Tenet Healthcare Corporation (THC) Q2 2016 Earnings Report, Transcript and Summary

Trevor Fetter - Chairman, President & Chief Executive Officer Daniel J. Cancelmi - Chief Financial Officer William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc. Stephen M. Mooney - President & Chief Executive Officer, Conifer Health Solutions LLC Jason B. Cagle - Chief Financial Officer, United Surgical Partners International, Inc. Clint Hailey - SVP and Chief Managed Care Officer, Tenet Healthcare Corp. J. Eric Evans - President-Hospital Operations

Whit Mayo - Robert W. Baird & Co., Inc. (Broker) A. J. Rice - UBS Securities LLC Joshua Raskin - Barclays Capital, Inc. Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker) Sheryl R. Skolnick - Mizuho Securities USA, Inc. Andrew Schenker - Morgan Stanley & Co. LLC Chris Rigg - Susquehanna Financial Group LLLP Joanna S. Gajuk - Bank of America Brian Gil Tanquilut - Jefferies LLC Matthew Borsch - Goldman Sachs & Co. Ana A. Gupte - Leerink Partners LLC John W. Ransom - Raymond James & Associates, Inc.

Ladies and gentlemen, welcome to the Second Quarter 2016 Tenet Healthcare Earnings Conference Call. My name is Dana and I will be your operator for today's conference. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. The slides referred to in today's call are posted on the company's website. Please note the cautionary statement on forward-looking information included in the slides. I would now like to turn the call over to Trevor Fetter, Tenet's Chairman and Chief Executive Officer. Mr. Fetter, please go ahead, sir. Trevor Fetter - Chairman, President & Chief Executive Officer: Thank you, operator, and good morning, everyone. I'd like to direct your attention to slide number 3, which includes a summary of our results for the second quarter. We generated adjusted EBITDA of $617 million, which included a $12 million charge related to our decision to curtail and restructure USPI's bariatric surgery service line. That item alone more than accounts for the variance between our actual results and the midpoint of our outlook range for the quarter. In our hospital segment, we grew same-hospital patient revenue by 4.4%, which was slightly above the high end of our annual outlook. This was driven by a 0.5% increase in adjusted admissions and a 3.9% increase in revenue per adjusted admission. This strong growth in revenue per adjusted admission was driven by our continued investment in high acuity service lines. We're also very pleased with the early results and integration of the joint ventures that we formed last year in Birmingham, Alabama and Tucson, Arizona. In short, we had solid performance in our hospital business in the quarter. Our ambulatory business continued to deliver outstanding revenue growth, with same-facility system wide revenue up 11.7%. This was the fourth consecutive quarter of double-digit revenue growth. We grew cases by 5.2% and revenue per case by 6.1%. Growth in revenue per case was driven largely by an increase in the complexity of cases at our surgical facilities. About a year ago, we purchased a majority interest in USPI. In April, we increased our ownership to just over 56%, and we expect to own approximately 69% by this time next year and 100% of the business in 2020. Either directly or through JVs, we now operate approximately 500 outpatient facilities in both our USPI and Hospital segments. We have created the nation's leading ambulatory services platform, which includes urgent care centers, imaging centers, free-standing emergency departments, surgery centers and surgical hospitals. Through this extensive portfolio and our partner network, Tenet is very well positioned to benefit from the continued growth in the ambulatory sector. Reflecting on the last 12 months, I'm very pleased with USPI's performance, its management team and the exciting prospects ahead for USPI and the entire Tenet enterprise. The synergies between our Hospital business and USPI have exceeded our expectations already, and the synergies between our three business segments and vast network of healthcare system partners have great potential. Conifer had a good quarter and delivered results consistent with our expectations. EBITDA was up 5% to $63 million. Conifer also generated revenue growth of more than 13%, and we were again pleased by the growth from third-party customers. Non-Tenet revenue grew by 28% to $224 million, which underscores the value that Conifer is able to deliver to other hospital systems, physician groups and employers. We've spoken before about Conifer's work to further penetrate the large addressable market for revenue cycle management, and in particular its value proposition for providers seeking comprehensive revenue cycle solutions. We believe that Conifer has become the largest player in the outsourced hospital revenue cycle management industry, and Conifer's new customer momentum has accelerated. WellStar Health System, one of the largest providers in Georgia, recently selected Conifer to manage the revenue cycle operations for its entire portfolio of acute care hospitals. As part of this 5-year contract for 11 hospitals, Conifer is providing a range of services including patient access, enrollment and eligibility, and billing and patient financial services. Conifer's value-based care business also won an important new engagement. Canopy Health, an accountable care network in the San Francisco Bay area, recently selected Conifer to provide payer operations support and population health services. Canopy has 4,000 participating physicians, 12 hospitals, 3 medical groups and 500 ancillary facilities. It's a joint venture between the University of California, San Francisco Medical Center and John Muir Health. Since 2013, we've been in a hospital partnership with John Muir that owns our San Ramon Regional Medical Center, and San Ramon is one of the 12 hospitals participating in the network. Both the WellStar and Canopy Health contracts are great examples of how building strong relationships with not-for-profit health systems can benefit different segments of our business, and we are confident those relationships will be a source of growth for Tenet as we go forward. Finally, I'd like to provide an update on the Clinica de la Mama litigation. Yesterday, we disclosed in our quarterly filings that we believe we've reached an agreement in principle with the government to resolve this matter for $514 million. The final resolution is subject to the negotiation and execution of definitive agreements, which we expect to complete during the third quarter. The payments will be made shortly thereafter. In addition to the monetary component, the agreement in principle contained other terms which are outlined in the 10-Q that we filed last night. And with that, let me turn the call over to Dan Cancelmi, our CFO.

