Tenet Healthcare Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 24, 2024

There are 13 speakers on the call.

Operator

Good morning. Welcome to Tenet Healthcare Second Quarter 2024 Earnings Conference Call. After the speaker remarks, there will be a question and answer session for industry analysts. I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations.

Operator

Mr. McDowell, you may begin.

Speaker 1

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tennant's Q2 2024 results as well as a discussion of our financial outlook. Tennant's senior management participating in today's call will be Doctor. Saum Satoria, Chairman and Chief Executive Officer and Sun Park, Executive Vice President and Chief Financial Officer.

Speaker 1

Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website, tennanthealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Kennett is under no obligation to update any forward looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10 ks and other filings with the Securities and Exchange Commission.

Speaker 1

And with that, I'll turn the call over to Saum.

Speaker 2

Thank you, Will, and good morning, everyone. Our second quarter performance exceeded our expectations and extends our track record of consistently strong operating results driven by fundamental growth and disciplined operations. In the 2nd quarter, we reported net operating revenues of $5,100,000,000 Consolidated adjusted EBITDA was $945,000,000 representing growth of 12% over Q2 2023 with an adjusted EBITDA margin of 18.5 percent. USPI produced another very strong quarter with $447,000,000 in adjusted EBITDA, representing 21% growth over Q2 2023. Same facility revenues grew 7.1 percent and adjusted EBITDA margins remain robust.

Speaker 2

Orthopedic volumes were strong with total joint replacements in the ASCs up 23% over prior year, coupled with ongoing growth in urology and GI procedures. Acuity and payer mix were strong. During the quarter, we expanded our reach by adding 11 new centers, including a new partnership with the Florida Orthopedic Institute in 3 surgery centers that perform over 15,000 cases annually. You may recall that we acquired a larger number of centers in the Q1 of this year. The integration of those centers is on track and the operating performance of the acquired centers has been in line with our expectations.

Speaker 2

We continue to be pleased with USPI's de novo development activity with nearly 25 centers currently in syndication stages or under construction. Turning to our Hospital segment, adjusted EBITDA was $498,000,000 in the Q2 of 2024. Same store hospital admissions grew 5.2% as we are taking advantage of a strong utilization environment by opening up capacity. 2nd quarter 2024 revenue per adjusted admission was up 5.7% over the prior year, reflecting continued strength in acuity and payer mix. Cost control was excellent.

Speaker 2

We are making significant investments to expand our network to support growth in our markets. Soon, we will open our new hospital in Westover Hills near San Antonio. This hospital will expand capacity in a geography that is growing at 6x the national average. The hospital will focus on procedural services with state of the art operating rooms and cath labs, a large emergency department and an entire floor devoted to women's services. I'd like to take a moment to thank again the Tenet and Conifer colleagues who worked to respond to the cybersecurity attack that took place at Change Healthcare earlier this year.

Speaker 2

In addition, I would note that Conifer continues to deliver outstanding cash collection and AR Days results. Turning to our full year guidance. At this point in the year, due to organic outperformance in both of our business units and our optimism about the rest of the year based upon fundamental strengths, we are raising our full year 20 24 adjusted EBITDA 20 or another 8% at the midpoint of the range over our prior guidance increase announced after Q1. Before turning the call over to Sun, I'd like to spend some time discussing our capital deployment framework. As we fully emerge from the pandemic, our repositioned portfolio of businesses is generating stronger results with attractive margins and strong free cash flow generation.

Speaker 2

The mix of businesses can thrive in any variety of political and regulatory environments as the fundamental tailwinds in the ambulatory demand for USPI, the high acuity program needs for our hospitals in growing markets and the need for efficient effective healthcare services like those from Conifer are strong in the marketplace. In terms of capital deployment going forward, our top capital priority remains the expansion of low cost, high quality ambulatory surgical centers for the communities around the country. This is a very fragmented marketplace marketplace and we will use our disciplined approach to improve access, patient care and performance for our physician partners to create value. Due to our strengthened cash flow profile, we have increased our planned 2024 capital spend per available hospital bed above recent levels. These investments will fuel future organic growth.

Speaker 2

We've built a data driven culture and will continue to invest to improve experience and clinical quality. Just as we were one of the early industry's early movers in capturing savings in our offshore captive global business center, we are now investing in selected AI enabled technologies to enhance our clinical and administrative efficiency. We embrace the opportunity for change that can ultimately improve our future earnings and cash flows. We have an ongoing commitment to deleverage the balance sheet and have retired $2,100,000,000 of debt so far in 2024. Our current leverage ratio on an EBITDA minus NCI basis is 3.27 as of June 30, 24, demonstrating our focus in this area.

Speaker 2

And finally, we will return capital to shareholders via share repurchase. We've repurchased approximately $550,000,000 through June 30th this year at competitively attractive trading multiples, which completed our prior repurchase authorization. We are pleased to announce that our Board has authorized a new $1,500,000,000 share repurchase program. With a strong and proven management team, a highly flexible balance sheet and a low trading multiple, each of these capital deployment priorities positions us to drive value for shareholders and we will continue to demonstrate discipline in our capital deployment. And with that, Sun will now provide a more detailed review of our financial results.

