Tenet Healthcare Corp
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Tenet Healthcare Corp
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Greetings, and welcome to the Tenet Healthcare Corporation First Quarter 2020 Conference Call. Today's call is being recorded.
It's now my pleasure to introduce your host, Regina Nethery, Vice President, Investor Relations. Please go ahead.
Thank you. We're pleased to have you join us for a discussion of Tenet's first quarter 2020 results as well as an update on the impact of the COVID-19 pandemic.
Tenet's senior management participating in today's call will be Ron Rittenmeyer, Executive Chairman and Chief Executive Officer; Saum Sutaria, President and Chief Operating Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer.
Our webcast this morning includes an accompanying slide presentation which has been posted to the Investor Relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent Tenet management's expectations based on currently available information. Actual results and plans could differ materially.
Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10-K, subsequent Form 10-Q filings and other filings with the Securities and Exchange Commission.
Now, I'll turn the call over to Ron.
Thank you, Regina. We appreciate everybody joining us this morning. Today's call will be different than our previously -- previous quarterly updates given the current pandemic and the need to detail our response and plans as we see the situation unfolding.
I will cover the Q1 topline view, which Dan will discuss in greater depth. And I will follow with details on the COVID-19 pandemic and how it developed across our business, our response and how we're now moving forward to reopen closed departments and hospitals, and returning to operations at USPI.
I'll also touch on the impact of Conifer and our response. These remarks are going to be a bit longer than normal to capture the events and add transparency, so we will extend the call time as needed to ensure we answer your questions.
Starting with slide three, let me start with a view of our position when this pandemic began to present. At the end of February, we were really pleased with the early progress of Q1, and following a really strong and sustainable 2019, we were looking at what appeared to be a very strong Q1 across all dimensions.
At the end of February, we noted admissions were up 1.1%, outpatient visits were up 5.5%, emergency room was up 6% and surgeries were on a solid trend, all of which continued into the early weeks of March. And we expected that to continue into the second quarter and the year. We would execute the strategies we have firmly put in place in the past 18 to 24 months.
As an example, our hospital segment was ahead of budget, due in part to the successful service line development and investments in 2019, the very detailed organizational consolidations in the field focused on improved effectiveness, coupled with the increase in surgical specialists choosing to bring their cases to our hospitals that was delivering ahead of expectations. It was also clear we were beginning to realize value from the capital investments made in the second half of 2019.
The USPI segment was ahead of budget due to similar service line expansions at the end of last year, higher acuity procedures, and the effective ramp-up of acquired and de novo centers from 2019.
Our Conifer business continued with strong client revenue growth performance, translating to stronger fees and ongoing efficiency initiatives. The focus on detail was having an immediate impact, and we are quite pleased with the early signs of continued improvement.
This level of performance, coupled with the continued expense management and operational improvements, resulted in a strong company-wide results through February ahead of our expectations. These were great results by any measures and indicative of the strides we had made as an organization during the last year and were the basis of sustainable forward performance.
Slide four, as we entered late February, the pandemic was beginning to take shape as a potentially serious situation, and we began to take early actions in anticipation of yet unknown changes in our hospitals and surgery centers.
Our initial response was to acquire PPE and forward buy PPE in anticipation of an unknown need. We tasked our operations team with developing a ventilator management system, a clear supply distribution plan for rapid resupply to all acute care locations and a staff deployment plan from our internal Tenet resource staffing agency so we could add critical staff where needed.
While we have protocols for infectious disease management, we immediately designed and deployed additional clinical protocols and contingency PPE utilization plans to tighten how we engaged in dealing with this highly infectious situation based on the available CDC information at the time.
We developed an analytical tracking system to monitor nationwide PPE usage and inventory, ventilator and testing capacity, which then will be reported to our COVID-19 command center every morning.
We activated a nationwide COVID-19 call with all Hospitals, USPI and Conifer, led by an Incident Command Center and Chief Medical Officer and included our nursing, pharmacy and supply chain leadership, integrating a key functional area as a quick response team.
We established in a few short days tracking and monitoring of these important items, including the actual, by hospital, of positive and negative cases, persons under investigation, COVID discharges and deaths, coupled with a closed communication process.
So, every engaged hospital and group across the entire enterprise were using the same source of information and receiving the same precise recommended actions. This also allowed an open and immediate sharing of learnings, best practices and fundamental peer support across the entire network.
Additionally, as new CDC, state, local and other agency rules, procedures and information were being issued, which was quite frequent, the command center ensured we remained in a constant and aligned execution across our network.
As we began to see these cases present in the hospitals, we immediately acted to ensure patient and staffing safety was addressed across every location, focused on isolating COVID-19 cases.
We were keenly aware that the protection of our staff and facilities were critical for our system to remain responsive. And we were able to accomplish this throughout our entire system, remaining on the frontline and responsive to the communities.
At the same time, across the country, the shelter-in-place and suspension of all elective surgeries began to quickly roll out. Much of these actions took place between March 15th and the 22th, followed by the U.S. Surgeon General's tweet on March 14th to basically halt all elective surgeries. While some governors may not have officially suspended elective care, shelter-in-place orders across the country achieved the same effect.
During the same period of approximately March 15th to March 26th, we saw the number of PUI cases jumped from less than 400 to over 1,000 and a strong increase in confirmed COVID-19 cases, while the number of PUIs continued to increase daily.
Our preplanning was instrumental in ensuring we had a defined set of plans and we're able to maintain, although with some difficulty, the initial surge across the system. We had significant increases in Detroit, Massachusetts, Florida, and Southern California, with each system responding aggressively and doing an incredible job.
Our other markets also felt the initial strains in these early weeks, dealing with numerous cases and the unknown preparation for what we were told would be a new surge in many locations. Fortunately, we maintained coverage and response and were able to handle the spikes in issues that presented across the system.
Slide five; while these serious clinical issues were engaged in our frontline and support functions, we quickly realized that the significant drop in volumes is going to have an immediate serious effect on our business.
We determined we needed a new staffing strategy for our headquarters and nonclinical operations, which led us to taking actions over a series of weeks to furlough approximately 10% of the workforce, which included 3% of hospital field operations, ensuring, however, we maintain staffing coverage to handle the actual and potential demand for COVID-19 patients as well as the necessary staffing to respond to emergencies that might have presented in the hospitals.
We took action to furlough and flex down teams at USPI, closing over 100 facilities and reducing the hours and days in the balance of the facilities. We maintained the minimal staff, as recommended by CMS and some USPI locations prepared to handle any overflow from hospitals, driven by the need to serve emergencies, which, fortunately did not occur.
Given the reductions were in the hospital units not directly addressing COVID-19 patients, we redeployed personnel if possible and shut down certain service lines to ensure we maintained adequate PPE and space available for the potential surge of patients.
