Trevor Fetter - Chairman & Chief Executive Officer Daniel J. Cancelmi - Chief Financial Officer William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc. Britt T. Reynolds - President-Hospital Operations.

Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker) Whit Mayo - Robert W. Baird & Co., Inc. (Broker) A.J. Rice - UBS Securities LLC Sheryl R. Skolnick - Mizuho Securities USA, Inc. Joshua R. Raskin - Barclays Capital, Inc. Kevin Mark Fischbeck - Bank of America Merrill Lynch Andrew Schenker - Morgan Stanley & Co. LLC.

Please stand by. We're about to begin. Good day everyone and welcome to the Third Quarter 2015 Tenet Healthcare Earnings Conference Call. My name is Dana, and I will be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

The slides referred to in today's call are posted on the company's website. Please note the cautionary statement on the forward-looking information included in the slides. I will now turn the call over to Trevor Fetter, Tenet's Chairman and Chief Executive Officer. Mr. Fetter, you may begin, sir..

Thank you, operator, and good morning, everyone. I'd like to start with the financial highlights of the quarter which are summarized on slide two. We delivered third quarter EBITDA consistent with our guidance range, USPIs results were in line with our expectations, and Conifer achieved strong, year-over-year growth in both revenue and EBITDA.

Our adjusted free cash flow was also very strong in the third quarter and exceeded our expectations. Compared to the third quarter of 2014, in the third quarter of 2015, we drove an increase of 23% in EBITDA and improved our EBITDA margin by 110 basis points.

I'm pleased with the way we grew our case mix and high acuity services, as well as our performance in pricing growth and cost control. These are all very strong indicators that our strategies to grow the drivers of value are working.

On our second quarter earnings call in August, we discussed our expectations that hospital volume growth would soften in the third and fourth quarters relative to the first half of the year. Our record volume growth in the third quarter of 2014 provided us with a very tough comparison.

And while our adjusted admissions growth was in line with the guidance we provided, hospital admissions were slightly weaker than we anticipated. Much of the pressure on inpatient admissions was due to a handful of anomalies or local market-specific issues that we've been resolving over the past few months.

We're pleased to have achieved increases in higher acuity procedures, largely driven by investments that we've made in key specialty areas. For example, joint replacements are up over 5%; infectious disease surgical cases increased over 15%; and neurosurgical cases grew by about 9%.

This helped us to generate a 6.5% increase in same-hospital revenue growth during the quarter in spite of the softer volumes. We achieved solid volume growth in our outpatient facilities. Our ambulatory segment drove a 6.3% increase in volumes and remains on track to deliver strong performance in the fourth quarter.

Based on our performance so far this year and our expectations for the fourth quarter, we are reconfirming the midpoint of our adjusted 2015 EBITDA outlook and narrowing the range. We also are increasing the midpoint of our adjusted free cash flow guidance by $100 million to a new range of $350 million to $500 million.

We remain enthusiastic about Tenet's opportunities under the Affordable Care Act. The third season of open enrollment kicked off on Sunday, and we're pleased that 90% of Tenet's hospitals are included in in-network with the lowest cost silver plans on the exchanges. That is the highest percentage we've achieved in the last three enrollment periods.

In addition, HHS is focusing enrollment efforts on five cities including Dallas, Houston, Miami and Chicago where we generate roughly 20% of our hospital admissions. We are optimistic about 2016 and focus on connecting eligible individuals and families with coverage options.

Turning to slide three, in recent months, we've announced several transactions to improve our hospital portfolio, and I'd like to give you a quick update. We completed our joint ventures in Tucson and Birmingham, and our acquisition of the Hi-Desert Medical Center near Palm Springs, California.

In total, we invested roughly $300 million in these transactions. We also completed the sale of Saint Louis University Hospital at the end of August and expect to finalize the sale of the majority interest in our four Dallas hospitals into a joint venture with Baylor Scott & White Health in the fourth quarter.

This morning, we announced a definitive agreement to sell our North Carolina hospitals to Duke LifePoint Healthcare. We also expect to sell our Atlanta hospitals as early as the first quarter of 2016. We expect the divestitures in Dallas, Atlanta, and North Carolina to generate roughly $1 billion in cash proceeds.

We expect the cash will be realized at various times over the next six months, as individual transactions are completed and receivables from the divested operations are collected. The proceeds may come at times when we have borrowings on our revolving credit line due to the timing of interest payments and seasonal cash outflows.

So, as a practical matter, the first use of the incoming cash is to reduce those outstanding borrowings. I'd like now to turn to slide four and spend a few minutes discussing how we intend to use the remaining proceeds and how we're thinking about capital deployment over the next few years.

I feel confident about our business strategy and the opportunities for us to create value through organic growth, augmented by strategic acquisitions in our business. But when it comes to capital deployment, we need to be flexible and adjust priorities based on the circumstances.

