Tenet Healthcare's Management Presents at Barclays Global Healthcare Conference (Transcript)

Mar.12.13 | About: Tenet Healthcare (THC)

Tenet Healthcare Corporation (NYSE:THC)

Barclays Global Healthcare Conference

March 12, 2013 9:30 am ET

Executives

Daniel J. Cancelmi - Chief Financial Officer

Analysts

Joshua R. Raskin - Barclays Capital, Research Division

Joshua R. Raskin - Barclays Capital, Research Division

Now, here we go. Okay, so up next is Tenet. Before I introduce Dan Cancelmi, we're going to go through our automated or our audience participation questions real quick. There's 7 questions, I think. Some of them are going to be pretty obvious, and we're going to try to fly through them. So the first and hopefully a very obvious one for a hospital management company would be, "Do you believe that health performance is going to be a positive in 2014?" We'll give you a couple of seconds to very quickly figure out, but then I think you want to hit forward.

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. Not a big surprise. Wow, very negative. I don't know who was that hit that bottom, but that would be an interesting discussion. Please see me after, I'd like to go through that. Number two, contracting rates on the exchanges. Do you think they'll be closer to Medicaid's? So let's put Medicaid at # 1. Let's put Commercial at #5. I don't know if that puts Medicare at 2 or, 3 but somewhere in between there, what do you guys think?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. Getting closer to probably indicative of people paying attention to your web conference call. Number three, utilization in 2013 we saw obviously, good trends in 4Q, so maybe we'll start. What do you guys think you for 2013 overall?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. So more and certainly more on the increase than the decrease. That's makes a lot of sense to me. Next question, how would you like to see Tenet deploy capital in '13: M&A, repurchase, increase to dividend, repay debt or invest in the core? I think they've done all of this. [indiscernible]

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

Wow, you've got a lot of stuff to do Dan. As a CFO, you're busy this year, it looks like. I don't even know where to give you consensus. Next one, this one is an easy one, the core [ph] of services, not such an easy question, on well, whatever. Well, I'll let the audience decide if this is an easy question. Are earnings going to grow in 2013?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

That's about what I would have thought. I would have guessed 6% different, but close enough. And then, I think we might have 1 or 2 more -- oh 2 more, so currently, do you currently own shares in Tenet right now?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. And more importantly, what's your current bias: Positive, neutral or negative regardless of whether or not you own the shares?

[Voting]

Joshua R. Raskin - Barclays Capital, Research Division

All right. So a clear skew there, which is good. So let me introduce Dan Cancelmi whose the currently, the Chief Financial Officer for Tenet Healthcare. Has been with the company for a longer period of time than the CFO role, which is now, I guess, a couple of quarters in. And as I'd like to think of it as he is now a fair game having reported a couple of quarters in that role. So, Dan's going to go through the presentation here. We're going to hold all the Q&A until we get to the breakout room and points the end of 3. We already used 5 of his minutes. So I'm going to turn it over to Dan.

Daniel J. Cancelmi

Thank you, Josh, and good morning, everyone. It's a pleasure to be here. Since I intend to make forward-looking statements this morning, please refer to the language on Slide 2.

Let me start off by saying that we believe Tenet has ended 2013 very well positioned to deal with the uncertainties coming from Washington and more importantly, to capitalize on the many opportunities in our markets across our 3 lines of business. Over the past several years, we have reshaped Tenet's business, positioning the company to benefit from rapidly evolving changes in healthcare. This strategic repositioning also diversifies the sources of our earnings and should accelerate our growth.

While our 49 Acute Care Hospitals remain the foundation of our business, we have moved aggressively over the past several years to grow our Outpatient business and our Conifer Services business. These businesses benefit from Tenet's reputation for high quality, improve our margins and growth rate, and they require lower levels of capital investment. As a result of our improved performance, we have created substantial financial flexibility to grow our business while meaningfully reducing our share count.

Our Conifer business recently completed several important acquisitions that enhance its service offerings, and our San Ramon facility recently entered into a partnership with a highly reputable not-for-profit system, John Muir, that will yield us $100 million of proceeds. Also, we expect to close on the acquisition of Emanuel Medical Center in California during the second quarter and will continue to pursue and evaluate other attractive opportunities across our 3 lines of business.

