Good day, and welcome to the Tenet Healthcare 4Q 2018 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the
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. 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 subsequent SEC filings. Tennant assumes no obligation to update any forward looking statements or other information that speak as of their respective dates, and you are 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 Chief Executive Officer. Ron?
Thanks, Brendan, and good morning. As we posted last evening in our release, Tennant delivered strong financial performance in 2018. Revenue, EBITDA and EPS were all above consensus. EBITDA was in the upper half of our outlook range, up 4.7% and up 9% on a normalized basis. We also more than doubled in EPS in 2018 to $1.86 which was above the high end of our outlook range.
Each of our businesses rounded out 2018 with solid results. USPI delivered adjusted EBITDA less facility level NCI growth of nearly 13% after normalizing for the divestiture of Aspen. USPI's case growth was 3.4%, including strong performance in both our surgical and non surgical businesses. Conifer had a great year with adjusted EBITDA up nearly 35% on a normalized basis. They also improved margins by 3.30 basis points in the Q4 alone.
Their performance throughout the year was a result of diligence and execution and a more pointed approach to cost management. Our hospitals delivered normalized EBITDA growth of 2%. Volume performance was below our expectations, but we do expect improvements throughout 2019 with our new leadership and new focus. And to that point, we are actually addressing gaps in performance with new leadership teams in specific hospitals and markets and with increased oversight and thoughtful direction from Saum Sotarya, our new Chief Operating Officer. One of Saum's highest areas of focus in 2019 will be to lead the continued restructuring of our platform for organic growth in our hospitals.
With that overview, I'd now like to take a few minutes and speak to some of the specifics in 2018. Clearly, it was a year of significant change, change in the way we think, change in the way we operate, change in the way we lead and engage our teams and change in the way we conduct outreach in our communities. We've made measurable changes to our culture and we'll continue to make significant moves throughout 2019. We believe it is correct and fair to say by any measure we are a different company than we were in 2017. We are much healthier, more focused and more aligned across businesses.
As you can see on Slide 3, we delivered on many of the plans we laid out at this time last year. Broadly speaking, these plans were centered on core areas: performance, which we just discussed portfolio enhancements efficiencies and importantly people. There is an inseparable link among all of these elements, because while individually important, they follow different paths. They also very they're very intertwined creating a foundation for sustainable growth. I believe that we will be more successful with our teams energized around a common mission and a sustainable drive for consistency and execution of performance and quality, service and delivering the mission efficiently.
This is something I and the teams have been working on since I arrived, revisiting and restructuring core strategies, aligning operations around the problem, not the person, hiring the best talent possible, integrating functions, removing unnecessary processes and as a team focusing on the core of what we do and how to do it better for the long term growth and returns. So let me provide a quick rundown of some of the key steps forward from last year that speak to those points. In addition to delivering solid performance, we also divested non core operations including 17 hospitals and facilities in 2018 and another 3 hospitals just last month. These divestitures generated proceeds of over $1,000,000,000 including cash and the elimination of capital lease debt. We did this while continuing to expand our ambulatory portfolio and complete the buy up of USPI.
We invested $240,000,000 in ambulatory M and A, including adding 27 facilities and 7 new health system partners. This was a great year for acquisitions of de novos and we will continue to pursue these opportunities aggressively. We exited 2018 with $250,000,000 in run rate savings And today we're announcing a new $200,000,000 initiative. We expect to be on the $200,000,000 run rate as we exit 2019, bringing the total cost savings to $450,000,000 and a little more than 2 years. I'm really proud of the progress the team has made here and believe that our teams have adopted a mindset that we can always do things more efficiently and effectively without compromising the quality of our work and service to our patients.
We've reshaped leadership ranks across the organization, tapping the best talent internally and externally to help define the culture of accountability we need ingrained in our teams. In addition to these achievements, much of what we did last year was to identify areas that were lacking the appropriate level of attention and strategic direction like marketing, physician recruiting and scheduling, just to name a few examples. We identified these in other areas across the business and continue to make changes to put us on better footing for the future. And much of the transformation taking place is happening because we have new or different leaders in place, some of whom have been in their positions for the better part of 2018, but many of whom were recently appointed or promoted, so they just have started to scratch the surface. When I think about 2018 as a year of change, I think about 2019 as a building year.
I'm pleased with what we've achieved in 2018, but we have a lot we need to improve upon going forward, including volume growth in our hospitals, a stronger sales pipeline for Conifer, patient satisfaction, physician recruiting and better coordination of hospitals and ambulatory platforms. At the highest levels, we remain largely focused on the same things, growth and operational excellence and everything that supports that to a stronger team of people and a more unified culture. Our priorities for 2019 are summarized on Slide 4. As it relates to growth, we are focused on earning patient loyalty. Growth in our hospitals and at USPI is dependent on building and sustaining greater loyalty from our patient.
This is about how we handle arrival to departure and everything in between. What we do impacts new and returning patients and our objective is to be seen and known as the location desired for quality care. Driving further improvement in quality and service is core to these efforts and something Doctor. Ernest Franklin, our new CMO is working very closely on across the enterprise. Doctor.
