Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok. I'm the Managed Care and Facilities analyst here at Barclays. And it's my pleasure to welcome Saum Sutaria, Sun Park and Will McDowell from Tenet Healthcare. Before we get started, [Indiscernible] has some opening remarks.

Sure. Good morning, everyone, during our conversation today we may be making some forward-looking statements. I would just suggest you refer back to the cautionary statement in our earnings materials -- in our most recent earnings materials in that context. And with that, I'll turn it over to Saum for some opening comments.

Good morning. Thank you for having us, Andrew, and your colleagues. A pleasure to be here, and I'll make a very few opening comments just so that you can get to all your questions. We had a very strong 2023. And importantly, beyond the performance, the portfolio transformation and the transformation of our balance sheet is going well. For those of you who recall and have followed the company for a long time, we articulated a set of goals 5 or 6 years ago that included repositioning the Hospital business to a higher acuity platform, dedicating capital to expanding and increasing the acuity and USPI platform, improving the performance of Conifer, both for its clients, its margins, its return on capital and the ability to introduce and leverage technology and automation, which has gone very well. We wanted to deleverage the company, which we did do over a number of years. And then finally, as we've talked about more recently, the opportunity to continue to execute our integrated strategy across the business units and yet at the same time to take advantage of the opportunity with very, very high-quality assets that we had built on the Hospital side where there were opportunities for transactions that value the asset in a way that furthered our goals around deleveraging the organization. And we found those opportunities working at it over the last 12 to 18 months. They happen to be culminating in transitions of assets that seem like they're all packed together, but this has been a long effort to have down this path the way we have. We're very optimistic about the future in terms of what can and should be achieved with the company's portfolio. And in particular, we're very comfortable with the portfolio of assets that we have today looking forward. So with that, Andrew, I'll happy to take questions.

Maybe to start, we can touch on the topic that's been on a lot of people's minds over the last couple of weeks Change Healthcare. How is Tenet affected by the disruption at Change Healthcare?

Yes. Thanks for the question. And first of all, let me just say, it's obviously quite disturbing that we have a cyber-attack on systems that really, in many ways, form a critical engine of liquidity in the health care system having been through this a couple of years ago. I can imagine what healthcare is going through in the state of confusion that can exist in this type of environment. And again, I would just say, first and foremost, it's very disturbing that this kind of thing can happen. For us, Change Healthcare is an important vendor to the company. We utilize it in some, but not all of our hospitals. And we do not utilize it at USPI or in our physician business, but in some of our hospitals. For us, importantly, the penetration of Change Healthcare's systems did not extend into Tenet systems, remember, because of Conifer, we have third-party clients in addition to Tenet, and it's important that it didn't penetrate. And secondarily, 2 of the most important functions within Change Healthcare's portfolio, the ability to produce clean claims and then the ability to transmit them electronically because Conifer is billing edits and proprietary processes are important to us, those systems for us were kept on premises rather than in the cloud, and so they were unaffected. So we've been able to produce clean claims in our environment. The difficulty has been frankly submitting them electronically from our standpoint. So we've not had any business operations interruption, it's financial operations, and we'll probably say more about that at the end of the quarter.

Understood. Switching to the demand environment at USPI, you delivered strong volumes in 2023 and guided to 1% to 3% case growth in 2024. How should we think about that outlook particularly in the context of the exception of 2023?

You should think of it as great growth and recovery post pandemic. I mean last year was tremendous in the first quarter. I think we grew at 3 times high end of our typical growth rate. And while that tempered a bit through the year, it was still well above our normally guided growth rates. And obviously, we had strength in the net revenue as well. So '23 was a terrific year. We anticipate growth in '24 as we've guided to. I said this before, I generally value being incredibly transparent about the fact that, if you look back over at least [Indiscernible] 15 or so years, every time USPI had an incredibly outsized year of growth, usually there would be some tempering of that in the coming year before returning to a normal flow. The way I look at this is over a 2-year period, if you look at it that way, it's still going to be about most likely a typical growth rate. So we're really pleased with the growth and development of the business. We're really pleased with the acuity. We had some deferred volumes that we saw last year in GI and ENT. But at the same time, as I indicated in prior comments, our higher acuity service lines, orthopedics and other things grew very rapidly. And as long as that higher acuity business continues to grow, I think we'll have a nice tailwind of, in particular, net revenue going into '24 regardless of the actual -- where the actual volumes settle out. So we feel very good about USPI for the 2024 year.

