Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

All right. I think we're ready to get going on the next presentation. We're very pleased to have Tenet Healthcare with us. We have from the company Saum Sutaria, Chairman and CEO; Sun Park, EVP and Chief Financial Officer; and Will McDowell, Head of Investor Relations. We're going to do a little bit of Q&A, but I think we'll want to make a couple of comments to start off.

Good morning, everyone. Thanks for joining us today. Just in the course of our conversation today, we may make some forward-looking statements. I would suggest in the context of those statements that you review our cautionary statement, which is included in our most recent earnings release and SEC filings. Thank you, A.J. I'll turn it back over.

No, that's great. Well, thank you guys for coming. And it's been quite a year. We're 11 months into it now, just maybe to kick off and level set for everyone. What are some of the positives you would have us take away from the year? And where, if any, there have been challenges?

Thanks. it has been quite a year. It feels like some of the transactions that we executed at the beginning of the year were years ago at this point, given how much has happened. But this has been a big year of for Tenet Healthcare in total and for our business units with the culmination of many of our multiyear efforts and strategies coming together. I feel like the core operations agenda and our shift in the operating model that we've been making over the last 5, 6 years has really padded well in the company so that we can rely on that especially our data-driven culture in terms of how we're running the operations in order to make better, faster decisions in the operations. The acuity strategy that we've been after for a long time is playing out nicely. We've been able to add capacity this year, given all of our efforts over the prior 2 or 3 years in bringing contract labor down and doing it as a reasonable expense. That's allowed us to expand margins in the core business in both of our key business units. Obviously, long term, one of the critical objectives for Tenet Healthcare was to delever the company. We were able to execute on the basis of transacting markets that we spent 5 or 6 years improving transactions at attractive enough multiples and yields on a post-tax basis to allow us to deleverage the company significantly and bring a degree of stability to our future and ability to invest. Our Ambulatory Surgery business has grown tremendously. We've executed on and recovered from a number of things that we had going on in our transactions from a couple of years ago, added to that another platform that's performing ahead of our expectations and continued our normal course M&A and operations agenda. And as I said, in a business that performs incredibly well have expanded significantly even on those margins. And then finally, Conifer has a number of growth opportunities in front of it, not the least of which are resulting from longer term and expansion opportunities post our transactions, which is a terrific validation of the results that Conifer can generate within our system and others that people have seen. So we're very optimistic looking forward. I mean we're in a good utilization environment, A.J. But even in a tough environment from an operational perspective, we've developed a lot of confidence in what we can do from '22 and '23. And so we're very optimistic about the future.

That's great. Well, one of the story lines, this year has certainly been the volumes and the strength of volumes. And I know there's been some expectation, we might even see some tapering off in the back half of the year, but that doesn't seem to have materialized. Certainly, there's a return of seniors to the health care system, maybe lessen the impact of the early mortality that caused by COVID. What are some of the factors you think are driving the fact that we've seen strong volumes? And you guys seem somewhat optimistic that we'll see that continue into next year?

Yes, I think that's right. I mean our long-term thesis on this, I've repeated a long time going back to 2021 time frame that with all of the early excess mortality it would create a demand hole that would be filled, and that may have been the simplest way to look at what the impact of COVID mortality would be. And generally speaking, when you have a lot of expenditures in the last 5 years of life, you would imagine that, that demand hole would fill actuarially over a 5-year period. And we're kind of in that process. And I mean, simple math would indicate that, that should continue into 2025. I think the business units behave differently. The Ambulatory Surgical business unit, a lot of that pent-up demand, I think, came back pretty quickly. And what's driving the growth there is our Acuity strategy, but also some of the expansion of indications, in particular, in GI and other things that we've seen. The Acute Care business slower to recover, of course, and we've been much, much more careful in our strategy of what we want to recover from that standpoint. Again, along the lines of our high acuity strategy. But that demand has been strong. It continues to be strong. It has strengthened through the year. Coverage because of employment remains strong. Medicare utilization recovering access programs due to funding for Medicaid have increased the people's ability who participate in that market to expand capacity, to allow that access to flow better into the health care system. So when you put all that together, it is a favorable demand environment right now.

Okay. Okay. You had on the third quarter conference call, a number of things you called out that we should consider normalizing as we think about the leaping off point in '25, I think there was $113 million of reported EBITDA that won't be there next year because of divestitures, amount of program payments for Michigan and Texas or out-of-period payments and all. Anything else we should take into account as we think about jumping off point? Or how should we think about the move from '24 to '25?

Yes, I would say those are kind of the technical adjustments that we would make on a '24 baseline, just by virtue of timing and divestitures. And then obviously, there are lots of puts and takes that inherent in our various businesses that obviously, we're still in the planning process to kind of add those all up, and we'll provide more details when we give guidance. But maybe I'll just separate kind of those technical pieces versus the business operational puts and takes that we'll go through.

Okay. And do you think when it's all said and done, you'd be looking at some level of growth from '25 -- '24 to '25?

