day, everyone, and welcome to the Tenet Healthcare 2Q 'eighteen Earnings Call. Today's call is being recorded. At this time, I'd like to turn the conference to Brendan Strong, Vice President of Investor Relations. Please go ahead, sir.
Good morning, and thanks, Augusta. 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 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 filing 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, Tenet's Executive Chairman and Chief Executive Officer.
Thank you, Brent. Good morning and thanks joining us as we discuss our results for the Q2. As you saw in the press release we issued yesterday, we had another solid quarter of performance. We delivered adjusted EBITDA of $634,000,000 which was above the midpoint of our outlook and represents an increase of 11% versus the Q2 of last year. This was the Q3 in a row where we exceeded the midpoint of our outlook.
We delivered adjusted EPS of $0.49 in the quarter, which was also ahead of our outlook and was much improved from the loss of $0.17 that we reported in Q2 of 2017. And we continue to have positive progress on improving free cash flow. So let me take a minute before Dan gets into greater detail and provide some perspective on our results. In our hospitals, we had strong performance across many of our markets, particularly in California, Massachusetts, South Carolina, Texas and Palm Beach, Florida. At the same time, we did face some headwinds in some other markets and I'd like to comment on those for context.
So let's take a minute and talk about some of the facts that created these headwinds and a bit of discussion on what actions we are taking to offset these going forward. 1st, as we did share in Q1 earnings conversations, we made the decision to discontinue certain margin dilutive and less efficient service lines within some of our markets. These were selected based on lower volumes, reimbursement characteristics and our view of service line growth potential. Was done thoughtfully and we also have ensured the cost associated with these changes is being addressed immediately. These decisions clearly had an impact on our growth.
Secondly, patient volumes were also a challenge in Detroit. A contributing factor is our continued work to resolve differences we've had with our primary academic partner, which has experienced significant physician attrition. Detroit is a large and important market for Tennant and we have invested heavily in this market over the years. We are though very encouraged on resolving our issues in Detroit and we expect to have a good outcome with our current negotiations. These are not systemic issues and we are actively bringing these to a conclusion.
Our teams in Detroit and headquarters are very engaged on securing a resolution whether with Wayne State or an alternate plan that ensures continued great service lines for the DMC system, while meeting the needs of the people of Detroit. Whether or not we are successful in Wayne State, we are clearly committed to remaining the leading academic health system in Detroit and to the growth in this market. We also had volume pressures in Chicago, which as you know is a market we are exiting. In fact, I think we've been exiting it before we even bought it. Last month, we signed a definitive agreement to sell our 3 remaining hospitals in Chicago area.
And finally, we are we expect to get this transaction closed by the end of the year. And the Chicago sale is really a good transaction for Tennant. We're receiving $70,000,000 for a group of assets that have breakeven EBITDA and we are pleased that we found a buyer that will preserve what's best for those hospitals and the surrounding communities. We're going to continue to operate these facilities until we complete the sale and have to continue to address any and all performance weaknesses. These are real and live examples for the sake of transparency.
They are not excuses. They are a reality we face and we'll address with the right amount of diligence and support. Understand that by any measure, I'm not satisfied with volumes in the quarter in these selected markets and we're taking the actions and we'll continue to move with urgency to improve our performance in this area. We also will ensure we approach resolutions that are permanent versus temporary. As part of ensuring we have visibility and understanding of our markets, we have started a program where we're visiting 2 key markets every month.
The intent is to have a deep dive on quality, service and financial performance and have an opportunity to exchange with every senior member of the team. We include USPI and Conifer based on their presence in the market. I also take many of my senior team and change out with other key leaders based on the market characteristics. We also visit with our local community board, selected medical leaders for our service lines as well as our key management. The objective is to keep a flow of real time awareness of their performance, the dynamics of the team and gather views from other critical stakeholders.
We also walked the floors, visiting patients and nursing stations. We have never returned empty handed in terms of things we need to revisit. A consideration of how our team may need future support in certain areas and ensuring the home office team ups their game. Assuming we stay on track, our objective is to be in all markets twice per year and then do a special focus on those that may need further attention. This is yet another aspect of changing the culture and developing accountability throughout the organization.
It allows us to gather fresh insights from those leading the day to day business and have a closest eye on the market. It also has heightened an opportunity we need to drive deeper on in individual markets as it relates to the right services in the right markets and closely aligning our marketing, IT and capital budgets and further tightening how we allocate resources properly to deliver more consistent growth. So let me take a minute now to speak about marketing. Our new Head of Marketing, Marie Quintana, has joined us in mid May to develop a plan that will implemented in phases starting next year. This will involve additional investment in our marketing organization and overall marketing spend.