Thank you, Trevor, and good morning, everyone. We continued to generate growth across our three business segments, Hospitals, Ambulatory and Conifer, all leading us to reiterate the outlook for adjusted EBITDA that we shared with you in February. We generated adjusted EBITDA of $617 million in the quarter. As Trevor noted, adjusted EBITDA would have been $12 million higher if you exclude the charges related to the restructuring of USPI's outpatient bariatric surgery business, which is a small service line within our Ambulatory segment. This charge also lowered EBITDA less facility-level NCI by similar amount. Same-hospital revenues grew 4.4% and adjusted EBITDA in our Hospital segment increased 7% after adjusting for acquisitions, divestitures and a decline in health IT incentives. This was the fourth consecutive quarter of double-digit revenue growth in our Ambulatory business. Adjusted EBITDA less facility-level NCI increased 18%, excluding the charge I just mentioned. Conifer's EBITDA increased 5% and revenues from third parties were up 28%. And finally, adjusted free cash flow was $268 million in the first half of the year, an improvement of $180 million. With that overview, I'll now provide some additional color on our results. As you can see on slide 4, we grew adjusted admissions by 0.5% and our 3.9% growth in revenue per adjusted admission reflects continued improvement in acuity. Overall, we grew same hospital patient revenue by 4.4%. Total admissions declined 1.1%, primarily driven by a reduction in OB and respiratory cases. Outpatient visits in our Hospital segment grew 0.8% and our free-standing outpatient centers at USPI delivered even stronger growth. All of this contributed to 7% EBITDA growth in our hospital segment. Turning to cost, on a total hospital basis, our cost per adjusted admission increased 3.4%. Our labor cost only increased by 1.6% on a per adjusted admission basis. We continue to generate efficiencies from various labor initiatives we've been focused on, including staffing mix, standardization and premium pay. Supply expense increased 2.4% due to growth in more complex cases. However, this was below the rate of growth in the first quarter. The supply expense improvement was attributable to success we've had with initiatives that we've put in place in recent quarters, including success mitigating some of the pricing pressure we have been experiencing on pharmaceuticals. Other operating expenses increased 7.7%. This increase is attributable to growth in our health plan business and higher malpractice expense as a result of the reduction in Treasury rates. The incremental health plan costs were driven by an increase in covered lives and were substantially offset by higher premium revenues. Excluding the growth in our health plan business and the year-over-year incremental expense due to the decline in Treasury rates, our total Hospital segment costs only increased 1.6% per adjusted admission this quarter. Moving to bad debts, as you can see on slide 5 bad debt expense was 6.7% of revenue, down 60 basis points from the second quarter of last year. The growth in our Ambulatory business, which has very low levels of bad debt, is a key driver of the improvement. Also, Conifer continues to effectively manage our revenue cycle operations. Uncompensated care as a percentage of adjusted revenue was 19.9%, down 150 basis points year-over-year. Turning to slide 6, our Ambulatory business delivered 11.7% revenue growth. Our case growth was strong in our surgical facilities as well as our imaging and urgent care centers. And there was an increase in acuity at USPI's surgical hospitals, which contributed to revenue-per-case growth of 6.1%. Slide 7 provides additional details on the performance of our Ambulatory business. For the quarter, we generated pro forma EBITDA growth of 20.9%. After excluding the $12 million charge related to the bariatric business, EBITDA less facility-level NCI would have increased 18%. As you can see on slide 8, Conifer generated adjusted EBITDA of $63 million, which was up 5% year-over-year. Revenue from third parties increased 28%, and we expect third-party revenue growth to continue to be strong as a result of the six new WellStar hospitals that we are now serving. Turning to cash flows, we generated $268 million of adjusted free cash flow in the first half of the year. This was an improvement of $180 million. We continue to be very focused on our cash flow generation and remain on track to produce $400 million to $600 million of adjusted free cash flow this year. In summary, we are driving growth across our three business segments and we have improved adjusted free cash flow this year. After reviewing our results for the first half of the year, we believe that our 2016 adjusted EBITDA outlook of $2.4 billion to $2.5 billion that we provided at the outset of the year is still appropriate. I will now ask the operator to assemble the queue for our Q&A session. Operator?