For example, on last quarter's conference call, with our stock in the high 50's, I suggested that one option would be to use the divestiture proceeds to pay down debt. Specifically, our 8% notes due in 2020 which are callable at $104 million today for a total of $780 million.

The volatility in both the debt and equity markets since then has caused us to reevaluate and postpone calling those notes, and instead we're adding the ability to repurchase shares to the alternatives that we have available. We view share repurchases as an important tool to have in our toolkit.

We have a strong track record of buying back shares at low prices, including $1.2 billion in stock buybacks since 2011 at an average price that is well below today's price. We announced yesterday that our board has approved a new authorization to repurchase up to $500 million of our stock through December 2016.

Taking a big-picture perspective on our sources and uses of cash over the next five years, we expect to generate enough free cash flow, together with currently available liquidity, to fully fund the obligations to our minority partners, including the purchase of the rest of USPI.

We expect our first installment payment, which is the only payment in 2016, will be between $125 million and $135 million. We also expect to have sufficient cash to fund a robust program of surgery center acquisitions at USPI while continuing to delever through EBITDA growth.

We feel confident in our ability to invest successfully in the growth of our business, increase the view (7:35) of our company and, when appropriate, repurchase shares. We've already demonstrated our ability to do so.

In 2008, we launched Conifer and created a business that is a market leader today, worth far more than the investment we made to build this business. Two years later, we began to invest in outpatient centers that were key to the creation of our joint venture with USPI.

We grew a $300 million investment into $900 million in value, which we were able to utilize to create the joint venture. We also gained national and regional scale through the Vanguard acquisition, and increased the number of (08:06) markets in which we're number one or number two in market share.

Our teams have also done a great job identifying and capturing synergies, and we've built a structural capability to create value in acquired businesses. We're on track to generate over $200 million in synergies from the Vanguard hospitals, exceeding the high end of our original goal of $100 million to $200 million.

And with USPI, we've only owned the company for four months, but we believe we can extend, sorry, exceed our target of $50 million in synergies over the next three years.

Moreover, we're only now beginning to realize the potential of business opportunities that exist between our three business units in solving some of the most pressing problems facing potential health system customers and partners today.

We refer to this as an integrated enterprise solution for revenue cycle, value-based care, and ambulatory development, with joint ownership of acute care assets in selected cases. It's a powerful offering directed at the 80% of U.S. hospitals in the not-for-profit sector.

We're only in the early stages of conversations with potential partners about this, but I think there's real potential to create synergies for Tenet by owning all three of our business segments and coordinating these enterprise solutions offerings.

Notwithstanding our capabilities and success in acquisitions, while our equity is at these levels, we will narrow our focus. Our first priority will be to acquire surgery centers within USPI.

USPI has been able to purchase centers at an average EBITDA less NCI multiple of roughly 7 times to 8 times, and reduce the effective multiple to 4 times to 5 times, two years post acquisition. At Tenet, we were able to achieve similar economics on outpatient acquisitions.

Now, with the synergies between USPI and Tenet, we can create additional near and long-term value for our shareholders by continuing to deploy capital in this way.

As we invest capital in building our ambulatory platform, we will continue to expand our relationships with the not-for-profit health system partners that have been so important to USPI's success.

We have a healthy development pipeline and are pleased that our partners remain enthusiastic about exploring new opportunities to leverage our capabilities. For example, since completing the joint venture, USPI has expanded its relationships with Baylor Scott & White, Memorial Hermann, Dignity Health and Meridian Health, among others.

We will also continue to invest in Conifer to augment its revenue cycle and value-based care business lines. One of the many benefits of the Tenet-Conifer relationship is the ability for Conifer to develop new services and technologies within Tenet's hospitals and refine them before they get rolled out to the broader market.

This has enabled us to build incremental revenue both within Tenet's hospitals and for our physicians. Also, Tenet's portfolio actions not only create new revenue opportunities for Conifer, they also help diversify Conifer's customer base.

For the time being, we plan to pass on acquisitions of turnaround hospitals requiring large capital investments and defer large investments in projects like newly constructed hospitals and new patient towers. Turning to our leverage, as recently as two years ago, our ratio of total long-term net to the latest 12 months adjusted EBITDA was 4.7 times.

We added leverage to acquire Vanguard, bringing the net leverage ratio up to 6 times at the end of 2013. Today, our net leverage ratio is a little lower.

Even with a $500 million share repurchase which adds 0.2 turns of leverage, we expect our leverage to be in the high 5s at the end of 2016, and we're committed to reducing our leverage by driving improvements in operating results and growing free cash flow.

By the end of 2018, we believe our net leverage should be around 5 times EBITDA, and absent other capital requirements, we expect it to trend lower after that.

The markets may change between now and then, but assuming that rates remain near current levels, we don't see much benefit in having net leverage below a range of 4 times to 5 times and would pursue attractive acquisitions or share repurchases in order to be within that targeted range.

