Tenet Healthcare Corp THC
Q4 2012 Earnings Call Transcript
Transcript Call Date 02/26/2013

Operator: Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2012 Tenet Healthcare Earnings Conference Call. My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session following the presentation.

At this time, I would now like to turn the presentation over to your host for today's call, Mr. Thomas Rice, Senior Vice President of Investor Relations. Please proceed, sir.

Thomas R. Rice - SVP, IR: Thank you, Anne, and good morning, everyone. Tenet's management will be making forward-looking statements on this call. These statements are qualified by the cautionary note on forward-looking statements contained in our Annual Report on Form 10-K. During the question-and-answer portion of the call, callers are requested to limit themselves to one question and one follow-up question.

At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO. Trevor?

Trevor Fetter - President and CEO: Great. Thanks, Tom, and good morning, everyone. Let me start by saying that we were pleased with our performance in the fourth quarter and the year. In fact, these results, both for the fourth quarter and the full year are the best that we've had in 10 years. Our fourth quarter performance represents growth of 17% and was slightly ahead of the midpoint of our outlook range, both for the quarter and for the year.

Looking to 2013, we are confirming our outlook range which extends our existing compound annual growth trend of 15% for a full decade.

Our performance was led by strong top line growth with solid pricing and significant in outpatient and surgical volumes. This marks another quarter where our volumes were among the strongest in the industry. By the way, the flu only contributed 30 basis points to our inpatient growth and 50 basis points to our outpatient growth.

Here are some volume highlights. Adjusted admissions increased by nearly 3%. This marks the ninth consecutive quarter that we've grown adjusted admissions and the 19th quarter out of the last 22 quarters. Outpatient visits, surgeries, and ER visits were all up between 7% and 9%. This is very strong performance.

Pricing remained solid with commercial growing within our expected range and acuity was stable to slightly up. With all the interest in how exchange pricing is developing I want to give you an update on our recent activity.

In the last few weeks, we signed the first of our contracts for insurance products to be sold under the exchanges. These contracts are with three large Blue's plans and cover 15 or roughly 30% of our hospitals. The first thing that you should know is that these contracts are all structured like commercial contracts, not managed government contracts. Our position is that the exchanges are a different distribution channel for insurers to sell commercial product to the individual market. We do not view them as distribution channels for selling managed Medicare or Medicaid product since those markets are very different.

Most importantly, these initial contracts have aggregate pricing with a discount of less than 10% relative to the commercial rates that we already have with these payers. Where we have accepted any discount at all, it's for additional market share. One of the contracts includes a narrow network and the other two have tiered benefit plans with our hospitals in Tier 1.

At an Investor Conference in January; there was some talk about the possibility of deeper discounts and pricing at Medicare or Medicaid levels. Our recent negotiation should reassure you that this is not the case and this market is shaping up as we expected.

Turning to one of our long-running strengths, cost efficiency was outstanding for the quarter as our Medicare Performance Initiative continues to deliver great results. I want to call out supplies expense, where we achieved a sixth consecutive quarter of year-over-year reductions in the per adjusted admissions cost.

It was a good quarter for cash flow, with $279 million in adjusted cash flow from operations and adjusted free cash flow of $131 million. We've grown free cash flow every year since 2007 and we are confident we can continue that trend.

We completed two terrific financing transactions in recent months, raising capital at historic low rates for the Company and for our ratings category. Altogether, we raised approximately $1.7 billion. We used the proceeds to buy businesses, buy shares, and buy back high-cost debt. The refinancing that we completed in January alone will contributed $33 million to free cash flow on an annual basis. Not only did these transactions helped to create value and improve cash flow, we also reduced risk by extending our debt maturities. That's all good news. The even better news is that we still have the opportunity to refinance another $1 billion of high-cost debt, extending our maturities, and reducing interest expense.

While I'm on the subject of capital, please also note that we have significantly reduced our share count. We repurchased another 3.4 million shares in the fourth quarter at an average price of $29.36 per share. Since mid-2011, our average price for the entire program, including the exchange of the preferred stock works out to $21.73 per share. We repurchased more than 36 million shares or more than a quarter of our fully diluted share count at the beginning of the program, spending $792 million in the last year and a half. As of January 31, we had 104 million shares outstanding. Obviously, this activity has created a lot of value for shareholders and the program is continuing as previously disclosed.

We continue to be very pleased by the strategic and financial progress at Conifer. Conifer reported EBITDA of $31 million in the fourth quarter including $9 million from non-Tenet business. Conifer completed two important acquisitions in the fourth quarter which will help to solidify its position as the leader in providing services in the hospital revenue cycle and value-based care. These acquisitions not only accelerate growth but also add some very important operating and service line capabilities.

The skills and capabilities that we've built at Conifer are important to the care delivery parts of our business. As you know, our strategy in our hospitals and outpatient centers is to provide great value to our customers, meaning high quality at a reasonable price. We have competitive market positions, demonstrated excellence in clinical quality, and a competitive cost structure. Add to that Conifer's capabilities and value-based care and we have the capability to excel in innovating with new payment models. We've leveraged our success in these initiatives through a commitment to an aggressive clinical alignment strategy including an emphasis on physician employment and innovative arrangements with payers.

In Northern California, we have successfully completed our first share of operations in an accountable care organization with roughly 7,000 Blue Shield members. This is a virtually integrated system that's designed to compete with offerings from Kaiser Permanente and others in the local market. Our second ACO commenced operations in Florida earlier this year.