By the end of March, ER traffic and admissions had decreased by 35%, hospital surgeries by 50% and USPI surgical volumes by 75%, driven by the shelter-in-place orders and the potential patients' apprehension of contracting the virus in medical facilities.
The increase in COVID cases in areas like Detroit, Florida, and Massachusetts required the use of premium time, and we also had USPI hospital nurse volunteers who were not needed at their locations due to the shutdown, volunteered to travel to our Detroit and Arizona hospitals as well as some that volunteered to go to New York City to support hospitals in the hardest hit areas of the country.
We added temporary staffing where possible and available to ensure we had the needed coverage as cases increased in those markets. These reactions taken immediately improved effective in supporting specific locations.
Additionally, we continued to acquire needed PPE regardless of pricing, which, in many cases, was five to seven times higher than our normal contracted price. We used CDC, state, and local guidelines on PPE usage and were persistent on a constant resupply and balancing as we engaged every available source and chase down many, that proved to be false, to acquire additional PPE.
While the situation was chaotic, our frontline personnel were heroic. Our teams behind the scenes worked endlessly to support every location and delivering this mission of care.
I'd like to take a minute also to comment on our Global Business Center in Manila. In Manila, the lockdown occurred on March 15th, forcing our 900 associates to work from home. As part of the creation of this organization, our business continuity planning was truly put to the test.
Within a short period of time, our Manila operation was functional and performing at about 98% of the pre-lockdown levels from home. We continue to see excellent performance from the Global Business Center, and we continue to increase the leverage of this highly effective and skilled team.
Moving to slide six, this now brings us to today. We are carefully coordinating a comprehensive recovery effort across different geographies in compliance with state and local orders while we are continuing to treat COVID patients.
During the past weeks, we have engaged in the planning and detailed steps to reopen elective surgeries and to open our hospitals to our patients in our communities. These plans focus on every physician and how they will reengage in their respective practice, including how they plan to prioritize cases, how this fits into a methodical ramp in OR schedules, procedure and diagnostic screening, all while balancing staffing and support units to effectively have a labor plan that mirrors the demand curve, a labor plan that engages with our physicians to ensure their needs are met and balanced with the needs of the patient and the facility.
We have begun to resume elective procedures consistent with area regulations and in close consultation with our physician. Our early reads are promising, and we expect it may take us several months to bring up our USPI locations to pre-COVID volumes.
In Hospitals, it will be a balance of how quickly COVID cases fall, how effectively we can rebalance the surgical volume and how well we can reach into the communities and reassure the patients and the overall community that the hospital is open and safe.
ER volumes will need additional focus, and we have initiated a detailed marketing campaign to reinforce what our ERs do, can do and do-do as appropriate, highlighting our trauma levels and skills and that they are safe and open for business. These campaigns will be tailored to reengage our community along the concepts of a community built on care that has been so successful in the past.
It is early for us to make predictions on speed and curve of the restart, but we're engaging at every level to bring our services back to pre-COVID positions. We also have taken steps to ensure adequate bed capacity in case of a surge in COVID cases and have access to in-house COVID testing in all markets.
Moving to slide seven, let me address the lingering question about what we believe will happen if the pandemic surges in the fall or winter. As would everyone else, we have no idea if that will happen.
But importantly, we do have a plan, which should assist us in responding more succinctly and effectively in every market. Our view is this plan is tailored to the market, the demographics and the learnings we've had from this current situation on deployment of people, supplies and support.
As a framework, we will isolate COVID patients in markets where we have multiple facilities, utilizing a designated COVID facility to receive patients. We will ensure every location has limited access and directs COVID-related cases to a specific place where we can determine that, that individual needs to be transported or can self-direct to the centralized location.
Testing treatment as appropriate, admissions or send home orders to self-isolate will be coordinated from that primary location. These functions at the designated facility will provide updates and reporting and provide appropriate follow-up with patients and loved ones.
Where we have fewer locations, we'll designate a specific wing or floor that can quickly be adapted to the COVID patient load and provide this care isolated from the balance of the facility.
Our belief is we can maintain safe, clean facilities that do not treat COVID cases or, if they do, will allow them to isolate patients, allowing us to provide the ongoing and reliable care our communities expect while ensuring our response to COVID cases is direct and effective in every community.
This also ensures our USPI surgical centers will remain open and functioning, allowing normal flow of patients to continue to receive the needed medical care and life-saving actions we provide.
To accomplish this, we need to be transparent in the community of our actions, communicate and advertise the approach, rebuilding the confidence in the safety of the locations.
We need teams prepared to move people and take the actions this dictates without delay. These plans are now being finalized across our system and we believe will be extremely helpful to virus-free of peers. For headquarters and office locations, we have a strict zero tolerance set of procedures enforced daily for every employee to protect them and the others they work with.
Slide eight, from a financial perspective; we've addressed specific actions to improve our cash position, which Dan is going to detail deeper during his review. Additionally, while the strength of January to mid-March helped cover Q1, April was a tough month as we realized significant volume reductions across the hospitals and USPI segments driven by the shutdown orders.
We closely managed our cost profile by taking responsible and rapid actions, utilizing a list of things designed to ensure our operation areas remained effective, recognizing the reduction in support and areas that were closed by the orders on shelter-in-place and elimination of elective surgeries.
As I stated earlier, over a series of weeks, we furloughed approximately 10% of the workforce, which included 3% of hospital field operations, maintaining our operational effectiveness.
We have reduced our annual CapEx by $300 million or about 40%, deferring and eliminating projects unless they are life-threatening or critical to sustaining core operations. We've also successfully issued $700 million of additional secured bonds and have increased our revolver by $400 million to $1.9 billion.
We received approximately $345 million in grants to date or approximately 0.2% of the $175 billion authorized by Congress for grants under the CARES Act and other stimulus legislation.
CMS has advanced us approximately $1.5 billion under their advanced payment authorization, which we'll have to pay back starting in August and completing by March 2021, unless Congress acts to extend the repayment schedule, which would be extremely helpful.
We also expect to defer in 2020, based on the CARES Act, approximately $250 million in payroll taxes, which we will have to repay 50% December 2021, 50% in December 2022.
Early in the pandemic crisis, we have also delayed the funding of our 2019 401(k) match that we typically fund within March each year. We did release it for our eligible furloughed employees so they could avail themselves for this resource and, at this point, we're going to be shortly funding the balance of all eligible employees.
That leads to the question of guidance, and guidance is important, and we, as much as everyone else on this call, would like to firm up expectations for the second quarter and the full year.
Frankly, we pulled our guidance on April two because it was clear, the pandemic, as it developed, was simply impossible to put any reasonable framework together. We realized April will be a very weak month given the shutdown and the lack of elective surgeries.