And my expectation is we will primarily self fund this effort from additional cost savings from other changes she is making as well as perhaps some other pockets we're continuing to trim. Marketing to the right demographic and the right decision maker with clarity on the priorities that the potential patient believes are the priorities for their care is a critical step in continuing to build our awareness in every market. And to create a connection where we are recognized for our quality, access and compassion in resolving the individual need in the most effective and efficient manner for the patient. At the same time Marie joined, we added a new Head of our IT function, Paola Arber. Paola brings a solid background in IT transformation and efficiency, and she's hit the ground at full speed.
She and I are very aligned that every IT dollar spent must have a payback that we can recognize and isolate and then have real time tracking to remove the dollars whether that means increasing the measures of throughput or elimination of unnecessary work. And every system enhancement has to be prioritized to ensure we are not only spending wisely, but we have a clear vision on what the output will be and exactly by when. With the measures in place to ensure we meet those criteria, she brings a new level of thinking and engagement in every aspect of the business and understanding of linkages within the system. Moving on to USPI, they performed very well and have posted a strong quarter. Volume growth was strong across all areas of the business.
In addition, we completed some great acquisitions. Year to date, USPI has deployed $120,000,000 on acquisitions. Importantly, our pipeline for both acquisitions and de novo development remains very strong. And we think it's likely we will exceed the $100,000,000 to $150,000,000 target for acquisitions of de novos this year. And frankly, we're happy to do it given the great returns in this business.
Performance levels, we are increasing Conifer's EBITDA outlook by another $20,000,000 which is overall a total of $80,000,000 since our original guidance on Conifer at the end of 2017. We have made an incredible amount of progress at Conifer over a relatively short period of time. And there are meaningful future opportunities in cost and volume to further improve Conifer's performance on an ongoing basis, which we are actively vetting every month. As to the potential sale of Conifer, we continue the effort of engaging with a few down selected bidders. And as I said last quarter, we continue to engage with these bidders on a contract framework between tenant and a potential new owner.
I think there are really a few important considerations which I'd like to share to help put this effort in the process in context. Today, as a 76% owner of Conifer, we can add people and take away people based on our expectation of performance. We have control over personnel, staffing, leadership and everything associated with what we need to do to improve overall performance. I believe given the results over the last three quarters that should be clearly apparent. We believe we know we will lose that ability when we sell Conifer as we become only a customer versus an owner.
Today, we are both an owner and a customer. So this contract framework that I'm speaking about is a critical aspect to the changes per tenant to move to only a customer versus both. Our single point of future leverage in this new contractual relationship is a series of SLAs or service level agreements that are sufficiently specific and granular. These need to be tightly coupled with appropriate incentives and penalties to shape the performance we need in the areas that collect cash and engage in intake aspects and other part of the Tennant business. So let me just give you a simple example of why I think this is so important.
Let's assume our new owners or buyers perform at a 98% level. They collect 98% of our cash. That could sound pretty good. A 98% hit rate would certainly be a great performance in almost any business measure. However, for us, that would be a direct impact of a loss of $250,000,000 in cash annually.
Thus, the ability to have the right levers in place and the right freedoms to act quickly is a critical decision point And simply said, that is not an easy negotiation. And that's what we're doing now. And finally, as should be clear by the performance being posted, we have improved EBITDA at Conifer by over $70,000,000 over the last three quarters. And now expect cost reductions in 2018 to be approximately $90,000,000 with future opportunities which we are framing as we head into 2019. We expect these to be recognized and part of the price we expect to receive from a buyer.
It's also important to understand that this is a simultaneous RFP and M and A process. In a typical divestiture, you're done with the business once you sell it, period. In an RFP process, you set SLAs and if the parties are agreeable, you move forward expecting from the new provider a reduction in cost and an improvement in performance with clarity of each and corresponding penalties and incentives tied to measurable change in both aspects. With Conifer, since we are not actually walking away and we're not disconnecting as is typical in a sale, we're going to be committed to and dependent on a new owner for our cash collection and other numerous aspects of our business. Negotiating the right agreement between our hospitals and Conifer is paramount to both the sales process and our future success.
And as I have said before, our decision on whether or not to sell Conifer is highly dependent on price, but equally highly dependent on the terms of the new agreement. Since the performance under a new owner will directly impact our leverage and free cash flow given that a large portion of Conifer's EBITDA translates dollar for dollar into free cash flow. While this may seem to take longer than expected, it is a function of the complexity of the process I have outlined. And I do not have a date certain when we're going to actually close this out, but we are actively engaged in these discussions. Make no mistake though, we continue to operate Conifer with full expectation of improved performance across service, quality and cost and are aggressively working on scaling up the sales process in the field to gain more clients.
So until we make the change, we are going to run Conifer at full speed. At the same time, we are meeting with these selected few bidders and attempting to bring these points to a conclusion in a shorter time as we can. So let me move on to cost. On costs, we're on track to deliver as our commitment of 250,000,000 dollars of run rate savings by the end of 2018 and we will increase to $195,000,000 what we expect to book in 2018. I and my team are actively engaged in evaluating the next round of opportunities for 2019.
