Tenet Healthcare Corporation (THC) Q3 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Tenet Healthcare Corporation Third Quarter 2019 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Brendan Strong, Vice President, Investor Relations. Please go ahead, sir.

All right. Thanks, Kevin and good morning, everyone. 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. In addition, please note that certain statements made during our discussion today constitute forward-looking statements. These statements relate to future events, including but not limited to statements with respect to our business outlook and forecasts, our future earnings and financial position and future corporate actions. These forward-looking statements represent management’s current expectations based on currently available information as to the outcome and timing of future events but, by their nature, address matters that are uncertain. Actual results and plans could differ materially from those expressed in any forward-looking statement. For more information, please refer to the risk factors discussed in Tenet’s most recent Form 10-K and subsequent SEC filings. Tenet assumes no obligation to update any forward-looking statements or other cost or information that speak as of their respective dates. You are cautioned not to put undue reliance on these forward-looking statements. I’ll now turn the call over to Ron Rittenmeyer, Tenet’s Executive Chairman and Chief Executive Officer. Ron?

Thank you, Brendan and good morning to everyone. As stated in our earnings release last evening, we had a very solid quarter across all of our business segments. And importantly, against the numerous specific areas we have targeted for 2019, including physician recruitment, quality metrics, ambulatory acquisitions, marketing, board refreshment and cost improvements. Overall, I am very pleased with our results this quarter and the solid progress we’re making on core initiatives to drive performance improvement. It’s now approaching two years since we started the transformation of the company. During this period, there have been some significant and notable changes starting with the team we have built during this period. Regardless of the process and ideas we bring forward, that sets up the context for change, without a team that has both the capacity and the capability to embrace, refine and execute these changes. Transformation becomes nothing more than an academic exercise. This team fits the profile of changed leadership, embracing accountability, ownership, inquisitiveness and the touch needed to drive sustainable changes to the core business. Tenet is in a much different place than it was two years ago. And while we’re not done, the facts clearly support that we’ve begun to shape the future of the company with a new foundation built on results. We are establishing consistency in execution and delivery of the commitments we make relative to all aspects of the business. We have addressed the variations by building a strong depth in analytical skills, centralizing the team and providing this resource across the enterprise, which in the past was missing. Decisions are now built on an analytical framework and while experience and history do matter, requiring the depth and accuracy of strong analytical support in decision making has made a notable improvement in how we do our work daily. These changes have been reflected in the past trends throughout the last eight quarters. The quarter we are reporting on today continues to change as we have committed to in the past. Within our hospitals, the volume growth we delivered was broad-based with admissions up 3.6% continuing the trend from the last two quarters. We’ve also improved upon so other key operating metrics, including adjusted admissions, which were up 2.8%, surgeries up 0.8% and when we combine this with our USPI facilities in Tenet markets for more realistic and competitive view, surgeries were up 3.2%. Additionally, emergency room visits and outpatient visits also continued to show improvement, while commercial volume continues to trend higher and revenue per adjusted admission and acuity grew as well. Within USPI, our ambulatory business volumes in our surgical and non-surgical facilities were strong, resulted in case growth of just over 5%. We also delivered EBITDA less than NCI growth of more than 17%, excluding Aspen, which everyone knows we divested a year ago. We added five surgical facilities to the ambulatory platform in the third quarter, including forming JVs with three new healthcare partners. Year-to-date, we’ve added a total of five new health system partners and we plan to close on more in the fourth quarter with a pipeline that remains very strong and robust. Looking at the hospital on the ambulatory platform together in the improving growth trends, we believe we’re seeing more of the benefits of the work we’ve been doing to manage our continuum of care. This includes improved access, better coordination between our Tenet Hospital markets and USPI, scheduling improvements in our hospital ORs and continued investment in clinical capacity and technology, and finally, our marketing program of a community built on care. It takes time, diligence and focus across every aspect of the business to make these changes take hold. We realize this requires continued effort to build on every day and we’re committed to doing so. In both our hospitals and USPI facilities, we continue to drive improvements in quality and patient experience. This includes improved trends in HCAHPS, star ratings and to date we have 52% of our acute care facilities receiving a Leapfrog grade of A. We continue to focus on patient safety, infection control, et cetera, making improvements across the entire system. The work on the spin-out of Conifer continues as scheduled. We have a fully engaged team coupled with outside experts with a very detailed work plan and milestones that we closely monitor and review quarterly with the Board. At this point, we’re immersed in the preparation of the filings and assorted details. The recruiting of the CEO is moving along very well and we’re engaged in the first past interviews. I suspect this will take until late in the first quarter as we wrap up that part of the process and account for the end of the year 2019 holidays, normal delays, et cetera, which are inevitable. We remain competent on the schedule already discussed. We see no changes to the schedule at this point. We have nothing more to report beyond these points other than it is underway and on schedule. From a performance standpoint, Conifer delivered EBITDA growth of more than 11% and we’re raising the range of Conifer’s adjusted EBITDA outlook for 2019 by $10 million. Now withstanding the solid EBITDA performance, revenue growth remains a challenge and a key focused area. We recently announced the addition of a new