Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Okay, great. We're going to keep moving ahead. Thanks for joining us. It's my pleasure to introduce Tenet Healthcare. Tenet's a diversified health care services company, operating 3 related businesses, acute care hospitals, USPI and Conifer. The company operates 65 hospitals and also the largest ambulatory surgery platform in the country with nearly 400 facilities. Doing the presentation today is CEO, Ron Rittenmeyer; but joining us down into the right, in the Georgian Room for the breakout would also be the Chief Financial Officer, Dan Cancelmi; and COO, Saum Sutaria. So Ron, I will -- take it away.

Okay. Good morning. Before we start, I need to ask you to look at our forward-looking statements on Slide 2. Please take a moment to read that. I will not read all those little details for you, but please do so. Let's get started on Slide 3. This is our agenda. First, a little brief walk-through of the enterprise, followed by a look back at 2019. And given our performance, I thought it was time to add a little more clarity to the methodologies we've changed from the process and talent perspective that really are behind the changes that we've been making. And then finally, a bit how we've transformed and continue to transform the overall culture which really does drive our performance. The map on the screen provides an illustration of what Tenet looks like today and the magnitude of our reach across the country, tying together the health care spectrum from the high acuity inpatient to the outpatient, whether in a hospital or a surgery center, allowing us to truly leverage our broad skills and resources. To our hospitals and USPI subsidiaries, we care for patients, from a vast system of about 600 facilities. That includes acute and specialty care hospitals, freestanding outpatient clinics, neighborhood urgent care centers and other sites of care. We operate these facilities independently, some in collaboration with our Tenet markets and some in collaboration with our more than 50 health system partners. We have a really unique mix, allowing us to participate and develop less mature markets and maximize more mature markets across the system. Our refocus on high acuity, emergent and elective care is driving our system to be more responsive to the needs within the communities we serve and providing industry-leading excellence and efficiency in specialty care. Our Conifer subsidiary is the nation's leading health care-focused revenue cycle management platform. Manages more than '17 million unique patient interactions annually and $25 billion in net patient revenue. And then you will also note the newest addition to our map, which is our global business center in Manila. We opened the global business center this past August and have built out teams and functions over the last several months. The team is already well immersed into operations, providing us with a dedicated network of around-the-clock support services, which we're going to discuss a little bit later in this presentation. This will continue to expand for Tenet, USPI and Conifer as a very critical resource to provide the right support to our platforms, 24/7. So with that overview, let me now get a little bit into the last 24-plus months of change that established the new baseline on which we're building. Change for us, frankly, falls into 2 main buckets. The first being performance and the metrics driving the detailed operational initiatives that support our mission of providing quality, compassionate care, delivered at the right time, right place, in every community we serve based on continuous improvement throughout the system. And second, about having the best talent that challenges conventional thinking and processes, coupled with a strong and continually refreshed and disciplined governance to ensure we stay within the proper framework. I think it's very fair to say that we're a completely different company than we were in 2017. We are a stronger, more focused company that understands and embraces delivering on our commitments. While 2018 was a time of change. 2019 has proven to be a building year with strong momentum heading into 2020. We've established clear goals that are hard to achieve, but they're attainable with the right mindset and execution. And importantly, we adapt quickly when needed. The concepts of real-time and data move to the forefront of our conversations and has helped us to modernize our approach to efficiency and effectiveness. Our focus on organic growth delivered a consistent and sustainable improvement both in our hospitals and USPI. We delivered measurable improvements in quality, safety, patient experience. We improved operations, delivering on our cost-saving initiatives to achieve $300 million in savings by the end of 2019 of our overhaul $450 million target by making smarter decisions based on patterns and analysis and executing with agility and speed. We expanded our financial flexibility through a series of refinancing transactions. Among other benefits, this has enabled us to lower cash payments for interest and reduce the risk associated with our outstanding debt. We remain focused on and committed to reducing the actual dollar amount of our debt. On volume growth, this is one of our most notable achievements in the last year. It's been tremendous improvement in volumes across the portfolio. On the left, which shows hospital adjusted admissions, you can see we had some spotty periods in 2018. Some up, some down. But those reflected the change that we had begun to make in our approach. In 2019, under Saum's leadership, we began to deliver positive volume growth for the first, second and third quarters of the year. The rate of improvement was also the strongest we've achieved in the last 18 quarters. Similarly, we've continued to deliver strong surgical growth in our Ambulatory business. On the right side of the page, you can see how we generated solid growth in 2018 and again in the first 3 quarters of the year. As it relates to Conifer, I want to highlight the strength of the Conifer business and EBITDA, but more as it relates to margin expansion. Since 2017, we've seen solid and continued growth. And our expected margin for 2019 is at roughly 28%, a 10-point improvement in the last 2 years. The next slide, Slide 8, supports the fact that we've continued to provide marked improvement since 2017. Our outlook for adjusted diluted earnings per share is in the range of $2.25 to $2.91, approximating a 78% annual improvement since 2017. On adjusted EBITDA, shown on the right side of the slide, we are reaffirming our guidance range for 2019 and specifically the midpoint we provided of $2.7 billion. We are still in the close process, and we'll discuss the quarter and the year details in our earnings release and call on February 24 and 25, although I know people will try to get more questions out of me but that's the plan. For now, I want to underscore, we are comfortable with that guidance and the midpoint of $2.7 billion that we previously provided. The sustainable improvements in our performance could not have been achieved without an intense focus on our talent and overall governance. In 2019, we continued to focus on people and talent from all aspects of the organization, refocusing and reshaping our recruitment and development efforts. First and foremost, attracting and retaining quality physician remains a critical part of our growth strategy. Last year at this conference, we spoke about how we were planning to restructure our physician recruiting process to ensure we are employing high-quality physicians and groups in specialties that address needs in our communities versus recruiting of single physicians unless done to meet a specific need. We also recognize the need to provide the best environment to practice medicine for our medical staff. That means, as an example, efficient and seamless scheduling, quicker speed and OR turnover. These type of revamped processes have enabled us to build out our employee specialty groups even further and align with leading medical practices for both our Hospital and Ambulatory business. For our leadership teams and talent development, we have devoted significant energy and attention towards a high-performance culture that prioritizes accountability and ownership. We have attracted new talent to join the organization, coupled with elevating or transitioning top performers to new roles with defined career paths. With that, has also come an overhaul of our approach to coaching and mentoring and helping others to seek alternative opportunities outside this enterprise in careers that may be better suited to their desires and skills. At the Board level, we've remained true to our commitment to bringing in new directors, building on expertise, increasing diversity and accelerating change. 