Good day, and welcome to the Tenet Healthcare Second Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Brendan Strong, Vice President of Investor Relations. Please go ahead.
Good morning. 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 not limited to, statements with respect to our business outlook and forecasts, our future earnings and financial position and corporate actions.
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 Tennant's most recent Form 10 ks and SEC filings. Tennant assumes no obligation to update any forward looking statements or other information that speak 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, Tennant's Executive Chairman and CEO.
Ron?
Thanks, Brendan, and good morning. Reflecting on the Q2, I am really pleased with the performance across the entire enterprise. The continued improvements we have noted across each business led by our quality initiatives supported by our innovative and engaging marketing programs and executed by our teams in every facility have established a new baseline for performance. We are not declaring victory, nor are we slowing down the transformation. It is being driven by a change in the culture, which we have begun and we will continue as we improve performance, focused on generating a better cash profile and preparing Conifer for a very successful spin.
Let's touch on a few of the key items in the quarter. We delivered adjusted EBITDA growth in each of our operating segments. We exceeded the midpoint of our adjusted EBITDA outlook. One more time, we beat consensus estimates for revenue, EBITDA and importantly EPS. We had a clear and meaningful improvement in our hospital volumes.
USPI delivered a very strong quarter with solid increases in surgical volumes. At Conifer, despite all the uncertainties on changes with their future, generated double digit EBITDA growth and 5.40 basis points of margin improvement, reflecting the continued ongoing work to tighten the cost and service structure of the company. Across Tennant, leadership changes have continued as part of our ongoing commitment to instill accountability and performance improvement. Some of the more recent changes included a new CFO at USPI, the appointment of Interim CEO at Conifer and several new leaders in hospital operations in San Antonio, South Florida, Massachusetts as well as our headquarters operations support teams. We've also announced the addition of a new Board member, Chris Lynch, who has significant financial vacuum and great experience working and serving on Boards in highly regulated industries.
Chris will officially join the board tomorrow and we look forward to his contributions. This is in line with our announced Board refreshment that we started in 2018. And to date, we have changed the Board by over 50% in less than 2 years with highly qualified and diverse members. It's equally important to note that during these changes, our overall quality continues to improve across all of our tenant hospitals and USPI facilities. Infection rates have steadily declined, while other important measures continue to improve.
We continue to emphasize our commitment to quality, ethics and compliance as foundational parts of our transformation. Our Q2 financial and clinic results were also very positive. In our hospitals, admissions adjusted admissions and emergency room visits grew between 2% and nearly 3.5%. This quarter, we delivered admission growth in 18 of our 20 markets and we're pleased about the significant improvement in our growth trajectory and have confidence that we are making the needed changes to improve the service levels, competitive positioning and financial profile of our hospital portfolio. This improvement is a type of performance that you can deliver with the right leadership, focus and accountability.
USPI had another great quarter with continued volume and pricing growth in both surgical and non surgical platforms. The acquisition pipeline remains robust as do our plans for continued de novo development. We added 2 health system partners in the 2nd quarter and we acquired 5 surgery centers. We also opened 4 de novo surgery centers and 2 urgent care centers with a very strong pipeline of de novos for the rest of the year. In Tenet and USPI, our continued focus on recruiting top physicians and the community built on care marketing program across our operations are critical to our success.
We are working on our service line portfolios across both businesses and are ensuring these are tailored to the needs of our various communities. We believe our best referral is our patients, doctors and our employees who live and work in our communities. Conifer set another record for quarterly performance, achieving the highest quarterly EBITDA and EBITDA margin in its history. Conifer has great opportunities ahead and there's a lot of excitement in the organization about the changes that we're about to embark on. I also want to mention, as I stated in the Conifer release, that we're reconfirming our 2019 outlook for revenue, adjusted EBITDA and adjusted EPS.
But before I turn this over to Dan, I really need to comment on the terrible tragedies we've all witnessed this past weekend. We are the 2nd largest private employer in El Paso, with over 5,000 employees from every part of our company who have been impacted in so many ways. We cover 4 acute care hospitals and over 50 access points, including outpatient centers and physician clinics. The response to the El Paso tragic situation by Tenet Medical and support teams was excellent. And I also want to mention the amazing response by HCA's Del Sol Medical Center and the University Medical Center as well as all of the first responders who raced into danger.