Additionally, in several markets including Atlanta, we have formed clinical integration organizations CIOs. These are collaborations with independent physicians and hospital to develop ongoing clinical initiatives that are designed to control costs and improve the quality of care. These capabilities provide a solid basis for negotiating with plans under and ACO structure or other risk-sharing models.

These are just a few examples of how we are actively embracing new contracting structures and care delivery methods all the way from full risk through our proprietary health plan to pay-per-performance contract structures with ACOs, CIOs and other creative structures in the middle.

For some insights on how we intend to drive further earnings growth in 2013, I'll now turn the floor over to our Chief Financial Officer, Dan Cancelmi. Dan?

Daniel J. Cancelmi - CFO: Thank you, Trevor and good morning, everyone. In November we provided a preliminary 2013 outlook for adjusted EBITDA of $1.325 billion to$1.425 billion. This morning we are confirming that outlook. The midpoint of that range; $1.375 billion, represents growth of 14.3% over 2012. This performance would extend to a full decade our trend for compounded annual growth and adjusted EBITDA in the neighborhood of 15%.

Let's review the major drivers of our expected earnings growth in 2013. One of our larger growth drivers will be our Medicare Performance Initiative or MPI. MPI has a very strong track record, achieving incremental savings of $70 million in 2011, followed by savings in excess of $80 million in 2012. This history of success supports our confidence that we will capture at least another $80 million of MPI savings this year.

The second growth driver is our HIT initiative. Our implementation plan has been well executed and we have achieved our targeted milestones while coming in under budget. Through the end of last year, 26 of our hospitals have achieved the required meaningful use criteria, with another 14 hospitals expected to meet the criteria this year.

Up until 2013, this program has been a drag on our earnings. However, this year, the direct impact of the HIT program on EBITDA turns positive due to our expected recognition of additional HIT incentive payments. This is expected to result in a $33 million EBITDA improvement relative to last year.

A third source of EBITDA growth will be from acquisitions. Conifer closed on two acquisitions late last year. They are expected to contribute $10 million to $15 million of EBITDA. Our recently announced with John Muir should build momentum over the course of the year and have a positive impact on 2013 EBITDA. In addition, we'll be able to invest $100 million proceeds we will receive from the transaction to facilitate further earnings growth.

Rounding out our acquisition filter, our purchase of Emanuel Medical Center in California should close during the second quarter. As we mentioned last November, in total, acquisitions should add about $25 million EBITDA in 2013. In addition, our outpatient acquisition and de novo development program should contribute an incremental $20 million to $25 million of EBITDA. This range includes both the outpatient facilities we expect to open or acquire this year plus the full year earnings impact of the outpatient centers that came online last year.

We are also confirming the key assumptions we communicated to you in our preliminary 2013 outlook. On a same hospital basis, those assumptions are; admissions growth of flat to up 0.5%, adjusted admissions growth of flat to up 2%, revenue growth per adjusted admission of 1.5% to 2.5%, controllable cost per adjusted admission growth of 1% to 2% excluding Conifer, and the bad debt ratio in the range of 7.5% to 8%.

Our outlook also includes $550 million to $700 million of incremental revenues from the following sources; $250 million to $300 million from her CHI partnership, $125 million to $150 million from the Conifer acquisition, $75 million to $100 million from Emanuel and $100 million to $150 million of incremental revenues from additional owned physician practices.

Turning to Medicare reimbursement, the inpatient rate increase of about 3% that went into effect in the fourth quarter and the outpatient rate increase of about 2.5% that went into effect at the start of this year are expected to result in about $47 million of incremental Medicare revenue in 2013. Given the two month delay in sequestration, we expect the adverse impact will be about $45 million and we estimate the Medicare coding and documentation adjustment included in the ATRA legislation will reduce EBITDA by about $10 million.

Our 2013 outlook also incorporates the anticipated reduction in Medicare and Medicaid disproportionate share revenue that is scheduled to begin in the fourth quarter. We estimate the fourth quarter DSH reductions will be about $35 million. We'll have further visibility on the DSH reductions when CMS issues its proposed federal fiscal year 2014 payment rules in the second quarter. For now, we are assuming an estimated 50% reduction in our Medicare DSH and a Medicaid DSH. As for the California provider fee program, we expect to recognize $115 million of revenues this year, an increase of $43 million over last year.

Turning to Conifer, the ongoing integration of the CHI business continues to go well and is on target to generate $250 million to $300 million of incremental revenues this year. As we have discussed in the past, earnings from the CHI book of business are expected to be modest this year as we integrate this business into our systems. However, earnings from the CHI partnership will become increasingly visible in 2014.

The net impact of these assumptions is expected to drive total revenue growth of 8% to 10% and a margin of 13.5% to 14%. Based on our outlook range for EBITDA, we expect adjusted cash flows from operations to be in a range of $775 million to $875 million compared to $691 million in 2012.

This solid growth in operating cash flows includes a $31 million reduction in cash interest expense from our recent debt refinancing, as 10% interest costs were replaced with a historically low 4.5% coupon. The interest expense savings will be $33 million on an annual basis. We have attractive opportunities to invest $550 million to $600 million in CapEx during the year to further grow our business.

Turning to the first quarter, our outlook range for adjusted EBITDA is $250 million to $290 million. At the middle of the range, this outlook represents growth of about 15% compared to Q1 2012 excluding the $75 million rural floor settlement from last year's results.

This range does not include any contribution from the managed care portion of the California provider fee program. However, the first quarter outlook does include $12 million of earnings from the fee-for-service portion of the program, which has already been approved. This is the same amount that we recorded in the fourth quarter.

