Tenet Healthcare Corporation (THC) Q1 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Tenet Healthcare Corp. Earnings Conference Call. My name is Mary, and I will be your coordinator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Thomas Rice, Senior Vice President, Investor Relations. Please proceed.

Thank you, operator, and good morning, everyone. Tenet's management will be making forward-looking statements on this call. These statements are based on management's current expectations and are subject to risk and uncertainties that may cause those forward-looking statements to be materially incorrect. Management cautions you not to rely on and makes no promises to update any of the forward-looking statements. [Operator Instructions]. The presentation Tenet is making today includes non-GAAP financial information. A reconciliation of this information to GAAP can be found in the appendix to the presentation. At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO.

Thank you, Tom, and good morning, everyone. This quarter is pretty straightforward. Solid operating results with some additional benefits to EBITDA. I'd like to refer you to the earnings release, 10-Q and slide presentation that we filed this morning with the SEC. These documents are posted on our website. On Slide 3, you'll see that EBITDA for the quarter came in at a very strong $379 million. Even without the California Provider Fee, this is solid performance. By the way, you'll notice that the final California Provider Fee number was $63 million, not $64 million as we had estimated. The shortfall is due to some non-Tenet hospitals in California ultimately failing to pay into the program as required. Biggs will take you through a number of the items impacting first quarter EBITDA in a moment. For now, I want to point out that we recorded $25 million in Medicaid health IT incentive revenues in the first quarter. We'd expected to book this income next year, but in 5 states, the program regulations got finalized by the end of March in a manner that enabled us to meet the requirements immediately. As a result of this benefit, and reflecting our continued confidence in our expected performance for the balance of the year, we are increasing our 2011 outlook for EBITDA by $25 million to a new range of $1.175 billion to $1.275 billion. Inpatient and outpatient volume growth helped generate a strong start to the year. As you can see on Slide 4, we achieved positive admissions growth of 0.6%, growing volumes for the first time since the third quarter of 2009. Paying admissions grew at a virtually equivalent rate, increasing by 0.4%. I'm pleased to be in positive territory but more pleased that this is the second consecutive quarter in which we achieved an improving volume trend. As you recall, we were down 3.5% in Q3 last year, then down 2% in Q4 and now up 0.6%. Outpatient visit growth was even stronger, growing by 6.1%. Paying outpatient visits grew by 6.2%. Those numbers include the benefit of acquired centers that are part of existing hospitals, purely organic outpatient visit growth was a solid 2.5%. Adjusted admissions grew a strong 2.3%. This volume strength was broadly based. As you'll see on Slide 5, all 4 of our regions, plus our Philadelphia market, achieved outpatient visit growth, and all but our Central Regions achieved positive inpatient admissions growth. The implication is that the improving volume trend that we generated since November is becoming increasingly well-established. You'll see on Slide 6 that pricing remains a bright spot. We continue to achieve our anticipated results from commercial managed care negotiations, and at this point, we've completed contracts for at least, -- for approximately 90% of our anticipated 2011 commercial revenue, 60% of 2012 and 20% of 2013. We believe our hospitals continue to offer an excellent value proposition to our managed care customers. We performed well on cost control once again this quarter. Our performance in the supply chain and bad debt expense were specific areas of strength. On labor, we incurred upward pressure from annual salary increases, but we improved productivity compared to the prior year. I'd like to turn now to reporting on our growth initiatives and margin improvement drivers that are noted on Slide 7 through 14. Starting with our outpatient effort on Slide 8, we continue to close these transactions at the pace and with the pricing that we had anticipated. We closed on 5 outpatient acquisitions this year, 3 in January and 2 more on April 1. The full quarter impact of these new acquisitions should be visible in our second quarter results. We continue to have an attractive pipeline of future outpatient acquisitions. The second driver on our list is Conifer, which continues to make meaningful progress towards its growth objectives. We signed revenue cycle outsourcing contract with 2 new customers since the first of the year. We expect these contracts to generate another $20 million in annual revenue. In