Brendan Twohig Strong - Tenet Healthcare Corp. Ronald A. Rittenmeyer - Tenet Healthcare Corp. Daniel J. Cancelmi - Tenet Healthcare Corp. Keith B. Pitts - Tenet Healthcare Corp. J. Eric Evans - Tenet Healthcare Corp. William H. Wilcox - United Surgical Partners International, Inc. Stephen M. Mooney - Conifer Health Solutions LLC Jason B.

Cagle - United Surgical Partners International, Inc..

Whit Mayo - Robert W. Baird & Co., Inc. Chris Rigg - Deutsche Bank Securities, Inc. Kevin Mark Fischbeck - Bank of America Merrill Lynch Justin Lake - Wolfe Research LLC Sheryl Robin Skolnick - Mizuho Securities USA, Inc. Ralph Giacobbe - Citigroup Global Markets, Inc. Joshua Raskin - Nephron Research Gary P. Taylor - JPMorgan Securities LLC Ana A.

Gupte - Leerink Partners LLC John W. Ransom - Raymond James & Associates, Inc..

Good day everyone, and welcome to the Third Quarter 2017 Tenet Healthcare Earnings Conference Call. My name is Dana, and I'll be your operator for today. At this time, all participants are in a listen-only mode. Later, the company will conduct a question-and-answer session.

I would now like to turn the call over to Brendan Strong, Tenet's Vice President, Investor Relations. Please go ahead, sir..

Good morning and thanks, Dana. 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. In addition, please note that certain statements made during our discussion today constitute forward-looking statements.

These statements relate to future events including but limited to statements with respect to our business outlook and forecasts, our future earnings and financial position.

These forward-looking statements represent management's current expectations based on currently available information as to the outcome and timing of future events, but by their nature address matters that are uncertain. Actual results and plans could differ materially from those expressed in any forward-looking statement.

For more information, please refer to the risk factors discussed in Tenet's most recent Form 10-K and subsequent SEC filings. Tenet assumes no obligation to update any forward-looking statements or other information that speaks as of their respective dates, and you're cautioned not to put undue reliance on these forward-looking statements.

I'll now turn the call over to Ron Rittenmeyer, Tenet's Executive Chairman and Chief Executive Officer.

Ron?.

Thank you. Good morning everyone, and thank you for joining us today to discuss our third quarter results. I'm pleased to be here with you and to share some of my initial perspectives. But before I do, just a few quick comments on the quarter. First, let me talk about the impact of Hurricane Harvey and Irma.

As you know, we have hospitals, outpatient centers, and thousands of colleagues who live and work in communities that suffered considerable damage due to the devastation caused by both storms.

Between Houston and other communities in South and East Texas, Florida, South Carolina and Georgia, we had 13 hospitals and about 100 ambulatory and urgent care centers that were impacted in some way. In preparation for the landfall of both storms, we shut down facilities that we felt there was any risk to patients and colleagues to remain open.

And for those that did stay open, we also had teams staffed throughout the storms sheltering in place, often working 24 and 36-hour shifts. Our colleagues did this without even knowing what was happening to their own homes, and they did it to protect our patients. We are incredibly proud and grateful for their heroic efforts.

Operationally, we were fast to respond, all coordinated by our emergency response teams. The preparation was very extensive and the recovery was nothing short of seamless. Within a matter of days, we had reopened facilities that had been closed and were back to receiving patients, rescheduling cancelled procedures and restoring full operations.

All told, the storms obviously had an impact on volumes and increased expenses, but there's no question that this level of preparedness was the absolute right thing to do.

And it's important to note that while there was a meaningful impact on our third quarter performance and there will be some additional costs we'll be incurring in the fourth quarter to finish repairing some of these facilities, we haven't seen anything that would make us think that over time that the volume environment has changed permanently as a result of the storm.

As you saw from our earnings preview in the press release yesterday, we delivered adjusted EBITDA within our outlook range in spite of the hurricanes and unanticipated Medicaid cuts in Florida and Texas. Hospital segment EBITDA was down driven by a combination of factors including the two storms, California provider fee and soft volume.

Our ambulatory business grew adjusted EBITDA and adjusted EBITDA less NCI and Conifer's EBITDA was actually flat last year. In a few minutes, I'll ask Dan to take us through the details. But before I do, let me just take a minute to provide what I've outlined is the top priorities for the organization.

These are captured on slide 3 and I'll try to put these in some context.

Since the company announced the leadership transition on August 31, I've spent my time immersing myself into the day-to-day operations at Tenet, focusing across the enterprise, looking beyond the surface and at the areas that drive our results in quality, service, growth and cost.

My early takeaways are that Tenet is a strong organization, quality assets, solid growth opportunities, many talented people and much potential, but it is also an organization needs to streamline, improve response across all areas and up the quality of care and patient satisfaction.

This can be done while removing duplicative efforts and unnecessary processes and also by challenging ourselves to reach further without losing the core of what makes the company great. It's clearly not an easy change to make but a necessary transformation for our future.

In the past 60-plus days, it has been one of extensively reviewing what works well and what needs improvement. And I'm looking at everything.

That includes operational infrastructure, staffing across the enterprise, control processes, reporting and really most of all accountability and measures, and it is about how we can be more agile and efficient, critically reviewing our portfolio makeup and whether we have the right assets and the right markets, our quality, and depth of execution and how we move at greater speed, reinforcing accountability and beginning to change the basic company culture by motivating our people to be more entrepreneurial and mission driven with a much greater linkage between compensation and quality and service.

Now as I discuss these, please understand that these are all important, so they're not in an order of priority, but rather must be equally achieved and built on each other in order to maximize our potential.

So, starting with improving financial performance, it's a process, and I believe it will take several months, not years, but it is a process that we need to embrace as we adapt to change in our markets, the volume environment, and changes in technologies.

We clearly need to be more opportunistic and engaged in better solutions from a cost perspective. We need to maximize technology as a tool for sustainability, speed and accuracy. And we also need to keep focused constantly on trimming excess costs and align every resource more effectively.

Clearly, volume growth is challenging in the segment, especially in the hospital segment. While some of the declines in the third quarter were related to the hurricanes, our focus on growth needs to be better refined.

This is an important part of improving the financial performance, and we will be spending some time to go very deep on analyzing our options to enhance growth and to make it more sustainable going forward.

It'll mean changes in how we approach these markets, how we invest in these markets, and how we measure success, all in a strong foundation of compliance and ethics. We need to evaluate, revisit, and revamp the concept of growth, how we look at it, how we deliver it, where we need to focus our resources in order to achieve it.