Franklin joined us in January and his proven track record and clinical leadership and his tenure as a physician and operational leader will be incredibly beneficial as we work to improve patient experience. We're also working to strengthen our network of physicians. We are focusing on earning more business from independent physicians and improving scheduling, providing the best place for quality care to be delivered. We have also restructured physician recruiting focusing by service line on the groups that make a difference in meeting the needs of our communities and patients. We are focused on adding new physicians on an ongoing basis throughout 2019, bolstering our clinical skills and depth across our business units.
Another major part of our growth plan is the direct community focused marketing approach that we've discussed previously. Integrating our marketing programs and communications teams similar to what we're doing with other departments, we ensure we use the same umbrella campaign across the country and tailor it locally to the service lines that fit the needs of that specific community. We continue to brand local hospital systems, reflecting the local heritage and name recognition that resonates within the community and engaging our teams locally to be the face and voice of that message. Our message is now built on the tagline, a community built on care And every aspect of our multiple systems, hospitals, surgery centers, in tenant markets, urgent cares, freestanding EDs, all will carry this message with their local brand. Whether it's the DMC in Detroit, the hospitals of Providence in El Paso, the Desert Care Network in California and so on, we will deliver the same unified message in print, radio, video and to community influencers.
All of these messages are using our employees, doctors and staff, not actors and are produced internally. They serve as a linchpin to changing the culture, starting in the field and flowing back to headquarters with a clarity of the message and purpose being stated by our employees, doctors and teams. We will continue to build on developing our brand image through 2019 and going forward. I already spoke about our efforts to continue expanding our inventory platform, which remains a top priority given the strong growth fundamentals and solid returns generated by these opportunities over time. We have a very healthy pipeline of acquisitions and de novos and prospective health system partners.
This will remain a key to our future growth. Conifer has had an excellent year in executing their mission. Increased efficiency, improved quality and overall top quartile results with a year over year improvement of $74,000,000 in EBITDA. We delivered nearly as much EBITDA growth at Conifer in 2018 in incremental dollars as Conifer delivered over the prior 3 years. Sales growth has lagged and we have focused on reengineering the sales process and team.
We expect to add a new Head of Commercial Sales shortly and rebuild the sales team. We've identified targets and are continuing to be engaged in new potential business. Our results from last year will improve our competitiveness in the market and we expect to see this develop over the year. With respect to Conifer, we've said on a number of occasions that a range of alternatives are being evaluated and that we would close out the process only when the right decision is reached for Conifer and for Tenet shareholders. We have recently entered into exclusivity with 1 of the parties that has been engaging with us.
While there can be no assurance that this negotiation will result in a transaction, we are very pleased with this progress and we will continue toward delivering the best transaction for Conifer and our shareholders. As you would expect, we have confidentiality terms in place as part of this exclusivity. And due to that, we'll not offer specifics or answer any other questions at this time, other than to say it is really, really good progress on what's been a very thorough and active process. And I will provide we will provide an update at the appropriate time. That brings me to our remaining priorities of operational excellence and talent and culture.
We need to continue to enhance our agility, continue developing a culture of consistency and execution and results and build on our efforts to drive further cost containment. Operational excellence will also come from deeper integration, better coordination of our business platforms and further standardization of processes where we can leverage best practices in the right way. For talent and culture, we will develop the energy and attention required toward team development, focusing on the best and the brightest, including coaching, challenging and further developing our people and adding new high talented individuals. Having the right teams in place where we create the right environment to build long term sustainable growth for our business. Before I turn it over to Dan, I want to briefly comment on our outlook for 2019.
Our results in 2018 were strong across each of our businesses and we anticipate further development and improvement in 2019, resulting in adjusted EBITDA growth of 4% to 7%. In our hospital business, we anticipate delivering EBITDA of roughly 3% in 2019. Rebuilding volume growth is one of our biggest areas of focus in 2019 and we expect it will take most of 2019 to put us back solidly on the path to deliver sustainable long term volume growth in our hospitals. I am optimistic that volumes will respond to the changes and restructuring we're making across the country. At USPI, we anticipate delivering another 10% to 12% growth in adjusted EBITDA less facility NCI.
And for Conifer, we're targeting normalized EBITDA growth of roughly 25%. Once you adjust for the impact on Conifer from our divestiture program as well as hospital divestitures that were completed by some of Conifer's other customers. Growth and new growth will remain a key focus of this team. So with that, Dan will now provide additional details on
our results and the outlook for 2019. Dan? Thanks, Ron, and good morning, everyone. We generated $684,000,000 of adjusted EBITDA in the quarter, above the midpoint of our outlook range and up 7.4% year over year on a normalized basis. Adjusted EPS was $0.51 which was above the high end of our range for the quarter.
