Trevor Fetter - Chairman, President & Chief Executive Officer J. Eric Evans - President-Hospital Operations Daniel J. Cancelmi - Chief Financial Officer Keith B. Pitts - Vice Chairman William H. Wilcox - Chief Executive Officer & Director, United Surgical Partners International, Inc. Stephen M.

Mooney - President & Chief Executive Officer, Conifer Health Solutions LLC Clint Hailey - SVP, Chief Managed Care Officer, Tenet Healthcare Corp. Jason B. Cagle - Chief Financial Officer, United Surgical Partners International, Inc..

A.J. Rice - UBS Securities LLC Joshua Raskin - Barclays Capital, Inc. Whit Mayo - Robert W. Baird & Co., Inc. (Broker) Sheryl R. Skolnick - Mizuho Securities USA, Inc. Kevin Mark Fischbeck - Bank of America Merrill Lynch, Inc. Chris Rigg - Susquehanna Financial Group LLLP Brian Gil Tanquilut - Jefferies LLC Matthew Borsch - Goldman Sachs & Co.

Sarah James - Wedbush Securities, Inc. Ralph Giacobbe - Citigroup Global Markets, Inc. (Broker) Ana A. Gupte - Leerink Partners LLC Gary P. Taylor - JPMorgan Securities LLC Andy Schenker - Morgan Stanley & Co. LLC.

Good day, everyone and welcome to the First Quarter 2016 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 forward-looking information included in the slides. I would now like to turn the call over to Trevor Fetter, Tenet's Chairman and Chief Executive Officer. Mr. Fetter, please go ahead, sir..

Thank you, operator, and good morning, everyone. Our results in the first quarter make it one of the best that I can remember. We're off to a stronger than expected start to 2016, driven by solid results across the enterprise.

In addition to strong operating performance, the acquisitions, divestitures, joint ventures, and other strategic moves that we completed over the last year have improved our business by delivering solid results and they've positioned us well for the future.

As you can see on Slide 3, EBITDA was $613 million, above the high end of our outlook for the first quarter. The upside relative to our expectations was driven by great results across all three businesses with exceptional performance coming from our Ambulatory segment.

Performance continue to be strong in our Hospital segment, where same hospital patient revenue grew 6% with a 2.2% increase in adjusted admissions plus a 3.7% increase in revenue per adjusted admission.

Our strategy to pursue higher acuity inpatient admissions, such as orthopedic surgery, cardiothoracic surgery, and trauma, continues to help us drive both volume growth and improvement in our revenue per adjusted admission. Our Ambulatory segment performed very well this quarter and continues to deliver strong same-facility growth.

Same-facility system-wide revenue increased 11% on a pro forma basis, driven by an 8.6% increase in cases and a 2.2% increase in revenue per case. It's clear that consumers and payers have a preference for healthcare services that are offered in lower-priced, more convenient settings.

We believe this trend will continue, so we'll keep making disciplined investments in our Ambulatory segment. This will include acquisitions of new centers, construction of new outpatient facilities, and investing to increase our ownership of USPI over the next four years.

To that last point, in April we invested $127 million to buy a little more than 6% of USPI, increasing our ownership to 56.3%. Conifer also delivered solid results this quarter with a 20% increase in revenue from third-party customers. EBITDA was $63 million, which was slightly ahead of our expectations.

Conifer faced a very difficult comparison this quarter, following the exceptionally strong results in the first quarter of 2015 due to the nonrecurring income related to the extension and expansion of the Catholic Health Initiatives contract. Conifer remains on track to deliver the results that we outlined earlier this year.

Turning to cash flow, we've been very focused on increasing our cash generation over the past several years, and also on communicating with investors exactly how we'll accomplish that. Adjusted free cash flow improved by more than $200 million compared to the first quarter of 2015.

And our results this quarter were the strongest first quarter result in a decade. For all of the reasons we discussed on our last earnings call, we expect to grow free cash flow in 2016 and have outlined a path to meaningful improvement again in 2017.

Reflecting on our accomplishments, on our first quarter call last year, we discussed a number of actions that we were taking to align Tenet with the major trends impacting the delivery of healthcare.

We emphasized our plan to shift our portfolio toward faster-growing, more profitable and less capital intensive businesses, including increasing our outpatient services offerings through our partnership with USPI.

We said we intended to develop scale in our local markets and were willing to exit markets if we believe the hospitals would be better positioned under another operator. We also shared our goal of being the partner and service provider of choice for not-for-profit health systems.

In the quarters that followed, we delivered on these objectives, culminating with the sale of our Atlanta facilities to WellStar on March 31.

We intend to continue pursuing outpatient acquisitions, and while we're always considering other acquisitions and divestitures to better position our hospital networks and enhance our service offerings, the transformation of our portfolio is largely complete.

Our results this quarter reflect the benefit of our diversified strategy, and I think this will become increasingly evident as each quarter passes. We announced in January that we'd commenced negotiations with the Department of Justice in order to try to resolve the Clinica de la Mama investigation.