Chief Commercial and Strategy Officer at Conifer, who is a key hire to lead this effort. Jeff Jones, who has 30 years of strategy, operations and revenue cycle experience in the healthcare sector, joined the team last month. Jeff will be restructuring the commercial part of the business and developing a new, stronger sales team. Hiring a new commercial leader is one of the steps we outlined on the conference call in July when we announced our plans to spin-off Conifer. We’re pleased to have Jeff on Board and look forward to working with him and the rest of the Conifer leadership to develop a new sales and marketing plan for the company. Consistent with the 2019 outlook we provided in February, we expect to deliver approximately $2.7 billion of adjusted EBITDA this year. Even though we’ve faced some significant unanticipated headwinds that have totaled more than $50 million to date, including more than $25 million in the third quarter. Those headwinds included Hurricane Dorian, the effects which were very real for some of our team members who had to deal with the aftermath of flooding in their own lives as well as the lives of their families, friends, neighbors and communities. Storm impacted our operations in both Florida and South Carolina as we evacuated locations that were in the path of the storm and canceled procedures. Our caregivers and disaster recovery teams did an outstanding job to protect our patients and facilities and I’m very grateful for their efforts and dedication. We also had a one day labor strike affecting 12 of our hospitals. During that period, our hospitals were fully operational during the strike and we had no diversions, but it did require some additional expenses. Dan will discuss some of these other headwinds and tailwinds that we experienced in the quarter later in the call. We also continue to deepen integration efforts in the terms of the back office functions which we’ve discussed in the past. As I’ve stated, we are consolidating the three headquarter locations into a new building in North Dallas. Teams will start moving into this new space next month and the process will continue in waves into early in the first quarter. The benefit is very clear to all of us as we bring together the talent pool with face to face interactions that always outweigh a long drive or phone call and the ability to capture and create synergies going forward. This is long overdue and we see this as a positive change for all of our colleagues as well as providing significant efficiency and communications and moving into action. Dan will discuss the continued cost savings process and overall I can say we remain on track to exit the year with $200 million in run rate savings, bringing the total cost savings to $450 million in a little more than two years. Part of this comes from our shift to becoming more of a global operation that is more efficiently equipped and staffed 24 hours a day. To that end, we officially opened our Global Business Center in Manila in mid-August and that’s off to a very good start with personnel in place and already functioning. Our transition of certain roles has begun and will continue into and throughout next year. I also want to touch on our continued effort on board refreshment. As part of this commitment, we named the Director to the Board in August. Dr. Nadja West is a retired Lieutenant General in the U.S. army, the 44th Surgeon General of the army and the former Commanding General of the army’s Medical Command. She has also held leadership roles in multiple hospitals during her career. She is a great compliment to our Board and her experience and insights will be invaluable to the team. Ed Kangas and Brenda Gaines will be retired from the Board later this week. They have both had long and distinguished 10 years at Tenet Directors. Tirelessly serving the company and providing pivotal guidance through many periods of significant industry and company transformations. We are very grateful to Ed and Brenda for their leadership and service. They will be missed. As a result of these governance changes, 70% of Tenet Directors, who have joined the board within the last two years. There are just a few other minor things I want to touch on before turning the call over to Dan. Last month, we introduced our new mission and vision and values to our employees underscoring our commitment to truly redefine Tenet’s culture. These changes are very straightforward and they communicate what we really stand for as an organization. We stand for compassion. We stand for quality, integrity, accountability, respect and inclusiveness. These values also support and are closely tied to all the work we are doing under the community built on care marketing program. As I’ve spoken about before, our employees are the ambassadors of our program and our campaign. Our employees, physicians and patients are featured in all of our ads and they have really embraced the message of this campaign better connecting to those in our communities. Our ads are much less digital. We realized many of our communities listen to radios, read papers. And now we need our patients in their environment with a more human touch to them in their communities. I also want to extend our support to the community of Dallas. Just two weeks ago, many of our neighbors, friends and team members suffered tremendous loss from the very destructive tornado. The devastation has been very severe in certain parts of the city and the response by first responders has been excellent. We were fortunate to suffer no damages to our offices, but I know several people had been displaced in their homes and will be for some time. We’re grateful to everyone who’s been working and we will be working to rebuild our community. And finally, I want to take this opportunity to thank Brendan Strong for his years of service as Vice President of Investor Relations. As you know, we made an announcement a few weeks ago that Brendan would be taking a new role as Chief Financial Officer of our Massachusetts market. This is a great opportunity for Brendan to gain operational experience in a large and complicated group of facilities. And his new role is very an important position in a key market for the company. We’re looking forward to his contribution as one of our operational leaders. I also want to take this time to announce the addition of Regina Nethery as Tenet’s Vice President of Investor Relations. Regina was Humana’s Enterprise Vice President of Investor Relations for many years and she is well known to many in this space. We are both excited and fortunate to have someone with our excellent background joining the team and leading the investor relations function. She’ll be on board by mid-November and an official announcement should now be crossing the wire. So with those comments, I’ll now turn it over to Dan to get into some the further details. Dan?

