Tenet Healthcare Corporation (THC) Q3 2012 Earnings Report, Transcript and Summary

Thomas R. Rice - Senior Vice President of Investor Relations Trevor Fetter - Chief Executive Officer, President, Director and Member of Executive Committee Daniel J. Cancelmi - Chief Financial Officer, Principal Accounting Officer, Senior Vice President and Controller Clint Hailey - Chief Managed Care Officer and Senior Vice President Daniel R. Waldmann - Senior Vice President of Public Affairs Britt T. Reynolds - President of Hospital Operations Stephen M. Mooney - President of Revenue Cycle Solutions Audrey T. Andrews - Chief Compliance Officer and Senior Vice President Paul Browne - Chief Information Officer and Senior Vice President

Joshua R. Raskin - Barclays Capital, Research Division Thomas Gallucci - Lazard Capital Markets LLC, Research Division Albert J. Rice - UBS Investment Bank, Research Division Sheryl R. Skolnick - CRT Capital Group LLC, Research Division Joanna Gajuk - BofA Merrill Lynch, Research Division Darren Lehrich - Deutsche Bank AG, Research Division Erin Blum - Goldman Sachs Group Inc., Research Division Ralph Giacobbe - Crédit Suisse AG, Research Division Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division

Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Tenet Healthcare Earnings Conference Call. My name is Jeff, and I'll 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 conference over to your host for today, Mr. Tom Rice, Senior Vice President, Head of Investor Relations. And you have the floor, sir.

Thank you, Jeff, and good morning, everyone. Tenet's management will be making forward-looking statements on this call. These statements are qualified by the cautionary note on forward-looking statements contained in our annual report on Form 10-K. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time, I will turn the call over to Trevor Fetter, Tenet's President and Chief Executive Officer.

Thank you, Tom, and good morning, everyone. Last night's election results are encouraging for the full implementation of the Affordable Care Act. Based on our model of expanded coverage under the act, all of our hospitals are in markets that will see an increase in covered lives, and in virtually all of our markets, that growth exceeds the rate for the country as a whole. As you know, the act should be a material positive driver to our earnings over the next few years. In any event, it's nice to have the uncertainty of the election behind us, and I'd like now to turn to our third quarter results. I'd like to summarize our discussion of the third quarter by saying I'm very pleased with our performance. We reported $269 million in adjusted EBITDA. This represents growth of more than 40% compared to last year's third quarter. This performance was consistent with our expectations and slightly above The Street's consensus estimate. Our solid performance was led by strong top line growth that was driven by increases in pricing and outpatient and surgical volumes. Looking across the investor-owned provider sector, Tenet reported among the strongest set of volume metrics in the third quarter. This volume growth is clear and gratifying evidence that our initiatives around physician alignment and our outpatient strategies are working. Once again, we were very strong on cost control. Our Medicare Performance Initiative is continuing to deliver great results in controlling costs. In the third quarter, supplies costs per adjusted admission declined by 2.2%. The high-level takeaway is that our fundamental business trends in terms of volume growth, pricing and cost control remain solid. We experienced a small seasonal increase in bad debt expense. This is largely the result of the increase in uninsured volumes and was partially offset by improving self-pay collection rates. Against that backdrop, let me quickly list some of the same-hospital highlights for Q3. Volume growth in all categories compared very favorably with what our peers reported across the sector. Adjusted admissions increased by 1.4%. This marks the eighth consecutive quarter that we've grown adjusted admissions and the 18th out of the last 21 quarters. Surgeries grew by 1.8%. Total ER visits grew by 4.9%. Total outpatient visits also grew by 4.9% and roughly 80% of that growth was organic. We're actively acquiring centers, about 15 in total this year. We'll also open 14 new outpatient centers this year that we built from the ground up. That's more than one newly built center opening each month. To give you a sense of how fast we're growing our outpatient portfolio, at year end 2012, we expect to operate 124 freestanding outpatient centers, which is double the number of centers we had 4 years ago. Diving a little deeper, our case mix index in the third quarter declined by 40 basis points year-over-year, but we saw a significant strength in targeted service lines like cardiovascular medicine, nephrology, Cath/EP and neurological medicine. Net inpatient revenue per admission increased by 4.4%, and net revenue per outpatient visit increased by 2.6%. We continue to have excellent visibility into our future commercial pricing. We've completed contract negotiations for approximately 60% of 2013 and 40% of 2014 expected commercial revenues. We continue to be able to negotiate new contracts with average increases within our targeted range of 5% to 7%. While some are higher and some are lower depending on where each health plans pricing level start, the average increase remains consistent with our expectations. Selected operating expense was well controlled, increasing by only 1.5% per adjusted admission. This was a very solid achievement and better than our expectation. Health IT expenses continue to be a headwind in the quarter. We expect 2012 as the peak year for HIT implementation costs, and we expect a favorable swing of $45 million in EBITDA between 2012 and 2013 as a result of both lower implementation costs and greater recognition of incentive payments. Our HIT initiative is on schedule and on budget, with 19 hospitals achieving meaningful use in the third quarter. We have a great team managing this program. Our head of clinical IT, Liz Johnson, was just recognized for the third year in a row on Modern Healthcare's list of top clinical informaticists. I'd also like to recognize our long-time Chief Information Officer, Steve Brown, who recently retired after 36 years with the company. Steve's an operator CIO. He understands hospital operations from the ground up, and over his career, put great systems in place that we use to drive innovative strategies like Conifer and MPI. His successor, Paul Brown, has extensive experience in advanced clinical systems and is off to a very strong start with Tenet. Paul led our recent Health IT webinar, which I hope you thought was valuable. We continue to be very pleased by the progress at Conifer Health Solutions, our services business. Conifer is solidifying its position as the leader in hospital revenue cycle services and is growing and adding some very important capabilities through acquisitions. The first of these Conifer acquisitions is InforMed, which will be integrated with Conifer's capitation management business. InforMed utilizes extensive health care data and proprietary technology to assist more than 200 clients, including health care providers, employers and payers, to improve patient care and identify cost efficiencies. As providers move increasingly into risk-based contracts and employers become more interested in population management, they need the capabilities we provide through Conifer. Combining InforMed and Conifer means that we will now support care management for 3 million lives. The business of Conifer cap management systems and InforMed fit very well together. Where Conifer's customer base is mostly physicians and hospitals, InforMed has built a great business serving employers and payers. Together, this is a very powerful service offering. We announced the InforMed acquisition last month and it closed last week. Earlier this week, Conifer announced the completed acquisition of Dell's Hospital and Health Care Solutions Revenue Cycle Management business. This acquisition will expand Conifer's scale and scope, bringing additional best practices, creating new cost efficiencies, injecting valuable intellectual capital and driving improved financial performance for both Conifer and its clients. With the Catholic Health Initiatives' partnership, InforMed and Dell Revenue Cycle Solutions, Conifer is solidifying its leadership position in a rapidly growing, high-margin capital-light health care business. Just to give you a few facts, Conifer, upon the integration of these acquisitions and the CHI partnership, will manage $21 billion and 10 million patient accounts in the revenue cycle, 3 million lives in care management, will have 9,000 employees and 500 health care entities as customers. I'm very excited about Conifer's prospects. It's equally important to understand that the other segments of our business have some exciting and innovative developments. In the acute care business, we've previously announced that we are engaged in exclusive acquisition conversations with Emanuel Medical Center in Turlock, California. This is moving forward quickly, and we hope to have a definitive transaction to announce in the near future. Transactions of this type will accelerate our growth in existing markets and are incremental to our proven organic growth strategy. I'm pleased with the quality of hospitals that now seem to be exploring the idea of a sale or a joint venture. Our outpatient group also remains very active. We continue to identify, negotiate and close a steady stream of outpatient acquisitions, consistent with the strategy we've outlined on past calls and in our recent webinar. We're steadily increasing the portion of our business that we generate in outpatient settings, and as you know, that increases our margins and returns on capital. Before I leave acquisitions and the topic of capital deployment, I'd like to reiterate our belief that Tenet's stock represent an excellent, excellent value and remind you of our $500 million stock repurchase authorization that commenced in the fourth quarter. Let me now turn the floor over to our Chief Financial Officer, Dan Cancelmi, to provide some further insight on how this growth strategy is expected to contribute to our financial outlook. Yes, Dan, you're on mute.

