Tenet Healthcare Corp
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Tenet Healthcare Corp
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Good day, everyone, and welcome to the First Quarter 2018 Tenet Healthcare Earnings Conference Call. My name is Rochelle, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later, the company will conduct a question-and-answer session. Today's call is being recorded.
I would now like to turn the conference over to Mr. Brendan Strong, Tenet's Vice President of Investor Relations. Please go ahead, sir.
Good morning. 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 and our future earnings and financial position. 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 information that speak as of their respective dates, and you're 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. Good morning. As you saw from yesterday's press release, we had a very solid start to the year. Our Hospitals (sic) [Hospital] (00:01:41), Ambulatory and Conifer segments, all continued to execute and deliver, generating $665 million in adjusted EBITDA, which was well above the high end of our outlook for the quarter. We also delivered adjusted diluted EPS of $0.57 in the first quarter ahead of consensus and compare it to a loss of $0.27 in the year-ago period. We're very pleased that each operating segment embraced many new key initiatives and all contributed to this performance.
Stepping back for a minute and reflecting on the first quarter and the past six months. It is apparent that the changes we're making have resulted in measurable progress and going forward we see this continuing. The organization understands that in order to be successful we need to be in a constant state of improvement. On one level, it means taking the best of what we do and doing it even better. And it also means developing, executing new approaches and adding new talent, and continuing to improve on those additions as we move forward. Status quo cannot be the basis for great success at Tenet.
What we're changing every day creates a continued process to ground this in our priorities. Importantly, the changes we are making are becoming ingrained in our culture and their staying power becomes part of how we operate every day.
On slide 3, you can see our progress in four key areas: progress on sustainable performance, operating enhancements, strategic initiatives and people, and most of all within that people section creating a culture of performance. Of course, there's going to be some overlap on all of these. I may jump around a little bit, but let me start quickly with performance.
In the first quarter, we continued to drive growth across the enterprise and improve the quality of our revenue streams, resulted in Adjusted EBITDA growth in each of our operating segments. In our hospitals, same-hospital revenue grew 6.7% and revenue per adjusted admission increased by 6%, driven by higher acuity.
As you will see in Dan's presentation, first quarter growth in this metric was our strongest in the last two years. Our hospitals also delivered growth in admissions and adjusted admissions, partially driven by an increase in the flu cases, which we previously noted.
As we seek to further distinguish our hospitals, we're constantly evaluating the services we provide. These evaluations are ongoing hospital by hospital as we look at the needs of a particular community, how we can better serve them. In some cases, we are deemphasizing services that are no longer important to our communities and using the capacity to double down on other services that are in greater need. As a natural result of this, we expect to reduce margin dilutive and less efficient services and improve both the quality of delivery and the corresponding margins of these improved service lines.
In our Ambulatory segment, we delivered growth in revenue and revenue per case in our surgical business, driven by higher acuity cases. We did face a headwind on surgical cases, due in part to the impact of the flu and higher deductibles, which have also become typical in this first quarter. We're very pleased with the growth in Adjusted EBITDA and Adjusted EBITDA less NCI in our Ambulatory segment. This is a consistent area of strength for USPI and continues to be so.
Conifer had a very strong quarter. You may recall, we discussed expectations in the services area and how we saw greater performance opportunities with Conifer. Conifer delivered $98 million of Adjusted EBITDA in the first quarter. This was a significant improvement over last year, even excluding a few items that Dan will address in his remarks. Conifer's performance was driven by a number of changes to the company's cost structure focused on eliminating unnecessary steps and work.
As a result, we raised our outlook for Conifer by $50 million or more than 17% at the midpoint. We believe there is further opportunity improving Conifer's performance and regardless of any sale activity we'll continue to press these improvements.
So let me talk a bit about our progress on operational enhancements. As you know, we committed to a significant cost reduction initiative last year, targeting the achievement of $125 million this year while exiting 2018 with a run rate of $250 million in annualized savings. We are ahead of that plan. And I'm pleased by the way our teams have worked to address tighter cost controls more aggressively with much more urgency.
We now have had a few months since the regional management layer was taken out of the hospitals. While many doubted this move and concerns were raised, we have proven that this new structure works and that it works well. We haven't missed a beat. We are more agile, more efficient and more decisive. And we have significantly shortened the timeframe from idea to action.
On quality and service, we are making progress on key metrics like reducing mortality rates and infections acquired in our hospitals. As it relates to reducing the infection rate, we performed better than the national average in five out of six publicly reported infections that are included in CMS' calculation for Overall Hospital Star Ratings (sic) [Overall Hospital Star Rating] (00:07:00).
Our Leapfrog Hospital Safety Grade scores continue to be above the national average. For example, nearly 75% of our hospitals achieved an A or B rating in the most recent report, which compares to the national average of 58%.
We also increased our HCAHPS Star Rating GPA, but we're not where we need to be in terms of improving patient experience. This is the top priority for our hospital leaders, and we are very focused on making measurable progress in this area.
