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Edited Transcript of THC earnings conference call or presentation 30-Apr-19 1:00pm GMT

Q1 2019 Tenet Healthcare Corp Earnings Call

DALLAS May 3, 2019 (Thomson StreetEvents) -- Edited Transcript of Tenet Healthcare Corp earnings conference call or presentation Tuesday, April 30, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brendan Strong

Tenet Healthcare Corporation - VP of IR

* Brett P. Brodnax

United Surgical Partners International Inc. - President & CEO

* Daniel J. Cancelmi

Tenet Healthcare Corporation - CFO

* Jason B. Cagle

United Surgical Partners International Inc. - CFO and SVP

* Ronald A. Rittenmeyer

Tenet Healthcare Corporation - Executive Chairman & CEO

* Saumya Sutaria

Tenet Healthcare Corporation - COO

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Conference Call Participants

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* Albert J. William Rice

Crédit Suisse AG, Research Division - Research Analyst

* Anagha A. Gupte

SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst

* Ann Kathleen Hynes

Mizuho Securities USA LLC, Research Division - MD of Americas Research

* Benjamin Whitman Mayo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care

* Frank George Morgan

RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research

* Joanna Sylvia Gajuk

BofA Merrill Lynch, Research Division - VP

* John Wilson Ransom

Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research

* Matthew Dale Gillmor

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Matthew Richard Larew

William Blair & Company L.L.C., Research Division - Analyst

* Patrick Thomas Feeley

Barclays Bank PLC, Research Division - Research Analyst

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Ralph Giacobbe

Citigroup Inc, Research Division - Director

* Stephen Vartan Tanal

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, and welcome to the Tenet Healthcare Q1 2019 Earnings Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to Mr. Brendan Strong, Vice President of Investor Relations. Please go ahead, sir.

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [2]

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Good morning, Emma. Thank you, everyone. The slides referred to in today's call are posted on the company's website. Please note the cautionary statement on forward-looking information included in the slides. In addition, please note that certain statements 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 future earnings and financial position. These forward-looking statements represent management's current expectations based on currently available information as of 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. You are cautioned not to put undue reliance on any of these forward-looking statements.

I'll now turn the call over to Ron Rittenmeyer, Tenet's Executive Chairman and Chief Executive Officer. Ron?

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [3]

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Thank you, Brendan, and good morning. As you can see in the materials we posted yesterday, we had a solid start to the year. We have successfully implemented several changes that are and will continue to positively impact our performance. We are continuing to make improvements in our operations that are having a positive impact. We're sharpening our organizational structures to continue to refine, simplify and effectuate change, with our leadership remaining resolute about execution.

We're also continuing to maintain acute awareness of issues that may arise so that we can address them more expeditiously and with a finer point. I am very pleased with our progress and the continued improvements in our performance that will set the stage for the balance of the year. Before I turn this over to Dan, I wanted to add some perspective on the quarter.

We delivered another strong quarter above consensus in adjusted EBITDA, adjusted EPS and revenue. We generated adjusted EBITDA of $613 million or $13 million above the midpoint of our outlook. Adjusted EPS of $0.54 was well above consensus and the high end of our outlook range.

Our hospitals delivered results consistent with our expectations. We were pleased that the volume growth meaningfully improved in the first quarter despite a much milder flu season, and we are optimistic about delivering even stronger volume growth as the year progresses.

Looking out over the Hospital portfolio, we are seeing positive momentum in many of our key markets and in specific service lines where we are prioritizing investment. We believe this is due in part to our alignment of marketing and community outreach efforts to meet growing patient demand and on our focus on chronic disease patients who have a greater need for our services.

We believe we have opportunities for margin improvement in our Hospital business through a combination of improved cost management and equally important, leveraging our cost base as we grow our revenue base. The strategic investments we are making to grow and enhance our service offerings will place some near-term pressure on our Hospital margins but are improving our competitive positioning as we go forward. So we see these investments as a targeted and important move.

As we move throughout the year, our expectation is that we will make continued progress on margin improvements in all other business areas, particularly given the targeted initiatives we have in place to grow volumes and continue to improve expense control, coupled with increased accountability.

I've used the term pointed before to describe the way we think about cost management, meaning we are targeted on where we see opportunities versus a broad-based approach that is less specific, tying back to overall organizational effectiveness. I'm confident we have the right initiatives in place to carry us forward and better serve our communities, with these programs now becoming part of our DNA across the broader organization.

USPI had a great quarter, with a strong growth in surgical volumes. Revenue per case for all of Ambulatory was up nicely, with growth of more than 3%. USPI had very healthy EBITDA gains of 12%, which is an area of consistent strength for that segment.