Our Hospital segment generated $352,000,000 of EBITDA, approximately $10,000,000 ahead of our expectations for the quarter and up 0.3% after normalized for the items listed on Slide 8. Ambulatory EBITDA was 245,000,000 dollars which was 12.4 percent higher year over year and EBITDA less facility level NCI was 151,000,000 dollars up 7.1% after adjusting for Aspen, which we divested in August. Conifer's EBITDA rose 10.1% to $87,000,000 with margins up 3.30 basis points. And adjusted free cash flow was $600,000,000 in 20 18. Turning to hospital volumes, which are summarized on Slide 9, adjusted admissions were flat excluding Chicago and planned service line closures in certain hospitals, which lowered adjusted admissions by 30 50 basis points respectively.
We divested our last 3 Chicago hospitals in January, so these will no longer impact our same hospital metrics starting in the Q1. Revenue per adjusted admission was very strong this quarter, up 5.4% after you adjust for California provider fee revenue. And expense management was favorable again this quarter with cost per adjusted admission up 3.5% with excellent results in SW and B, supplies and corporate overhead, which we reduced by 28% in 2018. For the full year, our Hospital segment produced 2.4% EBITDA growth after you normalize for the items listed on Slide 8. Moving to our ambulatory business on Slides 1011, USVI continues to perform well.
For the full year, they produced case growth of 3.4%, EBITDA growth of 15% and EBITDA less facility level NCI growth of 12.7%. This quarter, we broke out Aspen's results on Slide 11 in order to help you better understand USPI's results. Conifer had another strong quarter too, as shown on Slide 12. For the full year, Conifer's EBITDA increased 26.1% and its margins increased 560 basis points to 23.3%. Conifer's revenue was down this quarter, but that was primarily related to hospital divestitures.
Now let's look at our 2019 outlook on Slide 13. Overall, we are targeting EBITDA growth of 4% to 7% this year. In our hospital business, we anticipate EBITDA growth of 1% to 6%. If you normalize for divestitures and other items on Slide 8, hospital EBITDA will be essentially flat. Turning to USPI, we anticipate generating 10% to 12% EBITDA less facility level NCI growth.
For Conifer, we are targeting growth of 4% to 6%. Normalizing for divestitures, however, Conifer's EBITDA growth will be closer to 25%. Slide 14 contains additional details on our outlook. As Ron mentioned, we are working on a new 200,000,000 dollars cost reduction initiative. We anticipate realizing $50,000,000 in 2019 and achieving $200,000,000 of annualized run rate savings as we exit the year.
This will increase the total annualized savings from our cost reduction initiatives to $450,000,000 in a little over 2 years. Slide 14 also points out that our outlook assumes approximately $260,000,000 of revenue from the California Provider Fee Program, similar to the amount we recognized in 2018. As you may recall, the current program is scheduled to expire on June 30, 2019. So we will be recognizing $130,000,000 of revenue in the first half of this year under the current program. We fully expect a new program beginning on July 1 will be approved, but this will take some time.
As a result, we do not anticipate recognizing any revenue under the new program in this year's Q3. In the Q4, there are 2 potential outcomes. If the state and CMS approve the new program before the end of 2019, then we will recognize the revenue associated with the second half of this year in the fourth quarter. We expect this will be around $130,000,000 of revenue. If the approval does slip into next year, then we would record the $130,000,000 next year plus a full year revenue from this program in 2020.
Slides 1415 contain additional details on our outlook and Slide 16 contains some of the larger moving parts to walk our EBITDA from 2018 to 2019. Before I conclude, I would like to spend a few minutes on cash flows and leverage. Starting with leverage, we repaid $150,000,000 of debt in 2018 through open market repurchases and lowered our ratio of net debt to EBITDA to 5.6 times at the end of 2018. We expect to make additional progress in 2019 and we remain committed to reducing leverage and moving it below 5 times primarily through EBITDA growth. Finally, in January, we announced a refinancing of $1,500,000,000 of our debt, which lowered our interest expense and extended maturities.
We will continue to look for these kinds of opportunities. In summary, we delivered solid results in the Q4 and calendar year 2018. We improved margins 120 basis points in 2018 and we expect our margins to grow another 80 basis points this year, a 200 basis point improvement in 2 years. We expect to continue to strengthen our financial results this year with EBITDA growth of 4% to 7%, including the benefit of continued excellence in cost management. And we have and will continue to make progress on reducing our leverage ratio.
Let me now turn the call back to Ron. Thanks, Dan.
I just want to close by saying we will enter 20 19 with a renewed sense of urgency and volume growth, more effective execution and investing in our teams while continuing to add external talent to our mix. We'll meet the headwinds and challenges openly and with a mindset geared to addressing each quickly and effectively. So with that, Brendan, I think we're ready to turn it over for questions.
Great. Amanda, can you please start the queue?
Thank you. At this time, I'd like to take our first question from A. J. Rice with Credit Suisse. Please go ahead.
J. Rice:] Thanks. Hello, everybody. First, maybe just to quickly ask about the hospital portfolio. You saw some improvement particularly on pricing obviously in the quarter.
When you break down, I know you've got a lot of different markets performing in different ways. Would you highlight any markets that did particularly well, any that are particularly challenging? I know last time you talked about Detroit a little bit. Can you just give us a flavor for what's happening underneath the aggregate numbers in the hospital portfolio?
