Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

All right. Good morning, everyone. We're here on day 2 of the Global Healthcare Conference for Goldman Sachs. I'm Jamie Perse, our next session is with Tenet. I'm going to turn it over to Will briefly and then to Tom for opening remarks, and then we'll get going.

Thanks a lot, Jamie. Thanks for having us today. Just a quick comment. We're going to be making some forward-looking statements today. Obviously suggested you refer back to our cautionary statement, which was included in our most recent earnings release as well as related SEC filings for anything related to that. With that, I'll turn it over to Saum.

All right. Thank you. Jamie, first of all, for having us, and thank you for being here. I'll just make a few brief comments, and then we'll get into the Q&A. A few things about the business. I think probably the most important thing from my point of view is that we're at a stage in the recovery where we feel like a lot of the fundamentals that we would exercise in our operations and our operating model are working on a more predictable basis. It feels good to be in a place where we're not just talking about recovery, but we're talking about the next 2 or 3 quarters, but also the next 2 or 3 years and how we think about building back from the pandemic. The fundamentals of growth are strong. Now that we've had enough distance from looking at the numbers for the first quarter, we feel very good about the fact that we've added physicians on a net basis in the first quarter at USPI. That's good. That's the health of our physician practice partners, growing their practices and choosing to participate in our USPI centers. We feel good about the service line mix and the acuity that we're seeing at USPI. I think I talked a little bit about this in the past, but joint growth in double digits, healthy recovery of the GI business, which is so important to the portfolio and good diversification and success in our acquisitions, in particular, the urology platform, that we now participate in and some of our other initiatives, in particular, in bariatrics and robotics. So we see a very nice runway of fundamentals at USPI to move forward from. In addition, the work that we're doing in that business unit to improve our efficiency, improve operating utilization, improve our permanent staffing is very good. As you guys know, contract labor is really de minimis in that business unit. So we feel very good about where that business unit is going over time. In the hospital business, a lot of very good things happening as well. Volume strength in the first quarter and into April that I had mentioned before, we feel like many of the fundamentals there, are improving. ER volumes are up. Our physician practices are busier than we've seen in the past. Our net physician adds are significant in our employed specialty networks, we see elective business improving. We see commercial volume strength. So I think many of the things that are fundamental to again, the recovery of that business on the hospital and physician side that we have there feel good in terms of the investments we make. We have much better predictability than doing the pandemic about the returns that we'll generate. And again, as I said, we're starting to think longer term. And not to leave out Conifer, but Conifer grew third-party revenue very nicely. The margins continue to hold very nicely. And we see a big opportunity there with Medicaid redeterminations. Conifer has a very unique eligibility and enrollment platform that serves our third-party clients. That's both on the exchange side and on the Medicaid side. And that package as a point solution is beginning to enter the marketplace, it's timely, and it's a capability that we think health systems will need even if they don't choose to look at end-to-end revenue cycle outsourcing. We think this will be a nice product to add in the marketplace with the types of results we already get for our third-party clients. So again, I think a good environment to be in. And a good time to be looking to the future in health care services demand.

Well, we'll come back to a lot of what you touched on. I want to start just with the utilization environment. You've had a little bit more time to look at the first quarter and get a sense of what really happened, what drove the growth. What can you say about the sustainability of what you saw in the first quarter? And we heard yesterday from a peer of yours that there may have been some catch-up of procedures deferred in the fourth quarter into the first quarter? And what's your reaction to that?