In summary, we delivered on our strategic goals during the quarter and achieved financial results in line with our outlook. I'm confident that we have made and will continue to make smart investments in our future. We're well positioned with a strong integrated business model and building leading positions through our hospitals, USPI and Conifer.

I'm very excited about the opportunities to drive growth across these three business lines in coming years and to improve margins and free cash flows and drive sustainable value for our shareholders over the long term. And with that, let me turn the call over to Dan Cancelmi..

Thank you, Trevor, and good morning, everyone. There are several points that I would like to start with today about our results for the quarter. We generated EBITDA that was within our guidance range. EBITDA was $566 million in the quarter, representing an increase of 23% and a 110-basis-point improvement in our margin.

We are raising the midpoint of our adjusted free cash flow outlook by $100 million as a result of another strong quarter of cash flow performance. This is the second time this year we've raised our cash flow outlook. Last quarter, we increased it by $75 million. We drove admissions growth in our higher acuity, higher margin service lines.

However, our total admissions were impacted by declines in certain lower acuity business. Over a longer term horizon, we continue to believe that our strategies will produce admissions and adjusted admissions growth.

Charity and uninsured admissions increased 3.7% in the quarter, primarily driven by higher numbers of uninsured patients in Florida and Texas. Our Conifer services business delivered another strong quarter with EBITDA up 30%. Our outpatient businesses continued to drive strong results.

Our Ambulatory Care cases increased by an impressive 6.3% and our hospitals achieved a healthy 3% increase in outpatient visits. Finally, our cost management efforts remain effective, including a year-over-year reduction in contract labor. Now, let's spend more time discussing our results.

As you can see on slide five, our hospitals reported a 0.6% decline in same-hospital admissions which was around 100 basis points below our expectations. Our initiatives and investments to expand key, high acuity service lines continue to drive growth.

However, certain of our lower acuity business, namely behavioral health and respiratory volume, was softer than we anticipated in the quarter. Also, we generated hospital surgery growth of 0.8% and grew our emergency department volumes 1.5%.

We generated same-hospital patient revenue growth of 6.5%, which was primarily driven by a 5.8% increase in revenue per adjusted admission. We continued to drive growth in higher acuity service lines, and our case mix increased 1.4% in the quarter.

And the California Provider Fee program increased our same-hospital revenue by $41 million, which drove our revenue per adjusted admission up by 110 basis points in the quarter.

Keep in mind for modeling purposes that we recorded $150 million of same-hospital California Provider Fee revenue in Q4 last year since CMS did not approve the program until then. In this year's fourth quarter, we anticipate recognizing $41 million of revenue. Our operators continue to manage expenses well.

On a total hospital basis, our cost per adjusted admission increased 3% in the quarter and 1.9% year-to-date. Our previous full-year 2015 cost guidance was a range of 2% to 3%. As a result of our performance this year, we are now reducing our full-year cost outlook to a range of 2% to 2.5%.

We continue to identify and realize cost efficiencies and acquisition synergies across our various business units. In particular, our teams have been very successful realizing synergies related to the Vanguard acquisition.

We expect to exit 2015 on a $200 million annual run rate, which was the high end of our initial estimate, and we anticipate capturing additional synergies in the future. I want to point out that our contract labor declined 15% in the third quarter on a same-hospital per adjusted admission basis.

While we did experience pressure from contract labor last year, our teams have been very focused on reducing these costs and improving the balance between employed care providers and contract labor. We are clearly realizing benefits from these efforts as our contract labor cost declined for the fourth consecutive quarter.

Pharmaceutical costs have been a source of pressure over the last few years with drug manufacturers pushing through large increases. This quarter, our pharmacy expense increased by approximately 13%. This alone accounts for roughly half of the 4.3% same-hospital growth we reported for supply expense per adjusted admission in the quarter.

We have various initiatives in place to mitigate some of these increases, including product substitution, formulary optimization, SKU reductions, strategic buying and reducing waste.

Also, we anticipate generating additional efficiencies in pharmacy and other supply spend when we insource our group purchasing functions and transition to our recently announced group purchasing arrangement with HPG in early 2016.

Bad debt expense was 7.3% of revenue in the quarter which was consistent with our performance in the first half of the year. Slide six (19:02) our uncompensated care trends over the past several years. We've added to the slide the discounts that we offer to uninsured patients through our compact with uninsured patients.

I think you will find the additional information helpful because our uncompensated care can move back and forth among these three lines depending on how a patient is ultimately classified. This quarter, our uncompensated care as a percentage of adjusted revenue was 21.7%, which is up 80 basis points year-over-year.

The increase is due in large part to a $28 million positive adjustment last year related to estimated future recoveries of patient balances after insurance payment. However, I'll note that this ratio has been fairly stable over the past four quarters. Turning to slide seven, our Ambulatory segment's case growth was very strong, increasing 6.3%.

Revenue per case also increased 3.5%, resulting in 10.1% growth in same-facility system-wide revenue. For anyone not familiar with USPI's historical financial reporting, the system-wide growth shown on the slide includes the cases performed at consolidated and unconsolidated centers.