All of this applies to our hospitals and to our ambulatory business and also to Conifer.

And while the path is not clear at this point, especially given the heightened (07:36) political climate, we have to take a lead on making timely decisions on these actions and evaluating the impact and results and adjusting as we go and not allowing excuses to get in our way.

Conifer also has to trim its staff and locations to better achieve scaling and consolidation of infrastructure. Internally, it's going to revisit its organizational structure as well as addressing how to improve execution further with the continued improved workflows and a stronger pipeline. USPI continues to do very well across its offerings.

Hurricanes were but a distraction, and their response was terrific. Their offerings, partners and models remain strong. And while they also have improvements to achieve, they are certainly on the right track. In fact, there are opportunities to take some of the how from USPI and adapt it to the Tenet Hospital Operations.

As we do this, we will be equally focused on enhancing operating efficiencies through targeted cost reductions. That means eliminating work by eliminating processes that do not add value. It also means trimming the overhead by increasing spans of control in a targeted manner and better utilizing technology.

As you saw on the press release we issued in October, we implemented an enterprise cost wide reduction initiative to lower annual operating costs by $150 million. A part of this was the elimination of the regional layer in the hospital division.

It clearly added complexity and a layer of management that slowed decision making, reducing the accountability of the hospital CEO, and defusing the staff support designed to have an impactful engagement at the hospital level.

This is an example of how we're going to flatten the organization and we believe this is a process we need to seek out across the enterprise and address as appropriate. The cost reduction initiative is not just about improving our cost structure. It's a thoughtful and new approach to better management of our business.

And it supports our efforts to transition to a leaner, more nimble enterprise.

It encompasses a more thoughtful review of support staffing and a determination of how we maximize synergies across the company, the streamlining of overhead and centralize support functions at the corporate level, and similar actions within Conifer and our Ambulatory business segments.

These were and they are tough decisions to make, but necessary for us to adapt to change in our business, our local markets and the healthcare industry overall. I'll also note that we anticipate achieving the full run rate of this cost savings initiative by the end of 2018, and Dan will speak to that in more detail.

So then I believe these actions will make us a more agile company in executing strategic initiatives and responding to new opportunities in the markets we serve. Aggressive cost management is a continuing process and must be coupled with a similar effort on growth. Both parts are critical to our success.

And I want to be clear that in no way will we allow this initiative to stand in the way of our efforts to improve the quality of care we deliver to our patients and the high level of patient satisfaction and business integrity we aim to achieve. Improving care and service is another immediate priority.

And I believe that we'll bring ourselves closer to our patients by streamlining interactions between centralized support functions, our hospitals and other care facilities, eliminating layers, empowering decision making and accountability and ensuring our rewards match the process is the expectation across the enterprise.

We're also going to continue to take a fresh look at our assets as part of an ongoing effort to review, analyze and pursue all options to enhance shareholder value, whether it is a divestiture or an acquisition in the right place.

This of course could include major transactions or additional hospital divestitures, small tuck-in acquisitions in existing hospital markets, ambulatory acquisitions and other options that we will evaluate in the months ahead. We need to think differently and more strategically about capital deployment.

We need to constantly ask ourself whether we're making the right investment or the right divestiture at the right time and test and verify the process and payback of these investments. We are also very cognizant of our high debt level and are committing to reducing it in a systematic way.

Finally, as part of our commitment to a strong governance, we're wholly focused on ongoing board refreshment. We recently announced the appointment of Jim Bierman to our board. Jim is highly qualified with significant operational and financial expertise in healthcare, and we're looking forward to his valuable insights and perspective.

We are committed to continuing to bring high talented and engaging individuals into our boardroom in the coming months. The infusion of fresh thinking from Jim and other board members that we will shortly be adding will benefit the organization as we seek to maximize Tenet's future value.

And we also are, under the direction of Bob Kerrey, our lead director, continuing to search for a permanent CEO. But frankly, we're not going to wait for that to happen in order to make some of the decisions necessary to move the company forward, which was what I've just covered.

We're moving quickly and we're moving decisively to improve our operations and financial results, consistent with the actions we announced in late October. So, with that, I'd like to turn it over to Dan, our Chief Financial Officer, for a more detailed review of the third quarter. And then we'll be back with questions when he's done.

Dan?.

Thank you, Ron, and good morning everyone. In the quarter, we generated adjusted EBITDA of $507 million, a solid result in light of the $30 million impact from the hurricanes and $10 million of Medicaid cuts not anticipated in our outlook. Tighter cost control was key.

Adjusted EPS was a loss of $0.17 and included a $0.30 benefit from a change in our tax provision related to Aspen. EBITDA grew approximately 5% in the quarter once you normalize for the California provider fee, the hurricanes and the Houston sale. However, volume trends remain challenged in the hospital business.

Revenue in the Ambulatory segment increased 0.9% on a same-facility system-wide basis. However, there was one less surgical day this quarter which lowered growth. On a same-day basis and excluding the hurricanes, same-facility system-wide revenue increased 4% and cases were up 0.7%.

Adjusted EBITDA less facility-level NCI increased 1% and was up 5% excluding the hurricanes. Conifer's EBITDA was $79 million in the quarter, flat compared to last year and free cash flow was $164 million for the quarter. With that overview, I'll explain our results in more detail starting with EBITDA.

Slide 5 provides an overview of our EBITDA by segment. In our Hospital segment, EBITDA was $269 million versus $346 million last year.

Normalizing for $55 million of revenue in last year's third quarter related to the California provider fee program, a $20 million impact from Hurricane Irma and a $20 million decline related to our Houston sale, EBITDA in the segment was up 5% year-over-year. Our cost controls were excellent.

This enabled us to mitigate the effects of the Medicaid cuts in Florida and Texas as well as a $26 million increase in same-hospital bad debt expense. Turning to volumes which are summarized on slide 7, adjusted admissions decreased 2.2% on a same-hospital basis, and admissions were down 2.6%.

The hurricanes impacted our volumes by approximately 50 basis points and Humana lowered our growth by approximately 90 basis points. Let's take a more detailed look at the volume story. After taking Humana and the hurricanes into account, same-hospital admissions were down 1.2% or about 2,000 admissions.

Roughly half was attributable to a decline in deliveries and the other half related to a decline in behavioral health volumes. The behavioral decline is partly attributable to our decision to close a unit at one of our hospitals.

When you look at same-hospital outpatient visits, about half of the decline is related to the sale of our home health and hospice assets in the second quarter. These assets were dispersed across many of our hospitals and we have not excluded the visits associated with these services from our historical results.

