Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Okay. I'm A.J. Rice, the health care service analyst at Credit Suisse. Thanks, everyone, for dialing in. Next up in presentation is Tenet Healthcare. We're joined today by Ron Rittenmeyer, Executive Chairman and CEO; Saum Sutaria, President and Chief Operating Officer, Dan Cancelmi, EVP and Chief Financial Officer; and Regina, Vice President of Investor Relations. I thought just maybe an open-ended way to get started.

Ron, as you guys reported, results were [indiscernible] around Q3. What would you say for someone that maybe wasn't dialed into, that's new to the Tenet story where the 1, 2, 3 takeaways or messages that you would want them to walk away with.

A.J., and thanks, everybody, for joining. I would say that when I look back at the third quarter, we felt it was a really good quarter for us. The execution across the board was very good. We continue to recover across every one of our categories. Hospitals are actually doing very well throughout the COVID thing, even though we've had spikes. And during the quarter, we actually had a surge that we had more patients at one point than we had early in the process. And I think we've learned how to manage the COVID issue for the most part. We, obviously, can't control the volumes that come to us with COVID. But we have learned how to approach those volumes, how to deal with it. Fortunately, we've seen, at least from a seriousness level of infection, we're able to manage it much better than we were, younger profile, and we don't have the death issue, the mortality issue that we did have. USPI did great, very strong quarter for USPI. Again, year-over-year, good earnings growth. Acuity in the hospital was up again and continues to hold at a very, very good level. And in many respects, the things we've done for the last couple of years that we've talked about in terms of our analytical tools, in terms of how we manage cost and how we deal with managing our overall staff and deployment, plus the amount of physicians that we've added, which has been significant to our USPI team as well as to our hospitals has really started to pay off in terms of our ability to run the business. So we run the business on a much more analytical basis, much more focused on data to drive decision-making. And it's just a different approach than we used to be x number of years ago. So we're a different company in that respect. And I think overall very positive. Additionally, when I think about the quarter, we restructured some of our debt. As you know, we issued some new notes at 6.125%. And good to high-yield market allowed us to move to 2022s out another 6 years, reduced our interest rate on those notes pretty significantly. The grant funding has continued. We were unfortunately due to a change in HHS guidance had to reverse $70 million in the third quarter from the second quarter. But then, of course, they came out after the quarter was closed and reissued guidance. And now we'll probably claim another $100 million due to that in the fourth quarter. So this is -- the grant funding is a bit of a moving target. The advance we got under Medicare, they extended the payment dates into 2022, I believe, right Dan, 2022.

That's a number of '22.

Yes. So at this point, look, we don't have any concern paying it back. We'll pay it back on time. We're not going to pay it back early. But we will pay it back on time. So we have no concern about that. And the grant funding will obviously continue to rely on that's out there. We received about -- around $850 million so far, I think, in grant fund, plus or minus. And we're applying it accordingly. And right now, it will just carry on going forward. And clearly, we're seeing an uptick in COVID cases. So the application of that funding would be appropriated accordingly. But overall, look, I think we had a very strong quarter, good positive numbers. EBITDA at $621 million, pre the reversal of the $70 million. But just in terms of non-grant funded money, $621 million was a pretty good number. And our patient revenue increased, our same inventory numbers increased on revenue per surgical case. And cash flow continues to be very strong. Conifer has done a great job collecting cash this year. They've really been buttoned up. The team that we put together there really has delivered and continues to -- for all clients, not just for Tenet, but all clients, has continued to do a great job. So -- but we're entering the fourth quarter realizing that COVID has gone up a bit. But I think we just posted our slides and our October numbers we put, we gave a peak in October already, what we look like. Our October numbers look, in our opinion, look very good. We're very pleased. I mean our admissions are close to 90% of pre-COVID levels. Our outpatients are up at 86%. ER visits are up close to 80%. And our surgeries are above 90%; 93%, I think, in the hospitals and 96% at USPI to pre-level. So, I guess my view is that the trends are good. Trends are very positive. Our cost control is excellent. And we're dealing with the crisis of the surge appropriately. So I think we feel pretty good about where we are. I hope that helps.