Yes. In our prior earnings call, we said we will be more than offset those technical agreements strong demand environment, pricing, operational discipline. We talked about some supplemental potential payment growth as well as some strategic activity in our hospitals in USPI. So I think with all those our current view is that we should be able to do that.

Okay. And. Go ahead.

Yes. The only thing I would add to that, A.J., is from our point of view, when we look at it, including for '25 and even where we are now, look, our objectives when we think about this long term, are clear, right? We've -- in total, Tenet Healthcare is now a very attractive total margin business, right? The margins have improved tremendously. The leverage has improved tremendously. And obviously, the growth rates at which we want to operate should improve. I mean -- and so when we put that picture together, our purpose is to make sure that the community understands this is a highly investable business over the long term, not only because of the business units that we're in and the tailwinds that exist in some of them, but also just the fundamentals as we look forward. And I think that's -- that's what our '25 commentary was built upon is that optimism about where we're headed.

And it sounds like, as Sun mentioned it again today, the incremental -- you might -- you think there may be some incremental supplemental payment opportunities. What specifically are things you call out anything you call out there that you're watching carefully?

I'll say in general, the supplement payments have been very durable, very meaningful, as Saum said, about creating access. So I think long-term environment for these are very positive still. Our commentary until next year, again, there are a lot of details to work through, but I'll give like Tennessee as an example, the new program that they're contemplating in Tennessee. I think we're all well aware of it and monitoring it, and that's something that we are putting into our calculus. Now we'll see by the time we give guidance with the final activity or the decision either happens or not, and we'll get off of that.

I was hoping you would tell us that it's already happened having today, but

That's something you told.

Exactly. And you called out continued efficiencies on the cost management side. What would be -- is there a way you can crystallize that so we can picture where there's still some opportunities there?

I mean operationally, from our standpoint, obviously, contract labor being a big extraordinary expense through COVID has come down quickly and nicely, and we've sustained that. I've probably commented a few times that I had a little bit of concern that contract labor would go up as we added back capacity to accommodate volume this year. That hasn't happened so much because our -- we've been able to scale up our nurse hiring through our nursing school relationships, but also not just new grads, but beyond that. So that's actually been managed pretty well from my standpoint. Labor efficiencies, obviously, in terms of our staffing, are always an important opportunity. Length of stay management is always an important opportunity. We're still in the process of -- it's an ongoing process for us now, constant renewal and renegotiation of our entire purchase services book, which we now have more or less full control of, especially on preference items and other things as we begin to consolidate share is pretty important to us. And then there are efficiency opportunities efficiency and yield opportunities that continue to present themselves, which do impact earnings from our work in the revenue cycle.

Yes. You mentioned some of the work you're doing on the labor front with nursing schools and so forth. Your biggest peer actually went out and bought one of those. I've heard discussion about that there could be other of those opportunities out there to purchase. Would you guys ever consider something like that? Or how is the relationship with nursing schools evolving? Do you see more interest on their part?

Yes. Look, I mean, I think there are multiple strategies that can be effective in aligning with nursing schools. From our standpoint, we have found great success in being engaged in our communities one by one in supporting the nursing schools, especially because many of the graduates stay local. I think people forget though the scale is different. We actually have a nursing school of our own in San Antonio that has the ability to do a lot of virtual education as well. There's a decision point there about how much and how actively to scale that up versus what we have today, which is the core of what they do today, which is really more on a local in-person basis. So I mean I think for us, the #1 driver of the decision-making is our operational need. We're not looking to get into the nursing school business, so to speak. But we have various abilities to actually scale up there if we want to.

Okay. Okay. I didn't know where we would be when we set the conference up and knowing the political landscape, but I guess we know pretty well what it looks like for next year. Obviously, there's a lot of details on policy to be worked out with. But maybe any quick takeaways that you have where you would focus? I mean, people ask about Medicaid. They asked about public exchange, Medicare, a number of things. Any high-level comment, and then I want to ask you about a couple of specific areas.

Sure. Well, I mean, I think it's good for all of us that we have the stability of knowing what the result is rather than sitting here today, still wondering what the results may be and any ensuing chaos from that perspective in the impact on the economy that we would have. Look, we're -- I mean, in the end, the market seems to have spoken that there is a belief that this demand environment, the earnings potential of at least our business and where this may head, has a degree of stability associated with it and some trust. I'm taking away is trust and obviously, responsibility that comes with that to manage the business through this environment. We can get into individual issues as you want. But that's my takeaway.

I think the main question we get is around the public exchange. And that has been a tailwind in the last couple of years for the industry, particularly once the enhanced subsidies have got in, it's been a tailwind for the managed care guys. It's a little harder to know how much of those incremental volume was young health, these that aren't showing up in the hospital anyway. But as you guys have looked at it and maybe you'll be drilling down more, what -- what do you think about the potential for those enhanced subsidies to go away at the end of '25. And would that -- does that create a meaningful headwind, not so meaningful? How do you think about that?