Yes. As I indicated in my opening comments, I mean, the growth in the first quarter was multifactorial. So there's obviously going to be some rebound effect as we come out of the pandemic. We anticipated that happening last year, if you recall, right? And our assumptions for last year indicated in some ways that we thought that COVID would be removed from the environment. We haven't seen any material COVID spikes, and we've also seen an environment with improving labor liquidity and that's a good thing. And so when we look at the services that are growing and we look at the outpatient leading indicators, in particular the physician practices, which appear to be growing faster than they were a year ago, we know that predictably downstream, we will continue to see the benefit of that. Outpatient activity with the creation of inpatient demand, more on an elective basis. And that's a good thing. And so we feel like actually many of the fundamentals from a sustainability standpoint in particular, with our initiatives in high acuity care are paying off, and we're optimistic about that future going forward. At USPI, I think one of the more important things to realize is this is all elective business largely, right? So when we see volume strength there, these are choices that people are making to come in to get a variety of procedures. And so as we talked about in the first quarter, probably some of the GI work is a bit of rebound in deferred care, but the strength in all of the other service lines are very unlikely to be, right? Those are near-term conditions that are harder to defer. And for us, what we focus on is the efficiency of making operating room available and the growth of our physicians that participate in the USPI centers, which generally indicates that we'll continue to grow over time. And we're seeing both of those things improve at USPI.

Do you think we're back to a normal 1Q from a seasonality perspective? And from here, we should see just normal seasonal trends. And it's a follow-up to the same question. Just trying to get a sense of if there's anything unique about the first quarter that we should assume doesn't repeat going forward.

Jamie, one of the things that's really encouraging on -- particularly on the acute care side is we've seen 10 consecutive months of positive adjusted admissions growth since last August. So it's not like there was like a big spike in 1 or 2 months. Which would suggest there was this pent-up demand then it tapered off. That's not the case. So that's really -- we're optimistic about that, that we continue to see month-to-month positive adjusted admission growth in the hospital business.

Okay. You mentioned strength in April previously. Are you able to say anything about.

We're not getting to the monthly numbers. I would just tell you that we feel very good about where we are today.

Okay. Okay. One thing you brought up on your first quarter call was just some markets are behind other markets just in the way they've handled COVID. You have some markets that are certainly Texas and Florida probably open up much more quickly. What is the rest of the portfolio? And is there incremental opportunity in some of the markets that have lagged to kind of catch up?

Sure. I mean we have a pretty diverse portfolio from a market standpoint. It's probably a bit of a unique feature of ours in the hospital business. And for example, in this state, it was just on the end of April, I believe that the COVID restrictions were removed from the hospitals and the physician practices to try to get them busier. And so there's a lot of work going in retooling those operations without those precautions to start to ramp that up. And I think and even in this state, there's still some counties that have restrictions different from what the state did. So there are markets that are just slower to open back up than to your point, Texas and Florida. And I think that to the extent that those markets recovered earlier, we should see some tailwind in these markets that open up a little bit later, similar to what we saw in those that are earlier.

Let's stick with top line, but a couple of other components here for a minute. Mix has been a really strong benefit. Part of this is just where the market has gone. Some of this has been Tenet specific focus on acuity. Where are we from a mix perspective and an acuity perspective? And is there a pressure as incremental volumes come back that we get to a lower baseline for Acuity or are we at a sustainable level?

Well, we've had -- from an CMI, case mix index perspective, we measure of acuity. We've had a 3% CAGR growth since 2019, which is pretty strong historically in the industry to have that type of CMI growth. So it's obviously the focus on the higher complexity, higher acuity service lines is clearly paying dividends from our perspective. The mix has been strengthening. Commercial came back quicker, obviously, after the pandemic for obvious reasons. Medicare volumes are strengthening as the past year or so. So that's encouraging. We -- the lower acuity business, we've made some conscious decisions to limit capacity in certain cases based on the cost of temporary contract labor. As the contract labor rates have moderated. We've opened up some more capacity, which helps from a volume perspective. Listen, that lower acuity volume coming back will have a mathematical impact on net revenue per adjusted admission, as an example. But we feel really good about our revenue yield on our core service lines and where we are from a health plan contracting position. And so we would expect to continue to see acuity growth.

Okay. Bringing the payer mix element here. You mentioned Medicare coming back. Is that now growing consistently faster than commercial as there's catch-up and then also just on the redetermination side, what are you seeing in these early days of redeterminations in terms of impact on coverage in your markets and what's coming into your hospital?

