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Tenet Healthcare Corp (THC) Q1 2019 Earnings Call Transcript

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Tenet Healthcare Corp  (NYSE: THC)
Q1 2019 Earnings Call
April 30, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

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.

Brendan Strong -- Vice President, Investor Relations

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, in future earnings and financial position.

These forward-looking statements represent management's current expectations, based on currently available information, as to the outcome and timing of future events but, by their nature, address matters that are uncertain. Actual results and plans could differ materially from those expressed in any forward-looking statement. For more information, please refer to the Risk Factors discussed in Tenet's most recent Form 10-K and subsequent SEC filings. Tenet assumes no obligation to update any forward-looking statements or other information that speak as of their respective dates and you 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?

Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer

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've 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. For sharpening our organizational structures, to continue to refine, simplify and effectuate change with our leadership remaining resolute about execution. We are also continuing to maintain acute awareness of issues that may arise, so that we can address them more expeditiously and with the finer point. I am very pleased with our progress in 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 want to add some perspective on the quarter. We delivered another strong quarter above consensus and 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 in the high-end of our outlook range. Our hospitals delivered results consistent with our expectations. We are 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 play 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 that 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 the 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 EBIT -- 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 declined for Conifer, whereas as we've discussed previously, impacted primarily by divestitures by Tenet and other customers, that 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 the new commercial leader that which we are working on now.

On a strategic review, we continue to work as we've discussed on the exclusive basis regarding the potential transaction. As you may recall, we started this exclusivity shortly before the Q4 earnings call, which was approximately 9 weeks to 10 weeks ago. And these discussions are continuing. We have qualified third-party advisors 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, we'll 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's 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?

Daniel J. Cancelmi -- Chief Financial Officer

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 UK 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 five, 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% for 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 lower level expense growth. If we exclude the $38 million increase in our practice as well as the $11 million of increased costs on our risk-based contracting business in California, cost per adjusted admission only increased 2.5% in the first quarter.

Moving to our Ambulatory business on Slide six and Slide seven. In our surgical business, revenue grew 4.2% on a same-facility systemwide 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 non-surgical business, which represents our urgent care centers and freestanding imaging centers, revenues increased 4.3%. Non-surgical 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 eight. 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 31st. 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 nine through Slides 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 30th 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 or 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.

Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer

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's strategic review we remain in exclusivity regarding a potential transaction and as bullish as that as that 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.

Questions and Answers:

Operator

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

Ann Hynes -- Mizuho Securities -- Analyst

Hi, good morning. 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 can let me know what admissions -- adjusted admissions and maybe same-store revenue in acute care was -- if you had to adjust for the one day? And secondly, obviously, a reacceleration of admissions is the big focus for you guys this year, if you can go into a couple of near-term actions you're taken to even improve it further? Thanks.

Daniel J. Cancelmi -- Chief Financial Officer

Good morning, Ann. This is Dan, let me address those. 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, absolutely a tough flu comp.

The -- and to your point about the one less business day in the quarter, as I'd pointed out in my prepared remarks that had about 1.7% impact on USPI's surgical volumes. So their growth was to 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 done, 2.2%, but we 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 were -- was in line with our expectations at least from a pure pricing perspective. Again, first quarter last year was tough comp, because the growth in net revenue last year was over 4% and 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's at, but 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 gone.

Operator

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

Pito Chickering -- Deutsche Bank -- Analyst

Good morning, guys. So two questions here. First one on cash flows. So normally first quarter and you have a lighter than the rest of the year, but this quarter from a cash flow from ops is significantly lighter. You sort of go into that a little more detail and why you have confidence on the annual guidance of cash flow from operations?