We view May as the beginning of the recovery and are pleased with many facilities opening at 50% of pre-COVID surgeries last week and a more promising schedule this week. We're also aware that in some markets such as Detroit, this restart may be slower as COVID cases are ultimately closed out over this next several weeks. And we will have to determine the flow of new and remaining cases by market to get a realistic cadence before we can draw reasonable conclusions.
USPI has seen approximately 40% of its pre-COVID cases as they start to reopen across the country. Again, as with hospitals, much will depend on market, partners and state and local approach to opening the economy.
Conifer will continue to perform as they have throughout the crisis, and we'll have to deal with decreasing billings resulting from the pandemic. Their focus remains on current and past due collections for all clients as well as patient intake functions in Tenet, which we believe will begin to ramp up.
Our objective is to return quickly, but to do so safely and with a keen awareness of the market level conditions, which will dictate our level of engagement. We'll manage the cost profile tightly with attention to adding back services and staff based on demand and ensuring we do not get ahead of ourselves in this process.
Since we're not prepared to answer any of the guidance questions, we are planning to hold a briefing in June to discuss the business and how we're viewing the restart across all of our areas since, as I said earlier, today, we can't predict the speed of the recovery. We will approach this as an open call, similar to the various financial conferences we attend each year.
We will provide an overview and an update but will not discuss specific numbers other than to put them in context of what we see occurring, realize we can discuss trends and observations.
But the specificity we do at calls like this, normal earnings calls, is not realistic to expect in this update since our financial books will not be closed or audited, so we want to set a clear expectation now.
We will provide a question-and-answer session as well as to ensure we can provide as much transparency as possible since we know how important these next few months will be dealing with this unknown situation. We will still hold our scheduled earnings calls to provide the quarterly analysis and in-depth discussion you expect.
Regarding the spin of Conifer, we were on schedule at the end of February. As you would expect, for the last eight weeks, we have been 100% engaged on the pandemic and are now equally engaged in recovery.
This is no signal in this statement, so please do not speculate, as we will continue the actions to prepare to spin on schedule, fully aware there may be new bumps in the road we have to address. As with guidance, we'll continue to ensure we're transparent on the timing of spin, advising any changes if necessary.
As I noted at the beginning of the call, we've had a tremendous momentum based on the solid foundation the teams have laid over the last two years. The foundation built by the successful turnaround led by this team has served us well in executing and leading through the pandemic.
Our continued focus on portfolio optimization, use of detailed analytics fueled by real-time data, improved patient/physician experience, strong and reliable globalized operating model, and solid underlying free cash flow focus will continue to position us for strong return to growth once we begin to reopen and operate.
This team is energized, focused, accountable, and most of all, operates with clarity as a team. We've been through some difficult transitions during the last two years as we restructured the company. The COVID-19 crisis created a new high bar in testing the ability to develop, execute and lead the organization through these incredible situations.
Our hospital teams were incredible, as were our USPI colleagues, and our support teams across the organization, including Conifer. Throughout all of this, their response was selfless in all aspects. I'm immensely proud to have stood shoulder to shoulder with them in this crisis and know they are here together to deliver the next phase.
So, with that, I'm going to turn it over to Dan, and I'll finish then with some few closing comments. Dan?
Thanks Ron and good morning everyone. I will start off by thanking all of our caregivers and employees who have been working tirelessly throughout this crisis to ensure we are able to provide quality care for our patients during these trying times. They are true heroes, and we express our deepest thanks to them.
Let me begin my remarks on the quarter with slide nine. As we previewed with you on April 2nd and as Ron noted in his comments a moment ago, the impact from COVID-19 in the back half of March was significant on our results for the quarter.
Up until March, we were on pace for a very strong quarter. Through February, our adjusted EBITDA was $40 million better than budget, with all three of our business units ahead of plan.
The performance improvement we produced over the past several years was continuing with solid volume and pricing growth, higher acuity and tight cost management.
However, due to the effects of the pandemic, we estimate that our adjusted EBITDA in the quarter was negatively impacted by approximately $125 million due to patient volumes declining significantly and quickly in our facilities, with the most pronounced impact on our USPI ambulatory volumes and the additional costs we incurred acquiring additional PPE, overtime and related staffing to effectively respond as well as the cost to maintain all facilities at a high level of readiness.
Fortunately, due to our strong performance through March and the quick actions we took to reduce our costs in the back half of the month, our adjusted EBITDA was only down 6% compared to last year.
Let's now turn to slide 10, from an EPS perspective, our earnings per share in the quarter were strong at $0.89 per share compared to a loss of $0.19 per share in last year's first quarter. A large portion of this EPS growth related to an income tax benefit of $0.86 per share we recognized in March this year associated with the easing of the interest expense deduction limits by the CARES Act, which we appreciate.
Turning back to EBITDA for a minute, you'll see on slide 10, our EBITDA results in the quarter for our three business units. Our hospital segment results were relatively flat versus the prior year, down approximately 1% as growth earlier in the quarter was offset by the impact of the pandemic in the back half of March.
As I mentioned earlier, USPI was also ahead of our plan until the impact of COVID-19 took effect, which resulted in its EBITDA being $21 million lower than last year. Conifer was also performing well pre-COVID-19 and was still able to achieve its EBITDA expectations for the quarter despite the headwinds in the latter half of March.
Let's now turn to slide 11, which outlines the severity of the volume declines in the back half of March due to COVID-19. Not surprisingly, these volume trends worsened in April, as governmental shelter-in-place orders and guidance to restrict elective procedures took further hold as well as the growing reticence of patients to seek care because of the pandemic.
Here are a few statistics. Hospital admissions were down 25% in the back half of March and about 33% lower in April. Hospital outpatient visits dropped 35% in the back half of March, and were down about 60% in April.
Hospital emergency department visits declined about 25% in the latter part of March and approximately 50% in April. Hospital surgeries were up close to 40% in the last few weeks of March and roughly 55% in April. And USPI's system-wide surgical cases fell over 50% in the back half of March and were down about 80% in April as we closed or scaled back capacity in all facilities.
While theses volume declines demonstrate the profound challenges we have been facing, we have been extensively planning for how we will ramp back up our operations in a very safe, thoughtful and data-driven manner as restrictions are lifted or eased.
Looking briefly at cash flow in the quarter. Cash flows improved despite the COVID-19 headwinds, due in part to us deferring about $75 million of 401(k) matching contributions at the end of March as we wanted to preserve liquidity at that point.
Since we have been able to enhance our liquidity recently by increasing the borrowing capacity of our line of credit facility from $1.5 billion to $1.9 billion and accessing the debt capital markets in April by issuing $700 million of secured notes, we intend to fund the 401(k) match to our employees in the second quarter.