Conifer also had another strong quarter, driving continued improvements in adjusted EBITDA. Conifer delivered $99 million of adjusted EBITDA in the quarter, with solid EBITDA margins of 28.4%. And comparing that to Q1 2018, this is more than 400 basis points of margin improvement on top of really strong results at Conifer in the first quarter of last year, when we really started to transform Conifer's performance trajectory. The revenue declines at Conifer were, as we have discussed previously, impacted primarily by divestitures by Tenet and other customers, and will be further highlighted in Dan's remarks. We remain very focused on sales growth at Conifer through our business development and marketing teams and with the upcoming addition of a new commercial leader, which we are working on now.

On the strategic review, we continue to work, as we've discussed, on an exclusive basis regarding a potential transaction. As you may recall, we started this exclusivity shortly before the Q4 earnings call, which was approximately 9 to 10 weeks ago. And these discussions are continuing. We have qualified third-party advisers as well as members of our team engaged in this effort, and beyond that comment, I cannot set a date for announcing the next step or comment on the progress. Those discussions are ongoing and as we said before, there can be no assurance that these negotiations will result in a transaction.

We remain committed to delivering the best outcome for Conifer, Conifer customers and for Tenet shareholders. And before I turn it over to Dan to provide additional details on our results for this quarter, I just want to mention that we are reconfirming our 2019 outlook for revenue, adjusted EBITDA and adjusted EPS. Dan?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [4]

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Thanks, Ron, and good morning, everyone. We generated $613 million of adjusted EBITDA in the quarter, above the midpoint of our outlook range. Adjusted EPS was $0.54, which was above the high end of our range for the quarter.

Our Hospital segment generated $337 million of EBITDA, which was consistent with our range of expectations. Ambulatory EBITDA was up 12% to $177 million, and EBITDA less facility-level NCI was $112 million, up 9.8% after adjusting for the divestiture of Aspen, our former U.K. business. Conifer's EBITDA was $99 million, with margins up 410 basis points to 28.4%, and adjusted free cash flow was an outflow of $148 million.

The first quarter is typically a softer cash flow-generating quarter for us, and we anticipate much stronger results as we move through the year.

Turning to Hospital volumes. As shown on Slide 5, our performance meaningfully improved in the first quarter, especially given the difficult flu season comparison. Adjusted admissions grew 0.6%, and admissions were essentially flat. Revenue per adjusted admission increased 1.3%, and we continue to benefit from a modest increase in acuity compared to strong acuity growth in last year's first quarter. Expenses increased 4% per adjusted admission compared to last year. As anticipated, malpractice expense contributed to this growth as we continue to resolve larger cases. Increased malpractice will also remain a source of pressure in the second quarter.

Looking forward to the second half of the year, stronger expense management combined with more favorable malpractice comparisons should result in a lower level of expense growth. If we exclude the $38 million increase in malpractice as well as the $11 million of increased cost on our risk-based contracting business in California, cost per adjusted admissions only increased 2.5% in the first quarter.

Moving to our Ambulatory business on Slides 6 and 7. In our surgical business, revenue grew 4.2% on a same-facility system-wide basis, with cases up 2.8% and revenue per case up 1.4%. On a same business day basis, surgical volumes were up 4.5%. In the nonsurgical business, which represents our urgent care centers and freestanding imaging centers, revenues increased 4.3%. Nonsurgical visits declined 1.8%, primarily due to lower flu-related visits in our urgent care centers, and revenue per visit increased 6.3%. EBITDA in the Ambulatory segment grew 12% to $177 million, and EBITDA less facility-level NCI increased 9.8%. Both of these growth rates exclude the $7 million of EBITDA and EBITDA less NCI that Aspen generated in the first quarter of last year.

Let me now transition to Conifer on Slide 8. Conifer continues to deliver higher margins on a lower revenue base, which was consistent with our expectations. Once again, Conifer's EBITDA performance was incredibly strong, with EBITDA of $99 million and margins up 410 basis points.

Conifer's EBITDA was up 12.5% once you adjust for the $10 million of customer termination fees in the first quarter of last year. As expected and previously discussed, Conifer's revenue declined 13.6% in the first quarter, primarily due to hospital divestitures by Tenet and other Conifer clients. The vast majority of these were in-sourced by the customer, including a sizable one that occurred on December 31.

Moving to our outlook. We are reconfirming the key components of our outlook for 2019, including our views on revenue and EBITDA by segment, adjusted EPS and adjusted free cash flow.

Additional details on our 2019 outlook are contained on Slides 9 through 12. I also want to reiterate my fourth quarter call comments regarding the California Provider Fee program. As you may recall, the current program expires on June 30 of this year. For modeling purposes, please note that we do not anticipate recognizing any revenue under the program in the third quarter of this year.

As a result, approximately $65 million of this revenue should be shifted into the fourth quarter, which means we are assuming about $130 million of revenue from this program will be recognized in this year's fourth quarter. If the accounting criteria for recognizing this revenue under the new program are not met as of year-end, then we would record the $130 million of California revenue next year plus a full year revenue from the program in 2020.