Great. Total joints has been a key driver of both volume and pricing strength at USPI over the last few years. How much runway do you think is left on total hips and knees, moving to the ASC setting? And how are the first few months of Medicare with shoulders and ankles done?

Yes. Obviously, for us, broadly speaking, bone and joint disease in the ASC setting is a really important strategic lever, both in terms of our inorganic priorities and in terms of our organic priorities, including what we're doing vis-a-vis physician recruiting. And as you point out, the growth rate on the largest space of procedures in the freestanding ambulatory setting are still growing rapidly, right? I'm still amazed that in a very short period of time, we've become the largest provider of outpatient orthopedic services, essentially as a single organization in the world, and yet it's still growing that rapidly. So I think that the hospital outpatient environment, which is now covering a lot of these surgeries, still has room to move into the freestanding setting as more and more surgeons become comfortable with practicing in that outpatient setting. I still would remind the audience that most orthopedics training in the U.S. still does not expose the residents to an ambulatory surgery setting during that 5 or 6 year period. And it's usually after they've graduated that they have that opportunity. Obviously, they're doing same-day work in a hospital setting. But that transition of comfort takes time, but it's also an opportunity for us. We have initiated about a year, a year and change ago, maybe a little bit longer now actually programs in upper extremities, shoulder, ankle, surgery that we're scaling up through the system. Some of that, of course, happens with your typical orthopedic surgeons that are multi-specialty, but we've also started picking a few pockets where we have centers of excellence dedicated surgeons to those areas in order to build the protocols to do that more quickly. Less about the surgery, Andrew, it's more about how you actually, especially with shoulders manage the recovery postop and get them out, and it does require good clinical protocols to do that effectively.

Acuity increase have also been a focused area at USPI. What are you doing deliberately to drive that higher? And what are the implications for volumes and unit revenue increases in that scenario?

Yes. I mean the #1 strategic priority, of course, is what we've talked about, which is in the orthopedic arena, right? And the revenue intensity there is because the surgeries are more complex, but they also have associated implants and implant costs, which increase the revenue. We've talked a little bit about other strategic initiatives. Our urology -- urology has historically been a 90-10 hospital ASP environment, at least for surgical work. United Urology ventures did support that in the other direction to see if we can move to a position of being 10-90 and build protocols to do that and scale that. We're very pleased with how that's going. That's high acuity work that is coming into the ASCs. Despite GLP drugs moving bariatrics into ASCs been a priority, you've pointed out shoulders and ankles from that perspective in terms of more complex surgery. And then we're starting to build more protocols in the cardiovascular arena. We do a fair amount of that work in devices today. But again, because of the high predominance of Medicare mix, I think that's going to be a more cautious growth area for us over time.

Got it. Moving on to the ASC development side. I think you're expecting to deploy close to $250 million in the Ambulatory segment this year, about 10 to 15 de novos to come online. How is the competitive environment for ASC assets and surgeon recruitment changed over the last 3 years? Any noticeable differences?

Yes. I mean, the ASC space is getting a lot of interest, not the least of which is because we've made such a significant commitment to it. And it is a followed -- that being said, our approached acquisitions and the discipline around them, we haven't really seen material changes in, for example, at pre-multiples, obviously we focus more on post-synergy multiples as being accretive to the company. But we haven't really seen much in the way of changes from that -- in that perspective. I think we have some advantages. Obviously, our scale, our service line development, our relationships with physicians who prompt other physicians come and join us and our ability to deliver the highest margin in the industry. I think all of those things attract good partners that we can grow with.