This is impacting our outpatient visit growth and will continue to do so until we fully annualize these sales in the third quarter of next year. However, the EBITDA associated with the home health and hospice business was minimal, so it's not impacting EBITDA growth.

On the pricing side, revenue per adjusted admission declined 0.2% and this continues to be negatively affected by the California provider fee. As shown on slide 8, after adjusting for the California provider fee, revenue per adjusted admission increased 1.3% this quarter.

Turning to costs, total hospital segment expenses per adjusted admission increased just 1.7% in the quarter despite the extra costs that we incurred to prepare for and promptly recover from Hurricane Irma. And there are additional levers we are pulling on the cost side.

As outlined on slide 9, we are targeting $150 million of savings with 75% of this expected to be achieved in our Hospital segment. In addition, we are streamlining corporate overhead costs which are included in our Hospital segment. This will help our Hospital segment margins.

For modeling purposes, we anticipate realizing about $5 million of savings in the fourth quarter and achieving around $75 million of these savings during 2018, exiting next year at the full run rate savings of $150 million.

Turning to slide 10, you'll see our bad debt expense in the quarter was 7.2% of revenue compared to 7% in last year's third quarter. Our total cost of uncompensated care was 22.9% of revenue, up sequentially and year-over-year primarily due to a continued increase in self-pay revenues.

Moving to our Ambulatory business on slide 11, after adjusting for one less surgical day and the hurricanes, same-facility system-wide revenue increased 4% and cases were up 0.7%. On slide 12, adjusted EBITDA less facility-level NCI increased 1%.

The hurricanes lowered EBITDA by approximately $10 million and EBITDA less NCI by approximately $4 million. Normalizing for this, EBITDA less NCI grew 5%. As you can see on slide 13, Conifer grew its revenue 0.8% and revenue from third-party customers was up 5.4%. EBITDA for the quarter was $79 million which was flat with last year.

Slides 14 and 15 provide the details of our revised outlook. Overall, we are lowering the midpoint of our adjusted EBITDA outlook by $100 million. In the third quarter, our results were $18 million below the midpoint of our guidance. For the fourth quarter, we anticipate EBITDA of $771 million to $821 million.

At the midpoint, our view on the fourth quarter has declined by $82 million since we last updated our outlook in August.

Of this $82 million, $30 million is due to repair costs associated with the hurricanes, $17 million is due to executive severance and stock-based compensation costs, $5 million is due to incremental Florida and Texas Medicaid cuts and $5 million is due to the timing of acquisitions at USPI.

We also anticipate achieving about $5 million of savings under our $150 million cost reduction initiative in the fourth quarter. That leaves us with a roughly $30 million reduction in the fourth quarter that we attribute primarily to lower volumes and higher bad debt expense in the Hospital business as compared to our prior expectation.

With this, we now anticipate roughly flat organic EBITDA growth in the Hospital segment in the fourth quarter after adjusting for the California provider fee, the sale of Houston, hurricanes and HIT incentives.

On cash flows, we also made some changes to our outlook and we are now anticipating adjusted free cash flow of $450 million to $650 million for the year. Slide 15 provides an updated view for each of our segments.

In our Hospital segment, we are expecting to deliver flat to negative 1% organic EBITDA growth this year after normalizing for the items listed in footnote 3, primarily our divestitures in Atlanta and Houston, high-tech incentives and the hurricanes.

For Conifer, our adjusted EBITDA outlook remains unchanged, with EBITDA expected to decline in the 1% to 4% range this year due to the divestitures and additional costs that we have discussed on prior calls.

For the Ambulatory business, we expect to generate EBITDA less facility-level NCI growth of 11% to 14% this year despite the impact of the hurricanes and delayed timing of acquisitions. This rate remains well above the longer-term growth targets of 8% to 10% that we have discussed in the past. USPI's acquisition pipeline remains strong.

Before I conclude, I want to briefly comment on our cash flows and leverage. Year to date we've generated $217 million of free cash flow compared to $237 million through the third quarter of last year.

This year over year decline of $20 million is primarily attributable to reduced cash flows in our health plan businesses of about $100 million due to the sale and wind down of these businesses this year and a one day increase in our days in AR since last September, partially offset by a decline in our CapEx spend of $122 million.

At September 30, our ratio of net debt to trailing 12 months EBITDA was 6.4 times. This ratio has increased this year as a result of the timing of the approval of the California provider fee program.

If we adjust for the California provider fee and subtract roughly $40 million of trailing 12-month EBITDA related to our former Houston hospitals that we sold during the quarter, our leverage would have been 6.1 times at September 30.

While this is up slightly since the end of last year, we also increased our ownership stake in USPI to 80% in July and we did it without meaningfully changing our leverage ratio. We continue to believe that we can reduce our leverage.

Our expectation is that EBITDA growth will be the primary source of delevering and we also expect to pay down debt over time. In September, we repaid $250 million of debt which reduces annual cash interest payments by $20 million and we have board authorization to retire another $150 million of debt through open market repurchases.

And we will continue to evaluate additional opportunities to reduce leverage. Ron would like to summarize his observations on the quarter before we start Q&A. Before I turn it back to Ron though, I want to take a moment to call out the agile response of our teams to the challenging operating environment highlighted by impressive cost control.

Additionally, I want to thank all of our healthcare professionals at our hospitals and outpatient centers for their support and dedication to our patients including during this quarter's natural disasters.

Ron?.

Thanks, Dan. The summary sheet on slide 16 I think covers everything. We did feel that the quarter overall, considering the items mentioned, was reasonably good. Clearly, the cuts in Florida, Texas, the hurricanes and severance costs had to have an impact on the remainder part of this year.

But there's also a reduction anticipated because of volumes which is, for us, that's something we have to get very aggressive about and deal with, and we will.

We will start very shortly working very hard on a separate focus on growth to determine what markets, what are things we have to do, and that'll be a combined effort of all three businesses getting together because it affects all three businesses. We're also going to continue the cost trimming.

To me, cost is something that we should be looking at every day anyway and continuing to reduce our overhead and reduce unnecessary processes. So, we'll be equally focused on that throughout, both from the hospitals all the way up through the corporate headquarters and across all businesses.

And the board, as I said in my last comment, and the team will continue to look at all options. We have said that before and we are doing that. It's hard to close that out in 60 days since I've been in this role. But I would tell you that we are very actively evaluating everything because we have to do that.

And that's probably the best thing I can say at this point to that. So with that, I guess we'd open it up, Brendan, right, for questions? So, I'll turn that over..

Correct..

For the operator..

Thank you. And we will take our first question today from Whit Mayo with Robert W. Baird..