Daniel J. Cancelmi -- Chief Financial Officer

Hi, Pito, this is Dan. Let me address that. Yeah, the first quarter is typically our softest cash flow generating quarter, primarily due to certain annual working capital requirements such as our employee 401k 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 and capital expenditures about $49 million year-over-year. It's some of that's timing we were -- we have not changed our estimate for capital investments this year than what we previously talked about. A couple 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 and in terms of how the payments flow based on the timing of the approval with 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 a somewhat of an impact too. And then with our days, it did tick up a bit in the first quarter. Historically, if you go back through the years based on seasonality that oftentimes we have seen slight uptick from say, Q4 to Q1, we also -- we're improving our back office or central business office functions that are USPI in our USPI platform to improve efficiencies on a long-term basis and they 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.

Pito Chickering -- Deutsche Bank -- Analyst

Great. The one follow-up question for you on the risk-based contracting. Going back to third quarter, saw the $20 million of losses, fourth quarter it's $4 million, led $1 million in the first quarter, $25 million losses on a $100 million of revenue. I think you talked about these -- the incoming from higher acuity patients. But could you sort of talk about these contracts and when they come up, because if these numbers are right there's a pretty margin -- margin pressures for you guys?

Daniel J. Cancelmi -- Chief Financial Officer

Yeah Peter, this is Dan. Let me hit that. We anticipate those losses are going to come down quite a bit from what we've seen. We -- as we move through the year, the losses of in that business we anticipate to be much lower on a quarter-to-quarter basis. We have changed that management in that business entirely. We're on it. We're fixing it. We're not done yet. We're also evaluating -- 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.

Pito Chickering -- Deutsche Bank -- Analyst

Right. Thanks so much.

Operator

Thank you. We'll now move to our next question today from A.J. Rice from Credit Suisse. Please go ahead.

A.J. Rice -- Credit Suisse -- Analyst

Thanks. Hi, everybody. One of the areas of our performance and again this quarter we're in the last -- a number of quarters has been the Conifer particularly the margin strength. And I wondered just to flesh out two 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 better chance to keep holding on toward a 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, there were CHI legacy business, it's more profitable than that was being divested and is that helping your margin and Conifer be so strong?

Daniel J. Cancelmi -- Chief Financial Officer

A.J, this is Dan and let me try to address some of those points. In terms of the decline in revenue because of divestitures. Yes, they were divestitures by Tenet as well as other customers and 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, buyers when they take the facility over are more comfortable with their own internal revenue cycle process. However, many customers look to us for -- maybe at a minimum transition services for a certain period of time until they get their arms around the business and evaluate in 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's 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've 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 then successful that are sticking, they're going to continue to stick and there is opportunity for more efficiency as we move through this year and next year. We've talked about our most recently announced $200 million additional -- $200 million cost efficiency program and Conifer is part of that and so we feel good about continuing to be able to improve the performance of Conifer. We -- revenue whereas Ron mentioned in his prepared remarks, that's obviously an area of focus and the work that we're working toward rather topline.

Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer

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

A.J. Rice -- Credit Suisse -- Analyst

Okay, thanks a lot.

Operator

Thank you. We'll now go to our next question from Whit Mayo from UBS. Please go ahead.

Whit Mayo -- UBS Group -- Analyst

Hey, thanks. 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 three 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? Thanks.

Jason Cagle -- Chief Financial Officer

Sure. Hey Whit it's Jason. How are you?

Whit Mayo -- UBS Group -- Analyst

Good.

Jason Cagle -- Chief Financial Officer

Good. Let me start with the last question, first. We sold two facilities in the quarter and we merged two locations into one, 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 besides that 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 in 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.

Daniel J. Cancelmi -- Chief Financial Officer

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

Brett Brodnax -- President and Chief Executive Officer

Hey, Whit this is Brett. How it going?

Whit Mayo -- UBS Group -- Analyst

Good.

Brett Brodnax -- President and Chief Executive Officer

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 merged 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 this 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 M&A perspective.

Whit Mayo -- UBS Group -- Analyst

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

Jason Cagle -- Chief Financial Officer

No. Well there weren'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.

