Thomas R. Rice - Senior Vice President of Investor Relations Trevor Fetter - Chief Executive Officer, President, Director and Member of Executive Committee Britt T.

Reynolds - President of Hospital Operations Clint Hailey - Chief Managed Care Officer and Senior Vice President Stephen M. Mooney - President of Revenue Cycle Solutions Daniel J.

Cancelmi - Principal Accounting Officer, Senior Vice President and Controller Daniel R. Waldmann - Senior Vice President of Public Affairs Audrey T.

Andrews - Chief Compliance Officer and Senior Vice President Kelvin A. Baggett - Chief Medical Officer and Senior Vice President

Ralph Giacobbe - Crédit Suisse AG, Research Division Albert J. Rice - UBS Investment Bank, Research Division Kevin M.

Fischbeck - BofA Merrill Lynch, Research Division Sheryl R. Skolnick - CRT Capital Group LLC, Research Division Gary Lieberman - Wells Fargo Securities, LLC, Research Division Colleen Lang - Lazard Capital Markets LLC, Research Division Whit Mayo - Robert W.

Baird & Co. Incorporated, Research Division Gary P.

Taylor - Citigroup Inc, Research Division

Thank you, operator, and good morning, everyone. Tenet's management will be making forward-looking statements on this call.

These statements are qualified by the cautionary note on forward-looking statements contained in our annual report on Form 10-K. We undertake no obligation to publicly release any revision to our forward-looking statements to reflect events or circumstances after the date of this communication.

We make no promise to update any forward-looking statement, whether as a result of changes in underlying factors, new information, future events or otherwise. A set of slides which will be referenced on the call were posted to the Tenet website earlier this morning.

During the Q&A portion of the call, callers are requested to limit themselves to one question and one follow-up question. At this time, I will turn the call over to Trevor Fetter, Tenet's President and CEO.

Great, thank you, Tom, and good morning, everyone. I'm very pleased with our performance in the second quarter.

We reported $288 million of adjusted EBITDA, well above our expectations and the Street's consensus estimate. These results included a portion of the 30-month California Provider Fee program, which we were able to recognize earlier than we had anticipated.

The total amount of EBITDA from the California Provider Fee in the quarter is $47 million, of which $28 million is attributable to other period. If you back that out of Q2, our EBITDA for the quarter is $260 million.

We had provided an EBITDA outlook for the second quarter of $225 million to $250 million, and if you exclude the entire $47 million from the Provider Fee on the basis that it was not in our guidance, we came in above the midpoint of our range. When we established our EBITDA outlook for the full year, we anticipated the entire California Provider Fee would be recognized in the fourth quarter.

So while it's a positive surprise for the second quarter, the amount of the fee is roughly consistent with our expectations for the full year. The high-level summary of the quarter is that our fundamental business trends in terms of volume growth, pricing and cost control, remain strong.

Let me quickly list some of the same-hospital highlights for Q2. Volume growth in all categories compared very favorably with our peers: Adjusted admissions increased by 1.5%; surgeries grew by 4.9%; ER visits grew by 5.0%; and total outpatient visits grew by 5.3%; and roughly 80% of that growth was organic.

We achieved our commercial pricing growth objective and our commercial book is solid. And again, we demonstrated strong cost control, including a 2.3% decline in supply cost per adjusted admissions due to -- largely to efforts around our Medicare Performance Initiative.

Taking a deeper look at volume metrics, as I mentioned, we grew adjusted admissions by 1.5% due to strong performance on the outside -- outpatient side of the business. This marks our seventh consecutive quarter of growth in adjusted admissions.

And while that's an impressive consecutive string, we generated strong volume growth for a substantially longer period of time. Looking back over the last 5.5 years, we achieved positive growth in adjusted admissions in 17 out of the last 22 quarters.

Over the same 5.5-year period, Tenet's same-hospital admissions growth exceeded the peer group average by 90 basis points. Our Case Mix Index in Q2 was flat compared to the first quarter and down by 0.7% year-over-year due to volume growth in lower acuity services.

Turning to service lines. The significant strength we reported last quarter in major trauma continued into the second quarter.

Neuro, thoracic, oncology and vascular surgeries were also strong. Each of these service lines is part of our targeted growth initiative.

Turning to revenues. Even excluding the favorable impact of the $28 million out-of-period California Provider Fee, we exceeded our expectations on pricing.

Net inpatient revenue per admission increased by 4.1%. Revenue per adjusted admission increased by 3.3%, and net revenue per outpatient visit increased by 1.9%.