Now, let me take a minute and talk about the strategic repositioning of the company, where we're also making significant progress. Starting with divestitures, we sold the Chicago area MacNeal Hospital and our minority interest in North Texas hospitals, both in early March.
This morning, we announced that we have completed the sale of Des Peres Hospital in St. Louis. These transactions and the divestitures of our hospital in Philadelphia have resulted in cash proceeds of approximately $600 million since the beginning of the year. That leaves us with the last remaining health plan in California, our hospitals in Chicago, and Aspen Healthcare. We expect to complete the sale of the Golden State Health Plan in the second quarter. And in Chicago, we are making progress with interested parties on the sale of our three remaining hospitals.
In the UK, demand for private healthcare service has come under extreme pressure over the past few years, and this has impacted demand from potential buyers. Having said that, we are continuing our pursuit of the sale of Aspen and remain committed to exiting this business.
The common thread between our hospital divestitures in this market as well as the exit of our health plan business is that we continue to strategically refocus the company as appropriate. Last week, we announced that we had accelerated the completion of our buy-up of USPI from Welsh, Carson, thereby satisfying all of our remaining obligations to Welsh, Carson under our previous put/call arrangements.
We now own 95% of the USPI and Baylor, USPI's first and still their largest not-for-profit health system partner, owns the remaining 5%. USPI is a great business led by an exceptional team. Accelerating our buy-up is consistent with our efforts to move quickly to prioritize opportunities that will propel our future growth and deliver value to shareholders.
When you look at the balance of 2018, USPI has a robust pipeline for development activity. We are in discussions with new health system partners and remain bullish about additional opportunities to steadily expand our portfolio in key markets, and that includes growth in both our surgical and non-surgical businesses. And for example, we just opened our 100th urgent care center operating under the CareSpot and MedPost brands. Our new facility is located in El Paso in a very high traffic retail setting. This is the sixth urgent care center we've opened in El Paso and all six of these facilities are co-branded with our hospital network in this market, which is our strategy going forward.
As it relates to the potential sale of Conifer, management presentations are ongoing and we feel good about where they are in the process. And given Conifer's current and projected performance, it makes this a very valuable asset. Conifer has a very meaningful opportunity to improve its financial performance over the next 12 to 18 months whether we own it or not. And as I've said before, it will come down to price as well as the structure in terms of any new contract between Tenet and Conifer.
But for now, we are very happy with their results and we expect the interested buyers to appropriately reflect Conifer's improved results and ongoing cost opportunity. And that pretty much will cap what I'm going to say on the Conifer sale today.
Finally, I'd like to address some of the changes we've made over the last several months to strengthen leadership teams across the company and recalibrate the culture. It is paramount that we have the right type of talent in the right positions to meet the expectations we've set. As I mentioned last quarter, we conducted an in-depth talent assessment across the organization in the first quarter. This was an objective and frank process designed to identify the future leaders of Tenet and to drive further accountability.
We have now added talented new executives to the organization in the last six months and we have expanded roles within our leaner leadership structure and promoted from within. We're also upgrading certain critical roles to a higher level of talent. These actions will drive improved performance where it matters throughout the company.
One example is Bill Wilcox, who's here with me today, Chairman and CEO of USPI, was recently named the Vice Chairman of Tenet, who joins Keith Pitts in that capacity. Bill will drive the continued integration of USPI and Tenet where appropriate, as well as maintain strategic oversight of enterprise business development, including sales and marketing. In addition to his Vice Chairman roles, he will continue to serve as Chairman and CEO of USPI. Keith's role as Vice Chairman will continue where he will oversee M&A, and we will add enterprise purchasing as well as construction and design for the entire enterprise.
The addition of Bill Wilcox as Vice Chairman of Tenet will bring some of the great things that USPI is doing to our Tenet team directly. In addition, the expansion of Keith's role will add greater focus on these specific areas, allowing Eric to spend more time on the operational aspects of the hospital group. It is leveraging our senior talent to help balance priorities and accountability.
We've also named a new Chief Nursing Officer from our El Paso market, Sally Hurt-Deitch, who will work for Eric Evans and with our Chief Medical Officer to accelerate improvement in critical areas like quality, safety and patient experience. Sally is an experienced nurse and executive, having held the CEO role at our hospital in El Paso, one of our fastest-growing markets, and where her leadership helped improve important quality and safety recognitions. She has also served as one of our 10 group CEOs, where she oversaw six hospitals. Her experience as a leader has been tested and she clearly understand and respects the needs of both patients and staff and is the type of leader we expect and want in our senior clinical team.
The promotion of Sally and the expansion of CNO role is a great example of how we're leveraging talent within the broader organization and taking higher potential leaders from our hospitals and bringing them to the corporate side. We're also doing the reverse, as we see great opportunities for rising talent to continue to build their skills in the field.
And finally, at Conifer in the last six months, we did announce a new Chief Operating Officer, a new General Counsel, and this morning we will name a new Financial Officer. Across the company, these have all been great hires, changes and promotions. I expect we will make additional changes on an ongoing basis as we continue to upgrade the leadership and talent to instill a higher accountability culture.