This provides a better overview of volume performance across the entire portfolio. On slide eight, you'll see that our Ambulatory segment generated 17% year-over-year EBITDA growth. The results at USPI and Aspen have been consistent with our expectations.

Given the attractive economics of this business, combined with our consumer-friendly nature, we will continue growing these care settings both organically and through acquisitions. I want to remind everyone that USPI operates surgery centers that bill the Medicare program as freestanding surgery centers, not as hospital outpatient departments.

And it was never our intention to convert any of the centers into hospital-based outpatient departments. As a result, we do not foresee any exposure for USPI to the provision in the Bipartisan Budget Act related to the prospective site-neutral payment methodology.

As patients, employers and insurers continue to focus on lowering their spend, USPI is well positioned as a patient-friendly, cost effective, high-quality provider. Conifer delivered another great quarter of year-over-year growth, with EBITDA increasing 30% to $61 million.

This continues a trend of impressive growth in recent years, which is summarized on slide nine. As we discussed last quarter, Conifer remains on track to meet or slightly exceed $260 million of EBITDA this year. Our free cash flow was very strong in the third quarter.

Adjusted net cash provided by operating activities was $563 million, up from $256 million in the same period last year.

Key drivers of this growth include accounts receivable performance improvement by our Conifer team, our strong cash flow-generating USPI business, and additional (22:37) of supplemental Medicaid funds from various states, including the California Provider Fee program.

After subtracting capital expenditures, we generated $356 million of adjusted free cash flow in the quarter. As a result of our cash flow results the past two quarters, we are raising the midpoint of our 2015 adjusted free cash flow guidance by $100 million to a new range of $350 million to $500 million.

As I mentioned earlier, this is the second time this year that we are raising our outlook for adjusted free cash flow. Last quarter, we raised our expectations by $75 million. Slide 10 provides additional details on our updated outlook for 2015. In short, we are maintaining the midpoint of our range of adjusted EBITDA and tightening the range.

As summarized on slide 11, we are reiterating the same pro forma view of 2015 that we provided in August, and added a few more details that we thought you would find helpful for modeling purposes.

The goal of this pro forma information is to give you a starting point for modeling purposes, of our numbers once all the previously announced acquisitions, and divestitures are completed. In summary, we effectively managed through a softer than expected inpatient volume environment, and delivered EBITDA that was within our outlook range.

Expense management continued to be a key area of focus and was an important contributor to our results in the quarter. And our Conifer and Ambulatory Care businesses, continued to deliver strong growth.

As a result of our performance this year, we're maintaining the midpoint of our full-year adjusted EBITDA outlook and raising our outlook for adjusted free cash flow by $100 million. And we've announced the authorization to deploy up to $500 million of capital on share repurchases through the end of next year.

I'll now ask the operator to assemble the queue for our Q&A session.

Operator?.

Thank you, sir. And we'll take our first question today from Ralph Giacobbe with Citi..

Morning.

I guess to the target leverage amounts, I guess the first question is, does it include the $1 billion in proceeds?.

Yeah. So, Ralph, this is Trevor. Let me – I think we've gotten a lot of questions around these things. Let me open it up and I'll let Dan add to it. This is not intended to be guidance. This is intended to express our strategy about how we think about leverage going forward.

It does include everything that we are aware of in the way of transactions, proceeds, borrowing, paying distributions to minority partners, et cetera..

Good morning, Ralph. Yes. That's right. I mean, the view is, of 2015, on a pro forma basis as if all the acquisitions and divestitures had occurred as of the beginning of the year. So, think of the $2.3 billion as a starting point that we'll grow from.

Certainly, as we move through next year, we're going to continue to generate growth in our USPI business. Conifer continues to drive attractive growth. We anticipate we're going to continue to drive growth in our hospital segment.

The other element to consider in that pro forma view is that does not reflect the improvement in the operations and in the synergies that we'll capture related to the Tucson and Baptist Birmingham assets that we acquired.

We've continued to drive additional cost efficiencies and we'll be able to capture more next year, as well as the fact that when we transition to our new group purchasing arrangement with HPG next year in early part of the first quarter, that's also will going to drive additional efficiencies for us.

So, again, lot of growth that we see as a starting point from that base line in 2015 at $2.3 billion..

Okay. All right. That's helpful. And then just on the NCI, can you help us think about sort of the cash versus non-cash portion of that line and what is sort of the non-cash piece? Like the outflow for CHI and even on the USPI side, I think there's sort of a cash versus non-cash piece.

Can you just remind us the components of that and why that is in terms of the non-cash?.

Yeah. The non-cash piece is roughly 35% to 40% of that number, Ralph, and that's the Welsh, Carson component as well as the Catholic Health..

And by not, I guess, I'm just trying to get a sense of why is that non-cash? Is there some adjustment that's made on the balance sheet to help us think through why that's a non-cash portion? Is there some sort of catch-up ultimately that needs to be made and the liability's essentially set up on the balance sheet?.

