Trevor Fetter - Chairman and CEO Dan Cancelmi - CFO Bill Wilcox - CEO, USPI Eric Evans - President, Hospital Operations Keith Pitts - Vice Chairman Jason Cagle - CFO, USPI.

Whit Mayo - Robert W. Baird A.J. Rice - UBS Chris Rigg - Deutsche Bank Sheryl Skolnick - Mizuho Justin Lake - Wolfe Research Sarah James - Piper Jaffray Brian Tanquilut - Jefferies Kevin Fischbeck - Bank of America Merrill Lynch Ana Gupte - Leerink Partners Ralph Giacobbe - Citi.

Good day, everyone, and welcome to the Second Quarter 2017 Tenet Healthcare Earnings Conference Call. My name is Dana and I’ll be you operator for today’s call. 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..

Good morning, everyone, and thank you for joining us today. I’d like to begin today’s call with a summary of our financial results for the second quarter and our perspectives on some of the trends we’re seeing in our business, then turn to an update on recent developments and our revised outlook for the remainder of the year.

Beginning with slide three. We generated adjusted EBITDA of $570 million and net operating revenues of $4.8 billion in the second quarter. EBITDA was positively impacted by a $23 million gain, primarily related to the sale of home health and hospice assets.

In our hospitals and outpatient centers, we experienced the same soft volume that affected other companies in our industry. Our teams responded well with solid performance on cost control, mitigating most of the impact on EBITDA during the quarter. The volume pressure was attributable in part to our temporary out of network status of Humana.

If you exclude Humana volumes from the second quarters of both 2016 and 2017, adjusted admissions were essentially flat and case growth in our Ambulatory segment was up 1.3%. As a reminder, all of our facilities and physicians are back in network with Humana as of June 1st.

Our operators and marketing teams have been working to win back the volume as it diverted while we were out of network. For the latter half of the year, we expect volume to be helped from being back in network with Humana as well as from our core major hospital projects, which have all come on line.

These include our new patient towers in Delray Beach, Florida; and Detroit, Michigan, both of which just opened and began serving patients in July. The new towers not only create expanded high-acuity capacity, they advance our service line strategies by adding specific beaches to support key programs.

At Delray for example, our recent investments improve our ability to deliver high-end cardiac and trauma services for the surrounding community and add capacity at one of our busiest hospitals. The new tower includes a significant expansion of the hospital’s cardiac program and a new helipad which augments our trauma capabilities.

Our emphasis on trauma services company-wide, resulted in year-over-year growth of more than 10% in trauma admissions in the quarter. We’ve been making investments in trauma across the country because the need for these services is growing and will continue to be provided in an in-patient setting.

We expect that the two towers combined with our new teaching hospital El Paso and our new orthopedic institute in San Antonio will strengthen our position in these four key markets. Beyond these facility enhancements, we continue to improve our portfolio by exiting none strategic business lines and markets.

Last week, we completed the sale of our Huston-based hospitals and related operations to HCA. We received proceeds of approximately $750 and used it to repay the borrowings we had on the revolver in July, to fund our increased ownership position in USPI. As we discussed with you last quarter, we now own 80% of USPI.

In our Ambulatory Care segment, we’re pleased with the improvements we draw on adjusted EBITDA and adjusted EBITDA less NCI of 18% and nearly 21% respectively. Building out our Ambulatory platform remains the primary focus for us, and we continue to target $100 million to $150 million in acquisition opportunities every year.

And we’ve invested half that amount as of this point in 2017. Last week, we acquired a minority position in new short stay surgical hospital in Tyler, Texas, which is an expansion of our long-standing partnership with Baylor Scott & White Health.

The surgical hospital specializes in muscular skeletal services and is a highly regarded facility, one of only 19 in the country with five CMS stars for patient satisfaction and overall quality.

As you may know, surgical hospitals performed inpatient and outpatient surgeries are typically much larger than an average surgery center and have higher revenues per case. It’s a great business model; and with this addition, we now have 21 surgical hospitals in our portfolio.

At, Conifer, revenues were up over 3.5% while adjusted EBITDA of $60 million was slightly below our expectations. Conifer saw soft revenues in its hospital client base, leading to top and bottom-line pressure.

Reducing AR days has been a primary focus for Conifer and have been investing resources on different performance improvement initiatives as part of that effort. Of course, this investment has had an impact on the bottom-line but we have started see an improvement in AR days on a more consistent basis in both the first and second quarters of the year.

We are pleased with the initial results, but there is more work to do and we are very focused on it. Turning to our outlook. We are lowering the midpoint of our outlook range for 2017 adjusted EBITDA by $75 million.

This reflects a $30 million reduction related to the sale of our hospitals in Houston and our expectations for a softer volume and payor mix environment. Excluding Houston, the EBITDA revision amounts to a reduction of 1.7%. Clearly, the operating environment for healthcare providers this year has been challenging and volatile.

We are responding by reducing complexity, focusing on reducing leverage, managing pricing and cost well, and successfully integrating our recent acquisitions. We are also taking the right actions for our business by expanding access points for patients and investing in key service lines.

