have stepped up your ownership position quite a bit and are at 80%. You'll be at 88% by the middle of next year. I'm wondering does that change anything you do, just the fact that you have more ownership? Do you see the competitive landscape evolving either in the availability of transactions, the pricing of transactions, the development opportunities, de novo that you see? Give us some flavor for that, if you would.

Great. A.J., it's Trevor. I'll start and then I'll ask Bill Wilcox to fill in. It -- I think all the points that you mentioned and the discussion that we just had with Bill and Eric illustrates the benefits of the strategy that we are pursuing. So regardless of what somebody needs or where they need it and what kind of setting, we have a network that is capable of providing it in our key markets. Our strategy with respect to USPI hasn't been changed now that we own 80%, but we've enjoyed quite a lot of benefits from the transaction. Synergies have exceeded our expectations, so now, as we go forward, whether it's in operational synergies or acquisition synergies, a greater percentage of those flow to benefit of Tenet shareholders as we have purchased the minority interest in that. Bill, I think what would be interesting is if you could just comment on that portfolio and how you're developing out the de novo properties as well as the acquisition environment and then specifically get to A.J.'s question about did anything change as a result of transactions in the industry?

Well, it continues to be quite competitive from virtually every aspect, but we are very pleased that we tend to win more than our share. I think that the strategic wisdom of our working with health systems including, most importantly, the Tenet health systems, it is really beginning to play out as that continues to be our key focus and it allows us to help grow the platforms of our Tenet markets and also our not-for-profit health systems market. So we're seeing a pipeline that's more robust than I've ever seen it, both in terms of acquisitions and de novos and also in terms of new markets, either through our Tenet markets or through new health system partners.

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

I was just hoping you could give some color on how you think that Humana -- or how volumes will ramp with Humana being back in network in the second half of the year? Should it improve fairly substantially relative to the first half? Or do you think it will take into 2018 to see something change materially?

Chris, this is Eric. So I would say with regard to Humana, we definitely think it will improve, but that's in the context of really what's a softer environment, and so it will take some time to earn back that business. As you can imagine, habits change quickly and there are certain parts of that, that are faster to move back than others. But we do anticipate that to improve across the second half of the year, but it's in the context of -- even within that book of business and other books of business, it's a little bit softer volume picture. But that improvement is included in our outlook.

Okay. And then just on additional divestitures. Can you give us a sense for how we should think about that this year and into next year? Do you think you'll have some more announcements within 2017?

This is Keith, Chris. Yes, I think we'll have some more announcements in 2017. I don't think that the -- there is no impact to our guidance in the quarter 4 for any further divestitures. So I want to be clear about that, but in terms of closing any potential divestitures, we think end of the year, first of next year is probably more realistic. There may be some a little bit earlier, but I don't think they'll be material for this year. So I think we'll be in a good position to have a clean view of guidance for 2018, once we come out with that.

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

I'm still puzzled over this guidance, so I'm going to come back to it again, because I'm trying to understand what has to happen to the underlying volumes and the underlying business at both Conifer and USPI, not just at the hospital? So basically, I think the math suggests given $525 million of guidance at the midpoint for the third quarter, somewhere between an $850 million and $900 million fourth quarter. And around the midpoint of that, that suggests $225 million for the California Provider Fee that we're going to get to $650 million for the business in the fourth quarter. So how do we get through the third quarter to the fourth quarter? So -- because when we kind of add up what you just said about seasonality, that's only $60 million, so there's like -- there's more left in there. Does this require that you've got to get beyond the midpoint of the guidance range for inpatient volumes? Is there some incremental piece that I'm missing because it's -- visibly it's sticker shock, it's a big number, and I think that's why it's important that we understand it.

Sheryl, this is Dan. Let me go through some of the pieces in terms of the fourth quarter and also I'll put in the context of the entire back half of the year and then comparing to last year. So as you pointed out, there is the $225 million related to the California Provider Fee that we, at this point, still anticipate that gets approved. USPI, in terms of thinking about it from the first half of the year to the back half of the year, that's roughly $75 million of additional earnings EBITDA in the back half of the year compared to the first half of the year. And even on a year-over-year basis, there is growth in the ambulatory segment of close to -- it's about $30 million year-over-year compared to the fourth quarter of last year. Conifer, first half, second half is about $20 million of additional EBITDA. We do anticipate Conifer to earn various incentives in the fourth quarter. And so first half, second half there's about $20 million there. The -- in terms of the hospital business, as I mentioned a couple of minutes ago, on a year-over-year basis, there's a couple of obvious items that are somewhat impacting the year-over-year comparison. As I mentioned, fourth quarter last year, we went out of network with Humana. So we're back in network with Humana, so that obviously should help in terms of hospital growth. And I also mentioned Hurricane Matthew, that had an impact on our facilities in the fourth quarter of last year. So obviously it's helpful that we don't have any type of event like that this year. In fact, we also are anticipating hospital growth in the fourth quarter. And as Eric pointed out, we have various projects that have recently come online. We continue to -- we will continue to drive strong expense management. And when -- we think we, based on where we think we can delever it, we can get to $2.5 billion on a consolidated basis for the full year.