Overall, we were pleased with our performance in the third quarter. Despite inpatient volume headwinds, we were able to achieve adjusted EBITDA growth of 40%, primarily due to solid outpatient volume trends, favorable commercial managed care pricing and excellent cost control. These positive trends led to our strongest third quarter in the last 10 years. This performance provides a solid foundation for future growth, and we remain very optimistic about our ability to build on this and create significant growth and shareholder value. For Q3, we previously provided guidance that our outlook for adjusted EBITDA would be in the range of $250 million to $290 million. We were pleased that our growth initiatives continue to take hold as we were able to generate $269 million of adjusted EBITDA in Q3. Due primarily to the delay in the approval of the managed care portion of the California Provider Fee program, this morning's earnings release provided a revised estimate for 2012 adjusted EBITDA of $1,200,000,000. Let me explain this revision. Our previous full year guidance of at least $1,250,000,000 of adjusted EBITDA assumed that the managed care portion of the California Provider Fee program would be approved in the second half of 2012. However, state officials in California recently informed the hospital industry that they do not expect approval of the managed care portion of the program until 2013. As a result, over $40 million of revenues that we expected to be able to recognize in 2012 will be delayed and recorded in 2013. Primarily as a result of this temporary delay, we revised our outlook. In addition to the temporary delay in recognition of the California Provider Fee revenue of over $40 million, based on recent trends, we are moderating our volume and payer mix assumptions. Our recent volume impairments trends are softer. Although our recent payer mix trends are softer, our adjusted admission growth was again among the highest in the investor and sector. Other more granular assumptions we shared with you on second half performance are coming in as expected. These metrics include managed care pricing and AR management improvements, cost efficiencies from our Medicare Performance Initiative, Health Information Technology incentives and Medicare inpatient rate increases. Specific examples validating these assumptions include the fact that our commercial managed care revenue per admission increased 6.6% compared to Q3 2011. Our supplies expense for adjusted admission decreased 2.2% compared to last year's third quarter. Our hospitals are achieving Health Information Technology meaningful use criteria, which is enabling us to recognize HIT incentives that will approximate $35 million in the second half of 2012. And beginning in October, we received the largest Medicare inpatient rate increase in 4 years. This is an approximate 3% increase for us, which is about $12 million of additional revenues we will recognize in Q4 or about $48 million on an annual basis. Also, CMS notified hospitals last week of the increase in outpatient rates Medicare will pay hospitals starting in January 2013. We estimate our outpatient rates will increase 2.5%, which is about $11 million of incremental revenues on an annual basis. We are pleased that the actions we are pursuing to grow our business, especially those most directly under our control, continue to take hold, which contributed to our 40% earnings growth this quarter. We also included an estimate of our 2013 expectations in this morning's press release, citing a range of $1,325,000,000 to $1,425,000,000 for 2013 adjusted EBITDA. We are providing this 2013 outlook earlier than in the past as we believe it's important to share with investors the likely implications of current business trends on next year's anticipated performance. Our 2013 outlook represents meaningful earnings growth and is expected to result in adjusted EBITDA midpoint of $1,375,000,000, which is above The Street's current consensus estimate for 2013. The following key assumptions were used to develop our 2013 outlook: growth in same-hospital inpatient admissions of flat to up 0.5%; growth in same-hospital adjusted admissions of flat to up 2%; same-hospital net revenue growth for adjusted admission of 1.5% to 2.5%; same-hospital controllable cost for adjusted admission growth of about 1% to 2%; and a same-hospital bad debt ratio in the range of 7.5% to 8%. This should result in total revenue growth of 10% to 12% and an EBITDA margin of 13% to 14%. I also want to point out that our preliminary outlook for 2013 includes the accretive impact from recently closed acquisitions, as well as those we expect to negotiate and close in 2013. Looking beyond 2013 is more difficult. Our outlook for 2013 performance is very close to what we estimated 2 years ago, largely as a result of better-than-expected performance from MPI, even brighter prospects for Conifer and the attractive prospects for value-creating acquisitions. However, as a result of the soft economic recovery, the industry has been encountering volume and payer mix headwinds. Also, there are open questions related to health care reform, including the structure and pricing within the exchanges, and whether state Medicaid programs will be expanded in some of our more important states. As a result, until there's more clarity on these issues, we're not going to comment further beyond our outlook for 2013 financial performance except to say that we continue to believe that implementation of the Affordable Care Act ultimately will be a material positive source of earnings growth. I'll now address our recent M&A activity. In early October, we issued $800 million of new notes at historically low interest rates. The proceeds from these notes will be used to pay down approximately $400 million of borrowings under our line of credit and debt scheduled to mature in February 2013, as well as funding $400 million of anticipated M&A activity. In October, we announced that we are in exclusive negotiations to acquire Emanuel Medical Center in Turlock, California. Although we are not yet in a position to announce a transaction, discussions and due diligence are continuing in a productive manner. Emanuel's estimated annual revenues are anticipated to be in the range of approximately $150 million to $175 million after the initial integration of this facility into our organization. Emanuel will enable us to strengthen and expand our regional network in the Central Valley, including our 2 existing facilities in this area of California: Doctors Medical Center in Modesto and Doctors Hospital of Manteca. As Trevor mentioned, we recently announced 2 exciting and important acquisitions by our Conifer Health Solutions business that will enhance its service offerings. These acquisitions, coupled with Conifer's groundbreaking partnership with Catholic Health Initiatives which began in the third quarter, further solidify Conifer's position as a leader in business process management solutions for health care providers. The estimated annual revenues of the Dell Revenue Cycle Management and InforMed businesses are anticipated to be in the range of approximately $125 million to $150 million in aggregate after their initial integration into the Conifer organization. These transactions are in addition to our ongoing outpatient acquisition activity. We are pleased with the acquisition opportunities that can strengthen and grow our 3 major business lines. Given the attractive options in these pipelines, we are vigorously pursuing them. It is important to note that we expect meaningful EBITDA creation from purely organic sources in 2013, which we have consistently delivered since 2004, as well as incremental earnings from this acquisition. To summarize the quarter, we are able to grow our adjusted EBITDA by 40%, which was attributable to strong top line revenue growth of 5.8%, which was primarily due to favorable commercial pricing trends and adjusted admissions growth that was the second strongest in the sector, diligent cost control, the continued successful rollout of our clinical systems implementation initiative resulting in the realization of HIT incentives and the development and execution of numerous performance improvement initiatives that we're aggressively monitoring and holding management personnel accountable for achieving the expected performance. Also in recent weeks, we've successfully completed several important acquisitions that will grow our business, and we were able to access the credit markets at the appropriate time to obtain financing at historically low interest rates that we expect will create shareholder value. As we turn to Q&A, we are joined this morning by Britt Reynolds, our President of Hospital Operations; Steve Mooney, the CEO of Conifer; and other colleagues who are ready to answer your questions. Operator, please assemble the queue for questions.