Well, I would say Medicare volumes have been strengthening, whether it's fee-for-service or MA. But commercial volumes, as Saum mentioned a few minutes ago, have been solid. And again, when we think about -- we welcome additional Medicare volume. We have a very efficient platform. We can generate margins from that business. And so we more than welcome that volume continuing to strengthen. In terms of Medicaid redeterminations, it's early, it's premature to draw any specific long-term conclusions at this point. Several of our markets have begun the redetermination process. Arizona started in April; Florida started in May; And Texas started in June. I would tell you, we have not seen any noteworthy positive or negative trend. We have not seen any significant increase in our uninsured volumes. We haven't necessarily seen any significant increase in Medicaid pending where someone comes in. And we determined that they don't have Medicaid coverage and then we try to get them qualified for it. So we haven't seen any significant trends there. And we -- I know that CBO came out with a report recently about individuals who have doubled coverage. Medicaid coverage as well as commercial coverage, maybe through their employer, their partners employer. And we've been tracking that on a daily basis. And we really haven't seen any significant volumes of people coming in with double coverage at this point. The next 2 of our larger states that begin the redetermination process, it's California and Michigan. That will start in July. And so we obviously will continue to track and keep everyone updated. There was some information that CMS released recently in terms of the state process and are they going about it in the most appropriate manner. So we'll see. I mean it's early and -- but at this point, nothing significant either way. And that's how we assumed it. That's what we assumed in our guidance for this year.

Saum, you mentioned Conifer and the role that will play in navigating redetermination. Can you elaborate a little bit more on that? Does it present in a differential position?

Yes. One of the things that Conifer has long had is an eligibility enrollment service as part of the end-to-end offering really in the front end of the revenue cycle. And by working in particular across multiple entities in the states that we're in, we've really honed the ability to actually take and support enrollment efforts, both on the outpatient side and when patients come into the inpatient setting and appear to not have coverage, we have a very rapid eligibility determination process that prevents the leakage of that case moving out of the environment before determining if they're eligible for enrollment. So for hospital system clients, this can be very beneficial. It also obviously helps the physicians that are taking care of them to not have it be a situation where the patient may be uninsured for their own professional billing. But the client is typically the hospital. And what it allows them to do is identify eligibility during that hospital stay so that they're able to bill and collect for that. The Medicaid side of that just requires really understanding the Medicaid enrollment processes state by state, which we have a lot of expertise in given the Conifer client portfolio. The exchange side of it is more unique because you can support helping the patients to make the right choice for them on the exchanges. And as everybody knows, the mathematical thesis around redetermination sits kind of on the exchange enrollment for those that are disenrolled. So we think that, that portion of it -- the 2 combined with the exchange portion of it, which is pretty unique, will be very helpful.

Okay. Let's go to reimbursement rates. I mean everyone's getting a little bit better pricing on the commercial side. I guess there's 2 things I'm looking for here. First, are you still in the process of going through contract renegotiations. And so the momentum you're seeing in terms of rate should build throughout the year. And then second, how do we think about the next 3 years and the escalators that are embedded in contracts that have been renegotiated in this higher inflationary environment.

Yes. We're always going through contract renegotiations with the payers. I would say that we're very well contracted at this point, almost 100% contracted for 2023. Mid-80s for 2024 and even pretty substantially contracted for 2025. One thing that's important, more recent negotiations, the rates we've been able to negotiate a little bit stronger than historical levels. And when we think about going down the road, one thing that's important to keep in mind is when we negotiate contracts, typically long-term contracts, 3, maybe 4 years. And we, generally speaking, negotiate annual rate escalators, where you get X percent increase year 1, and then another X percent year 2 ,another increase year 3. It's not like we negotiated a onetime rate increase, and that rate stays the same for the entire 3-, 4-year period. So obviously, as the inflation comes down, that will be beneficial because we have built-in rate escalators negotiated with Health plans.

And those escalators sort of reflect this higher inflationary environment just to say it clearly.