Our best guess at this point is that the approval of the managed care portion of the program will occur in the second quarter and we expect to record revenue of approximately $53 million from this portion of the program if approval occurs at that point. This $53 million of revenue has increased from the $40 million we mentioned last quarter simply due to the approval being delayed two additional quarters.

Before closing, I want to reiterate our confidence that the net impact of healthcare reform on Tenet will be materially positive in 2014. Our confidence is based on the simple fact that historically Tenet has served a payer mix that includes a significantly larger proportion of uninsured (to) many of our investor-owned peers. As these patients obtain insurance and the burden of serving yesterday's uninsured is diminished, the potential favorable impact to us can be expected to be proportionally greater.

We have provided investors with our expectations for the growth in both government and commercial insured populations in each of our markets. These projections were included in our last few conference presentations and the slide showing this data are posted to our website.

This large uninsured population currently served by Tenet which will substantially convert to paying patients beginning in 2014 is one more example why Tenet is uniquely well-positioned to thrive, with the right set of capabilities and enviable reputation for quality and a well-established record of success.

We'll now move to the Q&A portion of our call. Operator, please assemble the queue for questions.

Transcript Call Date 02/26/2013

Operator: A.J. Rice, UBS.

A.J. Rice - UBS: Maybe I'll just take on some of the comments around health reform and as you think about your focus on acquisitions, the focus on recruiting of doctors, other things in terms of running the business and develop a strategy over the next year, can you just comment on anything you're doing? I appreciate the comments on exchanges. Anything else that you can point to that you're doing differently as you try to prepare for health reform?

Trevor Fetter - President and CEO: I'll make a couple of comments and then ask Britt Reynolds to describe in a little bit greater detail our appetite on acquisitions. But what you've heard so far is an emphasis on value. So, whether it is high quality, low cost all being part of the equation to have a value proposition in our markets that is superior to our competitors. Building out those capabilities within Conifer that I mentioned is a very important part of making that all work and enabling us with confidence to enter some of these risk-oriented contracting structures that are becoming more prevalent under health reform. We've been very aggressive in outpatient acquisitions, as you know. We believe that outpatient capacity will be important in serving the newly insured patients who were previously uninsured and we continue to have excess capacity in our hospitals, both physical capacity but as well through our productivity improvements we keep opening up more capacity in ERs, ORs et cetera. But I think at this point in time we have a greater appetite for hospital acquisitions than we've had in the past. We've been aggressive in physician acquisitions, and Britt, I'll turn it to you. I would just say in doing so that Britt has joined us from HMA a little bit more than a year ago, has quite a lot of personal experience in making and integrating acquisitions. You might just start with Emanuel. We announced we finally signed the definitive agreement, have started the filing. Why don't you take off from there Britt?

Britt T. Reynolds - President of Hospital Operations: Sure. Yes, as Trevor mentioned, we signed our definitive agreement with Emanuel Medical Center in Turlock, California and this is an excellent example of a market we believe that can be integrated with our existing two hospitals in that region, Doctors in Modesto, Modesto California, and Doctors in Manteca and gives us greater market share opportunity and penetration in that geography. We'll also couple that with our managed care plans that we own in the state as well as the existing ACO that was covered this morning, the success in that market. That's an example, if you will, or a microcosm of the strategy that we're taking in many of our markets which include physician integration and alignment, appetite for acquisition or other alignment strategies including IPAs. As well as we have again a continued robust pipeline and appetite for hospital acquisitions as Trevor included.

A.J. Rice - UBS: Maybe just to comment on the supply expense area. That's been an area of success for you guys. Can you – if you drill down and talk about where specifically you're seeing the opportunities for some savings?

Trevor Fetter - President and CEO: Sure. Let me ask Scott Richardson. Scott has been our Operations, CFO for many years and is actually retiring this spring. I'd like to take this opportunity to thank him, because he has been an architect of the Medicare Performance Initiative, he has done a lot to drive that performance on cost that you've seen. Not to worry, although Scott is retiring, these are well-engrained systems and methods in our Company. But why don't you just give a few examples of what has driven the excellent performance over six quarters and over a very extended period of time, but actually declines over six quarters in supplies expense.

Scott Richardson - SVP, Operations Finance: Sure, Trevor. Thanks. Yeah, A.J., some of the areas that we are focusing in on and have been focusing in on are implants – orthopedic hip implants and knee implants, et cetera, due to the incredible cooperation by our orthopedic surgeons at our hospitals. They have changed our behavior to some degree and helped us get some lower pricing through the standardization of the implants that they're utilizing. Pharmacy and the medications; we have a very robust plan. Every year our program looks at the utilization of certain drugs – exchanging different drugs, going to a lower-cost drug that has just the same level of effect. Spine implants as well was a big focus this past year, and again, gaining the cooperation from our physicians, we're able to see some significant savings, and we believe that there's still some more there and we continue to work with our physicians. Another area is blood. Having – standardizing blood protocols throughout our hospitals, making certain that there's not waste and we're using just the right amount has gained us savings. And the other area that we looked at is more or less the commodities area, which is more or less that mid-level area of supplies, and this past year we've been looking into the operating room where you're not getting the big, fancy, heavy-priced implants in cardiac implants, we're looking at the mid-level types of supplies like packs, instruments et cetera and we've been able to get some lower cost on those. So, there's still a litany of cost to go through standardization and utilization and behavior changes from the physicians. So, we continue on a very robust program on getting those costs out.

Operator: Andrew Schenker, Morgan Stanley.