And with that, I'm going to turn it over to Dan, our Chief Financial Officer, for a more detailed review of our first quarter's performance. Dan?
Thank you, Ron, and good morning, everyone. We generated $665 million of Adjusted EBITDA in the quarter, which was above the high-end of our outlook. Solid organic revenue growth combined with an improving cost structure were key drivers of our performance. Adjusted EPS was $0.57.
Our Hospital segment delivered $402 million of EBITDA in the quarter, compared to $309 million last year. This $93 million increase was primarily due to cost reduction initiatives, increased acuity and $64 million of California Provider Fee revenue, which was included in our first quarter guidance, just to be clear. These items were partially offset by divestitures.
Ambulatory EBITDA was $165 million, which was up 7.8% compared to last year's first quarter and EBITDA less facility-level NCI was $109 million, up 9%.
Conifer's EBITDA was $98 million, which was well ahead of our expectations on a substantially improved cost structure. And Free Cash Flow was an outflow of $30 million, down year-over-year primarily due to an $82 million decline in receipts related to the California Provider Fee program.
Turning to Hospital volumes, which is summarized on slide 5, adjusted admissions increased 60 basis points and admissions were up 30 basis points. We estimate the flu added around 100 basis points to our volume growth, but more importantly, we grew high-acuity services, which contributed to our 6% growth in net revenue per adjusted admission or 4.1% if you normalize for California Provider Fee revenue.
Overall, expenses in our Hospital business were well managed with total cost per adjusted admission up 2.7%, but salaries, wages and benefits were only up 0.7%. As for supplies, with the increase in our acuity, our supply costs obviously increased and we are aggressively managing potential opportunities in that area.
Moving to our Ambulatory business on slide 6, in the first quarter, the surgical business delivered same-facility revenue growth of 2.3% with revenue per case up 2.8%. Similar to our hospitals, USPI drove growth in higher acuity procedures. We did see a drop in surgical cases of 50 basis points, which was due in part to cases being delayed due to the elevated flu season and rising high deductible health plans will continue to have an impact as consumers are increasingly deferring elective procedures later in the year once they have met their deductibles.
We remain confident in USPI's ability to grow surgical volumes as we move through the year. In the non-surgical business, which includes our urgent care and imaging centers, revenue increased 11.8% with volumes up 8.7%. Flu-related visits were a key factor in our urgent care growth this quarter.
As shown on slide 7, Adjusted EBITDA less facility-level NCI increased 9% in the quarter.
Let's move on to Conifer on slide 8. EBITDA was $98 million in the quarter, which included a $10 million contract termination payment that Conifer received following a change in ownership at one hospital, as well as $3 million of customer incentive revenue, both of which were in our outlook. Even without these two items, Conifer's EBITDA grew 31% to $85 million. This was primarily achieved by fundamental improvements in Conifer's cost structure.
Conifer's performance this quarter was very strong and we now expect its margins to expand by roughly 400 basis points this year to about 21.5%. And we continue to see other meaningful opportunities for Tenet or a new owner to further improve Conifer's margins over the next few years. For 2018, we now anticipate Conifer delivering EBITDA growth of 17% to 20%.
Turning to slide 9, given our solid Q1 results, we are raising our outlook for Adjusted EBITDA by $50 million with a new midpoint of $2.6 billion. And we increased Adjusted EPS to a new range of $1.36 to $1.70. The increase in our EBITDA outlook was driven by higher expectations for Conifer.
Let me update you on our $250 million of cost reduction initiatives. Across the enterprise, we now expect to achieve $175 million of the savings in 2018 with the full $250 million in annualized run rate savings achieved by the end of the year. I also want to point out that we lowered our 2018 outlook for non-controlling interest expense by $5 million, which reflects the favorable impact from our increased ownership of USPI, substantially offset by higher NCI expense due to stronger performance at Conifer.
Slide 10 provides additional details on the key components of our outlook by segment and slide 11 contains an updated EBITDA bridge for 2018.
Next, I want to comment on cash flow, leverage and our accelerated buy-up of USPI. For the year, we now anticipate Adjusted Free Cash Flow of $725 million to $925 million, a $50 million increase. We expect to distribute $320 million to $350 million to minority partners and incur $50 million to $100 million of cash restructuring payments. This will leave us with roughly $300 million to $500 million in cash to fund ambulatory acquisitions and a portion of the $630 million buy-up of USPI. As you may recall, our payments for USPI each year were based on USPI's projected financial performance with true-up payments or refund the following year based on actual results. The $630 million included a true-up payment related to USPI's results being better than our forecast for 2017.
By the way, this will lower our balance sheet redeemable non-controlling interest line by about $500 million in the second quarter. This agreement now eliminates any true-up amount in future periods. We funded the majority of the USPI buy-up with cash and borrowed $170 million on our revolver. We anticipate paying off the revolver as we move through the year.
On leverage, we ended the quarter at 5.53 times net debt to EBITDA, and we continue to target 5 times or less by the end of 2019. Also, during the first quarter, we retired $50 million of debt via open market purchases, which will lower our interest expense by a few million dollars this year.
