Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Thank you so much for coming. I'm just going to throw it to Will for some safe harbor rules and then to Saum for some opening remarks.

Sure, absolutely. In the course of this fireside chat, we'll be making some forward-looking statements. I would suggest that you reference the cautionary statements that was included within our first quarter earnings release. And with that, I'll turn it over to Saum for some opening comments.

Thank you, Will. Let me just spend a few minutes giving you a sense of how we see the company today and what's been achieved and what the platform looks like going forward. So 4 years ago, we looked together at doing a few things with the company. One was, importantly, expanding what we thought was the most important forward-looking asset for the company, which was USPI and really committing to that growth. It's obviously in a terrific, fragmented sector. And as we'll talk about, we're very uniquely positioned there. The second was to make a decision on Conifer, but at the same time, significantly commit to improving its performance. And obviously, we've done that with over 1,000 basis points expansion and now return to top line growth in that company. As you're well aware, we've made a decision to hold on to that asset, given its importance and the potential in the market. And the third was to work on improving significantly the performance of the Hospital business. That has been a significant effort and has been both in the vein of cost reduction and entirely retooling the strategy to a high-acuity procedure-based platform that is seeing top line growth and margin expansion. And I think importantly, that strategy has been very helpful in helping us manage through a pandemic in which we have been able to retain much of our procedure-based business in that environment. And finally, as part of this, there was always a commitment to deleveraging. And even if you look at the first quarter of this year, that commitment has continued. I think we retired almost $800 million in debt during the first quarter. When you look at the business today, half of our earnings, USPI, which is really the growth engine of the future and Conifer are largely insulated from the issues that face us in the marketplace with respect to contract nursing labor, which is obviously creating some challenging times in the Hospital business. In our Hospital segment, we feel that we have managed that very well through the pandemic. We have been very deliberate about how we have thought about the utilization of contract labor and capacity that we're going to open and not open depending on the nature of the contract labor rates and other premium pay pressures that we face. As a result, all 3 components of our business have performed very well. But I would reiterate again that it is important to understand that half of our business is earnings. And a significant proportion of the free cash flow in USPI and Conifer are insulated largely from the situation that we see with respect to nursing contract labor. So as we look forward from the standpoint of our platform, our commitments haven't changed. USPI has scaled almost 50% in the last 18 months. We continue to have an incredibly robust pipeline looking forward. We've indicated that we're back out in the market from the standpoint of point solutions with respect to Conifer, and we are committed to growing our offshore presence for margin expansion. And our high-acuity hospital strategy, I think, will carry us through this period of uncertainty from a labor standpoint. And so we look at our path to the future is very much similar to what we have done and a commitment to that level of execution, which has not changed.

Well, let's actually talk a little bit more about labor. As to your point, you are insulated because of USPI and Conifer. But there's obviously a lot of focus on labor right now, and there's a lot of recruiting efforts. We know that a lot of the providers are trying to convert or shift many of these contract nurses into full-time labor. What are you seeing on that front right now? And how competitive is it today?

Well, I think there's 3 or 4 things going on. The first is that if you look at the last Omicron surge, I think the demand for contract labor similarly spiked. It's taken a lot longer to normalize. Obviously, Omicron has been largely irrelevant since March. But I think many people, including in the acute care industry, the broad acute care industry signed up for 12- to 16-week contracts, which are now starting to come up. That's releasing some of the pressure on the contract labor rate today. So I think that's important. The second thing that's important here is that as we look forward, we have been, over the last year, working on solidifying nursing school relationships and other things to onboard new grads more effectively and create more rapid career paths for them. So that's really just about in every single hospital market, having a strategy to be able to source new grads along with what you point out, which is now trying to repatriate travelers back into the full-time environment. And that's an active and ongoing effort. I think there's no way to escape the fact that the next year to 1.5 years is going to require constant attention to the issue of placement of nurses in a way that helps us stabilize the workforce in the next period of time.

We've also established our Tenet Resource Agency.

Yes.

Several years ago. It's grown significantly. We have several thousand nurses employed or through this agency. It rates admittedly higher than typical full-time employees, but still gives us a lot of flexibility to have resources available in various markets throughout the country, and it's been very successful.

You've also noted in your recent earnings calls that you pulled back on certain service lines where it just doesn't [indiscernible] lines right now. What are some of these lines that you're pulling back on? And when do you think you might have to start staffing?