Andrew Schenker - Morgan Stanley: I was wondering if you could just give us a little more – I appreciate all the color on the pricing exchanges. I was wondering if you could give us a little more color on how the narrow network and tiered network products are looking to be structured right. There is obviously no enrollment in the product space, maybe just a little more color on how we should be thinking about this thing?

Trevor Fetter - President and CEO: Sure. I have with us today Clint Hailey who runs all of our managed care operations. Do you want to just give a little bit more insight into how those networks are shaping up?

Clint Hailey - Chief Managed Care Officer: Sure, Trevor. We try to design those narrow network or tiered benefit plan arrangement such that the health plan has adequate flexibility to sell a network, to design a network or a benefit plan that we'll sell to consumers while at the same time enhancing steerage to us. In the cases in question with the three Blue's plans that we've signed contracts with, we didn't specify any particular hospitals being excluded or anything like that if that's where you're headed with the question. Generally speaking, we don't do that for a variety of reasons. But we do, generally speaking, when we have narrow network arrangements, we just try to limit the number of hospitals in the network or the number of freestanding outpatient centers et cetera. That's kind of the way we approach the narrow network contracting.

Andrew Schenker - Morgan Stanley: And then, just a little bit more on that, I mean is the discount predicated on a minimum volume requirement there or is there a sign scale, just trying to get a better sense there.

Clint Hailey - Chief Managed Care Officer: We do it in a variety of ways. The most preferential way is revenue guarantees, so that you have some – that way again it gives the health plan a lot of flexibility as it relates to how they achieve certain threshold levels of revenue. But they all vary. In some cases, it's more specific in different metrics and things of that nature. I hope that helps?

Andrew Schenker - Morgan Stanley: No, that was very helpful. Thank you. And then just changing direction a little bit here, you guys obviously saw some great outpatient volumes and highlight your outlook there to continue acquisitions. I was just wondering if you could give us a little more color on what the pipeline looks on the outpatient side and what the runway looks going forward as you continue to expand into that channel?

Trevor Fetter - President and CEO: Sure. Britt, you want to comment on that?

Britt T. Reynolds - President of Hospital Operations: Sure. Well, we acquired several – in total, de novo projects as well as acquisitions, roughly 17 in 2012, that pipeline and the staging of the pipeline from initial interest all the way through letters of intent continues on that same robust pattern as we saw last year. So, our pipeline is equally attractive as we've seen in the past several years and have every reason to believe that that will continue, as well as an increased appetite that we mentioned earlier for de novo development, particularly in the freestanding ED arena in many of our markets.

Operator: Tom Gallucci, Lazard Capital Markets.

Thomas Gallucci - Lazard Capital Markets: I guess the first is just on reform; obviously, optimistic there. Can you give us a little bit of a sense of sort of how you think about the Medicaid side of things versus the exchange side of things? You addressed some of the pricing which sounds pretty good. What sort of enrollment expectations do you anticipate or is it a case where you can sort of count on the Medicaid initially helping out and then the exchanges sort of ramp-up over time?

Trevor Fetter - President and CEO: Okay, so, Tom, thanks for the question. I think it's important we'll probably get more questions on our views about reform. So, just a couple of opening comments; I'll ask Dan Cancelmi to address the question specifically. But we are not yet providing specific guidance or modeling details about our expectation on health reform. But the main point we really wanted to make today had to deal with something seems (there) basic but our geographic presence in payer mix has been a disadvantage historically relative to other companies in the industry with higher margins and has been a source of the gap between our margins and, say, the highest ones that are out there in comparable companies. And as our expectations become more tangible on reform, we see a lot of upside in our markets, but for the same reasons that we had these headwinds before. So, we're giving some kind of general comments today. We'd like for some more details to be filled in, in say, the next few months and then we'll be able to do more in terms of very specific guidance later in the year. Dan, you want to talk a little bit about Medicaid?

Daniel J. Cancelmi - CFO: Just one, let me provide a brief overview of how we've been looking at reform in our various models, and in particular, from a Medicaid perspective. What we've been doing is we look at current uninsured population and we bifurcate it between uninsured and charity, and based on our markets we go in and analyze and project what various levels within those two categories we believe will convert to Medicaid. Now, obviously, with certain states indicating that they will expand Medicaid, including most recently, Governor Scott in Florida which we're certainly pleased to hear that. We look at the states that have indicated that they will expand Medicaid as well as the states where they still haven't necessarily indicated or they've indicated that they are not going to expand. And we run – we stress test our model a number of different ways and for states that are going to expand, states that are not going to expand, at least in the near future and based on our overall modeling, we believe it's going to be a materially positive impact on us and Medicaid certainly will be part of that and we've looked at it with a full expansion for all the states and we've also looked at it with the states that have indicated at least at this point that they are going to expand.

Thomas Gallucci - Lazard Capital Markets: Then maybe as a follow-up to those comments; given that some states are, some states may or may not, does that meaningfully change your strategy where you might invest in outpatient or buy facilities on an inpatient basis?

Trevor Fetter - President and CEO: No. So, take Texas as an example. It's hard to imagine a scenario in which the situation in Texas is any worse than the status quo today and even with the status quo Texas is an attractive place to have hospitals and outpatient centers. We don't like the fact that a quarter of the state's population is uninsured. But keep in mind that even absent an expansion of Medicaid there will be subsidies for people with incomes between 100% and 140% of the federal (poverty) level to be able to buy insurance on the exchanges. And also keep in mind that going back to the implementation of SCHIP in the late 90s that within three years every state was in. So, we – as it stands in Texas today, we're living with the status quo. Status quo is far from ideal, but it's something that we've dealt with and a lot of our expansion in outpatient has been in Texas. And I think we would look for it to become better from here.