Okay, so let me ask you a different question. On an actual basis -- but it's related, on an actual basis, your cash flow for the 6 months, free cash flow, was fairly modest, I think you'll agree. And even though USPI is performing very well, Conifer is a little draggy, presumably you're going to get that fixed and get some operating leverage from all the new businesses it's added at some point. But in the hospital business, first of all, A; is -- are the hospitals generating cash flow? And to get to meaningful cash flow, free cash flow -- -- excuse me, free cash flow, if you can even think about it that way, and to get to meaningful free cash flow, not adjusted, but free cash flow generation for the business, where do you have to get your hospital margins to?

So you're right in terms of from a cash flow perspective, obviously the ambulatory business is very strong and we expect that to continue. We -- going forward, we need to drive incremental free cash flow generation. As you pointed out many times, the difference between adjusted free cash flow and free cash flow, that's real cash going out the door. As we pointed out, we've had about roughly $60 million so far this year. We, going forward -- we're not coming out with guidance for next year at this point, but yes, we do anticipate those numbers to come down on a going-forward basis. But the free cash flow generation is going to be based on certainly driving growth in our hospital business, Conifer also continuing to drive down our receivables is a part of that. You're right, the first half of the year, cash flow generation was not very strong compared to last year. It was, I would tell you, it was slightly ahead of our internal expectations. As you may remember, the first half of the year, we have certain working capital items that are on an annual basis that are funded in first 3 or 4 months of the year, and we typically generate stronger free cash flow in the second half of the year. We've also been winding down our health plan businesses, which has been a use of cash in the first half of the year as well. We should be substantially done winding those down by the end of this year as well.

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

First, just on the malpractice expense. As you noted, it was up significantly in the second quarter here. Should we think about this as the new run rate for the back half of the year and into the first quarter of '18 or not? And then, what drove this increase given it was up about 30% year-over-year and sequentially?

Justin, it's Dan. In terms of the run rate, the -- we don't anticipate the run rate in the back half of the year to be at the same level as it was in the second quarter, although there will probably be some incremental costs compared to what we had been seeing, say, over the past year or so. In terms of what drove it, there were a handful or so of prior year older cases that we've decided made sense to settle them to minimize future financial risk.

Okay, great. And then on the follow-up is on the Florida Medicaid cuts. So I think they were in the 7% to 8% range, if I'm remembering correctly, I know the LIP could work to offset that but I was hoping you could tell us what the impact of the Medicaid rate cut is to Tenet before thinking about the potential LIP offset?

Yes. The rate cuts have been -- they have been going through that. And that number, we do expect it to be offset with the incremental low-income pool reimbursement. Whether it fully offsets it or not at this point, it's -- we don't know, unfortunately. We would hope to have an answer for that on this call, but they still haven't released the final model to see what the additional reimbursement will be. We think it will be some time here in August, maybe in the next week or 2, but right now, we just don't have visibility into it.

We'll move next to Sarah James with Piper Jaffray.

I appreciate the comments on outpatient pressure from elective surgeries being put off because of rising deductibles, that's certainly a term that your peers are speaking to as well. But I wanted to clarify, because the outpatient surgeries were down more than inpatient. So was that primarily the elective volume dropping off, and if so, would that mean acuity and outpatient is increasing and will continue to do so as less elective surgeries are in the mix there? And as you look at your outpatient volumes as a whole, could you bucket between the remaining elective and nonelective mix so we can get an idea of where that might trend in the future?

Sure, Sarah, this is Eric. On the outpatient surgery side, certainly we think that's an area that's much more affected by the deductible issue we talked about earlier. It is primarily elective business on the outpatient side, and so that is certainly a place, where we feel that impact. I think the good news for us is with higher deductibles and people having more choice options is that we're -- we have a fantastic surgery ASC platform that positions us well to continue to earn that business, whether it's in the hospital setting or at an ASC in our markets.

And I don't know Bill, if you want to comment a little bit on what you saw on the outpatient surgery side.

