Quorum Health Corporation (QHC) Q3 2017 Earnings Conference Call November 9, 2017 11:00 AM ET
Executives
Michael Culotta – Executive Vice President and Chief Financial Officer
Tom Miller – President and Chief Executive Officer
Analysts
Sheryl Skolnick – Mizuho Securities
Elie Radinsky – Cantor Fitzgerald
Operator
Good morning. My name is Mike and I will be your conference operator today. At this time, I would like to welcome everyone to the Quorum Health Third Quarter 2017 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]
I will now turn the call over to Mr. Michael Culotta, Executive Vice President and Chief Financial Officer. You may begin your conference.
Michael Culotta
Thank you, Mike. Good morning and welcome to Quorum Health's third quarter conference call. Before we get into the rest of the call, we just have to make a quick announcement that just few minutes ago our website went down, as get number of websites for this vendor. So we're going to go ahead and proceed with the call. We're also going to precede with the slide descriptions even though you won't be able to get it on our site to see those slides. So again, we apologize for that we are trying to get the website backup hopefully very, very soon. So again, we will go ahead with this.
So before we begin the call, I would like to read the following disclosure statement. This conference call may contain certain forward-looking statements including all statements that do not relate solely to historical or current facts. These forward-looking statements are subject to a number of known and unknown risks, which are described in headings such as Risk Factors in our Form 10-K filing and other reports filed with or furnished to the Securities and Exchange Commission. As a consequence, actual results may differ significantly from those expressed in any forward-looking statements in today's discussion. We do not intend to update any of these forward-looking statements.
We issued a press release yesterday afternoon with our unaudited financial statements and definitions and calculations of adjusted EBITDA and adjusted EBITDA adjusted for divestitures and potential divestitures including reconciliations to U.S. GAAP measurements. We have included a slide presentation on our website to supplement today's discussions.
Our results consolidate the results of 32 owned or leased hospitals and the results of Quorum Health Resources. Our same-facility information excludes the Sandhills facility in Hamlet, North Carolina, sold on December 1, 2016; the Barrow facility in Winder, Georgia, sold on December 31, 2016; and the Cherokee facility in Centre, Alabama, sold on March 31, 2017, the Trinity facility in Augusta, Georgia, sold on June 30, 2017, and two Pennsylvania facilities, Lock Haven and Sunbury which were sold on September 30, 2017.
In addition, we also filed our third quarter Form 10-Q last night. All of our discussions are supplemented by the press release, the earnings presentation slides on our website, and our Form 10-Q. All calculations we will be discussing exclude impairment of long-lived assets and goodwill, expenses incurred related to the spin-off from Community Health Systems, certain legal, professional and settlement costs, net gain or loss on sale of hospitals and severance costs for headcount reductions. Please refer to the slide presentation for a further description and calculation of adjusted EBITDA adjusted for divestitures and potential divestitures.
With that, I would like to turn the call over to Mr. Tom Miller, President and Chief Executive Officer.
Tom Miller
Thanks, Mike, and good morning and welcome to Quorum Health's third quarter 2017 conference call. With me today is Marty Smith, Executive Vice President of Operations; Matt Hayes, Senior Vice President of Operations; Dr. Shaheed Koury, our Senior Vice President and Chief Medical Officer; and Mike Culotta, our Executive Vice President and Chief Financial Officer. Mike and I have some comments covering our third quarter results, and then we'll open up the call for some questions.
You can see our results, as we remain focused on successful execution to achieve our long-term goals. Slide 3, which I hope so you had a chance to look at, outlines our key initiatives, as we continue to concentrate on improving our core operations and increasing our profitability by, first, improve in volume in our core assets.
Our 24 Continuing Hospitals have increased – a 1.3% in admissions, and 3.2% in adjusted admissions in the third quarter. Refine our portfolio and reduce our debt. Seven non-strategic hospitals have been divested. And we have APA and LOI representing an additional $115 million in proceeds. We paid down $40 million of debt to date with another $4 million expected this week. And we have an additional LOI that we anticipate signing by the end of day-to-day.
Our third strategy increased our case mix index and what I mean by that is, look at the severity of the patients that were taken care off. We've had a six consecutive quarters of increasing our same facility Medicare case index with the third quarter being 1.43. We continue to add physicians for expanded and enhanced services, and most of our markets that are underserved. A 17% year-to-date increase and commence our physicians, and we commence 27 year-to-date and what we define as our priority specialties, general surgery, cardiology, orthopedics, and GI.