Speaker 2

Sun?

Speaker 3

Thank you, Saum, and good morning, everyone. Our results in the Q2 continued a positive start to the year with adjusted EBITDA coming in well above our guidance range. In the Q2, we generated total net operating revenues of $5,100,000,000 and consolidated adjusted EBITDA of 9 $45,000,000 a 12% increase over Q2 of 2023. These results were driven by strong same store revenues, continued high patient acuity, favorable payer mix and effective cost controls. I would like to highlight some key items for each of our segments, beginning with USPI, which again delivered strong operating results in the 2nd quarter.

Speaker 3

USPI's 2nd quarter adjusted EBITDA grew 21% over last year, with adjusted EBITDA margin at 39.2%. On a same facility system wide basis, USPI delivered a 7.1% increase in revenues over last year, with net revenue per case up 6.8% driven by high levels of acuity. Surgical case volume grew slightly as well in line with our expectations. Turning now to our Hospital segment. 2nd quarter hospital adjusted EBITDA grew 5.3% with adjusted EBITDA margins up 120 basis points over last year at 12.6%.

Speaker 3

Same hospital inpatient admissions increased 5.2 percent and revenue per adjusted admissions grew 5.7%, again demonstrating favorable payer mix and continued high acuity levels. Our consolidated salary, wages and benefits were 42.5 percent of net revenues in the 2nd quarter, And our consolidated contract labor expense was 2.6 percent of SWB, both substantially lower than the 45% and the 4.3% respectively that we had in Q2 of 2023. Our 2nd quarter results also include a favorable adjustment of $30,000,000 from additional Medicaid supplemental revenues in Texas related to prior years. Our USPI and Hospital segments continued to deliver outstanding performance in the 2nd quarter, reflecting strong fundamental same store revenue growth and disciplined expense management. Next, we will discuss our cash flows, balance sheet and capital structure.

Speaker 3

We generated $602,000,000 of free cash flow in the Q2. And as of June 30, 2024, we had nearly $2,900,000,000 of cash on hand with no borrowings outstanding under our $1,500,000,000 line of credit facility. We also invested $61,000,000 for USPI acquisitions in the 2nd quarter at attractive multiples. And finally, during the Q2, we repurchased 2,000,000 shares of our stock for $270,000,000 Year to date through June 30, we have repurchased 4,800,000 shares for $548,000,000 Our leverage ratio as of June 30 was 2 point six one times EBITDA or 3.27 times EBITDA less NCI, a substantial improvement from year end, reflecting the proceeds that we received from our hospital divestitures as well as our outstanding operational performance. I would note that we have not yet made most of the tax payments on the gains from the hospital sales.

Speaker 3

The impact of these payments would increase our current leverage ratios by about 15 to 20 basis points based on our current 2024 adjusted EBITDA guidance. Finally, we have no significant debt maturities until 2027 and all of our outstanding senior secured and unsecured notes have fixed interest rates. We have made substantial progress transforming our balance sheet and capital structure, and we are well positioned with a high degree of financial flexibility and cash flow generation to support our capital allocation priorities. Let me now turn to our outlook for 2024. For 2024, we now expect consolidated net operating revenues in the range of $20,600,000,000 to $21,000,000,000 an increase of $600,000,000 over prior expectations.

Speaker 3

As Saum mentioned, we are raising our 2024 adjusted EBITDA outlook by $300,000,000 to $3,825,000,000 to $3,975,000,000 reflecting the strong fundamental performance of our businesses. At the midpoint of our range, we now expect our full year 2024 adjusted EBITDA to grow 10% over 2023 or 18% when taking into account the impact of reduced EBITDA from divested facilities. At USPI, we are now expecting 2024 adjusted EBITDA of $1,750,000,000 to $1,810,000,000 a $100,000,000 increase over prior expectations. In addition, we have increased our assumption for same facility net revenue per case growth by 2 50 basis points to 4.5% to 5.5% range for 2024. This is partially offset by a 50 basis point reduction in our assumption for same facility surgical case growth to 1% to 2% for 2024.

Speaker 3

In hospitals, we are raising our 2024 adjusted EBITDA outlook range by $200,000,000 to 2.075 dollars to $2,165,000,000 We have increased our assumption for growth in hospital inpatient admissions to 3% to 4% full year 'twenty four, a 150 basis point increase over our prior expectations. Finally, we would expect Q3 consolidated adjusted EBITDA to be in the range of $900,000,000 to $950,000,000 And we anticipate that USPI's EBITDA in the 3rd quarter will be about 24% of our full year USPI EBITDA guidance at the midpoint. Turning to our cash flows. We now expect free cash flows in the range of $1,100,000,000 to $1,350,000,000 an increase of $150,000,000 at the midpoint. This range includes the payment of about $700,000,000 in net taxes related to our completed divestitures.