Thank you, sir. We will now begin the question-and-answer session. And we'll go first to Whit Mayo with Robert Baird. Whit Mayo - Robert W. Baird & Co., Inc. (Broker): Hey, thanks. Maybe first for Trevor. You alluded in your prepared remarks some growing synergies across your three businesses. And can you elaborate a little bit more on that? Is there any new potential business that you see around the corner? It just felt like you were suggesting something, so just wanted to come back to that. Trevor Fetter - Chairman, President & Chief Executive Officer: Yeah, thanks, Whit. What I was suggesting is we have obvious synergies between USPI and the rest of Tenet that we have harvested and are exceeding our expectations. The potential synergies formed by the network of not-for-profit health systems that we have relationships with, either in the USPI business segment or the Conifer business segment or in the acute care business segment, that's one where we're really still in early stages of development. I think I've mentioned on previous calls that if you were to take the revenues of all of these partner health systems and add them all together, it represents around 10% of the U.S. hospital industry. So, we've built quite a substantial ecosystem here, and these relationships are very deep in the form of Conifer and USPI. But I think I'd ask Bill Wilcox and then Steve Mooney to just add some of their perspective on how the three segments are working together. Bill, of course, is the head of our USPI segment. Bill? William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc.: Thank you, Trevor. Good morning, Whit. One of the things that I'm particularly excited about are the conversations and plans early on that we had with Eric and the Tenet hospitals. I think there's a lot of synergy opportunity on programs like our total joints and bariatrics. And then just the overall development of an ambulatory presence, including de novos and acquisitions, not only with ASCs and some surgical hospitals but also on the non-surgical front. And then of course with Steve and Conifer, and we get really to have many bragging points here, but the obvious opportunity to introduce our health system partners to the Conifer capabilities as time progresses. Stephen M. Mooney - President & Chief Executive Officer, Conifer Health Solutions LLC: This is Steve. On our side of the fence, especially in the revenue cycle business, it's a pretty big, significant strategic decision for the health system. So, trust becomes a very big factor in those dialogues. And when you have situations like USPI and the relationships they have and the depth of those relationships with these not-for-profits, the trust piece is very deep, and allows us to have conversations at a level much quicker than we typically would in the past. And as Bill said, we're still in the beginning stages of that, but our development teams are working very closely together. We're targeting those organizations we think have a need, obviously, in the areas we have, as well as the ones we think we can have the best benefits on both of our services. So, doing the same thing with USPI is giving introductions on that side. And I think over time, you're going to hear more wins in the standpoint of both the USPI side as well as Conifer with like partners. Whit Mayo - Robert W. Baird & Co., Inc. (Broker): No, that's helpful. And maybe just my follow-up question, just around USPI, just trying to tease out some of the growth. The consolidated revenue looks like it was up only maybe 3% on a same-store basis based off the 10-Q disclosure, but the system wide is up 11%, which implies the unconsolidated is growing much faster than 11%. I know that's been historically the bulk of the growth. So, just some moving pieces that I'm just struggling to reconcile?

Hey, Whit. This is Jason. How are you? Whit Mayo - Robert W. Baird & Co., Inc. (Broker): Fine, thanks.

You've seen this with our business for some time. The two, the unconsolidated and consolidated, don't necessarily move in tandem. You see more similarity by market than you do by consolidation treatment. So, there's not a systemic factor at play there, it's the mix of facilities and a little different pace of growth in one piece of the business. Whit Mayo - Robert W. Baird & Co., Inc. (Broker): Okay. That's fine. Thanks.

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

Hello, everybody. I might just ask you first about your managed care contracting, a lot of the MCOs are reporting how they're struggling on the exchanges. I wonder, as you're thinking about contracting next year and beyond, a), are you seeing any difference in pricing, in terms that people are asking for, and specifically, can you comment on the dialogue around what you're hearing on the public exchange side? Trevor Fetter - Chairman, President & Chief Executive Officer: Sure. And A.J., I'll just kick that over to Clint Hailey. I would just start by saying, our growth from the exchange business continues to be strong. The provider perspective obviously is very different than the payer perspective on this. But Clint, why don't you update some of the stats we always give about the participation in exchanges. And then also, some commentary on what you're seeing.

Sure. Thank you – thanks for the question. So, for starters, I would say we're – about two-thirds of our contractor revenue for next year is done. So, we have pretty good visibility into what things look like for 2017. And we're about 50% for 2018 so far. And so, we have a pretty good idea of trends we expect. And as Trevor alluded to, from an exchange perspective, we're in 90% of the lowest cost silver plans in our markets, and right at 80% of all the exchange plans offered in our markets in terms of our participation statistics. So, we feel like we're pretty well positioned. That said, to get kind of at the heart of your question, in terms of what we're seeing, in terms of differences and things like that, perhaps surprisingly, we're not really seeing a lot of difference in terms of health plans coming to us saying, "Hey, can we do something different on exchanges versus our regular commercial business," or anything like that. I mean, it's somewhat surprising to me but we're really not seeing any difference.

Okay. Trevor Fetter - Chairman, President & Chief Executive Officer: A.J., just one last stat; our admissions on the exchanges were up nearly 15% and visits were up 30%. So still, from the provider perspective, in our markets – so that's giving a couple of caveats there, it's still pretty strong.

Yes. No, I understand. And then just a follow-up, on the expense side, I appreciate Dan's comments but maybe just to ask you about two line items. Labor trend – been some commentary about labor pressures, labor turnover. Can you just make us any comments there? And then any update on the benefits from the HPG supply agreement, are we seeing the benefits yet or is there still more to come?