We believe these actions will help our hospitals grow their market share for both inpatient and outpatient services over the long term. In addition, our facility portfolio has continued to evolve in step with the trends for increased consumerism, including smart investments to build out our ambulatory platform.

And we are pleased that with the greater ownership stake in USPI, Tenet shareholders now benefit even more from the strong growth fundamentals of that business. The combination of our hospitals, USPI and Conifer, and the way it has diversified our Company, remains a strategic differentiator for Tenet.

We are confident in our strategy and we believe that we are well-positioned for the future. And with that, I will turn it over to Dan Cancelmi, our CFO..

Thank you, Trevor, and good morning, everyone. I will start with a high level summary of our financial results. We generated adjusted EBITDA of $570 million in the quarter. EBITDA included a $23 million gain, primarily from the sale of home health and hospice assets, and a $27 million year-over-year increase in malpractice expense.

These two items were not included in our second quarter guidance. Adjusted EPS was a loss of $0.17. Same-hospital revenue per adjusted admission was up 3.3%, on an apples-to-apples basis after adjusting for the California Provider Fee revenue. Adjusted EBITDA in our hospital segment was $346 million.

Revenue in the Ambulatory segment increased 3.8% on a same-facility system-wide basis. Adjusted EBITDA less facility-level NCI increased 20.7% to $105 million. Conifer’s EBITDA was $60 million, and adjusted free cash flow was $108 million for the quarter. With that overview, I will explain our results in more detail, starting with EBITDA.

Slide five provides an overview of our EBITDA by segment. Our hospital and Conifer segments performed slightly below our expectations while our Ambulatory segment performed in line with relatively high expectations that we have for that business.

In our hospitals, volumes have been softer than anticipated and an increase in uninsured revenue has resulted in upward pressure on uncompensated care expense. The shortfall in revenue in the hospitals also impacted Conifer’s revenue.

At the same time, Conifer is making investments to improve performance for their clients, which has increased their expenses. A significant portion of these investments are related to initiatives that are showing measurable progress in reducing Tenet’s days in AR which improved to 53.6 this quarter.

Turning to volumes, which are summarized on slide seven, adjusted admissions decreased 1.4% on a same hospital basis and were up 10 basis points excluding patients insured by Humana in both periods. Even with this adjustment, our volumes growth for the first half of the year has been lower than we originally anticipated. Turning to costs.

Total hospital segment expenses per adjusted admission only increased 2.3% in the quarter and 2.1% for the first half of the year, which is below the low-end of our outlook range for the year of 2.5% to 3.5%. We were pleased with our expense management this quarter, especially given the soft volume environment.

On slide nine, our total uncompensated care was 22.3% of revenue, up sequentially and year-over-year, primarily due to an increase in uninsured revenues. Moving to our ambulatory business on slide 10, we delivered 3.8% same-facility system-wide revenue growth.

Cases were down 50 basis points and revenue per case was up 4.3%, including some benefit from increased acuity. Excluding patients that were insured by Humana in both periods, case growth was up 1.3%. On slide 11, adjusted EBITDA less facility level NCI increased 20.7%.

You may recall that in the second quarter of last year, the results in our Ambulatory segment were adversely affected by the restructuring of USPI’s bariatrics business. After adjusting for this, our growth would have been 11%. As you can see on slide 12, Conifer grew its revenue 3.6% and revenue from third-party customers was up 9.4%.

EBITDA for the quarter was $60 million and we anticipate a seasonal uptick in Conifer’s EBITDA in the second half of the year. Slide 13 and 14 provide the details of our revised outlook including the changes to the underlying assumptions.

We lowered the midpoint of our revenue outlook by $650 million to reflect the sales of our Houston hospitals last week and the softer volume environment. We now anticipate adjusted admissions to be flat to down 2% this year, below our prior expectations of up 1% to down 1%.

Adjusted EBITDA is moving $75 million lower to a new range of $2.450 billion to $2.550 billion. $30 million of this reduction is related to Houston; $35 million is related to lower expectations for our hospitals; and $15 million is due to a reduction in our outlook for Conifer. For the Ambulatory segment, we have increased our outlook by $5 million.

We are now targeting adjusted free cash flow of $525 million to $725 million, which is $75 million lower than our prior expectation.

A substantial portion of this cash will be used to fund upto $300 million of cash NCI distributions, acquisitions at USPI, and cash payments for restructuring and other items, which totaled $62 million through June 30th. Beyond that, our priority for excess cash is debt repayment. Looking at few of the other assumptions on this slide.

We increased our expectations for bad debt, to reflect our experience in the first half of the year. We also lowered our D&A estimates to reflect the Huston divestiture. And we lowered our assumptions for interest expense and NCI expense to reflect our recent refinancing and increased ownership of USPI.

Slide 14 provides an updated view for each of our segments. Looking at our hospital segment, after the $30 million reduction for Huston, the remaining $35 million reflects our updated volume expectations and an increase in bad debt.

