Tenet Healthcare Earnings Call Nuggets: Second Half Outlook and Outpatient Margins

Tenet Healthcare Corp (NYSE:THC) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Second Half Outlook

Jailendra Singh – UBS: Actually this is Jailendra Singh filling in for A.J. Rice. Just a couple of questions if I can ask. On your 2013 guidance, is it fair to assume that $100 million guidance reduction is completely driven by lower volume expectations or has anything has changed for second half outlook, and if you can kind of highlight some headwinds or tailwinds you expect in second half versus first half?

Daniel J. Cancelmi – CFO: Yes, when we assessed our outlook for the second half of the year, we believe that based on the inpatient volume headwinds that we’ve seen in the past two quarters, we believe that it was appropriate to moderate our aggressive growth assumptions in the second half of the year. I might add, we are still projecting growth for the year of about 6%, and our various initiatives that we have been focusing on, including outpatient development, our cost efficiencies that we’ve been focusing on through our Performance Excellence Program, our pricing and negotiation with commercial players; we’ve been doing very well in those initiatives and in meeting or exceeding our objectives there. As well as our Conifer services business has been doing quite well, not only on their services business, but also doing a very good job managing our bad debt levels. But yes, to getting back to your point, when we looked at our earnings for the second half of year, given what we’re seeing from an inpatient volume perspective, we thought it was appropriate to moderate the guidance.

Jailendra Singh – UBS: Then, my follow-up on IPPS and DSH rules to release on Friday, any thoughts on that, and I was wondering what is assumed in your guidance for fourth quarter now.

Daniel J. Cancelmi – CFO: Yes, we were obviously pleased with the Medicare rule that was issued on Friday. We got 2,200 pages over the weekend. We were pleased to see that there really wasn’t any substantive changes from the proposed rule, other than the methodology that’s been used for disproportionate share revenue estimates under healthcare reform came in slightly more favorable than we’d anticipated. We might add that we believe this new method that was outlined in the final rule is a fair message from our perspective in terms of trying to measure hospitals on uninsured volume levels…

Jailendra Singh – UBS: Are you willing to quantify what that means for your fourth quarter? Is it flat or still down? I mean DSH…?

Daniel J. Cancelmi – CFO: No, we do not expect our DSH levels from a Medicare perspective to decline in the fourth quarter. There is still Medicaid, disproportionate share revenue headwinds in the fourth quarter, but from a Medicare perspective, we do not anticipate any decline of any note in the fourth quarter.


Outpatient Margins

Justin Lake – JPMorgan: Just a follow-up here on the revised guidance. You lowered revenue by $150 million. You lowered EBITDA by $100 million. Should we be thinking about that from a contribution margin perspective in terms of – it just sounds pretty high relative to the revenue decline? Can you bridge that for us?

Daniel J. Cancelmi – CFO: Not necessarily, Justin. There was a range that we put out there. When we looked at where we saw our inpatient volumes heading in the second half of 2013, we moderated our inpatient growth that we had assumed in the second half of the year. You need to also take into consideration the mix of the business between inpatient and outpatient as well.

Justin Lake – JPMorgan: I’ve always thought of outpatients as a higher margin business. Is that wrong?

Daniel J. Cancelmi – CFO: No, absolutely, outpatient is a higher margin business.

Justin Lake – JPMorgan: So then lastly, you talked about exchange contracting. I’m curious in terms of the types of plans you’re contracting with. I know you said you have at least one contract at every facility. But I’m thinking, the Blues typically own, or have historically owned the individual business. I’m curious if you could give us a percentage of your hospitals that have a contract with their local Blue Cross Blue Shield plan for 2014 in terms of exchange contract?

Trevor Fetter – President and CEO: Sure, Justin, this Trevor. I’m going to ask Clint Hailey to answer that, but just to interject that –well, the exchange market, we think is going to be important for us next year. So we’ve had a very concerted effort to be out in front of this, and I’m very pleased with the stats that Dan reported in his prepared remarks about the degree of coverage that we’ve achieved as well as the fact that the plans of which were covered, seem to be very successful in their price points relative to other plans in the exchange markets that exist so far. But Clint, why don’t you add your perspective to the whole exchange topic?

Clint Hailey – SVP and Chief Managed Care Officer: Sure. Thanks for the question, Justin. Just to kind of elaborate on Dan’s comments and Trevor’s comments, a 100% of our hospitals have at least one exchange contract. Roughly half of our hospitals have more than one exchange contract at this juncture. We really don’t know at this point in most of our states what’s going to be offered on the exchanges because it’s not public at this juncture. However, we can speculate about it, but that’s probably not a good idea. But what we do know is in California we had some release of information about specific plans in specific markets a month or so ago, two months ago. And in Florida, late last week, we also saw who’s participating and at what premium levels, and Justin, I think that really goes to the heart of your question, which is, how are we positioned relative to what’s been – what’s out there in the public domain. And just to kind of give you a sound bite that I think is pretty good, we’re in almost 80% of the least expensive two options amongst the silver plans. And we believe in all the things that have been written about where people are going to enroll, silver plans look to be where most people are going to enroll. And so, with us having 80% of the plans in those lowest two cost positions amongst silver plans, we feel pretty good about how we’re positioned.

Justin Lake – JPMorgan: How many states do you feel like you have enough information to say that in outside of California and Florida? Are there any other states you can point to where you kind of feel that level of comfort?

Clint Hailey – SVP and Chief Managed Care Officer: Yeah, so Dan talked about in his prepared remarks the fact that we feel like we’re about 80% complete on exchange contracting, and that’s not 80% in California and Florida, it’s 80% across the portfolio. So, we feel like we’re in better shape in some states than others. However, we feel like we’re in pretty good shape in most of them.