our most recent investor presentation, I made a comparison to a public company, Accretive Health, and showed that Conifer and Accretive are already similar in terms of number of customers, with the only major difference being that Accretive has less customer revenue concentration. Since that presentation, Accretive's market value has increased sharply to more than $2.8 billion. We are very confident in Conifer's capabilities and value proposition and think this market is more than large enough to accommodate Accretive, Conifer and HCA's upcoming revenue cycle service offering. Our Medicare Performance Initiative continues to make progress toward its annual target of $50 million of incremental savings. The very small, 1.2% increase in supplies cost for adjusted patient day is evidence of the impact of MPI on cost control. Health Information Technology, specifically our program to install advanced clinical systems, is the fourth driver on our list. We were certainly pleased to be in a position to record $25 million in Medicaid incentive revenues earlier than originally planned. Health IT implementation expenses continue to impact earnings growth in 2011, but remember that as the stimulus money exceeds the cost, this program will become a source of earnings in 2012 and beyond. Item 5 on our list is bad-debt expense. You will recall from our January 11 presentation, we expect an improvement in bad debt expense as the economy recovers. This macro improvement is expected to be augmented by Tenet's own effort to continuously improve the revenue cycle. Reduced bad debt expense has already contributed positively to our first quarter results, and this gives us added confidence in our EBITDA outlook. Operating leverage, Number 6 on our list, is difficult to quantify, but we'll get it through volume growth. We've seen good momentum since November but we still have great opportunity ahead of us. We believe the drivers of volume growth are primarily the investments that we've made in our facility and advanced clinical systems, the value proposition we offer to payers and the many physician-alignment activities that we've been implementing. And finally, healthcare reform or the Affordable Care Act, was not expected to contribute to earnings in 2011 because the cuts came before the coverage. As you know, we're currently are living with a 50 basis point HIT from Medicare pricing. Nonetheless, we overcame that revenue challenge to create strong earnings growth this quarter. While we're continuously looking for more ways to drive value, we're on the right track, and I'm very pleased that since January, when we first presented our 2011 outlook, we reported 2 very solid quarters representing tangible progress towards these longer-term objectives. Before I turn the call over to Biggs to review our performance in greater detail, I wanted to give you a brief update regarding the Community situation. As you know, yesterday, we received a revised proposal from Community to acquire all the outstanding shares of Tenet for $7.25 per share in cash. Our Board of Directors will review the revised proposal in consultation with its independent, financial and legal advisers to determine the course of action that it believes is in the best interest of the company and our shareholders. I'd also like to give you a brief update on the lawsuit that we filed on April 11 to compel Community to disclose fully its admissions practices. On April 22, we filed a motion with the court requesting a scheduling conference to set a timetable for the proceeding. The judge has scheduled that hearing for May 13. Yesterday, we filed a motion on discovery that contained some of the items that we are requesting. Those are the only updates on the litigation. Because the Board will be reviewing the proposal from Community, and the litigation is pending before the court, please understand that we will not be taking questions on Community's proposal or the litigation on this conference call. I'd like to conclude my remarks with the summary of our first quarter results. So please, turn to Slide 15 and 16. We had a solid quarter and we've gotten the year off to a great start. Our volume trends are improving and the pricing and cost trends continue to be favorable. Most importantly, our first quarter results provide compelling evidence that our positive earnings trajectory is gaining momentum and we're on track to meet our objectives. We're pleased to raise our 2011 outlook for adjusted EBITDA to a range of $1.175 billion to $1.275 billion. Our initiative in the Medicare Performance Initiative, outpatient services and Conifer are meeting their interim milestones. While expenses from our Healthcare IT program continue to be a modest drag on earnings growth this year, the program is on track and expected to contribute positively to EBITDA beginning next year. And now for further insights into our financial performance and outlook, let me turn the call over to Biggs Porter, our Chief Financial Officer. Biggs?