We also continue to have excellent visibility into our future commercial pricing. We've completed contract negotiations for approximately 95% of 2012, and 60% of 2013 expected commercial revenues.

We continue to be able to negotiate new contracts with anticipated yields within our targeted 5% to 7% range. While some new contracts are higher and some are lower depending on where each health plan's pricing levels start, the average increase remains consistent with our expectation.

At the time of our first quarter release, we referred to the possibility of terminating a contract with a national commercial managed care payer. I'm happy to report that we entered into a new contract and will continue to serve that customer.

Before I turn to cost, let me just mention that the Inpatient Prospective Payment System final rule came out last week, and it was 100 basis points better than we expected. To help put this in perspective, you should know that this is the largest increase in Medicare inpatient rates we've received in the last 4 years.

Selected operating expense was well controlled, increasing by only 3.5% per adjusted admission, which was better than our expectation. Salaries, wages and benefits was the line item showing the most meaningful increase in the quarter.

SWB per adjusted admission, which grew by 5.7%, included an 180 basis point increase attributable to greater physician salary cost, as we expanded physician employment in targeted markets. The continued decline in interest rates caused us to incur $8 million in unexpected incremental malpractice and workers' compensation expense.

Our Medicare Performance Initiative, or MPI, continues to drive incremental cost savings. Year-to-date, MPI cost savings are exceeding our expectations, and we remain comfortable with our full year outlook of $80 million.

One of the areas where MPI is particularly effective is in driving savings in the supply chain. Supplies expense declined by 2.3% per adjusted admission and was led by initiatives in spine, orthopedics and pharmacy.

We also continue to incur expenses related to our healthcare IT program. I'm confident these investments will improve our productivity and value proposition over the next few years.

There were no offsetting incentive payments in this quarter to our HIT expense, but remember, that just as HIT is a headwind to earnings this year, it becomes a tailwind in 2013 and in subsequent years through 2016. The delta just between this year and next year is a positive $50 million.

Slide 4, on the slides that we posted to our website today, is an updated version of something you've seen before and contains our current projections for HIT incentives and expenses. Bad debt expense as a percent of revenue before provision for doubtful accounts increased 40 basis points over last year's second quarter, but remained well within our outlook range of 7% to 8%.

One of the most exciting developments in the quarter was the announcement of Conifer's ground-breaking partnership with Catholic Health Initiatives. This partnership solidifies Conifer's position as the leader in the healthcare revenue cycle and highlights Conifer's growth potential.

It proves that we're capable of serving clients across the size spectrum, from single hospitals to large national system. Once Conifer has fully implemented the CHI hospitals, it will provide revenue cycle services to approximately 150 hospitals and service $18 billion of net revenue annually.

To help you assess the value created by this business, we are initiating segment disclosure of Conifer's financial performance. Conifer's adjusted EBITDA in the second quarter was $25 million, $16 million of which was from the Tenet business at market rate and the remaining $9 million from non-Tenet clients.

I would like to close with some comments about our outlook for the remainder of 2012. Based on solid performance in the first half, we are reconfirming our range of $1,250,000,000 to $1,375,000,000.

This implies an increase in EBITDA of about $100 million in the second half compared to the first half to reach the midpoint of our range. We're comfortable with the current Street consensus for Q3 of roughly $270 million, as our internal range is approximately $250 million to $290 million.

So I'd like now to share our best thinking on our expected performance for the balance of the year. Let me draw your attention to Slide 3, which details the major line items we expect will drive our earnings growth in the second half.

I'll focus on 5 categories. First, a couple of these items, like Provider Fees and Health IT incentives, are easy to estimate.

We have good visibility into these items, and we're confident in our estimates. Second, other initiatives, like MPI and outpatient, represent a continuation of well-established operating trends.

Based on our historical performance, we have a high degree of confidence in our ability to deliver on our expectations. Third, the Medicare update and reductions in FICA and other capped payroll taxes are fairly mechanical and easy to estimate.

Fourth, we expect $50 million from incremental managed care revenue already under contract. The pricing component of this is driven by specific contracts that are signed and are already effective in the third quarter.

So while incremental commercial revenues may vary due to acuity or other factors, the variance is unlikely to be material. And fifth, the $20 million we've labeled volume, acuity and payer mix is the category least under our control and hardest to estimate.

But let me assure you that Britt Reynolds and his operations team have precise operating plans, by hospital, with detail on how we will achieve these objectives. In the aggregate, as shown on Slide 3, we expect a total of $715 million compared to the first half, $598 million, for a second half increase of $117 million, which is sufficient to achieve the midpoint of our 2012 outlook.