Great. In your first year as CFO, what are your early impressions of the business? And what additional value do you think you can bring to the organization? It seems like and it has picked up the pace of their hospital divestitures in recent months?

As Saum mentioned, it's been a transformation of the portfolio taken several years to get through. And it's left us, I think, Tenet in a real important inflection point. Listen, I mean, I think the transactions have significantly deleveraged the company, obviously. But we also from an organic cash flow generation standpoint, have also improved there as well. We had a very strong year last year. We expect similar performance this year and in other words, while continuing to invest in our business. So I think what I'm really struck by is the opportunity that lies before us with that. Our capital allocation strategy, Saum just mentioned, investing in USPI inorganically $250 million a year on average, investing in our hospital, high-acuity strategy, continuing to deleverage the company and then a balanced approach in share repurchases, those were is and will continue to be our capital allocation priorities. If you take a step back and say, well, how do you execute on those over the next month, over the next quarter, over the next year? I think there's a real opportunity there to [Indiscernible] that's really what all of us, me included, will be focused on.

You recently announced the 2 California hospitals and Adventist as part of the divestiture to characterize, I think the first 2 deals on NCI as opportunistic. Would you characterize this last -- latest transaction similarly?

Sure. I mean, I think as I've said from the beginning, we're very comfortable with and have been comfortable with the portfolio, and this is a high-quality market and opportunistic transaction that has multiple components to it. I mean, I think the multiples on the asset transaction were very healthy. The continued expansion of our Conifer footprint is very good. I mean that's a business that, generally speaking has higher margins than the acute care space, but also has better free cash flow yield, right? And so we feel very good about continuing to grow that business as well.

Sticking with the hospitals for a minute. There's been a lot of discussion around the Two-Midnight Rule as a potential tailwind for hospitals this year. What's been your experience to date here? And do you expect any benefit from this change in 2024?

Yes. We're not really assuming any significant benefit from the Two-Midnight Rule, because of our work in Conifer, we have been very active in the space around ensuring appropriate documentation and certainly ensuring appropriate coding and interactions with the plan around [speeds] and denials related to Two-Midnight and inpatient status. So of course, we've redoubled our efforts in those areas. I think this will largely lie in the hands of the plans with how they respond to guidance from the regulators in that area. .

Are there any changes in observation because you...

We haven't yet. But I think we'll probably have more answers 6 months from now. Look, if there are changes it's not going to be downside for the organization, it's going to be upside. And that's only a positive thing because many of these patients are adequately [Indiscernible]. .

Speaking of some other changes, there has been pretty large shift in payer mix over the last year between Medicaid redeterminations and the overall growth on the exchanges. How do you think this impacts your hospital business over the next 18, 24 months?

Yes, I'll start and then if you want to add to that. I mean, I think that, again, we've said that from our perspective, Medicaid redetermination are probably largely neutral in the sense that you have from exchange growth and probably some growth in the uninsured. I think if you look at the utilization recovery that's occurring probably on balance, it's adding a little bit more than being controlled at this point, the exchanges, but we're following it very carefully. We obviously spend a significant amount of time with our eligibility and enrollment services in Conifer, in our markets and our clients' markets, helping people get enrolled where appropriate into exchanges or reenroll into Medicaid in order to ensure coverage. So we think we're doing everything we can to ensure that people have adequate coverage, and obviously, from a downstream perspective hospitals will benefit from that.

And maybe little more shorter [Indiscernible] we're really pleased with our overall position with our network and exchanges. And then Saum said, Medicaid redetermination there's positives and negative dynamics of it, also from a guidance perspective, [Indiscernible] one way or the other. But we'll continue to monitor very closely.

Great. Moving on to the labor environment, how would you characterize the cost picture related to professional fees and physician subsidies? Has that been tracking in line with expectations? Would you say that situation will stabilize at this point?