Sure. We continue to see a softer volume environment this year. You've heard us already talk about it's a continuation of the cyclical nature of our business as the patient payer responsibilities increase. Also for the -- for our segment, over 2 years ago, when we did the Tenet transaction, we had the opportunity to strategically restructure several of our partnerships. And you might recall that we talked a lot about the moves between consolidated and unconsolidated facilities in those years. And at the same time, we were benefiting from the demise of the various out-of-network models in some of our larger markets. The reason I bring this up is that those last 2 factors resulted in unprecedented growth for us in 2015 and '16. So while we are seeing softness in our year-over-year comps, we're coming off some -- 2 really strong years. And the primary area of our softness is in pain management and GI, which are lower revenue procedures so that's why you're seeing some nice strength in our net revenue per case. And some of -- we're seeing that as a result -- that shift in pain and GI, primarily as a result of some of the benefit plans emphasizing a shift from the HOPD to the ASC.

Are you also seeing a benefit from some of your inpatient business shifting into outpatient? And do you have any metrics where you're gauging how much of your redirected business you're capturing versus what may be going to competitors?

Yes. So let's say -- it's a great question. Obviously, technology continues to open the door for more things to be done on an outpatient basis. It's hard to have an exact measure on that. We definitely know that, that has an impact. I would say this, the good news for us whether we think about, what Trevor mentioned earlier around care settings, is our goal is, as technology moves is to be location agnostic, treating the patient at the right care, at the right place and the right price point. And so I think over time, as it moves, we don't think it's dramatic, and I think we talked little bit earlier about the total joints for Medicare patients. Again, that's one where there's a certain amount of procedures that based on comorbidities and age and risk are always going to be in the hospital, which is why you see us focus on service lines that we believe, over the next 10 to 20 years, will stay in the hospital and why we partner very closely with Bill and USPI to ensure that when patients are making different choices and there is a better option for their care, that we are the place they choose.

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

Trevor, you guys talked about how in the past you adapted to soft-volume environments through cost controls. But as we think about what else you can do to drive volumes, whether it's resuming physician recruiting or refocusing sort of sizing. How should we think about the proactive measures that you are taking right now or contemplating to adapt to the soft macro?

That's a great question, and Eric, in that last answer, came very close to describing a really very promising initiative that we've been piloting for a couple of years and are rolling out throughout the company called Care Continuity. And I think that is an example of one of the tools that we're using. Eric, do you want to describe a little bit of that?

Yes. So to build on that, I think when you look at our advantage as a company, it's I think our strength of our platform. And so for us we are really working to make sure we make it easy for the consumer to access us in the right care site in a way that's meaningful and that connects them to our system. So the program Trevor mentioned, is Care Continuity, it's a program where we're focused on our access points and making sure that our patients have easy access to that next level of care and improving the service levels and integration of care to drive better outcomes. So that's part of I think this consumer movement and how do we connect our access points in a unique way that our investments have allowed us to do. I think the other thing I would say from a growth standpoint is, as -- even though we're facing softer volumes, in the core service lines, cardiovascular, orthopedic, neuro sciences, et cetera, really moving up the acuity scale, making sure we partner with the best physicians and the best clinical staff to drive great outcomes. We think that with the softness, one thing we are continuing to see is an increasing pressure on rule providers to provide the higher acuity services. So we think over time, that migrates more to large urban areas where we are. And we are certainly continuing to invest in those type of services, and Trevor mentioned earlier, trauma is an example of that. I'd also say from the consumer side, and we touched on this earlier, the expansion of access points -- convenient access points, we are continuing to invest in our markets in making sure that we have very convenient easy access points, whether it's for ER or urgent care from the hospital side. What we do see in our urgent care centers and our ERs is continued strong -- our freestanding ERs is our continued strong growth. And it's a patient preference to be able to go to a retail-type site near their home, and we don't see that preference changing. And ultimately, it's an overall better experience for the patient, less wait times, it's a way we can better meet their needs and so we do plan to continue to invest in those areas to make sure we provide the easiest access to high-quality care.

Appreciate it. And my second question is just on the divestitures. I mean, obviously, you got the HCA deal done. As we think about the other markets that you looked at or analyzed over the last few months, is there interest coming from other strategics at this point? Or is it more of a, we're waiting for interest level to come in? And what kind of valuations are you thinking, speaking of the success you had with the Houston divestiture?

Well, first of all, valuations will vary depending on where the assets are and what the performance of them is. So obviously, if it's -- it depends on what the actual EBITDA is and whether it's strategic with synergies or not. So there's a whole lot of things that would impact what value you can get for certain assets. We continue to work -- we have some challenged areas, and we're working on continuing -- we are fairly far along on those, so -- on a lot of things, we hope this fall to have some more announcements to make relative to divestitures, but we are seeing some combination of strategics as well as some financial buyers on a few of the assets.