70% of our directors are new in the last 2 years, and 80% since '19 -- or since 2015. To provide you with a bit more color now on the focus on physician recruitment, I wanted to highlight a few of our medical groups affiliated with our hospitals. Starting from left to right, the Paley Orthopedic & Spine Institute at St. Mary's in Florida is very well-known for delivering highly complex pediatrics and adult orthopedic clinical services, including treatment of spine, foot and ankle deformities as well as congenital limb disorders. Patients travel from across the country and internationally to receive world-class medical care at this center of excellence. The group offers not only advanced clinical expertise, but a personalized approach to raise the standard and outcome of orthopedic surgery worldwide. Last year, we recruited additional high caliber physicians to the practice to address the increased demand for these individuals, and we'll continue to look for opportunities to bolster our services. The Biltmore Cardiology practice joined our Abrazo Medical Group in Phoenix this past May. Biltmore has over 25 years of experience providing comprehensive diagnostic and interventional cardiology, minimally-invasive cardiothoracic surgery, vascular and electrophysiology services. The practice is at the forefront of new treatments and a focus on clinical research and new technologies. In El Paso, Providence Medical Partners expanded its footprint to include the El Paso Orthopaedic Surgery Group. The team of 20 physicians and 10 providers offers comprehensive treatment for orthopedic issues, including diagnostics, nonsurgical treatments, minimally-invasive surgical procedures and rehabilitation. These are but a few of the examples of the high-caliber team for adding to our roster throughout our system. On talent, we have continued to invest in our people across the system at numerous levels in the company. As I've said many times in the past, we can own and operate the best facilities in the best markets, but without the right talent, we will never succeed. I'm pleased to take the opportunity to introduce you to a group of the executives we've recruited to the company over the last 2 years. These aren't the names and faces you know. But they are the people that myself, Saum and our Board rely on to deliver results. They are highly skilled with the experiences in their respective areas that is notable, and in many cases, expansive beyond health care while bringing innovation, energy, intellectual curiosity and a willingness to lead bold change with courage and confidence. As a group, they are having a tremendous impact along many dimensions. Combined with our long-tenured executives who have significant institutional knowledge and expertise, together, as a team, they've reshaped our culture and are continuing to drive us deeper in developing new approaches and metrics, which will drive sustainable performance. The faces you see have elevated the leadership at Tenet corporate, Conifer, USPI and our hospitals across all the functions, like HR, clinical operations, IT, marketing strategy, finance and so on. And as you may recall, in the third quarter of 2017, we commenced the refreshment process to ensure we had the right mix of skills, perspective and experience on the Board to maximize the future of the company. The directors we have added over the last several years have brought different viewpoints, approaches and experiences to complementing the existing knowledge on our Board. Together, we now have expertise in health care and clinical operations as well as decades of experience in finance, public service and leadership. We also have a more diverse Board in terms of gender and ethnic diversity and a powerful commitment among all directors to the highest standard of integrity and transparency. Our meetings always included the kind of healthy debate and dialogue that are important to calibrate strategy, set the tone at the top and keep us on the right path as an enterprise. So let's look forward. We have established a new foundation, eliminating the past process that lacks accountability and enabling a new culture and new set of opportunities. And we have done this by muscle-building an organization that will thrive unchanged, led by new and stronger talent whose profiles support the agenda and whose commitments are deeply rooted in the character and skill sets. Our growth plans remain similar. Through our execution -- though our execution now has more firepower, and will have, driven by these attributes' exceptional sustainability. We will continue to focus on driving performance across the enterprise, seizing opportunities that improve EBITDA and have a much stronger focus on free cash flow. It is about consistent speed of execution and tenacity, reinforced by how we make decisions, how we hold our teams accountable in quality, service and financial performance and how we tie rewards to those goals. We will operate with a stronger focus on cash and ensure our decisions maximize returns by continuing to enhance the data used to inform our decisions and reflect on those decisions by tracking results to further sharpen actions and plans. When we speak of portfolio optimization, it is simply a constant top-down review of our assets and the most appropriate allocation of capital. We remain diligent in our review of all our assets and test whether they remain core to the portfolio and our growth plans. We will take actions similar to the recent announcement that I'm sure you've seen on Memphis to trim and carefully add to our asset base, driven by a data-informed total cost of ownership approach, coupled with a realistic view of a market potential as it relates to our investments. As this relates to our Ambulatory platform, USPI remains a critical asset that will -- will be bolstered with acquisitions and de novo opportunities. Either independently or together with existing new partners, USPI is tightly tied to our overall strategy, allowing us to truly grow in our key markets while providing that similar support to many of our nonprofit partners throughout the United States. We are committed to thoughtfully and aggressively scale this aspect of our business. And we remain focused on a successful and carefully planned spin-off of Conifer while continuing to make enhancements to the business with the attitude that we will vigorously operate it until the day we spin it. And now I want to take a step into the next few slides and how we've changed our methods and how we work, which sets the foundation of our broader operating model. But before I discuss these, I want to be clear, while these charts are exactly what we use, we have changed the numbers that you're seeing to reflect an illustrative example, meaning the numbers are not