Thank you, Trevor, and good morning, everyone. Adjusted EBITDA was $379 million for the quarter with a margin of 15.1%. This is a very good result, reflecting improving operating trends and significant value being captured on a number of fronts. It also positioned us to increase our outlook for the year. I will spend a few minutes discussing the value drivers, and to begin with, will provide some commentary on how to compare the quarter to last year from purely operating perspective. Because of the influence of prior year provider fees, and a couple of other items, we believe the relevant comparison to last year is $306 million for the first quarter of 2011 EBITDA to $283 million for last year's first quarter for an increase of $23 million or 8.1%. I'll now highlight the elements of this comparison, which appear on Slide 17. The largest of these items was a recognition in the quarter of the $63 million of California Provider Fees and of $13 million in Pennsylvania Provider Fees, both of which reflect earnings contributions from prior reporting periods. We also recorded $25 million from earlier-than-initially-anticipated Medicaid HIT incentive revenue. This contribution from HIT incentives was partially offset by an incremental cost of $12 million from HIT implementation and related costs as compared to the first quarter of last year. Netting these incremental HIT costs of $12 million and just $25 million HIT incentives results in a $13 million net favorable effect from HIT in this year's first quarter as compared to last year. We may very well be able to accelerate additional Medicaid HIT incentives into this year, but we'll only include those in the outlook as they are finalized. The provider fees and HIT incentives reflect real value, but it's important that they are put into proper perspective from a quarterly earnings standpoint. The favorable impact of these items was partially offset by a $14 million net reduction in prior cost report settlements and by a $17 million negative adjustment to medical malpractice expense for unusually large claim adjustments on a few cases. As I said a moment ago, after netting the effects of these items out of 2011 and 2010 results, adjusted EBITDA was $306 million in the first quarter of 2011, reflecting a $23 million or 8.1% increase over last year. Revenues grew by $167 million or 7.1% in the quarter. In addition to what I have already described, revenues were enhanced by the finalization of $10 million from the Georgia Indigent Care funding and by the $7 million 2011 portion of the Pennsylvania Provider Fee. These 2 items were both anticipated and offset the negative effects of year-over-year declines we otherwise experienced in Medicaid reimbursement. Just as a sidenote, last year, the Georgia Indigent Care funding occurred in the second quarter rather than the first quarter this year. Turning to pricing. Net inpatient revenue per admit increased by 6.5% in the quarter. Inpatient net revenue per patient day increased by 8.3%. As shown on Slide 19, even without the provider fees and Medicaid incentives, net inpatient revenue per admission increased by 1.6% and 3.4% on a per-patient-day basis. Aggregate case mix was relatively flat year-over-year. Outpatient revenue per visit declined by 2.2%, reflecting the effect on mix of our strong growth in imaging volumes. Imaging visits have attractive margins relative to cost, especially incremental costs, but imaging is lower priced on a per-visit basis. This imaging growth is largely the result of our recent outpatient acquisitions. Negotiated commercial managed care rate increases continue to favorably affect aggregate inpatient and outpatient pricing. However, Medicare cuts to inpatient pricing, which became effective on October 1, restrained our pricing growth. More specifically, Medicare revenue per admission declined by 1.9% in the quarter. Turning to costs. Staffing cost per adjusted patient day were up by 4.4%, reflecting merit increases but also showing the impact of the staffing of our HIT initiative and increasing physician employment. Showing favorable results supplies costs were well-controlled in the quarter. On a per-adjusted-patient-day basis, supplies expense increased by only 1.2%. You'll recall that the comparable increase, which is 0.9% in the sequential fourth quarter. So the controlled supply cost is becoming an increasingly important highlight in Tenet's ability to generate margin expansion through our Medicare Performance Initiative. As I alluded to a moment ago, other operating expense included an increase in malpractice expense. While broad claims experience remains favorable, a $17 million charge from a few larger-than-normal claim adjustments held us back for continuing our malpractice improvement this quarter. Other operating expense also reflect an increased expense related to both HIT and to physician recruitment and relocation. Bad debt expense was $182 million in the quarter, a decrease of $7 million or 3.7% from a year ago. This resulted in a bad debt ratio of 7.3%, 80 basis points lower than a year ago. The primary driver of this favorable result was an $11 million decline in uninsured revenues, primary driven by a 2.5% decline in uninsured admissions. We had $267 million in cash and cash equivalents at quarter end, a decrease of $138 million from $405 million at December 31. As most of you are aware, our first quarter typically reflect seasonal cash pressures due to the annual cash payments for certain compensation and benefit expenses accrued through the prior year and a seasonal pay-down of other liabilities. As a result, $2 million in net cash was used in operating activities in the first quarter, a favorable variance of $20 million as compared to last year's first quarter cash usage. This decline in cash use was the result of higher EBITDA, partially offset by net income tax payments this year of $24 million on prior tax settlements, compared to net income tax refunds last year of $17 million, an aggregate adverse swing of $41 million in cash tax payments. Also, some of the income items in the quarter, including HIT incentives, the Pennsylvania Provider Fee and the Georgia Indigent Care funding will be recorded as cash in the second quarter or later this year. We also used $18 million of cash to purchase 3 outpatient centers and generated cash of $3 million through the sale of another -- of our medical office buildings. Turning to our outlook. We've included 2 slides, 23 and 24, which gives some breakdown of our income and cash flow outlook for the remainder of the year. We are raising our 2011 outlook for adjusted EBITDA by $25 million, reflecting the $25 million we recorded in Medicaid HIT incentive revenues, which we had not expected to record until 2012 or 2013. It is also clear that we're outperforming a number of our initial assumptions. For example, admissions growth was 0.6% in the first quarter, as compared to assumed declines of 1% to flat. Also, although acuity started out the quarter on a softer note, it finished flat to last year's strong first quarter. Although acuity and other elements of mix continue to shift as we go through the year, we now expect that our admissions for the year will be in the range of negative 0.5% to a positive 0.5%, increasing the range by 50 basis points, but still allowing for the vagaries of the economic environment. We also outperformed our bad-debt assumption, where the range for assumed bad debt ratio had been set at 7.6% to 8.2%. As you've seen, it came in at a significantly stronger 7.3%. Additionally, we expect continued growth in outpatient for the remainder of the year, as we complete additional acquisitions and execute on our physician strategies and also expect increasing benefit for the Medicare Performance Initiative. In provider fees, including the six-month extension of California, which is awaiting CMS approval, are expected to offset Medicaid pressures for the remainder of the year. The bottom line is that we believe our 2011 outlook for EBITDA and cash flow is on very firm footing. Looking at it from a quarterly perspective, we can't say for sure in which quarter we will record the additional California Provider Fee and additional HIT incentives, but it's reasonable that they could be recorded in the third quarter. As a result, our best guess is that Q3 '11 will be much stronger than Q2 '11 in sharp contrast to a more traditional seasonal earnings pattern. In summary, we remain confident that our initiatives drive revenue growth, reduce costs and drive increasingly positive cash flow will be successful. The ranges we have assumed in 2011 for pricing, revenues and adjusted EBITDA allow for residual uncertainty, largely related to the recession and other items outside our control. Our first quarter continued our upward progression and exhibited solid revenue growth, continued commercial pricing strength, inpatient and outpatient volume strength, good cost performance, net of allowances for implementing our growth strategies and an encouraging decline in bad debt expense. Subsequent quarters can be expected to display continuing enhancements to our earnings power as our key initiatives gain incremental visibility. Before we open the floor to questions, I'd like to remind you that we're here to talk about our first quarter earnings and we'd ask you to keep your questions focused on that. With that, I'll ask the operator to open the floor for questions. Operator?