Well, I would think about it may be slightly differently than individual service lines that are the same across every market. Look, we've taken a careful look at where we can provide distinguished services in each market. And so the answer in each market around where we constrain capacity a bit was based upon where do we have clinical leadership potential? Where do we have a set of clinicians that are committed to growing and building that service? And where are we, importantly, keeping all of our access open for emergency-based services? And then there are other areas, in each market, you will always find these things where you're not necessarily a leader, you're a participant in the market. And the cost of doing that subscale often exceeds the kind of revenue that may come in, in this environment. So you just have to make those decisions carefully and deliberately based upon the economics and the community need.

Yes. Let's shift to reimbursement. There's obviously a lot of puts and takes with the recent proposal for IPPS. One, I'd love to get your thoughts on that front. And then second, as it relates to commercial contract negotiations, what is -- how is that developing as you think about '23, '24 and covering the inflationary impacts that you see this year?

Yes, in terms of the Medicare proposed IPPS update, we were to be -- quite frank, we were disappointed with the level of the rate increase when you take into consideration the market basket admittedly was above 3%. But when you take into consideration the change in the outlier threshold and the estimate that uninsured levels will come down, it has an impact on the disproportionate share reimbursement that hospitals earn from Medicare. For us, all in, it's about a 2.3% annual increase. We're hopeful that when the rule is finalized, it will be a little bit more better than that. But that's the environment we obviously have been working with. Listen, the Medicare update is a little better than in most years, but still given the inflationary environment. So we're working, as you can imagine, with all the appropriate constituents to make sure all the parties understand some of the pressures that the hospitals are facing throughout the country. In terms of our commercial contracting, we -- our commercial contracting strategies, we believe, are a very important asset of the company. We negotiate contracts on a nationwide basis with the large national health plans and on a statewide basis for regional plans or plans like Blue Cross as an example. We just announced actually 2 recent contract renewals on multiyear contracts, very important, [indiscernible] Blue Cross of Texas. And when we think about our visibility into pricing over the next couple of years, we have very good visibility. We have roughly about 80% of our book of business under contract for 2023 and about 60% for 2024. We routinely negotiate rate escalators into those multiyear contracts. Inflation levels are always top of mind when we're negotiating these contracts, and we take that into consideration when we enter into these contracts, and we certainly did that with our 2 most recent contract renewals.

Let's talk about Conifer now that you're keeping it as part of the entire system. You've done a fantastic job managing costs within that business. Can you just maybe talk about the top line opportunities? What are the pipeline opportunities that you're seeing out there? And is it more regional? Is it newer contracts within existing systems? What are you seeing on [indiscernible]?

So Conifer, I mean, there's a few things to -- just this background. I mean, the first thing is that Tenet is not the majority of the revenue in Conifer at this point. So the diversification is good. I think it's in the high 30% range. And as our core clients in many cases, [indiscernible] and Dartmouth and others continue to grow and develop their systems, there are opportunities for growth there for end-to-end service provision. The second bucket here is that there are many regional health systems that are facing pressures because of the current environment where the volume of disputes and denials from health plans has gone up. And that creates an opportunity in a few different areas for point solutions that we've developed that we've been taking to market, again, in the hospital revenue cycle space. We've seen some success with that with both regional and even some larger multistate providers. And then finally, I think it's sort of underappreciated that there are 2 other businesses in Conifer, physician revenue cycle business and a value-based care business, which does financial risk management services for large risk-based IPAs as well as population health work. And those businesses are seeing more demand for their services. And so we feel very good about the business opportunities there. I'm optimistic that as we reenter the marketplace post getting out of the spin process and COVID that we will be very competitive for deals in the hospital and physician rev cycle space. And obviously, pop health is a different market.

So then shifting to the ASC side of the business. Can you just talk about trends, whether it's in GI, ortho, just where are you seeing most of the growth and the opportunities on the ASC side?

So the ASC business is recovering very nicely. As we've talked about, we've already exceeded where the business was in 2019. I mean, that's a very important marker for us because the Hospital segment [ isn't there yet ]. The growth opportunities in musculoskeletal -- USPI is unquestionably the leader in musculoskeletal services, just given the strength of the platform and the diversity. The specialty surgery centers from the SCD transaction, which are more single specialty, complement many of the multi-specialty centers that USPI had. So our growth trajectory in that area, both revenue intensity and potential volume and market expansion, is terrific. We're big believers in the fact that this market expands. This is not a cannibalization event from hospitals on a one-to-one basis. When you have a setting that has that good outcomes with that higher service level, you expand the market. And so we're actually very optimistic based upon our study in the market that there's a tremendous amount of growth there. The lower acuity service lines have been slower to return in the ASC business. But actually, we're very pleased with the year-over-year growth in GI, ENT, ophthalmology and other areas. So again, we see nothing but -- as the lockdowns and kind of the COVID overhang goes away, we see nothing but growth opportunity in this segment.