Thanks, Ron, and good morning everyone. Let’s begin with volumes. Growth in our admissions and adjusted admissions were strong again in the quarter. Adjusted EBITDA was up 9.4%. The $631 million that we delivered this quarter was above the midpoint of our outlook range. I think it is important to highlight that we achieved this even though we face more than $25 million of unexpected headwinds. The hurricane, a reduction in the discount rate, slightly lower California Provider Fee revenues and the nursing strike, none of which was anticipated when we provided our outlook in August. EBITDA in our hospital segment was up a little over 7%. USPI’s EBITDA was up 13.7% and EBITDA less facility-level NCI was up 17.5%. Conifer’s EBITDA was up a little over 11%, driven by 500 basis points of margin improvement. Adjusted EPS was $0.58, which was above the high end of our range. And adjusted free cash flow was $318 million this quarter. Turning to Slide 5, volume growth in our hospitals has continued to accelerate for three consecutive quarters. Admissions increased 3.6% and adjusted admissions are up 2.8%. Surgical volumes in our hospitals improve this quarter too, up 0.8%. And if you combine our USPI surgical volume growth in our hospital markets, surgeries grew 3.2%. Once again, our volume strength was broad based with growth in a majority of our markets. Commercial inpatient volumes were also strong and grew at a similar rate to our overall growth. Revenue per adjusted admission was also solid, up 2.9%. Our costs per adjusted admission continued to be well managed, up just 2.3%. We continued to successfully execute on our incremental $200 million cost reduction program we announced earlier this year, which increased our total costs reduction target to $450 million over the past two years. The savings, we realize under this program will continue to grow as we move through the fourth quarter and next year. Now let’s move to our Ambulatory business on Slide 6, driven by very strong growth in surgeries which were up 4.4%. Surgical revenue increased 6.9% on the same-facility system-wide basis. Revenue per case was up 2.5% consistent with our expectation. In the non-surgical business, revenue increased 5.9%, with visits up 6.3%. And as you can see on Slide 7, we are pleased with the strong and consistent results USPI has been delivering with EBITDA up almost 14% and EBITDA less facility-level NCI up 17.5%. Now let’s talk about Conifer on Slide 8. Conifer delivered another strong quarter with EBITDA up 11.1% to $90 million. Continued cost reduction initiatives drove a 500 basis point improvement in Conifer’s margin. I’d also like to point out that this was the fourth consecutive quarter we delivered more than 300 basis points of margin improvement at Conifer. Moving to our outlook for 2019, we made a number of changes to reflect our results through September and our fourth quarter expectations. We are optimistic about continued volume strength than the fourth quarter and raising our volume growth expectations for the full year. We are raising the midpoint of our adjusted EPS outlook by 10%. We are reiterating our outlook for adjusted EBITDA not withstanding more than $50 million of unanticipated headwinds so far this year. And we are reiterating our outlook for adjusted free cash flow. Additional details on our 2019 outlook are contained on Slides 9 through 12. On Slide 12, we added an adjustment to the California Provider Fee program revenues to our EBITDA bridge. We now expect revenue from this program to be $246 million in 2019, down from my prior expectation of approximately $260 million. The good news is that the program met the criteria for revenue recognition in the third quarter allowing us to record $58 million of revenue in the quarter. We anticipate recording a similar amount of revenue in the fourth quarter. We also added an adjustment to the bridge for changes in the treasury rate we use to discount our malpractice and workers’ compensation actuarial liabilities. The decline in the treasury rate added $29 million of additional expense in the first nine months of this year, whereas an increase in the treasury rate during 2018 lowered expenses by $12 million, a $41 million year-over-year headwind. Before concluding, I would also like to provide a few preliminary thoughts on 2020. We are working on our business plan for next year and we’ll continue to do so over the next several months. Based on what we know today, we expect to produce adjusted EBITDA in 2020 that is consistent with consensus estimates. Here are our few factors shaping our views on 2020. We are confident in our ability to drive continued organic volume growth in both our hospital and ambulatory platforms. We have very good visibility into pricing with 80% of our commercial book of business already under contract. The pipeline for ambulatory acquisitions in de novos remains strong and we expect our strong cost management to continue into next year. All-in, we expect to continue driving growth in revenue, EBITDA, free cash flow and EPS in 2020. And we’ll provide additional details when we release our fourth quarter earnings on February 24. In summary, we delivered another solid quarter including continued volume strength in our hospital and surgery center platforms and continued margin expansion at Conifer. We reiterated our outlook for adjusted EBITDA for 2019 and raised EPS by 10%, and we are confident about our growth prospects for next year. Let me now turn the call back to Ron.

Thanks, Dan. As Dan said, it was really solid quarter with improvements in each business. We are seeing more consistency and execution and growth patterns and we’ve really do have clear momentum. We continue to embrace change in all areas including people, but we are delivering on our plans despite of that and we’re focused on the areas that need to be addressed. So we’re looking forward to continuing to update the progress as we move forward. So with that, I guess, Brendan, we’re ready for questions.

Yes. Kevin, we are now ready to take questions.

Certainly, we’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Josh Raskin of Nephron Research. Your line is now live.