Yes, that's good overview. It raises -- there's a different question there. So when you talk about those levels of rebound relative to pre-pandemic levels, you've got a geography in your portfolio where you had some markets that were early being impacted like Detroit and so forth. And then you have others that have been sort of the second wave and now even some of that probably are in this third wave a little bit. How much variability in the rebound is there? And is the variability narrowing as we get farther into the pandemic that even the markets that are experienced in the hotspot, to maintain the volume?

That's a good question, A.J. I'll bounce that to Saum in a second. But the only thing I'd tell you from a top line view, we're better at what we do now, right, just like everybody else, not just us, I mean, this is true of the industry. If we know how to deal with it more, we've got more tools. We've learned a lot of lessons. We're managing PPE appropriately. All of those things now are clicking as part of -- almost part of life, okay, that we've -- we've accepted that we're going to live with COVID, vaccines notwithstanding, for a very long time. It's going to be one more infectious disease that we're going to have to deal with. So I think, first of all, I would say that I think we approach it differently than we obviously did in the early days, right? It's not that chaotic panic kind of thing. Of course, with the mortality rate down, that makes it much different than the early days of the mortality rate. So with that, I'll pass your question on.

Yes. A.J., the variability in COVID cases is significant. I mean, one of the things to note is that in October, despite the recent spikes, that volume strength you're seeing is at a low from a COVID standpoint, okay? So I know the numbers are going up again in November in a variety of areas. But from our standpoint, as a company, October was a month where that second wave had really diminished significantly. So what you're seeing there is good volume strength, which is why Ron says clearly that we feel very good about that, again ongoing ability to recover the operations. COVID volume has variability across the markets. Other volumes have less variability now because we've learned how to manage. And then frankly, the earnings have even less variability because we've also learned how to flex and manage the cost structure even with COVID in place. As we've talked about, the real costs associated with COVID are displacement of other volume and contract labor costs. And as we've gotten better at cohorting COVID cases, we've managed to -- though we're still spending on those things, when there's a spike, we've managed to mitigate those expenses a bit even relative to the second wave. So when you talk about variability, yes, lots of variability in where the COVID is. We're starting to see less variability in the volume recovery and we're obviously working towards even less variability in the earnings because we now know how to manage the operations better from an earnings standpoint.

Yes. That's good. And early days in the COVID crisis, there was a lot of concern expressed by the vast array of hospitals, many of which are obviously non-profits, that the industry was going to get hit with a lot of high-cost patients that it wasn't adequately reimbursed for. I know the government has made some adjustments there. Is today, would you say, that your margin on COVID cases is sort of similar to the corporate average or adequate? Or how would you describe what -- do you have a sense of that?

Yes. Just -- I'll start and then Dan can follow here. But one of the important things to realize about the COVID cases is that the margin that you realize off of that total book is very much dependent on the mix, the payer mix that you have, right? And for us, at least our experience has been that the payer mix that we've seen has not been what we would hope for in our background operations, had we been substituting other cases from a COVID standpoint. And that's fine. I mean our job is to take care of these patients, all of them in the communities there are the best we can and that's exactly what we're doing.

Yes, A.J., as we've pointed out a couple of weeks ago, the mix of COVID in terms of by payer is generally consistent with our overall mix of payers. So commercials, anywhere between 20%, 25%, which is consistent with our overall mix. And then obviously the rest 75% or 80% is Medicare, Medicaid, or uninsured. So we also talked about the fact, we've got a lot of questions about what's the average reimbursement on these COVID cases. And what we've said is, and it continues to be the case, the average reimbursement is higher in aggregate. But when you case mix adjust it or if you take into consideration the costs associated with those type of cases, particularly if the patient that ends up in the ICU, you obviously have more cost. And so, obviously, commercial reimbursement much more favorable than the government or uninsured. But I wouldn't -- again, we think it's pretty clear, when you look at our earnings trend in Q3, as COVID case has really spiked in August, they did have an impact on the earnings. So we're -- it isn't like we're making a significant amount of money on this type of -- our mix, obviously.

Right. I guess I was thinking about -- because one of your peers yesterday sort of made the argument. I don't want to go too far with it, but basically that absent a major lockdown again, which obviously would be bad for all the rest of the business. But if we just have the sort of ebb and flow of the cases, they think now the industry is at a point where you can manage that given the reimbursement, given what it's done on cost. And therefore, it's not that big a variable in the grand scheme of things for next year. It's hard to forecast it, but it's -- and the normal phase, they can live with that. What do you think about that?