Whit Mayo -- UBS Group -- Analyst

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

Jason Cagle -- Chief Financial Officer

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

Whit Mayo -- UBS Group -- Analyst

That -- that's fine.

Jason Cagle -- Chief Financial Officer

There wasn't a gain on those facilities.

Whit Mayo -- UBS Group -- Analyst

Yeah. And maybe my other question, I'm stuck around this number of times, and I know you want to comment on Conifer in the process, which I think makes 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? Thanks.

Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer

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

Daniel J. Cancelmi -- Chief Financial Officer

(inaudible). Nothing, Ron.

Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer

Yeah, OK.

Operator

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

Joe Castinado -- Bank of America -- Analyst

Good morning. Actually, this is Joanna Gajuk filling in for Kevin today. Thanks for taking the question. So coming back to your commentary around the hospital segment and the expectation for margin improvement the rest of the year. Can you flush it out, I mean, you flushed the California program payments in Q4. So anything else you will flush out in terms of the margin progression. Just Q1 EBITDA over declined Q2 implies 2.5% growth or so, still you talk about 4% to 7% for the full year growth. So that implies there is a still crop up in the second half. So can you just remind us again the different pieces that drive that? Thank you.

Daniel J. Cancelmi -- Chief Financial Officer

Hi Joanna, this is Dan. Let me hit. 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 certainly year-over-year items that we pointed out in Q1 that such as the additional malpractice year-over-year as well as the risk on 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 we 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 a 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.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Great. And if I may, a commentary around the leverage targets. Any changes there in terms of your 5 times leverage target? Thank you.

Daniel J. Cancelmi -- Chief Financial Officer

Yeah. So -- this is Dan. We remain very focused on improving cash flows, and we remain committed to reducing leverage to 5 times 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 5 times 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 you know what that means.

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

Thank you.

Operator

Thank you. We'll now go to our next question from John Ransom from Raymond James. Please go ahead.

John Ransom -- Raymond James -- Analyst

Hi. I guess if I were to pick on a pretty good quarter, the surgery volumes I know you talked about that in the fourth quarter. But what is the strategy on the hospital side to try to get a little more slow going on the surgery side of your business?

Tom Arnst -- Senior Vice President, General Counsel

Yeah. Hey, this is Tom. So few different things. First of all, I recognize that surgical declines are important to us to turnaround, so 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 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 mid-term 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.

John Ransom -- Raymond James -- Analyst

Okay. This is a kind of switching to capital allocation. Tenet is starting to probably 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 the maturity dates in 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 or so. I'm just wondering the legacy management team was in love with fixed rate debt, most companies have at least the turn of the EBITDA are more and 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?

Daniel J. Cancelmi -- Chief Financial Officer

Hey, John this is Dan. Good morning. Certainly was, we -- as we look ahead to some that refinancing decisions that we'll be making, variable rate debt will -- that will be in the tool box and then 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 also say that we're open to it if it makes sense for us. So absolutely it's something we will consider it is as we move forward. I would say also and your point about some of the debt and some of the make-whole costs. So 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.

John Ransom -- Raymond James -- Analyst

And just last one from me. Can it alone of all the hospital operators calls out net now probably more -- much more than your peers. Is this 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? Thanks. That's it from me.

Daniel J. Cancelmi -- Chief Financial Officer

Well John, it's Dan. Well certainly we were -- we're very transparent about it and we call it out when the numbers we're 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 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 continue to have some headwinds as we've -- as we move through this year. But your other point about structurally, listen, in some of -- some markets are more challenging from a litigation perspective than others. That's really all I'll say, won't necessarily call out any particular one.

John Ransom -- Raymond James -- Analyst

Thank you.

Operator

Thank you. Thank you. We'll now go to our next question today from Ralph Giacobbe from Citi. Please go ahead.