These individuals who live and work every day in El Paso showed what teamwork and amazing commitment means in a time of crisis. The Tennant family is deeply saddened by the events that have occurred and we view El Paso as part of our family and will stand with them during this difficult and tragic time. Through the Tenet Healthcare Foundation, we are announcing a donation of $100,000 to the El Paso Community Victim Fund that's being set up for the shooting victims. And we will also match up to an additional $50,000 of donations made to the Tenet Healthcare Foundation by our employees, vendors and others throughout the Tenet Enterprise, which we will then send directly to this El Paso Community Victims Fund. We are very proud of our teams in El Paso and we will support them and their families during this very difficult time.
So with that, Dan, I'll turn it over to Dan now so he can discuss the highlights. Dan? Thanks Ron, and
good morning, everyone. Let's begin with volumes. The improvement in our volume growth is noteworthy, representing a sharp improvement from recent trends. Our adjusted EBITDA of $657,000,000 was above the midpoint of our outlook range despite $13,000,000 of additional expense due to a decline in the treasury rates. Adjusted EPS was $0.56 also above the midpoint of our range.
Our Hospital segment generated $347,000,000 of EBITDA. USPI's EBITDA was up 8.4% and EBITDA less facility level NCI was up 9.1% after adjusting for the divestiture of Aspen, our former UK business. Conifer's EBITDA was a record $103,000,000 with margins up 5.40 basis points to 29%. And adjusted free cash flow was $191,000,000 this quarter. Turning to slide 5, hospital volumes were very strong this quarter.
Admissions increased 3.3% and adjusted admissions were up 2.2%. Saum and our hospital teams have achieved significant volume growth in a short amount of time. This was the strongest volume quarter that we have delivered since the period immediately following the expansion of coverage under the Affordable Care Act. Revenue per adjusted admission was strong too, up 3.4%. Cost per adjusted admission were up 3.5% with about 60 basis points of this cost growth due to additional expense as a result of a decline in treasury rates.
We are excited about the improving volumes and we will continue our aggressive work to achieve additional cost efficiencies over the next few quarters. Moving to our ambulatory business on Slide 6. In our surgical business, revenue grew 5.2% on a same facility system wide basis with cases up 2.6% and revenue per case up 2.5%. In the non surgical business, which represents our urgent care and freestanding imaging centers, revenue increased 8%. EBITDA in the ambulatory segment grew 8.4% to $207,000,000 and EBITDA less facility level NCI increased 9.1%.
These growth rates exclude the $7,000,000 of earnings that Aspen generated in the Q2 of last year. Let's now talk about Conifer on Slide 8. Conifer delivered another strong quarter with $103,000,000 of EBITDA and a 29% margin. Conifer's 2nd quarter results included $13,000,000 of annual performance incentive revenue as we met or exceeded performance benchmarks for customers over the past year. These are annual incentives and they will not recur in the back half of this year.
However, Conifer has the opportunity to earn these incentives again next year. Moving to our outlook, we are reconfirming the key components of our outlook for 2019, including our views on revenue and EBITDA by segment, adjusted EPS and adjusted free cash flow. Additional details on our 2019 outlook are contained on Slides 9 through 12. Finally, I'd like to provide an update on the California Provider Fee Program. We now believe we will be able start recognizing revenue under the new program in the Q3 of this year.
Our expectation now was that we will record approximately $65,000,000 of revenue under the new program in both the 3rd and 4th quarters of this year. Our previous annual estimate of $260,000,000 of revenue for this year remains unchanged. In summary, we delivered a sharp improvement in volume growth in our hospitals. We generated solid financial results with EBITDA and EPS in the upper half of our outlook range. USVI continued to produce strong and consistent earnings with solid volume growth.
Conifer achieved the strongest financial quarter in its history and we have reiterated our outlook for 2019. Let me now turn the call back to Ron.
Thanks, Dan. I'd just like to close out by saying we really did have another solid quarter. With growth in each operating segment, we're executing against the plans and making solid progress. We do remain focused on performance, operations and people. And while we're pleased, we also know we have more to accomplish.
Aligning the organization around accountability and a set of core goals is helping to build a much stronger path forward for our future. So with those comments, I'd like to turn it over now for questions. So Brendan,
Samari, please
go ahead. Thank We will now take our first question from Josh Raskin of Nephron Research. Please go ahead.
Hi, thanks. Good morning. I wanted to start I guess on the volumes and sounded like it was pretty broad based with 'eighteen of the 'twenty markets. I know you made some commentary around Detroit, Chicago last quarter. So wondering where those fell out.