And we'll go next to Kevin Fischbeck with Bank of America Merrill Lynch.

I appreciate the commentary about some of things driving the weaker volumes. But I guess, when we think about the pressure that you've been seeing on volumes, and I guess the pressure you're now seeing on payer mix in the quarter, is there anything that makes you look at this and say, this is a trend that's going to be getting better next year? When I think about the economy doing relatively well, obviously not great, but relatively well, I guess, I don't really see why we would expect volumes to improve or payer mix trends to improve for the foreseeable future. Is there anything that I'm missing in there that would argue for a better inflection point as we head into next year?

I think that -- and this is Trevor, I'll make a comment and Eric, I think may be some regional commentary is appropriate because, obviously, where you're located plays a big part in this. And we have seen some particular softness in the same regions that other companies talked about as they went through their earnings calls. We do think that there are certain industries in those economies like the oil industry in Texas that is beginning to firm and tighten and apparently, there's even a shortage of workers now to work on rigs. So generally speaking, employment is good for us, tight employment for us is even better for us because people then have more generous benefits plans. The birth rate is one that's a little bit causing you to scratch your head with that, there's not an obvious reason that it should be soft at this point in time. There's some speculation that it may be linked to immigration and some of the debate about immigration. So look, I think, as we went through in the prepared remarks, when you adjust for Humana, you're talking about very slight softness in the numbers that we're reporting and so that slight softness could turn to strength pretty easily. But it is hard to sit here right now and predict exactly when that's going to happen and why.

Yes. I don't have a lot to add to that, I would just say, you take an example like Trevor said of Texas, it's a state where long term, we believe in the fundamentals, we believe in the growth. We've made big investments, and we wouldn't expect the type of I think payer mix deterioration that we might -- we've experienced this year to be long term. So if we think about the next 6 months, certainly we don't see anything that's going to dramatically change that. I do think that the steps we're taking through on core service lines and access points provide -- position us well to earn market share in a market, whether it's got much growth or not. Our goal is we want to grow in our markets regardless, and we think with our access point strategy, we're well-positioned to do that. So it's hard to say beyond the 6 months we're talking about now, I wouldn't want to get out ahead of that, but certainly, there are very specific factors, as Trevor mentioned, that affect all of our regions.

Okay, and then I guess if you could just -- it wasn't clear to me exactly why USPI's guidance was going up. It sounds like Q2 was in line with what you were looking for, you predicted a good quarter, you got a good quarter. But when you talk about a generally weak volume backdrop, it wasn't clear why USPI was up to me. Was that deal related or organically is there something driving that?

Sorry Kevin, this is Jason Cagle. The back half of the year typically is a little busier for us from an M&A perspective. But obviously, we've said the first half of the year for us was burdened by Humana. That was now fixed in June and so we're a little more optimistic on volumes in the second half of the year than we saw in the first half.

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

So again following up on the volumes, ex-Humana they weren't bad but you talk about the softness. But I'm a little unclear when you say you're seeing payer mix pressures because ex the provider fee, the pricing growth has been reasonably good. So as you look at your underlying payer mix trends and you talked about some diagnostics stuff possibly you've done on various geographies, what is really the driver of the little bit of softness that you are seeing? Is it more from consumers? Is it more from payers on kind of value-based care or observation stays? Or is it more competitive? Or is it a combination of all of it?

I would say, just to reiterate a couple points earlier, I think it's definitely a consumer behavior change based on, what we think, is based on higher deductibles, and we're seeing different choices. We don't expect that those choices will necessarily be long term, but certainly I think it is driving some of our softness. And it's not just our company, we've seen it across the industry, so I don't think it's necessarily a market dynamic change, it's affecting all of us. I think beyond that, we do think there is increasing seasonality in the business based on plan designs. And we expect to be well positioned when consumers make the choice they need health care be well-positioned to earn that business at the right care setting at the right price point.

This is Dan, and the only thing that I would add is...

So you're not seeing...

I'm sorry, go ahead. The only thing that I was going to add was the other issue with our payer mix for this year has been growth in uninsured revenue, particularly in Florida and Texas.

And the growth in uninsured revenue I would say it's interesting, outpatient growth in the uninsured has actually dropped and inpatient has increased, and I think this goes to the issue we have to solve, which is how do we get meaningful coverage for people at the right care setting, because ultimately what that would point to is, they're waiting on the more preventative stuff and they're coming to our hospitals in a more acute situation.