Hi, thanks. Good morning, everyone. Congrats again Brendan and Regina as well. A question is really around the USPI pipeline, it sounds like you had three new partners, it sounds like a couple more opportunities in the fourth quarter. And correct me, if I’m wrong. But it feels like there’s a little bit more momentum there from a partnership perspective with some of the big systems. So curious if you’re seeing that, what’s driving system awareness to the outpatient surgery model? What’s sort of causing that change? And then maybe on a related topic, are the payers helping with that transition? Is there something going on in the market, where it makes more sense the payers are kind of encouraging that? Or changing things in a way that make it more advantageous for hospital systems?

Hey Josh, this is Brett. No, good observation and you’re right. There is a quite a bit of activity as it relates to health systems around the country. As you alluded to, we added three in the third quarter, one in Texas, one in Florida and one in New Mexico. We had a two additional health system partners earlier in the year and we expect to add a couple more later in the year. And that’s a pretty consistent, that’ll get us to a seven for the year, which is pretty consistent with what we saw in 2018. And to be honest, we are really focused on making sure that we partner with the right health systems around the country. When I say that health systems that are focused on ambulatory growth, focused on physician alignment, because as you can imagine, each of these health system partners takes a whole lot of time and energy and attention, and we want to ensure that we do a really good job of focusing on helping them execute their ambulatory strategy, not only the new health system partners, but the 50 plus health system partners that we currently have within the portfolio. So a lot of activity related to health systems. And to your other question, what’s driving that is the significant shift that many health systems are seeing from inpatient to outpatient and we wanting to make sure that they have ambulatory footprint that can accommodate that business as it moves from the higher cost settings to the lower cost settings. And to your last point related to payers, helping to facilitate this. And I would suggest that you don’t have to look any further than what we saw with United’s announcement a couple of weeks ago related to them actively trying to push some of the lower complexity business out of the hospital and to ASC. So a combination of all those things is certainly driving quite a bit of activity on the USPI side of things, in terms of new health system partners as well as driving growth with our existing health system partners.

Great. Thanks.

Thank you. Our next question is coming from Ralph Giacobbe from Citigroup. Your line is now live.

Great. Thanks. So you’ve seen volume trends obviously accelerate and inpatient particularly outpacing outpatient on the last kind of couple of quarters. Can you maybe just discuss any outside service lines, geographies and maybe more – any more detail on sort of market share? If you have that sort of that data about sort of capturing and what you’re seeing there. Thanks.

Hey, Ralph, it’s Saum. The volume growth is broad based. Obviously, we’re focused on higher acuity. Volume growth from a procedural standpoint, surgeries and in the Cath Lab and the interventional lab, et cetera, which is an important part of our strategy, but just as importantly, as we’ve talked about the last couple of quarters, we’re very focused on making sure we have good emergency department throughput and high quality ICU for sick medical cases that are still significant portion of what we end up seeing in the hospital today. And I think, we’ll continue to be given the aging of the population and kind of the disease burden that we see in many of our markets. So I would say, this is a combination of emergent and elective work and I don’t see that demand slowing. This is a question of us getting our operations and access and ability to schedule and manage our assets better, as a mechanism to move market share and see growth numbers that are above what we see in terms of just basic demographic and utilization trends in our market.

Okay. That’s helpful. And then just a quick follow-up. I think in your prepared remarks, you talked about commercial volume trending higher. I was hoping, you can give us a little more detail. What was the growth in pure commercial? I know when you look at payer mix, it includes, I think that may in Managed Medicaid, but just pure commercial being give a sense of what that growth was and how it compared to what you saw on the first quarter and second quarter? Thanks.

Hey, Ralph, it’s Dan. Good morning. The commercial volume trends were also very positive from we were three or four quarters ago. The growth in commercial inpatient volumes was very consistent with our overall inpatient growth of 3.6%. It was a little bit north of 3%. So the trends there are very similar and obviously that’s very encouraging, given that a line of business.

Okay. And just in terms of relative to the first quarter and second quarter, as it been sort of in that same kind of 3-ish percent range or just third quarter some level of step-up. Any help there? Thanks.

No. The trend is very consistent with the trend that we’ve seen with overall admission. Start out the first quarter, pretty solid, continued to build on that in the second quarter and continued growth in the third quarter. And so the commercial trends were very consistent.

Okay. Fair enough. Thank you.

Thank you. Our next question is coming from Ann Hynes from Mizuho Securities. Your line is now live.

Hi, good morning. So obviously, being able to maintain your 2019 EBITDA guidance with the $50 million headwinds is good. Can you just tell us what is surprising you versus your original guidance that you were able to maintain that despite the headwinds? Is that the commercial admits? Is it – just any detail, it’d be great.