To summarize the quarter, our results were led by strong top line growth in outpatient visits, surgeries and ED volumes and volumes in our targeted service lines. Our primary drivers of long-term value, including our initiatives in outpatient acquisitions and development, Conifer and the Medicare Performance Initiative, are on track to achieve their most significant performance milestones.

And, of course, please keep in mind that our substantial NOL, which is worth more than $1 a share shields much of our future profitability from taxation. I am very pleased with the strength of our core business.

Commercial pricing trends continue to be favorable. Costs remain well controlled.

We continue to make significant investments in health IT and physician relationships, and while a significant portion of these investments hit current period earnings, we're confident that they will make important contributions to future growth in our bottom line. We continue to feel very confident of our performance and quality.

I am proud of the 92 specialty center designations that we received last month from United Healthcare. These designations provide further evidence of the enhancements we continue to make in clinical quality.

We're also pleased to have announced recent multi-year agreements with CIGNA and Humana. Last week, we announced a major $110 million expansion at St.

Christopher's Hospital for Children in Philadelphia. The project includes the construction of a new Critical Care Tower, as well as the development of the Center for the Urban Child, the community-focused initiative designed to help area children overcome a variety of health disparities.

The internal rate of return on this project exceeds anything we've seen in recent hospital acquisition opportunities, and it carries less risk. This is a great investment, and we have more opportunities like it.

Although I'm the only speaker with prepared remarks on today's call, I'm joined by Britt Reynolds, our President of Hospital Operations; Dan Cancelmi, our Chief Accounting Officer; Steve Mooney, our CEO of Conifer; and other colleagues who are ready to answer your question. So operator, let's begin the Q&A.

I just want to go back to some comments you made on the first quarter. I think you called out or mentioned some underperformance in a handful of facilities, so I just want to get your update on what the progress is at this point, and maybe what the trajectory is for the second half?

And if that's part of that $20 million that you talked about on, sort of, Slide 3 there.

Okay, Ralph. So actually, it isn't necessarily part of the $20 million, but Britt Reynolds, I would like you to comment on our EBITDA recovery plans for those hospitals that we called out on the first quarter.

Absolutely, Trevor, thanks. We are seeing improvement in each of the 4 hospitals from Q2 versus Q1.

And in aggregate, the EBITDA in the second quarter for those hospitals outpaced EBITDA for those hospitals in the first quarter. And in 3 of the 4, we're seeing significant improvements in the underlying causes that we attributed to those variances in the first quarter.

And while we're not hitting every one of those targets, the detailed plans that Trevor identified, that we review monthly with these hospitals, we're seeing significant improvements in those contributing factors.

Okay. And then just sort of switching topics to the managed care side.

Anything to call out within some of the specific new contracts that you signed, whether it be, narrower networks or payment rate updates. And maybe just take a step back and help us understand what percentage of your managed care book is negotiated for 2013 and 2014?

And then just along those lines, specific to 2014, maybe help us understand, as you start to get into contracting it with 2 and 3 year deals, will your exchanges just be a separate carved-out piece that you'll negotiate sort of at a later time? Or do you just expect those lives to sort of roll into the existing managed care contract that's being negotiated today?

Okay. It's a bit of a massive multi-part question.

Why don't we just step back a little bit, because I, actually, can't remember the very first parts of the question. And just, I'll ask Clint Hailey to comment on the -- I know you had a specific question about how much we contracted for 2014.

And just generally speaking, I think the first part was, are there any unusual features in some of the recent contracts that we have negotiated. Maybe just give an overview, Clint, of the current environment and contracting activity, and see if you can answer the question about 2014 along the way.

Okay, sure. So a couple of things, really quick.

Trevor mentioned in his comments about 2012 and '13 percent contracted. We don't -- we haven't quantified '14 at this juncture, so at 2013, we're 60% contracted, roughly, and then almost completely contracted for 2012.

So for '14, it would substantially less than 60%...

Yes, yes.

60%.

Yes. That's a safe assumption.

Definitely no more than 60%. In terms of activity that we have had, you've probably seen several press releases for -- that happened over the course of the second quarter, the United designations that Trevor mentioned in his prepared remarks, as well as our CIGNA and Humana announcements.

And one of the reason we do those announcements is we do like to kind of give a little bit of color about what is going on in terms of our negotiations. We obviously can't release the financial details, because those are confidential, pursuant to both parties' interest.

However, in the CIGNA release, we talked about our CIOs, ACO activity, and that was kind of an exciting development there. There's been a lot of discussion in the ACO, CIO realm, but not a lot of uptake.