Slide 4 provides a high-level view of our 49 hospitals across 24 markets. These are competitive markets, but we have the #1 or #2 position in 14 of them. Across the primary service areas of our hospitals, our average market share is 20%. 3 of our hospitals have a market share greater than 50%, and 17 of our hospitals have market share of 20% or greater. But aggregate market shares are only part of the story. Where our hospitals are not #1 or #2 in market share, they typically have distinctive service lines to create competitive advantage. This service line perspective is what drives our Targeted Growth Initiative or TGI. One example of this service line focus is Philadelphia, where we are #2 in children services in a market that otherwise could be viewed as being saturated with general hospitals. Other examples of service line leadership and market-exclusive services include our high-level Toronto centers.

Our strategy is to build competitive advantages in quality and cost, deliver superior value to our customers and to build scale and service lines that are essential to managed care networks. Our service line strengths are further leveraged through our strategy of negotiating with commercial payors on a statewide or national basis. This contracting strategy, supported by our superior value proposition, has produced attractive commercial price increases over the last several years.

Our geographic footprint will enable us to capture significant benefits from the coverage expansion created by the Affordable Care Act. As the expansion goes into effect next year, our exposure to large uninsured populations in many of these markets will convert from being historical headwinds to important tailwinds for earnings growth.

Slide 5 shows 2013 to 2017 growth in covered lives for Medicare and Medicaid on the vertical axis and growth in commercially insured lives on the horizontal axis. As you can see, in virtually all of our markets, the covered lives are expected to grow at a rate that exceeds the national average and often by a wide margin.

The market power of our Acute Care Hospitals is leveraged by our growing commitment to our Outpatient business. We have almost doubled the number of outpatients facilities in our network in the last 4 years. And we have an attractive pipeline of acquisition opportunities to further grow our network. Our outpatient facilities are generally located in close proximity to our hospitals, but we have been making selected acquisitions in new markets in our existing states, and we're very pleased with the results. We expect to continue to acquire additional outpatient facilities in markets that are new to us to further accelerate our growth.

As an example of how we've deployed our outpatient acquisition strategy to grow our market share, let's take a look at how we built our network in the greater El Paso market. Slide 7 illustrates our position in the El Paso market as it existed 5 years ago with our 2 hospitals supported by 3 diagnostic imaging centers. By 2010, we strengthened our leading market share by adding a third hospital to service the rapidly growing Eastern suburbs, and we added another 4 diagnostic imaging centers. We broadened our strategy in 2011 adding 2 Urgent Care Centers and an Ambulatory Surgery Center. And in 2012, we have added a freestanding emergency department and a third Urgent Care Center. This gives us the extensive coverage shown on Slide 10.

This deep tactical coverage of the El Paso market provides an attractive value proposition for our patients, our physicians and our commercial payors.

Our strategy to have driven volume growth above the average for the industry. As you can see on Slide 11, through the middle of 2009, we established a very attractive growth trend for adjusted admissions. At that point for reasons we believe are related to the recession and more cautious consumer behavior, our upward momentum stalled. Towards the end of 2010, however, we were able to turn that around and volume growth resumed its upward trajectory. That favorable trend has been sustained. In our recently completed fourth quarter, we achieved positive adjusted admissions growth for the 9th consecutive quarter, showing some of the strongest growth in the investor end sector. I do want to emphasize that Slide 11 shows same hospital volume growth. Except for some contribution from a outpatient acquisitions, this growth is essentially all organic.

Clinical quality is critical to everything that we do, and we have invested heavily in clinical quality over the last decade. Those investments have driven meaningful improvements in our CMS core measures that have consistently exceeded the national average since the end of 2005. Our clinical quality investments have also contributed to our favorable malpractice trends in recent years. The major national payors have also recognize our achievements related to quality. These designations are expected to become increasingly important as the commercial market moves to narrow networks and other forms of steerage. While third party assessments of clinical quality will continue to be important, the market is increasingly moving toward focusing on patient outcomes as a strategy for driving value.

The metrics provided on Slide 13 show our success in some of the key measures. As you can see on this slide, our measures have been improving. These advances have real meaning for our patients and have a significant impact on physician satisfaction, which has improved steadily since 2003.