Hey, Ann, this is Dan. Good morning. There’s a couple of things in terms of why we are still feel confident with our overall guidance for the year. Yes, there were – but there was more than $50 million of unanticipated headwinds. So if you go back to when we set our original guidance, let me call off a couple of those. So the discount, right? That’s where the treasury rates have declined as a result of that when we discount and calculate our actuarial liabilities for workers’ comp and malpractice. That’s on $29 million of expense this year so far. And we had not anticipated. $10 million of strike – Hurricane Dorian costs in the third quarter. We also had some incremental nursing costs that we’re noteworthy. And then the California Provider Fee are going to be slightly lower than we had anticipated at the beginning of the year by about $14 million. So when you add those pieces up, it’s north of $50 million. So why are we still feel good about maintaining the guidance? A couple of things. One, the volume environment that we’ve been able to generate, it has improved quite a bit as we’ve moved through the year, including our commercial book of business as I just mentioned. So as we moved, this is the second time we’ve adjusted our overall volume guidance for the full year end. And so we’re – like what we’re continuing to generate so far here in the fourth quarter. And so that has really helped to mitigate some of the headwinds that I just mentioned. Also, our cost management continues to be very good. We were only up a little over 2% this quarter, even though some of those incremental costs were in the quarter. So combination of what we’re seeing from a volume perspective, a cost management perspective, pricing continues to be solid. Our pricing yield continues to be good, close to 3% growth in the quarter driven by negotiated rate increases as well as growth in our acuity. So that’s driving top line revenue growth. And then when you look at our other businesses, USPI continues to perform very well, very consistent, driving nice growth as we’ve moved through the year. Surgical volume growth has been solid. Revenue yield, again, very consistent with their expectations and then Conifer has continued to execute on a number of different cost efficiencies, actions. And you’ve seen the improvement in the margins year-over-year of Conifer. So all those things, when you add it all up, that’s why we feel comfortable about reiterating our outlook for EBITDA, despite some of those challenges we’ve faced.

Ann, this is Ron. We always – there’s never totally clear line of sight to everything. We understand the math and obviously there’s some things we have to step over in the fourth quarter probably as well. But at the end of the day, we have to set a number that we believe is achievable. And if it means, we’ve got to push a little harder to get there, we will. I think we have a very driven organization from an attitude standpoint about going after the right cost things. Obviously, we have really gotten very focused on the growth stuff. We’ve started to use analytical models that are very fact-based now obviously, and making business decisions. So I mean, all of this – none of this stuff just happens by accident. It takes time to build it. And for the last two years, that’s what we’ve worked on. And I believe now we’re starting to see some of this stuff form up and start to make a difference. So we’re going to continue down this path. And so that’s why we were comfortable and uncomfortable all the time about these things. But it really, I mean that’s what makes the job of leading the business what it is. So I think we’re in pretty good shape in terms of what we’re anticipating and so.

All right, great. Thank you.

Thank you. Our next question today is coming from A.J. Rice from Credit Suisse. Your line is now live.

Hello, everybody. Best wishes to Brendan and congratulations to Regina. I guess, first real quick on the cash flow, you’re maintaining your guidance at $600 million to $800 million. I think year-to-date, you’re at $361 million in free cash flow. When you look to the fourth quarter, I guess I would imply you think you’re going to have a big free cash flow quarter. What would be some of the variables that would give you comfort and maybe then us comfort that you can hit that?

Hey, A.J., it’s Dan. How are you? Yes. Let me approach it from two angles, sequentially from the Q3 and then year-over-year, last year’s fourth quarter to this year. So as you mentioned, our year-to-date free cash flow is approximately $360 million. It’s $361 million. We produced $318 million of adjusted free cash flow in Q3. Now to get to the midpoint of our full year guidance, we need roughly $340 million of free cash flow. And in the fourth quarter, we just produced $318 million. So that accounts for a large portion of it. Now there’s a couple of puts and takes to that I’ll call out. But you see, what we generate in Q3 almost gets you there to the midpoint for the full year guidance. But there’ll be some things we’ll move around. Obviously, earnings will be – we’re projecting earnings to be higher in the fourth quarter. So that should drive some additional cash flow generation. We are expecting by $25 million of incremental California Provider Fee funding monies to come in as well as some Texas Medicaid cash to come in, when you compare the fourth quarter to the third quarter, so there’s $25 million. We feel really good about our – when we called this out in the release, we saw about a one-day increase in our days in AR. That’ll come down. And the fourth quarter we made some process improvements, consolidated some sites to improve our processing functions on a longer term basis, save some money as well. That’s about $50 million just there and incremental cash flow. There’s a couple of minor things gone the other way. We do expect our capital expenditure investments to be about $25 million higher in the fourth quarter compared to the third. So that’ll take time a bit. And then interest payments will be roughly $20 million higher in Q4. So when you – you start with the $318 million in Q3, add in some extra earnings, add in by $25 million of extra California Provider Fee funding, about $50 million of additional cash receipts as we drive down days in AR. And then offset that with about $25 million of extra capital investments and about $20 million of extra interest payments. You get to where we need to be for the full year. So that’s the sequential walk. Let me do it also – look at that also year-over-year for anyone who wants to look at it that way. So the fourth quarter of last year, we produced roughly $88 million of adjusted free cash flow. So let’s just say $90 million is for rounding purposes. Our interest payments year-over-year are going to be about $85 million lower in the fourth quarter this year compared to last year. There was roughly $80 million of interest payments accelerated into Q3. Most of which were normally scheduled in Q4. But when we’d just completed our refinancing, it moved some interest payments into Q3 related to that. So there’ll be lower interest payments. So to start with $90 million add about $85 million of lower interest payments. Also we saw an increase of about one day in our days in AR last year in the fourth quarter. We don’t expect that to repeat. In fact, we expect it to go the other way and go down and in the fourth quarter this year. So that is roughly $100 million and we’ll get the year-over-year change of the incremental cash. So $90 million last year, lower interest of $85 million, probably about $100 million positive impact from our days in AR, capital expenditures were higher in the fourth quarter last year than we anticipate this year of about $30 million. So again, that helps the year-over-year comparison. And then there’s about $40 million of additional California Provider Fee cash receipts that are expected in the fourth quarter of this year compared to last year. So a lot of numbers, but I wanted to make sure, like it looked at that from both a sequential standpoint in a year-over-year basis. And when you go through that math, that’s why we feel comfortable with reiterating our outlook for adjusted free cash flow.