Ralph Giacobbe -- Citigroup Global Markets -- Analyst

Thanks. Good morning. Just on the ASC side, the volume and revenue were better and I think typically what's a seasonally slower quarter and not to mention, obviously the one 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 is a change in seasonal pattern and any explanation about what or why that maybe occurring? And then I just want to sneak in one more. I was little surprised I guess on the Medicare rate albeit proposal for 2020, your commentary that it was sort of in line with your expectations, I think the rate was sort of 3.5%. So is that just what you thought the number was or you see a little bit lower given sort of rate changed and other considerations? Thanks.

Daniel J. Cancelmi -- Chief Financial Officer

Hey, Ralph. Good morning. 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 or USPI comment. In terms of the proposed rule for Medicare in-patient rights that will go into effect 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. And in the next federal fiscal year. I would say globally, the market basket was a little bit above or maybe what people were thinking but -- and then we also have taken into consideration the impact from any wage index adjustments. So all-in, it was in line where we thought it was going to be. Brett, do you want to?

Brett Brodnax -- President and Chief Executive Officer

You bet. Hey, Rob. It's Brett. You're right, I mean we had a very strong Q1 related to same-store, same day of 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 they haven't met their deductible in November, December, they're just saying, why don't I just lay 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 for the remaining part of the year, but it certainly helped us for this quarter.

Jason Cagle -- Chief Financial Officer

This is Jason, if I could just add on, Whit, if you're still on, I finally caught up to you. Whit 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 a $31 million. The $26 million was an unconsolidated real estate entity that's sold the USPI's portion of that was only $1 million which is in the equity and earnings at the bottom. Sorry about that, Whit.

Brendan Strong -- Vice President, Investor Relations

Ralph, do you have another question?

Ralph Giacobbe -- Citigroup Global Markets -- Analyst

Yeah. I'm all set. Thank you.

Brendan Strong -- Vice President, Investor Relations

Thanks, Don.

Operator

Apologies. Thank you. We'll now go to our next question today from Ana Gupte from SVB Leerink. Please go ahead.

Anagha Gupte -- SVB Leerink -- Analyst

Hey, thanks. Good morning. So following upon on the comments for, Ron you said that we remain as bullish as ever on the transaction. I'm just trying to get a sense if you can give us any color on what's the drivers of this longer timeline. Are you exploring both as acquisition merger spin or a sale or both and is it due to the mechanics of a spin? Is that something to do on the negotiations on pricing or is that around your current contract that Tenet has and if you have been just spun what happens to that contract and putting some guarantees around that one?

Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer

Good, well thanks for the question, Ana. I'd unfortunately I -- 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 it's continuing that there's some message in there. There is 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 was engaged as we've been and 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'd just have to stick with it. So we will get to it, like I said it's only been 8 weeks, 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 require -- 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 and as we're not even be in exclusivity if I start doing that. So anyway, I'm sorry, but that's the best I can give you.

Anagha Gupte -- SVB Leerink -- Analyst

I'm glad to hear you're still bullish. Thanks for the color.

Brendan Strong -- Vice President, Investor Relations

Thanks, Ana.

Operator

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

Matthew Gillmor -- Robert W. Baird -- Analyst

Hi. 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? Were that some of the marketing efforts or were there other factors?

Tom Arnst -- Senior Vice President, General Counsel

Yeah, this is Tom. 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're seeing them present with. So both of those things, I think have been important to that improvement in emergency department admissions that you know.

Matthew Gillmor -- Robert W. Baird -- Analyst

Got it. Thanks very much.

Operator

Thank you. Frank Morgan from RBC Capital Markets has our next question.

Frank Morgan -- RBC Capital Markets -- Analyst

Good morning. Wanted to touch on the 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 in your guidance you had 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 payor mix, some other kind of shift in business. And then what gives you confidence in that pricing number for the guidance? Thanks.

Brett Brodnax -- President and Chief Executive Officer

Hi, 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 businesses are 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 a payor mix to improve in subsequent quarters.

Operator

Thank you. We...