[Operator Instructions] Our first question comes from the line of Doug Simpson, Morgan Stanley.

This is Aaron Gorin, on for Doug. I just wanted to get your thoughts on leverage for the business and what kind of opportunities that you might pursue that could entail additional leverage?

Well, let me just remind you that we've talked about acquisitions in sort of 3 segments of our business, outpatient. And I detailed in the comments that I made how we are on track with our acquisition program of outpatient centers, both imaging and surgery, and we're very pleased with the way that, that has been working so far. We had recently become more active in seeking very selected inpatient acquisitions and have competed in a process recently for a nonprofit that -- in which they selected a different buyer and a different structure than the one that we had proposed. And then we also expect to see acquisition opportunities, We're probably smaller and more limited in the services business. And those would have some bearing. All of those types of acquisitions have some bearing on leverage. With respect to leverage, generally, and the use of leverage to enhance returns, or just for the sake of it generating leverage to buy back stock, I'm not going to comment on that specifically. But I would note that we have reduced leverage substantially over the last few years. If you take into account, both the debt outstanding and the obligation that we once had to the Department of Justice, we've reduced outstanding leverage by about $1 billion since 2006.

We have a question from Adam Feinstein from Barclays Capital.

I just wanted to, I guess, go into a little bit more detail on the volume growth, just to get some additional thoughts there. I know you highlighted every region but the Central Region was up. But just the adjusted admission number was pretty robust. So just wanted to get some additional thoughts? And as you think about acuity also, we've seen a trend, where a lot of the companies talked about higher acuity in the quarter. So just curious in terms of just the mix of volumes and just any other additional points of view?

Sure, Adam. I'm going to ask Steve Newman to comment on volumes. Obviously, we are very pleased with both, as I mentioned, the trends, but also the fact that we actually got into positive territory for the quarter. So Steve, you want to comment a bit on the broad base of the volume trends and what is driving it?

Sure. Adam, we had a really strong quarter in volume. And as Trevor said, it really continues our trend that we've seen back since Q4. It did impact pretty much every region of the company. Every region was positive from the admissions perspective, except for the Central Region and all regions were positive for outpatient, including our Philadelphia market, which was strong in the quarter. I would say this, we're beginning to see early indications of return of elective surgical procedures. To be more specific, in the quarter, we actually had positive orthopedic surgery and positive general surgery in comparison to Q1 of 2010. And that was for all payers as well as commercial payers. This is really the first time we've seen this in a couple of years and gives us confidence that consumers are beginning to do discretionary surgery. All our volume was in the context of, still, a decrease obstetrical delivery rate. However, that delivery rate was a little better than it had been in Q4. It was only down 2.2% compared to Q1 of 2010. So I would say, that as you look across the company, as you look across our services, as you look across the new channels we've used to grow volume, it was a very strong quarter and gives us confidence moving forward.

Okay. And I just, with the a -- the follow-up question here is so you guys talked about your paying Admins being up. Originally, in the guidance, you had an adverse payer mix shift of $25 million. So is that still incorporated in the updated guidance?

Yes, we still think there's an adverse payer mix shift this year. We haven't updated a specific number relative to the $25 million, but still on that territory.

Okay. Great.

Your next question comes from the line of Sheryl Skolnick from CRT Capital.

Thank you very much for the slide on the EBITDA. It was extremely helpful. The first question is, can you give us more color on the malpractice expense increases and give us a sense of what happened there and whether or not there were other cases that we should be prepared to increase our expenses for? And then I have a follow-up.

Sure. Biggs, you want to take that?

Sure. We consider that malpractice adjustment in the quarter as a set of adjustments to be unusual. There are always adjustments, there's pluses and minuses every month, every quarter, as we evaluate our liabilities under the program. But as I can recall, over the last 5 years I've been here, this is the first quarter, where we coincidentally had several on which there were large adjustments that were negative. So we consider this to be an unusual event and do not expect it to be recurring. As I said, there's always going to be adjustments. But it's an unusual period to be several that are negative and of this magnitude. So that's the reason we called that out. Other than that, our trends are, in fact, still positive across the broader universe of cases, evidencing all of our work on clinical quality and reducing malpractice liability over the last several years. So once again, consider this to be an unusual circumstance this quarter.

Okay. I'm sorry, this is not my follow-up question, but I do have to push back on this a little bit, Biggs. So are these old cases before the quality improvements? Are they, I mean -- can you characterize them in a little bit more detail as to -- I am having trouble reconciling what I see in the numbers and the quality improvement and the kind of investments that you've made. And I think, it's very clear that the hospitals score very highly versus a $17 million negative surprise in the quarter associated with the number of these cases. So are they older cases? Was there a change that would make it less likely that you're going to see these big awards? Or were they just sort of accidents happened?

Some of them are older cases, some are not. I think that when we look at broad quality measures, of course, they're indicating our performance across every instance of clinical care across the company. And all it takes is for one escape, if you will, of all of our control procedures to create an instance of malpractice liability. So that's why you still have these things occur, even though you may have very sound clinical quality systems in place of standards and education that goes along with that. So once again, it's probably non-routine escapes, particularly when you look at the magnitude of them and the fact that it just happens to be that in 1 quarter, we're making a series of negative adjustments on 7 cases. I say, normally there's some going up, some going down. It's a portfolio of risk that we manage and typically don't have this kind of coincidence of having a number of them going negative in 1 quarter.