I expect prior to the 2019 plan, we will have these clearly in scope and a path to deliver them. I will tell you they will be meaningful and will continue to be part of changing the culture into a leaner, more decisive culture aligned on accountability and delivery of results. We have achieved considerable progress in this area and I expect we will continue to do so well into the future. So with those remarks, let
me now turn it over to Dan for further clarity. Dan? Thanks Ron and good morning everyone. We generated $634,000,000 of adjusted EBITDA in the quarter, up 11% driven by very strong performance at USPI and Conifer. Adjusted EPS was $0.49 compared to a loss of $0.17 in last year's Q2.
Our Hospital segment delivered $345,000,000 of EBITDA, up a little less than 1% after you consider a few items that impact year over year comparability. Ambulatory EBITDA was $198,000,000 up 21% and EBITDA less facility level NCI was $128,000,000 also up 21%. Conifer's EBITDA was 91,000,000 up 35% on an apples to apples basis And our cash flow performance has improved with adjusted free cash flow of $259,000,000 in the first half of twenty eighteen, more than doubled last year. Turning to hospital volumes, which are summarized on Slide 5, adjusted admissions were down 0.2% and admissions were down 2.3%. We have closed various subscale margin dilutive programs at 8 of our hospitals, primarily obstetrics and behavioral health.
This lowered adjusted admissions 40 basis points in the quarter and we expect it will lower growth by about 60 basis points in the second half of the year. As Ron mentioned, declines in Chicago and Detroit also lowered growth this quarter. After normalizing for Chicago, Detroit and the service line closures, adjusted admissions were up 1.1%. Revenue per adjusted admission increased 3.5% or 1.6% if you adjust for the California provider fee. Expenses continue to be very well managed.
Cost per adjusted admission increased only 1.5% this quarter once you normalize for the $23,000,000 home health gain on sale that was recorded as a reduction in other operating expense in the Q2 of last year. SWMB was only up 1.3% And supply expense was up 4.9%, which was linked with acuity growth, including strong growth in high end cardiovascular procedures like TAVR and WATCHMAN consistent with the Q1. Moving to our ambulatory business on Slide 6, Growth was strong and consistent across our ambulatory platform. The surgical business delivered same facility revenue growth of 6.6% with cases up 3.4% and revenue per case up 3.1 percent. In the non surgical business, revenue increased 13.6% with strong growth in both our imaging and urgent care businesses.
Non surgical visits were up 5.8% and revenue per visit was up 7.4% driven by pricing and mix. As shown on Slide 7, adjusted EBITDA less facility level NCI was very strong this quarter, up 20.8%, bringing our growth in the first half of the year to 15%. Growth in the second quarter was driven by a 12% increase in system wide revenue, including 4.8% same facility growth and the rest from acquisitions and an 80 basis point increase in system wide EBITDA margins to 29.7%. Let's move to Conifer on Slide 8. Conifer's performance for the Q3 in a row was very strong and we are raising Conifer's outlook by $20,000,000 to $355,000,000 for the full year.
EBITDA was $91,000,000 in the quarter. I want to call out 2 items that impacted Conifer's EBITDA, which were included in our outlook. First, Conifer received $7,000,000 of contract termination revenue following ownership changes at a few hospitals that decided to in source revenue cycle management. 2nd, we earned $3,000,000 of customer incentive revenue. Excluding these two items, Conifer's EBITDA grew 35% to $81,000,000 We are quite pleased with this performance and the important changes Conifer has made to improve its cost structure.
In recent years, Conifer's EBITDA in the second half of the year has been stronger than the first half, but we don't expect that in 2018 for two reasons. 1, divestiture of hospitals by Tenet and other customers and 2, Conifer's incentive fee revenue has been able to be recognized a little more evenly throughout this year. Our outlook for the second half of twenty eighteen assumes Conifer will generate $166,000,000 of EBITDA at the midpoint, which is consistent with what we delivered in the first half of the year after you normalize for customer termination fees and incentive revenues that we've recognized so far this year. And we do anticipate Conifer's earnings in the back half of the year will be weighed a little more toward the Q4. Turning to Slide 9, we've raised the midpoint of our adjusted EPS estimate by 12%.
The increase is primarily due to our expectations of lower non controlling interest expense for our Hospital segment. Slides 1011 provide additional details on the key components of our outlook by segment and an updated EBITDA bridge from 2017 to 2018. One thing to point out is that we maintained our view on same hospital revenue growth of 2.5% to 4.5%, but we lowered volume growth to down 1% to up 1%. In addition, we raised revenue per adjusted admission growth to up 2.5% to 3.5%. In regards to our $250,000,000 of cost reduction initiatives, we are achieving these savings faster than we had expected, particularly
at
Turning to cash flows. We continue to target adjusted free cash flow of $725,000,000 to $925,000,000 this year. We expect to generate roughly $240,000,000 to $475,000,000 of cash in the second half of the year after distributions to minority partners and cash restructuring payments. In addition, we anticipate generating over 100 $1,000,000 in cash from divestitures. We will use this cash to fund additional acquisitions at USPI and to build our cash balance in advance of our $500,000,000 debt maturity next March.