Operator: Darren Lehrich, Deutsche Bank.

Darren Lehrich - Deutsche Bank: I wanted to just ask a little bit about Conifer, and obviously, you've got a lot of revenue growth built in for 2013. I guess I'd be interested just to hear from you how you think the profitability in Conifer might ramp up, and just looking at the fourth quarter, how much investment in the P&L did we see getting ready for CHI? So maybe just a little bit more color on how you expect Conifer to ramp up this year.

Trevor Fetter - President and CEO: So, to talk a little bit about how Conifer is ramping up, I've got our CEO of Conifer, Steve Mooney here, and then with respect to how the Conifer numbers fit within Tenet's expectations, why don't we have Dan Cancelmi comment on that. But Steve, why don't you start with just the growth pipeline and how the CHI integration is going et cetera?

Stephen Mooney - President, Conifer Health Solutions: Darren, it's Steve. Yeah, so this year is going as expected so far. We talked about the big deal last year was CHI and Dan mentioned earlier the expectations for the revenue this year. So, that actually – revenue started flowing on us as of 1/1 of 2013 and that's on plan. So things are looking good from that standpoint. Implementation is going very well. We actually implemented our first four hospitals into our (indiscernible) database as of the fourth quarter, and as you know, I think that's about 18-month to two-year tradition and that's as far as that's concerned. Pipeline is still looking very strong. You should know we did a couple of acquisitions last year; the Dell Revenue Cycle business as well as InforMed, which expanded our service capabilities. As a result of that, we actually signed 10 new contracts in the fourth quarter, one in our patient communications business; three of those were in that area, and seven or more in our value-based care business. As we're seeing hospitals continue to figure out how they're going to play in the new world of reform, our database underneath the InforMed acquisition is becoming very popular in the market. So, things are going well. As kind of Dan mentioned, we don't see the profitability coming off CHI, obviously, till really being meaningful to 2014, although we will see some dollars trickle into the later part of the year this year and as we ramp into 2014. But everything is looking very strong at this point in time.

Daniel J. Cancelmi - CFO: Then just a follow-up on that, so, as I mentioned we've incorporated about $10 million to $15 million of earnings from the two acquisitions that we closed on in the fourth quarter, and when we look out into – throughout the course of the year, the earnings overall roughly speaking for the full year, in the neighborhood of, say, $120 million, give or take, which is nice growth over 2012. As Steve mentioned, the contribution from CHI will be fairly modest. There is a lot of integration cost being incurred, and as well, that's the same thing on the two acquisitions as well. So, this is an important business and as the revenue continues to grow through 2013 and 2014, Conifer is going to be approaching, $800 million, $900 million business in reaching $1 billion in terms of revenue in the next several years.

Darren Lehrich - Deutsche Bank: If I could, I just want to clarify one thing as it relates to the disproportionate share cuts and just running through your 10-K this morning, it looks like you've got $217 million of Medicare DSH and if I saw this rate, $280 million or so of Medicaid DSH. Are those the right figures and then when you think about $140 million of annualized DSH cuts starting in Q4, maybe just help us think about the assumptions you are making to get to that number.

Daniel J. Cancelmi - CFO: Darren, as I mentioned, from a Medicare perspective, right now we're looking at based on our modeling about a 50% reduction in the Medicare DSH revenues starting in the fourth quarter. Medicaid is approximately 25%. So, in aggregate, you have about a $35 million reduction for the quarter. If you take it out on an annual basis, it's roughly $140 million on an annual basis. We'll certainly learn more in the second quarter when Medicare issues the proposed rules and we are certainly staying on top of that and making sure that any input that we can provide into the process we will certainly do that and have been doing that.

Operator: Joshua Raskin, Barclays.

Joshua Raskin - Barclays: Just wanted to quickly follow up on the exchange contract that you guys signed and I appreciate all the color you've given. But just curious, how is that being applied to that existing Blue's relationship? Are these discounts only for new members that come in through the exchanges or does this now cover their entire population and then what do you do about members that were previously insured with the Blue's plan that end up on an exchange?

Clint Hailey - Chief Managed Care Officer: No, it applies to all of the individual exchange members in the three Blue's plans contracts that we talked about this morning. So, we obviously talked a lot about cannibalization of existing individual members, flowing through the lower exchange network rates. But that's the reason that tiered benefit plans and narrow networks are so important is, so that we get a disproportionally higher share of that volume into our hospitals that offset that cannibalization.

Joshua Raskin - Barclays: So, just to understand, if for some reason, reform doesn't work out in these exchanges, they are not popular or what have you, you have to just take sort of this relationship and apply that updated pricing to your existing book of business and what you're saying is, you guys are going to more than offset that because theoretically as a bigger part of the network (NAM) has a larger percentage of the hospitals within that network, you're going to make that up on volumes, is that the idea?

Clint Hailey - Chief Managed Care Officer: No. The question I thought was on exchanges, do we anticipate any cannibalization and the answer to that is, yes. However, the rates that we're talking out here apply to subsidized exchange product members, members who enroll through the exchanges. It doesn't apply to current individual enrollees in these health plans business.

Trevor Fetter - President and CEO: Yeah, a very important distinction. Let's just make sure there's no misunderstanding of that. So, as I mentioned in the opening comments that Clint is clarifying, this is pricing for people who enroll through the exchange. Presumably they are receiving some kind of subsidy to do so. It's not the existing commercial book that includes individuals.