After making these changes, we now anticipate EBITDA in the hospital segment of $1.485 billion to $1.555 billion, which represents a year-over-year change of down 1% to up 4%, after normalizing for divestitures, health plan losses, change in HIT incentives and the change in pension expense accounting that I discussed last quarter.

The lower revenue expectations for our hospitals including the sale of Huston have a follow-on impact on Conifer’s revenue.

When combined with the investment that Conifer is making to improve cash collections for our hospitals and other customers, we now expect Conifer’s EBITDA to be in the range of $265 million to $275 million, $15 million lower than our prior expectations.

Finally in Ambulatory segment , our volumes expectations have come down a little but we expect this to be offset by stronger growth in net revenues per case. And we anticipate the EBITDA and EBITDA less in NCI in this business to be a little stronger than our previous expectations.

Before I conclude, I want to briefly comment on our recent refinancing. Details are provided on slide four. We took advantage of the favorable interest rate environment in June and refinanced nearly 25% of our debt. We extended various maturities to 2024 and 2025, and lowered our annual cash interest expense by approximately $9 million.

And we have the opportunity to further lower our interest expense by retiring debt. At this point, we have no near-term maturities and only $500 million maturing before 2020, and all of our notes now have a fixed interest rate. To summarize, we have made solid progress strategically and positioned the Company well for the future.

We’re pleased with the results of our recent refinancing. We completed a number of transaction that are designed to simplify and de-risk our business. We increased our ownership interest in USPI to 80%.

We divested our hospitals in Huston and reallocated the capital toward our Ambulatory segment, and we sold home health and hospice assets as well as various health plan businesses. The volume environment has softened and our operators are responding with vigorous expense management.

Swift and deliberate response to changing economic environments is not new to us. We’ve a long history of strong expense management and we expect this to continue. With that I’ll now ask the operator to assemble the queue for our Q&A session.

Operator?.

[Operator Instructions] And we will take our first question today from Whit Mayo with Robert W. Baird..

Hey, thanks. Good morning. I don’t really like guidance questions, but I will ask anyway. Just looking at the implied fourth quarter ramp, it does appear to be pretty steep on the surface and obviously the California Provider Fee is a big swing factor, obviously the Houston divestiture.

But just can you help us think through what the apples-to-applies core growth is that makes sense of the fourth quarter, just seem to imply a pretty big acute care quarter?.

Good morning, Whit. This is Dan. A couple of things I would point out in terms of the fourth quarter. One is, as you pointed out, we will be -- we anticipate recognizing the California Provider Fee revenue in the fourth quarter. We still anticipate that program to be approved by year-end. Obviously that’s $225 million in the fourth quarter.

As you know, the ambulatory business from a seasonal perspective is very, very strong in the fourth quarter. So that’s going to drive a lot of growth from first half versus second half type of perspective, and sequentially as well, as well as year-over-year growth, Q4 last year versus this year.

In terms of the hospital business, let me point out a couple of things there. I would remind everyone that in the fourth quarter last year, we went out of network with Humana, beginning October 1st. So that was certainly a headwind in last year’s fourth quarter. We are back in network now.

Fourth quarter last year, we also absorbed the impact of Hurricane Matthew, which had an impact on number of our facilities. So, when you take all that into consideration, as well as Conifer, we anticipate seasonal uptick there.

In the fourth quarter, Conifer typically has the opportunity to earn customer incentives from customers, based on the contracts..

Do you have visibility into the Florida LIP money yet?.

Not yet, Whit. They’re still working through the numbers. They have not released a full model of what the ultimate impact will be to our hospitals at this point..

Okay. And really my second question, just maybe for Bill or Jason. With CMS now reevaluating the total knees, hips on the inpatient only list. Can you frame-up, maybe the opportunity and the need to spend any capital, make any investments if CMS does move forward with this? Just any color would be helpful..

Hey, Whit. This is Bill. As you probably know, the bulk of the conservation is around allowing joints, Medicare joints to be done in an HOPD, very little on the ASC front. And from a commercial perspective, it’s different though, and we are seeing more and more interest in doing total joint on an outpatient basis in an ASC.

So, we are really well-positioned as an enterprise to cover any level -- the bulk of these will continue to be done inpatient. We are seeing a trend towards possible outpatient departments. And there is a select group of patients that qualify for a true outpatient total joint at an ASC, in spite of the fact that CMS doesn’t pay for that.

And I think it’s going to be several years before that happens. And even if that does happen, there is a relatively small percentage of Medicare age patients that qualify for a true ASC total joint. So, I think we’re really well positioned. Not a lot of expenses required on our front.

We’re actively standing up programs with our great doctors and nursing teams in probably a third or half of our ASCs, but not a lot of CapEx to accommodate that..

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

Hi, everybody. Thanks. First question maybe, just when you think about the volumes which you saw in the quarter and where you’re making your adjustment for the back half of the year on the acute side.

Would you say you can concentrate that on any particular service line, geography, does it have anything to do with some of the projects you’re bringing on, impacting volumes up? Any color you can give us will be helpful..