It is also worth pointing out that we retired another $30,000,000 of debt this quarter, bringing the total to $80,000,000 this year. We have Board authorization to retire another $70,000,000 of debt by the end of the year. We ended the quarter at 5.7 6 times net debt to EBITDA, which is up from last quarter due to the cash that we used to increase our ownership in USPI from 80% to 95%. And we continue to target leverage at 5 times or less by the end of 2019. In summary, we delivered a strong quarter, especially at Conifer and USPI, and the performance of our hospitals was generally good in light of the volumes.
Cost management remains very strong. We completed the buy up of USPI, which has been a major use of cash in recent years. This creates new flexibility for capital deployment. And we are exploring new opportunities to further improve operating efficiencies and growth. I'll now turn the call back to Ron, who would like to
make a few additional remarks before we start Q and A. Ron? Thanks, Dan. In summary, I would repeat, it was a very solid quarter for us. The financial results for our hospitals were positive and we recognize the impact of volume declines in those selected markets.
And we remain incredibly focused on recovery in those areas. USPI had a great quarter and continues to add to the portfolio. Conifer continues to dramatically improve and deliver higher results. As a company, we're reducing overhead and overall delivering on our cost reduction objectives while cash flow is improving. And while leverage appears slightly higher this quarter, remember, we completed the buy up of USPI with cash this quarter, completed a larger than normal acquisition at USPI and repaid $30,000,000 of debt while ending the quarter with $400,000,000 of cash and no borrowings on the revolver.
These are solid sustainable results and we'll continue to build on these. So with that, I'll turn it back over to Brendan and questions.
So Augusta, please poll for Q and A.
Thank you. The question and answer session will be conducted electronically. We'll go first to Ralph Giacobbe with Citi.
Thanks. Good morning. Maybe just more details around the challenges in Detroit and whether you saw pressures in the Q1, how much worse was it sort of in the Q2? And you did sound optimistic about a resolution. Maybe you can help in terms of framing it on how long you think it would take to sort of turn that around?
Ralph, good morning. This is Eric Evans. Thanks for question. In Detroit, Ron outlined the kind of the key challenge, which is an ongoing distraction with our academic partner. I will tell you that it was also a headwind in the Q1.
This has been an issue that's been increasing and increasing in impact over the past several quarters. We are actively in negotiations to address our academic partner and our ongoing physician alignment with building great service lines. And Ron mentioned physician attrition there. That's not something you fix overnight. We want to make sure we have access points available in the right places to earn business and to be to have a network there in Detroit that matches our investment on the acute care side.
So I will tell you from a timing standpoint, we were working to make sure we resolve the academic partner situation in the second half of the year and we are going to be actively obviously working on continuing to invest on our ambulatory side of the business to grow our great service line. So I think that's going to be pretty much a headwind for the rest of the second half of the year, but we'll continue to be a focus and we expect to start working on growth there in the next year.
And while a headwind, I would say that we will reduce that headwind. Absolutely. And we have alternate plans in place already and we're going to resolve this quickly. It will take time to obviously finish it, but we had the plan designed and we know where we're going.
And Ralph, I would add one of the reasons to highlight Detroit is it does offset some of the growth we have in other markets that we're very excited about and our goal is to get Detroit on the right path very quickly, and we have a plan to do that.
Okay. And then just my follow-up. Can you talk a little bit about sort of the pricing side? You mentioned sort of weakness on volume side, but fairly steep deceleration from kind of the Q1. There's been a lot of discussion around sort of acuity mix as a driver.
I'm assuming that pure pricing was stable, so maybe help us on either the pressure you're seeing within sort of acuity mix and or maybe payer mix? Thanks.
Ralph, it's Dan. Good morning. Acuity remained strong in the quarter. So we're pleased with that, growing the higher end service lines that continued. And I would tell you that our revenue per admission growth in the encounters.
So the percentage of inpatient business as a percent of total adjusted admissions was higher in the 1st quarter. As you know, inpatient business has higher revenue yield per admission. And so as that moderated in the second quarter, it's sort of the math. It drove down the per adjusted admission statistic. But pricing on an inpatient side and outpatient side on a per visit basis from an outpatient perspective was consistent with the Q1.
And anything to call out on payer mix? I know the stats are in the release, but I think you also add in managed Medicaid and MA in the commercial stat. Any way you can sort of parse those out for us so understanding of sort of where the commercial mix was relative to the government mix? Thanks.