A. J, it's Dan. How are you? Yes, let me get a brief overview. Certainly, we were pleased with the hospital results in the 4th quarter.
As we mentioned in our prepared remarks, we came in about $10,000,000 above where our expectations were at the outset of the quarter. So as you mentioned, very strong revenue yield from Acuity. We continue to focus on more complex service lines, allocating capital, those type of service lines, as well as our negotiated contract rates. So certainly pricing was solid, costs continue to be well managed across pretty much across the board. We certainly from a volume perspective, we're not where we want to be at this point.
That's a key area focus of ours. We did call out a couple of things in my script regarding Chicago, which we sold those hospitals. So that should be out of the numbers going forward. We did have some service line closures as well. We didn't call out Detroit this time, A.
J. Detroit has not been an EBITDA problem. And so we like our portfolio of hospital facilities and really looking forward to growing those markets and driving additional growth as we look this year and beyond.
Okay. And then just maybe my other question would be around just fleshing out one aspect of the guidance in USPI and the ambulatory business. This year past year you had about I think in the prepared remarks you mentioned $240,000,000 de novos and acquisitions. It looks like in the guidance you've got a little more moderation $150,000,000 to $175,000,000 Is that just sort of your typical starting point and you may do better? Or is there some reason to think it won't be as robust as it was last year?
What's the pipeline look like? Maybe some comments about that.
Pipeline looks really good. I would say I would agree with you. The $150,000,000 to $175,000,000 that is our starting point. We've spent invested a little more than that in 2018 based on the attractive opportunities that were there and pipeline is very robust. So I'll turn it over to Brett to Yes.
Thanks Dan.
Hey, it's Brett Broadnax. First of all, yes, we were very pleased with 2018 results from a development perspective. As Ron mentioned, we invested $240,000,000 for the year. We added 7 new health system partners and we added 27 new facilities for the year. So it was one of the better years that we've had as a company from a development perspective.
As we look at 2019, as Dan mentioned, our pipeline continues to be robust. We have guided $150,000,000 to $175,000,000 But look, if we continue to find high quality acquisitions, it could be a little bit higher than that. And then on the hospital front, our health system pipeline continues to be very robust. We'll add as many health system partners in 2018 as we did I'm sorry, in 2019 as we did in 2018, which will bode well for our future growth from both M and A and SG and A.
Okay, great. Thanks a lot.
We'll take our next question from Ralph Giacobbe from Citi.
Thanks. Good morning. Certainly understand the sensitivity, but just wanted to be clear on Conifer. Ron, the exclusivity with a partner, is that just a straight up sale or is it some sort of JV or other alternative? Because I know you had mentioned other potential alternatives in the past.
Just wanted to be clear on that.
Brendan, are you there?
We're here.
Did something happen?
Yes. We can hear you now. Okay.
All right. So please go ahead with the next question, Amanda.
I believe Ralph was still asking his question. Are you still there, Ralph?
Yes, I'm here. I'm here. Thanks. I don't know if you called back to your question or not.
Yes, we didn't hear it at all. Sorry.
Okay. No worries. So it was basically certainly understand kind of the sensitivity, but I just wanted to be clear on Conifer. The exclusivity that you mentioned with a partner, is that a straight up sale or is it some sort of JV or other alternatives? I know you mentioned in the past potential alternatives.
So just wanted to be clear on that.
Well, unfortunately, I can't answer that question. And as I said to you, I'm really bound by a very tight confidentiality agreement that we signed. That's why I tried to put that in my text. I appreciate your question and I understand why you want to know. But this won't be that long of a process and I'm sure we'll be able to answer that down the road.
But right now, I'm really bound by this. And all I can say is, it's one of the partners we've been speaking to and I can't get any that we've been looking at and I can't go any further than that what I said in the statement, I'm sorry. So that's our agreement. Okay.
And then
By the way, it is good news, so for the record.
Okay. Fair enough. We'll wait for that. So you had previously targeted 3% to 5% EBITDA growth for 2019. Maybe just help us on the drivers of what changed to give you confidence to kind of raise it to that 4% to 7% range, maybe above and beyond kind of the incremental cost saves that you saw?
Thanks.
Sure. Good morning, Ralph. It's Dan. Certainly, as we fine tuned our outlook and modeling for this year. Certainly, one of the key factors is the cost efficiencies that we're going to execute on the new $200,000,000 cost reduction initiative.
So that's part of it. Certainly, as we examined each market with Saum coming on board in his role and diving deeper into each market, looking at the opportunities there. We and the trends we saw in the Q4 as well played a part in that as well. So we increased a little bit. It was nice to see the hospitals perform better than we expected in the Q4 and looking forward to continuing to deliver those type of results on the hospital side.
Okay. Thank you.
Our next question will come from Pito Chickering with Deutsche Bank.