But maybe just a little bit more color geographically and or by service line where you saw some of that strength and then I guess it also connected to that would be 3Q, where are you guys in July and you've got an extra work day, things like that? Is it fair to assume you're expecting this to continue into the near future?
Hey, John. Just real briefly, as we indicated, it was broad based. We would refrain from commenting on individual markets at this point. We had broad based volume growth. As you saw, we had strength on the surgical side.
We had greater strength on the medical side. Most of the benefit that we're seeing in the markets is really coming back to the work we've been doing on managing our continuum of care, improving access in the hospitals. Some of the initiatives we've had around scheduling efficiency in the hospitals, some of the initiatives we've had around scheduling efficiency in the operating rooms and procedure based rooms in the hospitals. Clinical capacity that we're adding and technology investments that we're making will play out over a longer period of time, but we're starting to see some of the benefits of that already. But it was broad based volume improvement.
And Josh, this is Dan. The mix was good too, particularly the commercial volume trends as well.
But no specifics on Detroit or Chicago this quarter?
Well, Chicago is we've divested Chicago, so it's no longer in there, same hospital statistics. And yes, there's nothing to comment upon related to Detroit.
Okay. Thanks.
We will now take our next question from Rob Jacoby of Citi. Please go ahead.
Thanks. Good morning. First question, just if you can give us a better sense of same facility EBITDA growth or margin performance and anything hindering that as maybe we didn't see as much sort of pull through as I would have thought from the 5.7% organic top line?
Hey, Ralph, it's Dan. Good morning. Actually, we did see the pull through. We did have to absorb 13,000,000 dollars of additional expense as a result of the decline in treasury rates. So our overall EBITDA, if you exclude the additional discount rate impact, it was $670,000,000 which was at the top end of our range.
So we saw pretty good pull through. In terms of margins on a same hospital basis for the quarter, when you normalize for the risk contracting business and that discount rate item I mentioned about, we grew our hospital same hospital segment margin 10 bps, 10 basis points.
Okay. That's helpful. And then just a follow-up question, just going back to sort of the volume side of the equation, obviously a strong result. A
little surprised, I guess, not to see the sort of
the flow through, I guess, on the surgery side. So maybe just help us on where you're seeing the declines there in terms of service lines? And how much of that may be just a shift from sort of hospital to ASC that hurts the optics there? Thanks.
Yes. Hey, Ralph, it's Saum. So, obviously, we're very focused on improving our surgical volumes through many of the same initiatives that I described earlier. That takes a little bit longer, frankly, as we move from some of the more immediate operational things that allow the full weight of the programs that we have to take hold to improving service levels in many of our operating rooms and other things. When you look at the total surgical volumes, we think Q2 is a sign of strength relative to where we've been in the past.
And I think that importantly, when you look at the ambulatory surgeries in conjunction with what we're doing in the hospitals, we had significant strength from that standpoint, including in the tethered hospital markets. So we feel pretty good about the progress we're making there. There's obviously a long way to go. And the investments we make in clinical capacity and the technology investments in some of these higher end service lines will continue to pay off over time.
Okay. Thank you.
We will now take our next question from A. J. Rice of Credit Suisse. Please go ahead.
Hi, everybody. First, just maybe to get you to comment a little more on your comments about free cash flow. Even if I normalize, I guess, for some unusual items in the first half, it looks like you were about a positive $43,000,000 and you're still holding to a $600,000,000 to $800,000,000 guidance number. What about the back half that gives you some confidence that you'll see that kind of swing? Is that all seasonality or are there other things in there?
Good morning, A. J. This is Dan. Yes, absolutely. Some of it is seasonality.
Let me go through just a couple of numbers. So you're right, $43,000,000 of adjusted free cash flow in the first half of the year. We do have we've talked about this in the past. We have certain annual working capital funding requirements in the first half of the year, namely where we match our employee 401 contributions and our incentive compensation payments. That's roughly $250,000,000 So you won't see that in the back half of the year, obviously, since it's a one time a year funding.
So you start with the 43, dollars add $250,000,000 to that. We obviously are anticipating earnings growth in the back half of the year of roughly $160,000,000 So that will contribute to improved free cash flow in the back half of the year. There is some timing issues related to payments from customers, just a couple of days here and there between receiving in the quarter versus in the subsequent quarter related to our Conifer business, that will be about $40,000,000 of additional cash flows in the back half of the year. We're anticipating there should be some tax refunds coming in around $15,000,000 there. And then we saw an uptick in days in AR in the first half of the year, which is roughly $90,000,000 to $100,000,000 We do not expect that to recur in the back half of the year.