[Operator Instructions] Our first question comes from the line of Josh Raskin with Barclays.

The first one, just I think you said 40% of your commercial revenues were contracted for '14. Do you think of that as exclusive of exchanges? Or are you in the mindset that commercial is commercial is commercial, and so exchanges would be part of that?

Let me turn that to Clint Hailey, our Head of Managed Care, in a second, and let me just make a comment before I do, with respect to the future. One of the interesting things as we think about the future and exchanges and different forms of engagement with employers and managed care companies, it's kind of a broader topic than specifically what you asked. If you look -- we did this a few weeks ago, if you look at the spectrum of engagement of hospitals with a covered population ranging from just traditional managed care contracting, all the way to pay-for-performance or gain sharing or risk-oriented contracts like ACOs, all the way up to actually owning and being the payer, various Tenet hospitals in various markets are doing all of it. So it's really interesting. We have become, and we have a future investor webinar in this topic, but we've become very innovative in the way we're looking at engaging with employers and with payers. We have examples of virtually every form of contracting in that type of engagement that exist today in the industry at work in at least one or more Tenet markets. And we're very pleased with some of these pilots and the different types of programs that we have going forward. Now with respect at least to the exchanges and how those seem to be developing, my own caveat would be nobody yet knows what the pricing is going to be like, and that's ultimately sort of what you care about most in trying to assess the future performance of the company. But Clint, why don't you just talk a little bit about some of the preliminary conversations that are taking place out there and how you see that market shaping up?

Sure, Trevor. Thanks for the question, Josh. In terms of the exchange contracting activities that we've got going on, it really is still a lot of preliminary discussions. We don't have a contract that's specific to exchange products in place today. Had a lot of discussions around that, and I think there's a lot of exciting prospects for 1/1/2014 related to the exchange products. The 40% number that you asked about, the way we calculate that is we take our most recent year run rate of revenue and say how much of that is contracted for next year. So it contemplates last year's revenue essentially in terms of the 40% that's contracted for 2014.