Brendan Strong -- Vice President, Investor Relations

Frank, do you have another question or Emma...

Frank Morgan -- RBC Capital Markets -- Analyst

No, I'm good. Thank you.

Brendan Strong -- Vice President, Investor Relations

We'll take the next question. Thanks, Frank.

Operator

Thanks you. Patrick Feeney from Barclays has our next question. Please go ahead.

Patrick Feeney -- Barclays Capital -- Analyst

Hi, good morning. Thanks. Just wondering if you can provide any update on the cost saving initiative, any color today on how that savings going to breakdown by segment. Any change in the timeframe for realizing the savings and maybe just how the process has compared so far to your own expectations? Thanks.

Daniel J. Cancelmi -- Chief Financial Officer

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 with the end of 2017. We talked about $150 million cost efficiency program. We increased that to $250 million. 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 in 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 where we're at.

Patrick Feeney -- Barclays Capital -- Analyst

Great, thanks. 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? Thanks.

Daniel J. Cancelmi -- Chief Financial Officer

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

Patrick Feeney -- Barclays Capital -- Analyst

Okay, thank you.

Operator

Thank you. We'll now go to our next question from Matt Larew from William Blair. Please go ahead.

Matthew Larew -- William Blair & Company -- Analyst

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

Tom Arnst -- Senior Vice President, General Counsel

Yeah hey, it's Tom again. I think good question and obviously it's at the highest level, the continued focus on expanding our presence in 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 elective 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 three of four 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. So 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 toward 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.

Matthew Larew -- William Blair & Company -- Analyst

Okay. Thanks, Tom.

Brendan Strong -- Vice President, Investor Relations

Thanks, Matt. 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.

Operator

Thank you. We'll take our last question now today from Steve Turner from Goldman Sachs. Please go ahead.

Steven Turner -- Goldman Sachs -- Analyst

Good morning guys, thank you for that. Just wanted to follow up on the cash flow outcome in the quarter and specifically, just on the 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 that to make that up and which quarter should be above average? Thank you very much.

Daniel J. Cancelmi -- Chief Financial Officer

Hey, Steve it's Dan. Let me address that. As I mentioned on -- inching to another question, there was an uptick in days and they are couple of 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 and they are based on the seasonality of the revenue flows in the hospital segment.

As you know, there roughly 60 days and they are so depending on the timing and the level of revenue streams, the days may arc and move around from quarter to quarter. I also mentioned that there was roughly half a day impact from the -- on the USPI side. We made specific decision to consolidate several business offices to improve performance on a longer-term basis so that had a partial impact as well.

Brendan Strong -- Vice President, Investor Relations

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

Operator

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

Duration: 57 minutes

Call participants:

Brendan Strong -- Vice President, Investor Relations

Ronald A. Rittenmeyer -- Executive Chairman and Chief Executive Officer

Daniel J. Cancelmi -- Chief Financial Officer

Ann Hynes -- Mizuho Securities -- Analyst

Pito Chickering -- Deutsche Bank -- Analyst

A.J. Rice -- Credit Suisse -- Analyst

Whit Mayo -- UBS Group -- Analyst

Jason Cagle -- Chief Financial Officer

Brett Brodnax -- President and Chief Executive Officer

Joe Castinado -- Bank of America -- Analyst

Joanna Gajuk -- Bank of America Merrill Lynch -- Analyst

John Ransom -- Raymond James -- Analyst

Tom Arnst -- Senior Vice President, General Counsel

Ralph Giacobbe -- Citigroup Global Markets -- Analyst

Anagha Gupte -- SVB Leerink -- Analyst

Matthew Gillmor -- Robert W. Baird -- Analyst

Frank Morgan -- RBC Capital Markets -- Analyst

Patrick Feeney -- Barclays Capital -- Analyst

Matthew Larew -- William Blair & Company -- Analyst

Steven Turner -- Goldman Sachs -- Analyst

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