Good morning, A.J. this is Dan. We were certainly pleased with our labor management in the quarter. As I mentioned in my remarks it was up less than 2%, it was 1.6%. And you know, we've been very, very focused on managing our labor spend. We have a separate team that this is all they do, 24/7, and we are applying initiatives across the entire enterprise. Standardization is an important attribute here, as well as, as I mentioned, our mix of staffing, variable versus fixed. And as we've talked in prior quarters, we've been laser-focused on premium pay and minimizing that to the extent possible. So, the performance in the quarter from a labor perspective was good. I wouldn't say there was anything unusual. You'll always have pressure here and there to some degree, but it's – we've been managing those costs very well. As far as the HPG benefits, yes, we've begun to realize those benefits. We transitioned over to HPG in the first quarter. And at that same time, we also in-sourced our procurement functions and we're seeing the benefits of that. And I think that is evident in our supply cost trends in the quarter, with growth coming down, the cost growth in the first quarter versus second quarter improved. And we're optimistic we're going to continue to be able to drive further efficiencies on the supply side.

Okay. Great. Thanks a lot.

We'll take our next question from Joshua Raskin with Barclays.

Hi. Thanks. Good morning. I was curious, you guys have completed what I would call the first round of these divestitures of specific hospitals. I know it's hard to identify specific facilities, et cetera, but as you think about your portfolio, do you think there's an opportunity for additional changes in the hospital portfolio? And then maybe I would juxtapose that with your investments in the outpatient space. Is most of the capital going out for ASCs or are you still building sort of in other areas as well? Trevor Fetter - Chairman, President & Chief Executive Officer: Josh, thanks for the question. I'm going to ask Eric Evans – he's our recently appointed Head of Hospital Operations, to comment on the hospital portfolio. He's had an opportunity now to visit nearly all of our hospitals in a relatively short period of time. Just as an overview, I would say we're pleased with the performance of our hospital business, and we believe we're taking market share, we're making some strategic investments that are very important. We have been very active on the ambulatory side, but it's not really a statement about the hospital business as much as it is about the opportunities on the ambulatory side at USPI. But Eric, do you want to start with your observations on the portfolio?

Sure. Good morning. I would start off by saying that we have as strong a portfolio as we've ever had, and I'm very optimistic about our performance in the group of hospitals we have. Certainly, we'll always be looking at the portfolio and there might be opportunities in small ways, but we don't see anything significantly changing in our portfolio in the near future. I would also say, from a capital investment standpoint, we've talked about a lot of large projects that are starting to wind up, but we have made a lot of facility investments if you look across our markets. In El Paso, significant renovations, a new hospital, a new tower in the past couple of years. In San Antonio, we have a new orthopedic tower that's coming up, a couple of new rehab units, and of course, a new hospital in New Braunfels that's only been open a couple of years. In Florida, same story, we've got a new tower going up, several free-standing EDs. And so, there's been a lot of really focused, targeted investment in our hospital assets. And so, while you hear a lot about ambulatory, we still feel really good about the opportunity to drive focused growth in our high acuity business and also create additional access points. So, that investment hasn't really tapered off. We have seen a lot of large investments that will be winding down over the next year or two, and we think those are going to really help us drive the adjusted admissions growth that we've been guiding you guys to. Trevor Fetter - Chairman, President & Chief Executive Officer: And then let me ask Bill Wilcox to comment on some of the acquisition and investment activity you've had at USPI, and sort of the landscape you see. William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc.: Okay. Great. We continue to have a very robust pipeline. And as I mentioned earlier, a large part of it is within our existing Tenet market. So, we see a lot of upside there both from a surgical and non-surgical perspective. One of the interesting evolutions that we're witnessing is a resurgence of de novo development opportunities, both with Tenet and with our not-for-profit health system partners. And those are relatively low-capital, nice opportunities there. So, we continue to be really pleased with ability to deploy capital to date, and for the outlook for the future.

Got you, got you. And then just a quick follow-up on the health plan. I heard higher costs may be offset by higher premiums. I just wanted to make sure, was there a deterioration in the loss ratio there? And I guess what's driving the growth on both sides?

Good morning, Josh. This is Dan. No, the increase in costs on the health plan side is attributable to the fact that we have more covered lives or more subscribers this year. Our exchange business, some of our Medicare Advantage plans, we've generated growth in covered lives and so you have the increase in the revenues, you also have the increase in the costs. The health plans are included in our Hospital segment. And as you know, they don't generate adjusted admissions. So, the health plan costs tend to impact the statistic even though there's not necessarily adjusted admissions. So, nothing unusual, we just pointed it out. We get questions periodically on what's driving some of the other operating expense trends. And so we just wanted to daylight that, and make sure everyone had visibility into that.

Okay. Thanks.

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

Thanks. Good morning. Just wanted to go to guidance, the revenue numbers came up but EBITDA stayed the same. So, hoping you can maybe sort of talk about the dynamics there and maybe the drag to margin despite the better top line. And if you could also just flesh out the bariatric restructuring, just trying to get a sense there. I know it's a smaller piece of the book, but it seems like it was still profitable, so just the dynamics around, I guess exiting that.

Sure, Ralph, good morning. It's Dan. We did adjust our revenue guidance for the full year after – we've seen the growth that we've generated in the Hospital segment in terms of revenue growth in the higher complexity cases. So, as we mentioned in our remarks, revenue growth of over 4%, which is exceeding where we thought we'd be at the outset of the year when we put our initial guidance out there. So, the growth in the Hospital business from the revenue line is certainly a contributing factor there, as well as the fact that we had some transactions that we completed during the year. And when we think about what we will be able to complete this year and the mix of centers that will be consolidated versus unconsolidated, we just have a different viewpoint now in terms of the centers we'll probably close on through the rest of the year, and so that's an element too. But certainly, the growth in our Hospital revenues is a key driver of that.