Hey. Thanks. Good morning. Dan, I don't think you've disclosed the corporate overhead cost in some time.

Is that a number that you have available?.

Good morning, Whit. This is Dan. Now we haven't historically specifically disclosed our corporate overhead number. I can assure that, Whit, that corporate overhead costs are being reduced. They have been reduced. They've been very tightly managed and they're going to continue to be evaluated and strictly managed in the future..

I would second that, so..

Okay.

And I mean, is there any reason why you can't provide the number? I mean, I know that there's some differences in the definition of corporate overhead, but is there anything that you can speak to that allows us to make a proper comparison to some of your peers?.

Yeah. Whit, I mean, there's nothing unique or strange about what's in corporate overhead. When you compare across different organizations, depending on what, we might include corporate overhead versus another organization may differ. So it's hard to get true comparability between the organizations..

Okay. And I guess my follow up question. I'm just kind of curious, from a board perspective, Ron, what purpose the poison pill serves now. It's one of the primary reasons your stock is at $13. So, I guess I just wanted to hear any updated thoughts on why it makes sense to keep that in place now..

Well, I have a board meeting in the next two days. So, I'm little early to give the board's thoughts on that since I've not discussed it with them. So, all I can do is reflect back to what we originally said in the original release and I'm sure that will be a topic of conversation in the next couple days.

So, I don't have a better answer to that because again, just my talking, not the board's. So, I'm not trying to push it off. I just don't have that. I haven't had that conversation. I have a board meeting starting tomorrow morning. So, I'm sure that will be one of the topics we discuss. So, fair question..

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

Good morning. Just wanted to make sure I fully understand exactly where you're at in the divestiture program that you announced a quarter or so back with regard to the 17 hospitals. So, two are complete.

Are any others under letter of intent or definitive agreement? And it sounds like that number could change but any color around that would be helpful..

Yeah. Thanks Chris, it's Keith. A couple of things. One is we have announced two definitive agreements this quarter. One was for the sale of the two hospitals in Philadelphia and one was the sale of MacNeal in Chicago. Those were all part of the four markets and eight facilities that along with the UK that we disclosed in early September.

We have some other ones under letter of intent. And every one of those is under some form of a process, whether we've selected a single buyer or we still have multiple buyers coming down to the end. So, we hope to have more definitive agreements signed this quarter and we'll have probably a little bit roll over into the first quarter of next year.

We would expect to close the definitive agreements that we've already signed. We expect to close those two transactions in the first quarter of 2018..

Okay. And then CapEx wise, midpoint of the guidance is $700 million.

Can that go lower next year or is that sort of the minimum you guys think you can spend?.

Chris, this is Dan. Certainly, we will be evaluating that. There is obviously some discretionary capital in that number as you would expect. I think we've talked in the past that roughly two-thirds or so of CapEx, some people would refer to as maintenance CapEx, half to two-thirds.

So yeah, there's still opportunities there, and as well as when you think about some of the hospital divestitures, depending on the timing, that will also be considered when we think about our CapEx target next year..

Yeah, I'd add to that too. As we look at this growth thing, it's a little early to talk about what we think of CapEx for next year because – and that's not growth like go out and do a bunch of acquisitions. It's more like just from organic growth, our own hospitals, our own operations, our own facilities, what else we might we do.

And so, we will be back on that one..

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

All right, great, thanks. So you mentioned that the Q4 number, it looks like you're talking about a core reduction in guidance there by about $30 million based upon a lower outlook on volumes and mix. Just want to get your sense about where you think the backdrop is right now around volume and mix.

It seems like a lot of the things structurally happening to the industry this year probably will continue into next year.

If you're doing 0% to negative 1% EBITDA growth, I mean, is there a good reason to think that the number will be better than that outside of the cost-cutting that you're doing? Is there a reason to think that the fundamentals should get better for hospitals next year?.

Eric?.

So, Kevin, this is Eric. Thanks for the question. I think from a volume perspective, there's no doubt we continue to see a very soft volume environment. We don't see any specific items that will make that change in the near term. I would say a couple of things. We are reacting to consumer preference changes.

The fact is, consumers are making different choices with higher copays and deductibles, looking at retail-based alternatives on the outpatient side that Bill and I are both adjusting to, to make sure we're well positioned.

I would say longer term, if you look at our core markets, the population in our markets is growing faster than the national average. The demographics, aging and demographics, we still believe will drive core acute growth in the high acuity service lines we're focused on.

And so, we remain optimistic about growing our business, and we're going to have to also earn some market share by having a differentiated product, and we're focused on that. So, I think that we do see growth going forward. But there's no reason to believe that the environment dramatically changes in the next few months.

Certainly, part of our strategy is to work very closely with Bill to make sure we have a care continuum that's well connected and is a differentiator in the consumers' mind. And I'll let Bill add in his thoughts on that..

Yeah, to Bill..

Hi, Kevin. Admittedly, is a soft environment and increased seasonality due to the higher deductibles and changes in the plans. But I think it's really normal variation, and recall, we're coming off of two years of unprecedented growth resulting in the steep comparisons.

We still have favorable dynamics by virtue of the benefits of ambulatory care from a quality of service and value perspective which yields the long-term growth and strong margins.

So, I think longer term, I remain confident in our organic revenue growth that we've showed in the presentation today, the 4% to 6%, and coming about equally from volume growth and increases in net revenue per case, primarily as a result of the increasing complexity that Eric just referenced..

Okay. And then I guess the other comment that you guys made in the prepared remarks about think how you think about growth and how you measure success. Can you talk about what that means? It's kind of, say if you're redefining (36:07) thinking about growth and again measuring success.

What have you been doing historically and what is it that you're kind of thinking needs to be done?.

Well, I can't answer historically. I mean, I'll let Eric answer that or Bill. But I think the going forward position has got to be taking a harder look at market by market and really analyzing what our position is in that market and where our gaps may be. I think we have some physician gaps that we need to close in several markets.

We need to utilize some perhaps best practices that USPI can help us bring to the table, and some other things to make our surgical facilities as well as some of our other things much more attractive to the physicians that would want to use them relative to how we treat patients, how we deliver service, et cetera.

So, it's the kind of thing that I think we're still in development on, but that's where we're heading.

But Eric, I don't know if you have any other color you want to add to that?.

Yeah. I think Ron hits it on the head. A couple of things I would say. We are definitely going to be more fine-tuned on by-service line market share. For us, we have to find ways to differentiate our product and across the continuum in a way that's meaningful to our consumers.

So, that continues to be a focus, especially for the high acuity service lines we've been investing in. I would also say one thing we continue to see is an increasing amount of patients on the high acuity side that migrate into large cities because it's harder and harder to cover those patients in rural facilities.