In summary, we delivered a strong quarter and raised our outlook. Our Hospital business performed well with strong revenue growth and continued cost discipline. Conifer instituted sustainable cost efficiencies, which translated into an exceptional quarter. And we now own 95% of USPI and completed various divestitures, including Philadelphia, MacNeal in Chicago area and our Dallas joint venture.
I'll now turn the call back to Ron who would like to make a few additional remarks before we start Q&A. Ron?
Thanks, Dan. Slide 12 is a summary slide. I think Dan has hit most of the important points. So I'm not going to revisit that slide. I guess what I would say is he's correct. We did have a good quarter, but we're not resting on that.
I strongly believe we're on the right path. Realistically, as with all businesses, I expect we may have a few bumps and weather a few storms, but I am fully confident that our direction is on target and our speed to deliver continues to increase. We are engaged in delivering our commitments and where possibly exceeding them.
So with that, I would open it to question. Brendan?
Rochelle?
Thank you.
Thanks.
Thank you. And our first question today we'll hear from A.J. Rice with Credit Suisse.
Thanks. Hi, everybody. Clearly, a big chunk of the outperformance was in the Conifer business and I know it sounds like you guys think that what you saw in the first quarter is sustainable as you progress through the year. Can you tell us what – maybe flesh out a little more specifically what changed to allow you to show that level of upside, and the fact that it has shown that level of improvement, does that make you a little less anxious to potentially sell the business?
This is Ron. Steve is here as well, but I would say that without getting too deep, look, it's about eliminating, and as I said in my comments, it's eliminating the unnecessary work and taking steps to increase efficiency. When you do a business like Conifer services business, I think Steve would agree that as you go through that process sometimes your ramp up is over, you're starting to operate, you need to go back and then revisit how are you organized, how are you structured, where you have opportunities to tighten up and as well as where you can gain other efficiencies. So suffice it to say that at least, I think experientially in services, I've been there, done that. We worked as a team. I mean, I think they're very focused on hitting that.
And we have gone out and looked at our operations pretty extensively and made the necessary adjustments. That will continue to be part of the fabric that we've changed and what we're going to do. Fairly accurate, Steve?
Yeah, Ron. I would say that's spot on. A.J., I mean, as Ron kind of said doing the service business you have your kind of ebbs and flows and we went through years of pretty hyper growth. I mean, coming out of that growth and then later in 2017, we started to rationalize that and it was pretty broad-based around the cost structure. I mean, things as simple as your travel areas, your overtime, your contract labor, but getting the other areas of efficiency of the business as well. So driving that as well in your spans and layers. But things, they stuck, obviously, had a good fourth quarter, came out in the first quarter, went well. Team is embracing Ron's challenge to us and things are going well.
Okay. And maybe...
Yeah. Thanks, Steve. I would also say, A.J., to finish the other part of your question. Look, I'm always excited about selling things for the right price. I haven't changed that. I said that in the beginning and I'll still say that. But it's a valuable asset. We think there is more upside. I mean, I'd be a fool to say that I don't expect to get money for that. I know the bankers don't like me talking like this. But at the end of the day, it is about maximizing the return for what we do. I mean, we're proving that we've got a valuable asset and we've got to hit a number that makes sense, otherwise it'd be inappropriate for me to push it. But I'm hopeful that we'll get there and that's my target. It is not strategic to this company. It's important. It collects our cash. Dan reminds me that every day. And I appreciate that and I'm sensitive to that. But having said that, a lot of people can collect cash. I think that it's a great operation and whether it works for us or not, we expect the same type of performance one way or another.
Okay.
As I told Steve, I'll either be a great boss or a tough client. You pick which one you want, but that's where we're going to be. So...
Okay.
Okay? Thanks.
And maybe my other follow-up if I could put it out there. In your prepared remarks, it sounds like you're saying the non-surgery piece of USPI, the urgent care and the radiology centers will be more tied to where the hospital footprint is. I know USPI has done very well in the surgery center business going on its own with free-standing surgery centers that have partners in whatever local market.
Maybe flesh out a little bit more why you think urgent care and radiology, if that's included in that, should be more tied to your hospitals as opposed to the opportunity to pursue free-standing sites?
Hey, A.J. This Bill Wilcox. So I don't think that we were saying that it is not going to be free-standing sites. What we're doing is developing market strategies within each of our markets, those Tenet markets and also the markets of our health system partners. And in essentially every case, they're developing ambulatory strategies and a key part of those are the free-standing urgent care centers, some imaging centers and then also some on campus emergency departments that round out our overall approach to each of the markets that we're in. Eric?
Yes. So A.J., this is Eric. The only thing I would add as we've talked about for quite some time, in our core markets, our goal is to meet the patient where they are across the continuum with a common brand and a great customer experience. So Bill and I are working closely on that. He obviously will do that outside of our markets, but it's really, really a nice opportunity for us to ensure that every access point we're making an impression on that consumer and tying them to the high quality services we provide.
Okay, great. Thanks.
And next we'll move to Ralph Giacobbe with Citi.