Okay. And then the follow-up is only somewhat related, I'm going to ask it anyway. The comments that Dr. Steve made about the orthopedic caseload and the acuity -- excuse me, and the elective or discretionary surgeries that you're not the first one to note that this quarter. And it's not the first time, you've noted an uptick in some of these surgery types. I think you had a slide on, it's either last quarter or the quarter before, where you're beginning to see some of this. So maybe we've got the 3 data points indicating a trend line here. But I'm curious about whether or not you're seeing that continue into the second quarter, whether or not you can give us any color on what kind of volume trends or acuity trends you may be seeing in the second quarter. And then I'll speak in there the question of, I noticed that you are giving admissions from the ER, whether or not you're seeing any of this coming in through the ER, or whether you're actually seeing it through more of the outpatient surgical than you would -- that would indicate that is more discretionary as opposed to later and sicker?

Steve, you want to comment on that?

Sure.

Just generally, acuity trends as we've seen it, because a little bit usual the way the year started and finished a bit stronger in the quarter than what we're seeing in the ERs, as well.

I think that's right. Certainly, when you look at the ER, for example, our ER volume was up 6.1% compared to the same quarter prior year. That was about 21,000 visits. About 3,000 of those visits were from influenza. But it's interesting -- at 3,000 more than prior year. But it's interesting that fewer of those cases were actually admitted. So the influenza was greater in frequency but less than severity in the first quarter. We've now seen the virtual elimination of influenza-wide symptoms in our ED and our physicians' offices. With respect to the acuity, as Trevor mentioned, and Biggs mentioned also, acuity started out soft in January and it strengthened through January -- I mean, through February, March and now April. So I think we've had a more consistent Case Mix Index, mix of surgical patients compared to medical patients. And pretty flat in terms of the total percentage of admissions that are elective versus ED admissions.

Your next question comes from the line of John Rex. [JPMorgan] John Rex - JP Morgan Chase & Co: I just want to circle back a little bit to kind of acuity and payer mix and putting it all together. So when I adjust for the provider payments and the high tech and even -- and cost reports, it looks like kind of the revenue yield is about flat when you do that. Just maybe negative 0.1%. So can you talk about the elements there that would be impacting that revenue? We're just seeing a little better yield from some of the reports, and I'd like to understand what's going on in the quarter.

Well, I think that the broad base of the consolidated or aggregate case mix was relatively flat year-over-year. But aggregate pricing on a per-inpatient basis was positive, even after adjusting for the provider fees and HIT incentives. So I'm not sure I'd get back to the same negative point that you're trying to lead us to. John Rex - JP Morgan Chase & Co: Sorry, I'm talking about revenue -- adjusted revenue -- sorry on the adjusted admits rather than all in admits of -- perhaps that has something to do with kind of the, some of the...

John, adjusted in -- yes, as I mentioned in my comments, on outpatient, our average pricing is down. But that's because of the mix to imaging, which is still, high margin, but it's lower-priced, lower cost and lower-priced. So as we've acquired the imaging centers and seen the dramatic growth in imaging volumes just through the math, it reduces pricing on a per-visit basis. But it's not a function of lower pricing. It's a function of mix. And it's not a bad result. It's growth in our revenues from these acquisitions and it's highly profitable growth, but it just affects the average pricing metric.

And acquired at a low multiple, I might add. John Rex - JP Morgan Chase & Co: Right. Okay. And then on payer mix, when I just look at kind of admits percentage of total, it looks like the category that moved up as a percent of total, were kind of the other category. So which is kind of indemnity self-pay and other and the others -- the other categories were all fairly, a little more stable, I guess, Medicare edging down. Can you just talk a little bit about what's going on in that, and then just trying to understand which categories are growing within the payer mix?

What we're seeing -- we still saw some declines in commercial volumes, but the rate of decline has mitigated substantially. And as we watched the insurance companies report their first quarter, we're encouraged by the enrollment trends that we're seeing there. We also continue to have growth in some of the payer categories we've had before. I'm not sure about the other typically as a mix of all sorts of things, including TRICARE and the very limited indemnity. And to be honest, I don't have at the top of my head, what's going on within other.

Yes, uninsured is down on inpatient. Charity is up on inpatient. Aggregate uninsured in charity is an increase of 3.5%, but once again, it's driven by charity, because uninsured is down. But as I say that, I think it's important to note that we also disclosed our total cost of care on uninsured and charity, and it remained stable or it's a flat over sequential quarters, potentially, year-over-year.

You have a question from the line of Tom Gallucci, Lazard Capital.

Just following up on the regions. What can you describe about the Central region that may be different than the others? Is there any -- I don't know, difference in unemployment or anything else in those markets that you can call out to maybe help us understand the positive and the negative trends that are out there and sort of see the inflection points?

Sure. Steve?

Tom, with respect to the Central Region, our weakness was primarily in St. Louis and Memphis. And we've seen those markets hit significantly from an unemployment perspective, and we had some issues with turnover in some of our medical staff there. So I think that was largely driven by those 2 markets. Throughout Texas, pretty stable volumes, a little weakness in part of Houston. But otherwise, I think, the Central Region loss would be focused in Memphis and St. Louis.