And so it was exciting to do something innovative with CIGNA in that regard. With Humana, a release we just put out last week, we talked about a market share shift commitment made by the parties that was financially advantageous to both parties.

That was an exciting development in the sense that, there's been a lot of discussion about network narrowing and steerage commitments and things like that. But there hadn't been a lot of activity in terms of concrete contract language around that, and we did achieve that with Humana.

And both parties -- both parties were interested in that. Finally, the last thing I'll address to that, that I think you were asking about was exchanges.

And we don't have, for the record, any contracts today that are specific -- specifically for exchange products. We've had a lot of discussions with health plans around that.

There are a lot of health plans talking about narrow networks on exchanges, and we anticipate there could be some market share shift opportunity associated with that on 1/1/14. However, we do expect that the broad network contracts that we have today, with all of the health plans, we expect many or most of those will be working -- will be -- exchange products will be available for people to purchase that use those networks.

But we're hopeful, also, that there will be some market share shift opportunity and strongly suspect there will be with narrow networks.

Just to -- I'll ask my follow-up question upfront, which is any update on the CFO search. And then second, just to speak and flesh out the commentary around Conifer a little more.

Obviously, for the CHI contract, seems to be a pretty big long-term positive. Yet you aren't calling out Conifer for the back half of the year in terms of incremental EBITDA boost, maybe comment on the ramp-up associated with that and what trajectory that Conifer has looks like to you if possible.

And then, has that CHI deal driven any other interesting discussions, or are you pretty much focused on ramping up CHI for now?

Okay. Great.

I will take the first part of the question, and I'll ask Steve Mooney to elaborate on the Conifer part. So with respect to the CFO search, yes, I know it seems like it's been going a long time.

We've actually been very deliberate in our search, and I'm very pleased with the candidates who we have, but it's a very important decision and something that we are going to make at the right time. And I really can't say more about it than that at this stage.

I would say that -- and I think you can see evidence now by the second quarter, that we're doing a release and conference call with Dan Cancelmi, our Chief Accounting Officer, filling in the role basically of backing me up on guidance and any question that has a reasonable degree of detail, that we've been doing very well and certainly not suffering in the interim for lack of a permanent CFO. With respect to Conifer, we wanted to avoid getting into a sort of discrete guidance for Conifer.

We did put in this segment disclosure, which I think should be very helpful to people in assessing the growth of Conifer as it evolves. One important point to make, I said this in my prepared remarks, just so everybody understands, we have set up an intercompany contract between Tenet and Conifer at market rates.

We think that's important because to the extent that large customers come along and want a great deal, it's hard to make an argument that you should have a better deal than Tenet. So that helps you kind of understand a couple of things about what are market rates and what can you expect to earn at market rates from a customer the size of Tenet and also the part that's non-Tenet, which is already $9 million in the quarter, I think is pretty impressive as an amount of income, particularly given the fact that none of that is coming from CHI, because we only just signed the contract and began the implementation.

Now I think that there may be some misunderstandings in the market about how that contract gets implemented and how exactly it gets rolled in, because we've only just begun bringing people from CHI on board into Conifer. And I'd like Steve Mooney to talk a bit about the CHI implementation, but then also Steve, to A.J.'

s question about what new opportunities has that opened up by having that relationship. And I think the answer to that basically is substantial, but go ahead.

Absolutely. A.J., this is Steve.

Also, I don't know if you were able to participate on the May 16 webinar that I did, but we actually put some information out there for the full year, which around our EBITDA range for Conifer was expected to be in the $90 million, $100 million, and our revenue is about $385 million to $425 million. so we're still maintaining that, we're not really giving guidance out further than that at this point in time.

But right now, the CHI initiative that -- there's clearly a lot of focus on that. I mean, that's got to be first and foremost, getting that implemented into our organization.

We effectively transferred about 142 leaders into Conifer on July 1, and that was also the day that we effectively took over responsibility for that operation. We've been in the standpoint of having a 3-day integration summit with those individuals, get them understanding our organization, plus working on all the implementation plans for the CHI program over the next 2 years.

There -- for the balance of this year, there's really no bottom line that's going to be contributed from CHI. There will be some revenue, that's still being worked through, some of it is the actual people.

We'll also take over the supplier contracts, the significant ones over the course of 2012, that'll generate some revenue. But the bottom line really won't -- we won't start seeing that until 2013, as we get into the more implementation stage, which are actually making more significant improvements in our operation.