The commercial mix was relatively consistent with what we saw in the quarter. There was a slight uptick in the uninsured volumes, but.
We'll go next to A. J. Rice with Credit Suisse.
Thanks. Hi, everybody. I might, I appreciate all the comments about the Conifer sales process, Ron, but I might just drill down a little bit further on that. I understand that you would want us to understand the give and take and the nuances of it, but it comes across as the way you describe it, maybe there's a little less enthusiasm for the sale process and maybe a little bit of a tug as to whether to keep it or not. And I wondered if I'm interpreting that right.
And then is the way you describe it, I guess, I think the thinking has been in the investment community that we would just basically take the EBITDA away from Conifer when you sell and that's a trade off, but it almost sounds like it's a little more complicated to that. Is there any way to frame how your outlook for the entire company might change based on how the sale if the sale process did move forward? Is it we just reduced the EBITDA from that we see today from Conifer? Is there more puts and takes than that?
Okay. Let me see if I can that. I'm not sure I got the full second part, but I'll give you my best shot and tell me what I missed. I'm as enthusiastic about it as I was in the first time. I'm just trying to give you you guys always ask for more transparency and more detail, so I'm sitting here trying to be more transparent without negotiating against myself.
The fact is, look, I mean, if the price is right, etcetera, we'll sell the company. I've said that from the beginning, it hasn't changed. The reality is that we've improved the performance of Conifer, which I don't think anybody expected. And I think we said last year that we were going to really focus on that because I believe there was I do have a little bit of outsourcing background. So I did believe there was a lot of opportunity there.
And we brought in a lot of different management. We have gotten very focused on how we're doing our business. And the net result is we've improved it pretty significantly. Dollars 90,000,000 in cost savings is not a small change. And it says that we have streamlined and really enhanced the efficiency.
I believe there's more to go and I believe there's more to do. But and I think we have a plan for that. And I don't want to get into that debate because of the sale process. But having said that, that doesn't change my enthusiasm. It just says, look, if I've improved it by if we have as a company, not me, as we as a company have improved it, then we as a company should get paid for that.
I mean, if you take the just do the math, just the I think $80,000,000 that we improved it, just in EBITDA times, let's take a low multiple of 12. I mean that's I mean and again, I'm just picking some numbers. That's almost $1,000,000,000 in value that we've created. It seems reasonable to me to get paid for that. So that's kind of where my head is and that's where my head has always been.
Now part of that for a minute. Equally, I've got to have a contract. Anytime you are going to a customer as an outsourcer, you're usually doing it with an RFP or at least that framework. And so I need that. And I need to ensure that I now have the right controls in place to make sure that they deliver 100% of my cash.
Because today I do have those controls in place. If it doesn't happen then I can make changes instantly. I just I mean, they're just up the street. It's not hard to make it's hard, but it's not impossible to make changes quickly. And we have done that.
And I lose that opportunity once I become a customer versus an owner. I want to be sure that I've got very tight agreement on what the expectation for performance is. And if that performance is not met that there's a corresponding penalty to create enough pain to get the attention on the points that we want. If they beat that performance, we should reward them with a piece of what they beat. It's not something that I would say is out of norm in outsourcing.
I think it's a little bit out of norm in revenue cycle in terms of what I've seen in this industry. But I would tell you the rest of the outsourcing industry pretty much operates like this. So to me it's
a very
normal expectation. So I have a lot of enthusiasm. I'm just trying to be very realistic, practical and this is where I am. And I am absolutely 100% engaged to try to drive this to a best interest of everybody. If I can get the price for the company that is appropriate and we can get these points hammered out, then I'm the 1st guy to say let's get going.
And if I can't, then I'm not going to back off the performance because I need the performance on this company to continue to drive forward. So I hope that helps clarify what I meant. There's no hidden agenda here. There's no, gee, I'm giving you secret words that I'm not going to sell it. I'm straight up about it.
So and I think I've been straight up with the team. So Yes. And I guess And the second part of your question, I don't think I understood. So
Yes. No, I guess and maybe Dan has some view on this. It sounds like in your comments that how you would change the outlook for the rest of tenant depends somewhat on how the contract renegotiation comes out with your new buyer. It maybe has
the current
the current reported EBITDA when you sell Conifer? Or should we be aware that maybe there would be some more meaningful adjustments that somehow back up on legacy Tenet if Conifer were to go away?
A. J, it's Dan. Good morning. Certainly, as we've pointed out, our guidance for this year does not reflect any impact from the sale of the Conifer business. So the outlook that we have out there assumes that we continue to own and operate Conifer.
And obviously, we've raised their guidance several times recently based on their very strong performance. So when you think about our guidance for this year, it assumes that we own the business through the end of the year. Now, a transaction is completed, obviously, we'll have to reevaluate what that means to the Tenet Hospital business going forward based on ultimately the terms that are negotiated with a potential buyer.