actuals and are for presentation purposes. But rest assured, every day, day in and day out in operations, they're very real. So I mentioned data-driven decisions and processes. These are but a few of the new database decision processes we have engaged throughout the enterprise. It's essentially a real-time dashboard that provides the same information to our leadership in headquarters and the field at the same time and in the same format, which recognizes patterns, changes to trends and informs immediate action versus waiting weeks to summarize information. We can now course correct quickly and take appropriate action using fact-based information. These data-driven insights cover a range of key metrics, including volume performance, payer mix, expense management, quality, safety and so on. And here's an example, a little bit closer look at how we use information to develop predictive mid-month reports that allow us to take corrective action and staffing, comparing what we've expected to what we're experiencing. It creates informed objective decisions with our medical teams, anticipates our supply needs, labor allocation and so much more. That means decision to action has now reduced significantly, providing our operators with tools to lead their organizations effectively. The geospatial, subservice and payer dashboard on the right side of the chart allows us to track what is happening in every market to ensure we've aligned the needs of the market to the actions we are taking and/or planning. These are tools we've been introducing late in 2019, and we'll continue to refine in 2020 going forward. We now have a much richer view of our own consumer base in each market. Based on data, one more time, and research, we're continuing to expand service lines with a focus on the needs of the patients with chronic illnesses as well as the aging population. As you can see on this slide, the number of patients requiring admissions aged 45 to 64 really increases when they present with 2 or more chronic conditions. Of course, that sounds obvious. But the impact is important in how we plan our medical teams, our allocations of assets and labor, supplies and so on. It allows us to ensure we've dedicated specialists to care for the patients with these illnesses with true alignment among clinicians and patient priorities. It ties together the previous data formats in building a solid, data-informed decision support system. These tools in the last few slides are just examples of when taken together, how we create a field of vision that allows not only immediate course correction, provides the basis for trending that support and it supports everything from real-time supply chain to capital allocations. It creates the basis for executing the immediate plan and building for the next 6 to 12 months in terms of recruiting and investments. It reframes the culture into a performance-driven organization across all levels. Let's now step over to USPI. USPI remains the leading provider of ambulatory surgery in the United States. Yet, we don't -- having to keep up with somebody here. Yet only have an ownership interest in approximately 5% of all the surgery centers. The top 6 providers own just under 20%, while 60% of all centers remain independent. As we've said in the past, this presents an ongoing source of opportunity to consolidate an ever-growing, a highly fragmented market, one that we can optimize. Ambulatory surgery -- our ambulatory acquisitions offer significant attractive returns. We continue to have a strong pipeline for individual centers as well as multi-center platforms. We expect to deploy $150 million to $175 million on opportunities each year, which I think we've said in the past, and that number can move up or down really depending on the transaction and the time to execute. But we remain committed to aggressively optimizing the growth in these acquisitions and ensure that EBITDA less NCI multiples remain below 5x. We continue to believe investments in de novo facilities are smart use of capital, and we have many attractive opportunities in the pipeline. We've also continued to allocate time and attention towards expanding key services in the outpatient setting to meet consumer demand and preferences. That includes investments in orthopedics, spine, cardiovascular and robotics services. We want to ensure that our communities have the access to the best possible care in the right locations for them, and de novos play extremely well in that effort. The next -- I want to speak briefly about the Global Business Center, which is off to a great start. We've leased 4 floors of the building shown in this photo. Exciting move for us. We joined many other significant companies in Manila. We have teams in place representing the accounting, payroll, marketing, procurement and billing for all 3 businesses. They work to provide our teams in the field with 24/7 support, reducing waste of time by aiding decisions and requirements. And it's not just about moving work, but about making smarter decisions about how we do our work. We've used this to redesign our workflows in a very deliberate effort to streamline processes. And we've eliminated a significant amount of duplicative work across all the business. It has ignited the change process across all 3 business units. Again, part of sustaining a cultural change throughout the company. Finally, our Conifer business. It continues to perform across many dimensions. We have been tightening up our performance in terms of processes. We've also invested in leveraging our scale and expertise, adding advanced analytics through machine learning, automation, neutral (sic) [ neural ] networks and a deep learning methodology. It's a very valuable asset, and we continue to develop until this -- and we'll continue to develop it until the spin-off. We expect to operate it with continued focus on these important attributes until the day we separate. As to the spin, we continue to work and execute on plans to prepare Conifer for this -- at the second quarter of 2021. And as we discussed previously, long list of material things to get done. And as you can see, this is our road map to getting there. It's a general list of gating items and how we will get it to completion. The font is small, but the takeaway here is that we have very detailed efforts. They are all underway, and they're on track to get done. One of those items that we made as a gating item is a national search we initiated for the CEO of Conifer. We've made excellent progress, and we should bring that to close in the next couple of weeks. So the spin plans are fully engaged, and we expect no major hurdles in executing, as discussed. So what are the enablers of performance? I think it boils down to a high-performance culture, one that prioritizes accountability and the follow-through as many times as it takes, delivering on commitments and finding solutions and we will remain action-oriented about all of our management processes. The last thing I want to touch on is our mission. It's clear up there, so I won't read it. But we are a community built on care. It's a grassroots marketing thing that has ignited our company in a movement that has enabled our employees and physicians together to help transform our culture. We stand for compassion, quality, integrity, accountability, respect and inclusiveness. Our vision is equally inspiring and reflecting our communities that we save lives, which is something that is supported by all employees at all levels of the organization, regardless of their roles. So with that, I thank you for joining us. We're going to take your questions, I guess, in the breakout session in a few minutes. Anybody listening online, please join versus the separate webcast link that's available in the Investor Relations section of our website. Thank you.

