Thomas R. Rice - Senior Vice President of Investor Relations Trevor Fetter - Chief Executive Officer and President Daniel J. Cancelmi - Chief Financial Officer Clint Hailey - Chief Managed Care Officer and Senior Vice President Britt T. Reynolds - President of Hospital Operations Keith B. Pitts - Vice Chairman Stephen M.

Mooney - President, Conifer Health Solutions.

Michael A. Newshel - JP Morgan Chase & Co, Research Division Albert J. Rice - UBS Investment Bank, Research Division Joshua R. Raskin - Barclays Capital, Research Division Andrew Schenker - Morgan Stanley, Research Division Kevin M. Fischbeck - BofA Merrill Lynch, Research Division Sheryl R.

Skolnick - CRT Capital Group LLC, Research Division Saurabh Prasad - RBC Capital Markets, LLC, Research Division Colleen Lang - FBR Capital Markets & Co., Research Division Jonathan Chan Darren P. Lehrich - Deutsche Bank AG, Research Division John W. Ransom - Raymond James & Associates, Inc., Research Division Whit Mayo - Robert W. Baird & Co.

Incorporated, Research Division Gary P. Taylor - Citigroup Inc, Research Division.

Welcome to the Q1 2014 Tenet Healthcare Earnings Conference Call. My name is Richard, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Thomas Rice, Senior Vice President of Investor Relations. Mr. Rice, you may begin..

Thank you, operator, 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.

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

convenience at a lower cost. Our outpatient strategy is also more aligned with the preferences of payers and physicians. Conifer achieved significant growth, reporting $48 million in EBITDA for the quarter on revenues of $285 million for a margin of 17%. This performance represents increases of 50% and 35% for EBITDA and revenue growth, respectively.

This growth includes contributions from both the Catholic Health Initiatives and Vanguard integrations. As anticipated, the margin contribution from CHI, to date, has not been material due to the upfront costs of integrating the CHI revenue cycle operations with Conifer. As we enter 2015, the contribution will become more meaningful.

This, along with other growth opportunities, keeps us very excited about both the near- and longer-term prospects for Conifer. We also continued to do very well in capturing synergies related to Vanguard. You will recall that we identified $100 million to $200 million of synergies.

Of this total, we expect to capture $50 million to $100 million in 2014. We feel increasingly confident that we will exceed the range of synergies over the longer term. From an operational perspective, the integration is well advanced.

One indication is that the volume weakness in the Vanguard portfolio that was evident in the last half of 2013 has now abated, and the performance across our total portfolio has improved and has become more similar among hospitals that were part of either Tenet or Vanguard historically.

With Conifer's accelerating growth, our continued success in developing our outpatient channel and our progress towards integrating the Vanguard assets, we've done a lot to advance our transformation from a regional operator of hospitals to a national diversified health care services company. In summary, we had a great start to the year.

We generated EBITDA approaching the top quartile of our outlook range and 9% growth on an apples-to-apples basis. Volume trends continue to strengthen and are running ahead of our expectations in spite of severe weather in many of our markets.

Health care reform-related benefits are tracking as expected, with significant growth in Medicaid volumes in those states that expanded their programs on January 1. Our strategy of driving growth in higher-margin, faster-growing capital-light businesses is paying dividends, with strong performances in outpatient and Conifer.

The Vanguard integration is proceeding smoothly, and we are increasingly confident that our acquisition synergies over the longer term will exceed our $100 million to $200 million range. Based on these successes, we are reaffirming our 2014 outlook for adjusted EBITDA in a range of $1.8 billion to $1.9 billion.

I'll now ask Dan Cancelmi to provide some additional color on the quarter and our outlook for the balance of 2014.

Dan?.

Where our previous patient encounters give us visibility into their prior insurance status, approximately 30% of these exchange patients we treated in the quarter were uninsured in 2013.

In our conversations with investors over the last few months, we've received many questions on our ability to help uninsured patients sign up for insurance, who have presented at our facilities on multiple occasions in the past.

This focus is of special interest, as this patient population generates about 40% of our bad debt expense in any given year. Slide 9 provides a helpful perspective of finding this patient population and shows how this population evolves over time.

In calendar 2012, approximately 109,000 uninsured patients presented at our facilities for 2 or more episodes of care. In 2013, only 17% of these uninsured patients presented to one of our facilities again.

The takeaway point is that while this population creates a significant and readily identifiable cost burden, our ability to fully address the problem is limited by the significant annual turnover of this population. Slide 10 shows the progress we've made with those who presented in the first quarter of 2014.

25,000 of the 106,000 uninsured patients, presenting multiple times to our facilities in 2013, presented again in the first quarter. As you can see, Conifer successfully enrolled 22% of these patients in Medicaid. This success rate was diluted by those states which have currently elected not to expand their Medicaid programs.