It's harder to have the volume and the talent to do that and we anticipate really focusing on that opportunity. And then we've talked a lot about access points, and that everything from urgent care centers to free-standing EDs, micro-hospitals and physician clinics, making sure that we are meeting the consumer where they're going.

And so, I think all those are things we've focused on the past, but the level of focus in by-market details are something that we're really trying to hone in on and make sure that we earn our fair share of the growth..

Yeah and I think that gets delivered by a better, a higher quality, higher patient satisfaction..

That's right..

And higher partner satisfaction in terms of how we deal with it.

So, Bill do you have anything you want to add to that?.

I agree completely. We're continuing our focus on service line expansion and are approaching it the same way we've always done as it relates to better service for our doctors and better experience for our patients and defining service lines a little more broadly.

It's focusing on really both ends of the spectrum, the more complex, like total joints and spine and then the more bread and butter, if you will, with the regular orthopedic, pain management, ENT and GI as all with the special programs..

And we'll move on to Justin Lake with Wolfe Research..

Thanks. Good morning. First question, in the third quarter, obviously great job on the cost side.

Is there anything here that you would look at as maybe not sustainable or one-time in nature, like maybe a decrease in medical malpractice expense or something like that? Or do you feel like this is a good comp going into next year?.

Justin, it's Dan. Good morning. No, as far as the malpractice, malpractice was consistent generally speaking with our expectations in the quarter. And there wasn't any significant adjustment related to the discount rate either in the quarter. So, I wouldn't say there anything unusual from a favorable benefit perspective.

From EPS, as I pointed out in my prepared remarks, we did have a $0.30 benefit in the tax provision, but that doesn't impact EBITDA..

Got it. That's helpful.

And then, thinking about the environment going into next year, is it fair to say that you talked about that 0% to minus 1% as kind of the core hospital rate? Is there anything you see beyond the cost cutting that would change that going into next year, or do you feel like that's kind of the secular environment we're sitting in and that's kind of a reasonable outlook to think about for 2018?.

So, Justin, this is Eric. I guess a couple things I would say.

Going forward, beyond just the cost cutting, which we are committed to and to go back to your last question, I would say that not only do we think the cost performance we have is sustainable, we see continuing opportunities including the $150 million that was referenced earlier, that's true cost cutting. That's not to cover our performance.

Certainly, that's going to be driving that to the bottom line by the run rate by the end of next year. And then, I would also say, when you look at the go-forward growth, we still have to grow our business, and we believe we have opportunities to do that. We don't think it's going to be 5% growth obviously.

But the 0% to 2% range we've talked about in the past, we're not going to get into guidance for next year, but I don't think there's any reason that we shouldn't expect growth out of our business. We expect to get closer to flat adjusted admissions in the fourth quarter. We've seen that number strengthen throughout the year.

And our expectation going into next year is that between the capital investments we've made, we've talked about those, we've had four or five large capital investments come online this year. Between that and the strategies we just discussed, we are going to find a way to grow in the acute care segment..

Great..

And, Justin, this is Dan again. One thing I'd point out is, we've been getting some questions on how we're thinking about next year. And obviously, we're not at the point of talking about guidance for next year.

But, I mean when you talk about what we're thinking about for next year, and some of the tailwinds that I think it's important to consider as well some of the headwinds for next year. So, from a tailwind perspective, certainly we have about $60 million of hurricane impact this year, depending on the level of hurricanes next year.

That would be a potential tailwind obviously. The executive severance of $17 million wouldn't necessarily be there next year. The cost reduction initiatives that we've talked about, I mentioned in my remarks that that's about $75 million next year that we'll be able to realize.

As you probably saw last week, Medicare outpatient payment rates came out a little bit better than we had been anticipated. It's about $30 million of incremental reimbursement next year. We've talked in the past about commercial pricing. We're essentially almost fully negotiated for next year, about 90%.

We have very good visibility into what we see from a pricing perspective, in generally speaking, the 4% to 5% type of range. And then obviously we're continuing to be optimistic about USPI growth moving forward next year. We think it can continue obviously to do a very good job controlling costs. So those are the tailwinds.

In terms of some of the headwinds, we'll have to address the additional Florida Medicaid cuts. It's about $35 million annually. We're seeing about $18 million of that this year, so there will be another, say, $18 million next year as we get the full year impact of that.

We've sold obviously our Houston hospitals, is roughly $25 million of earnings this year that aren't going to repeat next year since those hospitals have been sold. HIT incentives, just as a reminder, there's about $10 million that we anticipate this year. They will essentially be done next year. We'll have those incentives.

And then, as we pointed out in early September, the additional hospital divestitures that we've been focusing on, depending on the timing as we pointed out, there's roughly $70 million of EBITDA associated with those facilities.

So, just sort of a broad overview of some of the puts and takes potentially next year when you're thinking about from a modeling perspective..

Thanks, guys..

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

Okay. I think you've been – first of all, I thank you very much, Ron, for that overview of what you've been doing and what the priorities are. And I think we've pushed an awful a lot on 2018, so I'm going to try to avoid that and focus more on bigger picture items.

I'm sitting back and I'm listening to what's being said, and with all due respect, we have heard the story before that the businesses are going to grow, that we're going to grow our way out of leverage through EBITDA, that we're going to look at all of the opportunities that are available and choose the one with the best potential return, but it doesn't materialize.

We get an earnings report, with all due respect, that has a ton of but-fors in it, and is never just a cleanly we beat, we did a good job, we executed. So, I'm sitting here and I'm listening and I'm hearing so much that is all the same.

And then I hear you talk about culture change, and then I hear you talk about accountability, which I couldn't agree with more. And I'm asking myself how much I should really believe that things have changed.

So, help me to understand what the criteria are for the volume growth that is the key to continued growth at USPI, because it's softening there, the improvement or turnaround in the hospitals and the fixing of Conifer.

What's the discipline here? What are the goals? Where are we going? What's the road map? What's different?.

Well, that's a broad question. So, let's start with USPI. Bill's sitting here. I think he is very comfortable with his growth rates based on what we've seen in the bookings.

So, Bill, do you want to just comment on that part, first?.

Sure. Well, I think over the years we've been able to achieve that growth. Over our 20 years we've been able to achieve consistent growth. And I think the environment that is not that much different now.

If anything, it could even be more favorable, as I mentioned earlier that favorable benefits by virtue of the quality service and the value perspective. And again repeating myself, but we are coming off of two years of unprecedented growth. We have had a weaker volume growth year. That being said, the third quarter was the lowest.