Thanks. Good morning. I was hoping you can give more and discuss more the better pricing and the acuity, I guess, specifically what service lines you saw that in and maybe sustainability of that. And then in your prepared remarks, you talked about de-emphasizing some service lines. I was hoping you can get into which ones, what's the timing, and how we should think about impact of that as well.
Ralph, this is Eric. Thanks for the question. So first of all, just on your first question, we are very pleased with the acuity growth we've seen. It's in the key service lines we've noted in the past, particularly in cardiovascular and our trauma growth. We do think it's sustainable. But you'll also know in the headline number, the growth is not a tremendous number because you still have lower acuity stuff that will continue, I think, to go to more appropriate care settings over time. So our job is to make sure the growth we get is in the sustainable services that are going to stay in hospitals. We feel good about that. We think our investments and our strategies by market match that. And so, we do think that's sustainable.
With regard to services that we're constantly evaluating, it varies by market and varies by what the market needs, what they need us to provide. And certainly there are places where if we're not differentiated and there's others that can provide that service better and we have something else we can do, we're going to do that. But I wouldn't want to get into specific service lines because it is market-specific.
Okay. All right. That's helpful. And then just in terms of the – I think in your prepared, you also talked about the potential for some new system partners with USPI. And I think you may have mentioned two new markets. Just hoping you could flesh that out a little bit in terms of what the opportunity and maybe pipeline is there as well. Thanks.
Ralph, this is Bill. In terms of new health system partners, I don't think we've ever experienced a time in the last 20 years that we've had more interest from new health system partners and then also from growing our relationships with existing health system partners. I believe each of them as well as here at Tenet understands the need to have a strategy that goes beyond the hospital, as Eric just described, and ambulatory is a big part of that.
Was that your question? I may have missed part of it.
Yeah. And, I mean, I think you talked about two – was it two new markets or two new systems that you had talked about? Are these sort of de novo opportunities as opposed to just expansion or...
Yeah, look, I mean, we're not in a position to want to – we haven't announced anything. So all we'll say is that there are obviously a lot of activity, and they're a mix of the same thing, there's mix of partnerships, and where de novos makes sense we're doing that. So I would say that we are – I think our point is that we're pretty actively engaged in several discussions right now and more to come as soon as those discussions reach the right level. But it's inappropriate for us to get specific, I think, at this stage.
Okay. All right. Fair enough. Thank you.
And next we move on to Ana Gupte with Leerink Partners.
Yeah. Hi. Thanks. Good morning. On the hospital side, again as a follow-up, can you talk about what the payer mix was? The acuity is very strong, and I was just wondering about the sustainability of that. I'm assuming on hospital ED it's largely flu-related.
Good morning, Ana. It's Dan. How are you? Certainly, the acuity levels were very strong in the quarter, particularly cardiothoracic type of cases, which obviously drove the revenue growth on a per adjusted admission basis of 4%. From a mix perspective, nothing dramatically different than what we've saw, say in the fourth quarter. Uninsured was up a little bit, but bad debts were generally consistent from quarter-to-quarter. Certainly, we've been targeting certain service lines in our various hospital markets where we've focused on making capital investments there to grow those service lines. And obviously, we drove some nice growth in the quarter in those particular service lines.
We had a couple of questions on what the case mix index is. We don't disclose the total index, but I would tell you of certain services like in cardiothoracic. Depending on the type of procedures you could have a case late, a three, a five (00:34:24), and those are the type of services where we did generate growth.
And is the growth secular? Do you think you're seeing some market share shifting from the not-for-profit systems and so on in the markets that you've chosen to remain in?
Yeah. So all I would say is we think that the growth is sustainable. We certainly think the high-end procedures that come along with new technology are opening up some new opportunities for us to differentiate ourselves in the market versus competition and versus what patients have had as far as options in the past. I would also say part of what grows that acuity as well, and we're doing this partially to ourselves with our urgent care center and ambulatory strategy, is some of that lower acuity stuff we continue to see exit the hospitals. And so, we're going to get really good at the stuff that stays. Then our focus is going to be to make sure in those high acuity service lines we're very well-positioned to meet the patients' needs.
Got it. Thanks for the color.
And next move on to Josh Raskin with Nephron Research.
Hi, thanks. Two questions. Just one quick one on Conifer, just as a follow-up there. Just the cost savings and the margin improvement that you're seeing, I'm just curious is that all leaving the total enterprise or is some of that cost getting reallocated to other areas within Tenet?
And the second question was more around the consumer experience. Ron mentioned that you've got some work to do on consumer experience and I'm just curious how are you guys sort of going after that from the hospital perspective?
Good morning, Josh. This is Dan. How are you? The cost reduction initiatives related to Conifer's performance, those costs are leaving the system. It's not just moving from a Conifer segment over to the hospitals or USPI. Those costs have been eliminated from the system on a consolidated basis.