Excel in quality and the patient experience. We've seen consistent improvement in both of these areas, we reduced our serious safety event by 93% from April 2013 benchmark, and I’m extraordinary proud of that.
Cost controls, we achieved initial goals with the reduction of approximately 300 productive FTEs by end of the third quarter, and $10 million in our run rate on an annual savings and our corporate office including QHR. And an enhance profitability of our QHR service line; we had 630 basis point improvement in margins to 27.7% Q3 versus fiscal year 2016. And so we're focused on making sure that we've got the rationalize of things that we do and we're seeing the results associated with that. We’ll go into these highlights in more detail.
We grew net revenues at our group of 24 facilities by 2.7%, when factoring out the California Hospital Quality Assurance Fee, which negatively impacted our results by $11.5 million. Admissions and adjusted admissions grew 1.3% and 3.2%, respectively, and that core group this quarter.
Slide 3 and 4 demonstrate the impact of divesture on our adjusted EBITDA and margins. We divested two Pennsylvania Hospitals Sunbury and Lock Haven on September 30, 2017, and L.V. Stabler in Greenville, Alabama, on October 31, 2017, which now brings the divested total to seven non-strategic facilities. Our adjusted EBITDA adjusted for the six completed divestures this quarter was $36.9 million.
Slide 5 provided the recent highlights of our divesture program. Net proceeds of the seven completed sales approximated $46 million, and we have used by the end of day from our $44 million to reduce our secured debt.
Currently, we have an asset purchase agreement on one hospital with that one to close mid first quarter 2018, we have two other facilities under letters of intent, we've bet those to close in 2018. And at this time, we estimate proceeds from these three facilities stated above to be approximately $115 million.
We've expect to see a third letter of intent by the end of the day-to-day that with a total estimated proceeds to $155 million. We continue to evaluate additional facilities for potential divestures. This augments our efforts to reduce leverage and it help us establish a foundation for a cost-efficient, profitable company, which will create room for expansion. We will use substantially, all of the divestiture proceeds to pay down secured debt.
Slide 6 gives you the progression of ourself sales proceeds and debt pay down. We continue to estimate with all sales proceeds from the original group of 14 targeted hospitals including those completed today, that we will be able to pay down approximately $200 million or more in debt. We continue to strengthen our core hospitals, by expanding service lines and recruiting physicians particularly in our strategic specialty areas.
Through September 30, 2017, 95 physicians have commenced practices, an increase of 17% from 2016 with 27 commencement in our cardiac specialist. We currently have 20 physicians set to commence in the fourth quarter, four priority specialties. Please see Slides 7 and 8, remind you the higher operating expenses as the new physicians ramp up their practices.
To help demonstrate the impact of our strategy and add a targeted new services increasing intensity, I want to highlight that we have our own same facility Medicare case mix each quarter since our exception. From the third quarter, our same facility Medicare index increased 3.6% to 1.43. We surpassed our initial goal of 1.4 last quarter and remain above that target this quarter, also increasing with six consecutive quarters and our all payer case mix which is up 1.8% of the quarter.
We continued to increase access points in our market, while remaining discipline on costs. We added four new urgent care centers to bring our total to 13 with a three new diagnostic centers this year. We opened two new cath labs in New Mexico and Arkansas, and are targeting three more for 2018.
We expanded IPU services in five market and finalized our Quorum-based telemedicine program that will launched in 12 of our community in the fourth quarter with a primary focus on tele-cardiology, tele-critical care, and tele-site.
We have expanded behavioral health services in selected strategic markets and are set to open a new behavioral health unit in a significant market by the first quarter 2018. Additionally, we are kicking off a Quorum rural health of Medicare shared savings program in 20 of our markets in January 2018.
As our hospitals evaluate there are non-acute service lines we've made, the decision is to close the skilled nursing and rehab units in selected market and see additional opportunities in 2018. Our expansion project in Springfield, Oregon continues progressing according to our expectations.
Slide 9 cost to-date are approximately $80 million with the total project cost estimated as a $105 million. Phase 1 with new patient rooms is open and we estimate total project completion in late 2018, which will include expanding surgical suite and ER capacity.