Of course a lot of was the storms. But we're coming throughout the quarter, we had improved performance. We're having a strong start to the fourth quarter. And I think over time, we'll continue to be in that 4% to 6% revenue growth on a organic basis. And our pipelines of acquisitions and de novos and health system partners has never been more robust.

The de novos set us up for growth five, 10 years from now. And the combination of organic and acquisitions and new health systems partners sets us up both for the near term and the long term..

Thanks, Bill. And, Sheryl, I'd also say that when you look at the Hospital segment, I mean, it's easy – I can't argue with your points about this is how you feel about what we've seen before, the but-fors. Would say for the third quarter, most of the but-fors are real things. I mean hurricanes are hurricanes.

There's no way to plan those and the severance was a severance. But moving past all that and of course the changes with Texas and Florida, I mean those are what they are. So, those are real items and they shouldn't repeat themself. But they could. I have no way of anticipating that.

But as far as the operational part of the hospitals go, we did actually remove a significant number of people from a layer of organization that existed at least through August, and we took that out fairly quickly. We made the decision, and it was done within I'd say less than two weeks. Those people have exited the company.

So it wasn't a, here's something we ought to do. Let's think about it. Let's put a plan out for the next six months. Let's get around to it later. It was decided and it was done. And we moved on and we treated those people with dignity and respect.

But the fact is, we actually separated a lot of people, some who had been with the company a long time, but it was our decision that it was better for the company. In the end, Eric now has a direct relationship to people who actually run a group of hospitals in a very tight area. We've tightened up on that type of communication.

All that's part of the accountability issue. And we are moving forward in terms of a much closer accountability and measurement system. We have upped the quality issue already.

If there are any reportable quality problems for example, Eric and I, along with the corporate Chief Medical Officer and Corporate Chief Nursing Officer have a call with that hospital to go through in chapter and verse what that quality issue was, why it happened.

And I would tell you that people could lose their job here for not doing quality at the level that it needs to be done. So, we are very committed to those things, and we're going to up all of those games.

We're going to change the compensation system next year where quality and service will play a major part of the structure before you can even get a bonus. You have to pass a certain gate level in quality and service. So, I don't know how to prove it to you. I just can tell you that I think my style is to be incredibly focused. I don't like excuses.

If they are valid excuses, it's interesting, but then we need to figure out what are we going to do about it. We've made some commitments. We'll deliver on those commitments. If we don't, we'll explain why. No spin, just transparency, and we'll tell you exactly the way it is. That's all I can tell you. So, I don't have a better answer..

That would be delightful, and I appreciate the straightforward way in which you approach what is a serious and difficult question. If I can turn to a more detailed point for my follow-up, if I may, I am beginning to get concerned that Tenet, among others, but specifically for this call, Tenet is seeing a same-store increase in bad debt and in DSOs.

Now, we are seeing some increases in uncompensated care despite the decline in volumes, fine, I'll give you on the acuity, but that's, be that as it may, we're also seeing increases in your uncompensated care discounts. So, a couple points here. One, how did DSOs go up a day when you have Conifer who is supposedly be doing a good job for you.

Two, sub-question, at what point do you anticipate perhaps taking a good solid look at the quality of the receivables and making sure that the reason that the cash flows have been a little difficult to come by is not because there's leakage in that and what processes might need to be revamped.

In other words, sounds like you're not assuming anything is working. You're looking at everything.

So, at what point might we have a better understanding of what's going on with the DSO increase, with the bad debt increase, and whether or not it's adversely impacting your ability to generate that all-important cash?.

Sheryl, it's Dan. Let me address a couple of those points, and I'll turn it over to Steve to give his perspective as well. You're right, there has been an increase in bad debt expense driven in part by the growth in uninsured revenue.

Despite a decline in the volume metric, what we did see was an increase in the uninsured acuity, which is driving the growth in uninsured revenue. Days sales outstanding are up there, up a couple days since the second quarter.

I can assure you that we have dedicated resources, both on the hospital side as well as on Steve's team to drive days in accounts receivable. In terms of, let me just make sure it's absolutely clear. We evaluate our collection rates every quarter, okay. And we update our bad debt reserve processing every quarter.

So, we look at receivables very, very carefully every quarter. The collection rates have, generally speaking, been flat to down slightly. But I can assure you, we are updating what we believe to be the realizable value of our receivables on a quarterly basis. So, it's not like we haven't looked at receivables over the past year or two.

And we update those collection rates every year. So, I'm comfortable that our reserve process and our bad debt reserve that we have on the books right now is appropriate. In terms of continuing to focus to drive down our days receivables, Steve, why don't you address some of the things that you and your team have been focusing on..

Sure. Thanks, Dan. Thanks, Sheryl. I think the point you made is we are looking at everything and I think that's right. It's kind of a relentless focus on trying to perform and look at everything across the revenue cycle and understand how do we drive those days down lower.

We've had more collaboration now with our partners over in managed care, our legal partners, hospital ops and as well as the Conifer team, kind of looking at every part of our receivable and understanding why we're seeing movement.

The big issue we're really seeing is really it's around information support to the payers around clinical and complex case reviews. And even though it's appropriate for the payers to ask that, we're monitoring that very closely from the standpoint that we are pushing back in cases when we know those obviously receivables are due and owed to us.

And if they're getting unreasonable in those timeframes, we're looking at every remedy possible to us, including and up and including to arbitration. So, that's something we are looking very closely with and working very closely with our managed care partners, very closely with our legal partners, first thing that we need to do.

So, you might see in the short term you could see some slowdown. We think these behaviors changes and the things that we're doing are actually going to help on the long term by changing those behaviors in the payer side and get us a quicker cash flow stream.

But everything from an admissions area, looking at quality of inputs, looking at why we're getting denials in the back end, changing those process in the front end, and I think you're going to start seeing obviously as we have throughout the year, progress made on our cash, and you're seeing us do that that as we move out of 2017 into 2018..

Hey, Dana, before we take the next question, I just wanted to say we're going to try to extend the call for another 15 minutes so we can get to some additional questions..

Okay. Thank you, sir. And we will go next to Ralph Giacobbe with Citi..

Thanks. Good morning. I think you'd mentioned your underlying assumption in the fourth quarter for acute volume flat. I was just hoping you can give us a sense of where your expectations are on the ambulatory side.

And then any color or update in terms of what you've seen sort of real time quarter to date if you're willing to?.

Hey, Ralph. This is Jason.

How are you?.

Good.

How are you?.

Good, thanks. You can look at our guidance for the year and where we are year to date and back into the volume assumption for the fourth quarter. It is admittedly much higher than the run rate we've seen so far this year.