Sure. A.J. Good morning. This is Eric. Couple points on the volume. Obviously as we mentioned, it’s been a little softer than we anticipated. I’ll point to a few things -- a few points of things we would anticipate had an impact on that. One is higher deductibles, you heard a lot of talk about this.

In last couple of years, deductibles in many cases have risen by as much as 30%, and that is changing how people access care, at least in the short run, and we think it actually changes seasonality a bit as well. Couple of other things impacting us.

The birth rate across the country has dropped, and that affects couple of things; it affects our surgeries a bit because that does change our C-section numbers and certainly that’s something we’ve seen nationally.

I would also point to the fact, demand had some impact on the first half of the year, a little bit coming back in the last month of the quarter. There’s a number of things that I think are affecting the volume from a softness standpoint.

As far as the second half of the year being a little stronger than the first half, we certainly do point to those four projects that Trevor mentioned as being project that position us well in the key service lines we are focused on.

And we expect that those will certainly help us in the second half of the year, but in the context of what is obviously a little bit slower volume growth environment than we talked about previously.

On the service line side, what I would say is kind of backing up the point that deductibles are having an impact, the more non-elective procedures, so if you think about service lines like cardiovascular and neurology; those service lines are showing growth, year-over-year. The more elective procedures, things like orthopedics, we see the softness.

So, we think that does play into the story of deductibles rising and changing behaviors but ultimately we are well-positioned we feel when those folks need to find service, they will be choosing us..

Okay, great. And then on the, stats on the surgery center business briefly. There has been some changes to the competitive landscape in the last year, you got obviously United bought Surgical Care Affiliates. You guys have stepped up your ownership position quite a bit and 80% -- you’ll be at 88% by the middle of next year.

I am wondering does that change anything you do, the fact that you have more ownership, do you see the competitive landscape evolving either in the availability of transactions, the pricing of transactions, the development opportunities, de novo that you see? Give us some flavor for that, if you would..

Great. A.J., it’s Trevor. I’ll start and then I’ll ask Bill Wilcox to fill in. I think all the points that you mentioned and the discussion that we just had with Bill and Eric, illustrates the benefits of the strategy that we’re pursuing.

So, regardless of what somebody needs, where they need it and what kind of setting, we have a network that is capable of providing in our key markets. Our strategy with respect to USPI isn’t going change, now that we own 80%. But we’ve enjoyed quite a lot of benefits from the transaction, synergies exceeded our expectations.

And so, now, as we go forward, whether it’s in operational synergies or acquisition synergies, a greater percentage of those flow to the benefit of Tenet shareholders as we have purchased the minority interest in that.

Bill, I think what would be interesting is if you could just comment on the portfolio and how you’re developing out the de novo properties as well the acquisition environment and then specifically get to A.J.’s question about did anything change as a result of transactions in the industry..

Well, it continues to be quite competitive from virtually every aspect, but we’re very pleased that we tend to win more than our share. I think that the strategic wisdom of our working with health systems and including most importantly Tenet health systems is really beginning to play out, as that continues to be our key focus.

And it allows us to help grow the platforms of our Tenet markets and also our not for profit health system markets. So, we’re seeing a pipeline that’s more robust than I’ve ever seen it, both in terms of acquisitions and de novos and also in terms of new markets, either through our Tenet markets or through new health system partners..

And we will take our next question from Chris Rigg with Deutsche Bank..

I was just hoping if you could give some color on how you think that Humana -- how volumes will ramp with Humana being back in network in the second half of the year. Should improve fairly substantially relative to the first half or do you think it will take into 2018 to see something change materially? Thanks..

Hi, Chris. This is Eric. So, I would say with regard to Humana, we defiantly think it will improve but that’s in the context of really what’s a softer environment. And so, it will take some time to earn back that business. As you can imagine how that’s changed quickly and there are certain parts of that that are faster to move back than others.

We do anticipate that to improve across the second half of the year. But it’s in the context of even within that book of business and another books of business, a little bit software volume picture. But that improvement is included in our outlook. .

Okay. And then, just on additional divestitures, can you give us a sense for how we should think about that this year and into next year? Do you think you will some more announcements within 2017? Thanks..

This is Keith, Chris. Yes, I think we’ll have some more announcements in 2017. I don’t think that the -- there is no impact to our guidance in the quarter for any further divestitures. So, I want to be clear about that.

But, in terms of closing any potential divestitures we think end of the year, first of next year is probably more realistic there, may be some little bit earlier but I don’t think that will be material for this year. So, I think we will be in good position to have a clean view of guidance for 2018, once we come out with that..

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

Thanks very much. I am still puzzled over this guidance.

So, I am going to come back to it again, because I am trying to understand what has to happen to the underlying volumes and the underlying business at both Conifer and USPI, not just at the hospital? So basically, I think the math suggests, given $525 million of guidance at the midpoint for the third quarter, somewhere between $850 million and $900 million fourth quarter, and around the midpoint of that that suggests $225 million for the California Provider Fee that we are going to get to $650 million for the business in the fourth quarter.

So, how do we get through the third quarter to the fourth quarter? So, because when we kind of add up what you just said about seasonality, that’s only $60 million, so there is like there is more left in there.