Okay. All right. Thanks a lot.
We'll go next to Ann Hynes with Mizuho Securities.
I know CMS finalized IPPS rates last week. Can you give any preliminary thoughts on how that would impact your Medicare revenue starting in October or on an annual basis? That's my first question. Hi,
good morning. This is Dan. All in, obviously, the rate update, we were pleased with it overall. So around 2%, which translates to roughly incremental annual Medicare fee for service revenue of about $40,000,000 That also would have a flow through impact on our managed Medicare book of business as well. So all in about a 2% increase on our managed care revenues starting in the Q4.
Okay, great. And then on the hospital guidance, you reduced the EBITDA by $20,000,000 Is that really driven by Chicago and Detroit or are there other factors that may be changed sequentially?
It's a combination of several factors. Certainly Detroit and Chicago are part of it. And we also looked at where the volume trends have been over the past year.
And I just want to follow-up on Ralph's question on Detroit. What is actually I was just reading some news article that DMC separated with a 300 doctor physician group earlier this year. So I guess what that seems like a big group to me. What's the actual plan? Can you give us more detail?
I know you guys said you had a plan to get that market back on track. Can you actually give us more detail on what that plan is?
Yes. So I'm not familiar with the reference you make to a 300 definition group. But I would say that, obviously, a big part of our
go forward plan with Wayne State or without Wayne State that allows us
to go forward plan with Win State or without Win State that allows us to grow great service lines and make sure that the investment on the ambulatory side and our network side matches the investment in the acute care side. We still feel good about Detroit long term. It's a big part of our company. And our strategy there is much like the rest of the grow our ability to service the patient at the high acuity end that will stay in hospitals and then work with Bill and his team and our urgent care base, etcetera, to build a network of ambulatory assets that makes us a high value provider to our community, and we're really focused on that.
Okay, thanks.
Our next question will come from Gary Taylor with JPMorgan.
Hi, guys. It's Anthony McNeese on for Gary. Just two quick questions. One, the NCI decrease on the hospital side. Can you give us any color around that and what led to that this quarter?
Good morning, Anthony. This is Dan. I'll address that. Yes, based on where we're running so far this year and where we think we'll land for the full year, we concluded we minority partners.
Okay. And then the second question,
in terms of the I mean,
you guys your stock has moved a fair bit this year. Why don't you guys take advantage of your date and recapitalize look for a recapitalization of your balance sheet?
This is Dan again. Certainly, I'm pleased with how the stock has performed this year. We continue to evaluate our capital structure on a routine basis. And as we think about capital deployment down the road, we've been pretty clear in terms of how we anticipate deploying capital. In terms of future capital deployment and how we may revise our capital structure, depending on market conditions at that time and what our strategy is based on proceeds available to us and other initiatives we may look at and we'll obviously assess it at that time.
Great. Thanks guys.
Our next question comes from Ana Gupte with Leerink Partners.
Hey, thanks. Good morning. The question on volumes, I was looking for some color on how the Humana contract was and the impact of that in 2018 and what you're expecting as we go into the second half of the year? That was like a 1.6% hit to adjusted admissions in the Q2 of last year. And also on the ASC case growth, that was a hit of 1.3 percent.
How is that evolving both in patient and ambulatory?
Hey, Anna. This is Eric. Thanks for the question. I think on the Humana situation, a lot of that volume that is available, we have earned back, but not all of it. That's just one of those situations that takes time.
We think there's a lot of that that we've been able to successfully earn back in our business. But it is a ramp for that last percentage, and we're working very closely, obviously, with all of our payer partners to produce a product that allows their members to choose us. I don't know, Bill, do you want to add anything on the inventory side? Okay.
And then just a follow-up again on the guidance on the ambulatory. Your last year, you did observe some very nice seasonality in the Q4. It looks like you're assuming some of that in this year as well. Is there any impact from rising deductibles and or deductibles again year over year that might create even more of a steep seasonality this year?
Anna, hi. This is Jason. How are you? Hi, Jason. We obviously saw a very strong Q4 last year.
As far
as the general trends in
our business and the seasonality you've seen related to those deductibles, we don't see any trend changing that.
Okay. And then finally, on the pricing growth, you've given some statistics on bad debt. Are you observing anything more around collectibility of deductibles? And is that going to impact your pricing growth on a go forward basis?
Andrew, this is Dan. Our collection performance has remained pretty steady. No nothing extraordinary in the Q2 versus more recent quarters. And the Conifer team obviously focuses on this 20 fourseven and devote specific resources to various specific areas, whether it's balance after insurance or pure self pay or commercial plan. So performance continues to be pretty good.
Okay. Thank you for the color.
Our next question will come from Justin Lake with Wolfe Research.