All right. So thank you, everyone, for joining us. This is the Tenet Healthcare Q&A breakout. On stage with me, we have CEO and Executive Chairman, Ron Rittenmeyer; Executive Vice President and CFO, Dan Cancelmi; and President and COO, Saum Sutaria. So I'm going to open up with a couple of questions, and then we'll open up to the floor. I guess my first question really comes down to the $450 million savings that you've identified, and have realized about $300 million now. Can you describe where that $300 million really has come from, which segments? And for the incremental $150 million, where do you see that coming from? What changes are you making to realize that?

Yes. It's really broad-based. When you think about it -- and we've talked about this quite a bit in the past, all of our business units, we've been going through and reevaluating our cost structure, how we -- where the processes are, our workflows, et cetera. And we have -- we've had slides out there that shows the breakdown of the cost efficiencies by business unit. And predominantly, the Hospital business as well as the Conifer business had been key drivers of the cost efficiencies, but the Ambulatory business, we've also found opportunities there as well. We initially started off with $150 million program. If you go back to tail end of 2017, when Ron came on board. We increased that to $250 million shortly thereafter. And last year, there -- our target was to realize $125 million of that. We got to perform that, we came in at roughly $200 million of cost savings through last year. At the beginning of 2019, we increased our target to $450 million, so another $200 million. And we talked about realizing about $50 million of that as well as realizing the remaining $55 million from the $250 million program. So we had $100 million in this year's forecast, and we've achieved that. There's another $150 million of additional efficiencies that we'll realize this year, in 2020. Again, we're on track and doing very well on them. We're very confident in our ability to capture where there's cost efficiencies. And we're not done. In terms of what the -- when you think about the $150 million for this year, we get a lot of questions. What does that relate to some of the type of items we're talking about there? One of them is offshore and as Ron talked about a few minutes ago in his prepared remarks. We're also going through a really -- all the various costs that we have within the organization from labor perspective, looking at our labor standards, looking at our mix of labor, fixed versus variable staffing. We're also looking at, obviously, for a number of years, premium pay and in trying to get the right balance between contract labor and premium pay. Supply chain. We've been very successful through the years in terms of capturing efficiencies and minimizing spend in supply chain. Other operating expenses has been a big component of this $450 million program, many of those costs, to some degree, typically fixed, but we've been going through renegotiating vendor contracts, putting enhanced service level terms in place. And going through -- and really, there was a number of disparate vendors across the 3 businesses. As you can imagine, businesses are acquired. Many times, multiple vendors for each business are going through consolidation of vendors, rationalization of those vendors and getting consistent contractual terms across the organization. So we feel very good of what we have accomplished so far, there's more to go. We'll get that this year, and we'll always continue to look for additional efficiencies. It's got to be part of the culture of the organization and it is.