Does this require that you’ve got to get beyond the midpoint of the guidance range for inpatient volumes? Is there some incremental piece that I’m missing, because visibly it’s sticker shock, it’s a big number, and I think that’s why it’s important that we understand it?.

Good morning, Sheryl, this is Dan. Let me go through some of the pieces in terms of the fourth quarter and also put in the context the entire back half of the year and then comparing to last year. So, as you pointed out, the $225 million related the California Provider Fee that we at this point still anticipate that gets approved.

USPI, in terms of thinking about it from the first half of the year to the back half of the year, that’s roughly $75 million of additional earnings EBITDA in the back half of the year compared to the first half of the year.

And even on a year-over-year basis, there is growth in the Ambulatory segment of close -- it’s about $30 million year-over-year compared to fourth quarter last year. Conifer, first half, second half is about $20 million of additional EBITDA. We do anticipate Conifer to earn various incentives in the fourth quarter.

And so, first half, second half, there is about $20 million. In terms of the hospital business, as I mentioned a couple of minutes ago, on a year-over-year basis, there’s couple of obvious items that are somewhat impacting the year-over-year comparison. As I mentioned, fourth quarter last year, we went out of network with Humana.

So, we are back in network with Humana. So that obviously should help in terms of hospital growth. I also mentioned Hurricane Matthew that had an impact on our facilities in the fourth quarter of last year. So, we’re hopeful that we don’t have any type of event like that this year. We also are anticipating hospital growth in the fourth quarter.

And as Eric pointed out, we have various projects that have recently come on line. We will continue to drive strong expense management. And we think based on what we think what we can deliver that we can get to $2.5 billion on a consolidated basis for the full year..

Okay. So, let me ask you a different question. On an actual basis -- but it’s related, on a actual basis, your cash flow for the six months, free cash flow was fairly modest. I think you’ll agree. And even though USPI is performing very well, Conifer’s little draggy.

Presumably, you’re going to get that fixed when you get some operating leverage from all the new businesses added at some point.

But in the health -- and the hospital business, first of all A, are the hospitals generating cash flow? And to get to meaningful free cash flow, if you can even think about it that way, and to get to meaningful free cash flow, not adjusted but free cash flow generations for the business, where do you have to get your hospital margins to?.

You’re right in terms of -- from a cash flow, obviously the ambulatory business is very strong and we expect that to continue. Going forward, we need to drive incremental free cash flow generation. As you pointed out many times, the difference between adjusted free cash flow and free cash flow, that’s real cash going out the door.

As we’ve pointed out, we have about roughly $60 million so far this year. Going forward, back coming out with the guidance for next year at this point, but we do anticipate those numbers to come down going forward basis. But, the free cash flow generation is going to be based on certainly driving growth in our hospital business.

Conifer is also continuing to drive down our receivables as a part of that. You’re right, the first half of the year, cash flow generation, not very strong compared to last year. It was -- I would tell you, was slightly ahead of our internal expectation.

As you may remember, first half of the year, we have certain working capital items on a annual basis that are funded in the first three or four months of the year. And we typically generate stronger free cash flow in the second half of the year.

We’ve also been winding down our health plan businesses which have been a use of cash in the first half of the year as well. We should be substantially done winding this down by the end of this year as well..

And we’ll take our next question from Justin Lake with Wolfe Research..

Thanks. Good morning. First, just on the malpractice expense, as you noted, it was up significantly in the second quarter here.

Should we think about this as the new run rate for the back half of the year and into the first quarter of 2018 or not? And then, what drove this increase, given it was up about 30% year-over-year and sequentially?.

Hey, Justin, it’s Dan. In terms of the run rate, we don’t anticipate the run rate in the back half of the year to be at the same level it was in the second quarter. Although there will probably be some incremental costs compared to what we have been seeing say over the past year or so.

In terms of what drove it, there were handful or so of prior year, older cases that we’ve decided made sense to settle them, to minimize future financial risk..

Okay, great. And then, the follow-up is on the Florida Medicaid cuts. So, I think they were in the 7% to 8% range, if I’m remembering correctly. I know the LIP could work to offset that. But, I was hoping you could tell us what the impact of the Medicaid rate cut is to Tenet, before thinking about the potential LIP offset..

The rate cuts have been -- they’ve been going through that. That number, we do expect it to be offset with the incremental, low income pool reimbursement. Whether it fully offsets or not at this point, we don’t know, unfortunately.

We hope to have an answer for that on this call but they still haven’t released the final model to see what the additional reimbursement will be. We think it will be sometime here in August, maybe in the next week or two, but right now we just don’t have the availability into it..

We will move next to Sarah James with Piper Jaffray..

Thank you. I appreciate the comments on outpatient pressure from elective surgeries being put off because of rising detectable, but certainly turned out your peers are seeking to us as well.

But I wanted to clarify if the outpatient surgeries were down more than inpatient, so was that primarily the elective volume dropping off? And if so, would that mean acuity and outpatient is increasing and continue to do so as less elective surgeries are in the mix there? And as you look at our outpatient volumes as a whole, could you bucket between the remaining elective and non-elective mix, so we can get an idea of where that might trend in the future?.