Returning to our summary on Slide 6. We achieved solid pricing growth, including a 5.5% pro forma increase in commercial managed care revenue per admission. We generated this growth through a combination of enhanced commercial contracts and stronger commercial acuity.

This strong pricing offset the soft inpatient volume environment to help drive a 1.0% pro forma increase in net operating revenues. We achieved a 2.4% pro forma increase in patient revenue and a 3% increase in aggregate pro forma revenues, excluding a $75 million decline in our health plan revenues. Turning to costs.

We demonstrated another quarter of tight cost control. We held the pro forma increase in selected operating expenses per adjusted admission in our hospitals to 1.5%, which includes the growth in our physician employment. Bad debt expense as a percent of revenue rose 30 basis points on a pro forma basis.

This change was primarily attributable to a temporary increase in our receivables due to timing issues, and an increase in uninsured revenues compared to last year's first quarter. We expect to reverse this temporary buildup in AR as we move through the year.

Adjusted cash provided by operating activities from our continuing operations was $25 million in the quarter compared to adjusted cash used by operating activities of $20 million in the first quarter of 2013. Our CapEx was $281 million in the first quarter, which resulted in adjusted free cash flow of negative $256 million.

Our cash flows were adversely impacted by the fact that we are owed approximately $210 million related to the California Provider Fee program, Texas Medicaid DSH funds and the Texas 1115 Waiver program, which we expect to substantially collect as we move through the year.

Cash was also adversely affected by the timing of various working capital items we've talked about in the prior years, including the annual match of our employee's 401(k) contributions, our employee incentive compensation payment timing and certain payroll and property taxes.

Since we are past some of our seasonal working capital requirements, we expect our adjusted free cash flow to grow during the remainder of 2014. In terms of our outlook, we are very pleased with our progress in the first quarter. We executed on a number of critical tasks better than we had initially anticipated.

The areas of improving performance on which we will build in the second quarter include incremental year-over-year strengthening in our inpatient volumes, favorable momentum related to the impact from the Affordable Care Act, continuing tailwinds from our growing Conifer services business and a continuously improving longer-term picture related to the Vanguard integration.

As a result, we are comfortable reaffirming our 2014 adjusted EBITDA outlook in a range of $1.8 billion to $1.9 billion. Slide 11 provides detail on our second quarter outlook for adjusted EBITDA. Our outlook range for the second quarter is $375 million to $425 million.

Please note that we have not assumed any revenue from the California Provider Fee program in our outlook range for the second quarter.

However, if CMS approves the current program by June 30, we will recognize $70 million of revenues under the program in the second quarter, which would be additive to our $375 million to $425 million outlook range for the second quarter.

We remain confident that CMS will approve the program before year end and that the $140 million of revenues expected from this program for the full year that's in our 2014 outlook will be recognized before year end. Slide 11 also lists a number of the other assumptions we've included in our second quarter outlook.

As you can see, we expect growing contributions from Vanguard synergies, our Performance Excellence Program and health care reform. Sequentially, the second quarter will also benefit from the absence of the severe weather-related impact we incurred in Q1 and an expected $40 million benefit from health IT incentives.

These growth drivers are expected to be partially offset by the loss of $5 million of earnings from transactions that will not routinely occur that contributed to Conifer's Q1 performance, and the adverse impact from a 4% volume decline we typically see in the second quarter compared to the first quarter.

Building on the middle of our outlook range in Q2, we still require a noteworthy earnings ramp in the second half of the year in order to achieve our full year outlook. On Slide 12, we've listed the initiatives and other opportunities that we expect will drive our second half performance. In the interest of time, I'll leave them for you to read.

However, it should be clear that these are well-defined and quantifiable initiatives. Last week, CMS released the proposed Medicare hospital inpatient payment and policy changes for federal fiscal year 2015 that begins on October 1.

According to CMS' estimates, the impact of all proposed changes to Medicare inpatient payment rates is a reduction of approximately 1%.

This reduction, which includes an expected decline in Medicare disproportionate share reimbursement due to a projected decline in the uninsured population, is generally in line with the Q4 assumptions in our existing 2014 guidance. The final rule will be released in Q3 and it could include changes to the proposed payment rates and policies.

In summary, we have an active and exciting year in front of us. We are pleased that our growth strategies are working and leave us well positioned to generate attractive growth for the balance of the year and beyond. I'll now ask the operator to assemble the queue for our Q&A.

Operator?.

[Operator Instructions] Our first question online comes from Mr. Justin Lake from JPMorgan..

This is actually Mike Newshel, in for Justin this morning. So my question, to start off, is on how you're thinking about your reform benefit guidance since coverage expansion came in better than expected. You had a strong start. And Michigan Medicaid expansion is starting off fairly strong as well.

Do you think there's any potential upside to your reform guidance? And might you be in a position to update it in -- by the second quarter?.