Well in their case, that may be true because they might have a much higher commercial mix. If you don't have the benefit of having locations and markets where you have a higher commercial, more affluent system, and you have some markets that are in a less affluent higher Medicare or Medicaid mix, we won't go under because of that by any means, but we're not going to get that same margin benefit. So if you've been able to, over the years, manage your business where you only take care of the -- I would say, I don't want to use incorrect terms here, but less of the safety net hospitals, then you're probably going to do pretty well. Saum, you…

Well I would go back to a broader concept here, A.J., which is what we're doing is we're providing the appropriate public service for all patients that have a disease that's resulting from a pandemic. And so our job, as I said, is to learn from that and, though we have variability in COVID cases, attempt to run the operations, so we reduce the variability in volumes, attempt to manage the operations so that we have less variability in earnings due to COVID over time. If the COVID cases ebb and flow, my suspicion is that over time the performance will continue to improve regardless of the mix, okay? I will repeat, you would not choose to be in a COVID line of business relative to other lines of business that you would actually put into the hospitals because the length of stay is so much longer for that fixed reimbursement at any given DRG level, whether it's Medicare, Medicaid, commercial or uninsured, that the margin performance on that business is not going to be as attractive as other things we do. And then when you combine that with the fact that one of the impacts COVID has had is created a sense of fear among consumers about, for example, coming to the emergency department, you take away that current environment, which I think you're seeing industry-wide, that's going to create some pressure on margins. The last thing I'll say is that the effect of COVID on hospitals today is not just where there are COVID spikes. Different states are approaching how they deal with their populations differently. Some states are very open. And so even with COVID spikes, we are managing more actively to do surgical work, other elective medical work, and other things. Other states are much more locked down. And those states which are much more locked down, especially in the Northeast and the West Coast, parts of the Northern Midwest, the volumes lag today more than in the other states, perhaps in the South and Southeast. And that's just the reality of how the states are approaching it.

Right. And obviously, you guys have made cost adjustments done on a number of things. Do you think -- is there any way to assess whether you -- where you are on a relative share position? Has this been an opportunity, you think, to pick up share in any way? Or have you been able to [indiscernible] early?

Yes, A.J., I mean, I think from a fact-based standpoint, it's early just because share data tends to lag. But the types of things that we're very pleased with is that our recovery in our commercial business, both medical admissions and surgical admissions, has tracked ahead of our overall admissions. Our recovery in surgeries has tracked better than our recovery in other admissions. That's important because those are strategic service line investments to grow and expand our services that we have been making. We feel very good about our share, based upon what we think is just volume data on higher acuity emergency department visits coming back and tracking ahead of where we were even prior year. So I know the low acuity stuff in total is down, but we feel very good about those higher acuity visits, choosing to come to our hospitals based upon the outreach we've done with our ER safety campaigns. So when we look at all of that, we feel like that's a solid contribution to the types of earnings we're delivering in the recovery.

Right. And the company has done really well on the cost side of the equation through this pandemic and that is sort of one of the distinctives in the pandemic and in the last few years relative to Canada years ago. What are some of the key areas that have allowed you to do that when you think about what you've done in the crisis? Are some of that sustainable going forward? And what would those sustainable cost reduction or cost rationalization areas be?

Yes. I mean I can start briefly, and then we can add -- you guys can add on. I mean, look, I think the first thing is that our underlying platform of analytics and insights that we've put in to manage our labor on a day-to-day basis across the network has been very helpful. I think the second thing is our renewed focus on asset utilization in our operating rooms and procedure rooms to manage the staffing in line with the demand, including in USPI, has been important in terms of making sure that the revenue we do recover has a bottom line impact that is as similar as we can be to prior year despite the volume declines and asset utilization declines. Now we've tightly managed our supply environment over this period of time, including working on renegotiating a number of different supply agreements through the pandemic. And then finally, we've spent a lot of time, as we've talked about, working on all of our purchase services environment during this time to make those costs more variabilized so that we can scale them up and down as needed rather than more fixed in nature, and that has been helpful as well. And then at the same time, we have continued to actively make investments at our global business center and have expanded the number of roles over there in Manila significantly, which obviously has an impact from a cost arbitrage standpoint. We don't yet see the full benefit of that as we're in transition, but that benefit will accrue even further in '21.