Joshua Raskin - Barclays: Got you. So the only potential cannibalization would be if someone were to opt out of their employer group plan that they were previously insured this Blues plans and then opt for an exchange-based product because they have some subsidy then that would be an individual or a potential change, but none of the existing book of business really converts over?

Clint Hailey - Chief Managed Care Officer: And there's actually some limitations on that in the law based on my understanding of it, where if people have employer coverage, then they're not eligible for exchanges. So, this has to do with – I think our biggest cannibalization risk is in the current individual book of business that these Blues plans have moving over going through exchanges, getting subsidies, and getting a lower price. But again, we're willing from a broader strategic perspective – Tenet has always been willing in the entirety that I have been here, to reduce price in exchange for a narrower network, enhanced steerage, and things of that nature. So, we see this is very much in line with the strategies we've had all along. The market, the environment just hasn't been conducive to a lot of narrow network activity in the last five to seven years that I have been here.

Joshua Raskin - Barclays: And then, I just want to make sure – a clarification on the DSH cuts as well. If you take half of the Medicare number and a quarter of the Medicaid number, I would come in up with about $180 million – maybe $179 million or so, and you guys are saying about $140 million on an annualized basis, and that's a huge differential, but $40 million obviously on the EBITDA number could be a little bit of important in 2014. So, is that just rounding in terms of the 50 and the 25 or is there something else that goes into the calculation.

Daniel J. Cancelmi - CFO: No, in that the DSH number for Medicaid that's disclosed, it's traditional disproportionate share revenue as well as additional supplemental payments from various states such as the California provider fee program. So, the core traditional Medicaid DSH depending on how you define that is roughly in $125 million to $135 million range. So, roughly a quarter of that gets you to the $140 million number that I mentioned.

Joshua Raskin - Barclays: So, only $125 million to $135 million is subject to the (indiscernible).

Daniel J. Cancelmi - CFO: Right.

Operator: Sheryl Skolnick, CRT Capital Group.

Sheryl Skolnick - CRT Capital Group: You've addressed a number of the issues with respect to reform in these contracts, but I have to ask this question. So, buckle up, a fair warning. By the way, a great job on the year and the quarter. The notion of exchanging price for volume is not new to the hospital industry and in the past it hasn't always worked out especially well for hospitals. I am a little bit curious as to what gives you the confidence that you're willing to engage in these kinds of contracts now? Do you have historical experience with either these plans or in these markets that steerage actually can happen? Are there sort of – is there insight to the plan design and perhaps competitiveness of these plan sponsors that may give you confidence that if they have these tiered networks or these narrow networks that you'll actually be able to get the volume, because I would be a little be concerned that – it's great to have the contracts. The volume has to show up in your hospitals and yes, it's all better than getting them as uninsured and I get all of that. But I'm a little bit concerned about – or curious about more so than anything else about the notion of exchanging volume for price and what experience you have, like I said, that makes you more confident that this is the right way to do it at this time?

Trevor Fetter - President and CEO: You have a totally valid question. So, let's first roll back why are we talking about this at all. The reason is that there was a tremendous amount of investor interest around the JPMorgan conference, because there was a rhetoric, as you know, coming out of a variety of sources that exchange pricing for hospitals would be around Medicare or Medicaid or whatever. So, the point is as simple as this. We never believed that that would be the case. We believed that this is a distribution channel for selling product to the individual market, and that there was no reason that we or other hospitals should accept significant discounts from commercial rates that we already have with these plans for business that includes large blocks of individual business. So, today, what we're saying is, proof of the way that we anticipated that this should work is that with three significant Blue's plans covering nearly a third of our hospitals. We've entered into contracts for exchange products only that are at very slight discounts relative to where we are with them today. Now, getting to like I said, very valid question that you're asking, nobody has yet attempted to sell an exchange product. So, no one knows how big this will be, to what extend will it cannibalize their other business, to what extend will volume show up, which is yet another argument as to why you shouldn't really take significant discounts on this business. That's why it's important that we've actually entered into these transactions at very modest discounts relative to the existing book. If those Blues plans, for example, and others with whom we will enter into new contracts, if they are very successful and building a substantial business on the exchange, then the narrow networks and tiered benefits that Clint has negotiated will give us a disproportionate gain and market share in that new incremental volume. But again, this is – I think literally the question is unanswerable at this point because nobody knows. Nobody knows whether a single person will sign up for this stuff. We think that they will, and we think this will become an important new distribution channel to individuals and to the consumers and we think that as the consumer is more engaged in purchasing that health insurance for themselves, we're well-positioned because of the value proposition that we have of high quality and reasonable cost, and lower cost relative to some of the biggest brand name competitors that we have in local markets. So, anyway, that's kind of the way we're thinking about this new world. Clint, did I leave anything out on that?

Clint Hailey - Chief Managed Care Officer: No, I think you got it. The only thing I might add just to supplement that a little bit is, Sheryl, you mentioned that historically trades for price for volume haven't worked us so well. I've lived through a lot of those trades, and generally speaking, the trades historically – at least that I have experienced – have been from being non-par to becoming participating in a network. And so, the incremental discounts have been pretty large. So, call it 50% discount, 60%, 70% discounts. So, the incremental volume you have to get to make up for that incremental discount is pretty dramatic. Go back to what Trevor said about our incremental discounts and the amount of incremental volume necessary to make that up is not that great. And furthermore, I would just – one other thing I would add to that is when we had those joining of networks there wasn't anybody being squeezed out of networks. So, you were just joining a network that everybody could be in. There were no limitations at all. In the scenarios we are talking about, we are looking at limiting networks or limiting the benefits for higher cost providers. So, in theory, that would lead to enhanced steerage for a much small discount.