Okay. And maybe briefly follow-up on labor costs. I think the only thing you mentioned about labor was the one day strike, but it looks like your overall expenses were well contained. Some of the other providers were saying, they had to see an uptake in agency labor et cetera this quarter. I just wonder if you would comment on what you’ve seen on the labor side?

We actually feel really good about how we’ve been able to continue to manage our labor costs over the past several years. We did see an uptick in Q3 as we mentioned, because of the nursing strike. But we continue to be very focused on premium pay, whether that’s over time, whether that’s contract labor. And I would say, we get a lot of questions. We’ve seen anything unusual from a trending perspective. We really aren’t. So maybe Saum, if you want to add a couple of other point?

Yes. Thanks, Dan. We commented on this last quarter that as we had volumes continue to increase that we face some pressure from a premium labor standpoint. And so this has been a big focus in – the big area focus in the last quarter in terms of managing that more tightly. Yes, look, it’s a combination of things. It’s managing that more tightly and generating more predictability around our fulltime staffing, based upon having the confidence to believe that we’re going to have the volume trends that we saw last quarter continue into the third quarter. The last part of it is, we’ve been focused on length of stay management. As you can imagine, that has an impact here on the net effect of not just the volume but how long the patients are in the hospital and getting to a more appropriate length of stay in every case also gives us some benefits. So this is not something where the work is done. I think this is going to be an ongoing daily operational area of focus into the next few quarters. And again, if we have a winter surge, I’m sure that we will face additional risks in premium labor. But the good news is we have a little of a better foundation at this point in Q3 to work with and manage it.

Okay, great. Thanks.

Thank you. Our next question today is coming from Pito Chickering from Deutsche Bank. Your line is now live.

Good morning, guys. Thanks for taking my questions and nice quarter. And Brendan, thanks for help over the years. To dig a little more into Ralph’s question, you’ve been talking about volume growth investments for a while since, Ron joined and now we’re obviously seeing it. Is the growth coming from increased liquidation of ORs, CapEx investments there? Or is it coming from just increased utilization of existing ERs and ORs? Can you give us any metrics around doctors this year or is it coming from new doctors being recruited or from increasing the utilization of docs active – active docs today?

Pito, it’s Saum. Thanks for the question. Look, it’s a combination of things, as I have been talking about all year. The first area of focus for us has really been what I call growth operations, right? Let’s get our basic processes around access, scheduling, OR utilization, managing block times, managing block times in the cath lab, not just in the OR. A lot of that growth operational work has been an area of focus for us to just make it easier for people who want to choose to do business with us from that perspective. So that’s kind of number one. Believe it or not, there’s a lot of lift from getting that service level right. And what that does is translates into our second area of focus, which has been utilizing our commercial field force to go and share with doctors what we’re able to do from an operational perspective that will make their life more efficient and effective if they choose to give us a chance. Again, some of these doctors haven’t used our operating rooms or cath labs or procedure rooms for many years. Some of them split their business between us and other hospitals. And that operational lift and service lift, we’ve seen more trial again from those folks in our hospitals and we just have to maintain that service level effectively in order to lock in that movement of market share. So that stuff comes down to operations, quality and safety. I mean, it’s a little bit of blocking and tackling but it’s also creating the right environment within our procedural areas to make that a priority for what we do in the hospital. The third area of focus I think we’ve talked about is the – certainly the emergency department. And just making sure that we are not going on diversion, that we’re moving the patients effectively through the continuum. We’re not letting people come into the emergency department and leave the emergency department without being seen. Again, one might think of it as standard blocking and tackling and ER flow management. But we’ve tried to do that systematically across the board. Look on the physician side. I won’t get into specifics there, but not surprisingly the same operational challenges that I described in the hospitals are there in our employed physician practices for example. So ensuring better access, scheduling, lower wait times for specialty appointments. And just like you would on the volume side on hospitals, tracking our ability to grow the physician practices that we own and manage is a very, very important part of our day to day operations improvement work that we’re doing. And if we make those practices more successful and at the same time the hospitals are improving their service environment, we’re likely to earn the business from our employed physicians in the hospital based upon those operations. So again, it’s a bit of a virtuous cycle if you can continue the positive service levels.

Great. And then for follow-up, this quarter we saw a $25 million of non-core headwinds. You guys talk that which depressed margins. As we move into 2020, are there any headwinds besides Medicaid DSH? We should think about – and do you think that we should see – continued just to see leverage on 2020 assuming seems the revenues are at the similar levels?