Speaker 3

Adjusting for these tax payments, this represents 1.925 $1,000,000,000 of free cash flow at the midpoint of our 2024 outlook, which reflects the continued strong cash performance even after the loss of EBITDA from our divested hospitals. The continued improvement in our cash flow performance has allowed us to deleverage our balance sheet while making disciplined investments in our business and delivering value for our shareholders. And finally, as a reminder, our capital deployment priorities have not changed for 20 24. 1st, we will continue to prioritize capital investments to grow USPI through M and A. 2nd, we expect to invest in key hospital growth opportunities, including our focus on higher acuity service offerings.

Speaker 3

3rd, we will evaluate opportunities to retire and or refinance debt. And finally, we'll have a balanced approach to share repurchases depending on market conditions and other investment opportunities. As Saum noted, our Board of Directors has recently authorized a $1,500,000,000 share repurchase program as we have completed the prior program. We are pleased with our strong performance thus far this year and the significant progress we've made with this portfolio. We are confident in our ability to deliver on our increased outlook for 2024 as we continue to provide high quality care for those in

Speaker 2

the

Operator

Our first question comes from Brian Tanquil with Jefferies. Please proceed with your question.

Speaker 4

Hey, good morning guys and congrats on a solid quarter. I guess my question, as I think about the ASC revenue per revenue adjustment on the same store side And looking at your adjustment as well in surgical case volume, how should we be thinking about that? Is that mostly acuity driven? And then maybe as a follow-up to that, how do you think about the runway left to expand joint replacements, 23% growth this quarter? What's the runway there?

Speaker 4

Thank you.

Speaker 2

Hey, Brian. Thanks and appreciate it. On the net revenue per case, yes, I would think of that as a combination of acuity and mix. I mean a lot of it obviously as we build higher acuity activity into the ASC portfolio, both in some of the standard service lines by expanding or increasing the range of procedures we perform there. And then obviously in newer segments like orthopedics, cardiac, urology, etcetera, robotics, you see that type of increase.

Speaker 2

And the mix has been strong. So both of those in combination give us a lot of optimism about the ability to sustain net revenue per case increases over prior year. The ASCs are quite busy. I mean, last year was an incredibly busy year. This year is a very busy year from that perspective.

Speaker 2

But the acuity continuing to increase is a good fundamental marker of strength. I've said this before, my view on the orthopedics area is it is the number one growth vector in this segment for the next could be 5 to 7, 10 years. I mean there's just so much more that can be done in expanding the market, but also hospital outpatient based work that moves into a freestanding that moves into a freestanding setting. So it's a combination of the 2. I mean, that's how it's always been in the ambulatory surgery environment.

Speaker 2

1st, you get migration, then you get market expansion, with more qualified patients who choose to go into a simpler, cheaper, easier service setting. And I think both of those things will provide a tailwind. So I continue to believe that the orthopedics arena will dwarf all of the other service opportunities in this area over the next 5 years.

Speaker 4

Thanks, Sam.

Operator

Our next question comes from Ann Hynes with Mizuho. Please proceed with your question.

Speaker 5

Great. Thank you. Good morning. I just want to ask about supplemental payments. Can you remind us how many states currently have programs?

Speaker 5

And maybe what is the opportunity going forward for states that might not have programs to introduce programs or maybe existing states that actually have programs that could

Speaker 3

Thanks for your question. 6 of our current hospital markets participate in supplemental programs. And as we all have seen, there's discussions around potential expansions that hopefully will come true pending final approval. I think in your second question about potential enhancements, I would use obviously Michigan as a good example. For a long time, Michigan, while participating in these supplemental programs, was under reimbursing providers for the important access to health care that we provided to this population.

Speaker 3

Over a long period of effort and lobbying and coordination with the payers, we were finally able to, as you know, this year, get approved an enhancement to the HRA program. And that made a significant impact to our economics in that market. Now as I think Saum had mentioned before, that enhancement this year basically takes us up to an acceptable or average reimbursement rate for the Medicaid population or a sustainable piece, which enables us to invest in the market going forward, which enables us to continue these important services. So I think that's kind of where we are now. In terms of other states, I mean, I think we're we feel good about the sustainability of these programs.

Speaker 3

There's a good mix of, if you will, red and blue states that are providing these programs to again support the important access that we provide. So I think this is a very positive and sustainable piece for the providers.

Operator

Our next question comes from Justin Lake with Wolfe Research. Please proceed with your question.

Speaker 6

Thanks. Good morning. Wanted to ask about the hospital business. How did it look relative to your estimates in the second quarter, if we pull or your expectations, I should say, relative to the in the second quarter ex the $30,000,000 of unexpected tax I think it was a Florida payment or a Texas payment. Then kind of looking at the back half of the year, your implied guidance for the 3rd quarter seems to be about $500,000,000 which might be up about 25% ex divestitures in the hospital business.

Speaker 6

Obviously, you took up your hospital expectations. Just curious as to what's driving that strong second half performance given by at least my estimates, the 2nd quarter was generally in line ex that $30,000,000 Thanks.