Let's now turn to slide 12, as you can see, the first quarter results for each of our business segments broken down between the first two months of the quarter and the month of March.
It is readily apparent that the growth momentum we've been executing on over the past few years was continuing until the pandemic took hold. When you add up the numbers through February, you'll see we produced $451 million of EBITDA at that point and were well on our way to a very strong quarter.
As we outlined in our press release, our hospitals were delivering solid volume growth through February, as adjusted admissions were up 1.7% and emergency room visits were 6% higher than last year. Also, we were continuing our strong cost control and pricing growth was solid.
It was a similar story with our USPI ambulatory business through February. EBITDA was ahead of plan, surgical case volume was up 2% and net revenue per case growth was very strong, up about 7%.
When you add in USPI's imaging and urgent care volumes through February, USPI's total case growth was 5.7% at that point. Also through February, USPI's EBITDA minus NCI growth year-over-year was about 17%, which is another data point reinforcing the fact that USPI was carrying solid momentum through February after strong performance in 2019.
Not to keep repeating myself, but it was also a similar story with Conifer through February. Conifer was ahead of plan, driven primarily by its continuing cost efficiency actions until its revenues were impacted by a decline in clients' hospital revenues due to COVID-19.
Although our business were materially impacted by the pandemic in the back half of March, our strong performance across the organization up until that point enabled us to confront the COVID-19 challenges from a much stronger position.
Before I turn to liquidity, I do want to mention that we are no longer discounting our malpractice and workers' compensation actuarial liabilities. Previously, we reported these liabilities on a discounted basis using the seven-year treasury rate, with changes in the rate increasing or decreasing expense in EBITDA.
We concluded that changing to the undiscounted presentation is preferable because the discount rate adjustment was not an indicator of our operating performance and was a non-cash item and changing to the undiscounted presentation increases the transparency of our financial statements and operating results.
The undiscounted accounting approach is also consistent with how many other companies report these type of liabilities. Our auditors have reviewed our new accounting treatment and concluded it is preferable.
Let's now turn to slide 13 to discuss our liquidity. As of last Friday, May 1st, we had approximately $2.2 billion of excess cash as well as $1.9 billion of available capacity on our line of credit facility, as we do not have any borrowings outstanding on our revolver. We believe we currently have sufficient liquidity as we model various scenarios over the next year.
We executed on two important actions in April to enhance our liquidity. First, we issued $700 million of secured notes in April and used a portion of the proceeds to repay all outstanding borrowings on our line of credit.
Second, we worked with our bank group and amended our revolver in April to increase our borrowing capacity from $1.5 billion to $1.9 billion. We appreciate the support of all of our debt and equity investors and our banks as we manage through these difficult times.
As you can see on the slide, we also highlight certain of our larger cash receipts or disbursements in April. We received about $1.5 billion of Medicare advances during the month. This was significant regulatory relief that strengthened our near-term liquidity. It is important to note that we are mindful of our obligation to repay these advances.
After a four months' grace period, we will begin repaying these advances in August. Our hospitals, including surgical hospitals, will have up to one year, in other words until next March, to repay the advances on an interest-free basis.
And our surgery centers and physician practices will have up through this November to repay them. We are taking this into full consideration as we evaluate our liquidity over the coming quarters.
We also received approximately $345 million of grant aid from recent stimulus legislation, including the CARES Act. These grant funds are to reimburse providers for incremental costs incurred and lost revenues due to the COVID-19 pandemic. This funding relates to the initial $50 billion distribution from the $175 billion of grant aid earmarked for healthcare providers.
These funds will not have to be repaid as long as we satisfy the terms and conditions of the grants. There may be a few minor amounts that have to be repaid by a few of our facilities, but it will be insignificant.
Next, let's turn to slide 14, where we've summarized significant opportunities for additional liquidity in the near future. I won't go through each of these in great detail since we previewed most of these on our April 2nd call.
I will point out that we continue to expect that we'll be able to complete the sale of our Memphis hospitals in 2020 for about $350 million of proceeds as that process is still on track.
Also, there is still $125 billion of grant aid under the recent stimulus legislation that has not yet been distributed to providers. We anticipate we'll be eligible for some portion of these funds, however, that is contingent on how the funds are ultimately determined to be allocated.
We've also taken other actions to enhance and preserve liquidity as we manage through these incredibly difficult times, including dialing back our anticipated capital expenditures this year by $300 million or about 40%, significantly scaling back discretionary spend, negotiating with various vendors to extend our payment terms and reducing contractual obligations.
Due to extreme volume declines in our facilities as a result of the pandemic, we had to furlough certain corporate and administrative overhead personnel across the company and furlough and flex down staff in our facilities only if they were not needed for patient care needs in other areas of the facilities.
While we did maintain the health benefits coverage for our furloughed employees, we understand the hardship these actions created and we're very thoughtful before we decided to take them. Unfortunately, because of this pandemic, these actions were necessary.
Due to the actions we have taken in response to the pandemic to reduce our spend and the fact that we will be collecting cash on accounts receivable generated from higher revenue levels before COVID-19 took hold, we do not anticipate a material cash burn in the second quarter, even if we exclude the Medicare advances and stimulus grants received in April. Of course, this is dependent on how the impact from the pandemic unfolds over the next few months.
These are extremely challenging times for our patients, the communities we serve, our caregivers and all of our employees, the company, the healthcare industry as a whole as well as the entire nation. We will continue to try to do our level best to ensure we appropriately address the difficult challenges in the days and weeks ahead.
I'll now turn the call back over to Ron.
Thanks, Dan. A few closing comments. If you refer to slide 15, I just want to summarize. Pre-COVID-19 performance continued the strong operating momentum from 2019.
As with others, obviously, we've had a very significant drop in volume across the hospitals and USPI, driven by the stay-at-home orders and decline in elective surgeries due to the stopping of that. I think we acted very swiftly to protect our employees and patients.
We bolstered our balance sheet and liquidity with some support from the CARES Act, but not sufficient. We focused on cash by reducing CapEx, vendor spend, we eliminated all discretionary items, furloughing and flexing schedules to match demand.
We are planning for an effective and safe restart with very detailed planning, and the operational turnaround and discipline of the past two years, we believe, was instrumental in making our response effective, and our recovery led by the same team will address it in the same manner.
I also want to comment briefly on the Tenet Care Fund. We have redesigned our Tenet Care Fund to be a source of aid to our employees who have suffered a financial hardship related to COVID-19. The outpouring to support across our system from employees, vendors and others has truly been significant, and we're incredibly grateful and thankful.
Our leadership team donated 20% of their salaries and numerous leaders across each area of our business donated 10% of their salaries for the months of April, May, and June to this fund.