Yes. So it's just -- it is an indication of sort of that forward book. I would also tell you that, that could move very quickly from say a 40% number to a 60% or a greater number with a couple of big contracts for -- that cover 2014, that are likely to be -- where negotiations are likely to commence relatively soon. Specifically on Josh's question though, Clint, we're not really aware in any of our markets of providers that have entered into contracts for these state-based exchanges that are likely to start popping up in 2014. Still preliminary, very preliminary on that in this industry.

Yes, it is preliminary. One other thing I would just point out real quick about exchanges is the 40% of revenue that we have contracted for 2014, we fully expect that there will be some exchange members coming through those contracts. And so it's not like you have a different set of contracts for exchanges. Your existing contract portfolio is available to sell on exchanges in addition to other products.

Great point.

Okay, got you. And then just a quick follow-up on the M&A comments that you made. I think you said that 2013 included some of the expected acquisitions. Is that Emanuel, or is there actually more built into that? And then I also think I heard you say, Trevor, that the quality of the assets that are for sale has improved. Maybe you could help us understand what that [indiscernible]

Yes, let me make a comment -- I'll give you an overall comment, and I'll ask Dan to fill in on the acquisition assumption. One reason that we talked about that specifically is we did just raise a lot of capital, and you want to see earnings associated with that capital being deployed to a certain extent. As far as the quality of the assets, let's take Emanuel as an example, it is a high-quality facility, it's well capitalized. In fact, one of the reasons that they're contemplating -- they decided to contemplate selling the hospital is that they had incurred substantial expenses in building out certain facility expansions, as well as their HIT program. And so unlike many acquisition opportunities that we have seen and not pursued in recent years that would be characterized as a catching a falling knife or a turnaround of a facility that has lost its market position or has significant deferred capital expenditures, this is actually a facility that's well-capitalized, and it's in a very good market position, and like we said, in a market that we understand very well because of our position in that. So we -- that is more appealing to us than to purchase something that requires a significant turnaround. And as far as the guidance-related part of your question, let me turn it over to Dan.

Yes, our 2013 guidance does include the estimated revenue streams and earnings related to Emanuel. We have moderated our estimates of those earnings due to the fact that the ultimate timing of the closing of the transaction is not necessarily certain at this point. But Emanuel is included in our estimate of our guidance for 2013, as well as the InforMed acquisition we just announced, as well as the Dell Revenue Cycle business.

Our next question comes from the line of Tom Gallucci with Lazard Capital Markets.

I guess just one on the topic of reform first. Obviously, a lot of variables there. But what are you expecting at this point? What are you hearing out there in terms of the timing of the implementation of the bulk of what's expected? It sounds to me like some of the states in particular maybe are a little slow on the exchanges and what-not. So is it a '14 event that you're thinking about or is it a little bit further out than that at this stage?

Let me ask Dan Waldmann, who had done a state-by-state analysis for us, to give some comments on that. Dan is Head of Public Affairs, which includes government relations.

Thanks, Trevor. Hi, Tom. I think specifically on the exchanges, the date is coming -- the important date is coming up, I guess November 16 when states are supposed to inform the federal government what their plans are, whether they're going to move forward with their own state exchange or do a some kind of partnership exchange with the feds or to defer to the federal exchange. We have not seen any indication that would say that there's going to be a delay of implementation, so we are moving forward on the basis that as of January 2014, the exchanges are going to be up and running. Certainly, we'll be watching closely what happens as the new Congress comes in, but certainly, the election results, I think, are very favorable for ongoing and expected implementation. Medicaid side is, I think, a little bit more up in the air. Certainly, what the states are going to do on Medicaid expansion, I think that we just have to see how the states react, how the state legislatures react to the election outcome. I would note that in Florida, there was an anti-Obamacare ballot initiative that was on the ballot and it lost. And I think that the legislature down there has been taking a much more measured position on the prospect of Medicaid expansion than the governor has. So I think we also see some hope that we're going to see some more movement on Medicaid expansion as well.

Okay, great. And then maybe just back on the fundamentals. You talked a little bit about payer mix. Can you give us any more color on the volume side of things? How various aspects of payer mix trended in the quarter, and if there was any regional variation throughout the portfolio?

Yes, sure. Let me ask Britt Reynolds, our President of Hospital Operations, to comment on regional trends and some of the volume trends we've been seeing.

Yes. Thank you. We did see some regional variation, and we saw some really strong growth relative both to the sector as well as to payer regions, particularly in the state of Florida and especially in our outpatient business in the state of California. So we did see some segmentation there in our hospitals, as well as some key markets for us that we track closely both in size and in scope. And just ones that really are bellwethers for our organization. And what I feel really good about in this quarter is 10 key markets of size and significance to us had volume increases and significantly volume increases and better payers. So we're seeing some movement that is atypical from the trend rate year-to-date, and that gives me a lot of promise.

Our next question comes from the line of A.J. Rice with UBS.

I might just drill down a little bit further on Conifer. Obviously, the announcement of the acquisition of Dell Revenue Cycle Management, should we look at that and other deals you're doing, are they sort of tuck-ins of things that Conifer is already doing? Or does that enhance your capabilities in any way that's worth noting? And I know last time, there's been some discussion about Catholic Health Initiatives deal has led to other discussions. Any update on any of the other discussions with potential customers you've had that might be worth noting?

Sure. Let me ask Steve Mooney to cover that out. I would just start by saying, A.J., that the initial acquisitions -- and there are others we've made in prior years that were very small, but those all to date have been in the existing lines of business that we have. And there's one line of business that we didn't talk about in the prepared remarks, the patient communications business, Steve, that I think you should also at least mention to remind people that we're in that line of business. But why don't you talk about the -- what these acquisitions bring to us? And then in terms of philosophy, what you see down the road in terms of our acquisition strategy?