As Bill mentioned, absent the storms, we've seen good sequential growth through the third quarter, and thus far into the fourth quarter. We've talked about seasonality for a couple years now, and we're seeing it this year..

Okay. All right. That's helpful. And then there's been a lot of talk on the volume side, but even excluding the California provider fee, pricing number up 1.3% was softer than trends we've seen recently for you, and I guess a disproportionate impact to margins at least this quarter.

Anything to call out there in terms of pure pricing versus maybe payer mix or acuity mix? And then it looks like you expect another kind of 0% to 2% pricing stat in the fourth quarter, ex the California provider fee. So, just trying to get some color on what's driving the softness relative to where we had been earlier this year. Thanks..

Ralph, it's Dan. The big driver in terms of the pricing stat is really our surgical volume levels. That's the biggest driver of that metric. From a contract rate negotiation perspective, there's been no changes in terms of what our previous expectations were. It's really the acuity and the mix issue, particularly on the surgical side..

Yeah, and this is Eric. The only thing I would add is, as we've talked about before, what we continue to see is in the less elective businesses, so for example, cardiology service line, we're seeing continued growth. In the more elective businesses, orthopedics, et cetera, we're seeing some of the same trends you're seeing overall.

So, I think we expect some of that to get a little bit better in the fourth quarter, and certainly some of that's hard to predict when that might change because it does involve consumer behavior. But the surgical side and that mix has been the biggest impact on pricing..

Okay. Thank you..

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

Hi. Thanks. Good morning, guys. I appreciate you taking the question. I've got two. The first would be on this flattening of the management structure and the new accountability measures. I guess if you could just help us understand.

I understand that there's fewer people running the business, but how are operations running differently? What decisions are being made differently and what are those accountability measures? And then the second question, just on the hurricane impact in the fourth quarter.

Some of the other facility-based companies are suggesting that almost all of it was contained to the third quarter. I understand repairs. I thought that might be more CapEx type of stuff.

But why is there a big income statement – why is the income statement impacting the fourth quarter just as big as the third quarter?.

So, hey, Josh, how are you? This is Dan. Let me address the hurricane issue and then I'll turn it back to Eric in terms of the management change. In terms of the hurricane cost in the fourth quarter, it's predominantly repair costs in our various hospital facilities, as well as some of the USPI centers.

There's no one individual facility that's an enormous amount of that $30 million. But based on the wind and water damage that was incurred, like such as a façade at one of our hospitals, the repair costs are going to be at some facilities several million dollars, and they won't necessarily be CapEx.

In terms of equipment or anything like that that was damaged, there's very little of that. This is just more repair costs that you don't necessarily capitalize..

Okay..

Yeah. And, Josh, I guess to go back to your first question on the management structure, I would say this, that with the regional structural we had, we had four regions, which created an additional layer. That structure served us well historically. But going forward, as you know, it's a very fast-moving environment.

It's an environment that's changing, that has different efficiency and effectiveness expectations. And we came to the conclusion, after being very thoughtful, that the right way to do it was flatten the organization. And I can tell you early on, the next level of leadership that stepped up is very engaged and enthused about where we're going.

It does allow us to move a lot faster and it also allows us to move more consistently. We're one of the systems in the country that have the most operational scale, and where we believe we have the opportunity to win in our marketplaces is just to learn 77 times faster than our local peer hospitals.

And so, we took the best of what we had in our regional structure. I will tell you some of our outstanding leaders, some of them you've met, Marsha Powers for example in Florida, Dave Ross in the western region have joined our hospital service center team here in Dallas.

And our expectation is to take the very best of who we are and drive it faster across our company..

And one more, just what were the accountability of the metrics? How are you guys going to be measuring that?.

Yeah. So, I would say this, that we are very, very much focused on the sense of urgency. And then Ron talked about this. And so, when we talk about the metrics that we're going to be looking at with the regular flat communication with the groups of hospitals, our expectation is that we're going to ask on everything, why not yesterday.

And our expectation is with fewer layers and fewer decision makers that the people that are accountable, will be speaking directly to each other every day, and we will move faster on how we think through decisions, whether we're able to say yes or no, but moving on and making sure we're executing on our priorities in each group..

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

Hi. Good morning.

I'm sorry, can you hear me?.

Yes..

Yes. Please go ahead, sir..

I'm sorry. I'm sorry. Just going back to the 2018 bridge or some of the bridge elements heading into 2018, which was very detailed and helpful. Just want to circle back to Houston, Dan. I think you said a $25 million year over year headwind. And I guess at one point, we thought Houston was maybe $70 million, $80 million of annualized EBITDA.

You're calling out this quarter $20 million for just two months, which if you would just annualize that – maybe isn't the right thing to do – implies more like $120 million.

But I guess what I'm trying to get at really is what's the annual EBITDA from those Houston assets and what was recognized this year? I want to make sure I heard you correctly on just a $25 million year to year EBITDA headwind from that divestiture..

Yeah. This is Dan. It's roughly $25 million. We owned the facilities through July and some of those numbers were down compared to 2016 based on some of the volume challenges and Texas, particularly, the uninsured.

So, when you're thinking about the puts and takes for next year, there's roughly $25 million of earnings in calendar 2017 that wouldn't necessarily repeat..

Okay. And then, Conifer, I'm not sure I heard a comment on Conifer or maybe I missed it. But I know this year EBITDA performance has been impacted by the investments you're making in the P&L in that business.

As we think about heading into 2018, are we still making some of those investments, or is there a reason to think we get back to, I think you've talked about 5% to 7% long-term EBITDA growth guidance out of that segment? Would it be logical to be hitting closer to that or still seeing some depressed growth?.

Gary, this is Dan again. I mean, I did not mention Conifer. I was trying to hit some of the highlights in terms of the tailwinds and headwinds as opposed to every single business unit and every single issue.

But listen, one of the things that we need to take into consideration with Conifer is the timing of some of the divestitures, as well as even with the divestiture, in many cases, we do retain the business. So we'll see how that process unfolds and the timing associated with it and whether we keep some of that business.

So, I'm not in a position to really say too much at this point related to Conifer for next year just due to some of those, the uncertain timing as to when some of the transactions might close and whether we keep the business to be quite frank with you..

Okay. Fair enough. Thanks..

And we'll go next to Ana Gupte with Leerink Partners..

Yeah. Hi. Thanks. The first question was a follow-up on USPI and the guidance that you offered for the fourth quarter and what that means for the normalized growth in this business. So, you sound pretty confident about your implied growth rate in 4Q.