In summary, Tenet delivered solid financial results, with EBITDA in the upper half of our outlook range for the quarter, and EPS was above the high end of our range. Volume growth strengthened in our Hospital business. USPI continues to deliver strong and consistent operating results. Conifer is driving meaningful margin improvement. And we have reiterated our outlook for 2019. Let me now turn the call back to Ron.

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [5]

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Thanks, Dan. I'd like to close this out by just saying that we -- as Dan pointed out and as I've said, we had a very good quarter. But we're not sitting back on that, and we're going to move forward as strongly as we have in the past. We continue to execute well. I think we're beginning to see the benefits of the plans we've been implementing and talking about. Positive traction on volume in our hospitals and outpatient facilities, maintained very tight expense control across the enterprise and that will continue. And on the Conifer strategic review, we remain in exclusivity regarding a potential transaction and I'm as bullish as that as I was in the past. And we are reconfirming our outlook for 2019. So net, I think we had a great quarter. With that, I'll now turn it over to the operator for questions. Emma, I'll turn it over to you and Brendan, so...

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question today from Ann Hynes from Mizuho Securities.

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Ann Kathleen Hynes, Mizuho Securities USA LLC, Research Division - MD of Americas Research [2]

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Could you let me know -- one thing that stood out is that the acute care business over tough comps still posted positive admission trends. I don't think you said in your prepared remarks what the one less day had on that. So if you could let me know what admissions, adjusted admissions and maybe same-store revenue in acute care was, ex if you had to adjust for the one day? And secondly, obviously, a reacceleration of admissions is a big focus for you guys this year. If you can go into a couple of near-term actions you are taking to even improve it further.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [3]

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Ann, this is Dan. Let me address that. So yes, we were pleased to see improvement in our Hospital volumes in the quarter. Adjusted admissions were up 0.6%, and admissions were essentially flat. The flu comparison had an impact on admissions. It was about 80 basis points; and adjusted admissions, it was about 60 basis points. So the volume trends would be better absent the tough flu comp. The -- your point about the 1 less business day in the quarter, as I'd pointed out in my prepared remarks, that had about a 1.7% impact on USPI and surgical volume. So their growth was 2.8%, but it was 4.5% on a same-business day basis. But that also impacts the hospital surgical volumes as well. Our surgeries were down 2.2%, but you would have roughly the same type of impact on the hospital surgical volumes, too. So I -- the surgical trends were, I would say, consistent to slightly improved in the quarter. In terms of the year-over-year impact on net revenue yield, the -- certainly, in the first quarter of last year, acuity was incredibly strong last year in the first quarter. Our net revenue per adjusted admission growth, we were -- was in line with our expectations, I think, from a pure pricing perspective. Again, the first quarter last year was tough comp, because the growth in net revenue last year was over 4%. We're very comfortable with our pricing. We have good visibility into our pricing from a commercial perspective for the rest of the year. And we're over 90% contracted for this year and 60% for next year.

We know where Medicare is at, about a 2% rate in -- update went into effect in the fourth quarter last year. And the most recent proposal from Medicare was in line with our expectations. So we feel good with where our pricing's at.

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Operator [4]

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We'll now go to our next question from Pito Chickering from Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [5]

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So 2 questions here. First one on cash flows. So normally, first quarter can be a lighter than the rest of the year, but this quarter, from a cash flow from ops is significantly lighter. Can you sort of go into that in a little more detail on why you have confidence on the annual guidance of cash flow from operations?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [6]

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Pito, this is Dan. Let me address that. Yes, the first quarter is typically our softest cash flow-generating quarter, primarily due to certain annual working capital requirements, such as our employee 401(k) match. And we do expect our cash flows to be much stronger as we move through the year, and that's why we reconfirmed our cash flow guidance for the full year. In terms of some of the variances year-over-year, we did invest additional resources in capital expenditures, about $49 million year-over-year. It's -- some of that's timing. We have not changed our estimate for capital investments this year and what we previously talked about.

A couple of other things I'd point out in terms of the year-over-year comparison. We did see about $25 million of lower cash from the California Provider Fee program. No concern there whatsoever. It's just a matter of timing in terms of how the payments flow based on the timing of the approval of the programs. Also, in the first quarter last year, and I called this out in the Conifer section, where we had $10 million of revenue in the first quarter last year, that was also received in cash related to a contract termination. So that had somewhat of an impact also year-over-year. Additional malpractice settlement payments were about $20 million year-over-year. So that had somewhat of an impact, too. And then with -- our days in AR did tick up a bit in the first quarter. Historically, if you go back through the years, based on seasonality there, oftentimes, we have seen a slight uptick from, say, Q4 to Q1. We also, we're improving our back office or central business office functions at our USPI, in our USPI platform, to improve efficiencies on a long-term basis and that had somewhat of an impact, too. So we'll get all that back. But when you add it all up, we're still comfortable with our cash flow guidance for the year.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [7]