The implementation, roughly, is going to be about 2 years overall. On the opportunity standpoint, we are.

It's -- since the press release, there was a Catholic Health Assembly, which is where all the Catholic hospitals come together. There was a pretty buzz there about their relationship.

Kevin Lofton, the CEO of CHI, I mean, he pretty much had a conversation, I think, with every one of the CEOs before they actually got there. And every one of them knew about our transaction.

From a sales perspective, our pipeline has never been more full. Just to give you some sense, August is usually a pretty quiet month for us from sales activity, and a lot of individuals at the hospital level, CFOs and CEOs, are on vacation.

And this month alone, we've had several individual meetings with hospital CEOs and CFOs about the service offerings. So things look good.

Clearly, like I said, we have to be focused on CHI, we have to get the implementation of that done well and effectively, but we're also still pursuing other opportunities and making sure we grow effectively.

And I would just add that -- that was great, Steve -- that CHI itself is a fast-growing, and one of the fastest-growing, if not the fastest-growing faith-based hospital system. They are a consolidator within the faith-based universe and couldn't have a better partner from that point of view.

Trevor, to that point, they had announced, they are going to be assuming responsibility for Alegent Health care, which is up in Nebraska, and that's another $1.2 billion healthcare system, which right now are in discussions about bringing that into the organization as well, which wasn't part of the original CHI.

Right. And coincidentally, the same entity that is purchasing our Creighton University Medical Center, so that will be an easy transition, A.J.

I want to go back to the commentary before, around the commercial contracting. Whenever I hear providers talk about ACOs or narrow network contracts or market share shifts, I get a little bit concerned that the commentary is moving towards trading volume for pricing.

It sounds like your pricing is holding in pretty steady, but how do you think about that in the context of the economics of these types of new structures? Are you willing to take a little bit lower pricing?

And how do you think about that tradeoff?

Clint, go ahead, comment on that.

All right. Thanks.

It's really a mathematical equation. You can tell how much you give up on price, how much volume, incremental volume, you need in terms of a market share shift commitment to make the economics of it work.

In the Humana situation that we announced, the pricing shift, while we're not going to give a lot of specifics, it was less than mid-single digits. It was the pricing change give for the market share shift commitment, which was much larger in terms of percentages.

And so, it's -- it's not that hard, again, to do it mathematically, and so that's the way we look at it.

Yes, basically, you have to get a lot of volume to make up for any kind of degradation in price, so that's not a tradeoff that we generally want or need to make in these negotiations.

So what is the genesis around doing a -- it sounds like a couple more of these more recent deals have had those types of provisions in them. I guess, what's the rationale for kind of pursuing these types of agreements?

We haven't really seen a lot of that in the past.

No, I think that -- look, it's something that we've been working on for years, is trying to get hard steerage, so to speak, on volumes, because obviously, the contribution from incremental volumes in managed care is so significant that, that math that Clint referred to is much easier on a managed care contract than in any part of our business. And where we -- you've seen us do other more innovative contracting like the ACO that we began in Northern California on January 1, we're very pleased with the results that we've been seeing in something like that.

And I would just remind everybody that we've been doing capitated and risk-based contracting for decades as part of our heritage in California, and one of the secret weapons within Conifer is the Cap Management Systems business that serves more non-Tenet customers than Tenet customers and does precisely that. They manage these capitated and risk-oriented contracts for providers.

So we're very comfortable with that world and what we're doing. I would just echo something Clint said earlier on, this is very limited still.

There's a lot more talk than action in this whole area.

And I guess is it fair to say that the market share shifts are very well defined here and that you enter into the agreements feeling comfortable that the economics are going to work out the way that you think they will?

Yes, very well defined and also relatively minor. It could be material to an individual hospital.

Very nice job. I'd be happy to be proven wrong if it benefits the Tenet shareholders.

So let me turn to the cash flow, if I may. You kind of know I was going there.

You had very nice cash flow quarter. It was quite robust and a nice turnaround from the first quarter.

To what extent did it benefit from the rural wage floor settlement? And have you seen the actual cash from the Provider Fees, and just any other timing differences or other considerations that we should have, as we look towards modeling out your cash flow generation capability, because were you to turn meaningfully cash flow positive, that could be and would be a very welcome change of pattern.

Yes. And that is what we expect.

Dan Cancelmi, it's a great question. Dan, why don't you take that one?

On -- in terms of the cash flow from the rural floor settlement, we did receive almost all of that in the second quarter, about $81 million related to continuing operations, and we also received a little bit in discontinued operations. It was just -- there was about $5 million that was still outstanding at the end of June and almost all of that was collected in the month of July.