I mean I just think, again, no plan is coming and saying, here's what CPI has been for the last 1.5 years, and therefore, this is what we're going to do. So I think as Dan put it, the rates are better than what we were getting in the past. But more important, you can't separate management of the rate in the contracts from the management of your largest cost line item that's subject to inflation which is labor. So we really take the 2 hand-in-hand and say, it's our responsibility to manage both in order to be in a position where we can provide some predictability about earnings growth. And if you look at -- this is why we've been so focused on being best-in-class on labor management because you can't offset all of it through rate. But the combination of the 2, especially as our SWB as a percent of net revenue has been very well managed through an inflationary environment through our initiatives in length of stay, productivity, contract labor reduction. The 2 of them put together, as I said in my opening comments, give us a better, more tangible sense that as we move the dials on the knobs, we have a better ability to predict than during the pandemic, what will happen from an earnings perspective.

Let's go to the labor environment. We'll start with contract labor. What are you seeing there just in terms of utilization? And you've mentioned now that rates are at these lower levels, it's not as burdensome to take on contract labor to support the volume growth. Just what are you seeing on the contract labor front and your utilization and rates?

We've continued to see moderation in the bill rates, and we're part of that in terms of negotiation. But we have continued to see some moderation. And we would anticipate that to continue as we move through the year. That's how we build our guidance under that assumption. Utilization, we've been able to reduce utilization in many cases. Our recruitment and retention efforts have helped to increase our full-time employed staffing, which certainly helps. We've been very clear that we do not anticipate our contract labor as a percentage of total SWMB to return to pre-pandemic levels, which before the pandemic, our contract labor was roughly 2% to 3% of SWMB. In the fourth quarter, it was a little bit north of 7%. We brought that down to 6% in the first quarter. And we would expect there to be continued moderation, but we won't be back to the 2% to 3% territory by the end of the year. And we've been very transparent. We don't -- at this point, we wouldn't think that even next year, we would get back to 2% to 3%. Obviously, we're working towards -- we're continuing to reduce it, but we're not assuming we get back to 2% to 3% in 2024 at this point. But very good progress. The team is really managing that labor spend very, very effectively.

That's helpful. On the full-time employment front, probably the more important piece long term. What's the right way to think about sustainable wage growth. We're all familiar, it's a very tight labor market. Does that just structurally mean we're in for higher wage growth over the next 2 to 3 years?

Well, I do think that, to your point, even around contract labor and the longer-term improvements are more likely to come from the reestablishment of a permanent workforce than they are productivity management and other things, right? The nature of the initiatives are very much changing to recruiting and retention and even thinking about alternative and new nursing models and extending some of the capabilities there from that standpoint. So the supply and demand environment for certain things, in particular, more high-end nursing, right? If you're in a high acuity strategy, you're going to have to have higher-end nursing, you can't just take a new grad and put them in that environment. You have to train them to get there or the -- in particular, OR or cath lab technicians or others. Yes, there are real shortages there. And I anticipate we'll see a little bit of inflationary pressure more than just this year. But as we've said, we're managing that pretty well. I mean if you really look at the labor inflation on a unit basis, it's been a percentage point, 1.5 percentage points, a little bit more than the usual, but not incredibly excessive. You have to create a good work environment, people want to stay in. And we can always be better at that, but we're working hard at it today.

Okay. Let's go to the ASC segment for a moment. Last year, you acknowledged you had pretty aggressive target. You were hitting them at some periods during the first half of the year. Third quarter was a little more challenged that you brought down guidance. Since then first quarter, you beat and took guidance back up to kind of where you were last year. How should we think about the long-term drivers, the long-term sustainability of the type of guidance you've got in place for this year for ASC?