And sorry, just to clarify that. So the things you're closing, should we think of them as lower margin that has sort of more upside opportunity? Is that fair, or...?

No, you have to think about, if we're making an investment in a center where we own less than a majority interest, you don't consolidate it. So, our mix of centers – when we look out through the rest of the year and what we've done this year, there's more of a mix towards centers that we consolidate or will consolidate, so that has an impact. So, as you know, when you consolidate a business you have 100% of the revenues on your books as opposed to just your share of the earnings in the equity earnings line.

Okay. All right. Thanks. And then just a follow-up, a question here maybe on the leverage profile. If we include or consider the kind of $500 million settlement as sort of debt, I think the leverage ratio goes a little over six times, I think, and I know the goal is sort of high 5s by year-end and five times by 2018. So, I guess the question is just, do those targets still exist in terms of what you expect to achieve, or should we think about that a little bit differently just given obviously the level of settlement? Trevor Fetter - Chairman, President & Chief Executive Officer: Yeah, our view on our objectives on leverage have not changed. Obviously there is an outflow of cash here which will affect the leverage ratio by a number of basis points. But our overall objectives, our outlook on capital allocation, has not changed. And we did not answer your question about the charges relating to USPI, so I'd like Bill and Jason Cagle to address to that. William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc.: Okay. Hey, Ralph. On the bariatric line of business, I want to give a little context. It's a small business line for us, it contributes about $10 million a year. And you may or may not know that government payers and approximately half of the commercial payer products provide coverage for bariatric surgery in a hospital, but do not provide coverage for bariatric surgery in the ASC setting. So, as a result, much of the bariatric work in this service line is done on an out-of-network basis in the ASCs. And you probably recall that our overall strategy for many years has been to be in-network and enter into contracts with our commercial payers whenever practical; 98% of our current cases are in network. So, we determined last quarter that we should restructure our bariatric service line to pivot away from the ASC setting and refocus this service line on an inpatient basis within our USPI surgical hospitals, and as I mentioned, our Tenet hospitals and with some of our other health system partners. Jason, you want to...

Yeah. Just to give some further detail on the $12 million, Ralph, because it probably seems disproportionate to a business that makes $2 million a year for us. When we undertook the decision to restructure it this quarter, about a third of that $12 million were just the operational losses for the quarter as we wound down the ASC side of it and start to pivot into the hospitals. About two-thirds of it relate to prior periods in AR. As Bill said, we want to position this as a service line within hospitals in partnership with the payers and in network, and decided that this was the right time to do it. We think that the charges related to this restructuring are largely behind us. There might be small, immaterial headwinds in the balance of the year, but we took as much of the charge as we could during this quarter.

Okay. Thanks for the details.

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

Good morning and thank you. I'd like to focus a little bit on a different part of your guidance which is causing me and some others a little confusion this morning. The NCI guidance had been, if I'm not mistaken, $320 million to $340 million; it's now gone up to $330 million to $350 million. You've increased your ownership of USPI, you're consolidating entities within USPI. So, why is the NCI going up, apart from your growth, or is it just your growth?

Good morning, Sheryl. This is Dan. Yeah, the growth in the USPI business is creating additional NCI on that line item. And so, based on our run rate and based on the transactions that we anticipate through the rest of the year, we believe it's appropriate to make an adjustment there. But yeah, we've been generating very strong growth in the ambulatory business, and with centers with minority partners with an interest, then that obviously has an impact on that line. So, that's really what's driving that.

Okay, because I'm still confused. So, with the overall guidance staying – the range for EBITDA staying the same, it's a little confusing when you say, boy, USPI is really growing. Our hospitals are doing well. Conifer is doing at the margin a little bit better than you thought. And you're increasing the non-controlling interest because of that growth, but you're not increasing EBITDA. Is this just being conservative on both lines, or is there some other dynamic here that's pressuring the EBITDA that we need to understand?

Well, I would point out a couple of things. One, the EBITDA line has been impacted by this bariatric charge that I mentioned, $12 million, as well as – and we haven't really talked about this yet, but on a year-to-date basis, we've climbed over and absorbed $20 million of additional malpractice expense because of the decline in Treasury rates. So, there's over $30 million just in those two items alone. So, we're stepping over them. They're not excuses. But that has an impact in terms of the growth on the ambulatory side has obviously been very important to us, but we have absorbed those two items that I just pointed out.