Mike, this is Dan. Thanks for the question. Certainly, we were pleased with the trends that we saw in the first quarter.

In our expansion stage, we saw a significant growth in our Medicaid book of businesses, which we discussed in our prepared remarks and which we anticipate -- we also saw a corresponding decline in the uninsured volume in those states as well.

And as we mentioned, the -- our exchange volumes picked up sequentially each month as we moved through the quarter, and that has continued into the month of April as well. So that is nice to see, and that book of business is growing. As you mentioned, Michigan is expanded -- has expanded its Medicaid program April 1.

And based on what we saw in Michigan in the month of April, it's tracking consistently with the other states. So nice to see there. In terms of the aggregate or overall guidance for the full year 2014, we think it's a little premature at this point to make any revisions to our guidance for health care reform.

We will certainly be monitoring the progress in the second quarter and we'll provide a full update at that point and make any revisions if it makes sense..

Our next question online comes from A.J. Rice from UBS..

Just to maybe flesh out a little bit more on the Medicaid.

I don't want to beat this to death, but is the experience in each state similar? I mean I know those are big numbers, but I wondered if the experience in each state was similar? Or does it vary quite a bit and -- of the 4 expansion states? And then obviously, April 1, Michigan is expanding, and that's a big state for you guys.

What about the characteristics of your Medicaid population there? Is that -- I'm assuming that's a more significant state in terms of what it can do.

And any reason to think that you wouldn't see the similar trends in Michigan that you've seen in the other 4 states?.

A.J., this is Dan. Yes, in terms of our experience in the 4 Medicaid expansion states in the quarter and even into April, the growth in terms of the Medicaid book of business is fairly comparable among all of the 4 states.

There are some states that -- stand out above others, particularly California, but all the states had double-digit growth, with -- you could imagine California certainly being the most significant in terms of progress in terms of expansion.

So I would -- if you had to rank order them, I would certainly put California at the top and then -- but other 3 states are doing quite well as well. In terms of Detroit, yes, Detroit represents over 10% of our uninsured patients that we typically see in a given year. And we do anticipate significant benefits there.

And what we've seen so far in April is good in terms of the Medicaid volumes and the decline in the uninsured admissions there..

On the Vanguard synergies, you reiterated that you're confident with them, and long term, you might actually be at the high end or exceed.

What are sort of the gating factors you've got in your build-up to Q2, a step-up and then obviously further step-up in the back half of the year? What are some of the things that still remain to be done to make -- to be able to realize that? How much of that do you have in the bag, and time just has to play out just to capture it?.

Steve Mooney is here, and he leads up our Conifer business. We've been in the process of integrating the various legacy Vanguard facilities into Conifer's revenue cycle operations. That does take a little bit of time. You don't necessarily convert all those systems on day 1.

We have a very established plan of how we're going to convert those system when they're rolling in fully under Conifer. That's going very well. Those type of synergies, revenue-cycle synergies, will build over time in terms -- I mean -- and it's a multipronged approach here.

In addition to integrating the revenue cycle operations under Conifer, it's also in terms of Medicaid approval processes, follow up collections on uninsured accounts, a broad spectrum of revenue cycle management opportunities that will build over the next 7 -- or next several years, to be quite frank with you, as the implementation and the integration of the revenue cycle operations under Conifer continues.

So we're -- we feel real good about where we're at, at this point..

Our next question online comes from Mr. Josh Raskin from Barclays..

Question just on the pro forma numbers, and I can take this offline, Dan, if it's a little bit more complex than it sounds.

But I'm just adding up the admit numbers for Tenet in the first quarter of last year and then Vanguard's March quarter of last year, and when I compare that to the pro forma numbers that you gave for the first quarter of '14, I'm getting an admit number down 1.6%, but I think you said it was up 0.3%.

So on adjusted admissions, it appears to have similar difference, a little bit lower of a difference but there's still a difference. So I'm just curious, were there some divestitures? Or were there some movements in that pro forma? It worked last quarter, the calculation, so I don't know what changed since the first quarter..

No, the -- Josh, this is Dan. You might be picking up the fact that Vanguard used to report discharges, not necessarily admissions, but we've been consistent. There can be some miscellaneous timing differences between an admission and a discharge.

But no, the Vanguard book of business, and from an inpatient perspective, there was nice improvement in the quarter, which helped drive the 0.3% aggregate total company portfolio increase in adjusted admissions..

Okay. So you guys are definitively seeing Vanguard -- legacy Vanguard trending slightly better than same-store Tenet at this point..

Slightly better, yes, which is nice to see if -- which was a little bit different in the fourth quarter..

Yes, absolutely, absolutely. And then just a second question. It seems like the ED visits -- when I look at the new Medicaid population in the 4 states that expanded, the ED visits were the strongest of the improved metrics.

And so I'm curious, with your lower acuity that came in with those visits -- and I'm asking if it's -- just that's the mechanism by which these individuals have access to health care system previously.