So when you start taking those items into consideration, that's why we feel good about where our free cash flow guidance is for the year. We're obviously incredibly focused on improving free cash flow generation. It's not unusual for our free cash flow in the first half of the year to be softer than the back half of the year due to the certain working capital annual funding requirements.
Okay. And maybe my follow-up would just be around one more swipe at the volume strength. Do you think that I mean, a lot of what you're describing is the initiatives that you guys have taken and obviously the benefit of divestitures and things like that. Can someone just comment on what you're seeing in the underlying market tone? Do you believe that there's increasing strength in the volume trend in your underlying markets?
And I guess medical in particular since that was a particularly strong one, but just generally would you comment on what you think the underlying market is doing?
Hey, Jay, this is Saum. The underlying I mean, first of all, we in our underlying markets have a number of markets with significant growth, both in terms of the population and in recent trends, if you look over the last 4 or 5 years from a coverage standpoint, right? So while we appreciate those strengths, a lot of what we're doing and focused on over time includes taking market share or market share back in many of these markets based upon improving our both service lines, but also many of the operational things that we're focused on, which are resulting in some of the early volume strength as we rebuild, as I said, over time, the surgical programs and some of the cardiovascular and other procedure based programs over time. So again, I don't think from the numbers I see there's any major change in the underlying volume environment in the industry. Certainly, if you look across both the investor owned and what the large not for profit health systems are reporting, I don't see any significant change in trajectory there.
I think our focus is more on making sure that we are performing up to the level that we should in each of our markets. And probably that is resulting in both riding the trend, but real market share capture, which is our goal.
Okay, great. Thanks a lot.
We will now take our next question from Pito Chickering of Deutsche Bank. Please go ahead.
Good morning, guys. Thanks for taking my questions. You increased the hospital same store revenue guidance, which implies a stronger back half revenue growth versus the first half. You didn't increase the hospital EBITDA guidance. Are there new headwinds on hospital EBITDA that prevented you from raising guidance?
Or are you guys just being conservative here?
Hey, Peter, it's Dan. Good morning. Now listen, it's early in the year. We're tracking a little bit ahead of where we thought we'd be from a revenue perspective. But it's a pretty wide range we have out there.
So we still believe we're within that range. We're obviously target towards the upper half of the range, but we'll see where we come in, in the Q3 and then update accordingly at that point.
Yes. Look, this is Ron. I think that this is the end of Q2. We're beginning to see really some very positive things. I'd like to get it through Q3 to make sure the trend is solid and we know where we're heading before we so you could call that conservative or realistic or whatever, but we think the ranges are appropriate.
Okay, great. And then a follow-up here. Watching the uncompensated care, the trends continue to grow to 26%, 20%. Is this a trend you should be worried about? And can you walk us through what you're seeing on these trends?
And also looking at the self pay account receivables over 180 days, you seem to be taking up from 52% in this quarter from 42% at the end of 2018. Can you give us more color on that?
Hey, Pito, it's Dan. Listen, the uninsured trends have been relatively consistent with what we saw in the Q1. I would say there's nothing unusual or surprising. Most of the growth in the uninsured volume is related to states where they did not expand their Medicaid programs, but that's nothing new. So I wouldn't say there's anything really unusual.
Great. Thanks so much.
We will now take our next question from Sarah James of Piper Jaffray. Please go ahead.
Thank you. You guys have been consistently exceeding expectations on the segments where you focus on specifically for turnarounds. And one of the outstanding pieces here is the risk based contracting. And last quarter, you talked about turning it around through management changes and reevaluating if these contracts make sense for Tenet going forward. So can you update us on where you are in the process of evaluating those types of contracts and if you're seeing any initial signs of improving profits?
Thanks.
Hi, Sarah. It's Dan. Let me address that. Yes, actually we did see pretty significant improvement in the Q2 in terms of the overall operating results related to that risk contracting business. I think we talked about last quarter that the losses were roughly $10,000,000 or $11,000,000 that came down a fair amount in the Q2, which to a couple of $1,000,000 which that's what we anticipated.
We brought got new management team in place. We're going through reevaluating the entire business, the infrastructure, all management levels. And so far, we're making pretty good progress and we would expect our 2nd quarter trends to be fairly consistent with what we're anticipating in the back half of this year.