So it's all kind of all of the above when you talk about the acquisitions of Dell, the revenue cycle operation in InforMed and Dell bringing in more scale to our organization, but also it is bringing on additional capabilities, so I'll just give you a couple of examples. So on the Dell one we just announced this week, there's some things that are currently doing in the revenue cycle operation that we don't do. And one of those areas, for instance, is case management services. We still bring onto us for capability services that we can then obviously move into our existing client base. They also have, and I'll call this kind of a casual term, but they have SWAT teams. So they've got about 60-plus employees across the organization that go out and do targeted projects for cleanup of AR, can go in and do integration projects when they have a new client coming on board, and it's going to give great capability for us as we continue to expand our portfolio. For instance, not only with CHI but also our other clients that are in the pipeline, as we're bringing them on board, have that additional talent available to us. The other thing they have, they have a proprietary system, a solution that allows them to quickly and cost-effectively integrate smaller hospital clients into what was otherwise cost prohibitive for Conifer to pursue. We've got a rather robust workflow engine, but that workflow engine provides a lot of scale and capabilities for us when we get a new client. But it's also expensive to get in, so most of our clients as you know are rather large. Dell's clients have typically been smaller than the ones that Conifer have had but they're able to do through this cost efficient process that they have. So this really opens up a much broader market to [ph] us for Conifer. We were targeting a larger client base of net revenue, it expands that multifold for entire new population for us to go after from a client perspective. So a lot of capabilities, and we're really excited about that acquisition. On InforMed, and Trevor kind of mentioned a little bit, but we really were complementary to our business right now which is Cap Management Services. We will eventually rebrand that company, since it doesn't really tell exactly what they do. But we're really focused on primarily Cap on the provider space, as Trevor mentioned, on both hospitals and physician groups and IPAs where the InforMed organization was primarily really focused on employer groups, really around their population health offering, have a very robust process in that area, much more robust than we had at Conifer. So when you think about the ACOs being developed around in a value-based processing out there, it really gives us a much stronger level of capabilities in that particular area and also expands once again what our market is. We were primarily looking at providers space, we actually now can move into both the plan and also the employer space. So it's about the capabilities as well as expansion of market from that standpoint. To touch on CHI which you mentioned briefly, that is going really well, everything is on track. Some areas of the project we're actually ahead of schedule. We have a monthly steering committee meeting with the leadership of CHI including their CFO. Incredibly pleased the way that is going and everything is going as according to plan. Pipeline. Pipeline overall is looking strong. It continues to grow as a result of continued market acceptance of our solutions overall. In sense of CHI partners announcement, we've had several regional health systems that are committed to evaluating our service offering including ones where we have been shortlisted for full revenue cycle engagements. We see a significant pickup of interest around our clinical integration and population health offerings, with several clinical integration service discussions in process and one large regional system committing to enter into an agreement with us. We're also seeing increased interest in combined or add on of service offerings from both our existing clients and our new prospects. I mean, with obviously additional services we have, and Trevor mentioned what we're doing around Cap, we're doing around revenue cycle, also patient medications, we're doing admissions reviews in that area, we're doing HCAP services, we're doing marketing campaigns, scheduling services. We have a lot more topics to talk to our clients about around the areas that they're having difficulties with. So it really is a great conversation we can have from that area. One area of particular enlightenment though which is interesting by both our current clients and our prospects, is really the level of actual operational experience that Conifer has on the areas of population health and risk-based payment models, as well as having an actual clinically integrated network up and running. Apparently, there's a lot of posers in the space at the moment out there so it's been very interesting to us. So overall, it's been an incredible year so far as you know with both the CHI and the acquisitions we had. Things are looking strong in the pipeline front and continue to build capabilities for the needs of our clients.

Okay, that's great. Can I just ask you quickly on modeling? HITECH in the fourth quarter and next year, what's -- any range of assumptions there?

Yes, this is Dan. The HIT incentives in Q4 should be in the neighborhood of $20 million. And for next year, the HIT incentives are approximately going to be $75 million.

Our next question comes from the line of Sheryl Skolnick with CRT Capital Group.

Congratulations on the 10th anniversary, belatedly, of events that put the company on the path to being where it is today. It's been a remarkable period of time, a remarkable transition. And I know there's many people who are still there and have done -- who were there, who have been there through all of this. They've gone through a lot, and I think they're seeing the other side of it. And you ought to be congratulated on surviving what was a very, very challenging situation for the company.

Well, thank you for remembering. About 1/3 of our employees have been here for 10 years or longer, and I think it's safe to say that all of us, whether we were here 10 years ago or not, learned important lessons, and we continue making sure that those lessons are reflected in our core values and the way that we operate our business.

Yes. I think it's pretty obvious in what's been done. But I am going to be a little critical because I really don't understand why the company feels it important, and perhaps you can help me to understand, why the company feels it important to include acquisitions that are not yet closed in your guidance. It's risky. I don't care how close you are until the deal is signed, it's not signed. So -- and if I can confirm also as part of that, that you did say that you expect there to be, as a result of that, a total of 10% to 12% revenue growth in 2013, which quick math on a cash revenue basis would suggest $900 million. So clearly there's that plus Catholic Health Initiatives' revenue plus the Emanuel. Why take that step to include it? I mean, especially given the proviso that you've just given us that the timing is uncertain, why take that risk?

Just real simple, and it was source of quite a lot of discussion that we had. The reason is that only a month ago, 5 weeks ago, we raised a significant amount of capital in the capital markets. We tried to be very explicit about what the use of that capital would be, and we have visibility into a pipeline of near-term acquisitions, and I think the choice -- the alternative that we had was to exclude that from our outlook and expectations. And then you would have to ask the question of, "Wait a second, you just borrowed a bunch of money. You're paying interest on it. You're planning not to do anything with it." And so we're just trying to be transparent, Sheryl in giving you and others visibility into what we actually expect as opposed to creating too many moving pieces or noise, so to speak.