Speaker 2

Yes. Hey, Justin, it's Saum. Look, I think fundamentally, at least you asked relative to our own expectations, the Q2 ex Texas was still strong and above our expectations and mostly on the basis of strong volumes, success in opening up capacity that we chose to start to open up in the early part of the year and also really, really good cost control. If you look at it, contract labor was strong. Overall, SWB was strong.

Speaker 2

We felt very good about our supply expenses and where the supply expenses increased, it was all on the basis of acuity and volume. So just the fundamentals look very clean. And we still think that given the mix and the demand that we're seeing, we have the opportunity to build over the course of this year. So we felt like the guidance that we put forward for the rest of the year should reflect that optimism as we look forward. Every month has been different in the first half of the year, some months stronger than others, and that's okay.

Speaker 2

But in totality, the strength in the hospital segment has been significant. So when we look at the second half of the year, we recognize that an individual month may go one way or another. But in totality, we feel optimism about the demand that we see, our ability to service it at a very efficient or good cost structure and the mix.

Operator

Our next question comes from Whit Mayo with SVB Leerink. Please proceed with your question.

Speaker 7

Hey, thanks. So I'm in any way to quantify the capacity additions that you guys are adding. You opened up some as you said, now you're kind of stepping that up. Is it contributing to the growth now? I presume not.

Speaker 7

And just any way to maybe quantify the number of beds, units, anything to help us think about the amount of capacity that you're going to be adding? Thanks.

Speaker 2

Yes. No, Whit, it's a good question. And we haven't done that in the past, partially because for us, the capacity openings tend to be selective in markets that were as we have a diversity of markets that have been lagging a bit in recovery from a COVID perspective. But I would say that if you look at our volumes this quarter, this past quarter, capacity expansion that we undertook from the Q1 got it staffed up appropriately. Initially, you'd typically staff these things with a little bit of contract labor and move to permanent labor worked effectively.

Speaker 2

And so we're continuing to make those investments in order to service

Speaker 3

lines

Speaker 7

today versus what you turned off with COVID? Thanks. The service lines today versus what you turned off with COVID? Thanks.

Speaker 2

Yes. Actually, most of the service line expansion recovery, however you want to look at it, is less about reinstating things that we may have closed prior. It's more about increasing demand in the areas that we already chose to serve. I mean decisions that we made to exit service lines, we're not going to revisit those unless there's some more fundamental change in the market. Decisions we made to deemphasize certain things or capacity in favor of acuity or focused acuity are certainly things that we would look at expanding.

Speaker 2

And so when you look at the nature of some of that capacity expansion, it tends to be more med surg because we feel like we can adequately staff the ICUs, the trauma, the elective higher end surgery effectively and still be able to hire and retain effectively staff to expand in that med surg arena. And so it's oftentimes servicing the same areas that we would have been servicing, plus obviously opening up capacity for more throughput in general med surg.

Operator

Our next question comes from John Ransom with Raymond James. Please proceed with your question.

Speaker 8

Hey, good morning. And I never thought I'd say tenant with 3.3 turns of leverage. I thought that was going to happen after they fired me years from now. So congratulations on the rapid deleveraging. My question just if we step back and take the long term view of the ASC division, the volume numbers have kind of bounced around a little bit for a lot of reasons, mix shift and some decisions you guys have made.

Speaker 8

But as you look in the out years, what's a good number as we think about sort of the steady state ASC volume growth? Thanks.

Speaker 2

Yes. Thanks, John, and appreciate the point on the leverage. And I think probably it's a good thing for me too that we've delevered the company. So look, our algorithm on the ASC organic growth volumes of long term 1% to 3% is right. I mean, 2% to 3% is right.

Speaker 2

This year, obviously, we had started the year at 1% to 3% because of the incredible comp from last year, which was multiples above normal. And this is the thing about the ASC business, which is again, if you go back and look and we've done this very carefully over the last 10 to 15 years, both pre and post Tenet being a participant with USPI, the volumes can be lumpy. There are years where the growth is significantly outperforms the typical range and then there are years where it's at or below the lower end of the range. But from a long term perspective, it's an incredibly consistent business. And I think the reason for that is the fundamental tailwind of demand of moving things into a lower cost setting in the better service environment that you see there.

Speaker 2

And the drivers ultimately of that expansion are the ability of course to take what are often single specialty centers that start with more capacity than they need for that specialty and then get them into a hands of a USPI that has expertise in making single specialty centers, multi specialty or taking single specialty and expanding with appropriate clinical protocols the acuity that can be performed in those centers. And so there's a management competency there that's important. And then of course, as centers mature, the ability to be ahead of the challenge of refreshing recruiting and refreshing the medical staff in advance of potential volume declines as all centers mature and being able to renew their kind of ability to build and grow with a new and diversified medical staff. And USPI is really, really good at both of those things. And so that's why I think we feel good about the long term volume algorithm at USPI.

Speaker 2

Obviously, when you couple that with the fact that, the reimbursement trends in this area tend to be favorable, regulatory trends increasing the number of procedures that are appropriate for an ASC tend to be favorable. You get more confident in the revenue growth range that we put forward from a USPI standpoint. And then, of course, it's all about cost control and just maintaining the margin profile that we have. And so then the EBITDA guidance in that range becomes more predictable over a longer period of time. So long way to maybe say the growth algorithm in this segment, I think is actually more predictable over the long term than it is in other healthcare service segments.