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Great. And the one follow-up question for you, on the risk-based contracting, going back to third quarter, you saw, I think, $20 million of losses, fourth quarter it's $4 million, $11 million in the first quarter. So $35 million, I think, was losses on, I think, $100 million of revenue. I think you talked about these originally coming from higher-acuity patients, but can you just sort of talk about these contracts and when they come up? Because if those numbers are right, those are pretty margin -- big -- nice margin pressures for you guys.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [8]

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Pito, this is Dan. Let me hit that. We anticipate those losses are going to come down quite a bit from what we've seen. As we move through the year, the losses of that business we anticipate to be much lower on a quarter-to-quarter basis. We have changed out management in that business entirely. We're on it, we're fixing it, we're not done yet. We're also, to your point about the contracts, we're evaluating all contracts to continue to see if they make sense going forward. But we'll get that business on the right footing.

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Operator [9]

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We'll now move to our next question today from A.J. Rice from Crédit Suisse.

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Albert J. William Rice, Crédit Suisse AG, Research Division - Research Analyst [10]

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One of the areas of outperformance and again this quarter rather than the last number of quarters, has been the Conifer, particularly the margin strength. And I wondered just to flesh out 2 aspects of it. On the revenue side, as you guys are doing divestitures and have gotten rid of assets and you said others have as well that are Conifer customers, it doesn't seem like much of that business is being retained. Do you have any data on how much you tend to retain? And I'm assuming if it's doing a good job, I would think you'd have a better chance to keep holding on to it. Is there some systemic reason why it tends to move away from you? And then the other aspect of it is I know most of the margin improvement, sounds like you're attributing that to management cost savings, but is there something inherent about the Tenet or CHI legacy business that's more profitable than what's being divested? And is that helping your margin in Conifer be so strong?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [11]

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A.J., this is Dan. Let me try to address some of those points. In terms of the declining revenue because of divestitures, yes, they were divestitures by Tenet as well as -- as well as other customers, fully anticipated. In terms of your point about when the hospitals are sold, do we retain the business, sometimes we do, sometimes we don't. There are certain customers or buyers when they take the facility over, are more comfortable with their own internal revenue cycle process. However, many customers look to us for -- at a maybe -- at minimum, transition services for a certain period of time until they get their arms around the business and evaluate all aspects of the business and get everything up and running. And then they oftentimes just make a decision to bring it in-house, too.

So it sort of cuts both ways. We've obviously understood that some of this business was going to be lost and so that's why we certainly had daylighted it previously. The margin improvement has been very, very strong. Cost actions that have been implemented over the past year or so have been successful. They're sticking, they're going to continue to stick. And there's opportunity for more efficiency as we move through this year and next year. We talked about our most recently announced $200 million -- additional $200 million cost efficiency program, and Conifer's a part of that. And so we feel good about continuing to be able to improve performance at Conifer. We -- revenue, we're, as Ron mentioned in his prepared remarks, that's obviously an area of focus, and we're -- that's what we're working toward to grow the top line.

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [12]

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And I would add -- this is Ron -- I would add that revenue takes a bit of time. It's not -- there's a lot of relationships, there's a lot of time. It's not as simple as just a retail sale. It's -- it takes time to get your target, work with that target and develop your relationship and provide insight where you can actually do a better job and usually at a lower cost. Your comment about are the Tenet contracts or CHI contracts inherently more profitable, I wouldn't say they are. There is something about scale that helps, and obviously, they are the big players in the mix, and that scale does help. So beyond that, I don't know much more I can add, so.

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Operator [13]

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We'll now go to our next question from Whit Mayo from UBS.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [14]

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Maybe a question for Dan or Jason, if he's around, but looking at USPI, the consolidated revenue in the quarter was down year-over-year; unconsolidated looks like it was up about 15%. So I'm trying to sort of reconcile some of the moving pieces there. It looks like there are 3 fewer total facilities this quarter. So did you de-consolidate anything? I think you've historically focused more on consolidating. So maybe just help me tease out some of the moving pieces there.

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Jason B. Cagle, United Surgical Partners International Inc. - CFO and SVP [15]

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Sure. Whit, it's Jason. Let me start with the last question first. We sold 2 facilities in the quarter, and we merged 2 locations into 1. And that's something that we often don't talk a lot about, usually we're adding facilities. But it's a constant and routine process with our portfolio the size that it is at this point. And after I'm done, I'll let Brett talk a little bit about M&A. To your first question, you've seen this in a lot of quarters in the past. We're going to have quarters where the unconsolidated outperformed the consolidated facilities for that quarter and then vice versa many quarters. This quarter, if you look at the equity and earnings line, you see 15% growth compared to the overall growth of 12% that we talked about. So this was just a quarter where the unconsolidated facilities were particularly strong relative to the consolidated.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [16]

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And Whit, just -- this is Dan, before I turn it to Brett. On a same-store basis, system-wide, again, as we've pointed out, revenue was up 4.2% year-over-year.