Although as of today it remains unresolved, we believe that we've made significant progress toward reaching an agreement in principle on the monetary terms of a global resolution, meaning a settlement of both the criminal investigation and the civil qui tam investigation.

Last week, we made a global offer of $407 million, and because of that offer, we raised our reserve.

As a reminder, the government's allegation is that the contracts between four hospitals, three of our former Atlanta hospitals and our Hilton Head Hospital in South Carolina, and Clinica de la Mama, an unaffiliated company that operated prenatal clinics, violated the Anti-Kickback Statute at various times beginning in early 2000 through 2013.

In addition to providing prenatal care to predominantly undocumented and non-English speaking mothers, some of whom delivered babies at our hospitals, Clinica de la Mama provided translation, marketing, management and Medicaid eligibility services for the hospitals. As I mentioned, we're working with the government to settle the matter.

But it's important to stress that we cannot predict the timing or whether we will reach a resolution at all. As a practical matter, as we think about allocating capital to debt retirement and share repurchases, we will need to factor in the potential outcome of this matter as long as it remains unresolved.

Because our negotiations are ongoing, we will not take any questions on the topic and would refer you to the disclosure language in the 10-Q. Finally, we are reiterating our outlook for 2016 that we originally issued in conjunction with our fourth quarter results in February. We clearly had a strong start to the year.

However, it's still early in the year, and we believe that it's prudent to maintain our outlook at this time. Having exceeded the high end of our range for Q1, we're obviously gaining comfort in the upper half of our full-year range, since our outlook has not fundamentally changed in the past three months.

Before I turn the call over to Dan Cancelmi, I'd first like to introduce Eric Evans, who we promoted to President of Hospital Operations in March. Eric's an extremely talented executive and hospital operator who has consistently demonstrated the leadership skills and strategic talent needed to drive profitable growth in our hospital business.

Eric joined Tenet 12 years ago. Since then, he's been the CEO of two individual hospitals, the CEO of our El Paso market, and more recently the CEO of our Texas region.

He also spent two years in a management role at our headquarters, giving him insight into how our centralized functions can most efficiently and effectively support our hospital operations.

I'm grateful to Britt Reynolds for his contributions and wish him well in his new company, and I'd like to point out also that we have a strong bench in operations and were able to fill the position immediately without conducting a search. I'm delighted to have Eric in this role, and I think you'll agree as you get to know him over time.

Eric?.

exceptional quality care, high acuity growth, our continuum of care, and operational excellence. First and foremost, exceptional quality care. We will continue to focus on providing high-quality care for our patients and a supportive and positive environment for our team members and physician partners. Second, high acuity growth.

I will be driving our strategy to focus our hospitals on high acuity service lines that differentiate us in our markets. As Trevor mentioned earlier, smart investments in key service lines drove growth in higher acuity admissions this quarter. Third, continuum of care.

Working with Bill Wilcox and his team at USPI, we will enhance the alignment and collaboration between our hospitals, ambulatory centers and affiliated physicians. This remained a great opportunity for Tenet.

We know we can expand and better unify the continuum of care of our local healthcare networks and believe this will accelerate our volume growth.

In collaboration with Steve Mooney at Conifer, we're also identifying ways to make it easier and more attractive for patients to stay within the Tenet family once they have chosen to seek care at one of our access points. Our focus is to provide our patients with an enhanced service experience and improved care coordination.

When we do, our expectation is that they will return to us with their future healthcare needs. Fourth, operational excellence. We are building on and accelerating the operational scale advantages we have to drive cost efficiencies and growth. Expense management was solid in the first quarter, but we can always do more.

Our scale provides us the opportunity to quickly turn pockets of excellence into standards of excellence and to drive operational improvement. This is an exciting time and we have the right platform and the right strategies. With a keen focus on exceptional execution, I am confident we will deliver on our goals for 2016 and beyond.

I look forward to engaging with you and be happy to answers any questions during the Q&A session. I'd like to now turn the call over to Dan Cancelmi, Tenet's CFO..

Thank you, Eric and good morning, everyone. I'd like to start with a high-level summary of our financial results for the quarter. We generated adjusted EBITDA of $613 million that was above the high end of our outlook range, which is a great start to the year. Adjusted free cash flow improved by $215 million.

We produced adjusted admissions growth of 2.2% and we continue to grow key higher acuity hospital service lines. Our Ambulatory segment had an excellent quarter with incredibly strong same-facility system-wide growth. Conifer's revenues increased 13% and its earnings were slightly ahead of our expectations.

Finally, based on our strong results in the quarter, we are more optimistic about the 2016 outlook we provided in February. With that overview, I'll now provide some additional color on our results. As you can see on Slide 4, we grew adjusted admissions by 2.2%.

When combined with the 3.7% increase in revenue per adjusted admission, we delivered 6% growth in same-hospital patient revenue. Total admissions were essentially flat in the quarter and on 0.1%, which we anticipated given a less severe flu season and a tough year-over-year comp as Q1 2015 admissions were up 4.9%.