Sheryl Skolnick - CRT Capital Group: One of the things you mentioned Trevor, which is sort of underlying the question of reform here, was that in Texas, Texas is one of the geographic areas where you've invested a lot in outpatient and that raised a question in my mind, Texas – maybe Texas seized the light at some point and all the stacks go through the roof because Texas opts in; remote but not impossible because nothing is impossible (project). But as you think about the deployment of your CapEx budget, especially in the year before reform, does it play – does reform and the opt-in, out-out the reform dynamics, what role does that play in the geographic allocation of your capital spending program.

Trevor Fetter - President and CEO: So, don't forget about Texas that – our home state by the way – don't forget that Texas also is a bit unique by having a very robust economy, job creation, a diversified economy and net migration into the state. So, aside from the dynamics on Medicaid and the uninsured in Texas, there is a robust commercial business here and we have been participating in that and allocating capital into Texas for that reason. So Exhibit A would be, our Sierra Providence East Hospital which we built in 2008 and by 2012 was already bursting at the seams and we're doing a major expansion with the capital cost being nearly half of what the original cost was to construct the hospital. We're very confident that will be a great investment. We're making other investments in outpatient all over that El Paso market and into our other inpatient facilities. So, we're not hesitating on Texas because of Medicaid. Like I said, the status quo; we understand very well the status quo in Texas, absent the uninsured problem has been relatively positive compared to other states and we see more upside from here in Texas.

Sheryl Skolnick - CRT Capital Group: But it's not just Texas, it's those other states that might all of a sudden become attractive and offer you new growth opportunities by investing CapEx. That's kind of more what I'm getting at.

Trevor Fetter - President and CEO: Oh yes, absolutely. So, just this week we are taking to our Board a fairly material expansion of outpatient facilities in another state that where we would build new freestanding emergency departments. We're very mindful of the state-to-state differences and then going back to something Dan pointed out, we've been using in our investor presentations this year an interesting market-by-market analysis, showing the growth potential for commercial lives and government covered lives in our markets. So, we kind of break down it to that level how we're thinking about both the impact of reform, but also just general growth from economic conditions in those markets.

Operator: Kevin Fischbeck, Bank of America Merrill Lynch.

Joanna Gajuk - Bank of America Merrill Lynch: This is Joanna Gajuk in for Kevin today. Just to follow-up on the last question here in terms of investment as you prepare for reform implementation. I appreciate the comment about – also plans for acquisitions, but anything else we should be thinking about in terms of the Company preparing for those potential volume increases in 2014 or any investments around those contracts or narrow networks that you will be doing over this year to prepare for 2014?

Trevor Fetter - President and CEO: I don't think there's anything else worth mentioning. We already mentioned the excess capacity in our business. We ran about slightly over 50% of capacity utilization. That's plenty of additional bed capacity for patients; may not be exactly in the right places, but for the most part that's what we'll utilize.

Joanna Gajuk - Bank of America Merrill Lynch: And then just a follow-up on the – I'm not sure if I missed that, but your outlook for healthcare – for HITECH income for 2013, is it still the same? I guess you mentioned earlier or rather last time about $75 million; is that…?

Daniel J. Cancelmi - CFO: This is Dan. Yes, it will be $75 million.

Joanna Gajuk - Bank of America Merrill Lynch: And then for 2014, I believe you guys previously had in the slide; that will be similar and then for '15 it will be down like $25 million. So, is that still the case?

Daniel J. Cancelmi - CFO: It will be down slightly in 2015. It will be roughly $50 million in 2015, but about $75 million in '13 and 2014.

Operator: Chris Rigg, Susquehanna.

Chris Rigg - Susquehanna: I just want to confirm some numbers here on the Medicare headwinds. The sequestration cut is $45 million for three months, the documentation and coding adjustment headwind of $10 million is for one quarter and the DSH is obviously for just one quarter. Is that correct?

Daniel J. Cancelmi - CFO: Yes, the sequestration is for three quarter, so nine months of the year. That's $45 million. The coding and documentation is the fourth quarter and that's $10 million. And then the DSH reductions, that's fourth quarter as well.

Chris Rigg - Susquehanna: But all incorporated into the…

Clint Hailey - Chief Managed Care Officer: All of those numbers are incorporated into our outlook.

Chris Rigg - Susquehanna: Sure. Then I guess just come back to the exchange pricing real quickly here. Is this – (that's been) health reform, but factoring in sort of the narrow network component of the variable here, would this be – would these be the types of agreements you would cut even without health reform given the incremental volume I would expect.

Trevor Fetter - President and CEO: The short answer is, yes, but I think the difference would be that absent this new distribution channel of the exchanges, we would not cut these kinds of deals without a higher degree of proof from the plans that we will actually get the volume delivered. So, Clint has been doing deals in the past with health plans in which we have accepted discounts for narrow networks and others things, but they have had different forms of guarantees and other assurances and claw backs and things like that where if the volume isn't there, you can actually get back to where you were. That would probably be the difference where (indiscernible) what I said and answered to Sheryl's question, we are dealing with an uncharted new set of distribution channels and mechanisms here.

Operator: Whit Mayo, Robert Baird.

Whit Mayo - Robert Baird: Not to belabor the DSH discussion much further, but does that – do your assumptions include any flow through of the impact from Medicare Advantage as well?