Well, as far as the Catholic Health interest, we're not making any distributions to them. And as far as the Welsh, Carson piece, we will buy the remaining 49% of USPI over the next five years, and that's on the balance sheet..

Okay. Thank you..

And we'll take our next question from Whit Mayo with Robert Baird..

Excuse me. Thanks. Just maybe start with the free cash flow guidance. I mean, obviously, the raise is mostly from lower CapEx. And so are there any projects that push out into 2016? Just any context around just capital spending priorities to kind of frame up our expectation for what you might need to spend next year. Thanks..

Good morning, Whit. This is Dan. Now, we were certainly pleased with our cash flow performance in the quarter and so far this year. As I mentioned in the prepared remarks, this is the second time that we've increased our cash flow guidance. Conifer is driving nice performance improvement on the receivable side.

Certainly, the USPI business is great cash-flow-generating business and then we've started to get a little bit more money in from some of the larger state Medicaid programs. So we think we've reached an inflection point where we can continue to drive growth in free cash flow. We're very focused on driving improved free cash flow.

And when we look at the capital allocation opportunities available to us, we think, at this time, it was appropriate to reduce our estimate for capital spend this year. And we obviously are not talking about 2016 yet, but we think that obviously we're going to continue to drive growth in free cash flow..

Okay.

I guess I'm just kind of curious, if we go back to January when you set your original plan, what's fundamentally different in terms of some of the spinning priorities versus today? I mean, I don't think I've ever seen anyone really blow through their CapEx numbers ending the year, but I mean, does any of this just get delayed into 2016?.

Listen, when we think about some of the investment opportunities, we've made a decision that, given our focus on free cash flow, we think the spend that we're targeting for this year is appropriate at this point. I wouldn't say there's any significant projects that's been pushed out that will impact 2016 significantly.

So it's where we think where we're at, at this point, from an investment perspective..

Okay. And my second question just around the Ambulatory segment. Obviously a pretty impressive third quarter. And when I look at USPI's performance in the fourth quarter of last year, it was exceptionally strong as well.

Is there's just anything unusual to call out as we think about the year-over-year growth as we enter the fourth quarter? I mean, I understand that there's a very strong seasonal pattern that develops within the fourth quarter and that's probably been growing over time.

So I just want to make sure that we're all thinking through what the right growth rate is going forward..

Thanks. We've got Bill Wilcox and Jason Cagle from USPI here, and Bill will take that question..

Okay. Hey, Whit..

Hey..

We were probably as surprised as anybody on the strength of the revenue growth in the quarter. And I think a better way to look at it long term is in the 5% to 6% range with probably about half volume and half revenue.

There is a big seasonality component to our business, which has come on over the last five years, as we've seen changes in the way patients are involved in the decision-making processes. And I think we'll see that again this year. Roughly, a third of our earnings come in the fourth quarter, and we expect that again.

Some of the reasons that we think we're enjoying such a good success right now are – there's both a combination of market drivers and USPI specific drivers. And so the market drivers that are giving us nice tailwinds are continued recognition of the benefits of ambulatory-based surgical programs, both from a clinical and a payer perspective.

And we're seeing the continued demise of the out-of-network business, and that's, I think, driving business to the in-network providers.

And then, on the USPI side, I think we're doing a better job of keeping our doctors and earning the support of new doctors, as well as some turnarounds and then some big wins on a – at a few facilities that are moving the needle.

That address your question?.

Yeah, no. That's great, Bill. Thanks..

And we'll take our next question from A.J. Rice with UBS..

Hi, everybody. Thanks for the question. First off, I'd just ask on page 14 in your appendix, you have a number of items related to Q3 that you're highlighting. You mentioned a couple, but you didn't mention others in your prepared remarks.

Can you just expand a little bit on what was behind some of those, and then also whether there's any lingering effects into the fourth quarter from those?.

Good morning, A.J. This is Dan. Let me address a couple of the points in there. So, with the business disruption at our Desert Regional facility in Palm Springs, certainly one of our largest facilities. A lot of the various patient care units were essentially closed for an extended period of time.

The hospital was on diversion so the ED volume was being redirected and various med-surg units, trauma unit. So, it had a noteworthy impact on the quarter. We're still working through the insurance claim, but we think that's behind us. The hospital is fully operational. So we're past that.

In terms of the interest rate impact that we put on the slide, the seven-year rate went down 32 basis points. So that impacts our estimate of our discounted malpractice liabilities. There was some discussion, I saw on some of the reports said it was additional malpractice reserves. It really just – we discount the liability.

So when the interest rates move, it has an impact. In this quarter, we had recorded $7 million of additional expense..

Okay. All right. And then maybe one big-picture question. So we're coming at the end of our second year with the Health Reform benefit flowing through.