I continue to emphasize our dedications quality and patients safety. You can see are consistent improvements on Slide 10. Our executive quality dashboard indicate a 4.4% improvement for a hospitals over the baseline third quarter of 2016. Additionally, our serious safety event rate indicates a 93% reduction through quarter two 2017 from its 2013 baseline. We are very proud of our continued improvement with these patient-centered endeavors.
Organizationally, we're pleased to announce a new board – a member of our board of directors on September 28. Mr. Terry Rappuhn joined our board, and serves as the Chair of the Audit Committee and as a member of governance in nominating committee. And Rappuhn brings significant financial expertise to the board and has extensive experience in healthcare industry we will welcome Terry and I'm reporting to whoever on the board.
I want to second and talk about our strategy planning process. As you know, I'm a hospital’s CEO, and I believe it is important to sit with everyone of our hospitals and talk about their strategy for 2018. This morning, I had the opportunity to meet with one of our hospitals Kentucky River in Kentucky, and I will tell you two of the person and two of the teams that we reviewed everyone is dedicated to being focused on improving our quality, growing our volume, and providing a return for our investors with the visions to improve the health in every community we serve.
And as a CEO, I think it is important, that I feel on these sounded everyone so far and I will assure you nothing gets binding. And you know there's a lot of people, who try to blow smoke but that is gone we’re operators and we’re focused on how our hospitals to be successful. And every team who presented is feeling that way that they have a heart and that contribution that assist our organization. And it's great to see such a dedicated group of individuals who are there are.
Thank you, and let me turn over to Mike to discuss our financial result.
Michael Culotta
Thank you, Tom. And just some quick information, very quick, we understand that our website is now up. Again, we apologize for those that were on the website, and I hope you got into most of the calls and everyone can obviously see those slides now. So again, we apologize for that little blip that occurred this morning.
As we continue. Remember, we did not exist as an independent company until April 29, 2016. Thus the 2016 nine-month period relates to the partial period of ownership under Community Health Systems, and there are numerous items that affect the year-to-year comparison. Some of the larger items, several of which reflect adverse impacts resulting from the spin-off from Community Health Systems and related actions, relate to volumes and rate impacts, increases in losses from facilities that are being considered for sale, change in corporate office versus prior management allocations resulting from the spin-off, other previous corporate cost allocations and credits, increase in medical specialist fees that where negotiated part of spin-off, differences in TSA costs and customers services, compared to previous intercompany charges for similar services from CHS to the hospitals, declines in electronic health record reimbursements and rebates and administrative fees reimbursement from the GPO that declined due to the change in ownership.
There is also a large different in net revenues and other operating expenses related to the 2017 delays in California Hospital Quality Assurance Fee. All of these are described in more detail on the Form 10-Q in the Management's Discussion and Analysis section, where we included a Q3-to-Q3 comparison, a year-to-date comparison to the prior year, and a sequential quarter comparison.
We have included Slide 11, 29 and 30 to demonstrate the impact of the California Hospital Quality Assurance Fee, which significantly impacts revenues and adjusted EBITDA. In addition, we have given some information on the most recent information we have received on this program from the California Hospital Assoication.
Let me review some items relating to revenues and volumes on a same-facility and Continuing Hospital Group basis. And I will be following Slides 12 to 18. On a same-facility basis, total net patient revenues before the provision for bad debts declined 2.8%, and when factoring out the California Hospital Quality Assurance Fee, total net patient revenues declines 0.7%. This is on a 0.2% decline in admissions and a 0.5% increase in adjusted admissions, a decline of 2.6% in ER business, and a decline in surgeries of 3.4%.
However, and what is important, though, are the trends in the Continuing Hospital Group. Excluding the effect of the HQAF Program, that is HQAF for the transcribers. Net patient revenues before the provision for bad debts increased $5.5 million, consisting of $12.4 million on volume growth, offset by decline of $6.9 million from payer rates. This group of hospitals had a 1.3% growth in admissions, a 2.2% growth in adjusted admissions, a 3% growth in surgeries and a decline of 1.5% in ER visits. Just to further note, sequentially on a same-facility basis, admissions declined 0.2%, adjusted admissions increased 0.7% and ER visits increased 0.9%, and surgeries declined 4.7%.