Can you update us on SCD? And just what's the M&A environment like in the [ ASC side of ] business?

Yes. I mean, as I indicated, we continue to have an outstanding pipeline at USPI. USPI's ability to operate centers, having a track record of physician relationships, consistent track record over 20 years of positive physician relationships, which creates a reputation and our ability, together with Tenet, to deliver synergies into that environment make USPI the single most favorable partner from an acquisition standpoint. So the M&A market looks very good. Our pipeline looks very good. As we've indicated before, we're less worried about what the multiples are at the time of payment. We're more worried about our ability to deliver synergies and operating efficiencies that bring that multiple somewhere down around 6 or less on a post-synergy basis. And we think we're very uniquely positioned to do that.

You acquired SCD, obviously, at a very attractive multiple. Are you -- especially given the ortho focus, are there many opportunities on that front?

Yes, sure. Because you got -- again, this business -- it's a good question because it comes up a lot. Why were we able to acquire SCD at that attractive multiple? Because again, the remaining partners in the centers, the physicians are not necessarily just focused on what is the initial multiple that they may be receiving for the small portion of their equity that they sold. They're looking at it as a place that they practice over time. And if USPI combined with Tenet can deliver synergies into that environment, their earnings stream improves over time. And so again, it's a great example of why our ability to acquire centers and also do them at attractive multiples is very unique because the sellers are thinking long term, not a single transaction.

So let's shift to the hospital side. Just one thing because this is really important. We want to emphasize this. USPI is an incredibly important part of our platform. And we think at times, it's underappreciated in terms of the growth prospects it has and the substantial benefits it does bring to the table. The business has more than doubled over the past several years. We anticipate exiting next year with USPI alone, roughly 50% of our earnings platform. When you're adding Conifer, 60% of our EBITDA will be nonhospital EBITDA, which is largely insulated from the contract labor headwinds. Less than 10% of -- the contract labor cost of USPI and Conifer are less than 10% of what a typical acute care hospital has as far as our portfolio goes. So very little contract labor. The USPI's total labor spend is only $0.25 on the dollar, okay? So I mean, it's incredibly important. And as far as SCD, the most recent transaction, we expect roughly $140 million of EBITDA this year from the business growing to $275 million on a consolidated basis by years 3 to 4. And that does not include the additional earnings growth related to the 5-year development agreement we have with SCD, where we anticipate developing with SCD 50 or more centers. So that $275 million doesn't include any of that.

Let's actually talk about your hospitals. I think we all get the focus and the growth opportunities with the ASC business and Conifer. But I think there are a lot of client questions asking, does that mean hospitals are going to become just noncore and that there's more asset sales? Can you just maybe talk about your focus on the hospital side of the business? How important is it to the ASC system whereas it refers to price negotiations, billing, referrals, et cetera?

The Hospital segment is incredibly important to the platform because the combined platform is what generates the ability to have contracts of all sorts, managed care, supply chain, et cetera, that creates the kind of synergies that are available to the USPI segment. It's very important to understand that the contracts that are in place, as Dan mentioned, are national. So our ability to deliver -- develop even or deliver on ASC acquisitions are not limited to the markets that we're in. That's very important because you open up the whole country for ASC acquisitions or de novo development with those contracts. And that's very important, number one. Number two, the high-acuity strategy in the hospitals, given the growth that you see in 2 population segments, obviously, the over 65. But the thing that's underappreciated is the roughly 45- to 64-year-old population commercially insured with multiple chronic illnesses, right? So if you look at the prevalence and growing incidence of diabetes, obesity, hypertension, heart failure, that environment will continue to drive demand at least for a high-acuity strategy in the hospitals. So we're very optimistic that in the markets that we're participating in, we have a platform with which we can compete in that strategy. And we've worked on creating an operations platform that is designed to be efficient and effective for specialists to choose to want to come there because they can be more productive in our environment that's more efficient perhaps than competitors around us. There's a lot of runway left in that strategy.

Can you just maybe further elaborate on that strategy? It seems to me that what we saw in a Tenet hospital, say, 5, 6 years ago, obviously, there's a deeper focus on very high-acuity type procedures. What's changing as you start thinking about the management of these hospitals?