I wonder, if you guys could give us your perspective on where we're at relative perhaps to where you thought we'd be in terms of the benefit that reform might represent to you, say, in this spring or summer of 2013 versus today? And then how do you think about how you're going to realize the rest of that benefit over time?.

Okay. A.J., it's Trevor. I think, just breaking it down a little bit. So I think on the – let's start with the exchanges.

We, two years ago, anticipated – we thought the exchanges would provide a great opportunity for us, and I'm sure you remember all of that drama about what's the pricing going to be? Is it going to be Medicaid? Is it going to be commercial, whatever? Sitting here today, our exchange pricing is within 1% of commercial (36:26) which is what we expected.

So it's been a great product for us. We continue to drive substantial gains in volumes in this quarter. It was 53% in the exchange volumes, and I think those are well established now as a marketplace for individuals to buy insurance.

And as I mentioned in my prepared remarks, one of our strategies has been to have very attractive offerings on those exchanges that include our hospitals, and we hit a record high of 90% of our hospitals being in the lowest cost silver plan networks. So we are well positioned on exchanges to continue benefiting from whatever growth there is.

You can debate it. You can look at different data sources for what the exchange enrollment's going to be. But whatever it is, we're well positioned to benefit from it. On Medicaid, that's disappointing.

I'm disappointed that we're sitting here in 2015 and we still don't have Texas and Florida, and we don't have really sort of any progress from a political point of view in moving those states toward expansion.

Of course, from time to time, we'll hear positive things, we'll see it, we'll influence it coming out of state legislatures, most recently in Alabama. But the big ones for us are Florida and Texas, and we'll continue to wait.

We do have plenty of constituents in those states who understand that Medicaid expansion would be good for business and good for the people in the states. And we just, I think, have to be patient, but that provides upside if you want to look at the glass as half full. And otherwise, we've gotten all the cuts that we bargained for.

And on that basis, it's probably exactly what we expected. But I would prefer to look at what we see as the well-positioned nature of our hospitals on the exchanges and the potential upside from expansion in future states as continuing opportunities for us..

Okay. Great. Thanks a lot..

And we'll take our next question from Sheryl Skolnick with Mizuho..

Thank you so much. This was a very, very nice report in somewhat challenging circumstances, especially with the issue with Desert Regional. So congratulations to everyone.

My question is going to try to link your guidance on CapEx, your commentary on leverage, the share repurchase, and a conversation about expected returns because I really want to understand this thought process.

My sense is that there's a high level of discomfort with the announced buyback, and I'm not sure that I understood the explanation other than to say it's good to be flexible. And I think there's something more thoughtful behind it. So, I'm going to ask it this way if I can So, as I understand it, you would make this decision.

Yes, you want flexibility, but also because there's an expected return to holders from that buyback. And presumably you've judged that the return to the holders from that buyback is at least equal to the alternative uses of capital, including the repayment of debt and running at a fairly high 6-plus leverage at the moment.

So, I'm trying to understand what you think the expected return of the buyback is. I'm concerned about reducing CapEx at a time when you've just acquired, through joint ventures, some pretty significant assets that may, in fact, require investment.

I understand that you've got some pretty significant capital requirements not just to buy back, to buy the rest of USPI over time, but to facilitate the strategic plan of continued development and acquisition there.

So, I'm trying to understand how all of these competing uses of capital rank in the order of return on that, not only to the company, to the shareholder because when you've got 8% coupon debt out there, it concerns me that we're not seeing more deleveraging as part of this otherwise well-balanced strategy. And I'd love your view on this..

Okay. Why don't we – let me start with CapEx because I want to take off the table a notion that we are somehow cutting back on CapEx. At virtually every point in time for the last 12 years, we have had at least one or more new hospitals under construction. We have at this time one new hospital under construction, and it will near completion next year.

So a part of our anticipated ability to reduce capital spending is on very large-ticket projects. I mentioned in my script that for the time being, we would be passing on the opportunity to build new hospitals or really substantial new patient towers.

And I think in an industry that changes as rapidly as this one does, from the time you start a big capital project like a new hospital to the time you generate your first dollar is typically about five years. That's a long time to be out there with a very significant project where the needs change along the way.

So, I think in this volatile environment, Sheryl, as long as we're in a situation where our stock has been hit so badly, and enterprise values of hospital companies have been hit as much as they have, that it's just prudent to back off on some of those very long-term, long-dated, very expensive capital projects.

Same would go for turnaround acquisitions that involve substantial capital commitments. No greater example of that than Detroit, where we are nearing completion of the capital commitment that we had engaged in. By the way, those have yielded good results.

I think, once again, three of our fastest-growing hospitals in the quarter were in Detroit from an admissions point of view. So, we're nearing a natural completion of some of this heavy capital spending that should enable us to remain competitive, invest appropriately in the facilities we have. And I just want to take those CapEx cut notion off..

I agree with you. That's great..

As far as the return question, if we were having this conversation at our last quarterly call, as I mentioned, we'd be looking at an opportunity to invest nearly $800 million in calling those 8% notes that aren't due until 2020, that would have a certain return as of – that call price of 6%.