Okay. So if we can then parse that revenue increase just so that we understand what the sources of it are a little bit better, if I do the math correctly, you're talking about at the midpoint of the ranges that you gave, on an adjusted admission basis, you're talking about midpoint of up 1%. And then same-store net revenue per adjusted, somewhere in the neighborhood of up 1.5%. So that gives you 2.5-ish percent internal same-store growth without the acquisitions. And then on top of that, to get to roughly at even a 10% revenue, we would need to have something on the order of another, if I did the math correctly, that would give about -- you need to have something on the order of $150 million from Emanuel, $85 million from Dell, $50 million from the other acquisition, the InforMed, and then CHI adding additional revenues. And then you would have to get to the bottom end of your range with potential upside from additional acquisitions. Is that the right way to think about the guidance you're giving?

Sheryl, this is Dan. Generally speaking, I'd say, yes. Let me just address the Emanuel situation for a second. As I mentioned, we have included some estimates in there for that. I would tell you they're modest. But given the timing, we certainly didn't assume that it would occur on January 1. The InforMed and Dell businesses are assumed obviously for the full 12 months, and there's several other transactions that we feel pretty comfortable with that we believe that made sense to put an estimate in there. And getting back to your broader point about the growth in revenue, certainly, with the CHI business coming online and starting January 1, there's going to be a significant ramp up in the revenues there that will drive probably close to $350 million to $400 million. So that's certainly a big component. We're obviously anticipating continued strong outpatient volume growth. And from an inpatient perspective, although our volume assumptions are fairly modest from an inpatient perspective, we continue to believe we'll be able to realize favorable commercial rate increases throughout 2013, consistent with what we have been achieving.

Okay. And just to quantify what you meant by the initial volume and mix trends for the near term, I don't want to be confused about what that means, does that mean that they're weaker or stronger than they were in the third quarter?

The trends in 2013 were...

'12, I thought you meant '12? Or were you talking about '13 when you gave that? Because I thought you meant that you were reflecting in the fourth quarter '12 implied guidance that things were softer. But maybe -- I'm glad I asked, if you meant it was '13 and not the fourth quarter '12, that's fine [indiscernible]

No, I was referring to Q4. And the volume trends, they're just not quite as robust as what we had preliminary -- in our preliminary outlook when we were talking about this in the second quarter. We've still had favorable adjusted admissions growth. The outpatient volume trends continue to be strong. The inpatient volume trends, relatively consistent with what we've seen in the first 3 quarters of the year. We're just -- we want to be prudent and moderate our Q4 outlook based on the level of our inpatient volume trends that we've seen, as well as the mix, in terms of the mix of Medicaid and uninsured. So we just feel it's appropriate at this point in time to just moderate those assumptions that were fairly robust for Q4.

Our next question comes from the line of Kevin Fischbeck with Bank of America Merrill Lynch.

This is actually Joanna Gajuk, on for Kevin. I just want to go back to the disclosure which is really helpful on the 2013 assumptions in your guidance. And then can you just maybe talk a little bit more about your payer mix assumption there?

Okay. Dan, do you want to take that?

Yes. So our assumptions for -- let me address a number of our assumptions for 2013. We're assuming, from an inpatient volume perspective, growth of flat to up a modest 0.5%. We're anticipating continued strong outpatient volume trends, which obviously would drive the adjusted admissions growth up as well. Cost control has been excellent when we continue to capture the efficiencies and the expectations from our MPI initiatives. That is going to continue. So we're real pleased with the performance from a cost control perspective. We have a number of initiatives at each hospital to drive additional volume. Literally, we just went through our detailed business plan reviews for 2013 for all our hospitals. We're very optimistic of the strategies they have in place to drive additional volume growth, very detailed by market, by hospital, by service line. So we're confident we can drive incremental volume growth. And in particular, on the outpatient side -- inpatient, we're being moderate or conservative at this point in terms of looking out, given the trends that the industry is facing from a volume and mix perspective.

Great. But I was trying to get to your view on payer mix specifically for 2013 versus this year?

The payer mix, when we look out into 2013, we're optimistic we'll see some improvement. But again, we and others in the industry are facing some headwinds especially on the inpatient side in terms of -- from a mix perspective. So we obviously took that into consideration as we modeled 2013.

Great. And then on the last call -- last quarter call, we were talking about the contract you signed with Humana. Are there any similar contracts that you're working on with other managed care payers?

We are always working on contracts with state [ph] payers. There's nothing unusual.

Our next question comes from the line of Jay Kindelone [ph] with Imperial Capital.

I wanted to continue to focus here on 2013 EBITDA versus 2012. My first question, is the low end of your range, is that considering the 2% sequester as you've considered in your year-over-year guidance in the past?

Absolutely. We've modeled that the sequestration to occur beginning in February, and it's roughly $55 million next year.

Okay, great. So...

Now on the bright side, as mentioned in the script, we just got our largest Medicare inpatient rate increase of 3% starting in Q4, and that's -- it's approximately $50 million on an annual basis. The industry was notified last week of the updates in the Medicare outpatient rates, that's going to be about 2.5% for us. And so when you add up the increases from inpatient and outpatient perspective, they essentially offset the impact of sequestration if it does occur starting in February. But the sequestration impact is in our model for next year.

Okay, great, that's helpful. And then on the acquisitions, can you comment on what you expect the 2013 margin would be on that revenue on average for all 3 acquisitions discussed?

Well, we have built into our model for next year, as I mentioned, we've been fairly conservative on it. But you can look at that in terms of we've added about $25 million of earnings lift next year for the acquisitions. Again, it all depends on the timing when the transactions close, the integration costs associated with some of the acquisitions, those type of factors. But for modeling purposes, just assume approximately $25 million.

Great. And then just lastly, looking at the different initiatives and how you've outlined the year-over-year increases in the past, MPI, Conifer and outpatient, has anything changed significantly on the year-over-year on any of those lines as you think about modeling forward? And I'm sure you'll at some point probably put out a similar slide to talk about 2013?