Yeah, and, Josh, follow up on your question on patient experience, this is Eric, I would say that we are very, very focused on a national approach to driving improved service. So we know there's some must haves that drive outstanding patient experience and our whole focus is making sure that every one of our Tenet hospitals, our patients have a consistent experience that we consistently meet and exceed their expectations. We have ways to go in that. It is a hard thing to move. It's a lot of staff that we have to get involved in this, but we are certainly focused on driving a better experience. And as you know, consumers are not one-time customers. These are long-term relationships we want to make sure in every place they touch us, whether it's the physician office, an urgent care center, an ASC or the hospital that we tie to our network, we tie to the overall goals of what we want them to perceive us as providing and certainly we're getting better at that every month, but we have ways to go.
Okay. Thank you.
And next we move on to Brian Tanquilut with Jefferies.
Hey, good morning. Just wanted to ask Ron about your views on the balance sheet and cash flow. I know you laid out your four key objectives there. It's in the slide deck, but how are you viewing the ability to turn around free cash generation and delever the company in terms of your priorities going forward?
Well, I've asked Dan to jump in as well. I think the reality is that, obviously, first quarter is always tough because we have a lot of outflow. So a lot of what you see doesn't always convert 100% to Free Cash Flow. Collections have to be done at a better basis and cash has to come in better from that standpoint. That's something we're working on with Conifer to improve. But I believe that, at this stage, if you just look at what we project, the projection doesn't assume the sale or anything else. It assumes the continual improvement in Free Cash Flow across the whole enterprise. So in order to deleverage, we have to have that Free Cash Flow. And we say the end of 2019. Obviously, if I could do it earlier, we'll do it earlier. So our projections are based on that.
So I don't know. Dan, do you have any other color you want to add to that?
Yeah. Brian, it's Dan. As I've pointed out in my prepared remarks, we increased our Free Cash Flow guidance for the year by $50 million, and now, at the midpoint, it's roughly $825 million of Free Cash Flow. Last year, it was a little over $600 million. So we – obviously very focused on increasing Free Cash Flows and we remain committed to getting our leverage down to 5 times or less by the end of next year.
All right. Got it. All right. Thanks, guys.
And next, we'll hear from John Ransom with Raymond James.
Hi. Good morning. The prior regime had a real aversion to floating rate bank debt. I mean, I look at your capital structure. It's all fixed rate bonds, some of which come up for renewal. Is there any rethinking at all to use more bank debt in the future, especially as the – long into the maturities get a bit more expensive?
John, it's Dan. Good morning.
Hi.
How are you? Our revolver obviously is the variable rate. We do look at that from time to time as we evaluate financing opportunities, whether it makes sense to stay with fixed or move to a variable rate. When we completed the USPI transaction, we had some variable rate debt there and made sense at that time. And obviously that will be in the toolbox, so to speak, as we'll evaluate whether it makes sense to look at variable rate debt.
Yeah, I don't think we have aversion to anything. We're going to go with what is the best economic plan that we can come up with and based on the best information we have at the time. So I think to your question, I, at least as CEO have aversion to nothing. I'm always willing to – I think we should have the best minds. Look at this and come up with what the best structure is and go forward. So I don't know how to answer it other than that.
It's just if – Tenet is an outlier. It looked to us like they were paying significant rate premium to avoid exposure to floating rate, certainly, an outlier relative to its peers, so I didn't know if that thinking had changed.
Second question is there's been some bad press in Detroit. It's a market you've spent a ton of money, but one at which you've gotten some bad press. Any comments you want to make about efforts to turn that around? Is that a market you think you need to be in long-term? Expectations for that market relative to the enterprise of the whole would be helpful. Thanks.
This is Eric. So I won't say a lot about Detroit, but I will say about the DMC, is it's obviously been a big part of the safety net and a huge part of that community to provide care for a long time. We're committed to that market. We're making a lot of progress in that market. With progress we have to make sure we have sustainable partnerships and we have partners that can grow with us. We want to find a way to get that done there. Our goal there is to work with the existing partners to get that done, but no matter what we do we have to have a path forward that allows us to build great service lines that meet Detroit residents' needs and we do expect to grow in that community.
Is that a market where you don't have enough direct ownership of either post-acute or outpatient type services or free-standing ER or is that not right?
It's a market where I think there's ambulatory opportunities and we'll continue to look at that. Some of the dynamics by market make ambulatory less or more attractive, but certainly it's a market where we do believe there's ambulatory opportunities for us in the future.
And then my last question on Conifer is it's an interesting structural question as you talk to potential buyers because you may are probably not going to be done divesting hospitals. So just at a high level, how do you square that circle with potential buyers if Tenet's going to be selling more hospitals in the future and that revenue stream may go away. How is that part of the whole structure/negotiation?
Look, I think it's – first of all, I don't want to negotiate with myself here publicly, but I would say that that's part of the dialogue we have to have. We don't have a perfect plan, but what's known is known and we just have to talk about as we do that divestiture doing the best we can to let Conifer continue doing what it does, but it's up to Conifer to have a selling model that makes whoever buys them to think that's a good decision. You don't always sell to someone who has an agreement with another provider like Optum or whomever. So in those cases, I expect Conifer should have an equal chance to get in there. I also think that in some divestitures, we should have an opportunity to take over more business. Depends how you look at this.