Hi. This is Steve Baxter on for Justin. I wanted to come back to the comments around cost cutting. You described the opportunity for additional cost savings, but then you also talked about funding some additional initiatives using those savings. So I wanted to see if your expectation was that there would be incremental cost savings that were not used to fund other initiatives or whether we should think about those things being kind of complete offsets for each other?
And then any sizing relative to the $250,000,000 run rate exiting this year would certainly be appreciated? Thanks.
I think the maybe my comments were confusing. The marketing stuff that I talked about is being self funded within marketing for the most part. So the change of that organization and the change of programs that we were doing to more focused programs by market will be just a trade off. So $1 out of 1 pocket back into another pocket, so it stays within marketing. If there's additional cost, there are other areas that within the marketing communication budgets, we believe there's ample money to fund just by redirecting existing budget dollars.
So that is not I'm not using future cost savings. When I talked about 2019, what I was that we are we've developed, I think, a reasonable starting point for our 2019 focus. And it's not going to be as high as obviously we did this year at 250, but it will be measurable substantial and you're just going to have to wait till we get that done because it will also be some structural changes to how we operate the company. And when we do that, we need to have that buttoned up before we start publicly talking about it. But I'm very comfortable that we will deliver continual cost savings.
I think it's something now that is just part of how we're going to do things. But I'd like to get through the $250,000,000 first and I think we have a clear line of sight to finishing that. We're ahead of pace and then we will just begin the next process. And it will again encompass the entire company. So that's how we approach it.
So I can't give you color in terms of a number, but I would hope that you'd find some credibility in what we've already accomplished that we know what we're doing here and we'll in the next quarter, I think we'll have that pretty well buttoned up because we'll be entering our planning cycle and we'll be using that as a major part of that.
Great. Thanks.
We'll go next to Kevin Fischbeck with Bank of America.
Good morning. This is Joanna Gajuk filling in for Kevin today. Thanks so much for taking the question. First, a follow-up question on the guidance comments. So on Slide 11, when you show the bridge to 2018 from 2017, you talk about 14,000,000 improvement from volume activity mix year over year.
And this seems to be a 42,000,000 below the 56,000,000 improvement you showed in the slide deck last quarter with Q1. And then it seems there's $25,000,000 of that is a reduction related to the hospital segment and $17,000,000 is due to USPI. So can you help us flush out the breakdown between the volume versus pricing versus mix in those two businesses? And how much of the hospital issues are related to Detroit Chicago, I guess, that you've discussed before versus the rest of the portfolio?
Good morning, James. This is Dan. Let me address that. So listen, we continue to target overall for the company $2,600,000,000 As I mentioned in my remarks, we increased Conifer's numbers by $20,000,000 based on the strong cost performance. USPI is off to a very strong start.
We have not revised our guidance at this point, but certainly very pleased with where we're at so far on the ambulatory business. Certainly, the volumes in the Q2 were very strong, surgical growth of over 2% or over 3%. In the hospitals, as we mentioned, we took the hospital's estimates down $20,000,000 based on some of the volume trends that we saw in the first half of the year and we pointed out Detroit and Chicago in particular. But as we mentioned also, we're driving growth in many of our markets that Ron pointed out. Pricing continues to be very strong, either negotiated price increases or our acuity levels.
As I mentioned previous several questions ago about in terms of revenue yield, our revenue yield on a per admission and per visit basis is consistent with the Q1. We did see a moderation in the inpatient mix of the total business. So that had an impact on the aggregate statistics, but that's math. So we feel good about where we're at from pricing. We're fully contracted this year and probably about 3 quarters contracted for next year.
So we have very good visibility in pricing. Certainly, the Medicare update on the hospital side was 2% rate update all in there, which starts in October.
Right. So you're saying in terms of the USPI, the way I look at these tables in those two slide decks, the differences that are just running. I mean, are you saying that you're not seeing much of a deterioration there? Because I guess the volume mix or volume equity mix, there's call for the hospitals in the USPI. So that's what I was trying to understand if there's any difference in the outlook for the USPI on that
front. No. Our views on USPI are essentially unchanged in terms of from a pricing perspective as well as from a volume perspective.
All right. Thank you. And if I may, another question there, the real question rather, can you comment on the General Motors announcement yesterday? They signed a direct contract with Henry Ford Health Systems. So I guess that's another competitive pressure there in the market potentially.
So can you just like or flash out to us in terms of what this could mean for your market share? Thank you.
Sure. This is Eric Evans. So the General Motors Henry Ford announcement yesterday was basically another product they're offering to their employees in a kind of a narrow network model. We do that in some markets. We're looking at those opportunities as well.
In Detroit, in particular, our overlap with the General Motors employee base is not as strong. And certainly, we don't think right now that that's going to be something that's necessarily an issue for us. But clearly, we want to be competitive in those markets as well. I should mention that our Children's Hospital of Michigan is part of that network and certainly is an essential part of the care delivery system for all of Detroit. So, we'll look at those opportunities where they align with our market and we look at those across the company, but I don't see that as something that's a major factor for us in Detroit.