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [17]

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Whit, this is Brett. The only thing I would do is reiterate a little bit of what Jason said. I mean when we think about the portfolio optimization for the company, that is a normal part of our process. We sell facilities from time to time that we don't view as strategic to the company. We also merge facilities where we think we can capture synergies. And that's exactly what happened in this particular situation. As it relates to the M&A for the quarter, as you may recall, we had a really busy 2018. We invested $240 million in the space. We added 27 facilities last year. And notwithstanding that, our pipeline continues to be very strong. So we expect the latter quarters of the year to be very fruitful from an M&A perspective.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [18]

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Okay. So the $26 million gain through the unconsolidated income statement, that relates to the 2 facilities that were divested. Is that correct?

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Jason B. Cagle, United Surgical Partners International Inc. - CFO and SVP [19]

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No. Whit, there wasn't a gain on those. What I was talking about was the growth in equity and earnings over prior year, so $31 million versus $27 million last year.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [20]

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Okay. So the $26 million gain that is flowing through the unconsolidated affiliates, what does that relate to then?

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Jason B. Cagle, United Surgical Partners International Inc. - CFO and SVP [21]

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Whit, I'm not sure, I'll have to get back to you.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [22]

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That's fine.

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Jason B. Cagle, United Surgical Partners International Inc. - CFO and SVP [23]

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There wasn't a gain on those facilities.

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Benjamin Whitman Mayo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare Facilities and Managed Care [24]

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Yes. And maybe my other question, I've struck out on this a number of times, and I know you don't want to comment on Conifer and the process, which I think makes a lot of sense, but in the event that the business was separated, is there any framework that you can provide for us to help think through what the cash flow profile of the RemainCo would be anything that you could say would be particularly helpful?

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [25]

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On your second question about Conifer, I don't -- I'm not prepared to answer that today. Obviously, if we get to that point, we would have to discuss that and show that. So I think at this stage, it'd be a little premature for us to get into that. So Dan, any other comment about that?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [26]

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[I think we're good.]

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [27]

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Yes, okay.

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Operator [28]

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We'll now go to our next question from Kevin Fischbeck from Bank of America.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [29]

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Actually, this is Joanna Gajuk filling in for Kevin today. So coming back to your commentary around the Hospital segment and your expectation for margin improvement the rest of the year, can you flesh it out, I mean, you flagged the California program payments in Q4, so anything else you would flesh out in terms of the margin progression? Because clearly, Q1 EBITDA overall declined; Q2 implies seeing a 2.5% growth or so. Still, you talk about 4% to 7% for the full year growth. So that implies there's a steep drop in the second half, so can you just remind us again the different pieces that drive that?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [30]

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Joanna, this is Dan. Let me hit that. In terms of the Hospital business, as we move through the year, certainly, we are focused on continued improvement in volumes, which will certainly help. There are certain year-over-year items that we pointed out in Q1 that -- such as the additional malpractice year-over-year as well as the risk contracting business in California. Those losses will come down. The malpractice year-over-year comparison as we get into the back half of the year will also -- that growth will be much smaller than what you saw in the first quarter.

In terms of the other drivers of how we view margins in the Hospital business, we continue to be very tight on cost management. That's going to continue. We'll continue to execute on cost efficiencies, which will also contribute to margin improvement as we move through the year. As I mentioned, from a pricing perspective, we feel very good about our pricing. So a lot of the initiatives that we're focusing on will continue to take hold as we move through the year.

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Joanna Sylvia Gajuk, BofA Merrill Lynch, Research Division - VP [31]

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Great. And if I may, commentary around leverage targets, any changes there in terms of your 5x leverage target?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [32]

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Yes, so this is Dan. We remain very focused on improving cash flows, and we remain committed to reducing leverage to 5x or lower, primarily through EBITDA growth. As I mentioned on our call in late February, one can do the math based on our guidance we have. We still have some work to do to achieve 5x, and that's what we're focused on. Again, I can assure you that when we evaluate any capital allocation decision, we are always thinking about the impact on leverage and what that means.

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Operator [33]

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We'll now go to our next question from John Ransom from Raymond James.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [34]

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I guess if I were to pick on a pretty good quarter, the surgery volumes, well, I know you talked about that in the fourth quarter, but what is the strategy on the hospitals' side to try to get a little more flow going on the surgery side of your business?