No, no. Those assumptions are pretty much tracking as I mentioned in my prepared remarks.

Our next question comes from the line of Darren Lehrich with Deutsche Bank.

I wanted to just ask some questions around the outpatient business. Trevor, I think you said there's 124 freestanding sites. Can you just maybe update us on how that breaks down between different settings of care imaging, surgery, et cetera? And I'd be curious to know, thinking about this third quarter, what the adjusted admission growth rate would have been excluding some of the additions you've made in your outpatient business.

I did -- I'll ask Britt to comment on the outpatient portfolio, but I did in my prepared remarks, as I've done quarter after quarter, say that 80% of the growth in the outpatient side was organic growth. So we've got a strong organic same-hospital completely apples-to-apples outpatient business being driven heavily in the emergency departments and outpatient surgeries and things like that. That's a very strong, robust business. In fact, the outpatient business in total is a very strong business. We're basically augmenting our organic growth with acquisitions. But Britt, you want to talk a little bit about the types of centers, what we're building, what we're acquiring, et cetera?

Sure, absolutely. On the acquisition side, the vast majority of the numbers that Trevor gave you there are on the ambulatory surgery side. That's where we've seen acquisitions and acquisition opportunities materialize rather significantly. And our pipeline continues to be strong in that arena. So as we're thinking about our outpatient services, ambulatory surgery's a real key driver for us. We've also had a smattering of acquisitions, market-by-market, very specific from an integration standpoint on the imaging perspective and on the radiation oncology side. So we purchased, for example, a facility -- a few facilities that were either a Geminite [ph] or a Red Oak [ph] center in a specific market where it's already accretive to a service line we have there. We already have partnerships and relationships with those physicians, it just made sense to integrate that into our system. So from a pure acquisitions and pipeline standpoint, we're really pleased with the ambulatory surgery side. We occasionally get some from the imaging side, and we're more selective there because we want that to be complementary to the services. As Trevor mentioned, from a development standpoint, we're excited about our development in 3 freestanding emergency departments, again in markets where they are accretive to our markets, and also give us geographic outreach, portals of entry into our market. And those are the de novo developments that are rapidly materializing. And we are also seeing akin to that the Urgent Care Center opportunities, both prospectively and in the numbers that we talked about. So it really is there's not one particular area that's untouched. However, I would tell you and I would be excited to tell you that where we've been most successful is on the ambulatory surgical side. We like that from a managed care standpoint. That's been good to us. We like it from a predictability standpoint. We like that from the integration with physicians in that marketplace, both incremental to us as well as existing physicians. And I hope that gives you some color on what our acquisitions have been and what they look like, as well as the fact that they're organic, means that we're feeling really good about how they're implemented.

And then just so I could just real -- understand a little bit more about how you're thinking about the outpatient piece for 2013. In terms of the mix, the percentage of outpatient, obviously, that's been growing. Do you have a view or a range what you think the outpatient piece will contribute overall as you look at sort of how you build up your 2013 model?

Yes. Our outpatient mix has been growing, and for the most recent quarter, it's approximately 34%. You should expect that the percentage to continue to grow steadily.

Last thing for me is just as it relates to the outpatient strategy and how you're treating them from a relationship perspective. In large part, are most of these freestanding or are they -- some of them also being attached to the hospital and becoming departments of the outpatient hospital?

The vast majority of them -- this is Britt, I apologize. The vast majority of them are freestanding. That's our opportunity when we acquired them. And we maintain that in our marketplace. That gives us again good pricing leverage in the marketplace. And -- but from a retail standpoint, we want to be competitive, and we think that gives us both the inpatient ability, and with these acquisitions, the retail advantage on when they're freestanding. In certain circumstances, and again, each one is analyzed on a unique basis, they become departments of a hospital, where -- just the very mechanics, and I wouldn't want to go into great detail because they are very situational, that makes sense. But by and large, our strategy is for them to become, in most cases, remain and/or become freestanding entities from a strategic positioning standpoint.

Our next question comes from the line of Erin Blum with Goldman Sachs.

Just a quick one on the California Provider Fees. Can you just help us with the math of what you now expect for the fourth quarter? I think originally, it was supposed to be $66 million in the second half.

Yes. We estimate the fourth quarter California Provider Fee revenue will be approximately $12 million.

Our next question comes from the line of Ralph Giacobbe with Credit Suisse. Ralph Giacobbe - Crédit Suisse AG, Research Division: I know EBITDA was up -- or adjusted EBITDA was up 40%, obviously a robust number. And I may have missed this, but I guess I'm just trying to think about a same-facility number kind of x HITECH provider tax, the new deals. Is there a way to just estimate an EBITDA growth number off of kind of the same-facility revenue number?

The HIT incentives were approximately $13 million in Q3. That's the most -- in terms of when you're looking quarter-over-quarter, that's the most noteworthy item in terms of looking at in terms of the revenue streams or the costs moving around slightly depending on the timing of the approval of a program or achieving meaningful use. Ralph Giacobbe - Crédit Suisse AG, Research Division: So I guess you think it's fair for me to just take out $13 million from the EBITDA number from this quarter, put it over last year's EBITDA number, take that growth and that should be what we think organic growth is for the underlying assets?

Well, hang on a second. The HITECH revenues are offsetting HITECH expenses. So if you want to start excluding HITECH revenues, you should exclude HITECH expenses as well.

Right. Because our HITECH expenses were over $20 million in the quarter. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay. We can follow up on that. And then in terms of the commentary just beyond 2013, obviously, you put guidance out there what you expect the benefit reform to be. I'm just trying to understand the sort of the -- should we not rely on what's out there beyond 2013 as it relates to that because of the assumptions around your underlying business or just the assumption that you made in terms of what reform would mean for you?