We'll take our next question from Brian Tanquilut with Jefferies.
Hey, good morning guys. Just want to
ask a question on the cost opportunities. I mean, you outlined the investments you want to make on marketing and how you think you can self fund that. So how should we be thinking about your net margin or net cost opportunities going forward? And also I just want to hear your views on what kind of like margin breakeven would be based on or what same store needs to be to breakeven margin going forward?
Good morning, Brian. This is Dan. Obviously, we're pleased with our performance on costs so far this year and doing a pretty good job, particularly at the hospitals. We've also been driving down overhead type of costs as well as obviously Conifer's cost performance has been exceptional. Listen, we still have more work to do.
There's no question about that, whether it's through further centralization, automation, continuing to focus on non patient care type of costs that we think we can create additional efficiencies there. From a labor perspective, we continue to focus on premium pay practices, contract labor, our mix of fixed versus variable staffing, consistent labor standards across the organization, that's going to continue. Labor was only up 1.3% in the quarter and it's only up 1% this year. So not a bad start, but we can always do And we feel comfortable that we're going to continue to be able to drive cost efficiencies across the entire cost structure, SW and B, other operating expenses. There's a lot of opportunity there, renegotiation of contracts, better contract management, We'll be adding resources probably to further enhance our contract negotiation efforts.
We have various disparate vendors that we've been rationalizing. We're going to continue doing that. That's also room for further improvement from a cost perspective as well. So as Ron said, we don't we haven't buttoned it down entirely yet, more to come on that, but we feel there's certainly more opportunities going into next year and we'll be talking about that once we finalize that as part of our annual business plan.
Dan, so just a follow-up on that.
So just going back to the comment on
marketing spend, I guess, what I'm trying to figure
out is, you laid out all the cost opportunities remaining. But once you factor
in the increased spending
that you guys are trying to plan out, does that net out to basically 0 net savings from does that net out to basically 0 net savings from this point forward?
No, absolutely not. I mean, some of the investments that we've been talking about are really insignificant in the overall scheme of things. This $250,000,000 that we're targeting to, we're well ahead of where we thought we would be. Some of these specific investments were sort of like a laser focus on particular areas where we can take some of the savings and reinvest them. But the amount of the reinvestment is really insignificant in terms of the overall portfolio of cost savings that we're executing on, clearly insignificant.
We have time for one more question. That will come from Peter Costa with Wells Fargo.
Thanks for squeezing me in there. Just wanted to talk about when we look at the number of markets that you're in and now you're Detroit seems like it maybe got away from local management a little bit and now you guys are stepping in to kind of help out. And then you're doing some visit program and the deep dives. Should we think of that as a precursor to you selecting some more markets to be sold? Or perhaps is it just really how you're going to spend your capital and maybe some more local market changes in terms of management and things like that?
Well, I'm not going to publicly announce that right now. But I would say that as I've said before, we're evaluating this is not a one time process. So I would suspect that we constantly look at markets that any business in any business you have array of people from the low end of the high end, some that are the crown jewels down to some that are struggling a bit. And we do look hard at that and we look at our competitive position and whether or not we believe our competitive position is such that we can continue to reposition ourselves in the market or perhaps it's time to exit it. And that's ongoing.
I mean, the when we trimmed back some service lines in certain markets, we made those decisions consciously because we believe that we were not running profitable lines and we were not it didn't fit the payer mix right and it didn't fit the actual demographics of the market. So as you do that, you start to also pretty much clean off every market for a conclusion on whether you keep it or you don't. I think I said in October, we're doing a board strategy session and we'll start looking at those types of questions in a much deeper discussion at that. I'm not married to keeping anything. I think if it makes sense for us to move on, we move on.
And so the answer to your question is probably yes, we are going to continue to evaluate it. And yes, I would suspect over time there'll be markets we're going to potentially exit. So but I just don't have that list or that conversation point available today. All right. And then,
outpatient proposed rules on-site neutral payments for payment cuts to
clinics? Bill? Payment cuts to clinics, that's the physician payments on hospital provider clinics. Look, fortunately for us, the majority of our physician clinics have been set up independently, not licensed under the hospital. We do have a few that The impact to us, we initially, from the very beginning of getting TPR set up, our Tinnant Physician Resources group, we've been very deliberate on having those to be freestanding.
And so the impact there is not that great to us as it might be to others who have set those up under hospital departments. We do have a few of those, but it's not significant. Thanks.
I'd like to turn the conference back to our presenters for any additional or closing remarks.
Well, thank you everyone for joining us today. If you have follow-up questions, please e mail me and I'll be happy to find time to talk. Thank you.
That does conclude our conference for today. Thank you all for your participation. You may now disconnect.