However, the trends sequentially at the Continuing Hospital Group were much better. Admissions increased 0.1%, adjusted admissions grew 1.4% and ER visits increased 1.2%, and surgeries were down 1.8%.
On a same-facility basis, we did experience an increase in Orthopedics. The inpatient orthopedic surgical cases related to make joint replacement were up approximately 13.3%. However, other categories where either flattered down, including general surgery, cardiology, neurology, respiratory and urology, Medicare 1-day stays were down 1.5% and observations were up 3.7%, respectively, for the quarter. Births were basically flat. In terms of payer mix on a same-facility basis, we experienced decline of 430 basis points in Medicaid, 80 basis points in manage care and commercial and increases in Medicare of 350 basis points, and self-pay of 160 basis points.
The trends were somewhat similar in the Continuing Hospital Group compared to same-facility. Medicaid declined 490 basis points, while manage care and commercial stayed flat. Self-pay increased to 170 basis points, and Medicare increased 330 basis points.
The inability to accrue for the California HQAF program represented approximately 220 basis points of the Medicaid decline. The reduction in the California Hospital Quality Assurance Fee for the quarter was a $11.5 million, remember, this is offset by the reduction in the provider tax of $2.7 million.
On a same-facility basis, the provision for bad debts declined approximately $3.7 million, and as a percent of net patient revenues before the provision for bad debts, decreased to 10.5% from 10.9%. We continue to supplement the processes to backfill our third-party outsourced billing and collection group and an effort to improve follow-up and ultimate collection on accounts.
So overall in the area of net operating revenues it was a story of stock volumes, increased DSO and write-offs due to collection effort processes, lower intensity due to lower surgery and payer shifting. The one-less work day for the month in quarter did impact our volume trends. Our admissions would have increased 30 basis points, adjusted admissions would have increased 160 or 40 basis points and surgeries would increase 289 or 210 basis points. Oddly, it created 65 fewer ER visits or 10 basis points.
Turning now to expenses, we have included Slide 19 and 20 for your review on the changes in salaries and benefits, supplies and other operating expenses. Further detail can be obtained in our Form 10-Q. But briefly, overall salaries and wages and benefits increased $15 million. There was a decline of $17.4 million due to the divesture, a $2.6 million decline potential divestitures, offset by an increase of $7.9 million for the Continuing Hospital Group primarily due to increased cost of our physician clinics as a result of recruitment efforts and normal rate increases.
Corporate office salaries and benefits declined from last year. Supplies expense declined $5.4 million, and supplies – it’s decline $4.2 million as it relates to divesture group and decline $2.4 million related to the potential divesture group. The Continuing Hospital Group increased $1.2 million, predominantly in implant as it results with the increases in orthopedic surgeries as we have described earlier. Other operating expense declined $9.5 million, other operating expense declined $12.3 million related to the divestiture group, taxes and insurance declined $2.7 million due to the California provider tax mentioned earlier.
In addition in 2016 there was a $2.3 million of gross receipts tax refunds from New Mexico which related to a five-year period, this did not recur this year. Medical specialist fees continue to increase in the Continuing Hospital Group. HITECH accounted for a reduction in reimbursement of approximately $1 million. The majority of the decline in the depreciation expense line item was a result of last year's impairment charges and divestitures.
Our results also include updated long-lived impairment charges of $5.3 million as a result of additional assets being reallocated to assets held for sale and negotiations on the sale of certain facilities. So overall in the area of expenses we continue to bear the impacted cost substantially in excess of those anticipated time in Spin-off and to see pressure on salaries as we employ more physicians, which should continue to help improve on volumes, increase in supply as we see a higher implant cost due to orthopedic surgeries and increases in other operating expense as we continue to see increases in medical specialist fees.
In an effort to continue to control more cost we have taken a company-wide effort to review all of our contracts and renegotiate the contracts we believe are decremental to our financial performance.
Now for some comments as it relates to our cash flow for the nine month period and what is impacting cash flow. Please see Slides 21 through 24. As of September 30, we were owed $50 million from the California HQAF program from 2015 and 2016 and we were owed another $65 million from the state of Illinois as it relates to Medicaid patients and state employee patients, some of which goes back over two years. That's $115 million that it owes to the company equivalent to the hospitals in these two states floating alone to the state.