Our Board of Directors has donated 50% of the cash fees for the second quarter, and I have donated 50% of my salary for six months, from May through October, to the fund. This fund serves many and is a valuable and useful tool for our people, and we're thankful for all the support and proud to join in providing funding to this important resource.
Finally, I want to extend my personal thanks on behalf of our Board and our Executive Leadership to our brave teams and all healthcare providers around the country.
Healthcare is a field that individuals join as a calling. And as part of this pandemic, it is with our deepest sorrow to acknowledge that some of our caregivers have lost their lives serving others in need during this pandemic.
Our hearts go out to their families and coworkers as we share the impact of their loss. We honor them as heroes, along with so many others on the frontline, those who are flying across the country to fill a need in one of our markets or another area like New York, quarantining from their families while protecting and providing compassionate care in these challenging moments and saving lives.
And there's also heroes you may never see working behind the scenes, including the men and women preparing the meals in our hospitals, ensuring care is delivered in a clean and safe environment, fielding and distributing numerous donations, delivering supplies, and so many other things in our communities.
We have said many times since mid-March that we've all operated on a week that consists of yesterday, today, and tomorrow, since there has been no downtime or breaks from the pandemic.
We hope you join us in honoring and thanking the men and women who have responded across the country and without whom we have not achieved the results of where we are today.
So, with that, operator, I'd like to believe we're ready for questions.
Certainly, we'll now be conducting a question-and-answer session. [Operator Instructions]
Our first question today is coming from Josh Raskin from Nephron Research. Your line is now live.
Thanks. Good morning and I appreciate all the extra comments this morning. I wanted to circle back on the capacity conversation that you had, and what does capacity look like when it comes back online? If you were doing x number of procedures in normal conditions, how many can be done now? And sort of thinking both the hospitals and the ASCs, and what does that ramp look like?
Well, I'll let Saum talk about that, but I would just briefly say as I said, the ramp will be a function of the ability to in hospitals at least to consider where we are with COVID cases closing down and we're starting to ramp up.
So the ramp, there's no reason to think we have a capacity problem as much as it is that we'll bring back staffing as the capacity presents itself or the demand presents itself. Saum, do you want to put some color on that for them?
Yes, sure. I mean, Josh, it's Saum. I think a few things. First of all, the capacity is available. Really, the ramp-up depends on, first and foremost, compliance with the state executive orders. And in our case, 18 of our 20 hospital markets and the great majority of our ambulatory markets, the moratorium on elective surgeries has been lifted.
We have a few places, Michigan, Massachusetts and a few other states that are really hot, where we have some USPI assets, Pennsylvania and New Jersey, for example, where those moratoriums still exist. So, that's first.
Second of all, we have adequate capacity, infrastructure, ready for surge, PPE capacity. And also there's no shortage of ventilators and other infection control process equipment that we need, including surgical equipment, by the way. There have been shortages in the supply chain for basic surgical instruments and other equipment. We don't have that problem, so that's not an issue.
And look, the last thing is simply getting patients and physicians comfortable with the environment. We've put a lot of effort into infection control processes, but also really communicating the culture of safety that Tenet has in its operations and USPI has in its operations.
Over the last six weeks, we've performed tens of thousands of medically necessary and urgent surgeries in the USPI environment without a single known COVID exposure as a result of surgery. That makes people very comfortable to hear that.
In the hospital setting, we've just created separate tracks and very careful processes, including adequate testing capacity in order to ensure that people are comfortable coming back for procedures or other related items.
Final point I'll make is the emergency department is also a critical channel in the hospital, and I'd reiterate Ron's point that we have begun a campaign to communicate the safety of our ERs to all the constituents in our communities because, obviously, that's a space where we don't want medically necessary care deferred.
That's helpful. I think I was actually looking more -- 100 ASCs were closed. Sounds like a large majority of those are open. And then I was curious more around protocol changes, time to turn rooms and inability to have people in waiting rooms. But you -- it sounds like you feel like we have the capacity to do exactly what we were doing February and before.
That's correct. I mean there are two aspects to this. First of all, you're right; the vast majority of centers are opened. They may not be open full-time on the USPI side, but we're opening them up methodically day-by-day, OR-by-OR as the appropriate demand presents itself from patients and physicians. We'll do that largely so that we don't end up running ahead on costs relative to the demand side revenue that will be generated, so that we're responsible about that.
Same thing in the hospitals. I mean, the hospitals have remained open and fully functional, but even in some of the procedure-related areas where we flex down, we'll begin to flex in the other direction as the demand presents itself.
Look, in terms of turnaround times and other things like that, we don't foresee any problems related to delays and other things. And I would tell you that, again, the biggest source of delay that people are worried about, I think, is the testing capacity.
And we have in-house testing capacity in all of our markets and also arrangements with the large lab companies for testing on an ambulatory basis if we need it. So, we're prepared to provide that in all of our settings.
Thank you.
Thank you.
Thank you. Our next question today is coming from Justin Lake from Wolfe Research. Your line is now live.
Thanks. Good morning. A couple of questions here. First, you mentioned the $125 million negative impact of COVID in the second half of March. Really helpful detail. Just curious, I know as you started making adjustments on the cost side late in the month and into April.
I was hoping you could size those cost adjustments to help us think through the overall impact versus, let's just say, a $250 million monthly kind of run rate ex what I assume was a big impact from cost.
Justin, it's Dan. Good morning. Let me -- I'll start off and Ron or Saum can add. Yes, I would tell you that we've obviously taken a significant amount of cost actions, not only in the latter part of March, but further actions throughout April to mitigate the impact of this unfortunate situation on the company.
In terms of -- I specifically mentioned something in my remarks about when we think about the second quarter, it's obviously difficult times. Volumes are down dramatically. But when we think about the cash flows and the cash burn, as they say, we don't think it's material at this point.
Obviously, it depends how the rest of the quarter unfolds. But we're doing everything to reduce our spend, whether it's discretionary costs or capital expenditures. And as we also mentioned, we had to take the unfortunate actions of furloughing employees, but those actions were necessary for the company to continue to move forward.
Yes, just building on that briefly. Look, I do think the results for the first quarter and especially the last two weeks of March were impacted by our operating teams that on the hospitals and the USPI side and the physician business reacting very quickly. Everybody was focused in those last two weeks on really understanding what was COVID and how were we going to manage it.
But the operating teams moved quickly to begin flexing. You'll see more of the impact of that in April, of course, especially as the furlough and really the USPI ramp-down was primarily in April. And certainly, our ability to flex fully on the hospital side extended from the last two weeks of March, much stronger also into April.
I will also point out that the trend -- the volume trend line in the last two weeks of March also worsened in April, as the points that Dan and Ron have made are true from that standpoint. So, surgeries, admissions, emergency department visits, et cetera, as you can see in the presentation, worsened in April, necessitating further management of our costs.