And that's one of the big changes we made. So it is part of our focus to continue to move that line.

Okay. Okay. Another question really kind of revolves around the acute industry. So again, we have seen your volumes, and across the industry, in general, have improved beginning since the second quarter of this year. We saw some very strong government rates, some of the strongest in a decade. We've seen some -- I think we're seeing pretty stable commercial rates and labor trend seems to be relatively benign. So how sustainable do you think some of these factors are? And do you see any foreseeable risks kind of unknown to the acute care business?

Well, a few comments. I mean first of all, from our standpoint. We're, as you can tell from Ron's discussion, focused on really changing the strategy and the infrastructure associated with that strategy to build a sustainable growth platform in the acute care business. So that involves evaluating the markets, the needs of the consumers in that market. We've been pretty deliberate about refocusing our energies towards a specialty-focused model, both emergent and elective from that standpoint. We're much more focused on surgical procedures and diagnostic and other interventional procedures in the cath lab. So the process of going about doing that involved first, really focusing on what I would describe as the access operation. So everything from how patients get in, scheduling, et cetera, to really get that to be a focus for us in all of the areas of the acute care platform. Deploying clinical technology behind the kinds of leading medical groups that you saw some sampling of, expanding the nature of our interaction with physicians across that platform to be a center of excellence in cardiovascular, orthopedics, neurosciences and others. And then ultimately, really taking that growth platform and beginning to hone the operating model to have more standardization and supplies and other things so that the benefit of that volume would hit the bottom line from an EBITDA standpoint. So we're on this journey. The different markets are in different stages of evolution. But importantly, for us, the growth trajectory that we've seen over this past year has been broad-based rather than narrow across most of our markets.