Our interest payments are greater this year than last year due to that debt being outstanding for the full nine months this year versus only five months last year as well as the timing of the payments. The difference as you can see from the supplemental cash flow information in the 10-Q was $28 million. Our DSOs continue to rise primarily due to the poor performance of billing and collection efforts and those processes which we have resulted in additional account write-off. Each and every day it represents approximately $5.4 million into delayed cash flow we were up six days since year end or at $32.4 million.
Medical specialist fees are up $9 million year-to-date on the same facility basis and as you recall were up $22 million for the full year end 2016 versus the full year end 2015. So this is up $31 million over seven quarter timeframe. As we have recruited physician employed this increased our cost by approximately $20 million on an annualized basis, but the other side of this that we do see improvements in volumes in certain areas.
We have legal costs and other settlement cost including lawsuits relating to clients by shareholders and bondholders in connection with the Spin-off and the arbitration with our former parent related to TSA and other actions associated with the Spin-off. We were not indemnify back CHS for pre-spin claims related to QHR this impacted us $4 million in cash in the first quarter of this year.
Now this is just a little of what we know, now for what are we doing. As it relates to the California HQAF program, we received $31 million in mid-October and use those funds to pay down secured debt. We expect to receive the remaining balance sometime late first quarter or early second quarter of 2018. As it relates to Illinois, the state has floated some bonds to pay old payable and pension funds and we're doing everything we can to get out and front and get funds to us.
In addition the state owes us over $1 million in interest payments on the amounts that are due us for services performed for the state employees. We have not recorded any of the interest amounts and will not until received. Just prior to this call, we were notified that we will receive funds from Illinois on November 13. Just a few minutes ago, I just got text, we have reconciled up to $7 million of funds that will come in from the state of Illinois, we will continue to reconcile today and tomorrow and that number will grow. So we should see a large number coming in on November 13 from the state of Illinois.
As it relates to our increased interest payments, we will continue to sell facilities that are non-strategic assets to help reduce our debt load even if we get below the $24 million that we have in continuing facilities. As it relates to collection efforts, we are supplementing our workforce in our facilities and here at corporate to help get collections up. We need control of our billing and collection process as it would reduce costs and increase cash flow. As it relates to the increase cost of medical specialist fees, we are reviewing every contract as we have discussed before. As it relates to our increased physician cost, we are constantly reviewing on productivity and market share. We will continue to challenge our CapEx, but we are very careful not to short change quality.
The net secured leverage ratio for the quarter on a trailing 12-month basis is approximately 4.24 times. Our consolidated EBITDA cushion is $22.9 million and our secured debt cushion is $108.7 million. Please see Slide 25. You will see on Slide 26, our adjusted EBITDA adjusted for divestitures as well. Another item to note on Slide 4 substantial divestiture EBITDA for the quarter, these facilities are usually at losses and we do see – we do not see them sustaining profit.
Our guidance is as follows, and we refer to Slide 27. We expect operating revenues for the year ended December 31, 2017, to range between $2.055 billion to $2.065 billion, adjusted EBITDA to range from $140 million to $150 million, adjusted EBITDA adjusted for divestitures to be in a range of $160 million to $170 million. And certain expected hospital sales have moved to 2018. We have headwinds on the California Hospital Quality Assurance Fee Program of approximately $13 million, lower reimbursements on electronic health records incentives of $7 million and related to the net New Mexico gross receipts tax refunds of $2.3 million, which occurred this quarter in 2016. We have non-cash stock-based compensation of expenses of approximately $11 million to $13 million, and approximately $20 million to $25 million of non-cash self-insurance reserves. All of these items are add-backs under the credit agreement.
In addition remember, we estimate the California Hospital Quality Assurance Fee will be reported all in the fourth quarter and is estimated to be approximately $22 million. The Illinois income tax credit of approximately $8 million was recorded and collected in the third quarter. We reported a similar amount in the third quarter of 2016 but did not receive the cash until the fourth quarter.
Tom?
Tom Miller
Thanks Mike. Our consist success in expanding services in our markets as well as our focus on quality enhancements is evidenced in the results. And we are pleased by the improvements that we're seeing in our core assets particularly with the volume growth against the industry background of muted growth and then a rural environment that is under-served. Our portfolio refine and continues to progress, we have a clear path with APAs and LOIs to achieve at least the $200 million reduction in secured debt and to establish a foundation of cost efficiency and increase profitability which will create room for future expansion.