Didn't get a sense for whether Humana was a headwind at all in the third quarter and if that's helping you into the fourth quarter.

And then I guess from a normalized perspective, are you seeing the trends, the growth trends that we've seen so far maintaining themselves? There has been spotty feedback that the adoption might be slowing down some because surgeons don't get that much pricing per procedure even though there is an efficiency element around volumes there.

And what are you kind of looking at going into 2018?.

Yeah. Thanks, Ana. This is Jason. How are you? Yeah, as you know, we're back in network with Humana now and I probably should have called that out earlier because you'll recall that last fourth quarter, we were out of network with Humana. So, that is a tailwind for us in the fourth quarter and beyond when you're comparing to the prior year.

I think your last question was about the volume environment overall and whether we're seeing it slow. You've seen a slower growth trend so far this year than we've seen in years past.

But as I said earlier, I think what we're seeing within our business, if you look at it on a full calendar year perspective, is just increased seasonality with pushing more of that towards the end of the year. And you can see it in what we've implicitly guided for the fourth quarter and what we've seen so far in the quarter to date..

Okay. Thank you..

I was going to chime in that as it relates to recovering from the hurricanes, we've fully recovered in Florida. We're still a little down pre-storm, compared to pre-storm run rates which we do not think there will be a permanent slowdown there. So, that should give us some more momentum as we go into next year..

And then just the tuck-ins that you talked about for USPI, what can you talk a bit more about the pipeline there and who you're competing with for that.

It might be they're the payers or private equity or how does that look?.

Sure. So, as I said, the pipeline is as robust as it's ever been and broader than it's been in quite some time because not only does it include basic acquisitions, it also includes a higher number than recent years of de novo development opportunities and our pipeline for health system partners is very robust.

I think it's a continued reaffirmation of the model that we have in working with these prominent health system partners to become part of their ambulatory strategy. And it's the same strategy that we have within the Tenet enterprise and it's very appealing. In terms of competition, the acquisitions continue to get lots of attention.

We've been able to earn our fair share. And I think our model and our reputation and our singular focus on that ambulatory business has really worked to our advantage..

And our final question today will come from John Ransom with Raymond James..

Hi. Thanks for extending the call. Just to pick up on your outpatient strategy, I mean if I can get on my soapbox for just a second. I get a little frustrated sometimes when hospital companies talk about outpatient, because it's hard to separate out what kind of truly a savings structure on the physician fee schedule versus what's on the HOPD schedule.

And we could even talk about freestanding ERs, which don't look to me like they save a ton of money.

So, if we're thinking about people spending more of their own money in HSAs and what I'd call trend-right businesses versus trend-wrong, how much of your, just broadly speaking including USPI, how much of your outpatient revenue would you say is on the physician fee schedule versus what's still on the HOPD schedule? And maybe you could just talk about that both Medicare and commercial pay and site-neutral.

It's just a topic that is a little bit confusing and I'd appreciate any light you could shed on it. Thanks..

Yeah. This is Eric. I'll take a shot, and I know that Bill will want to chime in as well. I think from the hospital side, most all of our floating are (01:11:28) physician clinics. Our physician clinics are almost all IDTFs and independent. They're not under the hospital license. That has been a decision we made early on.

And so, they are set up on the lower fee schedule. The urgent care centers are set up as IDTFs. They're not hospital-based in general. There's a few that are historically that we're still working to transition. But in general, those are all on an outpatient fee schedule.

The freestanding ERs, I think what I'd say on the off-campus ERs is that while they don't necessarily lower cost from a hospital ER, the reality of it is that's where patients want to go. And so, if you look at this year, I'll just give you a couple stats, in the quarter to quarter, our ER visits were down, let's call it, 4% at our main campuses.

And on our freestanding campuses, they were up 22%. And not because those patients didn't have emergent needs. It's because if they had a choice between going to a big box or going somewhere close to home at a retail location, even for higher acuity needs, they choose to do that.

So, I think in general, our model is we want to make sure we offer the right cost point. And so, our physician clinics are primarily on the outpatient fee schedule. We have a few that aren't that are associated with maybe specialty hospitals like children's.

In general, our urgent care centers that are all on an outpatient fee schedule are imaging centers – and Bill will talk to that – are on an outpatient fee schedule. They're not generally hospital based.

Now that's not 100%, but that's typically how we've tried to focus, because we agree with you, from a patient perspective in order to be competitive, we can't have things at HOPDs in all cases..

John, it's Jason Cagle. From USPI's perspective on the ASCs, obviously there's no physician reimbursement there, it's just the ASC. Still, with the schedule, hospitals, same thing, no physician reimbursement, just to provider fee there.

The imaging and urgent care portion of our business, which is very small even combined overall, all of the imaging facilities are IDTFs and urgent cares. There's a small physician reimbursement component there, but it's such a small portion of our businesses, so it's not material overall..

Hey, so sorry, just to catch you there. So you've kind of, again on the ASC side, how much of that is HOPD versus physician fee schedule? Thanks..

None. None at all..

So it's all..

There is no HOPD reimbursement in the ASCs..

It's all ASC reimbursement. No physician..

Okay.

I just wasn't – so in general you would say, other than your freestanding ERs, almost all of it is physician fee schedule?.

Hey, John, this is Dan. I think that's fair. I do..

Okay..

Obviously, the ERs are under the hospital license, and but that's the lease on the hospital side..

Yeah. My other question is, thanks for that. My other question is -.

Just to be clear, there's no physician fee schedule on the ASCs. It's all on the ASC fee schedule and our hospitals are all on the HOPD. Our 20 surgical hospital are all on a HOPD schedule. There's no physician reimbursement..

Yeah. No, what I mean, what I was getting out was the ASCs, the freestanding ASCs are on the ASC schedule, not the HOPD schedule. That's what I was getting at..

Okay. Correct. Sorry..

Okay. All right. Yeah. I knew about. Now my other question, the company used to have a goal of getting debt to EBITDA to 4.5.

Is that still the goal, or is that doable just given the current environment?.

John, it's Dan again. What we've been talking about recently is driving down our leverage to 5 times by the end of 2019. Obviously, we're continuing to evaluate that. Reducing leverage is obviously a key priority..

Yes, it is..

Okay. And my last question is -.

Okay..

All right. Thank you. Thanks for your help. I'll jump off. Thanks..

All right..

All right, operator. I think we'll end the call. I want to thank everybody for being on, especially for us adding some time. But I think it was important to get as clear a picture out as we could, and we appreciate it. So with that, operator, we'll terminate the call. Thank you..

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for your participation, and you may now disconnect..