Good morning, guys. Thanks for taking my questions. On the USPI business, same store revenues grew about 5% in 2018, margin improved at 120 basis points. Is that the right ratio going forward in terms of same store revenue versus margin improvement? Or are we at a level where margin improvement becomes challenging?
And that's because if I look at your same store guidance for the ASC is about 46% and back out about $10,000,000 to $15,000,000 of incremental EBITDA from acquisitions, I don't see a big margin improvement in your 10% to 12% guidance?
Well, obviously, as we continue to grow, the margin improvement is more of a challenge on the bigger base. We do have some facility level margin improvement built into our guidance next year. And I would say we at a facility level, focusing on reported margins, we're still at 30% facility level margins and we try to improve that a little bit each year.
Okay. And just
the other thing I want to point out, listen, the USPI has been performing incredibly well. We're very optimistic that that's going to continue organically. Just to remind you, we look at it as 2% to 3% case growth going forward as well as 2% to 3% pricing growth and EBITDA growth, EBITDA less NCI growth, 8% to 10% on a long term basis. We're going to do a little bit better than that this year. But and then when you think about the pipeline, obviously, we're really good about the business.
Yes. I mean, it's been performing outstanding. I guess actually on that same topic, minority interest expense is guiding to grow, I think double the rate of the ASC EBITDA guidance. Does that mean that some of the growth is coming from selling more shares to doctors or just something else that's incurring in the minority interest line?
No, I was going to say,
I think that's this is Brad. I think that's primarily driven by the fact that we did a couple of large acquisitions in 2018 that we acquired a minority position and it was a result of a health system partnership deal in one of our key markets around the country. So that's a large part of what's driving the higher equity and earnings.
Okay. And is there a possibility for buying back some of that MI in the next year or 2?
We can we always continue to look for opportunities to buy ownership in existing facilities that we know well. Obviously, we don't have the due diligence risk related to buying ownership of the facilities that we already own and operate. So we continue to look for opportunities within the portfolio to do that.
And Peter, just to remind you, during 2018, we increased our ownership interest in USPI from 80% to 95%, where we reacquire or purchase the remaining lost cars and interest.
Yes. All right, guys. Thanks so much. Nice quarter.
Thanks, Steve.
We'll take our next question from Ana Gupte with SVB Leerink. Please go ahead.
Hey, thanks for taking my question. Good morning. The question firstly was on the pricing growth where you saw at least in the 4th quarter 5 plus percent ex the California provider fee, you've successfully renegotiated contracts with Anthem, Cigna and perhaps Humana. Can you talk about the sustainability of this? You're baking 2.5% to 3.5%, I think, into revenue per admission for 2019 and how that plays out?
It's Dan. Well, certainly, we were pleased to see the revenue yield in the Q4 of a little over 5%. For the full year, it was 3.6%. So again, that it is being driven by our focus and allocation of capital to the higher acuity service lines and certainly our commercial book of business as well. So when we think about this year, obviously, we see the guidance, assuming that it's going to be 2.5% to 3.5%, but we feel good about where we're at.
From a contracting perspective, we're about 90% contracted for this year and little less than half for 2020. So good visibility into pricing on the commercial side and we know where Medicare is going to be. Medicare is about 2% growth year over year. So we feel good about pricing. And then cost management, obviously, feel really strong about that in terms of what we've already executed on and what we think we can continue to execute on and capture additional costs and efficiencies.
Okay. Thanks for that. And then on the USPI, just to follow-up on the M and A landscape and the competitive dynamic there in terms of the availability of assets, surgeons, the multiples and what types of players are looking to buy here?
Yes. Hi, Ana. This is Brett Brodnex again. So in terms of competition, the primary competition that we continue to see is related to other surgery center companies that are playing in the space. We're also seeing a little bit of a resurgence of competition from health systems around the country who are trying to figure out how they accelerate their ambulatory growth.
Now many of those health systems are looking to organizations like us to partner with to help them to do so. But there are health systems around the country who are deciding to go it alone and we view those as obviously competitors. And I guess the 3rd dynamic that we were seeing a little bit of at this point is large position groups who are seeking private equity partners to consider a roll up strategy. Now some people would view that as competition. Quite honestly, we see that as an opportunity as we can work with some of these PE firms help leverage our infrastructure as opposed to them having to replicate the infrastructure, then we think there's opportunity to partner with these BD firms that help them grow their footprint and scale up their business at a much more expeditious pace.
In terms of the multiple I'm sorry, go ahead.
No, sorry. I'm not
going to answer.
Yes, in terms of the multiple
Go ahead.
Yes. Please go ahead. Sorry. No, no, I'm sorry about that. Go ahead.
Okay. In terms of the multiples, I would say that they're pretty they've been pretty consistent over the last year, year and a half. We're seeing multiples anywhere from 7 to 8 times, which has been pretty consistent with what we've seen in the recent past. We don't see that changing anytime soon. We think the market pretty well stabilized from a multiple perspective.
I will say that the market is doing a better job in terms of discounting in the risk associated with some of the assets around the country, but at the same time are paying a premium for the high quality assets. But overall, the averages are pretty consistent.