However, we drove increases in our higher margin, complex cases. Our strong acuity contributed to a 4.7% increase in same-hospital inpatient revenue per admission. Expansion of our hospital outpatient business remains an area of focus, and we continue to produce strong results with a 5.2% increase in hospital outpatient visits.

Also, the number of patients we treated that had exchanged coverage increased significantly, with our inpatient admissions up 28% and outpatient up 46%. All of this contributed to approximately 8% EBITDA growth in our Hospital segment this quarter after adjusting for acquisitions, divestures and HIT incentives.

Turning to cost, we continue to effectively manage our expenses. On a total hospital basis, our cost per adjusted admission increased 2.5% in the quarter, which is consistent with our expectation of 2% to 3% growth this year.

When we look at our income statement, you will notice that both SW&B and other operating expenses declined as a percentage of revenue. Our labor cost were only 1.7% higher on a per adjusted admission basis.

We continue to realize labor efficiencies from various (13:44) initiatives, including enhanced productivity standards being implemented across our hospitals and minimizing premium pay. We did see a 60-basis point increase in supply expense. This growth was primarily driven by our mix, including strong growth in both hospital and ambulatory surgeries.

Pharmaceutical companies continue to raise prices, which also placed some upward pressure on our supply expense. Moving to bad debt, as you can see on Slide 5, bad debt expense was 6.9% of revenue in the quarter, down 70 basis points from the first quarter of last year.

Uncompensated care as a percentage of adjusted revenue was 20.6%, down 120 basis points year-over-year. Part of this improvement was related to a decline in uninsured and charity admissions, which decreased 5.4% on a total hospital basis and 3.8% on a same hospital basis.

Turning to Slide 6, our Ambulatory segment growth continues to be extremely impressive. We added new details to the slide this quarter to provide you with additional visibility into the components of our volume growth. As you can see, surgical cases grew 9% and our imaging and urgent care cases were up 8.1%.

Slide 7 illustrates the solid historical performance of our Ambulatory segment across a number of key metrics. For the quarter, the segment generated pro forma EBITDA growth of 44.7%. Growth in EBITDA less NCI was equally impressive at 34.3%, and half of this growth was organic.

As you can see on Slide 8, Conifer generated adjusted EBITDA of $63 million, which was slightly ahead of our expectations for the quarter.

You may recall from previous disclosures that Conifer faced a very difficult comparison this quarter given the incremental revenue we realized in the first quarter of last year from the extension and expansion of our contract with Catholic Health Initiatives.

Also, Conifer is making targeted investments this year to further position itself for additional growth. Turning to cash flows, we generated $11 million of adjusted free cash flow this quarter, a $215 million improvement. On adjusted free cash flow on a GAAP basis also improved significantly, up $180 million.

Earnings growth, our strong cash flow generating Ambulatory business, and improved working capital contributed to the year-over-year cash growth. We continue to make strategic capital investments with $208 million of capital expenditures this quarter, up from $184 million in the first quarter of last year.

Looking out to next year, as we discussed in our last earnings call, we expect capital expenditures to decline by approximately $150 million as we complete several large construction projects and anticipate a corresponding improvement in free cash flow. In summary, we continue to realize the benefits of our diversified strategy.

One of the most important takeaways I hope you have this quarter is that we are delivering on the commitments that we made to reposition our portfolio for improved financial performance. This was clearly evident in the quarter with our adjusted free cash flow generation.

We're off to a strong start and are well positioned to achieve our outlook for the year. I'll now ask the operator to assemble the queue for a Q&A session.

Operator?.

Thank you. We will now begin the question-and-answer session..

Thank you, operator. And I'd like to just mention before we start the Q&A that we recognized all of you have three earnings calls back to back this morning. We would intend to end ours by about 10:55 Eastern Time and would like to take questions from as many people as possible.

So, if you could limit yourself to one question and one follow-up question, we'd appreciate it..

Thank you. And we'll take our first question from A.J. Rice with UBS..

Thanks. Hi, everybody. So, you can say you guys continue to do very well on managing the costs per equivalent admission and keeping that under control. One of the things for this year was going to be the benefit of moving the purchasing over to HPG.

Have you realized benefit there, or is that still in front of you? And is there anything else to highlight beyond the prepared remarks on particular areas of success in the cost side?.

Good morning, A.J. We did insource our purchasing functions as we talked about on our earnings call at the beginning of February, and we transitioned to our new GPO arrangement with HPG in February as well. We're off to a good start. Transition has gone very well.

We've begun to realize some efficiencies already from that arrangement and we anticipate as we move through the year and over the next several years, that we're going to continue to realize incremental benefits from that arrangement..

Right. And then....

And maybe in terms of our overall cost, very strong, effectively managed in the quarter. Labor continues to be well-managed by our operators. And we did see, as I put in my prepared remarks, some pressure on the supply side. But a lot of that was driven by our strong surgical growth in the quarter..

Okay. And then real quick on – obviously, one of the things you've been working on in the last year, and it's started to show the momentum here, has been the portfolio rationalization and sort of redeployment of the capital into high-growth, high-margin areas. I know there's been some discussion that there might be some additional things you could do.

Are there other things on the table? I don't know if you want to be specific about individual hospitals, but are you still looking at other things? And how might we see that unfold over the next year or two?.

A.J., it's Keith. We continue to work on strengthening our markets through acquisitions, JVs, ambulatory development and also potentially divestitures. And so we are working on – continue to work on things in a few places, but nothing that at this point in time is specific enough to mention..

Okay. All right. Thanks a lot..

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

Thanks. Good morning. Also want to talk a little about the capital deployment. I'm just curious if you could roll us forward from the end of the first quarter to where we are? Were there any additional proceeds? It sounds like you spent $127 million on the USPI portion of that getting acquired.

And then were there any other uses? I'm just trying to figure out sort of free cash flow as we go through the year.

My guess is CapEx starts to ramp down a little bit as well, right?.

Good morning, Josh. This is Dan. Obviously, we're off to a strong start to the year with the cash flow performance that we were able to deliver in the quarter. As we move through the year, our guidance at this point is unchanged. We anticipate adjusted free cash flow of about $500 million this year.

We will continue to make strategic investments on the Ambulatory business of approximately $125 million this year. Our capital expenditure spend for the year is in the $850 million to $900 million range.

We anticipate our free cash flow to grow as we move through the year, and as I mentioned earlier, when we look out to 2017, just starting off, we anticipate improvement of $150 million as some of these larger strategic investments we've been making in our Hospital business start to wind down..

Okay. And then, just a quick follow-up on the ASC business. At USPI, are you guys – look, I know you've been very successful with new partnerships on the health systems side.

Are you looking at relationships with large medical groups or even health plans that are looking for obvious cost savings for their surgery component?.

This is Bill Wilcox. We're primarily sticking with our historic strategy, in large part because there's so much opportunity within our existing Tenet markets. So we'll continue to expand relationships with our current health system partners. We'll selectively add new health systems, and we'll spend a lot of time working within our Tenet markets.

Now, that being said, as we take that strategy underway, oftentimes that involves groups like you just referenced. So we're by no means leaving those out. It's always a market-specific approach on a strategic basis..

Great. Thanks..

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

Hey, thanks. Maybe just for Bill. I mean, broadly speaking, I think we've seen pretty strong outpatient surgical growth for the sector. You've got your finger on the pulse with many health system partners.

Do you have any theories on why the sudden increase in demand and how sustainable you think this is? I mean, I get the physician, the patient, and the payer preference, but that's been the case for a long time. Just didn't know if you see any other trends at play here supporting the growth trajectory..

Well, I think that the current growth we have has – it certainly exceeded my expectations. But I do think it's a combination of tailwinds that are driving the growth.

We're starting to see – and this a different change – we're starting to see deliberate migration of cases to the outpatient setting, both from the payers and the patients as the patients become more and more of a consumer. Secondly, a new change has diminished competition from out-of-network players in some of our major – that's bolstered our growth.

And then we've done some things internally that we're proud of, and I think that's starting to come into play. I do think as these things anniversary that we'll get back to a more normal growth rate, although we'll continue to benefit from that migration..

Got it. And my follow up would just be around de novos. Just was curious how many centers you have under construction with or without health plan partners or is the focus still primarily on in-market acquisitions? Thanks..

That's a good question. We are seeing more de novo opportunities now than we've seen probably in the last 10 years. So there's been a nice array and they're not in any specific market, but we've got a pretty broad pipeline of de novos..

Great, thanks..

We'll take our next question from Sheryl Skolnick with Mizuho Securities..

Good morning, gentlemen, and a very nice job against a very tough comp with new businesses and nice new strategy..

Thank you..

I want to follow up – you're welcome. I want to follow up on something you said Trevor and I'm not going to ask directly about Clinica de la Mama for obvious reasons. But you did mention that it could affect how you think about capital deployment and I'm going to tie that to free cash flow as opposed to adjusted.

So, obviously you've got a bit more than you thought you did last quarter in potential cash settlement amounts, and if the sum is a nontrivial amount of $407 million that you might end up having to pay and maybe it's this year over the next 12 months or something like that.

So, to the extent that you have just gotten $575 million in cash that we thought might get deployed to either delever or grow the business, it sounds like you're going to be a little bit cautious about doing that.

So, can you give us an understanding of how your thinking has changed? And if we don't adjust free cash flow, what impact you might see on the business? I guess, what I'm worried about is this is going to be a use of cash and that might actually make the actual free cash flow rather than the adjusted free cash flow the amount you could spend be a little tighter this year than we might like?.

Yeah. And so, obviously, as I've mentioned, I can't say much more about the process that we've been engaged in.

But what I was trying to convey is that while this matter remains unresolved, we have been cautious with deployment of our capital resources, so that we would be in a position to reach a settlement and fund the settlement should we be able to do so and it's without commenting on the structure of a potential settlement or the amount.

And so, it was just, all I was really meaning to convey is to the extent that you had anticipated other uses of capital, here is a use of capital. We've given you our best estimate of the value of it by establishing our reserve, but we have had a cautious capital deployment posture while we have had this matter under negotiation..

So, said differently, is there an opportunity cost metric or something that we can think about that – I mean obviously, we can all do the math, but I want to make sure that we're thinking about this in the right context of how having an unexpected cash outflow relative to Street expectations, I'm sure you all were on top of it, might affect our thoughts about growth rates or the like? I mean I'm a little bit concerned here because of the difference between peoples tend to think adjusted free cash flow is what you really have to spend and a $400 million difference between adjusted free cash flow and real free cash flow could affect our estimates of growth rate.

Can you just sort of guide us in any way?.

No. I really can't. I mean it is – look, the business is performing better than you expected. So, there is more cash being generated by the business. Our portfolio of businesses is stronger and there is a potential use of cash, which will produce no return.

And so, I think you have to factor all of those issues into account as you think about the future and the value of the company..

Well, all I can say is that it is very clear that the business is performing excellently and that is certainly good from many respects, not the least of which is having the cash generation to pay what you have to pay, not just this item. Thanks very much for trying to help me. I appreciate it..

Okay..

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

Great. Thanks. The volumes improved nicely this quarter versus last quarter. Anything that you would highlight there as kind of the sequential change? Usually, we would have kind of thought that Q1 might be a little bit weaker.

Is it just leap year and mild weather season that help the higher acuity stuff come through? Or is there something else you would point to?.

Thanks for the question. This is Eric. I would say that really it's the core things we've been investing in around our higher acuity service lines. We've seen those continue to pay dividends. We've had very focused investments, really nothing flu or seasonal related as far as the volume, the 2.2% strong performance on adjusted admissions.

We appreciate you highlighting that. And we continue to see the programs that we've invested in and several of our markets perform really, really well..

Okay. And I guess you guys have talked about repositioning the portfolio.

And is there any evidence that that's really starting to change the growth profile of the company? Is there any way to kind of say things that you've done to get bigger local markets, those markets have outperformed or grown X versus Y somewhere else?.

Well, obviously, it's pretty early in that process. But certainly we do believe that as we exit markets where we're not – don't have as a big presence and we're in markets where we have a broader continuum of care that that will translate into being able to provide more services and a better service to those communities.

So we see that playing out over time. It's early to put too much into that..

Okay. Thanks..

We'll take our next question from Chris Rigg with Susquehanna Financial Group..

Hi. Good morning. Thanks for taking my question. Just wanted to come back to the supplies expense.

I guess, when we think about this going forward, is it primarily going to be driven by just business mix, so the bigger the Ambulatory segment gets, the more that will rise, or do you think that we're going to begin to see some progression on the group purchasing side so it does start to flat line here? Thanks..

Good morning, Chris. This is Dan. Certainly as we continue to grow our ambulatory surgical volumes and also our hospital surgical volumes, which we've been doing that, we've been demonstrating that here over the past year, that certainly places some emphasis on the supply line. However, it's generating very, very strong revenue growth.

So, it's more than offset by our revenue growth. But in terms – I would say we're very comfortable with our cost growth assumptions for the year of between 2% and 3%. We will be realizing additional efficiencies, not only from the new group purchasing arrangement with HPG, but also we've in-sourced our purchasing functions.

So, you will see a growing benefit from that as we move through, not only this year but over the next several years. So, we feel comfortable that we'll continue to be able to effectively manage our costs..

Right. And then another one on labor here. Obviously trends in the quarter were very good.

I guess, in some ways, so good that I'm wondering is this something that you feel is sustainable that you can continue to squeeze efficiencies out of that and you're given the people the right wage increases, things like that that you feel like this is in check for the foreseeable future? Thanks a lot..

Sure. This is Eric. I'll answer your question on labor. Obviously, we're very happy with our SW&B performance in the first quarter, up 1.7%. We actually feel that there's still additional things that we can execute on. We haven't fully implemented everything we want to do on our SW&B platforms.

So, our PMI team, you've heard us talk about in the past, continues to be very focused in that area and it is a place where we are confident we can continue to manage cost effectively..

Great. Thanks a lot..

And we'll take our next question from Brian Tanquilut with Jefferies, LLC..

Hey. Good morning, guys. Just a question on volume, just as a follow-up to that last one. Your same-store comps eased after Q1.

Should we think of that as an opportunity for accelerating same-store performance? And then how should we think about the seasonality factor? Does that change this year from say two years ago before we had exchanged plans in the market?.

Good morning, Brian. This is Dan. Let me address that one. So, when we think about our volumes this year, we're obviously off to a pretty good start in terms of volume growth, outpatient over 5% growth and inpatient was essentially flat, which I mentioned in my remarks, we anticipated that, again, the tough comp as well as the less severe flu season.

However, I just want to reemphasize, we're growing the higher end patient cases that we've really been focused on and we anticipate that continuing throughout the year. And in terms of, from a modeling perspective, at this point we're – for the full year, we're still targeting inpatient admissions in aggregate.

We haven't really changed our guidance there, essentially flat for the year. And we'll obviously re-evaluate our guidance after the second quarter..

Okay. And then, just on Conifer.

Do you mind just sharing some thoughts on what the sales pipeline looks like and if you're getting any new leads and new looks from larger hospital systems?.

Hey, Brian, it's Steve Mooney.

How are you?.

Hi, Steve Mooney..

Yes, the pipeline is still looking very strong. We continue to add to that. We're increasing our overall trajectory as far as that's concerned.

We've got – had seen a lot of singles and doubles on being hit across the organization in all three areas of our business lines; our value-based care business, our hospital revenue cycle business, as well as our physician services business.

As we've kind of discussed before, the hospital revenue cycle business, which is our largest one by far and has our larger size deals, is still rather lumpy. We get deals and we go for a period of time and help deals and we get another big deal.

So, right now, we're still absorbing a lot that we've done in 2015 with this contract, which was obviously very large for us and then renegotiation of the CHI contract that added 20 more hospitals to our portfolio.

We've installed about 17 of them last year and the remainder of those – one more goes in this year and the remainder of those we're still in planning and discussion. So we're still continuing, like I said, add to that pipeline is growing overall and then like I said, we're doing a lot of singles and doubles right now and things are looking good..

All right. Got it. Thanks, guys..

We'll go next to Matthew Borsch with Goldman Sachs..

Yes. Hi. Good morning. I was hoping maybe you could comment on the payor mix that you saw in the quarter. Obviously, on looking at it the ratio wise year-over-year a lot of strength in managed care and a decline in Medicare, Medicaid.

Can you put some context around that if you have any?.

Good morning, Matt. This is Dan. Let me address that. Our payor mix did improve in the quarter. We saw a decline in our uninsured volumes, as well as – we put it out in our release and want to make sure everyone knows that our exchange volume increased significantly year-over-year, which helped our payor mix.

The inpatient exchange business was up close to 30% and then the outpatient was up over 40%. So that contributed to the improved payor mix, as well as – keep going back not to keep re-emphasizing it, but the focus we've had on growing higher-margin, higher-acuity cases typically has a very attractive payor mix associated with it.

So growth in those service lines obviously has a beneficial impact on our payor mix. So obviously we're satisfied with the growth that we saw in the quarter in some of the services lines, which helped our payor mix..

Yeah. But just one follow-up question.

When you look – cut it geographically, is there anything that you can spike out in terms of areas of particular strength geographically, whether from your own efforts or organic trends in the industry or some combination of both?.

I don't think there's anything specific I would call out. I mean, in general, we have – across our geographies and regions, we have places that are up and down in a given quarter. But there's nothing to highlight in particular that would be of significance..

All right. Thank you..

We'll go next to Sarah James with Wedbush Securities..

Thank you. In the past, you've been able to shed some light on the acuity ramp by spiking out growth levels in categories like joint replacement or neuro.

Can you speak to growth in the major surgical categories?.

Yeah. I can speak to a little bit of that. So as we mentioned earlier, cardiothoracic, orthopedics, trauma, those are all areas that are up. I don't have all those figures in front of me. I would tell you from an orthopedic standpoint on the inpatient side, it was around 5%, and we've had strong growth in trauma and cardiothoracic, too.

So, again, it's been a common theme for us where we've invested, we've seen growth from those service lines, and we expect to continue to see that..

Got it. And I just want to understand -.

And this is Dan. Just one follow-up on that. Our acuity was – as I mentioned, our acuity was very strong, which drove very strong pricing realization for the quarter of close to 4%..

Thank you.

And then when you were talking about the payor mix in the previous question, I don't think we got directly to surgical trends in Medicare, because some of your peers have talked about Medicare surgeries coming up, but it kind of sounded like when you guys were laying out the land that it was more on the managed care, possibly the commercial side, with consumers coming in, driving up surgeries.

So I just wanted to understand better how that's trending in managed care versus Medicare?.

So I would say that we're seeing the higher acuity surgical growth in all parts of our business. It's not just managed care. Certainly, Medicare's a big part of that. Medicare was slightly up for the quarter, but in general, it's not certainly confined to just commercial. It's in the Medicare business as well..

Thank you..

We'll go next to Ralph Giacobbe with Citigroup..

Thanks. Good morning. Can you maybe talk about network designing in your markets? Are you seeing more narrow networks that maybe you're included in that some of your competition is getting squeezed out of? Or is that not really happening? And I guess the question is sort of broader, not just in the context of the exchange business..

Clint Hailey, our Head of Managed Care, is here with us, he will take that question..

Yeah. Thanks for the question. We've seen narrow-network growth over the last three years in both the broad traditional commercial category, as well as obviously in the exchange business. The way we look at it, pre-exchange, we were running about 5% of our inpatient admission volume through a narrow network type of arrangement.

And with the advent of exchanges going live, where we have about 50% to 60% of our inpatient admission volume coming through a narrow network, it pushed our overall narrow network volume up to about 11%. So we've seen pretty significant growth, but it's still a relatively small piece of the business in aggregate..

Okay. All right. That's helpful. And then separately, can you talk about the equity and earnings of affiliates line? Kind of came down meaningfully from the fourth quarter and seemed to maybe even hold back better EBITDA performance in the quarter.

I didn't see you change guidance in that, so just wondering if it's a seasonal thing or something else I need to consider..

Good morning, Ralph. This is Dan. I wouldn't say at all that our earnings were held back. USPI had a great quarter. They knocked it out of the park.

What you see happening on that line is just a transition of earnings accounted for on the equity method, where we had some centers that we did not have a majority interest in, and now we completed some strategic investments to acquire majority interest in those centers.

And when that happens, you begin to consolidate all the revenues, all the expenses. But the USPI business had incredible results in the quarter, well ahead of our expectations. So it did not hold back our earnings whatsoever..

Okay.

But can you help us on the seasonality? Again, fourth quarter was sort of closer to $50 million, then it's down to $24 million, and then I think guidance is for sort of a big step up – again, unless I'm looking at it wrong?.

No. This is Jason from USPI. I think if you look at the seasonality from Q4 to Q1 last year in that line, it's roughly the same proportion.

As you know, our business really spikes in the fourth quarter, so I think you're just seeing the expected decline from Q4 to Q1 because of the seasonality of our business and then the consolidations that Dan mentioned..

Okay. All right. Thank you..

We'll go next to Ana Gupte with Leerink Partners..

Yeah. Thanks. Good morning. I wanted to follow up on the payor mix and the bad debt. I think you just reported as far as I can see on a blended basis across Hospitals and the Ambulatory segment.

To what extent are you seeing – it seems like this quarter has been pretty good for everyone on bad debt, this improvement and you haven't really seen a spike even last year in the third quarter because there is prior authorization in the am-surg side of it versus this exchange enrollment and your payor mix is actually improving?.

Good morning, Ana. This is Dan. Let me address that. So, there's a number of factors impacting our improvement in our uncompensated care trends. One, we're growing our higher acuity business, which creates additional revenues. So we have very strong improvement in our revenue per yield – on a per case basis, which is driving very strong revenue growth.

Two, as I mentioned, our uninsured volumes were down 3.8% in the quarter, which certainly improves the mix and reduces the levels of bad debt expense.

The other thing I think is important to keep in mind, as we continue our diversification strategy and grow our ambulatory business, as you know, those businesses have very low levels of bad debt expense. So, as those businesses continue to grow, it has obviously a positive impact on our bad debt levels..

Okay. Just to follow up on that then.

Is there any color you can give us on what this looks like on the hospital side on its own? And you've been conservative, which is great on your guidance for your bad debt based on where your came out in the first quarter, what might you expect going forward particularly into the second half of the year on the hospital business, for you which is not the only driver obviously? But I'm just trying to get color for the broader sector as well..

Right. Let me just reframe this. Our total full year guidance for bad debts on a consolidated basis is in the 7% to 7.5% range for the full year. We'll reevaluate that after the second quarter. For the first quarter, we came in at 6.9%, which was down about 70 basis points compared to last year. So, nice trend there.

Specifically on the hospital side, as we continue to grow our hospital business, what we've been seeing is uninsured levels in various of our markets are declining. As I pointed out, our exchange business has improved significantly year-over-year.

Our exchange business in Florida and Texas in particular has been very strong, which is helping drive down our uninsured levels. Steve and his Conifer team have continued to do a really good job managing our revenue cycle operations and there's more room for improvement there..

Ana, this is Steve from Conifer. A couple of areas we're actually putting a lot of focus on, on the revenue cycle side, is patient responsibility and the point of service cash collections. Big area, we've actually had our highest collection rate in the last two years as we do our trending on that.

We're still seeing great results in our eligibility programs, getting patients converted from uninsured into state affiliated programs as far as that's concerned. And we saw overall cash dollars up year-over-year by about $9.3 million. So, a lot of focus on the areas around, obviously, patient responsibility, cash collections..

And we'll take our next question from Gary Taylor with JPMorgan..

Hey, good morning. First question is just yes or no. So, hopefully, it won't come against me. With the DMC class action settlement, was that reflected in the legal settlement and the cash amounts this quarter.

Is that done with?.

Yes..

Yes. Good..

It was..

Okay, good. And then my real question just on CapEx, thinking about your guidance into next year, stepping down $150 million or so.

Presumably that includes de novo spend on the USPI side? Or not necessarily?.