Great. Another one for me quickly. So we saw -- in the Ambulatory business, we saw volumes collapsed, pretty much collapsed, post the ACA bubble, let's call it, in the early part of 2016, 2017. And they've now reaccelerated and you have shown some fantastic growth back in the USPI. And this really seems to be driven a lot by, I guess, the change into site of care and lower-cost settings. Any thoughts on -- any other thoughts to the secular stories to what's driving the volume growth in the AC business?

Yes. So the USPI business, first of all, has been steady and growing at different rates for many, many years, right? I mean the business did not suffer a catastrophic loss in volume. And one of the reasons for that is there are a number of unique aspects to what USPI has done. One is that our partnerships with over 50 health systems gives us a very diverse array of markets beyond the Tenet markets, which are also important to us to grow. And that's critical. There's -- some of those markets are more mature from the standpoint of business having moved into the outpatient arena. Some of those markets are less mature. In the markets that are less mature, we're participating in that growth by being a development engine with the USPI platform with many of our health system partners. In the markets that are more mature, we're focused on diversifying the base of services that we can provide in that ambulatory platform to the point that Ron made about adding robotics, adding things like more sophisticated orthopedic procedures, spine, vascular, those sorts of things which can be done in an ambulatory setting effectively. So look, our pathway with USPI, despite a long runway ahead of us from the standpoint of the inorganic growth that's possible by bringing this fragmented market a little bit more together, still includes really successfully building an organic growth story at USPI, consistently over time in the ambulatory surgery platform. We intend to do both.

Can I ask a question? Speaking about inorganic growth, USPI. You mentioned today again that you're going to acquire for 5x once fully integrated. And I'm not doubting that because I've heard similar multiples from other acquirers. But I guess it's just not intuitive to me why when the financial markets' value so much higher that it's not more pricey for you.

Well, a couple of thoughts there. I mean obviously, there are organized ambulatory surgery companies that might trade at higher multiples. But remember, the industry goes back to the chart that Ron showed, it's very fragmented. So there are a lot of individual physician-owned, oftentimes, single or double specialty but not multi-specialty centers that trade at lower multiples. And then when you layer on that, the types of synergies that we can bring from an operating perspective, from a supply chain perspective, from a throughput perspective, we're able to get the effective EBITDA minus NCI multiple down into that range pretty consistently.

And we can do it rapidly, which is what's important because we have a model that we can just keep following and refining as we go. And we're very good at it.

It's another question for me. I'm just speaking of -- continuing on this theme of ASCs. I know you're not going to give 2020 guidance, but any thoughts on the impact that total knee replacements now being on the Medicare reimbursement list for 2020? Any thoughts on that?

Well, look. I mean having total knee replacements on the Medicare, it's -- this is going to stimulate demand, not surprisingly. And Medicare reimbursement for knee replacements in that setting is in excess of $9,000. It's -- from that standpoint, something that at least we, in our platform, can do well with. And we're big believers that the movement into ambulatory, which we embrace, is not a one-for-one cannibalization by any stretch of the imagination from the acute care hospital. Lower cost, better service, faster throughput, in and out of the center creates demand from people who are looking for something like that, that may avoid it in a more complicated hospital setting. So we're well positioned, both in our markets and our health system markets -- health system partners' markets to allow the enterprise to capitalize upon this opportunity. So we welcome it.

And I think it's fair to say that our -- we believe that equally, the hospitals will continue to play a role in this, depending on the acuity of the patient. So not everybody is suited to move into a surgery center given the complexity of their own health. So I think that's a fair announcement.

All right. So I'll keep going here. So every year, it's the flu impact on EBITDA's -- pretty -- it gets debated.

We were waiting for this question.

I mean I was just trying to hold off to the end.

Disappointed if you didn't ask it, actually.

So we generally see a strong or -- when we see a strong or stable flu season, we've generally viewed that -- or that's generally been viewed as pretty stable or accretive to hospital EBITDA. But occasionally, where there are sharp spikes, that impact can be relatively muted as it may push out or carried out, I guess, elective or as scheduled procedures. Given the December spike that we saw this year, I know you had reaffirmed guidance today, but can you quantify your, kind of, just what the plausible impact could be on results?

Well, I won't get into specifically the impact on results. But look, I would say, first of all, we forecast flu volumes in our winter months every year. Like, there's nothing new about that.