As I mentioned in my prepared remarks, we've outlined our expectations for 2013, which includes our most recent assessment of our underlying business trends. We're continuing to drive on our initiatives. Cost control continues to be very strong. Outpatient trends continue to be strong. Inpatient trends admittedly are softer than we'd like. And we're not alone in that regard. And so we've built that into consideration as we look out to 2013. As we've mentioned earlier, we've layered on a little bit of incremental earnings related to either to closed acquisitions or ones we think we're pretty close to closing on as well. So you should look at what we just talked about in terms of our expectations for 2013. Those are where we think our business trends are heading. Ralph Giacobbe - Crédit Suisse AG, Research Division: Okay. And then just the last one if I could. There's been a focus and pressure on volume for the industry just stemming from kind of a lower one-day stay in greater observation. Your volume stats were obviously better. So maybe if you could talk about either the magnitude of that dynamic within your own organization. Is it just not a nonissue? Or just any details around that trend.

Sure. Well, we were pretty well ahead of that trend in terms of our implementation of systems to make sure that we were properly categorizing patients as inpatients or outpatients. What you're asking is, sort of in indirect way, I know there a lot of questions asked on other calls about companies experiencing RAC audits. Ours has been very good. Audrey Andrews, our Chief Compliance Officer, is here. Remind us, Audrey, I think we've had net recoveries from the RACs. Is that right?

That's right. Thanks, Trevor. We remain net positive on RACs at Tenet. And as one of the other analysts pointed out, we really started investing in our compliance program 10 years ago. And I think some of those investments are paying off as our payments are being more closely scrutinized. We also made a decision 5 years ago to consolidate all of our RAC response efforts at Conifer. And that helps us make sure that we don't lose a payment just because we didn't submit a medical record on time. So our goal is and has always been to get it exactly right, not to be overpaid and not to be underpaid, and we've been working towards that goal for 10 years, and I think that is starting to really reflect positively for Tenet in the results we're getting from the RAC.

Yes, basically, bottom line is what you see is what you get in terms of the volume stats.

Our next question comes from the line of Whit Mayo with Robert Baird. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: I had a quick question, I guess, back to Darren's question on the outpatient strategy. Just curious if all these deals that you're looking at are in markets where you actually have existing assets or you're actually looking at entering new markets where potentially you don't have any hospital assets currently?

We've actually done both. Actually, the vast majority has been in our hospital markets. But there are -- this is in an attractive business. So outpatient, as you know, we are underrepresented in terms of our percent of our business that comes from outpatient relative to the peer companies. It's an attractive business, it's an attractive business in our markets, and it's an attractive business in other markets. And we haven't so far gone outside of a state in which we operate, except in case of El Paso where we went into the adjacent state of New Mexico. But that -- we have been making some acquisitions outside of our local markets but still within states. And we have synergies within -- on a statewide basis that have made that compelling for us. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: Got it, okay. And I guess another question I had was just maybe to talk about your IT strategy for a second. I know you're pretty far along with HITECH and implemented CPOE in a number of hospitals and certainly have embraced that more than maybe some others. I mean, as you look at where you are now, can you put your finger on any tangible benefits you had or surprises that to you help reinforce the longer-term benefit from these investments?

Yes, I've got Paul Browne, our Chief Information Officer here. I think Paul, why don't you let the audience know some of these early findings that we've had. And while we don't have a full ROI, I don't think anybody in the industry really does yet on these investments. We're very pleased with what we're seeing in terms of cost savings improvements to clinical quality and patient safety. And I think these are going to be excellent tools for us to even improve our performance further into the future. Paul, just a couple of highlights.

Sure. I think the best way to think about this is we envision benefits in 4 broad categories, moving from perhaps the most concrete to those that we cannot yet quantify quite as strongly. Certainly, we'll receive incentive payments and avoid penalties in future periods. We can clearly quantify that. We're seeing also, secondly, a number of transactional benefits, and what I mean by that is our ability to remove variable costs from the organization by identifying potentially duplicative test procedures, et cetera, et cetera, and eliminate those before the labor costs and supply expense are actually incurred. We will be starting very shortly a rather aggressive program around redesigning a number of clinical processes where we believe there's opportunities to use HIT to move the organization to evidence-based practices and see substantial improvement. And then fourth, we really believe we can turn those into favorable positioning with payer organizations, and we can really advance the organization as the industry moves to paying for quality outcomes as opposed to just procedures.

There's a theme here that we will expand upon in investor presentations and communications in 2013 going back to the comments we made earlier about managed care and then tying this in, and then -- we didn't have an opportunity today to talk about clinical quality. But the themes, our integration with physicians, integration in the provision of care, standardization of the provision of care, adoption of best practices, all of which leads to reduced costs, improved outcomes, better safety and lower cost. And that is all what our strategy is about. So this is an essential part of it, focusing on just the HIT incentive payments or whatever is kind of missing the point. The point really is what we're seeing in terms of our ability to communicate more effectively with physicians and payers about the provision of care to patients. Whit Mayo - Robert W. Baird & Co. Incorporated, Research Division: I guess maybe aside from some of the anecdotal benefits, I mean have you been able to get your arms around, any numbers around what percent of duplicative tests are out there and/or what dollar number for some of these cost saving opportunities are?

Sure. I mean, give them a couple of stats on some of the early results we've got.

So in the hospitals that are live already on our systems, we're seeing a 2.8% reduction in lab tests due to the removal of duplicates, 2.4% reduction in radiology tests and a 0.8% reduction in medication administration events. We think ultimately, that can translate into somewhere in the neighborhood of $30 million to $40 million a year in savings.

Ladies and gentlemen, since there are no further questions in queue, I'd now like to turn the call over to Mr. Fetter for closing remarks.

Well, thank you, all, for participating in our call today, and we look forward to having follow-up conversations, then communicating with you further in 2013. Thanks.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.