In closing I want to thank all our physicians and our Hospital leadership teams, our nurses, our support staff for their dedication and encouragement. And I'll just remind you we are focused driven dedicated management team to show that we can be successful. In closing I want to thank all of you for your support.
And with that Mike, let me turn it over to you for questions.
Michael Culotta
Mike we’re going to get started with the questions, just real quick, again we want to apologize our website is back down again we’ll try to get that back up. And again we apologize to everyone.
Question-and-Answer Session
Operator
[Operator Instructions] Your first question is from Sheryl Skolnick from Mizuho Securities.
Sheryl Skolnick
Thank you very much. Clearly a ton of hard work and a lot of success against a very challenging environment. One thing I think that probably has not come through in all of the very rich detail is the reason for the reduction in guidance. So just to restate and clarify the weakness in surgeries and some softness in the environment that's primarily bringing it down on both pro forma and not pro forma basis and then on the pro forma basis the delay in signing of the acquisition.
Michael Culotta
Yes, Sheryl that’s predominantly, we saw some softness in the surgery this quarter. So hopefully we'll see that rise again in the fourth quarter. But from the volume trends that we saw there the fact usually you do very well in October and November as you well know more of a difficult month. The other side of it is the $8 million that we received from the Illinois property taxes, you won't see that again. That’s a reduction in other operating expense or other operating expense will go back up another $8 million.
So again, we took everything into consideration and looked at various ways to look at it, it put us right in the middle of the range that we're giving on that. And as you are saying what else got adjusted of the timing sales. There were a couple of other LOIs that we had just have not yet gotten into an APA status that we thought we were going to be able to close by December 31. So we are seeing a little shift of that, there are still for sale. We're still working on those and we will see more that will occur in early part of 2018 that will come to closure.
Sheryl Skolnick
And can I just follow up on that point. So is that Tennessee? Can I see Tennessee on the list anymore?
Michael Culotta
Yes. Tennessee the buyer there we're still sort of working with them, but their financing temporary.
Sheryl Skolnick
I see. Okay. That’s helpful, I appreciate that. This news about Illinois, the money that you'll be receiving on November 13, thought off the process is very encouraging, but as far as you’re and clearly a result of the efforts that you went to above and beyond as a company above and beyond what your CSA vendor has gone two on your behalf. And my question is now that you're having success there, don't want to count chickens before hatch, but you're clearly having success last quarter now more good news this quarter. What are you doing about the rest of the receivables, what can you do to improve and trend and convert those DSOs into actual cash, because it’s non-trivial as you pointed out?
Michael Culotta
Well, we stepped up here corporate. We are also our hospitals are now getting to be more engage we've asked them to get more engaged with it. And so what we're doing is we're sort enough setting on our hands, we're actually looking at those we're not seeing any activity on those accounts. Nothing's being followed upon. We're doing a follow-up on it, we're going after it, we're using other third parties to help us with that. So you're exactly right, we just can't stop. We've got to continue and everybody knows – cash is cash and everything else – reason we've got to get the cash in door that’s the life time of everything. So we're doing everything we can and adding more resourced to it.
Sheryl Skolnick
So, are you still playing your vendor?
Michael Culotta
We're still paying the cost associated with it based on cash, there is a amount that is paid a certain percentage is paid on the collections of the accounts, that are not going to their internal capacity their internal third party collector that's a high rate, but as the cash comes in we do we are paying them.
Sheryl Skolnick
Okay. But that's basically being paid for performance, not otherwise?
Michael Culotta
Correct.
Sheryl Skolnick
Okay. And then in terms of if I could just go back to the fundamental point on the volume that I raised earlier, so Tom I think that’s for you and the operating team. First of all kudos on sitting through everything and one of the strategies then I had not one out of doubt in me that nobody gets anything but you. Good, thank you. On the other hand if you have all of the new doctors starting the obvious question is, why are we – I think I know the part of the answer, but why are we seeing the weakness, help me to understand there is some slight with a little less there. And you had success with them in the second quarter clearly beat the odds against everybody missing and you didn't, in this quarter we've got the softness going on. So can you have a through understanding of what happened and what you can do to you now improve that?