Pito, it’s Dan. Yes. As I mentioned in my prepared remarks, we feel really good as we move into next year. We expect to continue to generate volume growth not only the ambulatory platform but the hospital platform. Our price and we know where we’re at from a pricing perspective. We’ve got good line of sight there and we feel really good about our ability to continue to manage costs. In terms – listen, there’s always some headwinds, there’s always some tailwinds. If you’re looking for a headwind, I’ll point one out. We have it on our EBITDA bridge, there’s scheduled Medicaid funding reductions next year. That’s no surprise. That’s been out there for awhile related to the Affordable Care Act. But that’s the one that, we’ll have to obviously step over. But again, we feel good about our ability to drive growth next year.

Great. Thanks so much.

Thank you. Our next question today is coming from Stephen Tanal from Goldman Sachs. Your line is now live.

Good morning, guys. Thanks for the question. Just wanted to dig in a little bit more into revenue per adjusted admission. So it sounds like can you just call that as positive. Thinking about that relative to kind of maybe the shift to inpatient if you will or just strong results in that side and maybe a better medical surgical mix. But if I heard anything wrong there, I’d be curious to hear that. And then, maybe just a little bit more color on kind of payer mix. Commercial admissions, I guess slightly softer than overall growth. How about the others kind of Medicare, Medicaid, each inclusive of managed care and then maybe just some color on self pay charity and rates overall. Just that broader discussion would be really helpful.

Yes, Stephen. This is Dan. Good morning. A couple of things. So in terms of the revenue yield growth, as I mentioned, it’s up about 3% this quarter. Very solid, combination of growth and some of our higher acuity service lines. Obviously it plays a part in that as well as our contracting positions that we’ve been able to negotiate. So as we continue to grow our volumes and it’s in the right service lines, it’s obviously going to be a positive revenue yield. So that has improved as well as we moved through the year. Due in part to, as I mentioned, our commercial book of business has continued to improve as we move through the year. And so, we feel good about that. In terms of the payer mix, as I mentioned a few minutes ago, the payer mix has improved, the commercial volume improvement has been very similar to the overall admissions improvements as we’ve moved through the year. So nice to see the commercial book of business being solid as well. In terms of self pay and uninsured, I would say there’s nothing really unusual there. The numbers move around somewhat from quarter to quarter. There’s not a large amount of that volume, but enough of it – if it moves a little bit it can have an impact on the overall percentage that may look disproportionate to our overall volume trends. So I wouldn’t – there was nothing really from an uninsured or self-pay perspective to say that’s anything different than what we have seen over the past several quarters.

Perfect. Thank you. And maybe just a couple of quick follow-ups on those unanticipated headwinds. I guess the California Provider Fee, should we be thinking about $58 million quarterly is kind of the new run rate into 2020. And then just on the other side, on the discount rates, if rates stay unchanged, just to be clear, there should be no more of that kind of pressure both those sound, right?

Yes. In terms of the California Provider Fee revenue, yes, roughly $58 million, $59 million a quarter going forward. And in terms of the discount rate, we didn’t put anything into our guidance for Q4. But listen, the rates move – rates move we either have to absorb additional expense, we have to step over or sometimes you get a benefit from it. But assuming the rates stay where they’re at, and then yes, you wouldn’t necessarily have any more incremental expense associated with that. But the rates are going to move. So it’s just a matter of where they go.

Thank you.

Thank you. Our question is coming from Kevin Fischbeck from Bank of America. Your line is now alive.

Great, thanks. So the volume number has been good and it’s been improving the last few quarters. Just want to get a sense, I think, we’re still expecting and I think a lot of people are still expecting you guys to continue to look at you portfolio. And if things make sense to divest over time, do you feel like the volume improvement, the last few quarters has really changed any kind of sense of urgency or desire? Are you now at a point where your portfolio was right or is there still an opportunity to continue to evaluate it?

Thanks. This is Ron. Thanks for the question. I would answer that this way. We continue to look very hard at our portfolio in total. We believe there are opportunities there, but we’re not going to discuss those publicly as I said in the past, because as you know, when you do that you tend to destroy the opportunity. But I would say, that we have – if anything, we have probably begun to even become more focused on how we’re going to run the business and that’ll be probably a topic that we’ll address to JPMorgan this year in terms of what is our next move on strategy. We just finished a two day strategy session with the Board. We’re doing a lot of work on that now. But I think, from a portfolio standpoint, we’re very open minded about what we do in terms of developing different pathways, including, we’re not against divesting in certain things if it makes sense to us and the price works in our favor and it makes sense in the community. We’re not against acquisitions in terms of USPI and continuing to really become aggressive in that area. As well as understand our balance as we look at debt and we’re very aware of our debt levels and actions we need to take to help spend that down. So all of that is part of the strategy and I just think it’s a little early for us to get into that. But to answer your specific question, we’re probably more engaged in that now that we’re stabilizing some of the other areas than we were in the past. Probably the best way to answer that.

Okay, great. And then I guess when we think about the volume improvement that you’ve seen in the last few quarters, it’s not just you, you seen community do at HCA, it has been doing it UHS has been doing it. So it seems like there’s a broad-based kind of affirming and demands. So it sounds like you kind of attributed some of that improvement to obviously what you’re doing operationally, but also that you’re seeing the demand improve at the local market level. Is there some broader comment or driver that you would point to as to why demand seems to be rising more broadly? Is it just a lag to the economy finally now kicking into improve the volume growth? Or is there something else? Just trying to figure out how sustainable this broad – what seems to be a broad-based return of volumes? Is this the right run rate or is there something impacting this to the positive?