And I appreciate you're asking the question that way. I mean the reality is the way to look at the USPI business is long term. That is the most important 2 words that you raised. Because last year, there was a bit of a choppy environment. We had made assumptions about no impact of COVID. Frankly, our guidance is 4% to 6% EBITDA growth. We hit 4.6%, like this should not have been as much drama as it was, except for the fact that we had higher expectations for last year. Obviously, we have high expectations now for this year, to your point, in terms of our raise. The environment feels more stable. As I indicated in my opening comments, many of the fundamentals that we look at are positive. We indicated in the fourth quarter, to Dan's point about multiple months of momentum, we indicated at the end of the fourth quarter last year, that we had added physicians on a net basis for the year. I think there was a concern that we hadn't, right? Which was some of that Q3 issue. And the fact is that we had -- and that gave us confidence to come out in '23 and say, regardless of the impression of that third quarter in '22, we're confident about this year. Now we've had a chance to look at Q1. We've added even more physicians to the environment at USPI over prior year in the first quarter. So we feel good about the fundamentals there. Long term, this business has a terrific tailwind. We have a great service mix, because of the margins we generate, we are the preferred partners for physicians, right? If physicians are interested in an operating model that will help them diversify their centers, do it at very high margins and have a USPI business development support to grow their center, that package works very well in terms of growth. And then from an M&A standpoint, the pipeline looks great, and we feel very good about the access to high-quality assets that we're at the table for looking forward. And again, we're very comfortable with the fact that on a multiyear basis, as we look at each year's vintage, those multiples are getting driven down on a post-acquisition basis below 5 and 6 pretty consistently. So we think there's a lot of runway for USPI. The way to look at the business is long term, its ability to generate free cash flow for Tenet as we grow it and allow us to pursue self-funded acquisitions, right? And allow us to pursue further deleveraging of the company is really a strength of our business going forward.

I think last year, I think it was the third quarter, you talked about a facility in like Tennessee or -- I'm forgetting the details where you replaced a lot of low acuity with orthopedic and so volume was down, but revenue was up, and I'm forgetting the numbers. But how much is that kind of pressuring -- how much of that is happening within the 3% to 4% where you're seeing really good mix shift, but it's not coming through on the volume piece.

Yes. As I said, we're still going to continue to do what we think is the right thing from a service line standpoint, regardless of the volumes. I indicated in the first quarter of this year, with a lot of our service lines growing, some of the low acuity work that we were looking at has been flat. So one thing about Q1 growth, it wasn't that we just invited a bunch of low acuity work back. We're still going to focus strategically on what we think is right for the business. But that area did not grow. And that's indicative of the fact that we're continuing to pursue what we think is right regarding those service lines. We're not going to stop doing that because it's the right thing for the health of the business, the growth of acuity, the margin profile, and in particular, the value we bring to the payers in the USPI platform.

I guess that brings me to something I've struggled with a little bit. I mean the revenue per case growth in this 2% to 3% range. Sort of looks like what rate growth is. And so it doesn't feel in those numbers like there's this acuity mix happening. So can you help tease out what's happening within revenue per case and how much is rate versus the focus on acuity?

Well, similar to my point earlier about the hospital net revenue per adjusted admission, being influenced and impacted as lower revenue yielding procedures grow. You have the same dynamics in the ASC side, where as certain procedures such as GI continue to strengthen further and recover further from the pandemic. That has an impact, mathematically on the net revenue per case metric. Just similar to the hospital net revenue per just admission. We feel very good about our contracting position with our ASCs and our focus on the higher acuity services in USPI, orthopedic, et cetera. So we're -- we feel good about our pricing yield as we look out over the next 2 to 3 years.

Well, I was just going to say, I mean, just to make it very tangible. I mean, sometimes the reimbursement for one of those lower acuity -- ASC appropriate, lower acuity procedures, GI or ophthalmology cases and it could be 10th or 15th of what a joint reimbursement would be, right? So the mathematics work out so that what we really look at is the growth rate of our high acuity business. So that's why we follow our joint cases, for example, which is a really important growth area for the future in ASCs and including things from HOPD that will move into the ASCs and double-digit growth in those areas. So we feel very good about the fundamentals from that standpoint.

Okay. Can you talk a little bit about where you are on the M&A side. This is obviously a big piece of the strategy, allocating disproportionate dollars to USPI M&A. You've announced a large acquisition like each of the last 3 years or so. Where are you in just in terms of the pipeline and what you're seeing on the M&A front?