Got it. And the follow-up on that, I guess, just big picture, is this type of contracting something that you could see at one point in the future being a contributor to earnings? And is it something that you would want to grow that could be an important part of Tenet strategically long term?
Well, certainly, we look for opportunities to enter into certain risk arrangements where it makes sense. I would say, listen, this isn't necessarily ever going to be significantly material to the company's overall financial results. But certainly the drag that we saw in the back half of this year and in the first quarter, we don't anticipate that going forward. And as we continue to evaluate the business and the associated contracts and we'll make certain decisions as to what business lines we remain in related to that business. So we have it under control and that's what we work to get to and that's so we're on track with where we thought we'd be.
And Sarah, this is Sum. The only couple of things I might add to that is we participate successfully in risk sharing arrangements in some of our markets where there's more delegated risk already. We have for years without any difficulty. And we are also significant participants in government based risk sharing programs. For example, we're one of the largest who are in the BPCI program, BPCIA program, which we expect to be successful successfully executed across our system.
So risk based contracting is a broad term and can apply to a lot of different types of arrangements. Obviously, we're more selective about what we're doing at this point, but we also have a track record of success in many, many other risk based contracting arrangements outside of the one that we've referred to over the past quarters that happened to go south.
Thank you.
We will now take our next question from John Ransom of Raymond James. Please go ahead.
Hey, good morning. Obviously, the MedNow expense is a bit elevated this year. Without holding you to a specific prediction, if you look at hospitals that have been divested, service lines that have been divested, maybe up tearing up physician groups, your experience this year. Is that something it seems to me like we should see that trend tick down looking at the leading indicators, but I know it's complicated with rates and actuarial assumptions, but can you give us some handle on to think about that expense over the next 3 to 5 years?
Hey, John, it's Dan. Good morning. Good morning. Certainly, we're driving toward reducing the levels of med mal expense on a going forward basis. What we have been doing is, as you're aware, over the past roughly year is reevaluating and assessing the current portfolio of claims and we've made very conscious decisions to settle various matters.
And your point about certain divested markets, yes, there's been a couple of markets where we've exited, where the trends there were at higher levels than certainly we would like. And now that we've divested those markets, what people should anticipate over the longer term is we wouldn't necessarily have those type of headwinds from a settlement perspective related to those markets. So yes, what we've talked about is we anticipate at least through the end of this year for our expense levels to remain relatively consistent with what we've seen in the first half of this year and the back half of last year. But as we move forward and we obviously haven't put any numbers out for 2020 or beyond yet, but we are certainly working toward reducing the level of malpractice expense down the road. And it's a number of different initiatives.
We've obviously exited some pretty tough markets from a litigation perspective as well as our focus on various service lines, where we may not have had the strongest position and we've decided to close certain service lines in certain markets. So we're obviously very focused on that and that's where we're heading in the future.
Okay. And then look, I
know you're not providing 2020 guidance, but at least in terms of some of the numbers we've looked at when you wrap around the cost cuts for a full year and you've a little bit of EBITDA growth, you're going to generate in our model something like $400,000,000 to $600,000,000 of true free cash flow. What I mean by that is cash that could actually be available to pay down debt. I know you gave an adjusted free cash flow number, but that's not really a number that's going to pay down debt. So as you think about prepping the company for the Conifer spend and priorities between M and A and USPI and just cash debt reduction? How are we thinking about prioritizing those dollars?
Thanks.
Dan again, Jordan. Obviously, we are very focused on reducing our debt. We've obviously talked about reducing leverage as well to 5 times or less, but we are also focused on reducing the absolute dollar amount of debt. And so when we as we generate free cash flow and as we make investment decisions, that certainly will be at the top of our mind in terms of allocating capital.
Yes. This is Ron also. Listen, I think we've made a lot of changes here and we've stabilized
a lot of
I don't know the right word, stabilized, but we've certainly moved the company forward in a lot of areas very quickly. The area that we will put significant amount of additional interest in now and not that we weren't interested, but more emphasis from my office to the company will be on cash and where we spend our money and how we spend it even at the lowest level. And it is something that Saum and I are going to work on together to be very committed about. And it's not something that gets resolved in the next quarter, but we do need now to, I think, increase the amount of emphasis and the amount of focus across the entire enterprise on a day to day cash management basis that I think we could do a better job at. So and that is all geared towards what we've said consistently, which is that will be addressed through earnings and we will do that through, I think, adding that process to it through the entire company.