So that was certainly a positive development, to see the cash come in by the end of the quarter. Your question regarding the cash related to the Provider Fee program California, there was no cash flow during the quarter related to the California program.

That will begin in the third quarter, where we'll start making payments as well as receiving payments.

So was there anything at all unusual in your collections? Were they especially good?

Have you made improvements in that? Because the outflow from receivables, clearly, was helped by that $81 million, but it still looks pretty good, relative to where you've been before, so -- in the second quarter.

Is there anything that's going on here other than just better operations, second quarter?

We were pleased with our cash collections from Conifer. There was an improvement.

We've been placing a significant amount of emphasis on this area, Sheryl. You're right, the rural floor cash did come in, which helped the receivables come down and also had a positive impact on our days and AR, but we also saw improvement in our core operations as well.

So we're very pleased to see that.

With healthcare reform having cleared at least one hurdle with the Supreme Court, is there any analysis that you can share with us in terms of what you expect the benefit to be to you either on a margin basis or on some sort of absolute dollar basis?

Well, okay. So we -- remember, we have the distinction of having some longer-term outlook out in the marketplace, that did assume the benefits of health care reform, and we had that explicitly called out in a bridge in terms of the contribution, to say 2015.

From that, we see no reason at this point to change the assumptions that we've had, there hasn't really been anything different in terms of the law. We are watching, of course, carefully the certain states, like Texas and Florida.

Dan, do you have any incremental comments on that you'd like to make?

I just want to point out, we stress tested our model based on the recent Supreme Court decision as well as the fact there could be uncertainty regarding the Medicaid expansion. And we believe, after looking at it a number of different ways, that there's enough conservatism in our model to lead us to conclude that we do not need to make any changes to our outlook related to healthcare reform.

And then any incremental strategies or operational changes that you're making at this point to get ready for it?

I don't really think, beyond the obvious like making sure that we're providing good value to our customers, making sure we're really incredibly efficient in the revenue cycle, focusing intently on cost and areas like throughput and making sure that we have sufficient capacity for newly insured people. I think we've been doing those things for quite a long time, so we'll be well prepared for healthcare reform.

This is Colleen Lang on for Tom this morning. I was just wondering if you could give any color on the admissions mix in the quarter.

I think you mentioned in the release that you were seeing increases in the uninsured, I'm just wondering if directionally, you could talk about Medicaid, Medicare and the commercially insured.

Yes. Let me ask Dan to comment on that, break it down a little bit for you.

Yes, so the overall -- the admission mix, we were -- it was slightly negative. The trends were pretty good throughout the quarter, and then we saw a little bit of a dropoff in the latter part of June.

But it wasn't across the board, all the hospitals. It was really -- it's several hospitals.

So nothing necessarily would indicate that there's a long-term trend there. In terms of the regions, the Florida region had a pretty strong growth in volume in the quarter.

From a commercial standpoint, our commercial volume was pretty much in line with our expectations overall. And Medicare, when we look at Medicare for the quarter, volume was pretty good, as well as what was also positive in the quarter was the Medicare acuity, the CMI, also improved in the quarter.

Okay. Great.

And then just a follow-up, perhaps for Trevor. I was just curious what you're hearing on the D.C.

front, are you expecting or hearing any rumblings about changing sequestration at all before its implementation?

Most of those rumblings are from us. Since Dan Waldmann, our Head of Government Relations and Public Affairs, is here, and he and I were in Washington yesterday -- sorry not yesterday, last week, doing some of that grumbling, I'll ask Dan to comment.

Thanks, Trevor. I think, right now, certainly, there's a lot of noise out there, certainly coming primarily from the defense industry, screaming about the impact of the cuts.

I think, as Trevor said, we were in Washington meeting with senior HHS and CMS people and kind of talking about, not only the current Medicaid expansion, but also the outlook at -- in Congress for any changes that might be made on sequestration. I think it's going to be, continue to be noise until after the election and we really see what is -- what the political landscape is going to look like.

And there's a lot of options on the table. They could do the normal "kick the can", down the road, towards the end of the year, when they need to fix the Medicare physician payments and the expiring Bush tax cuts and address sequestrations.

So I think it's a little too early to tell, but we're remaining engaged in Washington and we think that we're finding a very receptive audience right now to our concerns.

And as I mentioned, Colleen, it was interesting, there -- you guys all covered it last week, that, that IPPS update, it is important to remember how good that is in the historical context.