And our stock has returned nearly 20% just in the last week and a half. So, we just are comparing those alternatives. It just seems like right now is not a great time to be investing in the repayment of debt.

The change to our leverage ratio is pretty immaterial, 0.2 turns, and we think that having the flexibility to do this, particularly, we are very aware of the very material change in our stock price just in the last couple of months really on no fundamentals at all, but more on fear and on revaluation of hospital companies, which by the way, on an enterprise value, we've been hit a little less than our peers, but because the leverage, we've been hit more.

The leverage works the same way on the way up and that's where we expect to be. We're expressing confidence in our future and think that this, among other things, is a great investment. And we're not doing it at the exclusion of other investments that we'll make in our businesses..

Fair enough. Thank you..

And we'll take our next question from Josh Raskin with Barclays..

Hi. Thanks. First question on the USPI side, I think, Bill, you guys had mentioned a 5% to 6% long-term same-store growth.

But more interested in how do we think about the inorganic growth and what do you think's a reasonable center count growth in the future? And can USPI, can the JV self-sustain that or will that need capital to do so?.

Hi, Josh. Well, I think that we have a very robust pipeline, both for acquisitions of ASCs and surgical hospitals, and we also enjoy a nice cash flow. So, historically, we've – and it varies a lot from year to year, but historically we've deployed about $150 million in capital each year and we've got free cash flow of about that same amount.

So I think hopefully, we'll have even more success than $150 million. And if so, we would go beyond our free cash flow, but everything that we, or most everything that we buy will be cash generating. So I think we're in good shape there..

And Bill, just remind me, when you guys buy the....

I'm sorry. I didn't answer your question. You had asked in terms of number of facilities, and we really don't look at it....

Yeah..

...that way because there's such a huge variation in the size of what we acquire..

Okay. And then just as a reminder, you guys typically get – you ramp up those new centers. They typically run company average margins within about a year, right? It's pretty quick as I remember..

Yeah, a year, year and a half..

Yeah. Okay. And then second question just on Conifer now. I think Dan, last quarter you'd said that the fourth quarter would be a little bit stronger than the third quarter. I think you mentioned you could do a little bit more than the $260 million this year.

So just want to confirm, is 4Q expected to be up sequentially or did something move into 3Q? And then I think you'd previously mentioned some investment spending in Conifer that was impacting the EBITDA, and I'm just curious how much of that investment spending does not recur next year..

Hi, Josh. Good morning. Conifer had another good quarter, and we're really maintaining our outlook for the full year for Conifer of at least $260 million, maybe a little bit more. So nothing's really changed.

In terms of our investment over the past several quarters, we talked about – one of the items was ensuring that ICD-10 implementation went very well, not only for Tenet but for other customers of Conifer. So, we've been making some investments to ensure that has been successful. And so far, it has been.

And so, we'll continue to have a little bit of spend in the fourth quarter on that as well. So again, I'd say, we're going to ultimately deliver this year at least $260 million, maybe a little bit more for Conifer for the EBITDA..

But no way to quantify what that sort of incremental spend is that doesn't recur next year?.

In terms of 2016, we'll talk about that when we go out with our guidance next year in terms of what type of investments we'll be making on the Conifer side..

Okay. Thanks, guys..

And we'll take our next question from Kevin Fischbeck of Bank of America Merrill Lynch..

Okay, great. I just want to clarify, I guess, maybe one thing about this free cash flow guidance.

Is there anything unusual this year or is this both, I guess, the cash flow and the CapEx, are these both good numbers to think about as we build our models going forward?.

Good morning. In terms of – as far as modeling cash flow going forward, we certainly think we're going to grow from here from our free cash flow that we're targeting in 2015. So, we think we can grow that into the future. We'll certainly provide more visibility regarding our investments that we anticipate making next year.

And so, getting back to the capital spend, we do have several new platforms coming that have come on board in Birmingham and Tucson. And so, we'll obviously take that into consideration. And so looking beyond the growth in the USPI business, that's going to continue to generate strong free cash flow.

On the hospital business, Conifer's doing a really good job in terms of AR management. So we think we're going to be able to continue to grow free cash flow next year. In terms of your point or question about was there anything unusual, I wouldn't say it's unusual.

We're finally getting a little bit of money in from these large state supplemental Medicaid funding programs. So we got a little bit more money this year compared to last year. But those numbers, they can move around a little bit. But we're obviously pleased with what we've been able to drive so far this year..

Okay. The other question would be on the cost side because that was one thing that seemed to pressure a lot of your peers, and it didn't impact you this quarter in the same way. And I appreciate the comment that you guys obviously maybe have a company-specific dynamic around synergies coming in through Vanguard.

If you didn't have Vanguard synergies outperforming, would you still have been able to bring that number down? Because it seems like a pretty good result, particularly in the context of the commentary you made about growing high acuity volume of that would have (50:54) increased adjusted admission costs..