And it's also something from a Conifer standpoint that they're from a collection standpoint as well as from even where they spend money and you can see the tightening we've done there. So there will be a lot of focus on that going forward much more than I think the company has felt in the past. So because we're at that point now to take that step.
Right. And then last one for me, maybe this is for Saum, but you've been in the organization for a while. Where do you think you are on a 1 to 10, if you will, in terms of integrating the opportunity between the Tennant legacy hospital systems and the USPI ASCs? And is that I mean, other companies who've done this, they call it collaboration, if we want to call it a collaboration rate, is that something that there's more potential for in the future? And do you see the companies kind of operating separately today or do you think there's value in them being more integrated?
Hey, John. It's a really good question. And I would say that we're early in that journey. It's hard to put a number to it, but I would say 3 to 4, if there's a 10, if you want to have a number to it. Look, I think there's 4 or 5 different things from an integration standpoint.
The first is obviously market facing opportunities in the tenant markets with USPI. We embrace ambulatory both from a surgical standpoint, imaging standpoint and obviously the urgent care business that exists there. And we're very focused on business planning together from the standpoint of what we can do in the markets to expand our ambulatory presence and access points for our patients. So that's kind of opportunity number 1. The question of USPI operating separately or together, I mean USPI is literally the leading platform with not for profit health system partners across the country and there both through the integrity of those businesses and the growth prospects that exist in those markets and the way USPI operates with those partners.
Our objective at Tenet is to actually match the level of that partnership in our markets that USPI has achieved with its most successful not for profit health system partners, which represents upside for both USPI and Tenet as a whole together and also our clinical community in the markets in which we operate. So there's success to be had all around. The 3rd component of integration is obviously looking for those functions, especially starting in the back office, where we have the ability to capture and create synergies. We're down that path and we'll continue down that path over time. And then finally, there are opportunities more from the standpoint of market facing and clinical ventures that we would pursue together.
So when we think about things in the future, whether they be more near term in terms of how to really approach the opportunity in orthopedics collectively, those are immediate opportunities that we expect to have benefit over the next 12 months. And if you think about it over a longer period of time, ambulatory cardiology procedures and other things are areas where we simply just do that planning together as a joint operating management team between myself and Brett and his team in order to capture those opportunities by making a single set of rather than a double set of investments. So going through all those points, there's a lot of upside here that's still left from the pathway that we have together. Hey, and John.
Great. That's
Brad. No, that's okay. This is Brad.
I was just going
you obviously support exactly what Tom said, I couldn't agree more. And I think if you look at just one data point as it relates to how Tenet and USPI are integrating, you don't have to look very much further than our pipeline. If you look at our pipeline a number of years ago, there's actually very few de novos and acquisitions in the pipeline that were in the actual Tenet markets. If you look at our pipeline today, our pipeline is significantly weighted towards the Tenet Hospital markets and that will continue to grow over time. In addition to obviously continuing to support our 50 plus health system partners across the country, so there's a more healthy balance between the 2 than there was just a few years ago.
Great. That's it for me. Thank
you. Thanks.
We will now take our next question from Brian Tanquilut of Jefferies. Please go ahead.
Hey, good morning, guys. Congratulations on the quarter. Dan, I
guess my question for you, as I think about
the going back to Ralph's question earlier about margin performance, I mean, even if I back out the 13,000,000 dollars hospital unit margin up 20 basis points and a 5.3% or 5.6% same store revenue number. How should we be thinking about your ability to drive leverage? I mean, this is a pretty solid same store performance. So how should we be thinking about your ability to drive that?
Hi, good morning, Brian. It's Dan. Absolutely, we believe there is a lot of opportunity to leverage our existing infrastructure in the hospital segment and grow margins. As I mentioned, we're up in the quarter when you normalize for divestitures from last year and that was contracting business and the discount rate. It is up 10 bps.
We obviously need to do better than that, but we are making improvement. One of the things John mentioned a couple of minutes ago, as we look down the road in terms of our malpractice expense, we'll obviously be targeting reducing those levels of expense. But as we continue to grow our hospital volumes, whether the medical cases or surgical cases, we'll be able to take advantage of our existing capacity that we have and be able to drive incremental margin. We also are very confident in terms of our ability to execute on our cost reduction initiatives, which right now are $450,000,000 in aggregate. As we move through the back half of this year, we anticipate additional ramp in those efficiencies.