Very helpful. Thank you. Thanks, Ana.
We'll take our next question from Kevin Fischbeck with Bank of America. Please go ahead.
Great. Thanks. Just wanted to go back to the volume commentary because obviously appreciate all the things you're doing operationally to try and improve things. But just wanted to understand, the economy is doing pretty well. Is there anything though that's like a counteract to 2019, why you're not going to see better volume growth this year?
You mentioned Detroit is not an EBITDA drag, but is Detroit still a drag? Or is there some other issue that's kind of holding you back this year that make it easier for us to have visibility into that improvement in 2020 beyond?
Kevin, this is Sung. Thanks for the question. I am pleased with the underlying foundation that we have in all of the remaining markets. And we have opportunity across the market in our ability to improve patient access, scheduling, some of the things that Ron described in the beginning that are just operationally going to allow us to serve those communities better. And then obviously we are focused on, but it takes time accelerating the pace at which we add high quality caregivers to our network.
And then finally, if you think about the discussion that we've been having around the strengths of the USPI platform across the country, that applies very, very much to the markets in which Tenet has hospitals. And so the integration with the ambulatory platform across the different vehicles, ambulatory surgery, urgent care, imaging, all of those remain growth opportunities for us in the tenant hospital market, which we will pursue over the coming year.
Okay. And then just a question on this on the cost saves. Can you break out how much is coming from Conifer? So just so that we know that if you end up divesting Conifer, how much of that cost saves you should be thinking about as you think it should be able to be ongoing business versus the divested business?
Kevin, it's Dan. So on the bridge, you can see the from William and Watkins from 2018 to 2019. We broke that down between the 3 business units that we'll realize this year. The full $200,000,000 will provide more visibility in terms of the specific dollar amounts by business units, a little bit down the road. But in terms of I would tell you that there are additional cost efficiencies opportunities at Conifer as well as all the other two business units and that's what we're going to be executing on.
But at least for now, refer to Slide 16, that at least gives you the paces for 2019.
Okay. Thanks.
We'll take our next question from Josh Raskin with Nephron Research. Please go ahead.
Actually, so Whit, are you on the line?
We can't hear anything.
Yes, I'm here.
Go ahead, Luke.
Okay,
awesome. Maybe just first on Conifer, I'm trying to reconcile 2 things that I presume are interrelated. First, the implied decline in the non tenant revenues seems a little steep this year. And I'm just wondering of the hospital divestitures, how many terminated the contracts with Conifer? And then second, looking at the $40,000,000 headwind from the divestitures in the bridge, it seems to suggest maybe $160,000,000 of loss Conifer revenue if we assume maybe a 25% margin or maybe $4,500,000,000 of managed revenues.
So I'm just trying to reconcile this. It just seems to imply a larger number than I would have expected.
Hey, Whit, it's Dan. The $40,000,000 or the $30,000,000 number that you've seen on Slide 16, I think that's what you're referring to. Yes, there's obviously a few pieces in there. Let me try to hit a few of them and then I'll turn it over to Steve in terms of broader overview. But that the $30,000,000 of growth, some of that is attributable to contracts we have with customers where we have price escalators in there or rate escalators that will certainly we anticipate drop straight to the bottom line.
So certain contracts we have could be the escalators could be based on CPI or another metric. So that's a fair size amount in that line. Certainly, as Tenet grows its business, there's additional revenue that Conifer realizes and we don't believe we need to add any additional resources either. So there's a little bit of that in there. And then the mix of business, it's important as we think about the types of services we're providing to all customers, certain point solutions, depending on the mix of those point solutions, the margins can be much more attractive.
We've also, in certain cases, decided to exit some business that wasn't necessarily the most attractive and may have had either smaller margins or maybe actually slightly dilutive margin. So a whole list of items that go into that in terms of what drives that $30,000,000 Steve, do you want to address the broader portfolio?
Yes, Dan. I think with the comment you made was about $160,000,000 I think it's Slide 15, you mentioned $150,000,000 in revenue decline. As we move it from, say, it was a tenant hospital and it gets divested, it then moves into commercial. And then what happens, we typically have a 2 year transition service agreement as a result of that. And so those counts now are starting to obviously come off the portfolio.
A lot of cases, as you know, they were required by some organizations that had internal operations. You know some of that happened obviously just last year and that's happening again in 2019. So that's kind of part of the process as we continue to go. So Dan mentioned some of it is a result of that and another part of it is a result of some contracts we just did not feel we want to continue with as we're coming off renewal, their profitability and other things like that. So it's kind of where it's at.
So of the just to be clear, the $40,000,000 headwind, how much of that is coming exclusively from divestitures? How much is coming exclusively from maybe terminated contracts? Or how much is coming from business that you intentionally walked away from? I mean presumably it wouldn't be much of an EBITDA tailwind if it was financially attractive.
With the vast majority of that number is coming from the investors.
Okay, perfect. And one last one since I heard Jason earlier. Looking at the $45,000,000 of acquired EBITDA in the ambulatory division this year, can you break out how much of that is expected to flow through unconsolidated versus the consolidated? And I guess that the corollary there is that the equity earnings growth and implied margin improvement looks really high this year. So I'm just trying to flesh out where all that growth is coming from.