Okay. And then Biggs, just wondering, I think, you had noted that some of the income items, some of the provider taxes and IT, Medicaid IT money, you had the income in the quarter, but you get the cash later. Can you just remind us sort of the recognition policy there, just to make sure we understand the timing?

Sure. On provider fees, it's tied to when CMS approves the program. The state has to approve the program, it has to be enacted, it has to be modeled, all of that has to be approved then by CMS. And so provider fees are recognized once CMS approves the program, but they're recognized only through that date through the quarter end. So by example, in Pennsylvania, the period goes from July 1 of last year to June 30 of this year. So there's still $7 million of Pennsylvania Provider Fee just from the current year's or current instance program to be recognized in the second quarter. But the cash has not -- it was -- CMS gave their approval in the first quarter, but the cash did not flow in the first quarter. It'll flow, we believe, in the second. On HIT, a little bit different, but also some similarities, each state was allowed to offer incentives, effective January 1 for the Medicaid HIT incentives. But once again, CMS has to approve each state's plan. Also, the rules here, we weren't totally certain how they were going to evolve, but -- and we thought there might be some incremental requirements. But what drives the recognition or the entitlement in each state, once their plan is approved is whether or not you have a plan of adoption for a certified HIT system. Included in that is you have to own all the elements of the system to be installed and they have to all be certified. So you have to own and you have to all these certified. So we have 5 states which CMS approved in the first quarter, and we do have ownership and the plan to install all the products necessary. So we were entitled in those 5 states. The other states that we operate in don't yet have approved plans, so we can't recognize those yet. But we'll do so, once those plans are approved and we're satisfied that we have met the requirements.

You have a question from the line of Art Henderson of Jefferies Company (sic) [Jefferies & Company]. Arthur Henderson - Jefferies & Company, Inc.: Just a couple here. You noted in your, I guess, on Page 6, about the commercial pricing for 2013. I guess, you gotten 20% of your contracts signed there. Could you talk about the commercial contracting environment and kind of how that's shaping up for the outward years?

Sure. I'm going to ask Clint Hailey, who heads our Managed Care contracting effort to discuss that. Clint?

Yes, Trevor. As we talked about what percentage of the contracts we've got done, we've gotten most of calendar year 2011 done. We very purposefully haven't done a lot of the out-year contracting as we see how the system reacts to healthcare reform and things like that. So we're really on track with regard to what we're -- what we've sought to accomplish, and we continue to make progress every quarter, and we expect that to continue over the course of the year.

I was just going to reinforce that what hasn't changed, in fact, what's improved in our dialogue with Managed Care is that we have a very compelling value proposition. I talk about it all the time, but we are not positioned as the high-priced provider in virtually all of our markets. We're either in the middle of the pack or in some markets, we still remain a little bit below. We offer demonstrably high quality. We have exceedingly low rates of denials or other adjudication problems. We have a highly automated back office. And so when you're running a Managed Care plan and you look at doing business with us, it's a fairly frictionless environment in which to do business. And we think that that's important now that the customers of the Managed Care plan are starting to exert more pressure on them about cost.

Just from a pricing standpoint, as we said previously, we think that the contract rates that we're negotiating for this year are in line with what our actual experience was from contractual rate increase standpoint last year. When we gave the January 11 presentation, we said that once we get into the out years, we haven't given specific guide for 2012. Once you go well beyond that, by the time you get to 2015, we thought they'd moderate down to mid-single digits, around 5%. Arthur Henderson - Jefferies & Company, Inc.: Okay, that's very helpful. Okay. And then the follow-up question, the Conifer asset has got a lot of value to it, Trevor. And I know that it's continuing to kind of grow. Could you kind of talk about what your longer-term expectations are for that asset? Is that something that you keep underneath the umbrella for a while, and then you look to spend it out and kind of the growth trajectory going forward there, and how you plan to kind of maximize the return on that?

I don't want to speculate about our future plans with Conifer. But let me just make 2 points before you get too carried away. One of them is that I did make a point about revenue concentration. So although, we are growing the outside business and that momentum is increasing, really, before you could have a viable standalone business, you'd have to have a much more diversified customer base and source of revenue. That's point number one. Point number two, is you noticed the excellent performance we have on bad debt expense in a pretty tough environment. I think we're going a bit against the current of the industry on that right now. That is due in large part to the excellent performance by our thousands of associates at Conifer, and it's very important to our bottom line to continue to have a high degree of management integration and systems integration with Conifer. So it is an integral part of Tenet. I just keep pointing out the comparisons, so that you don't forget, there is something here that it is a fast-growing, high-margin business that does have this comparable business out there that has quite an extraordinary valuation.

You have a question from Kevin Fischbeck, Bank of America Merrill Lynch.

This is actually Josh Marans in for Kevin. Could you please provide an update on your Medicaid outlook relative to your initial guidance for $30 million or $60 million of cuts?

Sure. Biggs, you want to do that?

Sure. Happy to take the question. We still see it in the $30 million to $60 million range. We obviously, continue to watch all of the states but haven't seen a change in the overall risk. Certainly, there's several states or a few states that we watch such as Florida and Texas to see how it evolves, but we do see the risk in that $30 million to $60 million level for this year. And we also watch -- I should just point out, we're also watching, of course, whether there will be a second California Provider Fee follow-on or whether Pennsylvania will have a follow-on or not and whether there's other states which enact similar programs. So we're also watching for the upsides.