My view, as Steve knows, is that anytime we divest something, I expect him to go get the business that's coming with the buyer. So we have to fight for that, and we have to prove that we're better than the other guy. So I mean this is true in any business that you do things, whether you're outsourcing IT or you're outsourcing revenue management business or you're outsourcing call centers. Businesses get sold all the time. And when that transaction happens, your job is to secure that business. Sometimes you win. Sometimes you lose. It's kind of hard to square something that is abstract when you're in the middle of a transaction other than to have a plan around. So...
Right. And then your view – I mean, having been in the process, is it your view that Conifer being owned by Tenet, is that, all things being equal, a bit of an impediment to compete? Would it be easier to compete if it were not perceived to be owned by a for-profit competitor?
No, I don't think it matters. I think that at the end of the day, it's about service and price. Services businesses are not magical. It is service and price. Service and price and execution, three characteristics. That's how the sandwich is made. So if you go in with the right service, the right price, the right execution, you'll get the business. It's not like we're stealing somebody's corporate secrets in the revenue cycle business when we take over collecting our cash, right?
So it's a little bit different than cellphones or something where there may be some competitive advantage. Our competitive advantage is doing it at the right price faster than anybody else and with the right expectations. So I mean, honestly, it sounds simple and it is simple. It's just you've got to be very good (00:45:31). This is a business where you have no room for missteps. Services business have to be focused and be absolutely executed flawlessly.
And we have room for improvement there. I think Steve agrees with that. And that's been my entire charge, I think, to these guys. There is no room for mistakes. So it is that kind of a business. So I don't think it's an impediment. I think if we're great at it, people will see that.
Thanks. Thanks so much.
All right. Thank you.
And next we'll hear from Steve Tanal with Goldman Sachs.
Thanks a lot, guys. Just curious on the expense per initiatives. What areas are proven to have more opportunity than you initially expected at this stage? And another question just around managing it all. How are you balancing really the risk to the core business as you're making cuts and along that line kind of thinking about the elimination of the regional management layer and how you've managed through that, would be curious to get your color there?
Is your question about as we tighten up the organization and cut cost, the concerns about risk on the business?
Yeah, and the first part of that really where are you finding incremental upside. But, yeah, that was the second part. And would be curious to hear about how that relates to the regional management elimination?
Well, I'll ask Eric to give you some better color on that because he's closest to it, but in my view you really do an analysis of spans and layers and also job quality, job content. If I have five people I can find work for all five. The reality is do I need the work for all five? And if I have better quality people, can I have four or three? And all the steps we take in any given job, where does the output go? And does that output actually get used? And is that output critical to our success? And thirdly, can I automate that output? Or do I even need to be doing it here?
So I mean, I think there are combinations of things you do when you look at each section of the organization and there is no magical formula. It's design. It's a design that is flexible to fit the needs of what you're doing. Yeah, it really is about same thing I said about Conifer. It's setting an expectation, making sure you have the right people doing it and the right measures, and out of that, you usually find out whether you need certain things or not. And that's really how we approach the regional layer. It was really a question of – so tell me what they do every day and at the end of the day, if we didn't have it, how might we do it differently? And I think Eric took that bull by the horn and came back with a solution, which was – at the end of the day we didn't need it. So I'll let him talk about that a bit.
Yeah. So I'd only add a couple things. I think Ron summarized it well. As I said before, the removal of that layer has actually made us much more effective and I think much more nimble in making decisions, pushing progress in the organization. And actually as we've removed that level, we've identified additional opportunities. And so, I think that do I think it's – I think it's actually a – it helps the core business. It's not a risk to the core business. I think the real question is, how do we use the change to drive even faster change in other areas and we still opportunities? So I think it's a win-win, basically lower cost, better execution. And now the question is where else do we go next.
And I'd just close that by saying – I mean, there's no question that sometimes you lose people when you do that. Some people don't like to change. Some people aren't suitable for the change and I'm okay with that. As long as we treat people appropriately and we do, we work very hard at that and it happens every time. So...
So totally agree. And I should add in too, I've been really, really impressed with our operators who stepped up. I mean, this has required a whole level of the organization to step up and take on a lot more and they've done it really well. And they've done it with energy. They've done it with excitement. And so, I believe that it is sustainable and I'm really, really proud of our operators.
And they like it. They're energized by it. So anyway, I hope that helps.
Right. It does. Thank you.
And we'll move on to Kevin Fischbeck with Bank of America.
Great. Thanks. I want to ask you about kind of the hospital volume backdrop right now. If you take out flu in the quarter, volumes were negative, but you guys are looking for 1% adjusted admission growth, kind of at the midpoint. What is it that you think is going to be kind of driving that growth in the back half of the year? I guess, obviously, you got hurricanes helping, but then you have tougher comps as you're anniversarying, getting back in with Humana network. So it's not clear to me exactly why the volume backdrop will be better as the year goes on.