Yes. The M&A pipeline is very strong. As I've indicated before, the benefit of USPI's connection to Tenet is that we have multiple avenues for growth, right? So there lots more as the economy and the health systems recover, we have the benefit of the leading brands, 50 health system partners that are also looking to expand and develop in their markets. So there's a pipeline that comes from that. There's obviously an M&A pipeline that comes directly from what we do with USPI. We've indicated importantly, we have well over 20 de novo projects that are in the works. So those are start-up facilities that are important. And then not surprisingly, many of the medical groups that are receiving private capital infusions in their own structure as they scale up, those are attractive groups to partner with. And of course, they look at USPI as a preferred partner to scale with because under our ownership and management, in particular connection to Tenet, the returns on those ASCs are better than any other ASC company can give. So as they're putting capital into 1 segment of the business, we partner with them to put capital into our segment of the business and grow. So the diversification of opportunities helps us have enough opportunity for high-quality assets. But look, we get inundated with stuff that's not quite high quality. And we're very disciplined about assessing and diligence those types of things and avoiding those that are not as high quality. And we pass on a lot of stuff, too.

On the de novo side, I mean, why couldn't 20 be 40 or 50? I mean we're all familiar with all the tailwinds of ASC momentum, all the volumes going to the ASC setting. When you look across your markets, is it that there's plenty of capacity in other markets. And so you have to wait for the market to catch up. I mean, any color on that.

Yes. So this is a matter of how you think about timing on de novos, right? So obviously, there are start-up de novos that you bring together the partnership, syndicate the asset and move. Many physicians like to do that on their own. And so you have start-up ASCs, oftentimes single specialty, and they'll bring it so far. And then they'll say, okay, now we want a partner who's going to get us more synergy, more growth opportunity, teach us how to make it multi-specialty from our single specialty and maybe even deploy capital with us to add 2 ORs or something like that. So there's kind of that for lack of a better description, 18- to 36-month window in start-up ASCs that we can acquire in before their full earnings potential. By the way, that's some of the basis of the second part of the SCD partnership as well. I mean that -- so we have opportunities in that time range. And then, of course, there are always going to be de novo centers that mature more fully that become available where it's simply a matter of synergy and there's senior physicians that may be leaving. One of the things about USPI's operating and management agreements is we have very good protocols for how to turn over equity when people leave to bring new people in and allow them to participate in the equity. And so we can help refresh partnerships at that stage. So as long as you can play along that time continuum effectively with a good value proposition, you can pick up things at different stages, even if every single center is not a USPI de novo.

Okay. Dan, probably for you here. margins, I mean, we're seeing some recovery in sort of the not-for-profit world after pressures last year. It seems to be like we're in an environment where it's conducive to a little bit of margin recapture from the pressures over the last couple of years. What's your sense of just the margin environment and specific to Tenet with the mix shift of the ASC business and slightly better reimbursement. Do you think you guys are in a position to improve margins over the next couple of years?

We do. We've obviously made significant improvement in our margins over the past 4 or 5 years through further efficiencies in our acute care portfolio from a cost perspective, labor management perspective, focus on higher acuity, higher revenue-yielding service lines. The growth in our USPI business. We got USPI margins approximately 35% to 40%, incredibly strong margins. We're going to continue to invest capital to grow the business. We think there continues to be margin improvement opportunities in the acute care hospital side. Conifer's margins have improved roughly 1,000 basis points over the past 3 or 4 years. And their margins continue to hold steady. So it's what we did. I mean, we continue to focus on strengthening our margins.

The one additional comment I'd make there is that we do believe in particular, with the premature mortality that we saw from COVID that would have sort of been actuarially spread over maybe a 5-year period that happened upfront. Is that population -- the age population, chronically ill within 5 years, again, of their own mortality repopulates that is a natural tailwind for the services sector. One of the reasons we focused our time during the pandemic on making our chassis more efficient is because, as Dan said, we welcome that Medicare population back into our environment because we can do it and generate a margin. And we're looking forward to seeing that repopulation. And that's a tailwind that we think will benefit from a margin perspective as much as a volume perspective.

Okay. Perfect. Well, with that, I think we're out of time. Thank you, Saum, Dan and Will .

Thank you.

Thank you.