Okay. And then just a follow-up on your revenue guidance. What are you assuming for the fourth quarter revenue, specifically related to hospital inpatient rates, on the Medicare side, following the proposed rule?

Well, I think that we've assumed what -- I shouldn't say, I think. We have assumed what CMS has put forward as their proposal of the 0.4% negative for urban hospitals. And as disclosed in the 10-Q, I think that's worth about $5 million of negative effect. So basically flat if you get right down to it.

Your next question comes from Kemp Dolliver from Avondale Partners.

Question on the Q3 EBITDA commentary in that is the predominant driver of that comment going to be the provider fee? Or are there other factors, as say, they relate to last year or Q2 that we need to take in consideration in modeling that sequential uptick?

Well, I think that the big drivers, as we look at it, was the California Provider Fee, which is if you modeled it today as structured, it will be worth $26 million. So that if it's recorded on a third quarter, reflects a sizable blip, which would create a different pattern. The other thing is the HIT, which -- what we have left in our outlook for HIT is $15 million, only $5 million of which is tied to state incentives and $10 million is tied to Medicare incentives. But if we do have other states, which get their programs approved, just may very well be in the third quarter. It's tough to call. In which case, there could be an additional acceleration of other income into the third quarter. But it's just too early to call.

That's fine. Second question relates to the line item in revenue that is other, which looks like that was about $120 million versus $90 million last year, and up about 35%, what is in there that would drive an increase of that size?

The state HIT is the largest component of that. I'm not sure what else is in other that would be the -- other than Conifer. In fact, Conifer's revenue is also going up. Not sure what else is in there. We'll look at it. If we get another answer, we'll give you that in the course of the call.

Your next question comes from the line of Gary Taylor, Citigroup.

First, I rarely do this, but I did want to congratulate you on the positive patient volume year-over-year. I know you guys have been working very hard to achieve that.

Well, I'm glad the call is being recorded.

But certainly credit where credit's due. And I'm sure you're very pleased by that. Just a couple of questions. I think I can do this and I think I'm close, but if you guys have a better view, I'd be willing to drive down your numbers, but what is your view -- what would you call same-store net revenue growth, excluding all the provider taxes and IT and so forth? That's kind of a 3.4% number?

I think we gave it on a slide. I'm not sure if we get the right reference number.

Yes, I saw the 3.4%, so I assume that should be the right -- I saw that earlier -- that should be the right view of kind of a same-store revenue number?

Yes.

And so adjusted admissions 2.3%, so kind of a correct kind of net revenue per adjusted admission number should be 1.1%, basically?

In that territory anyway, yes.

Yes, but keep in mind, the things they said earlier about that mix of more imaging coming into the outpatient side.

Right. So I was going to follow up and just hope, could you estimate what that is? You think that's 50 bps? You think it's 100 basis points? is there a ballpark of impact you might believe that, that outpatient mix is having there?

We haven't done that. I think that because there's been 2 questions on it, we're happy to do it and we'll get back to you with it.

Okay. My other question just on the controllable operating expense growth per patient day. I mean, that kind of reached its nadir in 2009 when you drove 35% EBITDA growth. It now looks up in the 4s. It actually looks probably higher than average despite pretty strong adjusted admissions growth this quarter. And you had a stretch there, where you had some just absolutely fantastic results there for a while. It was actually down year-over-year. Can you kind of help us think about how that number develops over the next 3 quarters?

You're looking for how the adjusted admitted number develops?

No, the controllable operating expense for just admission that was up north of four, is that pretty stable in your expectations through the year behind your guidance. It just strikes me that, that number's a little elevated versus what we're seeing in some of the other hospital companies?

Well, I think that from the standpoint of you kind of pick it apart, the pieces, salaries, wages and benefits, the merit increase was the biggest part of the increase. But then you have to consider that we had increased costs associated with physician employment and increased HIT implementation and expense year-over-year. There was a more substantial increase in the first quarter over prior year's first quarter, by example, on the HIT, that we would expect for the full year because program ramped up over the course of last year. So that rate of increase, although, will not repeat itself at that level, although, there will be increasing expense in the remaining quarters of this year over last year. The supplies expense was very favorable under 1% increase year-over-year on adjusted admission basis. So it will vary with mix but we certainly like that trend and if you look at our MPI initiative, which we expect to produce $50 million of savings in the course of over a year, a lot of that will show up in supplies and will show up to a lesser degree, in labor when you also think that the length of stay initiatives that we have as part of that. So I think that will -- we should trend favorably over the course of the year relative to what we were in the first quarter. But a lot will always depend upon the mix of patients, what happens with acuity and timing and otherwise.

Your next question comes from the line of Gary Lieberman of Wells Fargo Securities.

This is Ryan Halsted on for Gary. I apologize if I missed it, but did you talk about the decline in the CMI? I think, among those slides, you pointed out that you saw a decline in your revenue per admission due to the decline in CMI. And I'm just wondering if some of your competitors have talked about maybe higher acuity with some elective procedures being done this quarter with sicker patients?