And so do you think, as they sort of learn more about the system, that, that tails over time; or as they get enrolled in managed care, it tails over time? Or do you feel like the acuity was similar and it just happens to be a population that uses ED visits more frequently?.

Yes, I think, Josh, as the -- as reform becomes more ingrained in the culture and in our markets, I think, for many individuals, utilizing ED, it's probably maybe one of the first areas where they might enter our facilities. And probably over time, there will be maybe some moderation of that.

But I mean we were pleased with our ED volumes overall in the quarter. We're continuing to drive growth in ED volumes. And we will have to -- listen, it's the first quarter under reform, so it's a little early to draw any specific conclusions in terms of what reform means to ED volume over the longer term.

But as we mentioned, we like what we're seeing so far..

Okay. And then if I could just sneak in a last one, California Provider Fee.

Is there a scheduled update or time frame with the next sort of like a catalyst for the next meeting or the next decision point? Or are you just simply waiting on the state?.

Well, listen, we work with state officials in terms of where the program stands. It's going to be approved. It's -- that's not the concern. It's just really the timing of having all the sensitive paperwork process, being evaluated by CMS.

And we just don't have enough visibility at this point to conclude that it will be definitely approved by the end of June, so we do not believe it was prudent to put it in the guidance for the second quarter. But it's going to be approved. And we'll certainly keep everyone up-to-date on this as it moves through the next several months.

There -- historically, there have been approvals in June. Many of the hospitals in the State of California have June fiscal year ends. So we'll see. We'll certainly let you know in terms of what we're hearing..

Our next question online comes from Mr. Andrew Schenker from Morgan Stanley..

I just want to dig a little bit more into the "patients with multiple care episodes" information you shared, which was really helpful. I'm curious here, I mean what percentage are these PMCE patients as a percentage of total patients? And it seems like you had a disproportionate reduction in there.

And maybe just a little bit more detail on how you managed to see 25% of those patients again in the first quarter of '14 when you only saw 17%, I guess, in all of '13.

And as exchanges ramp and as Medicaid ramps in states like Michigan, should we see a disproportionate -- continued disproportionate impact on that population?.

This is Dan. The data is interesting. We've certainly been tracking it for a number of years in terms of patients with multiple episodes of care. What we saw and when you look at 2012 versus 2013, as we outlined on the slide, it's not necessarily the exact same patients that repeat multiple times again in the subsequent year.

And so we saw that in -- in the first quarter so far, we did see 25,000 of the 2013 patients, but that doesn't necessarily mean every single one of those 25,000 patients were in our facilities twice in the quarter. So it's -- the population evolves.

And our Conifer team has been -- has an incredible amount of experience doing this for several decades, tracking this, getting people enrolled in various government programs. And we certainly expect that success to continue, and what -- that's what we saw in the first quarter..

I mean, just a follow-up.

I mean what percentage, would you argue, of the uninsured are these multiple care -- repeat utilizers as a percentage of the total uninsured volumes?.

Andy, this is Trevor. I think, just to be really clear, the point of putting the slide in was we had received at an investor conference a couple of months ago a very significant number of questions about this population, who the analysts and investors referred to as frequent flyers.

And the chart here is supposed to help everybody understand that this is not as big an issue as they might have thought because that population is transient.

I think Dan does have an answer to the question, but I would -- I just think, to put that in context, it's really a different kind of issue, which is understanding the uninsured population, using the tools that we have within Conifer and the staff to enroll them where it's appropriate, as opposed to identifying some small group of people who are habitual uninsured users of the -- of our services.

It doesn't seem that, that is so much a factor..

Our next question online comes from Mr. Kevin Fischbeck from Bank of America..

Just wanted to go back to a comment, I think, Trevor, that you made around the commercial volumes being strong as they've been in maybe like the last 6 years. I think you said that the fact that it was as strong as it was, was evidence that you're positioned well in the most popular exchange products.

So are you seeing specifically that gap narrowing because of exchange volume already?.

We made a strategic decision to embrace the exchanges as an important new channel of commercially insured patients. And we were very active in engaging with insurance companies and negotiating contracts with insurers all over the country in our markets in order to make sure that we were well positioned.

Now what -- and maybe we got a little bit lucky in that the plans that we entered into contracts with ended up being very well positioned.

So we've used this stat many times before, but approximately 90% of our hospitals are in the 2 lowest-cost -- or 1 of the 2 lowest-cost silver plans in our markets, and we're very well represented across all metal types in all of our markets with our hospitals.

So to the extent -- then subsequently, you've seen the enrollment data, that the majority of people enrolling in exchange products, over 60% have signed up for silver plans, to the extent they're signing up for silver plans and choosing 1 of the 2 lowest-cost ones, we're there in those networks.