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Saumya Sutaria, Tenet Healthcare Corporation - COO [35]

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This is Saum. So a few different things. First of all, I recognize that the surgical declines are important to us to turn around. So a few things. First of all, we're very, very focused in the near term on improving our care coordination, our operations, our throughput, our access to the operating rooms, and ultimately, the flow there will help us in the near term. Now obviously, more fundamentally long term, we're very focused on building up greater presence as our communities demanded it, in surgical service lines. That includes the expansion of trauma programs and other higher-acuity surgical service lines. And then finally, as you can imagine, the benefit that the Tenet markets on the hospital side get from the partnership with our ambulatory platform through USPI allows us to focus on many of the surgical service lines that overlap between the two. So all of those things, both from the near-term operational to the midterm sort of investments and thought process around surgical service lines and obviously, over a longer period of time, rebuilding significant high-acuity surgical services in our markets where they're demanded, including trauma programs, represents the pathway that we're on.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [36]

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Okay, this is a, kind of switching to capital allocation, Tenet is starting to finally generate, not this quarter necessarily, but on an annual basis, a fair amount of free cash flow. I just look at your capital structure, with all those bonds and maturity dates and the make-whole provisions, it's pretty inefficient as you start generating cash, to actually work your leverage down on an actual basis and particularly if you get a slug of cash from Conifer. So I'm just wondering, the legacy management team was in love with fixed-rate debt. Most companies have at least, say, a turn of EBITDA or more in floating-rate debt. Has the thinking around that changed, especially as the leverage targets -- as you drive toward your 5x leverage target, to be a more aggressive user of floating-rate debt from banks?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [37]

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John, it's Dan. Certainly, as we look ahead to some debt refinancing decisions that we'll be making, variable-rate debt will -- that tool will be in the toolbox, and we will evaluate whether that makes sense at that point in time, based on where the environment's at. So I wouldn't say that we're definitely going to do it, but I'm also saying that we're open to it if it makes sense for us. So absolutely, it's something we will consider as we move forward. I would say also, and your point about some of debt and some of the make-whole cost, as we move through the year and get closer to next year, certainly, there are maturities in 2020. The breakage costs come down as you move forward to those maturity dates.

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John Wilson Ransom, Raymond James & Associates, Inc., Research Division - MD of Equity Research & Director of Healthcare Research [38]

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And just last one from me. Tenet alone of all the hospital operators calls out med mal probably more, much more than your peers. Is there something structural in place or developing to try to make this line item less volatile? And is it -- what in your opinion kind of legacy practices have led to a spike in this line item, especially relative -- I know you can't speak to your peers, but it does kind of stand out as something that Tenet seems to struggle with a bit more than the other guys. That's it for me.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [39]

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Well, John, it's Dan. Well, certainly, we are very transparent about it, and we call it out when the numbers move around. We obtain actuarial valuations on a quarterly basis. We also have internal actuaries look at it as well. So the movement from quarter-to-quarter, absent the change related to the treasury rate or the discount rate, is really a function of where we're at with certain cases and typically, larger cases and the decisions we make to resolve a case, a larger case, rather than maybe proceed to trial. So obviously, we've been focused on it. As we talked about, probably going to continue to have some headwinds as we move through this year. But your other point about structurally, listen, some of -- some markets are more challenging from a litigation perspective than others. And that's really all I'll say on this. I won't necessarily call out any particular one.

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Operator [40]

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We'll now go to our next question today from Ralph Giacobbe from Citi.

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [41]

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Just on the ASC side, the volume and revenue were better in, I think, typically what's a seasonally slower quarter and not to mention, obviously, the 1 less day. And if I recall, 4Q was actually a little bit lighter and a seasonally stronger quarter. So just any thoughts about whether there's a change in seasonal pattern and any explanation about what -- or why that may be occurring? And then I just wanted to sneak in one more. I was a little surprised I guess on the Medicare rate. The IPPS proposal for 2020, your commentary that it was sort of in line with our expectations, I think the rate was sort of 3.5%. So is that just what you thought the number was? Or is yours a little bit lower, given sort of wage changes and other considerations?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [42]

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Ralph, this is Dan. Let me address the Medicare rate update and the proposal, and then I'll turn it over to Brett to address your USPI comment. In terms of the proposed rule for Medicare in-patient rates that will go into effect on October 1, it was in line with our expectations. Net-net, it's about a 1.1% increase. And that does include the impact of the change in disproportionate share revenue in next federal fiscal year. I would say, globally, the market basket was a little bit above maybe what people were thinking, but -- and then you also have to take into consideration the impact from any wage index adjustment. So all in, it was in line with where we thought it was going to be. Brett, do you want to...?

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [43]

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You bet. Ralph, it's Brett. You're right. I mean we had a very strong Q1 related to same-store same-day at 4.5%, which we're very pleased with. And as we alluded to in Q4 of last year, what we're seeing is the consumer being a little bit more rational as to how they deal with their high-deductible health plan. So if they haven't met their deductible in November or December, they're just saying, "Well, why don't I just delay that surgical procedure to the first quarter." So that once that surgical procedure is done, they have a full year of their deductible being met. So we saw that as a nice tailwind in Q1. We're not expecting that to continue through the remaining part of the year, but it certainly helped us for this quarter.