Speaker 8

Thanks for that. And then just as a follow-up, I mean, SCD, long time ago, there were some short term challenges. You had a lot of de novo sites, you had a lot of indications you had to do. Is all

Speaker 4

of that in the rearview mirror? And did the de novo sites that you thought

Speaker 8

you had, did that pan out in terms of opportunity that ended up being bigger or

Speaker 2

smaller? The FCD portfolio, in particular, again, it goes back to this kind of tailwind in orthopedics. We feel good about. I would say this, it's sort of it's kind of we don't think about SCD USPI anymore. I mean, it's within our markets.

Speaker 2

The assets have been distributed into our management geographic management model fully with our field operators. So it's not like there's a separate segment or a separate management team or a separate recruiting line or anything like that. And that we've done more buy ups. I mean, we've stopped sort of reporting on it. So we feel good about the way that that's been integrated.

Speaker 2

On the de novo piece, that's a good reminder. We should update on that in the future. Yes, we have had de novo centers that have come through that pipeline. I don't know that it's been an average of 10 per year, which is what we estimated before, but I don't think it's been that far from that. We're in the 3rd year, I believe, of this arrangement.

Speaker 2

Arrangement. And we'll update on that more specifically in the future if that's of interest.

Operator

Our next question comes from Kevin Fischbeck with Bank of America. Please proceed with your question. Kevin, are you muted? You're live with the speaker.

Speaker 1

Sorry about that.

Speaker 2

It's okay.

Speaker 1

Yes, I

Speaker 9

was wondering if you could provide some color on your volume outlook. I guess, first on the hospital side, you're taking up the inpatient volume number, but not the adjusted admission number. Usually we think about outpatient volume growing at least as well as inpatient volume. So just trying to understand, obviously, you've outperformed so far year to date in that direction, but just trying to understand the drivers to that. And then second, the lower USPI volume outlook, just brought a little more color about what is driving that?

Speaker 9

Is that just decisions about service lines? Or is there something else going on driving that? Thanks.

Speaker 2

Yes. Let me maybe I'll start with the first and you want to take the second. So I mean, on the second and we'll come back to the first. Look, as I said, the ASCs are incredibly busy. I mean, last year was a very busy year in the ASCs and in some cases really pushing the envelope on volumes that these ASCs have seen before and we're kind of tracking in that same area.

Speaker 2

We always thought the volume would build a little bit as the year went on this year given just given the nature of the comps and the kind of volumes. And we are always cognizant of the fact that ASCs are designed to stretch. That's what the Q4 is defined by, right? So our view is even if it may feel busy, you always can figure out how to stretch them given we always do that in every Q4 that we see. I think what's playing out in the ASC industry this year is after a really strong year of recovery and there was last year, of course, some one time recovery work that happened.

Speaker 2

The actual organic growth is just making up for that one time recovery. And so we're seeing new cases, new patients, new doctors perform activity in the ASCs. It's replacing some of that one time growth from the prior year. And therefore, the total numbers are just sort of growing very slowly over prior year. But the ASCs are incredibly busy.

Speaker 2

And if you look at the margins, they're busy at a level where the operating leverage is actually creating very, very strong margins. The business doesn't have a lot of fixed cost at the center level. And so when there's that type of throughput, the margins look really good and they do all this year, which is why we again feel good about it. Our recruiting activity that I just described feels strong. And so again, we think about this long term and getting back to a normal growth algorithm over the coming year and potentially into next year.

Speaker 2

So that's really how I would describe the ASCs. Look, bringing changing the volume guidance at USPI, it's simply a recognition of math. I don't think it's anything more than that. No differently than us taking up the acuity and mix impact in the net revenue per case. The volume and revenue per case guidance still translates into really strong overall revenue guidance.

Speaker 2

And so we feel pretty good about that.

Speaker 3

Thanks, Tom. And on the Kevin, on your questions about the hospital piece, so on the inpatient admissions, yes, I mean, we saw 4.2% and 5.2% admissions growth in Q1 and Q2 of this year, respectively. Plus, we are seeing a, again, like we said, a favorable utilization environment. We're working hard to selectively open up capacity and invest. So all those things, I think we thought it was appropriate to bring up our inpatient admission outlook for the year up to 3% to 4%.

Speaker 3

On the adjusted admissions piece, that's where it gets a little bit less predictable with the mix of in and out patient. When we look at our Q1 and Q2 trends, we're in the 1.8% and 2.4% levels for the 1st two quarters. So we thought based on current data, it's appropriate to stay at our 1% to 3% range. So again, this sounds kind of data and trend driven.

Operator

Our next question comes from Josh Raskin with Nephron Research. Please proceed with your question. Hi, thanks. Good morning. What percentage of revenues for both segments come from patients with exchange based coverage?

Operator

And should we assume those patients are generating margins somewhere between what you earn on a typical commercial or Medicare maybe even slightly close to commercial?