Sure, Sarah. This is Eric on the outpatient surgery side, certainly, we think that’s an area that’s much more affected by the detectable issue, we talked about earlier. It is primarily elective business on the outpatient side, and so that is certainly a place we feel that impact.

I think the good news for us is with higher deductibles and people having more choice options is that we have a fantastic surgery ASC platform that positions us well to continue earn that business whether it’s in the hospital setting or an ASC in our markets.

And I don’t Bill, if you want to comment a little bit on what you saw on the outpatient surgery side?.

Sure. We continue to see a softer volume environment this year. You’ve heard us already talk about continuation of the cyclical nature of our business as the patient payer responsibilities increase.

Also for our segment, over two years ago when we did the Tenet transaction, we had the opportunity to strategically restructure several of our partnerships. And you might recall that we talked a lot about the moves between consolidated and unconsolidated facilities in those years.

And at the same time, we’re benefiting from the various out of network models in some of our larger markets. And the reason I bring this up is that those last two factors resulted in unprecedented growth for us in 2015 and 2016. So, while we are seeing softness in our year-over-year comps, we’re coming off some two really strong years.

And the primary area of our softness is in pain management and GI which are lower revenue procedures. So, that’s why you’re seeing some nice strength in our net revenue per case. Some of we’re seeing that as a result that shift in pain and GI primarily as a result of some of the benefit plan emphasizing a shift from the HOPD to the ASC. .

Are you also seeing a benefit from some of our your inpatient business shifting into outpatient? And do you have any metrics where you’re gauging how much of your redirected business you’re capturing versus what may be going to competitors?.

Yes. So, that’s a -- it’s a great question. Obviously, technology continues to open the door for more things to be done on an outpatient basis. It’s hard to have an exact measure on that. We definitely know that it has an impact.

I would say this, the good news for us, whether we think about what Trevor mentioned earlier around care settings is our goal is, as technology moves, is to be location agnostic, treating the patient at the right care, at the right place and the right price coin. And so, over time, as that moves, we don’t think it’s dramatic.

And I think we’ve talked a little bit earlier about the total joints for Medicare patients.

Again, that’s one where there’s a certain amount of procedures that based on comorbidities and age and risk are always going to be in the hospital, which is why you see us focused on service lines that we believe over the next 10 to 20 years will stay in the hospital and why we partner very closely with Bill and USPI, to ensure that when patients are making different choices, and there is a better option for their care, that we’re the place they choose..

We will take our next question from Brian Tanquilut with Jefferies..

Hey. Good morning, guys. Hey, Trevor, you guys talked about how in the past you’ve adapted to soft volume environment through cost controls.

But, as we think about what else you can do to drive volumes, whether it’s assuming physician recruiting or refocusing service line, how should we think about the proactive measures that you are taking right now or contemplating to adapt to the soft macro?.

It’s great question. And Eric that last answer came very close to describing really very promising initiative that we’ve been piloting for a couple of years and rolling out throughout the Company called Care Continuity. And I think that is an example of one of the tools that we are using.

Eric, do you want to describe a little bit of that?.

Yes. So, to build on that, I think if you look at our advantage as a company, I think our strength of our platform. And so for us, we are really working to make sure we make it easy for the consumer to access us in the right care site in a way that’s meaningful and that connects into our system.

So, the program Trevor mentioned is Care Continuity is a program where we are focused on access points and making sure that our patients have easy access to that next level of care and improving the service levels and integration of care to drive better outcomes.

So, that’s the part of I think this consumer movement and how do we connect our access points in a unique way that our investments have allowed us to do.

I think the other thing I would say from a growth standpoint is, as even though we are facing softer volumes, in the core service lines, cardiovascular, orthopedics, neurosciences et cetera, really moving up the acuity scale, making sure we partner with the best physicians and the best clinical staff to drive to great outcomes.

We think that with the softness, one thing we are continuing to see is an increasing pressure on rule providers to provide the higher acuity services. And so, we think over time, that migrates more to large urban areas where we are and we are certainly continuing to invest in those type of services.

And Trevor mentioned earlier, trauma is an example of that. I’d also say from the consumer side, and we touched on this earlier, the expansion of access points, convenient access points. We are continuing invest in our markets in making sure that we have very convenient, easy access points, whether it’s for ER or urgent care from the hospital side.

What we do see in our urgent care centers and our ERs is continued strong -- our freestanding ERs, is our continued strong growth, and as a patient preference to be able to go to a retail type site near their home. And we don’t see that preference changing.

And ultimately, it’s a overall better experience with the patient, less wait times, it’s a way we can better meet their needs. And so, we do plan to continue to invest in those areas to make sure we provide the easiest access to high-quality care..

I appreciate it. And then, my second question is just on the divestiture. I mean, obviously you got the HCA deal done.