And so we feel very good about the way we're positioned. I should mention that, as we predicted over a year ago, the pricing has been very similar to commercial. So this is an important new source of commercial insured patients. It's playing out that way. And we are very pleased with how our hospitals are represented..

Okay. And that then brings me to the follow-up question, which is I -- because I don't really fully understand the sequential commentary around the reform pickup because, if I looked at enrollment, the surge obviously happened in March and April. And if you kind of -- obviously, if you signed up March 15, it's effective May 1.

If you kind of take the weighted average enrollment nationally, it's probably about 3.1 million people moving to 7 million people on average in Q2 and then moving to 8 million people on average in Q3, and so there's a 125% increase in enrollment from Q1 to Q2.

And if you look at where the surge happened, Texas up 150%, Florida up 125% from February to April, it seems like there's a really big ramp in this dynamic, which you're already seeing in Q1, when enrollment really wasn't that high. Just trying to understand why there isn't more of a sequential lift.

Particularly if you throw in Michigan on top of everything else, it really feels like 5 million sequential improvement is low. And then why -- and then if it is low in Q2, why do you assume -- it seems like you're assuming there's a bigger increase in Q3 and Q4, when I, think, sequentially, the biggest increase might be between Q1 and Q2..

And so I think that it's -- I'm not going to speak to the national enrollment numbers, but in terms of what we are actually seeing in our hospitals, the ramp has been quite steep. We've mentioned that in our prepared remarks.

And the volume in -- exchange volume in April was over 80% of the entire exchange volume for the first quarter, so there is a steep ramp out there, but it is too early to tell exactly where that's going, what that means, how that translates into earnings and everything else.

So I would remain very optimistic about it but too early to make strong predictions about where exactly that's going. But remember, we're dealing with entirely new marketplace; new technology; and newly insured, in most cases, people, and we don't have lots of experience with how they behave and how those products will behave..

So you're saying that the longer you go out, the more confidence you have, sort of like, Q3, Q4, you feel like it'll -- it could happen in Q2, but by Q3 and Q4, it should all be there, so you're more comfortable saying that..

I guess we feel -- yes, so we'll be more comfortable about what we're seeing in 2014. Then of course, it remains to be seen exactly what the pricing will be for 2015. So let's put a pin on this, so to speak, and catch up again when we next report earnings and the time after that and we'll have a lot more experience with those..

Our next question online comes from Ms. Sheryl Skolnick from CRT Capital Group..

I couldn't have done a better segue, actually, to the question that I'd like to ask because I think you've been beaten up enough on this sequential delta of only 5 million in the reform guide, which I would echo the sentiment seems a little bit light, but I won't ask you too much for trying to be conservative.

Let's talk a little bit and focus a little bit about managed care pricing, if we could. And there's a couple of different aspects that I think we need to explore or I'd be curious in hearing your thoughts on.

First, with respect to Vanguard and bringing the Vanguard properties under your commercial managed care contracting, is there much of a difference in the pricing? Is Tenet higher or lower? And when do you think that the alignment of the Vanguard facilities and the Tenet facilities under your national and strong contracting capabilities will be completed? So that's question part 1A.

Part 1B is, as you think about the managed care contracting that you've done already to date, you mentioned that the pricing is not complete for 2015.

If you could walk through for us how much of it is done for 2014 versus how much is done a bit for 2015 and whether -- and out-years beyond that, and whether you're seeing any early indications of pushback on exchange pricing that might be different from your other commercial pricing, or any other differences in trends.

And then the third question I have is in particular with respect to treating the exchanges of commercial managed care, especially in Texas and Florida, if you could comment on that -- the build in those states and what you might be seeing.

Because I think it's really critical for all hospitals but for Tenet in particular that, that build gets some traction there, particularly where you are in your markets and the demographics around them..

Okay, so I'll start off and ask Clint Hailey to fill in. The first part of your question relates to our contracting approach and integrating the Vanguard portfolio. And yes, and I know you know this, Sheryl, but for the benefit of the full audience, we do approach managed care relationships differently.

We do it on a centralized basis where Vanguard has been done more on a regional basis. And we do insist that either all of our hospitals are in network or all of our hospitals are out of network.

We also -- in addition to the Vanguard transaction, there were some other important things going on within the managed care area last year, for example, Aetna's acquisition of Coventry. And so not only did we have a need to engage in negotiations to integrate our acquisition, but at least in that case, Aetna did as well.

We were pleased to have reached agreement, a new national contract with Aetna as of a month or so ago and very satisfied with the results there. But the -- I'll ask Clint to talk about the climate a little bit more, but he and his team are working payer by payer, going through and trying to reach a conclusion that is fair for both parties.

It -- I don't think you should have a -- the impression that, in every case, there is some disconnect between the Vanguard pricing and Tenet pricing. The disconnects are probably not as great as anybody would imagine, but it's still an important source for us of synergy.