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Jason B. Cagle, United Surgical Partners International Inc. - CFO and SVP [44]

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And this is Jason. If I could just add on, Whit, if you're still on, I finally caught up to you. What you were looking at on Page 16 is our unconsolidated facilities presented as a whole. The number at the bottom of that page, the equity and earnings, that's our total portion of that, which is the 31. The 26 was an unconsolidated real estate entity that sold, but USPI's portion of that was only $1 million, which is in the equity and earnings at the bottom. Sorry about that, Whit.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [45]

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Ralph, did you have another question?

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Ralph Giacobbe, Citigroup Inc, Research Division - Director [46]

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Yes, I'm all set.

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Operator [47]

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We will now go to our next question today from Ana Gupte from SVB Leerink.

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Anagha A. Gupte, SVB Leerink LLC, Research Division - MD of Healthcare Services & Senior Research Analyst [48]

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So following up on the Conifer, Ron, you said that you remain as bullish as ever on the transaction and just trying to get a sense if you can give us any color on what the drivers of the -- the longer time line are? Are you exploring both a tax-efficient merger, spin or a sale or both? And is it due to the mechanics of a spin? Is it something to do on the negotiations on pricing? Or is it around your current contract that Tenet has? And in the event you spun out, what happens to that contract trend, putting some guarantees around [that one]?

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Ronald A. Rittenmeyer, Tenet Healthcare Corporation - Executive Chairman & CEO [49]

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Well, thanks for the question, Ana. I -- unfortunately, I'm not going to comment beyond that. That's what I said last quarter, it's going to stay the same. I just pointed that out because I don't want someone to read my tone as saying that it's continuing, that there's some message in there. There's no messages. We're pursuing this as we were in the past, and we will continue to pursue it. And that was my point of saying that we're as engaged as we've been and we haven't -- that we haven't stopped that. But as to getting into specifics that you just asked for, I'm sorry, I just can't do that, given the agreement that we signed. And that's what I said last quarter and I just have to stick with it. So we will get to it. Like I said, it's only been 8, 10 weeks here. If we were already that far in a conclusion, I would say we probably didn't do the job well enough. So this requires -- when you do these things, it requires the appropriate amount of effort. So I just can't give you the kind of color you're asking for, because there may as well not even be an exclusivity if I start doing that. So anyway, I'm sorry, but that's the best I can give you.

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Operator [50]

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Our next question now comes from Matthew Gillmor from Robert Baird.

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Matthew Dale Gillmor, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [51]

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I wanted to ask about the admission trend through the ER. You mentioned overall admits were flat, but I think ER admits were up about 4%. So can you talk about that trend and what you'd attribute that to? Was that some of the marketing efforts or were there other factors?

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Saumya Sutaria, Tenet Healthcare Corporation - COO [52]

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Yes, this is Saum. Thanks for the question. I think a few different things. One is, obviously, we have been focused, as I mentioned, on access and operational improvements and throughput in all of the parts of our facility. That includes, from my earlier comments, the emergency department. And look, the second thing is we've been focused on better care coordination, and again, that applies to the emergency department, so that we can get patients into the appropriate level of care for what we are seeing them present with. So both of those things, I think, have been important to that improvement in emergency department admissions that you note.

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Operator [53]

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Frank Morgan from RBC Capital Markets has our next question.

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [54]

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I wanted to touch on the inside of USPI, specifically just the ASC portion of that. It seems like the pricing in that segment has been sort of in a slow deceleration over the last couple of years. And I know you're -- in your guidance, you have 2% to 3% assumed pricing growth for ASCs. And I'm just curious, what's been causing the deceleration? Is it more case mix or payer mix, some other kind of shift in business? And then what gives you confidence in that pricing number for the guidance?

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Brett P. Brodnax, United Surgical Partners International Inc. - President & CEO [55]

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Frank, this is Brett. So you're right. I mean it's primarily a mix issue. Our [GI] business was up 16% in the quarter. And as you know, the GI business is primarily governmental. And as a result of that, our governmental mix was basically outpacing our commercial mix for the quarter. That said, we expect that payer mix to improve in subsequent quarters.

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [56]

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Frank, did you have another question? Or Emma...

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Frank George Morgan, RBC Capital Markets, LLC, Research Division - MD of Healthcare Services Equity Research [57]

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No, I'm good.

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Operator [58]

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Patrick Feeley from Barclays has our next question.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [59]

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I was just wondering if you can provide any update on the cost saving initiative. Any color today on how that saving's going to break down by segment? Any change in the time frame for realizing the savings? And maybe just how the process has compared so far to your own expectations?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [60]

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Patrick, this is Dan. Let me address that. So just -- let me just sort of recap the entire program, and then where we're at with it. So we initially started off at the end of 2017, we talked about $150 million cost efficiency program. We increased that to $250 million. And as we moved through last year, we were ahead of pace, and we ended up realizing more in 2018 than we had originally thought when we began last year. So we had very strong performance there. We executed on a few items faster, and the savings were greater, in many cases.