We didn't really impact staff at all on the hospital side that were required for COVID care or potentially surge in COVID care in various markets. And I think, ultimately, especially in places like Detroit and Massachusetts and South Florida, where there was a surge, maintaining that staff and capacity served us well because we really did not have ultimately any problems with shortages in infrastructure, people or PPE.
Great. And then just a quick follow-up to the last question on surgery centers. They start to open. I think you told us that the -- that you see the volumes improving so that they're down only about 40% as they start to open. Is that just a function of getting the schedule back up or are you hearing back from the physicians that there's a reticence on the patient side to reschedule?
Yes. Let me clarify the numbers first, and then I'll pass it to Brett. When we had some conversations in the middle towards the middle to the end of March, we were seeing about a 60% decline in surgical volumes in the ASCs.
As I pointed out, as we got into April, those numbers increased into the 80% range from a decline standpoint. So, we're well past the nadir, especially as states have opened up and are back again, actively booking cases and add-ons and other things as is appropriate in each state with the orders. But I'm not sure that we're quite yet back above 50% of normal.
Brett, I don't know if you want to add comments there.
Yes. Hey Justin, it's Brett. Yes, I would say, I would just make a couple of observations. First, we are starting to see the demand improve significantly. Just to give you a sense of that, for last week, we actually performed 50% more cases than we had scheduled the Friday before.
And also last week, we had planned to have 88 facilities closed. This week, we have 32 facilities planned to be closed, but it will likely be much less than that. So, that just gives you a sense of how we're beginning to ramp up the operations.
As it relates to our medical staff, I would say that generally speaking, they're very much ready to get back to work and take care of their patients that have delayed medical care. There's certainly a significant amount of pent-up demand for elective surgery.
How quickly it comes back, to Saum's point, is a function of a number of different variables when the patients feel safe having the procedure done, getting appropriate medical clearances when their PCP office is open, whether or not insurance benefits are in jeopardy.
I'd just say we're ready to manage the increased demand by ensuring that we have the appropriate safety screening and testing protocols in place so that our staff, physician and their patients really have confidence they can work and be treated in our facilities safely.
Our next question is coming from Frank Morgan from RBC Capital Markets. Your line is now live.
Good morning. I just wanted to confirm that number one more time. You said you were at 40 -- the USPI was at -- operating at a 40% reduction. So, your low was minus 80% and you're now at minus 40%?
That's not correct. So, one more time. We talked in March about being down. I'm going to just use it as how much were down, down about 60% at that period of time. That worsened to being down about 80%. So, again, 20% of normal.
And in the last 10 days, as Brett points out, the demand both for backlog cases and other care, given again how I described the USPI environment is viewed as very safe, has increased rapidly. And we're trending, if you look on a forward-going basis, probably somewhere between 40% and 50% of normal, so down roughly 50% to 60%, but with active week-over-week increases that are substantial.
Now, when that gets back to 90%, I don't or 100% or 105%, I don't have a way of predicting right now. But what we're focused on more than anything is just ensuring that we're ready to serve that demand that doesn't seem to have any limits right now at the range we are on the growth that we'll see week over week over week as the physicians get their practices up and running. So, I think by the time we get to the end of May, we'll have significantly more information about that.
Okay. Thanks for the clarification. My question is what are the types of procedures that are actually coming back first in the ASC setting? And with regard to doctors being comfortable, do you think it's enough that if they're comfortable that the patients will follow along with their thoughts on safety? Thank you.
Brett, do you want to take that?
Yes. The only thing I would -- I'd just make, again, a couple of observations. I would say we're thoughtfully and safely ramping back up volume across the portfolio, and we'll ensure the capacity is there to meet the needs of our medical staff. But they're the ones who are prioritizing and making the clinical decisions in terms of who to care for first.
If you look at which procedures are actually coming back more quickly, it's actually probably the higher complexity cases in the area of spine, total joint, general surgery, some of those things that have been delayed but are certainly necessary to get done as soon as possible in order to avoid more complications later.
The types of procedures that are coming back a little bit more slowly are in the areas of GI and pain, ENT. That's probably how I would differentiate between the specialties coming back more quickly than the ones that are a little bit slower to come back.
But generally speaking, as I alluded to earlier, we are seeing the demand kind of begin to improve significantly across all specialties. But, of course, some are coming back a little faster than others. Does that answer your question?
That's got it. And maybe a cost question, do you feel like that April was sort of the maximum level of cost cuts that you can make from an operating perspective? Thanks.
No, this is Dan. No, we will react appropriately to the situation as we encounter them. We obviously are optimistic that the operations are going to recover and start ramping up as we've been talking about, but we will make the appropriate adjustments if otherwise.
Thank you.
Thank you. Our next question today is coming from A.J. Rice from Credit Suisse. Your line is now live.
Hi everybody and thanks for all your clinicians are doing. Maybe we talk a lot about the federal response to what's been happening from a payer standpoint. Maybe just to have you comment, there's been a lot of pronouncements from managed care companies about what they're doing.
Has that in any way benefited you or impacted how this situation has unfolded? And I know there was an FMAP enhancement on Medicaid. Has that had any impact from your perspective? And I guess the discussions about rates for next year would be a part of that as well, maybe if any of that's ongoing.
A.J., it's Dan. In terms of the -- a couple of those things that you mentioned. So as far as the FMAP, we obviously are -- we appreciate that. We think it's important. It will certainly help to some degree. I would say, at this point, it's nothing of significance in terms of -- from a dollars perspective. But it will obviously help as the additional funding is allocated to providers based on the care.
In terms of -- from a pricing perspective, as we've talked about in the past, our commercial book of business is essentially -- we're over 90% contracted this year and three quarters or 75% roughly for next year. So, we have a very good visibility into our pricing as we look at the next year and a half or so.
So, the rates that we have been able to negotiate in the contractual terms, it's been helpful in driving our pricing yield over the past several years and has continued so far this year and we expect fully to continue for the remainder of this year.
Okay. Maybe the follow-up would be, obviously, you're focused on just getting through the current month or two and getting back to semi-normal. But I wondered, clearly, we're being asked by investors to think about what is the recessionary impact on the business. Obviously, we're in a post-ACA world.
The last time we were in a downturn, we didn't have things like exchange or enhanced Medicaid. I guess from the respective, I'm thinking about the payer mix dynamics, the economic downturn, the volume, the cost side, particularly labor. Do you guys have any early thoughts that would be helpful in thinking through the implications of that, given what we're seeing out there economically?
Yes, this is Ron. Yes, we are talking about that. I don't know if we're prepared to give you kind of a great insight. But some of this will, I think, as people -- the problem is the unemployment figure is probably somewhat inflated as companies start to come back.