And it's important for us to have a stable national contract portfolio, as we've had for many years.

So Clint, you -- do you want to add a little bit to that, if I left you any room to add there about how you're doing, and also address this question that Sheryl has with respect to pushback, the degree to which we're contracted '14 and '15 and then specifically Texas and Florida?.

Yes. Why don't I start with the numbers, Trevor, and to answer a portion that she had about percent complete from a contracting perspective? We're 70% completed contracting for 2014 and 54% for 2015. Trevor mentioned the Aetna contract, which we completed a few months ago and announced.

We've got a couple other rather large plans that some of whom are getting close to complete. And if we -- when we complete all of those, it's actually 4 health plans that we're working on pretty diligently right now, the 70% would go to 93% complete and the 54% would go to 80% complete.

I mean, of course, they've got to be finished to be able to get to those levels of being contracted. But that's kind of where we're on the path to get done in the next few months. As it relates to one other thing you asked about, on exchange pricing trends, it's very interesting to see how inactive the health plans are as it relates to 2015.

They're all in a wait-and-see mode right now. And it's unfortunate that the deadline for filing the 2015 exchange proxy is June 27 because the health plans aren't going to really have a lot of good data to rely on in terms of how the performance of their exchange products is going for the first part of this year. And so it's a little bit unfortunate.

And I sympathize with them because it's hard for them to make any -- draw any conclusions about what they want to do different for '15, but hopefully, we'll see pricing hold and not have dramatic changes.

And we'll see a few health plans expand in new geographies, but the trends that we're getting on that business is not out of line with what we get on the commercial business..

And then what about Texas and Florida? She asked about exchange volume trends, that sort of thing, in Texas and Florida..

I think it's early, Trevor, to draw conclusions about what kind of volume trends we're seeing. I don't recall off the top of my head what Florida and Texas look like versus some of the other markets for exchange volume..

Britt, do you have that data?.

Yes, I do. Sheryl, I think your intuition was spot on. As we look to our commercial business overall in Texas and Florida, those were strong growth areas for us and significantly the higher areas of growth in our company.

And then as you drill that more into the exchange categories, Florida was really strong on the exchange side of the equation, and Texas as well followed suit and more globally with our overall commercial trends..

Yes. And I'll just put in a plug here for Blue Cross of Texas, who is a great partner in driving enrollment. They had a very comprehensive network, reasonably priced plans. And then once people were signed up, they were very active about calling them and informing them of their benefits, in particular the ability to go have a free checkup.

And so we're having a lot of success in that relationship in Texas..

Our next question online comes from Miles Highsmith from RBC..

This is Saurabh Prasad, for Miles Highsmith.

Could you let us know what were the expenses related to the $9 million HITECH revenue in the quarter?.

Yes, this is Dan. As we've disclosed, we had roughly about $10 million in health IT incentives..

What were -- so you don't disclose the expenses that were related to that..

We -- no, we have not separately disclosed that. Although, I would tell you, it is in excess of that number. It's -- I -- it's about 3x that number..

Our next question comes from Colleen Lang from FBR..

I was just wondering if you've any update on your plans to acquire those facilities in Connecticut, and any color you can provide on the agreement you've signed with Yale New Haven Health System..

Sure. Keith Pitts will answer that one..

We're still working through some legislation issues in Connecticut. The session does close towards the end of this week, so I think, over the next 30 to 45 days, we'll have more clarity on that, as well as how our Yale New Haven partnership unfolds..

Our next question online comes from Ralph Giacobbe from Crédit Suisse..

It's actually Jonathan Chan, on for Ralph. I just had a question. I -- obviously strong Medicaid volume growth in your expansion states. Just wanted to clarify how you were thinking about this volume growth that outpaced the decline in uninsured volumes.

How much would you say is actually incremental volumes versus, I guess, dumping from other payers, just on that piece above the uninsured decline?.

Jon, this is Dan. In terms of our uninsured declines, as you can see on the slide, the decline in the uninsured is in excess -- or it's below the level of the incremental Medicaid volume that's migrating into the exchanges.

So we think we're picking up a nice share of the growing Medicaid book of business in the states that have expanded their Medicaid programs..

Our next question online comes from Darren Lehrich from Deutsche Bank..

I wanted to just ask a couple of things here. I guess the first is a clarification on something you said, Dan, about the reversal of accounts receivable buildup.

Can you just quantify for us what that was? And I presume we're going to see that come back through the P&L, so can you give us a sense for when the timing is on that?.

Darren, this is Dan. In terms of the temporary buildup in receivables, if you look at our Slide 12 and you look second half compared to the first half, we have assumed that there would be about a $20 million recapture of some incremental expense in the first half of the year related to the temporary buildup. Receivables are good.

It's just -- there's been some temporary slowdowns with our Medicare MAC and claims processor just due to some processing and system issues. And then with several payers, there's been temporary buildup there. One example would be if you have a new contract and rates aren't necessary loaded exactly in the time frame that we initially anticipated.