So we entered this year ahead of -- well ahead of where we thought we would be. We had, as we talked about on our fourth quarter call, we have -- we had about $55 million of additional efficiency savings that would be realized this year. And we're on pace to realize those, absolutely. Then we also talked about a new $200 million cost-efficiency initiative and performance improvement. And we indicated that we would exit 2019, end of this year, on a run rate to be able to achieve that, and we would capture roughly $50 million of those savings this year. So we are on track. We have line item visibility into many, many actions that we're focused on and executing on and we feel very good about where we're at.

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Patrick Thomas Feeley, Barclays Bank PLC, Research Division - Research Analyst [61]

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Great. And my other question was just it looks like uncompensated care trends continue to tick up a bit over time here. And I'm just curious if there's any color there what you're seeing around that.

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [62]

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This is Dan. Let me hit that. The -- actually, the uninsured trends are somewhat consistent with what we saw in the back half of last year, I'd say. Some growth on the in-patient side, and outpatient, roughly flat. It was down -- outpatient was down 50 bps in the quarter year-over-year. In-patient was up 4.2%. I would say that the numbers -- we're dealing with smaller numbers here, but if there was a growth, then it's in a couple states that did not expand their Medicaid program. So that's partly the reason for the driver. But I wouldn't say -- and nothing unusual compared to what we've been experiencing.

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Operator [63]

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We will now go to our next question from Matt Larew from William Blair.

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Matthew Richard Larew, William Blair & Company L.L.C., Research Division - Analyst [64]

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You've been discussing a deliberate pivot towards patients with chronic illnesses, multiple chronic diseases, and have discussed kind of in-patient and outpatient investment to support that focus. Could you just talk a little bit more about how you anticipate capital allocation perhaps changing or being more focused to support your own focus on patients with chronic illnesses?

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Saumya Sutaria, Tenet Healthcare Corporation - COO [65]

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It's Saum again. I think good question. And obviously, at the highest level, the continued focus on expanding our presence and care for those with multiple chronic illnesses is important, in addition to all of the work we're doing with respect to the rest of the patient base that we tend to see through, either the emergency department or for elected surgery. So I wouldn't say that we're focused on chronic illness at the exclusion of building those other service lines, but it's in addition to with greater emphasis and focus.

And then to your question about how we think about that, well, there's really 3 or 4 different components. The first is we think about realigning our emphasis and focus in our primary care and specialty areas, including our employed physicians, to be much more focused on aggregating patients with chronic illness that you think about, diabetes, heart failure and other things, where we're best provided to manage and offer that care. The second thing is, from a capital perspective, obviously, we're going through, at this point, a refreshed understanding of our technology footprint and also our procedure room footprint that would support many of those service lines that are required by those patients that have multiple chronic illness. And that, of course, will play right into the service line focus that I described earlier, which will move us towards better and more deep focus on higher-acuity service lines that we can deliver in our hospital setting and very much in conjunction with the business that we coordinate within our markets on the ambulatory side with USPI.

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [66]

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Emma, let's take one last question. We're going to try to end in the next couple of minutes. I know people are trying to get on another call starting at the top of the hour here.

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Operator [67]

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We'll take our last question now today from Steve Tanal from Goldman Sachs.

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Stephen Vartan Tanal, Goldman Sachs Group Inc., Research Division - Equity Analyst [68]

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I just wanted to follow up on the cash flow outcome in the quarter and specifically, just on accounts receivable. Kind of maybe a little bit more color would be helpful on what drove the jump in accounts receivable days. And similar question for inventories and other assets. And then finally, just tying the whole thing together, if 1Q was in fact sort of a little lower than normal, which quarter do you expect to make that up and which quarter should be above average?

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Daniel J. Cancelmi, Tenet Healthcare Corporation - CFO [69]

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Steve, it's Dan. Let me address that. As I mentioned on an answer to another question, there was an uptick in days in AR, a couple days, from year-end to the end of the quarter. As I mentioned, a good portion of that can be attributable to historically from Q4 to Q1, there can be an uptick in days in AR based on the seasonality of the revenue flows in the Hospital segment. As you note, roughly 60 days in AR, so depending on the timing and the level of revenue streams, the days in AR can move around from quarter to quarter. I also mentioned that there was roughly a 0.5-day impact from -- on the USPI side. We made a specific decision to consolidate several business offices to improve performance on a longer-term basis. So that had a partial impact as well.

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Brendan Strong, Tenet Healthcare Corporation - VP of IR [70]

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All right, great. Well, Emma, I think we're going to conclude the call there. We'd like to thank everybody for joining us today. We're going to be at the Bank of America conference on May 14. We look forward to seeing you there. If we don't see you there, we look forward to seeing you at UBS on May 21. If you have any questions, please call me at (469) 893-6992. Thanks very much.

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Operator [71]

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Thank you. That would conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.