Okay. So, that's helpful. So, now we understand where $30 million of upside could have gone. Can we focus a little bit on volumes for a moment? So, you had positive adjusted admissions, you had negative admissions, comps were good last year but maybe not as – they were strong but maybe not super strong on the hospital side on the same-store basis. Can you talk a little bit about what the volume dynamics are, and how you anticipate volumes to play into your performance for the back half of the year and what we should be aware of? Because I get it that you're shifting into higher acuity. I also get it that you've changed your market complexion quite a bit with all of the investments that you've made and the divestitures that you've done. But this is still a learning experience, and with the weakening of volumes and it seeming like some headwinds on ER visits and other things, I think we need to understand that as underlying both your guidance and your performance. Thanks. Good morning, Sheryl. This is Eric, I'll address your question. So, what I would say from an admissions standpoint is we still feel really good about our growth in high-acuity, high-margin service lines. And what we've seen in this quarter, and we've talked about this for a couple of quarters, is a continued drop in our lower-acuity admissions. So, if you look at really three service lines, OB, pulmonary, and digestive medicine patients, they represent about 175 basis point decline in our key focus service lines. For example, our joints were up almost 10% this quarter. In our higher acuity lines we continue to see the growth we expect. And so, when we look at our overall business, we feel good about our guidance, where we're focused on. And of course, we focus on adjusted admissions, which were positive, in our range. And we feel like that's something that we'll continue to drive.

Okay. Very good. Thank you.

And we'll take our next question from Andrew Schenker with Morgan Stanley. Andrew Schenker - Morgan Stanley & Co. LLC: Hi. Thanks. Just maybe following up on the revenue per adjusted admission comments you just made. I appreciate the continued focus on high-acuity service lines and the decline in low-acuity. Maybe if you could talk a little bit more about that, but also, how we should think about the rest of the year playing out, right? I mean, your guidance still suggests 2% to 3% increase for revenue per adjusted admission. But for the first half it was at about 3.8%. So, are you guiding to an actual step-down there or was there just other moving parts we should be thinking about? Thank you. Yes, so I'll give a couple of quick examples of what's happened with acuity. So if you think about the number of deliveries or respiratory conditions that are coming out of our admissions numbers, those are obviously lower supply cost, lower revenue admissions that would affect that number. We continue to see, for example, in our heart program growth of our TAVR programs, our higher-acuity MitraClip programs. And so, those are higher intensity. They obviously drive higher revenue. You're seeing it show up in our supply expenses, but overall that's a targeted area for us. So, I think that dynamic of what's leaving and what's coming back is obviously driving that. But I'm going to let Dan talk a little bit more about the net revenue.

Yeah, so as we talked about in the quarter we had very strong net revenue per adjusted admission, close to 4%. That's due in large part to the growth we've been able to realize in some of these more complex service lines. As far as the outlook from the rest of the year, we have a range of 2% to 3%. Right now, probably looking at probably a higher part of that range. But, as some of the lower acuity business comes back on, that would have an impact on that metric. Andrew Schenker - Morgan Stanley & Co. LLC: Okay. That would make sense. So a strong flu season, I guess, in the fourth quarter could obviously swing that number around. Maybe just following up on the health plan, and you obviously – you guys called it out, got a question already on it. But it's not something most of us focus on at this point. So, maybe if you could just update us really on where you stand with that? I mean, how many members or what is the actual revenue running through the health plans? And maybe just more importantly, give us what are your plans for that segment going forward? Are you actively trying to grow membership? Or is this really a learning laboratory for you? I mean, what are your hopes with the health plan going forward? Thank you.

Andy, it's Dan again. Let me address those points. In terms of the health plans, so, let me be absolutely clear, there was nothing unusual in the quarter from an expense standpoint. Again, we pointed that information out because we get questions periodically about what's driving some of the other operating expenses. So, the growth in those costs is, as I mentioned, the number of lives that we have this year versus 2015 is higher. As an example, our exchange lives in Arizona, in the Phoenix market, there's been growth in the exchange lives there, which has been very – from an integrated market perspective, it's helped our hospitals in terms of growing the business in our Phoenix facilities. And so, as you take on more lives, obviously you have additional premium revenues and the costs associated with that, with the MLR. In terms of the overall economics of that business, how you should think about our health plan business, it's – there's revenues of close to $600 million on an annual basis. Andrew Schenker - Morgan Stanley & Co. LLC: Hello? Trevor Fetter - Chairman, President & Chief Executive Officer: Yeah, revenue is about $600 million on an annual basis, is the conclusion to Dan's answer. Andrew Schenker - Morgan Stanley & Co. LLC: Yeah. Sorry, sorry. It cut off very abruptly. And then maybe the second half, is your goal to really continue to grow that health plan going forward, or are you trying to maybe create new markets to enter? What are your long-term strategies for it? Thank you. Trevor Fetter - Chairman, President & Chief Executive Officer: Okay, Andy. The health plan business is really something that came to us with the Vanguard acquisition. It was oriented toward certain specific markets. And it is not our aspiration to become a major player in health plans in the industry. I think there's always a role for local health plans in certain circumstances in certain markets. And we are continuing to operate those health plans, and in certain cases, expand them within those markets.

And we'll take our next question from Chris Rigg with Susquehanna Financial Group.

Good morning. Just wanted to see if you can provide any color on the acuity level of the exchange admissions? Clearly, the HMOs are pointing out that the morbidity level there is quite a bit higher than they had projected. Are you seeing acuity gains there as well in addition to the volume growth? Trevor Fetter - Chairman, President & Chief Executive Officer: Apparently, they're 2% higher than normal commercial.

Just sort of like a case mix? Trevor Fetter - Chairman, President & Chief Executive Officer: Case mix, yes. Case mix is 2% higher on the exchange admissions than the total commercial book.