But Conifer has been doing a very nice job managing and controlling our receivables and bad debt. And I'd like to turn it over to Steve Mooney, who heads up our Conifer business, to maybe just provide some further insight and color..

Sure. Thanks, Dan. Yes, there's a few things. Dan kind of mentioned a couple of them. One is -- and Trevor talked about renegotiating a contract. And so when that happens, the payer's loading in their new rates, it's around new processor's claims [ph], and you have to reprocess it again when the new rates go in. They'll put them on hold until that time.

That actually is happening now. So these claims are getting paid and we expect that to clear out under [ph] the second quarter. The next piece, Dan mentioned there was a slight increase in our Medicare receivables due to our primary MAC, which is split in mostly Tenet hospitals, except for some of the new Vanguard hospitals.

There were different MACs, except for the San Antonio market, which is the Medicare administrative contractor.

So we obviously are on the phone with them quite often about what the challenges are, although we're actually having a full-day meeting coming with them to go through all the delays that we've been seeing recently, but that isn't scheduled till June, early June, so that might actually creep itself into the third quarter, from that standpoint.

The good news is the exchanges we are talking about, a lot of volume that, that increased over the period of a quarter, so as a result, it gets some built up in AR. We've seen that payments increase dramatically. As a matter of fact, all the payments we received in the first quarter, we saw that exact same amount paid in the month of April alone.

So we are starting to see that reduce itself down as well and expect that to continue over the course of the second quarter and into the third. And then finally, there was some delays in some of the national payers that also exchange products in them not having enough staff to process all the claims on the commercial side.

So there was some degradation in that AR. And we've been working very closely with the plans on their staffing levels. As you can imagine, we have a lot of clout because we're not only claims are processed for Tenet, but we do for other clients.

And so they're assuring us they are getting the appropriate staffing levels in play, and it doesn't [ph] seem it was down. Will that all [ph] take place in the second quarter, we don't know, but we definitely expect that to be coming down over the course of the year. So that's the primary items..

That's helpful. And then just the last thing I wanted to ask is related to DSH cuts, obviously those kick in, in fiscal year '15.

Dan, I think you mentioned that everything that was in the IPPS rule was consistent with how you guided along those lines, but can you just confirm for us, is the DSH cut going to work out to be roughly $25 million a quarter? Is that a good estimate, or is that too high?.

That's -- Darren, that's too high in terms of the reduction in the DSH payments. The -- when we look all in on the Medicare rule, we compare to what we had assumed. The rule in aggregate is pretty much in line with what we thought. The DSH reductions are actually slightly less than what we had assumed in our Q4 guidance..

Our next question online comes from Mr. John Ransom from Raymond James..

Just a question for Steve. On Conifer, I'm just curious how much progress you think you might be making hitting some singles and doubles in terms signing up hospitals.

You've got some big wins, obviously, but how is the pipeline for singles and doubles?.

John, it's Steve. Thanks for the question. That's a good question. Always, everybody wants to talk about the home run, never talk about single and doubles. So I think, as you know, we've got 3 primary business lines. One is our revenue cycle line.

One is our value-based care line of business, which helps managed [ph] organizations transfer from fee to value. And the third is our patient communication and engagement line of business, which is really talking about the patient experience. And so just to give you an example, for the first quarter, we actually signed 40 new deals.

5 of those were in the revenue cycle space. And those deals varied in size, but as we talked in past, that -- those deals usually are little lumpy as -- when they come in, right? We get them and then it slows down, and we get them again. On the patient communication and engagement line of business, we signed 19 new transactions.

And in the value-based care line of business, we signed 16 new transactions, to get you the total of 40. So why we think this is so important, it's really around just increasing the brand of our business.

It's not just about now getting a revenue-cycle deal, but it's getting our name on the street with the health care systems in the marketplace, both as individual hospitals and those systems are now understanding who Conifer is and the value we can provide to them as they move, like I said, from where they're at today from kind of a standalone system to an overall kind of system of, I would say, integrated system delivery.

So things are going well. So lots of singles are happening and we're getting some doubles out there, and -- but I would still expect obviously doing our forecast for the year, things are still looking very solid for the balance of 2014..

So just remind me, once you fully integrate Vanguard and once you account for some of the singles and doubles that you mentioned, what does your mix of in-house versus third-party revenue look like?.

In-house versus third party, we're sitting right around....

[indiscernible].

Yes, so about 35% was -- is about -- is what's coming from the Tenet organization, and the rest is external. As you know, that we were getting -- reducing our concentration on Tenet until the Vanguard deal got done, so it's great, from our standpoint, on the growth of our business, but it obviously put more pressure on our -- on that side..