As we think about the other markets that you’ve looked at or analyzed over the last few months, is there interest coming from other strategics at this point, or is it more of a we’re waiting for an interest level to come in? And what kinds of valuations are you thinking, speaking out the success you had with the Houston divestiture?.

Well, first of all, valuations will vary, depending on where the assets are and what the performance of them is. So, obviously, if it’s -- depends on what the actual EBITDA is and whether it’s strategic with synergies or not. So, there’s a whole lot of things that would impact what value you can get for certain assets.

We continue to work -- we have some challenged areas and we’re working on continuing -- we’re fairly far along on those, on a lot of things. So, we hope in this fall to have some more announcements to make relative to divestitures. But, we’re seeing some combination of strategics as well as some financial buyers on a few of the assets..

And we’ll go next to Kevin Fischbeck with Bank of America Merrill Lynch..

Great, thanks. I appreciate the commentary about some of the things driving the weaker volumes. But, I guess when we think about the pressure that you’ve been seeing on volumes and I guess the pressure that you’re not seeing on payer mix in the quarter.

I mean, is there anything that makes you look at this and say, this is a trend that’s going to be getting better next year? When I think about the economy doing relatively well, obviously not great but relatively well, I guess I don’t really see why we would expect volumes to improve or payer mix trends to improve for the foreseeable future.

Is there anything that I’m missing in there that would argue for a better inflection point as we head into next year?.

This is Trevor. I’ll make a comment, and Eric maybe some regional commentary is appropriate, because obviously where you’re located, plays a big part in this. And we have seen some particular softness in the same regions that other companies talked about as they went through their earnings calls.

We do think that there’re certain industries in those economies like the oil industry in Texas that is beginning to firm and tighten and apparently there’s even a shortage of workers now to work on rigs.

So, generally speaking, employment is good for us, tight employment for us, it is even better for us because people then have more generous benefits plans. The birth rate is one that’s a little bit causing you to scratch your head with that; it’s not an obvious region but it should be soft at this point in time.

There’s some speculation that it may be linked to immigration from -- the debate about immigration, so. Look, I think as we went through in the prepared remarks, when you adjust for Humana, you’re talking about very slight softness in the numbers that we’re reporting.

And so that slight softness could turn into strength pretty easily but it is hard to sit here right now and predict exactly when that’s going to happen and why..

I don’t have a lot to add, but I’ll just say, you take an example, like Trevor said of Texas, it’s a state where long-term we believe in the fundamentals, we believe in the growth, we’ve made big investments and we wouldn’t expect the type of I think payor mix deterioration that we’ve experienced this year to be long-term.

So, if we can go out the next six months, certainly we don’t see anything that’s going to dramatically change that. I do think that the steps we’re taking though on core service lines and access points, position us well to earn market share in a market, whether it’s got much growth or not, being our goals, we want to grow in our markets regardless.

And we think with our access point strategy, we’re well-positioned to do that. It’s hard to say beyond the six months, we’re talking about that; I wouldn’t want to get out ahead of that. But certainly, there are very specific factors as Trevor mentioned that affect all of our regions..

Okay. And I guess, if you could just -- it wasn’t clear to me exactly why USPI’s guidance was going up. It sounds like Q2 was in line with what you’re looking for. You predicted a good quarter, you got a good quarter. But when you talk about a generally weak volume backdrop, it wasn’t clear why USPI was up.

Was that that deal related or organically is there something driving that?.

Kevin, this is Jason Cagle. The back half of the year typically is a little busier for us from M&A perspective. But, obviously as we’ve said, the first half of the year for us was burdened by Humana that is now fixed in June. And so, we’re little more optimistic on volumes in the second half of the year than we saw in the first half..

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

So, again, following up on the volumes, which ex-Humana, they weren’t bad, but you talk about the softness. But, I’m a little unclear when you say you’re seeing payer mix pressures, because ex the provider fee, the pricing growth has been reasonably good.

As you look at your underlying payer mix trends and you talked about some diagnostics, possibly you’ve done on various geographies, what is really the driver of the little bit of softness that you’re seeing? Is it more from consumers, is it more from payers on value based care or observation stays or is it more competitive or is it a combination of all of it?.

Ana, thanks for the question. I would say, to reiterate a couple of points earlier, I think it’s defiantly a consumer behavior change, based on what we think is based on higher deductables, and we’re seeing different choices.

We don’t expect that those choices will necessarily be long-term, but certainly I think it is driving some of our softness and it’s not just our company, we’ve seen it across the industry. So, I don’t think it’s necessarily a market dynamic change that’s affecting all of us.

I think beyond that, we do think there’s increasing seasonality in the business, based on plan design. And we expect to be well-positioned when consumers make the choice, they need healthcare, to be well-positioned to earn that business at the right care setting at the right price point..

This is Dan, Ana. The other thing that I would is -- I’m sorry, go ahead. The only thing I was going to add was, the other issue with our payor mix for this year has been growth in uninsured revenue, particularly in Florida and Texas..

And the growth in uninsured revenue I would say is interesting. Outpatient growth in the uninsured has actually dropped and inpatient has increased. And I think this goes to the issue we have to solve, which is how do we get meaningful coverage for people at the care setting.