Yes. Well, I think 3 or 4 things. I mean, I think if you look back 5, 6 years ago, I think the hospital strategy was largely confusing, where you had a very heavy emergency department dependence. We still have a lot of emergency department care. But again, what we're doing is we're focused on capturing the high acuity that comes out of that. You had a population health-based type of strategy that had much more primary care orientation than we have today. And our approach to working in that environment is to ensure that we have affiliated with high-quality reputable specialists that can earn referrals and provide good value for those primary care doctors in that relationship. It's a very different type of approach. And then most importantly, the capital strategy is much more efficient because what the Medicare population needs and what this commercial population with multiple chronic illnesses needs is the same clinical technology. You get synergy in your technology investments, your CapEx that goes into the hospitals. And so all of our energy has gone into being excellent in the operating room, ICU, cath lab, IR lab and then obviously, the flow from the emergency department. And that's how we manage our acute care portfolio from high acuity on down.

There's -- we get a lot of questions, and you talked about the ASC M&A environment. But in general, with the current setup within the FTC, DOJ, what are your thoughts on just M&A in general as it relates to hospitals, ASCs? Are there any regulatory concerns or pushbacks [indiscernible]?

Well, let's be clear, the ASC industry is incredibly fragmented. I mean, we're still a tiny part of the industry, well less than 10%. I mean, it's incredibly fragmented. And so we don't think that, that's a risk at all on the ASC side at this point. And I think it will continue to be fragmented because there's so much de novo development going on, organic physician de novo development outside of any organized ASC company. Look, the acute care sector, we, like you, are following along what we're hearing from the potential shift in the regulatory space. And we'll obviously keep that in mind as we look forward. I would tell you that it's important to note that our hospital expansion strategy today is also different than it was many years ago. We're not out running around acquiring new markets. We're focused on extensions of high-performing markets with small focused surgical hospitals, sometimes 40 to 60, 70 beds up to 100 like we're building in South Carolina that are very focused on being physical plants that deliver our strategy, okay, because there's efficiency and whatnot that comes out of that. So the hospital expansion strategy is also very different. It's much more capital disciplined, frankly, than it used to be.

And as you think about your hospital expansion strategy, is there a focus to look beyond what you have today to further develop the Tenet ecosystem, whether it's behavioral or anything or rehab?

Yes. So we actually -- essentially, I mean, we don't spend a lot of time calling it out. I mean, we have both inpatient rehab and behavioral in our acute care hospitals. As you can imagine, we just bundle it all within our acute care hospital portfolio in the market. Both of those services are important to have in any market where you're looking to have any kind of a market or leadership position from that standpoint. If the question is, are we looking at further diversification into other segments in the ambulatory arena. And right now, the answer to that is no. We have so much runway with such an attractive platform on the ASC side that I think it would be dilutive to run around looking at 3, 4, 5 different other ambulatory platforms to go ahead and expand [ it today ].

Just on the ASC front, I know right now, surgeries are back to pre-pandemic levels. But as we think about this year, do you think that we're going to start to get to a point where we will see that mid- to high single-digit growth in the ASC volumes this year? Or is it still going to be another 1- to 2-year process?

Yes. Well, Owen is our CFO at USPI. So...

So I think we're really encouraged by the way that the last few months of the quarter ended up after the Omicron wave and see continued growth in the volume. So we hope to [ equip ] that 100% level. You noted the growth in some of the lower acuity cases has started to come back and particularly in the GI segment. So we expect that to continue as people start to continue to look for care after the COVID over the last few years.

And the growth in the GI segment, is that just surgeries that were set a year ago or 2 years ago, and those folks are [ going ] back? Or is it just more...

More screenings and just general routine GI that they may have pushed off or avoided for a couple of years.

Saum, I know you have a call, and so I was just wondering if you have any closing thoughts.

Well, again, I would close with exactly what I started with. We're optimistic about the business. We are on top of managing the best we can through a difficult environment in the acute care segment from a labor standpoint, in particular, in nursing and clinical techs. We think our track record over the last 6 quarters in doing that speaks for itself. We're not at all naive about the fact that we should learn from what's going on with all of our peers in the industry, and the effects are similar. It's important to note that the effects in the market are similar for everybody, right? But we're managing through it. But again, I think the most important thing to understand about Tenet Healthcare today and where we're headed, to Dan's point, is that half of the business with very, very strong free cash flows are insulated largely from this problem. And we continue to put capital into those areas because we see incredibly attractive opportunities to grow the Conifer business and obviously, most importantly, continue to expand that ASC platform given that we have the single most unique ability in the market to deliver synergies into that environment.

Well, thank you so much. Thank you.

Thank you.

Thank you.