And Catholic Health Initiatives has been growing also. So we have the high-class problem, John, of the 2 largest customers outpacing the growth of all other customers combined in order to create that high concentration.

If you add Catholic Health and Tenet together, it's well over 80% of Conifer's revenue is coming from us, but like I said, great high-class problem to have..

Great.

And my other question for Dan is, if you think about the health care reform contribution for '14, how much of that is approximately coming from Medicaid versus coming from exchanges? And what are you realizing in terms of revenue per adjusted admission on your Medicaid accounting for the Michigan expansion? What's a good number to use for that?.

John, in terms of when you -- one of the key assumptions that we used to build our health care reform assumptions for the year was that we assumed that about 2/3 of our uninsured would migrate into a Medicaid program and the other 1/3 would migrate into an exchange product.

As you know, obviously, the pricing for an exchange product is more attractive than from a Medicaid perspective, but it sort of gives you a rough sense of probably where it's apportioned -- somewhere maybe 50-50 or so. It just depends on the mix and the types of service..

So 2/3, 1/3 but 50% of revenue from either..

Yes, I mean I think, for modeling purposes, if you want to sort of look at it like that, that's not the exact, precise number. But just generally speaking, it all depends on the mix. Right now, the mix is certainly very strong on Medicaid, but that's -- we like what we're seeing there, and that's okay..

Our next question comes from Whit Mayo from Robert Baird..

Dan, I'm struggling to reconcile the comments you made on the IPPS rule. I think you said that the roughly 1% cut is in line with your estimate, and your 10-Q has a $20 million impact cited, but you do also seem to do considerably better on readmission penalties, value-based purchasing, the overall majority of the quality programs.

And DSH really isn't a big deal for you, from what I can tell, so what am I missing kind of versus our estimates?.

Whit, this is Dan. I don't think you're missing anything. The -- what we've built into our guidance for the fourth quarter is essentially in line with what we had projected. As I mentioned, we did a little better than what we thought. So on the DSH side, the reduction was not as pronounced as we thought.

We had some benefit compared to our projection on the wage index impact for next year. I would tell you, the one category where it was -- this would be a headwind would be, with the outlier threshold increasing, that went the other way. That's probably the most noteworthy. And then you're right on the readmission and the hospital-acquired conditions.

Those came in a little bit better than when you look at the national stats..

Yes.

So I guess my point is, putting the fourth quarter implied impact, putting that aside, I mean, if the overall industry is anticipated to see roughly a 1% cut, is it fair to conclude that your -- you can do better than that based off of your initial assessment of the proposed rule?.

Yes..

Okay, fair. And my last question, just on free cash flow. I recognize a lot of the working capital needs in the first quarter, and you anticipate seeing a ramp over the course of the year. You did sell another senior note since the last conference call, and collections have deteriorated a little bit.

You have this MAC issue now, but I think I hear Steve saying that a lot of this should reverse itself over the course of the year.

But I guess the question is, do you still feel good about hitting your free cash flow guidance, or should we just view that as kind of a stale number for now?.

There was a substantial amount of money owed from the various Medicaid supplemental programs in Texas and we're also owed some money related to the California Provider Fee program. It's over $200 million. And we expect to collect a large portion of that as we move through the year..

Our last question will be from Gary Taylor of Citibank..

Just had a few questions on the slides.

On Slide 5, where you cite the $10 million year-over-year ACA impact, is that just the DSH reductions that are being reflected there? Or are you also counting some of the market basket changes?.

Gary, this is Dan. The Medicare cuts, that's all the various adjustments in the Medicare payment rates related to ACA..

Okay. The other number I was really struggling to understand, on Slide 11, where you talk about the typical seasonal decline sequentially from 1Q to 2Q. You cite the $48 million seasonal -- or sequential seasonal impact. That's about a 12% sequential reduction in EBITDA.

And as we kind of look back, historically, it looked like, typically, your EBITDA might be down 5% or 6% sequentially. So it seems like a really sizable sequential reduction for seasonality reflected in that $48 million. You also have the comment there on payer mix, which we actually think -- presume would be improving over that period.

So can you help us understand just the magnitude of that $48 million?.

Yes. Gary, that $48 million would -- if you go back and looked at our historical volumes -- and again, there's a lot of puts and takes in terms of from -- quarter-to-quarter growth and efficiencies related to our Performance Excellence Program, revenue cycle management, outpatient growth, et cetera.

But if you just carve out the -- just historical change in volumes between Q1 and Q2, it's roughly about 4% decline just in -- at the absolute volume numbers between Q1 and Q2. And when you price out that volume, it's pretty much in that ballpark of that number. And so that's all that represents..

Thank you. We have no further questions at this time. I would now like to turn the call over back to Mr. Rice for closing remarks..

Actually, I'll just jump in. We have no further closing remarks. Thank you, everyone. And sorry we went a little bit overtime. And always, we're here available for follow-up. Thanks..

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect..