Trevor Fetter - Tenet Healthcare Corp. Daniel J. Cancelmi - Tenet Healthcare Corp. William H. Wilcox - United Surgical Partners International, Inc. Clint Hailey - Tenet Healthcare Corp. J. Eric Evans - Tenet Healthcare Corp. Keith B. Pitts - Tenet Healthcare Corp. Stephen M. Mooney - Conifer Health Solutions LLC.

Joshua Raskin - Barclays Capital, Inc. A.J. Rice - UBS Securities LLC Sheryl R. Skolnick - Mizuho Securities USA, Inc. Kevin Mark Fischbeck - Bank of America Merrill Lynch Ralph Giacobbe - Citigroup Global Markets, Inc.

(Broker) Gary Lieberman - Wells Fargo Securities LLC Chris Rigg - Susquehanna Financial Group LLLP Justin Lake - Wolfe Research LLC Whit Mayo - Robert W. Baird & Co., Inc. (Broker) Ana A. Gupte - Leerink Partners LLC Gary P. Taylor - JPMorgan Securities LLC Matthew Borsch - Goldman Sachs & Co..

Good day, everyone, and welcome to the Third Quarter 2016 Tenet Healthcare Earnings Conference Call. My name is Dena and I'll be your operator for today's conference. 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 will now turn the call over to Trevor Fetter, Tenet's Chairman and Chief Executive Officer. Mr. Fetter, please go ahead, sir..

Good morning, everyone, and thank you for joining us today. Let me start by saying that I'm pleased with our overall performance during the quarter. We met our EBITDA outlook range and we achieved great results in our Conifer Health and Ambulatory Care segment. These results demonstrate that we're building a stronger, more diversified portfolio.

And with that overview, I'd like to now provide a summary of our performance during the quarter. We generated net operating revenues of $4.85 billion, which is an improvement of 3.3% over last year. As you can see on slide number 3, we achieved adjusted EBITDA of $570 million.

This was within the outlook range that we provided in August and just shy of the midpoint. Our health plan business accounted for the shortfall, negatively impacting adjusted EBITDA by $5 million in the quarter. We delivered solid volumes in our hospitals, including adjusted admissions growth of 1.4%. Same-hospital patient revenue increased by 5.3%.

And in keeping with our strategy to enhance key service lines, we once again drove increases in higher acuity admissions. This continues to have a positive impact on revenue per adjusted admission quarter-after-quarter.

All told, hospital segment EBITDA increased 5% after normalizing for acquisitions, divestitures and an anticipated decline in EHR incentives. USPI and Conifer delivered exceptional performance. Our Ambulatory segment achieved broad-based growth across every key metric.

Surgical volumes were strong and we also achieved growth in visits to our imaging and urgent care centers. We were particularly pleased by the growth in same-facility system-wide revenue and the strong results for EBITDA and EBITDA less NCI.

Conifer had a strong quarter with a 30% increase in revenues from third-party customers and EBITDA of $79 million. New contract momentum for Conifer also picked up. I want to point out that we're seeing an overlap of two dominant themes; winning key contracts and expanding existing relationships. Verity Health is a great example.

Last month, Verity selected Conifer to provide comprehensive revenue cycle solutions for six hospitals in California. This was a significant win for Conifer.

What's also important here is that Verity was already a Conifer client in value-based care, which further underscores the opportunity that we have to deepen our relationships with existing clients.

In addition to Verity, Conifer expanded service agreements with other current clients in the past few months, those in the value-based care and physician revenue cycle management. Conifer also won an important scheduling contract for Jackson Health System, which is a not-for-profit system in Miami.

For the fourth year in a row, Conifer ranked number one in the Black Book Revenue Cycle Management Outsourcing survey for large hospital systems and medical centers. As we said before, outsourcing the revenue cycle function is a big strategic decision for hospitals and establishing a strong reputation is critical.

We're particularly proud of Conifer's leadership in this area. Many of you've asked about further opportunities to sharpen our hospital network. We completed several transactions over the last 18 months to improve our positioning in hospital markets or exit those where we didn't see a path to achieve scale.

This continues to be a focus of Keith and his team, and it remains our intention to actively manage and improve the strategic position of our portfolio. The portfolio strengthening is consistent with our strategy over the past few years. It's important to remember that five years ago, we had a number one or number two position in 14 of our 25 markets.

We both diversified and improved the strength of our portfolio since then, and we've now increased that number to 18 out of 25 markets.

Now, of course, the 25 markets today are not exactly the same as five years ago, but the point is that through active portfolio management, we now operate more hospitals in the same number of markets and have a higher proportion that are in the top-two market share positions.

Turning to health plans, we continue to believe that it's very important to have significant expertise in managing care in a value-based environment. We have deep experience and a proven track record in this area, both within Conifer and Tenet's hospital operations.

For example, we have more than 800,000 covered lives in our 18 accountable care organizations, and Conifer manages care for 5.8 million lives through its value-based care services. The health plans business we acquired with Vanguard is not a core element of our capabilities in value-based care.

It's subscale and not profitable in aggregate and it requires capital. So, we are exiting it. As part of this decision, we've discontinued ACA Exchange product in 100% of our markets, as well as our Medicare Advantage business in Arizona effective January 1, 2017.

In addition, we signed a definitive agreement to sell Harbor Health Plan in Michigan and we expect to exit our remaining health plans in Arizona and Texas next year. As you know, our operations were disrupted in early October by Hurricane Matthew.

I'd like to recognize the people who led our corporate Incident Command Center here in Dallas, along with our management teams and employees in Florida and South Carolina.

As Dan will explain, this was a significant storm for Tenet, with several facilities affected for at least one or more days, including more than a dozen hospitals, more than 50 outpatient centers and one Conifer center. Our preparedness and response to the storm was the best that I've ever seen.

In summary, we delivered solid results for the quarter and our diversified portfolio is enhancing our overall performance. Our focus on higher acuity inpatient services lines is the right approach for growing our hospital business. And the growth pipelines for USPI and Conifer are particularly strong.

We remain excited about several important initiatives in the company. These include Conifer's collaboration with our hospitals on pilot programs to improve our revenue cycle and value-based care offerings. We're also creating synergies between our hospitals and USPI, where we're working to increase access points either in Tenet markets or in new ones.

And obviously, we're looking to deepen our partner networks together with Conifer and USPI. And with that, let me turn the call over to Dan Cancelmi, our CFO..

Thank you, Trevor, and good morning, everyone. We continue to generate growth across those three business segments in the third quarter with solid performance at our hospitals and very strong results at USPI and Conifer. We generated adjusted EBITDA of $570 million.

As Trevor noted, the results for our health plans were roughly $5 million below our expectations for the quarter, and the key reason, our EBITDA was slightly below the midpoint of our outlook.

Same-hospital revenues grew 5.3% and adjusted EBITDA in our hospitals segment increased 5% after adjusting for acquisitions, divestitures and a decline in health IT incentives. Revenue in the Ambulatory segment increased 9.7% on a same-facility system-wide basis, and adjusted EBITDA less facility-level NCI increased 21%.

Conifer's EBITDA increased nearly 30% and revenues from third parties were up by the same amount. And finally, adjusted free cash flow was $368 million in the first nine months of the year, putting us on track to meet our outlook for 2016. 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 1.4% and admissions by 0.4% in the quarter.

We continue to grow our higher acuity service lines, such as orthopedic surgery, cardiac procedures and trauma, which contributed to our strong revenue per adjusted admission growth of 3.9% Turning to costs, our hospital operators did a great job managing labor and supply expense during the quarter.

Labor increased just 1.4% on a per adjusted admission basis and supplies were only up 0.9%. Other operating expenses increased 7.7% on a per adjusted admission basis, which is consistent with last quarter. Approximately one-third of the increase is due to growth in our health plan business.

As I mentioned on our call in August, the incremental health plan costs were attributable to an increase in covered lives and were substantially offset by higher health plan premium revenues. In total, our cost per adjusted admission increased 3.1%.

And if you exclude the health plans, total hospital segment cost increased 2.1%, which is a good performance. Moving to bad debt, as you can see on slide 5, bad debt expense was 7% of revenue, an improvement of 30 basis points from the third quarter of last year despite an increase in uninsured revenues.

Strong growth in our Ambulatory and Conifer businesses was a key driver of our improvement in this metric. Uncompensated care as a percentage of adjusted revenue was 21.4%, also down 30 basis points. Turning to slide 6, our Ambulatory business delivered 9% revenue growth.

Our case volumes were strong in our surgical facilities and we grew volumes in our imaging and urgent care centers. And we continue to drive improvements in acuity at USPI surgery centers and surgical hospitals, which contributed to revenue per case growth of 5.5%. Slide 7 provides additional details on the performance of our Ambulatory business.

For the quarter, we generated EBITDA growth of 28.7% and EBITDA less facility-level NCI growth of 21.2%. These are very impressive results. While we do not anticipate growth rates to remain at these levels indefinitely, we believe we will continue to achieve strong growth in this segment next year.

As you can see on slide 8, Conifer generated adjusted EBITDA of $79 million, which is an increase of 29.5% over last year. Third-party revenue was up 30% with about a third of this growth from customers who acquired certain hospitals we sold that selected Conifer to provide them with revenue cycle services.

Conifer's results included $9 million of annual customer performance incentives, which we had anticipated in our outlook for the quarter. It is important to note that Conifer has the ability to earn these incentives again in future years, although the size of the incentives and when they are earned can vary.

We are pleased that Conifer was recently selected by the Verity Health System in California to provide revenue cycle solutions over a six-year contract period. We plan to make investments to onboard Verity's hospitals over the next year, and we expect this to result in positive returns in subsequent years. This is typical for these types of contracts.

Turning to cash flows, we generated $368 million of adjusted free cash flow in the first nine months of the year. We continue to be very focused on cash flow generation and remain on track to produce $400 million to $600 million of adjusted free cash flow this year.

At the midpoint of $500 million, this is about $100 million higher than what we achieved last year, and we expect further improvement in 2017. As we've mentioned in prior quarters, we expect capital spending to be approximately $150 million lower next year as various hospital projects are completed.

Slides 9 and 10 provide the details of our revised outlook for 2016, including adjusted EBITDA in the range of $2.40 billion to $2.45 billion which, at the midpoint, is growth of 6.5% over last year. We are lowering the midpoint of our 2016 EBITDA outlook by $25 million or about 1% for a few reasons.

First, to reflect the year-to-date results of our businesses, including an additional $17 million of malpractice and workers' comp expense during the first nine months related to a decline in the discount rate.

Second, we now anticipate about $20 million of losses on our health plans in 2016 with $5 million in the third quarter and another $15 million in the fourth quarter. To put this in perspective, we generated about $400 million of revenue in the health plan business and $16 million of EBITDA in 2015.

And we previously assumed that our health plans this year would remain modestly profitable. So far this year, we have generated $400 million of revenue through nine months and incurred $6 million of losses on our health plans. As Trevor mentioned, we are exiting the health plan business next year.

The third item relates to Hurricane Matthew, which resulted in a loss of patient volumes in early October at our facilities in South Carolina and Florida. Some of our facilities were evacuated, while others operated on an emergency basis for a few days.

We have been fully operational at all of our facilities for several weeks and have been working with patients and physicians to reschedule elective procedures, but we do not anticipate recovering all of the volumes. At this point, our best estimate is that the hurricane will lower EBITDA by $5 million to $10 million in the fourth quarter.

The items that I just mentioned primarily affected the hospitals segment and were partially mitigated by a $20 million increase in our full-year 2016 outlook for our Ambulatory business and a $5 million increase for Conifer. I would also like to spend a few minutes talking about Humana.

As you may have read, as of October 1, we are out of network on a nationwide basis. Humana, like all of our health plan relationships, is a valued customer. We also value our relationships with the Humana members that we treat and their physicians. Our facilities provide compelling, high-quality services at attractive values.

Tenet is willing to invest in the long-term health of the business by working through short-term disruptions. For now, we think you should assume that there will be some impact on our volumes in the fourth quarter if we remain out of network.

We believe it is in the best interest of our mutual patients and physicians to negotiate a new contract on reasonable terms. In summary, we produced solid results this quarter and are taking steps to further enhance profitability, including exiting the health plan business.

In light of the factors that I just discussed, our expectations for our results in the fourth quarter have moderated a bit, but the underlying trends in our core businesses remain strong. We are optimistic about the opportunities in 2017 for our hospital markets, Ambulatory centers and Conifer.

We will discuss this further when we provide our outlook for next year on our earnings call in late February. 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. And we'll go first today to Josh Raskin with Barclays..

Thanks. First one is just a clarification, Dan. You mentioned the $17 million, the malpractice and workers' comp headwind from changing the discount rate.

Was that a change in assumption in 3Q or has that impacted the first half as well?.

Good morning, Josh. No, that impacted the first half of the year, primarily. But when we updated our guidance for the full year, we certainly took that into consideration when we evaluated the range of possibilities for the full year..

I guess, more specifically, Dan, did that change your – was that a change in our guidance? Was that included in the guidance after 2Q or was that an update this time?.

It was included in our results through the second quarter and it was certainly included within our overall range of possibilities at that time..

Okay. Okay. Understood. And then, just on the ASCs, you continue to see really strong growth there. It seems like it's much more same-store for you guys, a little bit less in the development side, I think your center count was down in the quarter.

Are you paring back that sort of growth capital, or using the center count grows after this quarter, was it just sort of idiosyncratic events into 3Q? Or how should we think about ASC or USPI, broadly, growth for the future?.

Hey, Josh. This Bill Wilcox. I think we're very optimistic both on the organic and inorganic level. The last seven quarters have really been – exceeded our past performance and future expectations on a same-store growth basis. And then, on the acquisition and de novo front, our pipeline has been very – is very robust and will continue to be.

And we've got a lot of exciting opportunities to deploy capital there. What you're seeing, with the slowing down of the facility count, is in certain markets we're either shutting down programs or merging programs into a more successful one..

Okay.

So, I shouldn't read into it as more competition for acquisitions or even de novos or anything like that?.

No. The acquisition competition is as competitive as it's always been, but we'll win our fair share there. And the de novo pipeline is more robust than it's been in 15 years..

Okay. Okay. Thanks, guys..

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

Hello, everybody. We often ask you about what you're seeing in managed care contracting going into next year, and where you stand on your re-contracting, if there's any change in terms.

I would just expand a little bit over what we normally ask, because you've restructured the portfolio and taken out some of the – I guess I'd describe them as weaker names. Does that change your approach in terms of looking for more substantial increase? I know some of your contracts are national based.

How has the restructuring of portfolio changed your approach to contracts, if at all?.

A.J., it's Trevor. Let me start and then I'll hand it to Clint Hailey, our Head of Managed Care, who's here with us this morning.

The point of really illustrating the changes in the portfolio and our increase from 14 out of 25 markets being number one or number two in those markets to 18 today with a much larger portfolio, so obviously those are more concentrated markets. They're markets where we have a much greater presence and our market share position is stronger.

That's all part of a very clear strategy to position ourselves more effectively for the future in a world where managed care is more consolidated, value-based care is more prevalent and access points are also more important.

We've obviously had a very dramatic increase in the number of access points into our system, both through our outpatient initiative that we began in 2008 and then, of course, with the expansion through USPI. So, it's all part of a very clear strategy within the hospitals segment to build strength.

I'd also just comment that notwithstanding Dan's comments about Humana that we have, generally, very favorable relationships with our payers and have a – continue to have an in-network strategy across our markets. And, Clint, I guess I'd just ask you to comment on the environment generally and what you see out there in the world of contracting..

Sure. Thanks for the question, A.J. So, I would start by echoing Trevor's comments about the way we contract. So, we contract at the broadest level possible. So, either statewide in the case of a Blues plan or nationally in the case of the national plans.

And exiting a couple of our states, obviously, obviated the need for us to contract with those Blues plans anymore and focused our efforts on the remaining plans.

In terms of changes in the contracting, we talk to health plans a lot more now about our clinically integrated networks, which is very different from three or four years ago, when we talked more about unit price on hospitals, was really a primary thrust of our conversations and we still have those conversations.

But we also talk a lot more about shared savings arrangements and things of that nature that are much more interesting and contemplate more aligned incentives than in the past..

Okay. Great. Maybe just a quick follow-up on the supply expense. Obviously, that was one of several areas you've highlighted as showing good trends there. I know you have a new purchasing contract there.

Is that at play, or is there still opportunity in front of you on that? And any other things you'd highlight on supply expense?.

Good morning, A.J. This is Eric Evans and I appreciate the question. Obviously, we're extremely pleased with our operators' performance on managing our costs, both in labor and supplies. On the supply line, at 0.9%, obviously impressive performance. It does include a portion of the GPO transition.

But I'll tell you, we're only nine months into that, and there's certainly additional things we're working through. We feel that we still have continued opportunity for the foreseeable future on the supply chain side and continue to do a great job in multiple categories, including we've done a much better job this year in the pharmaceutical category.

So, all in all, it was a great quarter there and we see sustainability in that performance..

Okay. Great. Thanks a lot..

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

Let's not forget the past, you were one of the very few who didn't miss third quarter last year, so you did have a tough comp and considering everything that went on, good job..

Thank you for mentioning that..

Yeah. You're welcome. So, you should always been nervous when I start off saying something nice, I suppose. Here's the question. So, I'm trying to really understand what's going on with the hospital segment operating EBITDA margin. And I'm wondering if you can help me parse this out.

On the one hand, trying to adjust out the losses, it looks like you're in and around about a 9% EBITDA margin, which is roughly in line with where you were last year, because I don't think we have the last year number. But that's a high-single-digit margin. And two points on that.

One, it seems flattish, which in the face of the investments you've been making, and increasing acuity, and the progress you've made on costs, seems at odds with those results. So, I'd like to understand some color on how that happened. The second question is, relative to other hospital companies, it seems low.

So, I wonder how much the shift of outpatient business to USPI, and as part of the joint venture, is being reflected – since it's higher margin, is being reflected in the absolute level of margin, and therefore, maybe, we don't have an apples-to-apples comparison to peers..

Okay. So, we'll have Dan begin with an explanation of the results. And then, I'd like Eric Evans to comment on some of the initiatives that he has to improve the results..

Hi. Good morning, Sheryl, this is Dan. Yes, to your point regarding the Ambulatory centers, to a degree, there is not apples-to-apples comparison because our Ambulatory centers are over in the USPI business segment. So, that certainly has an impact on the margins.

I would tell you that – I want to remind everyone that the hospitals segment also includes our health plans. And one thing – one fact that I'll throw out for everyone is, if you look at the hospital margins, excluding the health plans, as well as looking at the year over change in HIT incentives, the margins are actually up about 20 basis points.

And as we talked about in our prepared remarks, when you adjust for the hospitals that we've sold since this time last year as well as the new hospitals that we acquired in Tucson and Birmingham, we generated 5% EBITDA growth on a year-over-year basis. And it's actually 8% on a year-to-date basis. We've more work to do here.

Unquestionably, there's no doubt about that..

So – okay. I'm sorry.

Is there more to the answer?.

Yeah. So, Sheryl, I would add a couple of things. Thanks for the question. Obviously, Dan touched a little bit on the portfolio management effect of this.

And while we're pleased with our 5% same-store growth, we're also positioned in some of our new markets, in places where it's much more sustainable going forward where there's some real margin opportunity for us. And so, that's one answer as far as how we're going to improve our operations moving forward.

We're continuing – the one thing that continued in this quarter, that Trevor noted, continuing to execute on our higher acuity service line growth. We saw that across the different service lines we've been focused on, including ortho, total joint, trauma, cardiothoracic, that continues to be a differentiator for us.

The deeper integration with USPI to cover the entire care continuum, we think that's a win for the enterprise and, ultimately, will be helpful in making sure that we're able to meet the healthcare needs and differentiate the services we provide.

We're also doing a lot of things that you've heard from others, but expansion of freestanding EDs and micro hospitals. We just had two micro hospitals opened this quarter in San Antonio. We're excited about that.

We also have a number of major investments that are coming to a close here in the next six months, including our new campus in El Paso, a market I know well, that I'm excited about, on the west side of El Paso; the Transmountain Campus.

We've got a new tower that just actually opened last week, an orthopedic tower in North Central Baptist in San Antonio, a new tower at the Children's Hospital of Michigan; and a new tower at Delray Medical Center which, if you're familiar with, is one of the top-100 community hospitals in the country, really highly thought of cardiac program.

And so, we look at especially the towers. Those are instant adds to a facility, and in some cases, in many cases, facilities with capacity constraints. And so, we think all of those projects, obviously, coming online will help us with our margin story going forward.

And the last thing which we've mentioned in the past that we continue to look at is trauma programs. We have number of hospitals where we're going to be upping our trauma levels across the country. Those don't happen overnight, but those are certainly underway.

And I think the one last thing I would add on the growth story is we do still have considerable opportunity in growing our Rehab and Behavioral Health businesses, utilizing existing capacity.

So, I put those all those together, I mean, there's a lot of reason to be bullish and a lot of reasons to continue to think that this 5% growth we did this quarter, which is actually pretty impressive, is something that we can sustain..

Okay. So, I guess, just thinking about the level of margin, this has been terrific. The detail you're giving me is something certainly to chew on. But given that you've separated out the outpatient part of the business or the freestanding part of the business, you still have hospital-based outpatient.

Is there – to sort of frame the comparison, is there an upper limit on what the margin should be? So, in other words, if others are at 15%, you're going to be 200, 300, 400 basis points below that? Just so that we cannot unfairly penalize Tenet, for having a different corporate structure..

Sheryl, this is Dan again. We don't want to put any upper limit on what we're going to strive to achieve. We believe we're going to continue – we are going to grow our margins. I do want to remind everyone that the new hospitals in Tucson and Birmingham, they're not at their mature run rate margin levels.

And so, that's also going to drive incremental margin improvement over the next several years as we continue to capture cost efficiencies and synergies related to those markets. So, unfortunately, I can't throw a specific percentage out there to say, this is what we're striving for three years down the road.

But certainly, improving our margin is the top of our list along with generating additional cash flow..

And Sheryl, the one thing I would add too, I do think that the combination of our hospitals and USPI in total is definitely going to be an opportunity for us to have stronger margins. We continue to work very closely together. So, I don't know.

I think from the enterprise point of view, we certainly see lots of opportunities to continue expanding margins..

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

Great. Thanks. Just wanted to understand how the health plan business interacted with your hospital business. whether selling it creates any dis-synergies as far as like how much volume you're getting from them or anything like that? And then, I assume this is going to be a deleveraging move for you, that the cash is going to go to pay down debt.

But just wanted to make sure about that..

Good morning, Kevin. This is Dan. We don't believe that there's going to be any significant impact from us exiting our exchange business in our markets. Two of the markets in Michigan and Texas are small plans, to begin with. And really, even the one in Arizona, it's not a significant plan.

But where we believe we're going to be from a contracting position next year in Maricopa County. We feel good about where we're at on that, and then we anticipate that we'll be able to continue to earn the business of consumers who have exchange coverage next year in all of our markets, including Maricopa County..

And as far as what you're going to do with that cash? Is that to pay down debt or is there anything else you'd be earmarking that for?.

Kevin, I would say, we haven't put any numbers out there as to what the proceeds are going to be from the divestiture of the various health plans. It's premature at this point. But I would tell you – I wouldn't say that they're going to be significant..

Okay. And then just one clarification. You said that you wouldn't expect the USPI results to remain at this level for long, but you're going to be strong next year.

I wasn't sure if there is some finer point to put on that word, strong?.

No. I wouldn't read anything into that. Certainly, we believe we're going to continue to generate strong growth in the Ambulatory business, and we'll certainly go through specifics in February when we discuss our outlook for next year..

All right. Thanks..

And we'll take our next question from Ralph Giacobbe with Citi..

Thanks.

First one, any prior period revenue recognized in the third quarter sort of above and beyond that we need to be aware of?.

No..

Okay..

This is Dan, Ralph. Good morning..

Good morning. And then the outpatient surgery number was down 3.7%, pretty sharp turn from the positive stats going back five-plus years.

Just wonder if there's anything to call out there in terms of the reversal of this quarter?.

Yeah. This is Eric. I would just say, in general, we continue to see some of the lower end, from acuity standpoint, procedures, ENT, gynecology, et cetera, transitioning to the ASC world, where obviously we're very well positioned in more than just our core hospital markets.

I would also say, though, in particular for this quarter, we had one market that actually made up about 90% of that, and we are addressing that issue. And so, we don't see it as an ongoing major problem..

Okay. And then, one more, if I could squeeze it in. The charity and uninsured admissions up 10.5%, but the uncompensated care down, I guess, as a percentage of adjusted revenue, and flattish in terms of absolute dollars.

So, just hoping to maybe reconcile that?.

Ralph, this is Dan again. We did see growth in our inpatient uninsured volumes in the third quarter of little over 10%. Outpatient was actually down about 3%. The growth on the inpatient side was primarily in Texas and Florida.

In terms of our uncompensated care performance; one, it's certainly attributable to the very strong capabilities of our Conifer team, and from a revenue cycle perspective, as well as the fact that the growth in our Ambulatory businesses as well as Conifer, that's also contributing as well.

As you know, those businesses have very low levels of bad debt. Our collection rates have held steady this year, whether it's from managed care companies or patients who owe amounts after insurance. And Steve and his team continue to do a very good job managing our revenue cycle..

And we'll take our next question from Gary Lieberman with Wells Fargo..

Good morning. Thanks for taking the question. With regards to the Humana negotiation, I would assume that ultimately it comes down to price.

Can you talk maybe about how you feel your pricing is versus the other competitors in the market and maybe how far away or how far apart you think you are with Humana?.

Gary, it's Trevor. I really would prefer not to negotiate this contract on this earnings call. And so, I'd like to politely beg off from answering the question directly.

I would just say, as a general matter, that our hospitals are very well positioned with managed care as value providers with high demonstrated levels of clinical quality and costs that are generally below our leading competitors in markets..

Okay. Maybe then, I'll ask you about the uncompensated care trends. So, it came down year-over-year, but to a lesser degree than the trends came down in the first half of 2016.

Is that just a seasonal thing? And then, maybe separately, can you comment on your thoughts as we head into open enrollment and plan availability in your markets, and how that might affect the trends in 2017?.

Gary, this is Dan. What we did see, as I mentioned a little bit earlier, we did see an increase in uninsured volumes on the inpatient side in the third quarter, predominantly in Texas and in Florida. The outpatient volumes are actually down 3%. So, those numbers can move around from quarter to quarter. We certainly are focused on it.

And when we do see an uninsured patient at our facility, we attempt to qualify those individuals for any available insurance coverage that they would be entitled to.

And we've pointed this statistic out in the past, we have a separate dedicated unit within our Conifer team to focuses qualifying people for some form of government coverage, whether it's Medicaid or otherwise. And our success rate continues to be 90-plus percent. So, you need to work through some of these from quarter-to-quarter basis.

Someone may present as an uninsured patient, but we ultimately may be able to qualify them for some other form of coverage. In terms of when we think about on a going forward basis, we're very well positioned from a contracting perspective in our markets, from an exchange perspective next year.

We believe that we have contracts with the two lowest cost plans in our markets – in over 90% of our markets. So, we're very well positioned from an exchange contracting perspective next year..

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

Good morning. Just wanted to follow-up on a prior question with regard to the health plan exit, sale of the business and exiting just some other lines.

It wasn't clear to me, Dan, in your answer, whether you're saying the exit is just going to be immaterial to sort of the overall financial results EBITDA, or whether when you exit, is there going to be any – are you just selling lives? Can you pull out statutory capital versus just outright proceeds from the sale, or is it just all out, not going to move the needle at all on the leverage side?.

Chris, this is Dan. I'll start off and then I'm going to turn it over to Keith. In terms of – I'd point out some number again. The health plan business has – we're anticipating roughly $500 million of revenues this year in the business. So, essentially with no EBITDA.

So, certainly, it will help our margins on a going-forward basis as essentially the $500 million of revenue will go away. What we've talked about in the prepared remarks was that we incurred losses of $5 million in the third quarter, and we project approximately $15 million in the fourth quarter..

Yeah. Chris, just to clarify. I mean, the plans are – first of all, a good bit of that $500 million were exchange plans that we're actually just exiting. There's no purchaser for those plans. And you can imagine during the year, there became less and less interest in exchange plans by others.

And so, when you think about statutory capital and you think about the wind-down cost, there's some sort of some offset there. So, I think the point was it's not going to make – it's going to be a de minimis impact on the balance sheet from selling the plans, but it will have a very positive impact on the go forward.

Not only go forward, in 2016, it will have a positive impact, once the plans are gone and wound down, on enterprise EBITDA relative to this year and also enterprise risk..

Great. And then, just on the cash flow, when we think to the fourth quarter and some of the – it looks like there were some working capital issues in Q3. Is there anything worth highlighting in the fourth quarter, both good or bad, that's notable? Thanks..

Chris, this is Dan. When you mentioned the issues in Q3, there really wasn't any issues. It's really just a timing issue in terms of the various working capital items, whether it's collection on amounts due from some Medicaid programs or just timing of accounts payable and other working capital items.

In terms of when you think about Q4, I would point out that we do anticipate receiving fairly significant amount of additional proceeds when you're thinking about sequentially from the California Provider Fee program in the fourth quarter. That would be the one thing that I would point out, if you're thinking Q3 versus Q4 cash flows..

We'll take our next question from Justin Lake with Wolfe Research..

Thanks. Good morning. First question is for Bill Wilcox. Bill's been around the industry for a long time on the ASC side, and we went through this period 10, 15 years ago, there was a ton of growth and then growth moderated.

And now, we've seen, to your point, Bill, six straight quarters of really, really strong growth, not just at USPI, but within the surgery center industry, in general. I'm just curious if you can give us some color in terms of what you think is driving this enhanced growth.

How sustainable you think it is? And then, maybe just on the third quarter, some of your peers didn't see this continue. Certainly looked like HCA's growth, for instance, slowed down a little bit on their ASC business.

Anything that you can talk about in terms of yours versus everyone? What you think is going on in the rest of the industry as well (45:22). Thanks..

Hey, Justin. I think that with the industry continue to have nice tailwinds, as you know, those can take shape in different markets and at different times. I don't expect that we'll be able to continue the level of same-store growth that we're currently experiencing.

But there is a strength in our strategy and there is a strength in our market position, and we're fairly good at execution.

So, I do think that over a longer period of time while we won't have the same type of growth that we're currently experiencing, that we'll continue to have growth at least comparable to what we've had over the last several years.

Is that sufficiently vague?.

No. That's very helpful, as always, Bill. And just a question for Keith, on the health plan business, again, but more philosophical.

I mean, Keith, I think when you were running Vanguard and came over to Tenet, with the Conifer business, and some of the capabilities, I think a lot of people out there believed that we're heading to a world where providers need to take more risk, and you've got a vertically integrated system in a lot of ways, and you had this health plan business.

And the fact that you're stepping back from that and saying it didn't work or it didn't enhance value for the company and shareholders, I'm just curious, what do you think it's going to take? Where does the world need to go before – providers have to take risk, why not just step into the role of a managed care plan then? What is it going to take down the road for providers to kind of take that role, rather than taking risk from managed care plans?.

Well, that's a great question. I mean, obviously, the one thing that was great at Tenet is Tenet actually had much more capabilities embedded between the Tenet enterprise, particularly on the West Coast, and Conifer value-based care to actually manage sort of MLR-level risk.

And so, in terms of company's positioning today, we're incredibly well positioned, I think, among anybody to take kind of MLR-type level – provider-level risk.

And so, your real question is, so why don't you just jump from that and take – go up to the 100% level, and kind of market – be your own sales and everything else organization? I mean the problem we face, frankly, is our plans were just subscale.

And to get into scaled plans is really hard to do it regionally and where it really matters to get kind of scale to match up to where your footprint is, is really difficult to get.

So, at least from our perspective, given we're in so many different markets, having the viewpoint of being agnostic as to who the marketed plan is, but being able to partner with multiple plans on some kind of a risk or shared risk basis, we think that capability for at least the foreseeable future is a better capability for us to have than to try to be competitive in the health plan business itself..

And why don't I ask Steve Mooney also to just add something about Conifer value-based care. I threw out it during my prepared remarks that you're managing care through that entity for in excess of 5.8 million lives. That's the capability we really need more than operating a health plan..

Thanks, Trevor. Yeah. Justin, as Keith was just saying, I mean there's a few different areas that we're obviously helping. And so, to have the health plan operations, which you know, is doing things, there's a lot of risk involved, but we were actually able to handle, and Trevor has mentioned, about 5.8 million lives on the population health side.

We have – what we're doing on the actual risk based side, the actual modeling, to help organizations understand how they're building those contracts and manage that risk for those organizations. We're managing about $18 million in medical spend on that side of the fence. So, there's a lot of capabilities we have on that piece of the business.

And then, you're constantly seeing, as the health plans are thinking about how they manage populations, it's all about that, right? So, I mean, how you keep people in the right care setting, how do you get the cost aligned with the actual quality care outcomes, which we're doing across our population health management processes, in which we have about 400 nurses across the country that are actually managing that individuals from a personal health nursing standpoint.

Right now, we're helping Tenet in nine markets, supporting their ACOs in those markets with both of our intelligence and our outcomes optimization software, which are care optimization areas. So, all those competencies try VBC or (49:53) something we can roll out across the organization, actually owning the health plan operation..

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

Hey. Thanks. Just a couple of quick ones. Your hospital guidance includes five more hospitals in the first quarter than in the second or third.

What would be the guidance normalized for those divestitures? Or maybe an easier way to ask is, how much did the five contribute in the first quarter?.

Whit, this is Dan. Good morning. How are you? In terms of the – we're referring to our facilities in Atlanta that we divested on March 31. How you should think about that is roughly about $25 million of EBITDA in the first quarter..

Okay. That's helpful. And then, recently, it's been announced that there is a potential merger between Dignity and CHI. Just kind of curious what that means for Conifer. It seems like Dignity is pretty invested in Optum360, and CHI with you. So, just kind of curious on your thoughts..

Thanks, Whit. It's Trevor. I'll make a comment and then I'll turn it over to Steve. I would just say, look, it's interesting. The announcement literally is just the two organizations are exploring a merger. From our perspective, we have great long-term partnerships with both.

We're a partner with Dignity across all three of our segments; in Conifer, USPI and hospitals. With CHI, we're a partner both in Conifer and with USPI. So, we have deep relationships with both organizations. Specifically, within Conifer relationship with CHI, we announced sometime ago that the contract was renewed and extends through 2032.

So, I think it's certainly not something that you should see as a concern at this point. It's very solid relationship. Steve, I don't know if you have anything to add..

Yeah. Well, I'll just say, obviously, we have a very strong relationship with CHI on the revenue cycle side. There's obviously – you know as much as we do on that. But what we do know is the best way for us to succeed under any scenario is keep delivering our operating results to CHI, and that's what we intend to do.

And clearly, Dan talked about the incentive we got this quarter. So, we're delivering on performance side of the organization and continue to expand within that organization..

And we'll take our next question from Ana Gupte with Leerink Partners..

Yeah. Hi. Thanks. Good morning. My question was on the hospital inpatient side. You said that you are focusing on certain higher acuity service lines.

And I wanted to get a sense for what the care mix is for that portion of your business? And given that they've moved to mandatory bundling in cardio, ortho and trauma, what you'd expect for your pricing growth on a go-forward basis and in your margins?.

Hi, Ana. This is Eric. I guess, what I'd say is on the higher acuity service lines that we're focused on, I think the mix roughly matches what we see on other service lines. I mean, certainly, in certain cases, cardiology, orthopedics, there is obviously a significant Medicare mix, but that's been the case for a long time.

The higher acuity service lines certainly do drive higher net revenues and have – that give us the possibilities of driving higher margins as we manage our supply costs and manage our labor costs effectively. And ultimately, we think that the service lines we're focused on are the ones that are going to remain in our hospitals over the long term.

So, when we think about how we want to position ourselves, we need to be differentiated on those five or six things that we see staying in the hospitals. And we need to very closely partnered with an ambulatory provider, which luckily we have the best in the business in our company, to make sure we cover the full continuum of care..

So, on the bundling side, you don't expect anything? I know it's on a pilot basis, but next year or at least in 2018, are you thinking about the impact on your pricing?.

Yeah. So, on the bundling side, we have been very, very successful in working with CMS on bundled payments. So, going back to, we have one of the initial ACE programs in San Antonio. It's been really successful, great partnership with our physicians. We have a lot of expertise in managing both supply and post-acute costs.

We've done it in several markets. And so, we see bundling as an opportunity for us. In most of our markets, we are a value provider and we partner closely with physicians to try to drive great outcomes and at a good price for our patients. So, actually, the bundling side of that, we see more as an opportunity than anything else..

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

Hi. Good morning. Just a couple questions, thinking about as we head into next year.

First, as we're modeling the exit of the health plan business, that we're really just going to take $550 million of revenue ballpark out of the hospital segment, and any negative operating leverage associated with that $20 million EBITDA loss coming back?.

Gary, this is Dan. Good morning. So, from a modeling perspective with the health plan divestitures, yes, you should exclude roughly a little over $500 million of revenues from your model next year. As well as, as we've talked about, there's roughly $20 million of losses this year related to the health plan.

We'll get into the specifics – not to dodge the question, but we'll get into the specifics on our February call, when we lay out our full-year guidance for next year..

Okay. And then, continuing just on the acute segment, thinking about next year, when we kind of think about ballpark, you've got a HIT headwind. You get a pick-up from exiting the health plans. There's still – I think the Atlanta sale still not quite anniversaried. And then you get the hurricane pick-up, presumably.

It looks like as you get into next year, it is a year where that segment does grow EBITDA again. Obviously, it was down this year, because of the divestitures.

Am I in the ballpark on that or do you want to – can you comment on that?.

Gary, I don't – again, don't want to evade the question, but let me say this. We do anticipate growing our earnings next year and we've put – as we've talked about in the past, we believe we're going to drive 3% to 5% growth in our hospital business, 8% to 10% growth in our Ambulatory business.

So, we feel that we're going to be able to drive growth down the road. And certainly, we'll go into each business segment in detail in February, but we're not backing off at all our long-term guidance that we've put out there..

Yeah. No, that was....

And we'll take our final question today from Matt Borsch with Goldman Sachs..

Yes. Thank you for squeezing me in. I just had a question about the revenue cycle management business.

What are you seeing in terms of the intensity of competition? Is it fair to say that that's ramped up somewhat with maybe Optum coming at that business as hard as they have been?.

Yeah, Steve – so Gary, I just like to – it seems like – I'm sorry, Matt. It seems like Gary had a question that was cut off. Gary, feel free to call us back after the call. That was not intentional. Steve, go ahead and answer the question..

Yeah. Thanks, Matt. This is Steve. It's interesting. We've been in business now since 2008, and the competition has changed pretty dramatically. When you go back to our original list of competitors, most of those don't exist anymore. And then you have the new emerging competitors, you mentioned Optum360 being one of them.

It's interesting what goes on in the hospital space. Trevor mentioned this business is very strategic. And people are always trying to figure out what they need to do for their individual organization.

Are they trying to increase their overall performance from a yield perspective? Are they trying to reduce their cost structure? And when they are, they're trying to work out who's going to actually deliver those results to them. One thing about Conifer, being in business since 2008, we've got a great track record within the industry.

And even though some deals, and the most recent deal we won, which was Verity, which both Trevor and Dan mentioned, that was competitive against the players, one of which you mentioned and another one. And we won those both out, really because of our capabilities in the marketplace. So, I mean, competition is good.

Us being the only player in the market is not good. When somebody is doing a big deal like this, it's important if something doesn't work, for instance, on their side of the fence that they have somewhere else to go. So, it's important for us to have another strong competitor. We're still waiting for that strong competitor to emerge, I'll say that.

But the market is – right now, it's doing strong. The pipeline is looking good. We're starting to see more of the larger systems, looking at outsourcing, especially I think to expand their portfolio. It's very strategic, and they've to think about sustainability for that service and that sustainability typically comes from somebody like Conifer..

Last question on a different topic.

As you look at your ASC business and USPI, and we try to think about comparing the intensity with which you push high acuity – or try to introduce high acuity procedures into that, the ASC setting, are you pushing the envelope as much, or more, or less than some of the peers that are on a stand-alone basis? I'm trying to sort of figure out if it makes a difference that you're connected to the large hospital business that you have with respect to that question?.

I'll just offer one comment and then I'll ask Bill to fill in. We treat this question on a completely stand-alone basis. We accept that there is a cannibalization factor in the markets in which we operate hospitals and surgery centers. We think that that is a smart strategy.

It's a strategy that is played in many other industries, where it's better to cannibalize yourself than have somebody else do it for you. And of course, to the extent that's a nationwide trend, we greatly benefit from that, because we have such a broader surgery center platform in non-Tenet hospital market.

But Bill, why don't you just talk about general strategy about the service line development, the acuity that you're pushing and what you think the possibilities are within the surgery center environment?.

Sure. I think that everyone would agree that the push is really coming from the clinical advances, both in terms of anesthesia techniques and technologies, and surgical techniques and technologies.

And so, our strategy has been just to make certain that we work with those physicians that are most capable, and then we use best practices to make certain that those capabilities are spread throughout our organization, whether it's in our Tenet hospitals, or USPI hospitals, or ASCs.

And I think that we're seeing a lot of focus on the appropriate side of service from the employers and the payers and the government payers. And what we are doing with our enterprise approach is making sure that we've got the optimum position in each of our markets.

And then, when we do have programs that are successful, that we develop mechanisms to share that knowledge, then the final comment on it is that a lot of the differentiation in USPI is our historical and current focus on musculoskeletal business, where there are a lot of advances and that's really worked to our advantage, working with our doctors who are leaders nationally in that specialty..

Operator, I believe that that concludes the call. That was our final question. Thanks, everybody, for participating and we will see you again, if not sooner, at the fourth quarter call in late February. Thanks..

Thank you. Ladies and gentlemen, that does conclude today's conference. Thank you for your participation. You may now disconnect..