Tom Miller
Sure. We know by hospital where we see weaknesses and where we see strengths associated with that. Some of those are in the hospitals for sale and that's why the results of the 24 are so positive. But as we go further along have seen us all along of the hospitals that are non strategic to get closer to the divestiture, that we see reductions in some of the physicians activities with their hospitals. And we have the summertime activity, we've been very successful in recruiting to this I think Mike mentioned orthopedic has one example associated with the good results that we're having. But we're optimistic, again we've recruited 27 in each primary specialty areas, orthopedics and general surgery, cardiology and GI. And we're seeing those results and we do anticipated that we'll see those results coming back as we further divest these hospitals, because the core 24 doing very, very well.
And sure I did something for you, just so you get a feel. We went back and looked at first quarter recruits just to understand how well they're getting or going along to being affected. And what we found was in the first 90 days and we measure this against what an average doctor based on MGMA volume would be, based on our views. In the first 90 days our recruits, that we have recruited were about 36% productive to the midpoint of our views and at 120 days or 180 days they were 36% productive and at 100 or at 270 days or nine months. They were at 96% higher than average of the MGMA. And so we're seeing they were able – we knew that divided existed in these communities because our communities are very under-served and it's graded within that 270 days or nine month period we're getting them up to almost the average of MGMA are being used. So very positive result associated with that. We believe that all along. And we think that we will continue.
Sheryl Skolnick
That is excellent detail. Thank you very much.
Operator
[Operator Instructions] The next question is from Elie Radinsky with Cantor Fitzgerald.
Elie Radinsky
Hi, thanks for taking my call. I just got up on your website. So what I'm seeing here is that you're expecting to have $184 million on a pro forma basis as of 12/31/2016 at year end.
Michael Culotta
I’m sorry, in terms of what?
Elie Radinsky
EBITDA. Pro forma EBITDA for your divested hospital.
Michael Culotta
The EBITDA after divestitures?
Elie Radinsky
Yes. Pro forma after divestitures, correct.
Michael Culotta
After divestitures with that range goes from 160 to 170.
Elie Radinsky
160 to 170. Okay, some on page 32. Okay, so if we take out you're expecting approximately $200 million of debt reduction I was trying to get a pro forma debt number after everything is said and done.
Michael Culotta
Pro forma in terms what we're paying down is based on what we pay to date, based on the APA and LOI that's an additional 115 and then we have another LOI that hopefully will be started sometime this afternoon which would add another 40 million to that. So that would put you at right around 200 to 201
Elie Radinsky
Okay. So if we take assuming, are you expecting next quarter to be free cash flow. I'm just trying to get some pro forma numbers. So if you take the 170 EBITDA and then you'll take 178 approximately of debt is that the way to look at that? Just want to find out if I'm looking at the correctly or do you expect additional masses until the divestiture happens or to expect to generate free cash. Just trying to get a pro forma leverage for you.
Michael Culotta
Yes. We will expect, because those hospitals that we are starting to operating loss so you will have additional losses until the point in term they're sold. However those LOIs that we have on those hospitals will probably not be fully sold until the first quarter 2018 right around the timeframe. The APA actually will not be sold until the end of February, because of the CON. Remember healthcare environment in a number of states you do have to through the CON authorities to get those approved. So that will take twice.
We don't get really any information based on our estimates of our free cash flow, but we are positive so far from the standpoint that we did receive. The funds from California were 31 million in the fourth quarter. We're still reconciling this we can from the Illinois, information that we're getting so, we're hoping that $7 million numbers probably hopefully going to do once we do the other hospitals. We've only reconcile two hospitals at this point in time. So we have other hospitals on that, so we are hoping towards a really sizable number hopefully will come in before times getting when we get everything on Illinois. So just give…
Elie Radinsky
On that pro forma number that you gave me for an EBITDA for this year, that does include the California fee provider numbers?
Michael Culotta
That does include the California fee provider number which is in the Slide.
Elie Radinsky
All right. Okay, excellent. Thank you very much.
Michael Culotta
Thank you.
Operator
Your next question is from Sheryl Skolnick with Mizuho Securities.
Sheryl Skolnick
Hi, thank you. It’s nice to be one of you to coverage the company second. First thing. Now that we're on to 30-year your cap structure in your pro forma metrics on or after that I'm hoping you could not do nothing. So when I’m looking at where your leverage is today and I know you're going to be doing all the pay downs. You can help me an awful lot by capturing a couple of things for me. The first thing is can you give me what your credit agreement EBITDA is as of that day. Because you've calculated with the 4.24, but I just want to make sure. I'm using the right debt balance to go against that.