Got you. Great. And then, hate to come back to this, but just on the Bariatric costs, is the $12 million in addition to the EBITDA headwind you would expect? So, you said $10 million a year, and then does the guidance include a $5 million reduction in profits sort of on a core basis, or do you expect to gain that back pretty quickly in the in-patient side? Thanks.

Good morning, Chris. This is Dan. Yeah, the $12 million charge, as we mentioned, relates to the restructuring of the business. Roughly of it relates to prior years and the other half relates to this year. In terms of how – again, how you should think about this business, it's about a $10 million annual EBITDA business. And so, when you think about that, it's roughly $2 million to $3 million of EBITDA on a quarterly basis, and that's assuming if you would lose all of it and we're not going to lose all of it. We've factored a small amount into our outlook for the rest of the year but it's manageable. And the USPI business is growing incredibly well. And so, we're very optimistic about the second half of the year for the Ambulatory segment.

Great. Thanks a lot.

And we'll take our next question from Kevin Fischbeck with Bank of America.

Good morning. This is actually Joanna Gajuk for Kevin. Thanks for taking the question here. Just in terms of the outlook. I appreciate your comment around pricing for both segments, but also in terms of the outlook for Ambulatory segment, it seems like the same – system-wide volume outlook was increased by 200 basis points. So, any color you might give us there in terms of what's driving that and is there any particular line or any particular geography that's driving that better outlook? Thank you. William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc.: This is Bill. We have expressed over the last several quarters how pleased we are with how our volumes are growing, and it's different enough that we feel very comfortable raising that guidance for this year, although we do still think long term we'll be back to something more close to our historical averages. So, we just continue to have a number of favorable tailwinds, some specific to our industry and some specific to our company, that show us enough favorable outlook that we raised that. Was that your question?

Okay. Yes. I guess it does, so you're pretty much saying that it looks like sort of the overall trend, nothing really to spike out in terms of anything particular that's driving that? So that helps. And then, shifting to the Hospital business, in terms of the uncompensated care that actually declined year-over-year, but at the same time self-pay volumes increased, so can you just walk us through how we should think about uncompensated care here?

Good morning. This is Dan. Let me address that. Listen, we're very pleased with our uncompensated care trends; the two key drivers, as I mentioned in my remarks, is the further diversification into the ambulatory business, which has incredibly low levels of bad debt compared to a hospital facility, is obviously driving improvement in that metric, and let me point out again, Conifer is doing a good job managing our revenue cycle operations. They have been, and it was evident again this quarter. Now, in terms of some of the specific metrics for the quarter, in terms of the uninsured statistics, yes, the uninsured admissions were up 7.8%, which seems like a lot, but it's a very small base and it was in several markets. We're not overly concerned about that. The number can move around from quarter to quarter. Outpatient was actually down, and so when you look at our compensated care trends across the organization, they've been improving, and it's one of the reasons we adjusted our guidance down for bad debts from a range of 7% to 7.5% to 6.75% to 7.25%.

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

Hey, good morning, guys. Trevor, just a question on how you think the surgery center business melds with your hospital business. As we see the acuity levels go up, you guys pointed out joints, but at the same time, we're starting to hear your other surgery center competitors talk about pulling joint replacement surgeries or trying to gain that market away from the acute care hospital. So, how should we think about the potential cannibalization between your ASC business and the core acute care business? Trevor Fetter - Chairman, President & Chief Executive Officer: It's a great question. There are plenty of examples I think in different businesses and different industries of companies facing a choice, whether to cannibalize their own business when a disruptive technology or a different type of channel comes along or whether to capture that opportunity themselves, and we've chosen to capture the opportunity ourselves, and well beyond our own markets and networks of acute care hospitals, by being in this business in a huge way through our system of extended network and system of health system partners. So, that's a strategic choice and yes, there is some degree of cannibalization. And yes, it also plays out in the acute side, as Eric mentioned, in a change in the types of procedures that you see in hospitals. But the synergies are significant. Think of the buying power of the Tenet hospitals being extended to USPI, think of the relationships that we have with important national, regional, local payers that are extended to USPI, and add that to Bill's comments about pursuing an in-network strategy. These are really important linkages that go well beyond whether a particular procedure is performed in one setting or another. And regardless of anything that we did, that sort of movement of site choice is going to occur. The payers are going to drive it, the consumers are going to drive it, and we might as well benefit from it on the receiving end.

So, to follow up on that, Trevor, given that dynamic that you just described, so as we think about kind of like the longer-term volume trends in the inpatient setting, especially in the surgery front, I mean, is it basically safe to say that that will be flattish to maybe down going forward? Trevor Fetter - Chairman, President & Chief Executive Officer: No, because you've got really powerful demographic forces that are driving complexity in cases, they're creating more customers every day, let's start with that, the increase in Medicare being the most important statistic there, the increase in longevity of the population, the new procedures that are enabled by technology. Eric mentioned TAVR procedures; it didn't even exist a decade ago. So, as long as we are innovating in medical technology, as long as people are living longer, getting older and there are more of them coming along, I think the acute care business is very solid. And there are, as you know, enormous barriers to entry. And we have strong market positions in our markets.