Speaker 3

So, hey, Josh, it's Sun. I think on the hospital side, what I can tell you is that we are seeing, continue to see, admissions growth on exchange. So this year, it's about this quarter, excuse me, is up 62% on exchange admissions. From a revenue perspective, what I have for you here is about 6.5% of hospital revenues is from exchange as a percent of our total consolidated revenues. We can do some algebra and get back to you on what it may be for the hospital segment, but hopefully that piece helps.

Speaker 3

On the USPS side, I mean, I think the increase in exchange volume is there as well, but not as pronounced as it is in the hospitals. And we'll have to get back to you on the revenue proportion in the USPI space.

Operator

And margins?

Speaker 3

Margins, I think that's I think it's fair. It's favorable than the government paid programs, obviously. I think what we said is it's close or comparable, obviously a little bit less to our book of commercial payer business.

Speaker 2

Yes. I mean, the overall exchange acuity is also important to know. I mean, the exchange volume is up. Overall exchange acuity tends to be lower than, for example, Medicare, but that's probably not surprising to you. But obviously margins are a combination of the revenue contracted rate and the acuity.

Operator

Understood. Thanks.

Speaker 4

Thanks.

Operator

Our next question comes from A. J. Rice with UBS. Please proceed with your question.

Speaker 10

Hi, everybody. Thanks. Maybe one point of clarification and then the broader question. The $300,000,000 raise for the year versus Q1 guidance, How much of that is what you've seen year to date? And in your mind, how much are you raising your expectations for the back half of the year?

Speaker 10

And then my more business question would be on Managed Care pricing. I know we've been in this period where I think you were getting a little bump or at least toward the higher end of historic trend as they were compensating you for maybe some of the labor pressures and not just you, but the industry. Where are we at in those discussions? Do we have one more year? How much visibility do you have on 2025 at this point in your contract negotiations in the rest of this year, if you could give us some thoughts there?

Speaker 2

Yes. Thanks, A. J. So look, on the first point and Sun, you should comment in more detail. As we obviously, as we thought about our guidance and similar to my comments in the Q1, you kind of have to take the 1st and second quarter raises together because some of the first quarter raise obviously was forward looking and not what was booked for the Q1 and the out of period increases.

Speaker 2

So we can answer the question for the Q2 raise, but from our perspective, you kind of have to take and I realize we've complicated the situation in hopes of in some ways making it clear by separating our guidance raises from 1st quarter being mostly related to booked and ongoing changes in supplemental payments and then now more cleanly addressing the fundamental outperformance of our business in the Q2. But both of them had forward looking components. So I'll pass that. Just on the Managed Care, I'll pass that over for more detail in a second. On the Managed Care side, yes, you're right about that.

Speaker 2

I mean, I think that I would just characterize that generally speaking, contract negotiations have more or less terms of the way in which they're working and discussing. I mean, there isn't really as much discussion about highly acute inflation. That being said, contracts that haven't been renegotiated over the last few years, we're still very much in discussions about the opportunity to catch up, if you will, from what's happened in the last few years from an inflationary perspective.

Speaker 3

Thanks, Tom. And just to just provide a little more detail on the first piece, A. J, on the $300,000,000 estimating guidance increase, about $200,000,000 I would view as performance in the first half and then the $100,000,000 would be projecting that out into second half. And then as Saum said, when we raised guidance in the prior quarter, a big component of that was from our Medicaid HRA payments. If you recall, we raised guidance on that by $209,000,000 but $88,000,000 of that was recognized in Q1.

Speaker 3

Some of that was for prior period, but recognized in Q1. And then the remainder of that was expected to come through in Q2 2nd to 4th. So those are the different pieces.

Speaker 8

Okay. Thanks.

Operator

Our next question comes from Andrew Mak with Barclays. Please proceed with your question.

Speaker 8

Hi, good morning. Through the first half of the year, there's a pretty widespread between your inpatient surgical growth up 4% and hospital outpatient surgical growth down 3%. So just curious what's driving that spread. I don't think there was anything unusual going on from a comp perspective, but would love more color there. Thanks.

Speaker 2

Yes. So a couple of things. I mean, one is, obviously, inpatient surgical tends to reflect some of the acuity, both emergent and elective acuity in the programs that we've been focused on building. And so I would think of it as no more than that. And the inpatient surgical takes up OR capacity, obviously, significantly.

Speaker 2

And so for us obviously outpatient hospital outpatient surgeries as we've talked about in a more general sense also have this kind of trend of moving into the freestanding setting, right? And so you got both dynamics going on at the same time.

Speaker 8

Is that shift in the outpatient setting accelerating or is it pretty steady from your perspective?

Speaker 2

I don't know if it's accelerating. I mean, we noticed it too. I mean, it's hard to say it's a long term trend right now in terms of what's going on, especially because you have the confounding aspect of the mix shift, right? I mean Medicare, Medicare Advantage utilization is up. Obviously, the commercial side is strong.