So thanks for the question. This is Eric. I would say that we remain confident in our investments, in our core service lines and that's where we expect to grow. The question of how fast that outpaces some of the losses and lower acuity is always kind of a tough thing to do. We still do anticipate being in that 0% to 2% range. At this point, it's early in the year. We have assets we've talked about in the past that are still maturing; the new Children's Hospital tower, the new El Paso Hospital, the new tower at Delray Medical Center.
So lots of things there that we continue to work on, that we think give us additional opportunity going forward. But look, we think we're going to grow in the right areas. Like really the real question is, what do we do in the other areas and over time, we'll have to see how that plays out, but we still feel like that's an appropriate goal for us.
And then I guess on USPI, I guess, seasonally we usually have a drop from Q4 to Q1, but this drop was a bit more severe. I guess, you mentioned that flu was a headwind this quarter. I guess, do you have any evidence of that? Did you see surgical volumes pick up in March and April as the flu number tailed off? It seemed to me like you were implying there was a delay in surgery that should be coming back I would guess relatively soon.
Hey, Kevin. This is Jason. So I'll break your question into parts. I think the first one is do you have direct evidence of a flu headwind? We do. We track cancellations. A lot of times, we can get those back. But there was a definite impact of about 20 basis points that were flu-related cancellations in the first quarter. It did improve sequentially throughout the quarter as it has in years past. And so, your first point that it was a more severe drop. I don't think that was necessarily the case. I don't think it was more severe this year than last. It's the normal ebb and flow that as Ron and Dan mentioned in the prepared remarks, just results from higher patient responsibility in first part of the year.
All right. Thank you.
And next we'll hear from Sarah James with Piper Jaffray.
Thank you. I appreciate all of the commentary around the strategic review of what sectors or how much exposure you want to have to inpatient and outpatient RCM. But I'm wondering if there's also a rationalization going on for where you want to be weighted within each facility. So for example, as consumerism comes on we're seeing consumers seek out areas of excellence, suggesting that maybe you don't need every specialization in every hospital and it's possibly more advantageous to invest in certain areas that you can grow reputation. So how are you judging or rationalizing where you invest within the facilities that you do have?
Hey, Sarah. This is Eric. It's a great question, and that's exactly what we were talking about earlier when we talked about – looking at every market and deciding what we're going to be and what we're not. You're absolutely right. Consumers, they are more and more informed on where centers of excellence are and that's our – if you go back to our six core service lines, our goal in every market is not to do all six of those at every hospital.
So if you think about this in the market, we may have five, six hospitals. One of them is our cardiology center of excellence, one might be orthopedics, one might be behavioral health. So I would tell you that we are absolutely focused on being thoughtful in rationalizing how we approach the market, and you've seen that as well with our discipline around getting out of things where we don't necessarily have the scale, home health, hospice. We can talk about other things that we've announced recently.
So I think in every market we go through that analysis to make sure that the service lines we offer are both excellent and relevant to the consumer base in each market and that is a big part of what we're doing. So I think you're right on with your analysis. I also think that is the way consumers are starting to be more discerning in how they select their provider, and we've got to make sure we're meeting that challenge.
And maybe you could talk about the other impacts of consumerism. So how are you factoring that into your bad debt assumptions as deductibles rise or factoring that into how you think about urgent care as consumers may choose to go telemedicine? So if you could kind of split through (00:54:51), that'd be helpful.
Sure, sure. So I think, look, we – obviously, consumers have more and more choices, particularly in primary care, whether it's urgent care centers, primary care centers, tele. In each of our markets, we have to be in those spaces to meet them where they want to get, receive care because along that path our goal is to provide them a great experience at each point so that if they ever need us on the acute side or if they ever need us at an ASC, that we'll be meeting that.
When you think about deductibles, I think you've heard Bill talk about this. The increasing deductibles every year make it really important that we focus on the great stuff that Steve and his Conifer team do on cash collections, make it really important that we meet the consumer where they need to be early in the year in financing, and certainly, to some extent that affects our seasonality.
So we have to think through all of that. But one of the reasons we continue to grow our urgent care center footprint and we continue to make sure we have the right access points, whether it's free-standing ERs or micro hospitals, is there's no doubt that that consumer choice is leading them to different entry points and we have to make sure we stay relevant in all of those. I don't know if you add anything, Dan, on the bad debt?
Sarah, it's Dan. And the other thing just to address the bad debt point, we evaluate receivables by type of patient, by account type, by size of an account. Oftentimes, we refer to it as the segmentation. And so, we look at trends for all types of receivables and as well as by payer to make sure that we are fully evaluating, and as the various business units explore particular service lines, we have good visibility into the type of collection trends that we've seen in the past, and as well as the more recent trends as well.
Thank you.
And that will conclude today's question-and-answer session. I would now like to turn the call back over to Ron Rittenmeyer for any additional or closing remarks.
Thank you, operator. I would just like to thank everybody for joining us. Obviously, we're available for any follow-up as needed, Brendan and Dan, but primarily through Brendan. And we just appreciate you taking the time to join us.
With that, operator, we'll close the call. Thank you very much.
Thank you. That will conclude today's call. We thank you for your participation.