Okay. Any -- and those all sound -- none of those sound like they were just short-term reactions to the pandemic. They all sound like things you think will have an impact long term. Is there any way to quantify the incremental cost savings step-up next year versus this year?

Well, A.J., look, we've talked about -- we've been on a trajectory to achieve $450 million of savings through the end of this year. So we're on track with that. And during the pandemic, we've also dug even deeper and identified additional administrative type of saving opportunities. We've continued to integrate various back-office functions where the 3 business units would have had separate administrative back-office functions. We've done a lot of more integration there. Saum pointed out our global business center. We've transitioned a large number of roles over there and we're going to continue to do that. So we'll see and realize more of that next year. We're not done in terms of renegotiating contracts, less than attractive contracts, and maybe even terminating a number of contracts. We've been doing that. We'll continue to make those type of investments because the long-term return is much more attractive. A lot of the real-time data analytics tools that we've been implementing have been really beneficial in terms particularly on managing day-to-day labor and identifying as if volumes move up and down, making sure we have the right resources there. Listen, we've always done that, but it's even been more pronounced and more focused, and it's been very helpful there. And it also comes down to labor. It oftentimes is what's the right type of mix in each particular facility, whether it's the mix and fix versus variable staffing, addressing premium pay. Obviously during the past several quarters, because of the pandemic, contract labor has been out there. We've had to make investments there appropriately. That we -- obviously we're working on continuing to drive that down. But in terms of going into next year, there's going to be -- this is a continuous process and we're not done. A lot of the initiatives we focused on this year will continue to drive savings down the road. I guess another example would be space leases. We've been going through and consolidating space throughout the organization, which will generate savings on a long-term basis.

Yes. Yes. That's good. On the nursing side, as you look at that, we hear talk about, well, nurses have burned out from the last 6 months alternatively. It seems like average wage increases aren't really changing much. Maybe that's economically driven. What are you guys seeing? And as you think about 2021 wage increases, et cetera, what would you say?

Well, first of all, I think there's a broader -- I mean, you're raising a broader point, which is, I mean, at some level, and it's hard, we are a nursing company in terms of what we're doing in the pandemic, in particular the quality and performance of our nurses has to be balanced with, as you're describing, having enough staff and backup given the trying nature of the pandemic care that's required. And so obviously our focus there has been very strongly on protecting, not just our nurses, but all of our hospital staff, which is why we've been so rigorous and disciplined about staff infection rates and keeping those as low as possible. And we are just relentless in doing that because having the staff feel safe at work and wanting to come to work and wanting to continue doing what they're doing is our best asset when it comes to not just patient care, but keeping electives going and also minimizing the nature of contract labor. That being said, when you engage in contract labor in today's environment, it's not just the rates that are high. You're purchasing that contract labor for usually a 4- to 8-week period. And so you use those periods of time when you have that contract labor as the COVID demand goes down to continue to use the contract labor to give the rest of your staff some rest, okay? So this is a balancing act when you've already made the expenditure upfront, you give the rest of your staff some rest. And we focus on that in every facility where we have these spikes because we want that workforce to obviously continue to feel safe, but also energized in the future. There's no question about the fact that, as you point out, understanding and caring for what's going on with our nursing environment and all of the staff around them is pretty important right now.

Right. We've got a couple of e-mail questions coming in here. Someone's asking, does Tenet expect the normal year-end volume assuming that COVID outbreak can be managed? I guess you get a little volume pickup in the third quarter to fourth quarter. Have you assumed that?

Well, here's what I'd say. We're very glad, and which is why we shared the October numbers, that as COVID numbers have gone down, we've continued to see stronger volumes in the way that I described in terms of the types of admissions. So that's a very good sign. In terms of the typical spike in December, whether it be in our hospital business or in particular in the USPI business that you see when deductibles have run out, we just don't know. I mean, we just don't know. It's very hard to predict at this stage what will happen in there.