I don't think it was ever unstable for us, first of all, I think we did spend a lot of time beginning in 2021 initiating a review of all of our physicians [Indiscernible] contracts. And putting in place some longer-term agreements, put together multiple service lines in order to reduce the need for subsidies and also bringing some contractual terms that would allow us to mitigate the need for subsidies as the pandemic recovery occurred. In other words, volume improved and that, of course, improves revenue for the people that are engaged in that activity and that should reduce the need for subsidy inflow. I think for us, I personally still consider what we've guided to in 8% to 10% increase in cost this year to be a very significant number. But that being said, it's in our guidance, and we've managed it over the last couple of years. But the physician service market has been a bit turbulent and for a lot of reasons. And I don't think that -- I think it's manageable, but I think it's still in the environment. I think the nursing labor side in particular -- look, I'm a big believer that our strategy is the right strategy, which was to as rapidly as possible, bring down the cost of very, very high contract labor at first through appropriate capacity constraints, which helped us reposition our services and our hospitals supports higher acuity things, structural change that we wanted to make anyway. And then through 2023, utilizing our nursing school relationships with pandemic to really ramp up our hiring -- and the 2 of those allowed us to bring down contract labor very rapidly. And I still think that was the right decision as opposed to maintaining high levels of contract labor. Now we have I think, a better problem to solve, which is as utilization recovers, how do we strategically add capacity back online where we want to, that takes a little bit of contract labor to do as you smooth out the workforce. I think we're okay with that.

How would you share that marginal cost of labor versus the existing labor?

It's still high. You mean contract labor price...

Yes. Marginal cost of labor for the...

We're not at pandemic peaks, obviously, but it's still high relative to pre-pandemic.

Understood. Speaking of cost reduction efforts, I think a lot of hospitals in terms of testing out deploy artificial intelligence, obviously does Tenet see sort of generative AI present for the company. Do you have any interesting use cases in business?

Yes. So we've -- it's interesting because we've talked over the last 5 years about one of the strategic underpinnings from a capability standpoint that we have been engaged in, in the company to build a very robust analytics space. We've talked about it again and we're going to get -- some of that has utilized AI for years, GenAI being a little bit different, and I'll come to that in a second. But the ability to use artificial intelligence to make predictive -- better predictive changes around what we do has helped to manage our labor. It's helped us manage supply variability. Frankly, it's probably most active in helping us manage our payments arena in Conifer because we ingest lots of data from different systems from different states and we understand patterns before they become evident, and we use that to improve our documentation and coding and various other things. So I would say that in the business operations on the cost management side, I would say in the revenue cycle operations, we see a lot of potential there. We put good governance [Indiscernible] company and with the Board. And we have not really utilized any platforms yet that are directly [patient facing] from that standpoint. Probably the initial areas what we're looking at in particular, GenAI has to do with our employed position business and supporting them in their documentation in particular all of the administrative burden more efficient, giving them more time to see patients. That probably is where I would say our first real foray into something that touches clinical is going to be. But we're cautious about broad-based deployment, direct patient touch at this point with GenAI.

Great. Maybe shifting back to the capital deployment here in the last minute or so. I think a few years ago, you laid out a long-term target to get to 575 to 600 facilities by 2025. How would you frame that target now?

Well, we're still on target. We're of course -- our focus is quality assets and scaling in quality assets. We're very disciplined about and still moving -- still moving in the direction. But we're not going to chase a set of assets just to hit a target from that standpoint. Our real objective in making that estimate was to outline that we believe that the business would reach a position where the EBITDA generation between USPI and our Hospital and associated services business [Indiscernible] Conifer would get to about 50-50, and we're kind of getting to, right? And that's a really important -- really important metric for us. From there, as we look forward over the next 5 years to start to set some new goals about what we can do, in particular, in growth in the ambulatory business looking for.

Great. Well, we're just about out of time. Saum, why don't we wrap it there. Thank you, everyone, for joining and please enjoy the rest of the conference.

Thank you very much.