Thanks.
Hey, Wood, it's Jason. How are you?
Good.
Good. I can't tell you how much of our unidentified M and A is going to be unconsolidated versus consolidated. We go after the deals as they present themselves and we've never been effectively able to guide to that. I will say to your point on equity and earnings, the vast majority of that is what Brett mentioned earlier that we had a couple of large acquisitions right at the end of the year that really don't impact 2018, but are coming through the equity line in 2019.
Okay. Thanks guys.
We'll take our next question from Josh Raskin with Nephron Research. Please go ahead.
Hey, good morning. It's Mary on for Josh. My question is around the ASC seasonality, which didn't seem as strong this year in
the Q4. Is Is there
anything to call out on the volumes there?
Hi, Mary. Yes, this is Brett Rodnax. First of
all, I would say that if
you look at the full year, we were pretty pleased with the overall volume growth at 3.4%. Now if you look at Q4 specifically, you have to take into consideration that the Q4 in 2017 was at 4.6%. So we had a pretty significant comp that we were dealing with and that's really the primary driver of the results in Q4 of 2018.
Okay, got it. That makes sense. And then just on the inpatient surgeries this quarter were a little bit weaker than we were expecting. Is this primarily related to Detroit or the service line closures?
This is Dan. Certainly, when we think about the surgical volumes, we need to grow those. We're not necessarily pleased where our aggregate numbers are. But I would tell you that's obviously one of the areas when we think about an allocation of capital and focusing on higher acuity service lines, the strategy is to grow incremental surgical volume, whether it's in the inpatient settings or outpatient settings.
Okay. Thanks.
Our next question will come from John Ransom with Raymond
James. Hi, good morning. Last year, you had some losses in the California capitation business that you called out in
the Q3. What's the comparison
in your 2019 guide versus what you experienced in 2018?
Hi, John, it's Dan. 2019, the risk contracting business in Southern California, you should think about it in terms of roughly $15,000,000 for the full year, probably a little more weighted into the first half. We've changed that management. We're getting our arms around the business, and we'll get it solved and but it's going to take a little bit more time.
Okay. And then secondly, just going back to the Conifer business, not Conifer itself, but what is this market for revenue cycle hospitals, is it still growing or have we hit
a maturity point in your opinion?
I'll take that one. This is Steve. No, I don't think we hit a maturity point. I mean, I think as we're looking over the years, clearly, we have estimates on how we think the market is going to grow. I think in some cases, it hasn't necessarily grown as fast as we thought early on.
We were seeing a lot happening with all the EMRs going into hospitals, a lot of focus has come out for several years. They're kind of coming out of that now whether it's conversions to Epic or Cerner. They're now starting to focus on bottom line, bottom line improvement, how do they reduce their overall cost structure around these markets. We're clearly one of those solutions across the portfolio. There's lots of conversations happening in the market.
I think we're seeing more call performance solutions or point solutions, that's areas around first denial management versus eligibility services, could be areas around self pay, It's work around your coding, your clinical documentation work. We're seeing a lot more uptick in that area right now. And the full outsourcing, you know, are very strategic moves. So there's been, I think, few of those in the market in general. I don't think you're going to see still tons of those going forward.
But you are seeing a lot of solution areas and a lot of these areas of specialty that everybody is moving towards outsourcing. A lot of outsourcing is done today, but they're typically looking for a partner that can aggregate that across portfolio. That's where we think Conifer really differentiates ourselves over the marketplace by coming in with a complete suite of solutions for the market and obviously bringing in technology enhancements, whether it's areas around AI, RPA, natural process languaging. I mean, those areas everybody's looking at currently today is these one offs. We have to break that to our entire suite of business.
And last one for me. Dan, if we just look at M and A contribution and adjust for timing, and let's assume you hit the midpoint of your guidance, what's the 2019 EBITDA lift from M and A and this would include stuff that you bought in 2018 that you didn't own for the full year plus what you plan on buying in 2019. Can you kind of size the total EBITDA lift year over year?
Yes. I would John, on Slide 16, we call that out. And it's $45,000,000 That's a combination of deals that were done in 2018 as well as some deals that were done that we anticipate will be executed on in 2019. You may ask the question, what's the breakdown between prior year deals and what we anticipate related to investments we'll make this year. It's probably roughly 1 third of that, 45 would relate to investments that we make in 2019 and the remaining related to prior year deals.
Yes, that's what I was getting at. All right. Thanks so much.
Our next question will come from Brian Tanquilut with Jefferies.
Hey, good morning guys and congrats on a good quarter. Ron, so you guys have done a really good job with the $250,000,000 in cost cuts. So as we think about the next $200,000,000 do you mind just walking us through some specifics and where do you think you can squeeze more and how much harder would the extra $200,000,000 be to achieve?