And we'll take our next question from Matthew Borsch with Goldman Sachs. Matthew Borsch - Goldman Sachs & Co.: Yes. I was hoping maybe you could elaborate a little bit more on the demographic trend. Obviously, we're all aware of the baby boomers turning 65, which started in 2011 and 2012. I think that demographic peaks in terms of growing the number of people turning 65 by 2021. But how do you think about the demographic in terms of, is there sort of an age at which you see the higher utilization? I know it's not a black or white, but maybe do you have any theory as to whether that age point has moved older – that at least on average, people are staying healthy longer, so maybe it's not people turning 65 as much as people turning 70, or something like that? Trevor Fetter - Chairman, President & Chief Executive Officer: Right, 70 being the new 50. Matthew Borsch - Goldman Sachs & Co.: Correct. Trevor Fetter - Chairman, President & Chief Executive Officer: You've got all of these factors taking place all at the same time. And it's very difficult to tease out exactly what is driving our business. I'll ask Eric to talk about another factor that we really haven't mentioned so far in the call, which is market share. But you look at our business and the growth that we're reporting, not only this quarter, but that we've been reporting, this is a very solid business. There are other industries across the economy whose revenues are shrinking. The demand is being reduced. And we benefit from this being a domestic business that has very significant barriers to entry, and the investments that we've made in service lines and facilities, and that has been translating into an additional factor of growth, which is small but steady improvements in market share. Eric just had some of the statistics that he was sharing with us the other day. So, can you elaborate on that? Sure. So, I think you're raising a lot of good questions. And obviously, demographics play into what we see. We very closely track market share, including Medicare market share, which is where obviously the demographics are playing the biggest role. And a majority of them are markets we are taking incremental market share, and it's in those services where we expect to see the most acute growth that is unlikely to transition. I think just to tie in a little bit earlier to what Trevor said, too, our relationship with USPI actually allows us to have a broader alignment with physicians on all segments of care. And so, when we look at our market share trends, we're actually able to serve a patient in the right place for their needs, and there are specific areas where we continue to expect growth: cardiology, neurosurgery, neurosciences, orthopedics. And there will be a mix of stuff that goes to the outpatient side. But with Bill and I very closely coordinating, we actually think we can offer a superior value to medical staff and physicians that want to have the full continuum.

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

Yeah. Thanks. Good morning. I wanted to follow up on the question that was asked on the cannibalization. So, I think it's fascinating when I look at your P&L each quarter, what is the pricing differential? And this may be very obvious to everybody, but on the hospital outpatient side and the ASC side, and including the fact that your contracting probably benefits from the fact that you're all one-stop shopping to be able to – to kind of get to a mid-single-digit EBITDA growth in the long term, I guess, despite the cannibalization, when you do your models looking outward. Trevor Fetter - Chairman, President & Chief Executive Officer: Well, obviously, with the range of facilities we have and the breadth of our outpatient channel, we've got various different types of facilities that range the entire spectrum on price points. And you're right, the consumers, payers, physicians, all the participants, are becoming far more sophisticated and price-sensitive shoppers. And that's why we believe we should have this full spectrum of facilities, so we can really offer these services at the right place for the patient, at the price point that makes sense for their particular condition and ambulatory status and proximity. So, I think, it's obviously cheaper as you get out of the hospital system – setting because you don't have to run ambulatory surgery centers 24/7. You don't have to have money-losing services or emergency services or staff on standby, all those kinds of features. But again, that's the strength of our broad portfolio at work, and we think we're very well positioned for all of these trends.

And our final question today will come from John Ransom with Raymond James. John W. Ransom - Raymond James & Associates, Inc.: Hi, I just wanted to ask a couple of detailed questions on USPI. If you look at like-for-like services, either at Tenet hospitals or USPI ASCs, what's the average savings, if you will, for the commercial payer to migrate, say, a knee replacement from the hospital to the ASC? William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc.: Well, it varies a lot. I'd put an average range of between 15% and 25%. John W. Ransom - Raymond James & Associates, Inc.: Okay. And my second question is on the CJR initiative, just from a public policy standpoint, do you think there is any chance in the next couple of years that CMS might make ASCs eligible for reimbursement for total knees and hips? William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc.: Well, I'll give you my opinion on it. I don't think we're going to see ASC joints as an immediate windfall. Rather, I think it's another indication of the continued movement to shorter stay. Of course, right now Medicare doesn't even pay for total joints on an out-patient basis. And patient selection enters in very quickly and prominently based on age and weight, overall health, attitude, home environment. So, I think we'll see a migration but not some type of big windfall. That's my personal opinion on it. John W. Ransom - Raymond James & Associates, Inc.: Okay. And the broader question for Tenet, I mean, this was the first quarter of CJR. Have you made any evolutionary moves or even beyond evolutionary to start redirecting some of your post-acute admissions away from certain settings into say home healthcare? I think it's a very small initial effect. I will tell you, we obviously have had programs in BPCI and other things where we've worked on total joints in the past and we've been very successful in managing our post-acute care costs and effectively working with our docs. So we have great experience in this. We expect to be successful in CJR in the same ways. But it's really early on. John W. Ransom - Raymond James & Associates, Inc.: Okay. Thanks a lot. Trevor Fetter - Chairman, President & Chief Executive Officer: Thanks, John. That was our last question. So, I believe that concludes the call. Thank you all for joining us. And we'll see you in November.

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.