Yes, decline in case mix that we disclosed was just associated with Medicare inpatient, which helped to explain the overall decline in Medicare inpatient pricing, which was slightly greater than what the statutory rate increase was -- our decrease was year-over-year. So that's recently disclosed. Otherwise, case mix broadly across the company was flat, which means that other payers had higher case mix in the aggregate.

Okay. And then on interest expense, it looks like you are lowering your guidance there. Just wondering if you could comment on what the assumptions on that is?

Sure. We entered into a fixed to floating swap for $600 million of principal. So that will give us some interest savings this year. We did this in 2009 and generated savings. We took it off in 2010 based upon our view of the forward curve at that point in time. Based upon where we are now, we thought it was appropriate to put it back up and capture the interest savings. That still gives us predominantly fixed-rate interest rate structure, absent that $600 million fixed to floating swap.

Your next question comes from the line of A.J. Rice of Susquehanna.

I guess, really, just a couple of points of clarification around the guidance. The $1.175 billion to $1.275 billion new updated guidance, that $25 million increase, should we think about that as being basically the Medicaid HIT payment? It sounds like that -- that you've gotten in the first quarter. And then I guess, it begs the question about the $26 million California payment and additional HIT. Are they not in the updated guidance at this point?

Yes, you should view the $25 million increase of the guidance for the year as being driven by the $25 million HIT incentive we accelerated into this year and recognized in the first quarter. The follow-on California, the first 6 months January 1 to June 30 California Provider Fee was always in our outlook for this year, albeit it was initially in it, more like $15 million as opposed to what I said looks like now to be $26 million. So we didn't tweak for that. It's an $11 million difference but it's always been in the outlook.

Okay. And how about the IT stuff? Is there anything in there for that now at this point or not really?

There's $40 million becoming HIT incentive. There's $40 million total incentives included in our 2011 outlook. $15 million of which was always in there and then the $25 million that we received or that we recorded in the first quarter and we'll turn to cash here likely in the second or third is in the outlook. So that's what makes up the $40 million, the $15 million original plus the $25 million additional that we recognized the first quarter. Above and beyond that, there's maybe up to $25 million we do not have on our outlook, because we won't put it in until the plans for the states are approved by CMS and we're satisfied if we qualify. But that's, if you will, the range of the additional opportunity that we think maybe out there for additional HIT Medicaid incentives to be accelerated into this year.

Okay. If I could just quickly slip in a follow-up, but back in February when you gave your detailed guidance, you sort of laid out your thoughts about the quarters, 28% might come in the first quarter, 19% to 25% in Q3, Q2 into Q4 evenly split at sort of 24% to 26%. It looks like, if I used 379, your 30% to 32% in the first quarter of your new guidance range and you're making these comments around second and third quarter, I guess, do you have either updated percentages? Or is the effective commentary you're lowering a little bit, second quarter but raising third quarter. Is that the way to think about what you're saying?

So I put it more in terms of raising third. The second quarter may not look seasonally out of whack, except that there's lumpy items that may show up. Our total EBITDA for the year, an element like the California Provider Fee, which creates some lumpiness, is going to show up on the third. At least that's what we predict at this particular point in time.

And your last question comes from the line of Justin Lake of UBS.

This is Andy Valen in for Justin. Most of the questions have been answered, but I have 2 quick follow-ups. One on the payer mix. You noted that the adverse payer mix shift guidance was unchanged, but then that the rate of the Managed Care decline has slowed. Can you give us a little insight into the magnitude of the slowing and then how this -- maybe some color around how this looks inpatient versus outpatient?

Well, we're no longer going to give commercial managed care volume statistics, because they've been misunderstood and there's no comparable out there. So we're going to stay on that path and not give exact statistics. But we did give statistics, all through the last year and the fourth quarter improved over the third and the first quarter this year improved over the fourth quarter of last year. What we had assumed last time we gave specific guidance back in January, we said there's a $25 million effect and sort of on a last-time basis, we said that represented about a 3% decline in commercial managed care for the year. And we're not going to update or get precise, but from a dollar standpoint, that's still a reasonable territory.

Okay. And the second quick follow-up was, Trevor, I think you had mentioned there was an M&A question, that you are looking at inpatient, outpatient and then service acquisitions as well. Can you give us a little more color on what types of businesses are you looking for in the service area and then how this fits with what you have now, and then your long-term goals?

Well, really, just -- this is unchanged from anything we've said about it before. But we have made a very small acquisition and are looking at other small ones to augment our revenue cycle services business. We have a very robust set of suite and services that we offer to hospitals, where they can outsource the entire revenue cycle operation to us or just portions of it. And as we have grown that business, there had been pieces where we would -- where we saw an opportunity to either fill in the services or there may be opportunities in the future to actually acquire other businesses that give us more aggregate business, where you can imagine the synergies it's holding in a business like that into our existing operation, could be very compelling.

At this time, I would like to hand the call to Trevor Fetter for closing remarks.

All right. Well, thanks, everybody. We'd hope to cut this off a 10:00. Sorry, we're running a little bit late. I would note that our operator actually did what the instructions always say and cut people off pretty quickly after one follow-up question. So if you have other questions that you would like to ask, we are here in the office. You can give us a call and we'll attempt to answer your follow-up questions. But thanks for dialing in today.

Thank you for your participation in today's conference. This concludes the presentation, and you may now disconnect. Have a wonderful day.