I’ll let Saum jump in here as well. But I would say, from the top, at least from my role, the changes we’ve made obviously contribute to that. It’s not we’re just accidentally seen a lot of people walk in specifically to our hospitals. We have to provide the need that the community needs. We need to position ourself in the community as the primary place of interest as the location that can provide the care that the community needs. And that’s been our focus. We started that with a marketing program in early last year. We have really built upon that that feeds in terms of the type of doctors that you want to bring in to serve a community need. Once you provide that, then the community needs starts to develop and that begins to attract people. Inside, you have to operate the hospital at a much higher level of efficiency, so that you can satisfy not only the patient. In terms of inpatients today have a much higher expectation on quality, much higher expectation on service, you have to provide that. From the moment they walk through the door to the moment they leave. And that goes back to all the processes and programs we’ve been addressing. And then beyond that you’d have to have the service lines that that community requires in terms of what its care is needed. So I think on a broad-base, we have a very focused change that we’ve been making. It’s not just accidental that we’re getting the volume. A lot of it is because we are providing a pathway into servicing a need that the community has that we probably didn’t do as well in the past. So I’ll pass that over to Saum.

Yes. There’s not much to build on Ron’s answer. I think that if you focus your energy on emergent and intensive care with the right set of investments, you’re going to see a benefit there from better service and quality. If you focus your service line investments in the areas that are more relevant for acute care hospitals, things that we can uniquely do that are best done in a hospital, especially a high acuity hospital in the types of urban settings we have. You’re materially going to shift the times of service lines that you’re focused on. And the third thing is that, we in the early part of the year made some investments in some clinical technologies and things that we thought would be benefit. We were selective in how we did that in some of the markets to see if it would yield a benefit. And as they have yielded benefits, have given us more confidence to refocus our capital plans to aggressively be aligned towards some of those service line opportunities that we think we’re best positioned to serve in the acute care hospital. And so now as we get into 2020, we realign our capital priorities in a more deliberate manner. Hopefully that will build upon the operational work that we’ve been doing.

I’m sorry, Kevin. We’re going to try to just take one other question, because we’re coming up on the end of the hour here.

Certainly. Our final question is coming from John Ramsey from Raymond James. Your line is now live.

Good morning. Thanks for squeezing me in here. Dan, if we think about your 2020 comments, and just kind of focus on the EBITDA line for a minute. What is the math on the cost cuts that will be fully phased in 2020 versus partially phased in 2019 and then just some of the net headwinds in 2019 that might go away in 2020 versus new headwinds in 2020? Just want to make sure we have those numbers right. Thank you.

John, it’s Dan. A couple things on that. So the incremental cost efficiencies that we’ll be focusing on next year realizing. As we’ve talked in the past, the $200 million program that we announced earlier this year that we’ve talked about that we’d realize roughly $50 million next year. And then as we move through next year, you’d capture the residual of that. And then I’ve already gone through, some of the tailwinds for next year in terms of volume growth and pricing and cost management. Obviously, our cost management, that’s part of it, $250 million is part of the overall cost management of the organization. And in terms of the headwinds that I mentioned, we have it on our bridge and we’ve talked about that in the past. The Medicaid reductions right now are scheduled to go in unless Congress actually officially delays them. They were delayed at the outset of this quarter. But if Congress doesn’t take action, they would be effective retroactive to October 1 of this year. If they stay in place, those reductions, as I mentioned roughly $40 million annually next year in terms of Medicaid reductions. Also, we’ve talked in the past about some of the Medicare DSH reductions that went into effect on October 1 as well that’s roughly $30 million. But those are some of the high level ones and obviously we’re still working through our business plan and we’ll obviously have a lot more to say when we talk about it in February.

And just as a follow-up, it’s not clear about the Trump transparency rules. But what is your general sense, if you had to guess, it’s your big markets where your commercial rates stand versus some of your big competitors? I mean, the thought is that you guys have always been a bit lower than your competitors. But is that something that would be more apparent to people if in fact this rule does what it’s supposed to do?

Yes. John, I mean, obviously we don’t – this is Saum. We don’t know the commercial rates of our competitors, first of all. But I would say that, with the impressions we have in our general strategy in the managed care arena is to provide value to that customer base through the payer as the vehicle. And so, our objective is not necessarily to be the price leader. So, I suspect that we would fare well. But I’m not sure the value in making those kinds of rates transparent in this environment, because there’s a lot of inconsistency as you know from site to site.

Great. Thank you.

Thank you. We’ve reached end of our question-and-answer session. I’d like to turn the floor back over to management for any further closing comments.

All right, well thanks everybody for joining. It’s been just a great pleasure working with everybody. I’ll still be around for a week here or a couple of weeks here. So feel free to call me (469) 893-6992. And we’ll see you at Credit Suisse on Tuesday with A.J. Thanks.

Thank you. That does conclude today’s teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.