On Slide 14, I'd like to turn to our rapidly growing Services business. These businesses operate under umbrella brand name of Conifer. Conifer's largest business is its Revenue Cycle Services for hospitals and other healthcare providers. This is a technology-driven business, and as a result, a key competitive strength is related to economies of scale. Even before our CHI partnership, which I'll discuss in a minute, Conifer had invested more than $250 million in building its revenue cycle infrastructure and had established a leading competitive position.

Conifer's Revenue Cycle business took a material step forward with the announcement last spring of a ground-breaking partnership with Catholic Health Initiatives. Later in the year, Conifer announced another strategic milestone with acquisition of Dell's Hospital Revenue Cycle business. These transactions expand Conifer's scale and scope, bring additional best practices into the organization, create incremental cost efficiency, inject valuable intellectual capital and drive improved financial performance for both Conifer as well as its customers. Comparing these maps showing the growth in Conifer's client base over the past year demonstrates how fast Conifer is growing.

Slide 15 shows some of Conifer's key business metrics. In less than 12 months, Conifer has more than doubled its employees, grown its clients from 300 to more than 600, increased revenues process from $11 billion annually to $21 billion and doubled the number of patient accounts of process from 5 million to 10 million accounts.

Moving beyond Conifer's revenue cycle management, Conifer's Value-based Care Solutions business is very well positioned for the rapid movement in our industry towards Value-based Care business models including ACOs. With 2 decades of experience in helping physician groups and other healthcare entities deal with risk base and capitated contracts, our team at Conifer has developed the skills necessary to address the industry's movement toward Accountable Care Organizations and similar models.

Like last year, Conifer's Value-based Care Solutions strengthened its competitive position with the acquisition of a company with a complementary skill set called InforMed. This acquisition brought extensive healthcare population data management and proprietary technology targeting improved patient care and cost efficiencies. By adding more than 200 clients including healthcare providers, employers and payors, Conifer Value-based Care Solution now supports the care management for more than 3 million lives.

To complete our review of Conifer's business lines, let me briefly mention patient communications, which offers healthcare providers an array of critical services ranging from scheduling patient visits to clinical admission reviews. This business is smaller than Conifer's Revenue Cycle business, but we have some proprietary technology in a rapidly growing customer base that makes this division's prospects very compelling. The skills and capabilities we built at Tenet have enabled us to excel in innovating with new payment models. Tenet is committed to an aggressive clinical alignment strategy, which includes an emphasis on physician employment where appropriate and on innovative arrangements with payors.

Let's take a look at a few examples. In Northern California, we successfully completed our first year of operations in an Accountable Care Organization with roughly 7,000 Blue Shield members. This is an integrated system designed to compete with offerings from Kaiser Permanente and others in the local market. Our second ACO commenced operations in Florida earlier this year. Additionally, in several markets, including our Atlanta market, we have formed clinical integration organizations or CIOs. These are collaborations with independent physicians and hospitals to develop ongoing clinical initiatives designed to control costs and improve the quality of care delivered to patients. These capabilities provide a solid basis for negotiating with plans under an ACO structure or other risk-sharing model.

There isn't time to cover everything on this slide, but from top to bottom, it shows that we are active in the full spectrum of Value-based Care from full risk to a proprietary health plan to pay for performance contract structures.

Having reviewed our various growth strategies and some of the factors differentiating Tenet, I'll conclude with a couple of slides summarizing our recent financial results.

Slide 18 shows our 2012 performance. These results include a 17% increase in adjusted EBITDA in the fourth quarter completing our strongest year in 10 years. These metrics tell a pretty compelling story, volume growth among the strongest in the investor end sector with a financial impact of these volumes leveraged by solid price increases and excellent cost control. We did experience a slight increase in bad debt as a percent of net revenue in the quarter as the soft economic recovery continues to exert financial pressure on consumers. But Conifer continues to do a good job improving our collection rates and mitigating the impact of the pressure from uninsured volumes.

Slide 19 shows Tenet's strong earnings trajectory over the last 9 years. Since 2004, we have achieved a 15% compound annual growth rate in adjusted EBITDA and 8 years of consecutive EBITDA growth. Virtually all of this growth was organic, which is a major distinction of ours. While our primary growth engine has not been dependent on acquisitions, we continue to look for attractive acquisition opportunities, and we expect acquisitions will enhance our growth over the next few years.