Michael Culotta
Sorry, I don’t have that with me. So I don't think, I have that number in there. So there's a number of adjustments. But I can give you call back on that.
Sheryl Skolnick
Okay. That would be perfect. Because I'd rather do the analysis correctly than I guess. Yes, the second thing is you said that you've made payments as well since the end of the quarter, and one of the footnotes says that the term loan was that $83.53 million, I think, you said.
Michael Culotta
Yes.
Sheryl Skolnick
Right. $83.53 million. But then what about the ABL, was anything paid down on the ABL. So if you could as of yesterday or today were that down to be.
Michael Culotta
That analysis just slightly below, what it was at the end of the quarter.
Sheryl Skolnick
So in the neighborhood of $45 or so?
Michael Culotta
Yes.
Sheryl Skolnick
Okay. All right. And then your secured net debt does not include any capitalized leases or anything else, right. It's just those two items.
Michael Culotta
No, it would include capital lease. There is about $24 million to $25 million. That’s on the balance sheet on the capital lease.
Sheryl Skolnick
Okay. All right, that what I asked. So that's why my numbers weren't coming out exactly, where yours were. So now I understand and then you get me that credit agreement with me. Okay. And then what we're going to do is you're going to get roughly $155 million sometime over the next six months, when that happens and those assets are sold you get to add back the losses from those facilities to your credit agreement EBITDA definition as an adjustment correct?
Michael Culotta
That is correct.
Sheryl Skolnick
In their entirety for the entire LTM.
Michael Culotta
Correct.
Sheryl Skolnick
Okay. All right. So then we'll get a boost in the LTM will get a decline in the EBITDA by my math I was thinking that by the time you finish all of this, your secured net leverage could be mid 3% little bit higher maybe. Is that sounds like ballpark with the 200 in it.
Michael Culotta
Yes. The other thing is you and I talked little bit last night. This is way we are looking at this and again I'm not giving guidance or long-term guidance whatsoever, but just doing the math which is strictly what you're doing is, we are looking at other sales we've been approached in other hospitals. And if we can get the sales up to we're already going to be with those -- that those go to closure will be just north of the 200. But if we can get a few more sales in there and get down to about $250 million to $300 million additional pay down and then you sort of take a look at the adjusted EBITDA, adjusted for divestitures. You add back what you're doing which is LTM on those that are being divested.
And the other things we looked at is, if we can negotiate out of the TSA there are some very good opportunities for there. We’ve had two international consulting firms look at this and so easily between the cost savings and the revenue cycle improvement probably be another $40 million. So answer and just doing the math, so how you’re exactly right we're looking at total leverage of now is this not tomorrow or this is a little bit further out. But total leverage ratio about 4.6% with total net secured of 2.7% and that without add backs.
Sheryl Skolnick
Okay. That is enormously helpful. And then let me just follow-up on one thing and sort of put a point on that. So you're telling me that the cost savings that you have from there being able to do the collection other than through the TSA plus actually getting paid, would save you $40 million a year.
Michael Culotta
That’s what we believe, yes.
Sheryl Skolnick
And $40 million and a 160 is non-trivial.
Michael Culotta
Not at all.
Sheryl Skolnick
And the arbitration date at the end of June?
Michael Culotta
Correct, or sometime in June. Same, it can be moved up. Got in rid of some other way.
Sheryl Skolnick
Excellent. Okay, this is enormously helpful as usual. Thank you very, very much. I mean that it would like. It would be lovely for Quorum to be able to execute on all of this and have much success and I have this kind of stuff, but for you guys I can (44:58). It was alluding for you. So good job and thank you very much.
Michael Culotta
And I know you'll call back. Okay back to you
Tom Miller
Thanks, that’s all of call, Mike is that correct?
Michael Culotta
Yes that's correct. There are no further questions at this time.
Tom Miller
Let me thank everyone for your time. Again we believe we have a great opportunity in the future and we're continue to operate in that fashion of the group of dedicated people. So thank you for your time to call. Thank you. Mike.
Operator
This concludes today's conference call. You may now disconnect.
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