And then as we move into next year, as we talked this $200,000,000 additional cost efficiencies will capture about $50,000,000 this year and we'll capture the rest next year. And listen, we there's opportunities in terms of integration of various functions across the 3 business units, As Saum mentioned and particularly related to USPI, there's still more opportunity for site consolidation. We are consolidating our corporate offices. We continue to be very focused on labor management. We think we've been doing a pretty good job in terms of consistent practices and standards across the hospital platform.
And in terms of other operating expenses, there's a lot of additional opportunity there as we continue to renegotiate contracts, manage contracts better, rationalize various vendors where we may have multiple different contracts for the same vendor across the portfolio. So we've been executing on that. There's automation and centralization and we've talked about offshoring, which also will create efficiencies. And we've also been digging into our IT spend and we think there's opportunities there as well in addition to what we've already executed on. So when we think down the road in terms of the hospital business, given our ability to execute on cost efficiencies and grow our volumes, we're optimistic we'll be able to grow the hospital margins.
I appreciate it. My follow-up, Dan, as I think about your comment on the California provider fee, I know sometime in the second quarter, there was a lot of discussion about that being pushed out. What changed or what gave you that visibility and confidence that we're going to recognize the $65,000,000 in Q3?
Based on where the process is at this point, with the state working with CMS and we stay on top of that. We're very closely monitoring that. And based on where we see things heading here this quarter, we believe we'll be able to recognize that revenue in the Q3. So when we look if you go back 3 or 4 months, we didn't have as much visibility on where process may be at this point, but we feel pretty good about where things are at. And so at this point, we feel good about being able to recognize the revenue in the Q3.
And again, there's no change to our annual estimate. It's still $260,000,000 for the year, about $65,000,000 a quarter.
All right, got it. Thanks, Ed.
We will now take our next question from Whit Mayo of UBS. Please go ahead.
Hey, thanks. Maybe first one for Brett. I mean, if I could actually see the de novo pipeline for your surgery centers, any common theme there with the type of centers and why systems today are pursuing this strategy with you now? And just curious if you could talk about the size, the physician syndicate service lines, are these all ortho focused? Just anything that stands out to help visualize the opportunity?
Thanks.
Hey, Whit. Sure. This is Brett. Yes, I would definitely say that our de novo pipeline is accelerating. It's really a combination of a number of different factors.
First, and I think you're aware of this, most of the health systems around the country are very focused on accelerating their ambulatory growth, which is resulting in development opportunities and de novo opportunities
as a way for Tennant as well as
our health system partners to enter new markets in a very capital efficient fashion. There's also opportunities to develop de novos on campuses that are being used to move lower complexity cases to a lower cost setting. And you combine that with the migration of higher complexity surgical cases from hospitals to ASCs and we're seeing increased opportunities for the single specialty center of excellence in the areas of ortho, spine, etcetera. So in general, that's a quick answer to why we see such a strong growth in our de novo pipeline. And in terms of the kind of the mix of those de novos, I would say probably half of those are single specialty in nature, again, spine, total joint, ortho and the other are multi specialty in nature.
That's helpful. And second question just for Dan. Can we talk a little bit about the seasonality for the acute business? I mean, as I sort of reflect back on the last 4 to 5 years, you've earned a lot more in the first half than you have in the second half. And obviously, your guidance for the acute segment is much more second half weighted this year.
So can you help maybe bridge the gap? Because history says that it's tough to reconcile, but I think it's a little difficult to look at prior years with so much noise with portfolio management. So any help would be great. Hey, Whit, it's Dan.
In terms of when you think about the seasonality in the business, obviously, the Q3 is generally a quarter that's softest in terms of volumes and earnings is due to people on vacations, etcetera. But when we think about the 4th quarter and really the entire back half of the year, the improving volume trends that we're seeing give us confidence that we're going to continue to grow the hospital volumes and ultimately the earnings. We've talked also that the upside from the cost efficiencies that we're executing on are going to be more pronounced in the 4th quarter. So the continued trajectory from a volume perspective, our focus on cost management as well as our pricing yield has been strong and we anticipate to get some lift in the back half of the year from pricing as well. So those are some of the key variables why we feel confident in the ability to drive the growth in the hospital business in the back
half. All right. Well, maybe one last one just to slip in. Just any changes with state supplemental payments that we should be aware of over the next 6 months now that we're in the state fiscal year cycle?
No, nothing major. Obviously, I talked about the California Provider Fee Program, but nothing major at this point. Okay. We're good. Thanks.
We will now take our next question from Patrick Feehley of Barclays. Please go ahead.