Speaker 2

The exchange side is even stronger as a subset of the commercial book, etcetera. So there's a significant payer shift. Medicaid is down a bit. And so there's a mix shift going on that confounds it. So I don't want to draw any long term conclusions yet on the basis of what we've seen.

Operator

Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Speaker 6

Hey, good morning. Thanks for taking

Speaker 8

my question. Another question on ASC volumes. Can you talk a little more about urology urology and potential for that to provide a multiyear tailwind as robotic procedures move out of the hospital in the ASC? And on the other side, can you talk about the interplay between the weaker areas like pain and ophthalmology or are there other areas that we should be thinking about from a sort of case headwind? And one of the segments stopped being a headwind to sort of the volumes of Massey?

Speaker 2

Yes. Well, a couple of things. I mean, I think in terms of urology, this is a specialty where it has largely been divided by acute care hospitals and in office procedures. And so we're in very early innings of and really being driven by innovative urologists and their organized groups looking to move some of those surgical procedures into a more freestanding convenient setting. And our work in that arena accelerating it by providing good ASC management of higher acuity procedures as part of what they're doing.

Speaker 2

And so I think there's a lot of room for not only growth, but also expansion of the range of services that can be offered in the ambulatory surgery setting. You're right, robotics and other things will increasingly be a part of that. And one of the right now, we're doing a lot of this work mostly on a single specialty basis in the ASCs. Over time, as it grows and penetrates into the marketplace in the next 3 to 5 years, I suspect that you'll see it in multi specialty centers too. But right now, the efficiencies that come from piloting these programs in single specialty centers seems to make a lot more sense.

Speaker 2

The ophthalmology business actually these days is strong, partially because of recovery of utilization. It's just not as strong as certain other areas. And remember, with pain procedures, it's not about eliminating pain procedures from the environment. It is about changing the mix to include more invasive and higher acuity type of pain procedures in the ASC setting so that there's a diverse range of procedures, many of which require sedation and operating room time and other things versus what could be done in another environment. And so I don't think that headwind, so to speak, goes away anytime soon because there's a nice mix, that exists today.

Speaker 2

And we're selectively we've been focused on trying to either diversify or selectively upscale our acuity in certain places where all we had was low acuity pain. And with the idea that if we weren't able to diversify or move up the acuity chain, we were better off moving up the acuity chain in different service lines. And that's again, as I said in the past, we will do that in a more measured fashion over time at this stage.

Operator

Our next question comes from Jason Casarrolla with Citi. Please proceed with your question.

Speaker 11

Great. Thanks. Good morning. Maybe a couple more on USPI. First, you've done a number of acquisitions over the past few years, the 45 earlier this year, the SCD transactions and others, the de novo activity that's ramping.

Speaker 11

Can you maybe help frame the USPI facility mix between the centers that you would consider are running at a kind of fully mature run rate compared to maybe more immature centers that have a bit more EBITDA maturation to be had? And then maybe just as a follow-up, can you just remind us what percent of USPI facilities are in a partnership with an external hospital? And maybe just what the pipeline or outlook is for incremental hospital partnerships down the line? Thanks.

Speaker 2

Yes. So I mean both of these areas, I would say, a few higher make a few higher level comments. I mean, first of all, our recent M and A, including in the Q1, the objective is always to get these centers fully on as quickly as possible because you want them to operate under the USPI management framework, which is very effective. So again, we're not looking to keep them in separate segments from that perspective. Even one off acquisitions, I mean, we have a separate and disciplined integration process from that perspective.

Speaker 2

De novos, of course, you have the runway to start them out in setting up the framework over the 18 months that they're built and put them straight into the USPI platform. In terms of the percentage of centers that are running at full capacity or not, we don't really disclose that. As I said, my philosophy is the Q4 is a reminder that you can always stretch the capacity of an ASC for incremental doctors and incremental cases as long as they're performed at high quality with good patient safety. And so even if we feel busy during the year, again, we remind ourselves that we managed to stretch in the Q4 and therefore there's room in these things for growth. A lot of times it's the nature of the partnership, single versus multi specialty, the different technologies that are needed, expansion of operating room capacity for different types of procedures, nursing capacity that limits instantaneous ability to expand from a growth standpoint.

Speaker 3

Jason, just on the mix with hospital partners, it's around 30% to 40%.

Operator

Okay. Our next question comes from Sarah James with Cantor Fitzgerald. Please proceed with your question.

Speaker 12

Thank you. Inpatient admissions are running above historical average. How do you think about the sustainability of that? And maybe you can help us with orders of magnitude on the drivers between share gain and growing catchment area versus to midnight, the temporary utilization management suspension by United or capacity increases? Thanks.

Speaker 2

Yes. Well, I think inpatient utilization is building and growing primarily because of 2 fundamental things in the marketplace. 1 is just the consistent growth in the aging or aging population and especially with respect to those that have chronic diseases. I mean that trend hasn't stopped. And it's a fundamental tailwind for the hospital sector in my belief at least into the early part of the next decade if you just look at the demographics.