Clint Hailey - Chief Managed Care Officer: Yes, we have looked at that in terms of the impact on the managed care book of business, but those numbers are predominantly related to traditional Medicare and Medicaid.

Whit Mayo - Robert Baird: My second question was just; any new provider tax programs that are a tailwind this year, and Trevor maybe any updated thoughts around UPL and potentially your ability to participate in that going forward?

Daniel J. Cancelmi - CFO: (How about) just do a real quick overview on the provider fee programs. So, the California program that we're currently participating in that goes through the end of 2013. There's already discussion on the table and we expect a legislature to take it up this summer to extend that program, so we feel pretty confident about that. The Pennsylvania program; we expect that to continue to be out there; North Carolina program which was approved earlier in 2012, there's no sunset on that program, so that's going to continue; Georgia, we just received word that the Georgia program is moving forward. So that's, say, 5 million (about) from the Georgia program. There's a smaller program in Alabama that's going to continue as well as some of the other states. So, those programs are in place. The timing, the recognition is evident with California; can get a little bit lumpy, just due to – when the paperwork gets signed off on, but we feel pretty good where those programs are at this point.

Whit Mayo - Robert Baird: On Texas UPL?

Daniel J. Cancelmi - CFO: Yeah, on the Texas 1115 waiver program, we started participating in a number of those programs here in Texas in the fourth quarter. They are going to continue through 2013. We've incorporated some of that into our guidance. It's a little less than $10 million, but we're pleased with that. I mean particularly the primary market was El Paso, but we're obviously looking in some of the other markets as well.

Whit Mayo - Robert Baird: $10 million; that's a – or a little less than $10 million, that's for the full year 2013, just to clarify?

Daniel J. Cancelmi - CFO: That's correct.

Whit Mayo - Robert Baird: Okay, great. Thanks, Dan.

Operator: Erin Blum, Goldman Sachs.

Erin Blum - Goldman Sachs: Can you confirm; did I hear you say that you see opportunity to refinance about $1 billion of debt, and if so, which debt were you looking at and would you consider financing in the loan market?

Trevor Fetter - President and CEO: Yeah, why don't I give Tyler Murphy, our Treasurer an opportunity to address that one? Tyler?

Tyler C. Murphy - VP and Treasurer: Yeah, the debt we're talking about is – it's the 8.875% debt. It's callable next July at (104) unchanged. So, it's much like the transaction we just executed, taking out the debt before the call date. We will continue to watch that debt and see where it makes sense. Depending on rates, whether we can get the low fixed rates like we have on the last two tranches of 4.5 and 4.75, we'll continue to look at fixed-rate debt, or if those rates start to creep up then it might be the right time to look at the Term Loan B market and introduce some floating rate debt exposure back into our balance sheet.

Operator: Ralph Giacobbe, Credit Suisse.

Ralph Giacobbe - Credit Suisse: Can you help us or give us your market share in the markets where you sign these exchange deals?

Trevor Fetter - President and CEO: I'm not sure I know. In fact, I don't know off the top of my head. Clint, do you have any insights about that?

Clint Hailey - Chief Managed Care Officer: No, I don't know off the top of my head and we very intentionally didn't disclose which…

Trevor Fetter - President and CEO: …which markets they were.

Clint Hailey - Chief Managed Care Officer: Which Blue's plans they were because we haven't talked to those Blue's plans about whether they would like us to talk about these contracts or not.

Trevor Fetter - President and CEO: So, we do know that market share of each of our hospitals in each of our markets. But off hand, I don't think either one of us has that. Sorry about that. Do you have a follow-up question we might be able to answer?

Ralph Giacobbe - Credit Suisse: Yeah. The follow-up, I guess – I don't know if you have this answer, but do you have a sense at all in terms of excluded providers, what their share would be in the markets or in other words, what the capture rate could be?

Trevor Fetter - President and CEO: How about a completely different question where we might have the answer? I am now regretting we didn't cut the call at the top of the hour.

Ralph Giacobbe - Credit Suisse: Last one.

Trevor Fetter - President and CEO: Give me something different.

Ralph Giacobbe - Credit Suisse: Just on the same topic, but I just want to make sure I understand. So, we're talking about limiting networks. So, I just want to understand how the contract is structured. So, you have a deal that basically says some sort of promise that these are the hospitals that are going to be in and you have visibility on it, who is going to be out and that's the rate and there's sort of no wiggle room in terms of including others. I just want to make sure what your perfections are…

Trevor Fetter - President and CEO: That's a very good question. So, Clint, why don't you address how that actually works and I would just also say, you have to be careful on this. Excluding hospital by name for one hospital due to another has drawn some regulatory problems in the past. So, that's not a practice we engage in.

Clint Hailey - Chief Managed Care Officer: No, we don't have – to my knowledge I don't think we have any contracts that specifically name anyone who is excluded. Let's just talk about this generally. The way we generally do it is, in a market where say we have 10%, 15%, 20% market share or whatever it is, we would say something like this. The health plan can have up to 50% of the beds in a market or the hospitals in a market and they get to choose who they are. We represent some portion of that. And then they go decide who else that they need in the market from a geographic coverage perspective and that's the way they get to their number or under their number.

Trevor Fetter - President and CEO: Well, I guess, that was the last question. So, operator, thank you very much. Thanks everyone for listening in. Sorry, we went a little bit over time. Got a late to start there, but we had more people dialing in right at the start time than we had anticipated and we will talk to you again over the next few months, and then on the next quarterly call. Thanks.

Operator: Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day.