So, we're not assuming that immediately. I mean, there's a lot of companies sort of doing what we did, when we furloughed our employees, their health care stayed intact and we're paying all of those costs. If you follow the trends you see, there is a lot of that going on. And then there's COVID and some other things that people have used.
So, I think we'll have to wait and see what the real mix is in terms of people going back to work, how that will flow relative to insurance coverage. And then there's obviously a tail on that. So, there is requirements for COVID to exist for at least 18 months from a legal standpoint. So, I don't think we'll see an immediate impact of that. Obviously, we have some concerns on deductibilities, but a lot of that has been waived by a lot of the insurance companies.
So, again, I think we have to sort through that as we see the start-up come. But from a recessionary standpoint, I'm not -- at this stage, I'm not overly worried about it, but that's something that we're concerned about. And we'll watch and we'll monitor accordingly. So Dan, do you have any other thoughts on that?
Yes. In terms of -- we'll obviously reevaluate our -- as the cost structure is being long. Believe there's still more opportunities. As we've talked about on our February call, we have $150 million of incremental cost efficiencies that we are working on and executing on this year. And we'll continue to do those type of things to adjust the portfolio appropriately based on the economic conditions that we're facing.
All right. Thanks a lot.
Thank you. Our next question today is coming from Kevin Fischbeck from Bank of America Merrill Lynch. Your line is now live.
Great. Thanks. I wanted to see -- you guys are cutting CapEx by 40% this year. I mean how do you think that might influence or impact your growth kind of going forward?
Kevin, it's Dan. Actually, when we went through literally project by project that we had planned to fund this year, and the obvious capital spend that we continue to believe is absolutely necessary. As it relates to appropriate patient care, life safety investments as well as investments that we believe are important to drive growth in the future as we get through this. We have reduced -- as we talked about, we have reduced our capital spend by roughly 40% this year.
But I would tell you that we believe that once we get through this, that we'll continue and get back to our growth trajectory, and we don't believe a lot of the spend that we have reduced, that if the right opportunities are there, we'll make the investments.
So, we don't think it will materially impact our long-term growth prospects, the actions we're taking right now. It's absolutely important we need to do this now to preserve and enhance liquidity. And when we get to the right time, we'll make the necessary investments.
And I guess maybe along that same vein, I guess, the company has consistently gone out and bought surgery centers every year to help supplement USPI's growth. I mean how are you thinking about that pipeline and your ability and willingness to do deals? And maybe what that pipeline looks like? You think that will be a better pipeline over the next 12 months, but the disruption that some of the smaller players are seeing.
Yes, this is Saum and I'll ask Brett to comment as well. Just a couple of thoughts there. First of all, in the first quarter, we did close on a number of transactions that we're working on through 2019. So, that's one.
The second thing is, I think it remains to be seen how the centers ramp up and the sentiment of physicians and health system partners that we have in existing markets with respect to their plans from an expansion standpoint, but the market -- so we'll see how that goes.
But from the standpoint of the market that exists of independent surgery centers, stand-alone, multiyear, single specialty, we certainly anticipate that over time, and it's too early, over time, we will probably see more opportunities from those who are looking for a more stable ownership structure that can help them grow and thrive into the future. And we'll be prepared, as Dan said, to take advantage of those when there are good opportunities. Brett?
Yes. Saum, I think you covered most of it. The only color I would add is, obviously, the M&A landscape, as we said before, pre-COVID was very favorable. But obviously, we put most of the M&A activity on hold until we get to a point where we can ramp back up our existing operations.
And to Saum's point, in Q1, and as expected, we had a productive quarter. We added or acquired six surgical facilities. We opened two de novos and invested over $50 million. Of course, that was prior to the COVID crisis.
In addition, we continue to have a strong pipeline. But of course, our primary focus is going to be ramping back up our existing operations. That includes a number of de novos that were under construction when the COVID crisis hit. Obviously, those are pretty far along.
So, we'll continue to develop those, open those, which will likely come at the later part of this year and early next year. And in addition to that, we have four other de novos that are moving along quickly and then five additional de novos that are ready to be syndicated when things get back to some level of normalcy.
So, all to say, we believe that once we get back to the level of normalcy I was alluding to, I think we'll be in a pretty good position to refocus on the M&A activity that we stopped in the middle of March.
Okay. Thanks.
Thanks. Our next question today is coming from Ralph Giacobbe from Citi. Your line is now live.
Thanks. Good morning. I was hoping you can give us a sense or an idea of how exchange rates compare to commercial rates in your markets.
Hey Ralph, it's Dan. Good morning. The exchange rates, generally speaking, are relatively consistent with commercial terms and conditions and pricing. Yes, there -- it depends literally by market, of course. But it's not unusual for there to be -- add some discount from -- compared to a normal commercial plan.
But obviously, we work with all the plans, and we negotiate contracts on a national basis with national payers and on a statewide basis with regional or state-wide plans like the Blues.
So, it's -- we look at each market, each exchange opportunity, the pricing in terms of the affordability to consumers and make a decision whether it makes sense to have a little bit of a delta between traditional commercial rate and exchange rate.
Okay. All right. Fair enough. And then just a follow-up--
One addition to that you should keep in mind is that the company, long ago, put in place a broad in-network strategy with respect to the exchange plans, which obviously served the company well through the post-ACA period. And that strategy still remains in place in terms of being inclusive. We expect that to serve us well going forward here to the point about exchange capacity potentially increasing.
Okay. All right. That's helpful. And then just on the follow-up, I know you talked about M&A on sort of USPI. I was hoping you could talk a little bit about the JV pipeline in terms of health systems, if the current backdrop, you think, accelerates those conversations and sort of opportunities there.
And then on the hospital side, I know it's really early, but any perspective on competitors in your market? And maybe either their financial position or longer-term consequences of COVID either kind of a market share or even potential sort of M&A within your existing markets?
Yes. So, Brett, do you want to deal with the USPI pipeline?
Yes. On the JV side, our pipeline continues to be very strong related to prominent health system partners that are looking to partner with us and vice versa. If you recall, last year, we added seven new prominent health system partners. First quarter, we added another one. And if you look at our pipeline, potential new partners, it's very robust.
Obviously, the last couple of months has slowed those conversations down, but based on very recent conversations, health system partners are ready to ramp back up those conversations.
So, we anticipate actually probably exceeding, at least meeting or exceeding, the number of new health system partners that we add to the portfolio this year as we had last year. So, it continues to be a very active part of our development activity.
Obviously, most health systems around the country are still trying to accelerate their ambulatory growth, and we're still wanting to go to organizations in the country for those health systems that are looking for a partner to help them accelerate that growth.