I appreciate the segment disclosure on the hospitals versus Conifer, really, really helpful. And maybe this is a little too critical, but if I take your hospital EBITDA of $279 million this quarter and back out just the out of period California payment, it looks like the same-store EBITDA declined 5% to 6%.

And I'm not exactly sure that's the way we should look at it. So Trevor, can you maybe help reconcile that with what appears to be some pretty good and respectable volume and revenue growth in the quarter?

Sure. Actually, let me just hand it to Dan, who's prepared to address that question.

Yes. The one thing to keep in mind is the second quarter last year had $25 million of HIT incentives, that we were able to recognize last year in the second quarter.

We did not have any HIT incentives in the second quarter of 2012. So that's one item right out of the gate that creates the variance between Q2 this year versus Q2 last year.

So on a same-store hospital basis, maybe it's best to sort of look at it as a flattish quarter? Is that a fair assessment?

Flattish to slightly improved.

Okay. That's helpful, I just want to make sure we're looking at that correctly.

I know this is a little complicated to talk about, but Trevor, are there any potential Provider Fee programs that could get approved this year? Anything that states are discussing right now?

And is there also any chance that you may be able to qualify for any of the Texas UPL program funds or waiver plans, whatever that's being called now?

Yes, I'm glad you asked that question, because we haven't talked about that. Dan is our expert on Provide Fees and can give you an answer on that and comment on Texas as well.

Brief overview on the Provider Fee program. So California, there's 2 components of it: the fee-for-service component, as well as the managed care component.

Managed care portion has not been approved yet, but we expect that to be approved by year end. So that is the incremental $66 million of California Provider Fees that we anticipate to recognize in the second half of the year, so that's California.

In the second quarter, North Carolina's Provider Fee program was approved, so that was a 2-year program. We've been notified of the funding through September of 2012, so through the end of our third quarter.

We anticipate the program to be continued into the state fiscal year 2013, which begins in October. We have not been notified yet of those amounts yet, but we fully expect that we'll receive some notification on that, if not during Q3, certainly during Q4.

In terms of the other primary state, where we have the Provider Fee program, is in Pennsylvania, that was a 3-year program, that runs through the end of June of 2013. And actually, we expect that to be renewed as well.

Those are the states with the primary Provider Fee programs. In terms of the Texas UPL, yes, we are looking at opportunities in various areas in the state, in particular, in El Paso.

There's a program there that will commence in Q4, in all likelihood there will be, it will be an upside for us beginning in Q4 this year, and that will extend through 2013. And we're looking at other areas throughout the state for the right opportunity to enter into those type of programs.

Any sense for the size of El Paso? I know that you haven't exactly gotten the approval -- gone through the approval process yet.

Yes. The number hasn't been completely finalized.

Initial estimates could be in the $5 million to $10 million neighborhood.

Three questions, I think, are quick. The first is, do you have an estimate of high-tech operating expense above the EBITDA line this quarter?

High-tech operating expense above the EBITDA line. Okay, Dan's looking for that.

What's the next one?

Next one is, as the actual California provider tax payments begin flowing next quarter, or maybe, I guess, just in terms of how you'd recognize in this quarter, typically, we expect when we see companies, both these on the income statement, we see a grossed up revenue figure, and then we see a provider tax running through the other operating expense line, equating to a net EBITDA impact. So is the California program going to work that same way?

Or are you just accounting differently, just netting those both in the revenue line, or what's the difference?

Yes, Dan, go ahead.

In terms of your question regarding the HIT operating expenses, it's approximately $25 million in the quarter.

And that was up from maybe $10 million last year of expense?

It's about $5 million higher than Q2 of 2011. In terms of the Provider Fee programs, we account for those, in particular, let's talk about the California Provider Fee.

We account for those on a net basis. In other words, the net revenues from those programs, we recognize in our net revenue line.

We've thoroughly evaluated this, whether the income statement should show the gross amount of the revenues and the expenses that we -- or the payments that we make to the program. But we view these in substance as an additional Medicaid funding.

And to gross up the revenues and expenses, we just don't believe it, it makes the most sense, at least for us. We certainly recognize that other hospital companies do present it on a gross basis, and that's a perfectly fine approach as well.

Let me just give you some ballpark numbers on the California program. And the gross, this -- the 30-month program.

The gross payments that we will make are in the neighborhood of about $300 million. And the receipts that we get from it over the 30-month time period is about, say, $495 million.

So when you look at that and say, "Okay. What's the program in substance?"