In our guidance next year for capital, when we referred to the $150 million decline in capital expenditures, that doesn't include the $125 million that we're projecting to invest this year. So, if you look at our cash flow statements, it's on a separate line.

The capital that we've been referring to, whether it's going to be $150 million step down is the traditional capital that you invest in your business outside of acquisitions..

Right..

This is Bill. Just let me clarify my comments on de novo. I don't want to set too high of an expectation. These are very small projects with very little capital requirements, the de novos. And we still are excited about the acquisition opportunities, which we highlighted would be about $125 million..

Got it. So the question is, when I look at CapEx is going from $850 million to $900 million this year, down $150 million or so next year. Even just on your legacy hospital net revenue, that's kind of perhaps mid 4-percentage point kind of range.

Historically, it looks like that's been for most of the industry 6% to 7% of revenues on CapEx for a couple of decades.

So, in an environment we're seeing non-profit CapEx picking up, do you feel that's a good number to hold or gain market share just because, I guess, a number of the assets, particularly in Detroit, are newer and won't need the same level of maintenance CapEx.

It just looks like that percent of CapEx is just historically low number heading into next year?.

Gary, I think you sort of hit the nail on the head by referencing Detroit as an example. We're coming off of a sustained period of time of relatively high capital spending in the previous Vanguard markets where there were the large capital commitments, new hospitals constructed, new towers continuing to be under construction.

And in the Tenet market, such as El Paso where we have a new hospital continue to be under construction, a major reinvestment in two existing hospitals, a third relatively new hospital being expanded for the third time. So we had to pre-capitalize a lot of our markets, if you want to think of it that way.

And what we conveyed in the last quarter was that many of those sort of extraordinary expenditures including new hospital construction, the towers, et cetera, would naturally reach a point of conclusion..

And our final question today will be from Andrew Schenker with Morgan Stanley..

Thanks for the question. So, first of all, just a quick one here. Exchanges, obviously, that you highlighted a few times, the magnitude of the growth was in excess of what we were expecting here.

Were there any changes in your network participation or the positioning of your managed care partners that may have driven that? And then related to that, there's been a lot of investor concern around the sustainability of exchanges, particularly around United's comments about exiting markets.

I mean, how do you think about the sustainability and the health plan participation within your markets? Thanks..

I'll just make a quick comment and then ask Clint Hailey to fill in. But we've done very well on the exchanges. We're well positioned. Of course, our perspective on this question is completely different than the perspective of the insurers.

What we really care about is people having insurance coverage, having lots of choices in the competitive market, and in the markets that we serve that has been the case. And there have been willing significant participants, namely in the form of the Blue Cross insurers that have created robust markets in the places that we operate..

And I would just add that I think it's important to acknowledge that the exchange enrollment growth in our states was actually higher than the national average by a little bit. It was about 13% in our state, so that obviously played a role in volume growth that we saw.

That said, we also improved our positioning on the lowest-cost silver plans, which is where the majority of the enrollment is on exchanges. We're in 88% of the lowest-cost silver plans in our markets. And last year, we were in 83%. In the first year of exchanges, we're in 79%.

So, that continued improvement in our positioning I think has helped us as well. In addition, I mentioned earlier the 50% to 60% of our volume on exchanges is coming through neural networks. There's no doubt neural networks have helped this.

One final thing I would add is we looked at with all of the United's states that they are exiting what the impact on that would be for us. In overall markets, we're in 77% of all the exchange options in our markets across the country. And if United was out of – was gone today, we would be in 80% of all the options in exchanges.

So we have not been positioned as well with United as some of the other plans..

Okay. Thanks. And maybe just to squeeze one last question to end it on. You obviously outperformed in the quarter. I understand you don't want to give update guidance until the second quarter.

But maybe just as an ending summary here, if you could just remind us or summarize for us all the points where you outperformed in the first quarter? It sounds like surgeries, bad debt and Conifer to name a few.

I mean, how we should – how those factors are likely to trend going forward i.e., is there any reason those factors where you outperformed really would be one-time? Thanks..

Andy, it's Dan. Let me hit that. The outperformance was across in the entire portfolio. All three of our business segments outperformed our expectations.

The hospital business 8% EBITDA growth after you normalize for the acquisitions and divestures, very strong growth, strong acuity, solid adjusted admissions growth and in the right service lines as well. USPI, one of our other segments just knocked it out the park, as I mentioned, almost 9% surgical growth.

Their imaging business continues to grow in the same type of level. The urgent care business is growing nicely. So again, USPI had EBITDA minus NCI growth of 34%, half of it was organic. So, that segment has really killed it. Conifer had a very good quarter, too. Ahead of our expectations, grew its revenues in total 13%.

But one thing I want to point out, the revenues from third parties, they increased 20%. We continue to provide additional services to Catholic Health. The Dartmouth-Hitchcock arrangement continues to go very well, which we just started providing services in the second half of last year. So, all three of our business units did very well.

We're off to a good start. We are obviously optimistic about the rest of the year, but it's early and we will reevaluate our guidance after Q2..

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