Well, I think the 200 the problem with cost cuts is they're always hard to achieve. But the reality is that we I think we have a fairly good sense that there will be more as we do further integration. We're going to consolidate, for example, our infrastructures here in Dallas into one building. That may sound trite, but it actually will force a lot more integration quicker and we do need to do that. In the field, Conifer is going to continue to look at locations and do consolidations.
In the hospitals, we're doing the same type of thing. We're always going through jobs and premium labor and contracting labor and why do we need that and should these be permanent jobs at a lower rate than you pay for premium contracted labor. So there's a lot of effort on a lot of fronts. There's no silver bullet to this. We've talked about offshoring, which across the country, there will be some that activity will begin to take shape this year and move at a reasonable pace.
So to me, there's a lot of there's people stuff, there's process stuff. Paul Arber, our IT person, who's sitting here, is spending a lot of time looking at upgrading systems and investing by eliminating some inefficient stuff and some things that have aged out to doing some new things, which will be an investment that we can almost cover just by the fact that the money we'll save, the changes we'll make. So all of those things add up to, I think a reasonable line of sight to the $200,000,000 But I would be kidding if I said I have it totally defined down to the number because we're not that good. But throughout the year, like we said last year, as we kept increasing it, there are places that we know we haven't finished yet in every one of the divisions and in every part of the effort we've made to integrate. So kind of a long way to say that it's a broad program, but within that program, it's very specific.
So we are doing it and we're very active in it. And I would say it's engaged with my whole team. And I think last year was an interesting year in that people had to think about doing it wasn't something that was kind of normal. I think this year, we're already in the game and we understand it. And I think the ability to address it is much more ingrained in the organization than it was a year ago.
So we'll see where it goes, but that is my intent. I'm comfortable with the number. I'm probably the only guy in this room that's comfortable with the number, But I believe the number is realistic and we should be able to achieve it. So hope that helps.
I appreciate that. And then my follow-up for Dan. As we think about leverage, I mean, you've talked about 5 times. I think in the past, you've mentioned a target of getting to 5 times leverage by end of 2019. Is that still the goal?
And then how do you bridge that given the guidance ranges that you've provided for the year? Thank you.
Yes.
Hi, Brian, it's Stan. Certainly, we remain committed to getting to 5 times or lower from a leverage perspective. Listen, you can do the math based on the guidance we have. We still have a little more to do to get there and that's what we're focused on. Every time we make an investment decision, we are always thinking about the implications on our leverage.
So I can assure you that. So all I'll say is we absolutely remain committed to getting to 5 times or lower.
Yes. This is Ron and I totally underscore that from the enterprise standpoint. We continue to look at assets and evaluate assets relative to their fit and where that's going. We're not going to talk about anything specific. As I've said before, we'll never preannounce.
But I mean those things are ongoing and a very active part of our process. We're not married to anything. And so anyway, I'll just
I appreciate it. Thank you.
And we'll take our last question from Sarah James with Piper Jaffray. Thank you. There's been an influx of investment in urgent care from many sources. How do you think about the risk of market over saturation and maintaining share during this influx?
Sarah, this is Saum. Thanks for the question. I agree with you that there has been an influx of investment broadly speaking in the urgent care space, though the models are often not the same and serve different populations in that market. Remember, in many markets, including some of ours, there are shortages in primary care as well that are being fulfilled from a demand perspective by urgent care centers as they develop. And then of course, you have the retail clinics within big box retail that serve perhaps a different purpose in different population.
I think one of the things that you're seeing is that urgent care centers are increasingly providing slightly higher acuity care as well and taking on patients that may have some more chronic illness as well. So when I add that up at this point, it's not surprising to me that we're seeing more investment come in. There are different models. They're not all the same and it's not entirely obvious which models will sustain over the long term, but I don't see yet a major problem with oversaturation across the country.
Thanks. And the follow-up here, what you guys are doing on marketing and sales strategy is really innovative. And I'm wondering if you're seeing it move the needle yet on volume or if it's having any impact on your strategy of what specialties and what mix you want to have?
I don't know if it's that fine. I would tell you that it's clearly moving the needle on energizing our people in the field and energizing our teams around the country. They walk in the hospital, they can see their sorry about that. They walk in the hospital, they can see their picture on the advertisements in the lobby and they see their stuff on bus wraps as they go by. I mean, it's an energizing experience to feel you're part of the community and you're making a difference.
I believe and we believe from at least the initial reads that it's having a very positive impact. And I think this is marketing is an effort that takes time and it's how do you build a foundation in a community and that's what we're doing. So we feel good about it. We think that the initial responses, at least the visual initial responses are supportive. The real question will be how the numbers tumble and how the service lines fall out.
But we're a little early for that considering we just really kicked this off towards the end of last year. Thank you. And I think that's it.
At this time, I'd like to turn our call back over to our presenters for any additional or closing remarks.
Great. Thanks a lot, Amanda. We thank everyone for joining us today. Our next event will be the Barclays Global Healthcare Conference on March 12. We look forward to seeing
you there. And if you
have any additional falls questions, you can reach me at 469-893-6992.
Thanks.
Okay.