Thanks. Good morning. When we look at the other operating expense line on a same store basis, Conifer is down $16,000,000 USPI down about $10,000,000 But the hospital segment is up about 85,000,000 dollars a little over 10%. Is there anything specific that's driving that? I know you talked a little bit about Med Mal.
Can you maybe quantify that increase versus the prior year? Thanks.
Yes. Patrick, it's Dan. In terms of the other operating expense line, certainly that is where malpractice goes through. We do have an outline of the various elements of the increase in other operating expenses in our Form 10 Q and back in the MD and A section. But between Med Mal and as we make additional investments to grow our business, that's some of the items flowing through that line.
Overall, we feel really good about our cost management. As I mentioned in my prepared remarks, costs were up about 2.9 percent if you exclude the discount rate. And we continue to execute on our cost reduction initiatives that we've talked about at great length. And there are more opportunities, as I mentioned a few minutes ago in that other operating expense line, as we continue to dive in and reevaluate contracts, where we have some contracts will probably terminate down the road, where we just got a number of vendors we need to rationalize and start leveraging our scale more across all the business units.
Got it. Thanks. And just a follow-up on the un compensated care question from earlier. I just wanted was there any change to your discount or charity care policies for 2019? I just asked because we see the uncompensated care up, I think about 300 basis points as a percent of revenue.
But it looks like the charity and uninsured volumes are actually down a little bit as a percent of overall volume. So just curious, is there any change there in those policies or maybe possibly this is just an impact of the divestitures that we're seeing in the uncompensated care numbers? Thanks.
Yes. I mean there hasn't been any noteworthy change in our policies. I mean, we have seen an uptick in the volume to some degree, as I mentioned, predominantly in the states that did not expand Medicaid program. But I would the trends that we've seen so far this year haven't been anything that were unexpected. Actually, the trends actually in the second quarter sort of moderated from what we saw in the back half of last year.
So obviously working with our Conifer colleagues, when uninsured patients do arrive in our facilities, we do a really good job. If they qualify for insurance coverage through some program, such as Medicaid, We do a really good job, getting them covered. Our success rate is, about 96%, so really strong. So if someone can get some coverage, we'll be able to obtain it for them. So
we'll keep working
at it, but again, nothing particularly unusual.
Mary, we're going to take one last question and try to end before 10 so people can get on the other call. I know people are looking to join. If you could take the last question, Mary.
Yes. We will now take our final question from Peter Costa of Wells Fargo Securities. Please go ahead.
Thanks for squeezing me in guys. I have sort of a broader question regarding some of the new rate rules that have come out from CMS. First, if you have any comment on transparency that was in the outpatient PPS rule and then on the inpatient PPS rule, the final rule, the payments are coming down a little bit relative to what the proposed rule was from $4,700,000,000 increase to a $3,800,000,000 increase. And I'm curious, what was the headwind to you in the Q4 for that?
Peter, it's Dan. Actually, let me go through both the final IPPS role, the inpatient role as well as the proposed outpatient role. From the annual rate perspective, the inpatient role actually came in a little better for us. We estimate it to be about 1.4%, which is about $28,000,000 of annual revenue. That's a little higher than what we were anticipating.
When the proposed rule came out, we thought it was going to be in the low 20s $21,000,000 $22,000,000 So it got a little bit better, namely on the DISH line. On the outpatient role that's proposed from a hospital perspective, 2.4% proposal. That's about $15,000,000 of additional outpatient revenues. That's pretty much in line with where we thought it would be. The ASC rate update that's being proposed is 2.7% And then there are certain cases that will now be able to be reimbursed on they'll be placed on the ASC list.
So we think that creates opportunities for upside for USPI. So I would say overall, outpatient pretty much where we thought it would be and the inpatient a little bit better from the proposed rule.
Great. And then just as a follow-up on the transparency commentary in the outpatient rule?
Yes. We are certainly supportive of making the experience for our patient as good as possible and enabling our patients to understand the economics associated with any care that will be provided to them. We our Conifer team, we have technology in place to help patients estimate how much it will cost them for various procedures. And we do a pretty good job looking at their insurance coverage that they have, working with them, understanding their plan, understanding their coverage and estimating what the estimated costs will be. So it is it's obviously important to consumers and patients and we're obviously supportive of making the process as transparent as we can.
Okay. Well, thanks everyone for joining us today. If you have any follow-up questions, you can reach me at 469-893-6992. We look forward to speaking with you again either at a hopefully at a conference in September or on our Q3 call. Thanks.
Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.