Winter comes every year.

Yes. Sometimes, that forecast hits exactly when the flu spikes, and there's obviously a tail on both ends of that, and sometimes, frankly, it is 6 weeks before or after, right? I would tell you, in our markets, we have seen the impact of that blue spike. It hasn't been remarkably different than what we saw in the prior couple of years. And we assume that at this point, going into January, we'll continue to see the flu expand into other markets across the U.S. The interesting thing is the spike in the flu volumes hasn't been uniform across the United States. So I assume that there's still movement to go from the standpoint of how it will run its course this season. So this will probably be a December, January or early February phenomenon.

And whether or not it has a big impact on acuity from a hospital standpoint versus just the activity is yet to be really determined. So...

All right. Another one for me I guess. So when we think about development spend, as you highlighted in your presentation, de novo Ambulatory growth kind of remains first and best use of capital. How do we think -- how should we think about acute -- CapEx priorities in the acute setting?

Well, acute care hospitals require a fair amount of capital, right? And the question is how do you apply a disciplined capital allocation process that is very mindful of the return on capital that you're going to get from the standpoint of the clinical investments you make to grow the business. And that's really, I think, the primary change that we have been focused on making in 2019. I mean we make our life, safety, infrastructure and maintenance IT capital investments on an ongoing basis. I think some of the benefit of the work that we've been doing, especially in our information technology group, to really restructure a bit of our relationships and management, to variabilize more of the cost in the IT side is important. Over time, as you guys know, things will move to the cloud and things will move from CapEx to OpEx a bit in that environment. So we'll deal with that. But the ability to deploy clinical technology behind the types of medical groups that choose to do business with us and the service lines that we've been focused on is really where the upside is from the standpoint of better capital deployment in the acute care business. So we have plenty of projects on the acute care side now that have returns that mimic what we see on the Ambulatory side. And we'll continue to make investments in both, especially in those markets where we see a sustainable runway for us to succeed.

Any questions from the audience? All right, I'll keep going here. I guess one of the other questions and one of the concerns that we have generally had has been kind of the free cash flow generation of the, I guess, to combine of the overall firm. You've discussed this at recent investor meetings. Can you flesh out the opportunities to improve free cash flow? And if you can kind of talk through, a high-level perhaps, free cash flow for 2020 given we expect to see some of the restructuring costs roll off and EBITDA continues to grow?

We're very focused on improving free cash flow generation, stating the obvious. Saum's point about when we think about allocation of capital, for all the capital allocation decisions we make, we take into consideration what is it going to mean. Is it going to improve our free cash flow generation? It's first and foremost. What does it mean to our leverage? What does it mean to our overall debt? That's how we approach all these capital allocation decisions is what does it mean. Some of the -- so I mentioned some capital spend. The maintenance, you don't necessarily see the same type of returns as you do in an Ambulatory setting or other higher acuity service lines in the Hospital business, but it's part of growing the business. So when we look forward, our adjusted free cash flow guidance for 2019 is $600 million to $800 million, $700 million at the midpoint. In terms of 2020, we haven't gone out specific numbers yet. But a couple of things to think about, we anticipate continuing to grow our earnings next year. We obviously will continue to be very diligent in how we invest our capital with the primary focus on the Ambulatory business as well as higher acuity-type of hospital projects. We have been clear that we'll continue to make some investments from a restructuring standpoint to drive additional cost efficiencies. It'll create much more greater returns down the [ rest ]. We'll continue to make those type of investments in 2020 as well.

Okay. All right. So I guess going back now, I guess, back to Conifer. We haven't touched on that yet. And thank you for sharing, I guess, that's relatively new to the market, that you hope to have a CEO announced over the next couple of weeks. So as you think about kind of what's happening operationally and -- what's happening to really rejuvenate top line growth there? And what's the competitive advantage that the Conifer is pitching to the marketplace right now?