Yeah. I just wanted to – this is Trevor.

I wanted to ask Britt to comment on labor management because these problems that you've heard about on contract labor and so forth that were not evident for us in our quarter, we had had those problems earlier in the year and even in the last half of last quarter, but I think our operators did a great job of managing labor in the quarter.

You want to speak to that, Britt?.

Absolutely, Trevor, and good morning, Kevin. As Trevor alluded, we saw record volume in 2014, and at times were challenged to match the labor with that and used a lot of expensive overtime premium. What I'm really proud of our operators on is, as we've stepped through the first half of this year, we've continued to have robust volume.

And then, as we've alluded and commented on, we had a drop on the inpatient side in the third quarter. We haven't talked much about the reasons today, but what I'm really proud is, is that we have matched the staffing with the volume throughout the high periods and in the lower periods.

And more specifically, as you looked at the hospital business, I'm really pleased with the contract labor being down. As Dan mentioned, 15% per adjusted admission, taking the volume into account year-over-year. It slowed down sequentially from quarter to quarter.

So, this is something that we put in place a long time ago to make sure that we could be nimble in periods of up and down. And then, the last comment I would make to that, and it gets a little more granular, but I think you guys deserve to know that.

As you look at how we provide care, oftentimes we use our own internal folks on a premium labor basis, be it overtime or other aspects. Our overtime number in this quarter is down 6.5% per adjusted admission, and our salaries and wages, specifically, the salaries and wages on the hospital segment, is down just right at 1% or a little less.

So, if you look at all those productivity measures and matching staffing to volume, I'm really pleased with our operators..

But you're not seeing any kind of broad-based labor wage pressure or anything like that in your markets?.

I don't. And I think primarily for several reasons, but the most important being that this is something we've worked on with various aspects of our organization to look at how we're hiring folks, retaining folks, recruiting folks, orienting them, having them nimble, shifting more to a full-time employment rather than using PRN or periodic staff.

So, we think we're in a spot where we're nimble, and I really don't see a challenge going forward..

All right, great. Thanks..

And we'll take our next question from Andrew Schenker with Morgan Stanley..

Thanks. So good morning. Just for the high acuity cases, I wonder if you could provide a little bit more color there.

You mentioned the investments in key specialty areas, so should we interpret that really as you're gaining share or you also see maybe better commercial mix or more elective procedures? Anything else supporting those high acuity cases? Thanks..

Good morning, Andrew. This is Britt. You've heard us on many conference calls going back several quarters and actually years, where we've invested in the high acuity inpatient surgical-oriented programs, and that's technology, that's physicians, that's training of our staff and that's breadth of the service offerings.

Those are particularly in neurosurgery, very much so in orthopedics and all the aspects of orthopedics including spines, joint work and complex ortho procedures, surgical on the infectious disease, which was a high utilization particularly in this quarter.

And then also on the non-surgical side where it's very important in certain marketplaces on the neonatal intensive care units, we've seen growth. So, those are all places where we've deployed capital, time, attention and efforts to grow that business. And we've seen that and we continue to see that.

As you look at our volume in this quarter, and Dan alluded to this earlier, we had low acuity drop-offs in behavioral and pulmonary disease. And the pulmonary disease was very understandable compared to the earlier onset of flu and respiratory last year, pretty atypical in the third quarter in the industry.

So, what we've seen is higher growth in acuity, and we attribute that to effort, focus, moving market share, recruiting high-profile positions where necessary, and really just focusing and doubling down by our operators..

Okay. Great. And then just real quick, you highlighted the uninsured admissions increases in Florida and Texas. Can you maybe just talk about what's happening in those markets? Is it change in the economy, people dropping off the exchanges, anything worth highlighting there? Thanks..

Good morning, Andrew. This is Dan. So, when we looked at our trends in those particular markets, in aggregate, let me just frame everything here. So, our uninsured volumes were up slightly, about 3.7% across the entire portfolio which is a little less than 400 admissions.

And year-to-date obviously, the aggregate population of those patients that we've been servicing has actually declined as we've talked about throughout the year. In those two markets, we did see an uptick in the third quarter.

We don't think it's – as Trevor pointed out in his remarks, we feel very confident about what we can generate in terms of additional growth from exchange patients as well as some growth in Medicaid expansion states. So, there's nothing in particular that we saw that seems like a trend that we are overly concerned about..

Andrew, this is Britt. I would simply add too that in Texas and Florida, Trevor alluded earlier, we saw overall about a 50% increase in exchanges and in Texas and Florida, they were materially higher on the exchange growth in those states. So, we're definitely not seeing any degradation of the exchange in those key areas..

Great. Thank you..

And gentlemen, I'll turn the call back over to you for any additional or closing remarks..

Okay. Thank you, operator. And we just wanted to be sensitive to the fact there's another company with a call beginning in a minute here. So, thanks to everybody and we'll see you on the next call in February..