And to your second question about market share and competitors, I don't think we want to go down that path today. We really haven't been focused on that, and we've really just been focused on recovery in our own markets and what we're doing. So, I'd kind of like to table that for maybe a conversation in another time. So--
Okay, fair enough. Thanks.
Thank you. Your next question today is coming from Whit Mayo from UBS. Your line is now live.
Hey thanks. I appreciate you guys extending the call today. Maybe just for Brett, since I've got you on the line, and you've been with USPI for some time through various cycles. Medicaid is such a small piece of your business, and I presume most of that is probably tied to your surgical hospitals. Maybe I'm wrong.
But I'm just -- I guess my question is, how do you think this changes going forward? Do you think Medicaid grows in terms of the realities of the economy? Do you emphasize Medicaid as a payer or more? I'm just maybe a little bit more worried about mix. And I think I have heard you guys described this earlier. So, any context would be helpful.
Yes. Whit, to your point, Medicaid is a very small amount of our current mix, both in the surgical hospitals as well as the ASCs. I guess, I can foresee that mix shift a little bit towards Medicaid just because of what's happening in the environment related to unemployment. But I don't -- I don't see a significant shift from a payer perspective in that regard.
Okay. No, that's helpful. And second question just for Dan on the malpractice change. If you run the undiscounted math back a year, what's the difference? I mean I appreciate the change. I never really understood why you discounted it to begin with. But any way to frame up, if we did it this way, our 2019 expense would be X versus Y? Just any impact on the quarter would be helpful.
Whit, what we did, we did go back and recast the prior year numbers to remove the adjustment. But you may remember last year, there was about for the entire year, there was additional expense of about $23 million because of the change in the discount rate.
But in 2018 and 2017, there was earnings. There was $12 million of earnings from it in 2018 and about $5 million in 2017. So, how this rule change work, you just go back to the beginning period and you adjust all the periods. So, all the numbers that you see comparing this year versus 2019; they've been recast for the change.
Okay. So, we just take whatever you said, the $23 million or something from last year and just cross that out and that's the impact?
Well, no, the numbers we presented within the documents have already been adjusted to remove the $23 million.
Got to make an adjustment in order to do this.
Yes, okay. I got it. Thanks.
So, it's normalized. It's all normalized. Why don't we go for about another five minutes, right? Okay.
Thank you. Our next question is coming from Pito Chickering from Deutsche Bank. Your line is now live.
Good morning guys. Thanks for taking my questions. To ask Justin's question in a little different way, there are a lot of moving parts on the P&L due to huge movements within admissions, cost reductions and furloughs. Looking at 2Q, can you walk us through the variable versus fixed components for salaries and benefits, supplies and other OpEx?
Pito, it's Dan.
So Dan, do you want to start?
Yes, sure. Obviously, as volumes move up or down, we always look at our cost structure and adjust appropriately. In terms of, specifically, your question to the mix of variable versus fixed, you like to approach it every single dollar worth the cost as variable, right?
Now, some -- obviously, some costs are obviously more difficult to flex down, such as rent expense. But when you go through the areas of the P&L in terms of labor, how much is fixed versus variable? Maybe 40% or so for labor. It really depends on the environment and the situation. If it's an extreme situation like we've been dealing with, then you have to adjust accordingly.
And you have to be more aggressive, too.
Supply is a large -- very large portion of the supply costs are variable, obviously, not 100% because you always need to maintain a certain level--
For safety needs.
Yes, for needs that you know there's going to be at some point, whether it's the next day or a week or month ahead. The other operating expense category is the area that probably from a percentage standpoint, has the least amount of initial flexibility in terms of variability to flex down, because that's where you have rent expense in there and oftentimes, it takes a little longer to get at that.
But listen, I think we've demonstrated we do a really good job managing the cost structure as it's not only when the business flexes down, but also as it grows, and which we have obviously been doing in the past couple of years.
I just want to say, though, that we have really trying to take a much more aggressive attitude that all expenses are variable. And you have to really approach it with that kind of a mindset. You may run into the wall, but that doesn't mean you can't renegotiate, relook, reallocate, rethink about closing out areas or subleasing. I mean there's things you can do to deal with some of these things, and we just we tried to be very aggressive about that. Saum, I don't know Saum might have had a comment there.
The only thing I would add to that is that remember, I think the broad commentary we just made really applies in the ranges Dan gave to the hospital business. The direct variability even before renegotiating contracts and other things on the ambulatory side or the USPI side is greater. And it's important to note that as we ramp down facilities, whether they were shut down or ramp down quite significantly, we will demonstrate the ability to variabilize more cost in that environment than the hospital environment.
Operator, we'll take one more question.
Certainly. Our final question today is coming from Andrew Mok from Barclays. Your line is now live.
Hi, good morning. Thanks for squeezing me in. You guys sounded confident around the liquidity and cash profile of the business in your prepared remarks. So, I was hoping you could expand on that and speak to your plans to manage through cash and working capital needs in the back half of the year, especially as you start to repay the $1.5 billion of accelerated Medicare payments in August. Thanks.
Yes. So, in terms of -- as we move through the year, we do have to start repaying the $1.5 billion of advances. But keep in mind, that will start in August, and it will be repaid gradually based on claim payments that otherwise would be processed by Medicare and paid. So for example, say -- I'll make a number, I'd say you're getting paid for $25 million of Medicare fee-for-service claims in a given day or week.
And once we get to August, we'll take advantage of the repayment terms under the advanced program and for that $25 million of claims. And normally, they would send you cash associated with that. That $25 million then would be applied against the advances. So, it will be paid off gradually as we move through the back half of the year and into 2021 as well.
So, we obviously -- we're running numerous cash flow models depending on various scenarios. And based on the sources of liquidity that we currently have, whether it's the existing cash on hand of $2.2 billion or our revolver capacity of $1.9 billion. That's why I mentioned that we believe we have sufficient liquidity as we think about the next year.
Certainly, we pointed out a lot of information in the slides as to other liquidity enhancements as we move through this year. We believe we're going to be able to complete the sale of our Memphis hospitals. That would be roughly $350 million of proceeds.
And the various provisions of the stimulus legislation also provides some additional liquidity, such as the deferral of the company payroll tax match, which is roughly $250 million. And that doesn't -- half of it doesn't have to be paid back until December of next year and the other half December of 2022.
So, that provides us a window there, and we're getting a relief on the Medicare 2% sequestration adjustment. So, between all those components as well as how we're reducing discretionary spend and reducing capital expenditures, that's how we're going to manage through this. And it's obviously watching every single dollar that comes in and every dollar that's going out.
Okay, great. Thanks.
We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.
Thank you, everyone. We really appreciate your time. I know our prepared remarks were a little bit longer than usual. We thought it was important to get the information across and appreciate you staying on longer than normal to ask us some questions. So, have a good day.
Yes. Thank you.
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.