Because ultimately what that would point to is they’re waiting on the more preventative stuff and they are coming to our hospital in a more acute situation..

Okay. The follow-up I had is I guess I was talking less about payor mix from the point of view of the uninsured, more about commercial versus Medicare and managed Medicare demand. And one of your competitors has talked about observation stays, pressure from payers there and another talked about South Florida pressure on Medicare Advantage.

And are you seeing much of that at all or is it just largely volume driven by consumer demand, if you will?.

Yes, this is Eric. Thanks for clarifying the question. We have seen a similar trend. Certainly, we have seen observation growth. We have seen some same pressures in South Florida on some of those things. And commercial along with the rest of the payor mix has shown some softness..

Okay. And then, finally, on the bad debt, just coming back to that. Is this mostly macroeconomic, or you’re seeing more attrition on exchanges? You have an uptick in your outpatient volumes, it looks like on exchanges, even though the admissions were down..

This is Dan. In terms of the growth in the growth in the uninsured, as I mentioned, it’s in several markets, particularly in Florida and Texas. And that’s a trend that we have seen in the past several quarters. As you know, those two states have not expanded their Medicaid programs up till now.

So that -- depending on their decision to obtain coverage on an exchange product or not, that obviously is going to have an impact on the coverage. And so, what we have seen is this growth and whether it’s because they previously had an insurance coverage through an exchange product, and they don’t now that has increased to some extent.

But we don’t think it explains the entire reason for the growth in the uninsured in those states. .

Ana, I would add that the Care Continuity program we mentioned earlier, one of the big benefits for that program is that regardless of your payor status and particularly with folks who don’t have coverage, it is connecting them with appropriate resource for more preventative care.

And we think over time as we are more directly involved with helping patients access the right place and location that we can do some things to mitigate that..

And our last question will come from Ralph Giacobbe with Citi..

Thanks. Good morning. Just want to go back to the margin profile of your hospital base. If I try to normalize to exclude the health plan and then add back the California Provider Fee, it looks like just under 10% margin.

I guess first, is that a fair way to look at the base today? And I guess, where do you see improvement in target margins ultimately with your portfolio? And then, last piece of the question is just, what is baseline same-facility revenue growth that you think you need to actually show or see margin expansion?.

Ralph, this is Dan. Yes, in terms of -- let me hit the last point, in terms of revenue growth. we think we could drive growth in 2.5% to 3.5% type of territory. And, we feel strongly a good visibility into pricing over the next several years, over close to 90% under contract next year and about two-thirds of the book of business, even into 2019.

So that gives visibility into pricing. So, we think, given our focus on investing in growing service lines that we think will remain in the hospital on a longer term basis, we think we can sustain that type of pricing growth. And we think that can certainly help improve margins.

Some of our portfolio work that we are doing will also have an impact on growing margins as well..

Yes. And the only thing I’d add to that, we still are, as you know, integrating a couple of pretty large markets that we expect to continue to grow margin.

And certainly from just a core hospital facility, margin growth is a constant focus for us, part of that you can see in exiting businesses that are non-core for us, like home health and hospice and part of that just the normal work we do every year on finding additional efficiency and cost opportunities.

And then of course, as we mentioned earlier, we’ve also got to find ways to grow the business and we have strategies in place to do that..

Okay, that’s helpful. And then just want to go back to the discussion around hip and knee, that question earlier in the call.

I guess, first, is there any way to size up sort of how big that business is for you? And then sort of the discussion of the move to you know HOPD, so forget the ASC side but just a move from inpatient to outpatient, I think there’s a couple of few thousand dollars less on the Medicare side.

So, I guess, the question is ultimately, is that sort of a degradation of the margin, as we think about those procedures or is there some sort of other cost offset that we need to think about in terms of treating a patient, whether it’s sort of inpatient or outpatient or is it just a revenue impact? Thanks..

So, I’ll take a shot at that. So, I think your question was on the hip and knee procedures, how big of a business is that for us, and what’s the risk. It’s a sizeable business. I don’t have the exact number in front of me.

Obviously, it’s a business that we earn a lot of patient utilization off, although it’s been a little softer in this kind of environment because it’s elective. We go back -- going back to the answer earlier, we see this as a longer term issue. On the commercial side, we have had some migration and we think that’s going to happen.

The good news is we’re very well-positioned with Bill and USPI and the team; they are actually leaders in that area. I think on the inpatient side, there’s still -- when you think about the Medicare business, a vast majority of those patients have other conditions that make it really, really hard to see that transitioning in the near-term.

And even the regulations now, what we’re really talking about and as Bill mentioned earlier is approving, potentially doing those in hospital outpatient departments, and then the ASC discussion will be after that. But, I think if you look at the clinical diagnoses, it’s not going to be something that we see moving rapidly.

And even if it does move and does get approved for ASCs, it’s a relatively small part of the population that we think right now is going to be eligible to move to the ambulatory settings. So, we don’t see that as a huge impact in the near term, and really in the long term..

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you for participating. You may now disconnect..