Well, the program in substance is to provide additional supplemental Medicaid funding for a number of reasons, including various cuts in Medicaid funding. To present those type of numbers, especially in California, on a gross basis, we believe would be distortive to our cost metrics, as well as our revenue metrics, so that's why we present it on a net basis.

I totally agree. I just wanted to make sure we understood that going forward.

And that same accounting treatment's using -- is being used in North Carolina, Pennsylvania, Georgia, other places as well?

That's correct.

Okay. My last question is, when I look at -- in the Q, you give a mix of admissions.

And then obviously, in the press release, you give a mix of revenues. And when I look in the first quarter, that managed care bucket, admissions were up about 1.6%; revenues were up about 4%; and then when I look in the 2Q, admissions were up about 1.9%, so about the same, a little better, but revenue was down approximately 1%.

Maybe there's some rounding there. But it looks like the revenue in the managed care bucket is flat to down year-over-year in the 2Q versus being up 4% in the first quarter.

I guess, the only thing that changes is that Creighton comes out of it, but I guess I'm trying to understand what might have driven that type of sequential change, if that meant real commercial outpatient revenue or acuity or something was weaker sequentially. Is there a ready answer to that?

Yes. There's not a pricing problem.

It's really a mix issue in terms of -- that line item, Gary, includes both commercial, as well as government managed care. So it's a combination of those categories.

One thing to keep in mind is we had a fairly large pay for performance payment in the second quarter of 2011 from one plan, as well as some other settlements -- somewhat larger settlements in the second quarter of last year. So that's -- when you're looking at -- you got quarter-over-quarter in terms of this year versus last year, that has an impact of making those statistics not seem quite as robust.

But I can assure you in our pricing that we've been able to achieve, it was in line with our expectations for the quarter, both on the inpatient side as well as in the outpatient side.

So your real commercial admission trend, I guess, weakened sequentially. I know you used to disclose that, but you don't break that out anymore, but is that a fair conclusion, that the year-over-year growth wasn't as strong in the 2Q as the 1Q, or is that...?

No. I wouldn't draw that conclusion.

We did -- it was a major event on the HCA call and we'll all thank you for not being nearly as dramatic a call as the HCA call was. But I was wondering if you could comment on, now that you're out from under the Corporate Integrity Agreement, I would assume that your compliance programs remain quite robust, but could you comment on what you're seeing in terms of physician behaviors in your hospitals regarding the interventional cardiac procedures, and what protections do you have around those activities?

Sure. And having anticipated we might get a question on that topic, I invited our special guest, our Chief Compliance Officer, Audrey Andrews; and Chief Clinical Officer, Kelvin Baggett, to join us here.

So Audrey, why don't you take the safeguard question, and Kelvin, why don't you take the part about what are we -- are we seeing anything different in terms of clinical practice. Audrey, why don't you start with the safeguard?

Sure. We have a number of safeguards in place that continue beyond the expiration of our CIA to ensure that our patients receive safe and medically necessary cardiac care, and really, frankly, all clinical care.

We use a number of systems, we use InterQual to assist with level of care assessment, inpatient and outpatient. We also use the American College of Cardiology standard to document the medical necessity of care, and we have an internal peer review process that we've implemented so that other Tenet physicians can review the cardiac care in our hospitals and provide feedback to the physicians that perform the cases on medical necessity and quality of these outcomes.

So I'll turn it over to Kelvin to add a little more color on that.

Thank you, Audrey. So as Audrey mentioned, we do have some internal processes.

One being a checklist that has to be completed prior to the performance of these procedures, and what that ensures is that the physicians who are performing cath procedures are actually completing it and attesting to it, and it's also being verified, so was the stress test, the angiogram or some of these other tests performed, and does that indicate the need for that procedure. Audrey also mentioned our external process which is done by a interventional cardiologist who is not a member of that medical staff, who reviews those procedures.

And the other thing that we do is we participate in a national database, the National Cardiovascular Data Registry, which is by the American College of Cardiology, has about 2,000 hospitals participating, and it's also providing evidence, guidelines and feedback. What we do with those last 2 pieces in terms of the external review and the NCDR, the National Cardiovascular Data Registry, is we also have a internal process that we call our close call, where we look at the data, we look at any patterns, we provide feedback to the hospitals, which also goes to those physicians, to make sure that they're aware of any concerns that might arise regarding their clinical practice and that corrective action plans are put into place.

And so we've been working through that, recognizing that there's an opportunity to address various areas of care and to make sure that we have strong processes and practices in place to ensure that it's safe care and that it's high quality.

All right. Well, thank you, operator, and thanks to the audience.

We will see you again in another 3 months.