Speaker 2

And then you have the second issue, which it's kind of the unfortunate consequence that happened with COVID where you had a 1,000,000 premature deaths that actuarily would have in their last 5 years of life, most of those people would have ended up succumbing to some other disease over a 5 year period, but they all died upfront. And the number is probably even larger than that. And so what's happening is, I think every year you have more people aging into that last 5 years of life. So you would just naturally expect 5 years of recovery after the beginning of COVID. I mean, that just mathematically and actuarially seems pretty simple to me to understand.

Speaker 2

It's a question of how you then as a provider manage your physician, staffing, physical capacity in order to service that demand. And I think that's what we're seeing right now. I don't see the utilization dropping over time. I just see it kind of reaching steady state at some point. And then we build from there mostly just on the population growth side.

Speaker 2

I do think that there are a few things that are outsized effects currently and that's primarily in my view driven by Medicaid redetermination. And the impact of that Medicaid down, exchange up from a volume perspective, I'm not sure I could quantify it perfectly, is less profound than from an earnings perspective because obviously the reimbursement rates on the exchange book in that conversion are more attractive than what you would have seen on the Medicaid side. And so it's helping, obviously improve the earnings profile in the acute care hospitals. We see less of this whole effect by the way at USPI. And again, that goes back to why we believe the diversification of our business units.

Speaker 2

I mean, it was I'm purposely looking ahead and frankly looking at the uncertainty in the environment, political and regulatory. I like the diversification of the business units because the ability to figure out a way to succeed in almost any environment in the next 3 years, 4 years is something we're going to have to figure out how to do.

Speaker 12

Thank you.

Operator

Our next question comes from Stephen Baxter with Wells Fargo. Please proceed with your question.

Speaker 8

Yes. Hey, thanks for fitting me in. Just another question on the hospital capacity commentary you're making.

Speaker 1

I guess how should we

Speaker 8

think about the potential margin impact of the capacity coming back online? It sounds like maybe it's higher acuity capacity than maybe what you idled during COVID. Is that something that comes back online and it's margin additive? Or is this a bit of a drag as you

Speaker 9

kind of ramp it up

Speaker 8

and make investments? Just wondering how we should think about that? Thanks.

Speaker 2

Yes. Well, two things. Additional capacity that we bring online given our ability to manage cost on a marginal basis, we're not going to do it if it's not margin accretive. That being said, in the early phases months of opening up new capacity, especially if you have to do it, you start out with contract labor and other things until you ultimately recruit and staff up your unit. The margins can grow over time as to where you want them to be as opposed to what you do instantly.

Speaker 2

But it's generally not the case that we're saying, oh, let's go find some totally margin dilutive margin negative service and figure out how we might ultimately flip that. And that again, that's our degree of confidence and whatnot in what we're doing around these service lines in terms of how we think about them. But that's generally our algorithm is we like to see the incremental volume produce at least a contribution margin upfront. I will repeat, I am not we are not chasing mimicking 2019. It's not even part of our algorithm to think that way in the acute care business.

Speaker 2

We have deliberately and permanently shifted our mix in certain ways in our acute care portfolio And the revenue and margin profile that we're generating suggests that has been a good decision, at least for Tenet's acute care hospital portfolio.

Operator

Our next question comes from Michael Hoff with Baird. Please proceed with your question.

Speaker 8

Thank you. So as I think about your first half margin performance, arguably one of the strongest first half margin performances in the company's history, if I'm not mistaken. And I look across your metrics, it seems like there's still room to get back to pre COVID levels on hospital occupancy and average length of stay, which optically to me appears to provide more line of sight to maybe sustain strength and performance going forward. So my question specifically on occupancy levels, one of your peers has reached near mid-70s. And as I think about where Tenet is around 50%, how should we think about the directional view of this moving over time?

Speaker 8

Is there a path to 60s or 70s? And what's necessary to happen in order to accomplish this? And I know you've mentioned adding capacity, but curious to specifically hear your thoughts on occupancy levels. Thank you.

Speaker 2

Yes. Well, I think there's a few things. First of all, I'm not sure those statistics are truly apples to apples in the way that we each may define them in terms of how we think about our capacity. I would say that given that our collection of markets, market dynamics and mix are different also than the peer that you referenced, we probably take a more measured view of capacity and service lines that we're going to participate in. And so in some markets, our capacity utilization will be higher than in other markets.

Speaker 2

So that's generally how I would answer the question. I will say that as a macro point, we do internally as we've made so many different changes and improvements in our acute care segment over the last 5 years in terms of what we've been doing, both strategically, operationally and how we deploy capital, We definitely take notice of the fact that in this industry, the gold standard peer and the way in which they manage capacity, capacity utilization in particular is a gap between what we have been able to achieve at Tennant and otherwise. And so that is a constant source of discussion and opportunity for us. So don't take the comments in the beginning to mean we're looking for structurally different numbers. I don't know that they're apples to apples.

Speaker 2

But at the same time, we are very cognizant of the fact that we have improvement opportunity, just like we've made improvement opportunities come to fruition in other areas relative to the gold standard peer here in cost control, supply control, etcetera, etcetera.

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Earnings Conference Call
Tenet Healthcare Q2 2024
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