Okay, the feeling I had is I guess was talking less about payer mix from the point of view of the uninsured, more about commercial versus Medicare and managed Medicare demand. And one of your peer -- one of your competitors has talked about observation stays and pressure from payers there. Another talked about south Florida pressure on Medicare Advantage. And -- are you seeing much of that at all, or is this just largely volumes driven by consumer demand, if you will?

Yes. This is Eric, thanks for clarifying the question. We have seen a similar trend. Certainly we've seen observation growth, we've seen the same pressures in South Florida on some of those things. And in commercial, along with the rest of the payer mix, has shown some softness.

Okay, and then finally on the bad debt, just coming back to that. Is this mostly macroeconomic? Are you seeing more attrition on exchanges, you have an uptick in your outpatient volumes it looks like on exchanges even though the admissions were down?

This is Dan. In terms of the growth in the uninsured, as I mentioned, it's in several markets, particularly in Florida and Texas. And that's a trend that we've seen the past several quarters. As you know, those 2 states have not expanded their Medicaid programs up till now. So that, depending on their decision to obtain coverage on an exchange product or not, that obviously is going to have an impact on their coverage. And so what we've seen is this growth and whether it's because they previously had insurance coverage through an exchange product and they don't now, that has increased to some extent, but I don't -- we don't think it explains the entire reason for the growth in the uninsured in those states.

And Ana, I would add that Care Continuity program we mentioned earlier, one of the big benefits for that program is that, regardless of your payer status, and particularly with folks who don't have coverage, it is connecting them with the appropriate resource for more preventative care. And we think over time as we are more directly involved with helping patients access the right place and location that we can do some things to mitigate that.

And our last question will come from Ralph Giacobbe with Citi.

Just wanted to go back to the margin profile of your hospital base. If I try to normalize to exclude the health plan and then add back the California Provider Fee, it looks like just under a 10% margin. I guess, first, is that a fair way to look at the base today? And I guess, where do you see an improvement in target margins ultimately with your portfolio? And then lastly, the question is just, what is the baseline same-facility revenue growth that you think you need to actually show or see margin expansion?

Ralph, this is Dan. Yes, in terms of -- let me hit the last point. In terms of revenue growth, we think we could drive growth in 2.5% to 3.5% type of territory. And we feel strongly we have good visibility into pricing over the next several years, over close to 90% under contract next year and about 2/3 of the book of business even into 2019, so got good visibility into pricing. So we think, given our focus on investing in growing service lines that we think will remain in the hospital on a longer-term basis, we think we can sustain that type of pricing growth. We think that can certainly help improve hospital margins. Some of our portfolio work that we're doing will also have an impact on growing margins as well.

The only thing I'd add to that we still are, as you know, integrating a couple of pretty large markets that we expect to continue to grow margin end, and certainly from a just a core hospital facility, margin growth is a constant focus for us. Part of that, you could see in exiting businesses that are noncore for us like home health and hospice, and part of that is just the normal work we do every year on finding additional efficiency and cost opportunities. And then, of course, as we mentioned earlier, we've also got to find ways to grow the business and we have strategies in place to do that.

Okay, that's helpful. And then just want to go back to the discussion around hip and knee that we questioned earlier in the call. I guess first, is there any way to size up sort of how big that business is for you? And then sort of the discussion of the move to HOPD. So forget the ASC side, but just the move from inpatient to outpatient, I think, is a couple -- a few thousand dollars less on the Medicare side. So I guess, I'm just -- the question is ultimately, is that just sort of a degradation of the margin as we think about those procedures? Or is there some sort of other cost offset that we need to think about in terms of treating a patient, whether it's sort of inpatient or outpatient? Or is just a revenue impact?

So I'll take a shot at that. So I think your question was on hip and knee procedures, how big of a business that is for us and what's the risk. It's a sizable business, I don't have the exact number in front of me. Obviously, it's a business that we earn a lot of patient utilization of, although it's been a little softer in this kind of environment because it's elective. We go back -- going back to the answer earlier, we see this as a longer-term issue. On the commercial side, we have had some migration, and we think that's going to happen. The good news is we are very, very well positioned with Bill and USPI and his team, they're actually leaders in that area. I think on the inpatient side, there is still, when you think about the Medicare business, a vast majority of those patients have other conditions that make it really, really hard to see that transitioning in the near term. And even the regulations now, what we're really talking about, and as Bill mentioned earlier, is approving potentially doing those in hospital outpatient departments and then the ASC discussion would be after that. But I think if you look at the clinical diagnoses, it's not going to be something that we see moving rapidly. And even if it does move and does get approved for ASCs, it's a relatively small population that we think right now is going to be eligible to move to the ambulatory setting. So we don't see that as a huge impact in the near term and really in the long term.

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