Yes. So a couple of thoughts. I mean first of all, I think we said we're going to close down our process from a search standpoint in the next couple of weeks. Announcement, some time to follow. So I just want to make sure that we're careful about what we say there. Second thing is, look, from the standpoint of Conifer in the commercial market, especially in the revenue side of the space, really, given what we've been through over the last couple of years and exploring the right disposition of Conifer to enable its next-generation of growth, it's kind of been out of the commercial market in some ways. We've been very focused during that period of time in improving and enhancing the performance of Conifer for its core clients. Conifer, in the way it operates today, is actually quite different than what it was doing 3 years ago even. The addition of many predictive analytics tools, AI, automation of the workflow, more unique and critical skills, I think, in today's environment with respect to predictive work in the denial space in particular, and also in its interface with patients on the front-end from a retail standpoint, are all innovations that have developed inside of Conifer over the last couple of years. But really, the current clients are benefiting from it because we've been out of the commercial market having gone through kind of this process of looking at sale, and ultimately, choosing to spin out the business. So we're very confident, actually, from our recent interactions with customers about the ability to appreciate what Conifer 2020 is versus what Conifer 2017 is. So we're excited about getting back into the commercial market from that standpoint. And I think that some of the investments that we have planned there will further enhance our offerings there.

Yes. In the health care industry, we see a lot of nonprofit hospitals, organizations, driving valued-based programs, at-risk models. What is your philosophy with respect to at-risk models, the value as well? If you can comment if you have any investments or plans to invest in any Medicare Advantage plans or Medicaid Advantage plans?

Sorry, Saum. Yes. So really, the question is revolved around really what is Tenet's position and view on risk-based, value-based care models. And if Tenet has any Medicare plan -- Medicare or Medicaid health plans?

Yes. So let me -- that's a big question, and it's got multiple components. Let me just break this down. First of all, philosophically, when we take risk or we get engaged in value-based programs, the most important thing that we think about is actually performing at target or above target in the risks that we're taking, okay? So that -- I mean, number one, when we take risks, our objective is to meet the parameters of the risk we're taking and outperform what the parameters are. So that, I think it's really important because risk at some level is a financial construct, but it's really an operational imperative if you're going to take risk. We have been focused in our organization, both in the Hospital business and in the USPI business on what I would describe as end-to-end bundled-type manageable risks. So we're the, I think, one of the largest, if not the largest, participant in the BPCIA program. We take on bone and joint bundling in our ambulatory environment. And so our risk-based work in that arena, we're very confident in, we can understand the inputs, we managed the operation, we ought to be able to predict the outputs. And again, that's a very important point because risk can go the wrong direction. If you follow the company for a while, you know that we've had acquired, through the Vanguard transaction, a number of health plans. We've now divested of all of those health plans and have exited that market. But that being said, we do a tremendous amount of work with both physician organizations and the health plans, especially in the area of Medicare Advantage. It's a very important book of business to us and being able to perform in a value-based manner in that environment is absolutely a critical capability for us. We have some really significant capabilities, especially in California, South Florida and Arizona, where that population is quite large and then extending into San Antonio. So we have a significant book of business in that area. And then finally, within Conifer, we have a value-based care business, an actual successful 25-year going concern that helps other organizations take and manage risk with a unique capability and financial risk management and care management that is quite successful. In fact, the class survey that was just released 1.5 week ago rated it the #1 organization of its kind with those capabilities in the country. So we're very proud of that business, and that business serves other clients. So we participate in value-based care in multiple different ways.

Were your hospitals taking risks? Or they're not?

The hospitals have a number of contracts that have risks. Some of them are pay-for-performance, some of them, again, in the markets where there's more delegated risk end up taking more risk. But look, as a percentage of the net revenue that we take in, this is still very small, low single digits.

Last question.

Yes. I was going to -- just a quick balance sheet question. Can you just update us on your leverage targets and then post the spin, does that change? What's kind of, in your view, appropriate leverage for the remaining businesses?

We're very focused on reducing debt and improving free cash flow generation and as well as, obviously, reducing our leverage. In terms of the Conifer spin, we have not settled on what type of capital structure it will ultimately be in terms of the dollars and cents. What we have said is that we believe Conifer is a great cash flow generating business and can handle an appropriate amount of leverage upon spin. So obviously, as we get closer to spin, more to come on that but...

Yes. We're going to do a tax-free debt-for-debt exchange. It's not actual debt-for-debt but a concept of debt-for-debt exchange. I think we're out of time here, aren't we?

And we have about 30 seconds left.

What's your status on your California hospital seismic issues? Provide some commentary? Are you all done or...

I would -- look -- I mean, go ahead.

We're not done. We're not done. No, we're not done. But a good one.

We don't even know what -- I mean...

We don't even know the regulations.

Yes, the regulation changes pretty frequently. So we're not done. So -- I'm not sure anybody's done.

Thank you very much.