One of our larger growth drivers in 2013 will be our Medicare Performance Initiative or MPI. MPI has a very strong track record achieving incremental savings of $70 million in 2011 followed by savings in excess of $80 million in 2012. This history of success supports our confidence, but we will capture at least another $80 million of MPI savings this year.

The second growth driver will be our HIT initiative. Our implementation plan has been well executed and we have achieved our targeted milestones while coming in under budget. Through the end of last year, 26 of our hospitals have achieved the required meaningful use criteria with another 14 hospitals expected to meet the criteria this year. Up until 2013, this program has been a drag on our earnings. However, this year, the direct impact of HIT program turns positive due to our expected recognition of additional HIT incentive payments during the year. This is expected to result in a $33 million EBITDA improvement relative to last year.

A third source of EBITDA growth will be from acquisitions. Conifer closed on the 2 acquisitions late last year that are expected to contribute $10 million to $15 million of EBITDA. Our recently announced joint venture with John Muir should build momentum over the course of the year and have a positive impact on EBITDA as well. In addition, we'll be able to invest $100 million of proceeds we will receive from the transaction to facilitate further earnings growth.

Rounding out our acquisition picture, our purchase of Emanuel Medical Center in California should close in the second quarter. In total, acquisitions should add about $25 million of EBITDA in 2013. In addition, our outpatient acquisition program should contribute an incremental $20 million to $25 million of EBITDA. This range includes both the outpatient facilities we expect to open or acquire this year plus the full year earnings impact of outpatient centers that came online last year.

Turning to Medicare reimbursement. The inpatient rate increase of about 3% that went into effect in the fourth quarter and the outpatient rate increase of about 2.5% that went into effect at the start of this year are expected to result in about $47 million of incremental Medicare revenues in 2013. Given the 2-month delay in sequestration, we expect the adverse impact will be about $45 million, and the Medicare coding and documentation adjustment included in the actual legislation will reduce EBITDA by about $10 million.

Our outlook also incorporates the anticipated reduction in Medicare and Medicaid disproportionate share revenue that is scheduled to begin in the fourth quarter. We estimate the fourth quarter DSH reductions will be about $35 million. We'll have further visibility on the DSH reduction when CMS issues its proposed federal fiscal year 2014 payment rolls in the second quarter. However for now, we are assuming an estimated 50% reduction in Medicare DSH and a 25% reduction in Medicaid DSH. As for the California Provider Fee program, we expect to recognize $115 million of revenues in 2013, an increase of $43 million over last year.

Our outlook for this year is built on a set of conservative assumptions. I won't read each one, but they are outlined here on Slide 21. In addition to our growth strategies and the upside we expect from the Affordable Care Act, shareholders can expect enhanced returns from our aggressive program to strengthen our common share count.

As shown on Slide 22, we reduced a number of shares by about 25% in the last 7 quarters. With the completion of our current 500 million share repurchase program later this year, we will have reduced our share count by about 30%. Despite the significant reduction in shares outstanding, we've maintained the leverage ratio consistent with others in the investor end sector. This has been achieved primarily by the steady growth in our earnings.

We've also extended our debt maturities to create additional financial flexibilities. As you can see on Slide 24, we have minimal near-term debt maturities. With the exception of $474 million in debt coming due in 2015, we have no maturities until 2018. In January, we repurchased over $700 million of debt that had a 10% coupon. This debt was refinanced at a very low rate of 4.5%, which will produce annual cash interest savings of approximately $33 million. We do have additional opportunity to refinance almost another $1 billion of debt at an interest rate of just under 9%. If rates remain near current levels, this gives us additional opportunity to refinance and generate incremental cash savings and further enhance our free cash flow.

To summarize, Tenet represents a very compelling investment opportunity. Since 2004, we have achieved growth in EBITDA and average compounded rate of 15%. We have a $1.5 billion tax NOL, which contributes to the efficient conversion of earnings into cash flow. We have established a set of proven strategies to drive sustained growth. We're diversifying our earnings by growing Conifer and our Outpatient business. Our presence in the Sun Belt is expected to create attractive long-term growth, and the upside we expect from both an improving economic environment and the Affordable Care Act should help drive enhanced earnings and cash flows.

Josh, thanks again for inviting us to the conference. Next, we'll be taking questions in the breakout room.

Joshua R. Raskin - Barclays Capital, Research Division

Sure. [indiscernible].

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