Yes. Well, a couple of things. Let's just talk about the policy first and then we can get into a little bit of our business. So first of all, I think from a policy standpoint, this has been the most meaningful individual topic that has come up through the election. And obviously, because it requires an active legislation to deal with it. It is -- it rises in importance relative to something that could simply be regulated by the administration. Look, the summary that I would give at this point about the exchanges is that the exchanges have grown, I mean we're talking about 22 million -- 21 million, 22 million people who rely on their coverage from these exchanges. Now remember, the individual mandate was struck down. There was a concern that you'd have to force people into the "exchanges" with the mandate. And the individual mandate being struck down. The market has spoken. And has grown the exchanges. Now obviously, the subsidies have helped drive some of that. But I do think that you have a material amount of people covered. You look at the population and the exchanges. I mean, I go look, Texas, Florida, Georgia and the 2 Carolinas is 50% of the enrollment in the exchanges. And more importantly, together, they're almost 50% of the growth we've seen since the extension of the subsidies and Medicaid redetermination. And if you start to penetrate and dig into that, you find all kinds of interesting things. There were about 1.4 million members at the inception of the exchanges that were small business entrepreneur employed individuals. That number has more than tripled to be close to a 1/5th or more of the people on the exchanges, right? These are, again, hard-working citizens and one will go through, and I'm sure various stakeholders will go through and understand their voting patterns. But if you start to look at who these people are and the states they're in, this is an important part of the electorate for the administration and many of the people in Congress that just won. And so I think there's going to be naturally a thought process here. And people chatter a lot about, well, there'll be this trade or that trade for tax policy, this side of the other thing. But I think fundamentally, the importance of this coverage mechanism for people at those levels of federal poverty has established itself without an individual mandate in a pretty important way. So look, we expect to engage constructively in this discussion about the about the importance of the exchanges in the coverage environment.

So is the way to think about it, that there's just too many moving parts at this point to try to estimate what the impact would be on a tenant or on the hospital industry generally, if those enhanced subsidies would go away? Or is there any way to give a guesstimate?

Well, we can talk a little bit about how much of our revenue it is. But I mean let's be clear, like this is an important issue because if they go away, it's not helpful if the economics business, right? But we can maybe bound it a bit.

Yes. I mean just rough to, I think we've been -- we've stated this before, from [Technical Difficulty] a 60% year-over-year whether we look at current Q3 or Q2, and it's been, as Saum said, a super meaningful driver of growth here. And then on a revenue basis, it's about 6.5%, the exchange population, 6.5% of our total tenant revenues, so including our other business lines. And just to give a comparator, a little bit longer term, back in 2019, it was about 4%. Now our revenue shape and what's in and what's out is different, but just to give you a little sense of where it was and where it is today. So it is indeed a meaningful part. Now to your question, how do you project it out if the subsidies go away. I mean the -- there are a lot of moving pieces about, well, what does each person do, right, as an alternative and we can come up with a lot of different scenarios, right?

The only other piece of color I would add to that is that having the diversification of USPI where the exposure to the exchanges is lower than the hospital segment is an important point of diversification. I mean it's yet another reason why the diversification is a helpful piece of our business. .

Right, right. One -- and this is a technical question, and it just has come up earlier. If you have contracts with plans on the exchanges. People are signing up for silver plans, bronze plans. Is your rate that you get paid, whether they're silver or bronze, because there's one discussion point that says a lot of people to try to hold on to coverage may trade down to bronze from silver, if that makes sense and not just give up the coverage. My understanding is you probably still get paid about the same regardless of what metal here, you're sort of oblivious to that. It's maybe a network dynamic, but not a rate dynamic. Is that the right way to think about it?

Yes. I think the moving pieces and parts are more relevant in terms of which products occupy those attractive tiers. So what happens in the exchanges tends to be what you would expect rationally, which is it's hard to differentiate the products. People tend to buy among the cheaper silver plans, the subsidies and a lot of the math around the pricing and the benefits is based off of those plans. And so the population migrates to those plans. Now from a plan perspective, we don't run plans. But at the simplest level, my view of it is, there's a lot of strategy in determining how you want to price your brands for how much volume you want to get. And some of that strategy is based upon the rates that you may have with providers that have been negotiated. You're right. Our rates vary little V-A-R-Y vary a little based upon metal a metallic tier, but they vary based upon the plans that we may be contracted with and obviously, between broad open versus narrow networks, right? And so, it is very possible as the downstream recipient who is taking care of these patients, that if the membership moves to different products, we may end up with more or less covered lives in our network. We also may end up with more or less in pricing based upon how we're priced in those networks.

Okay. Okay. Interesting. The other topic, and this is even probably more open-ended is this issue of tariffs on the supply chain and whether that would have any impact. Commodity supplies, some large equipment. I know gets sourced out of Europe, Siemens, people like that. Any thought on the ability to respond to that or whether that would even be an issue? And any sense of how much you source from a non-U.S.

Yes. I mean to answer that question specifically on the last question, we have not looked at that carefully. We haven't revealed it, obviously, but we haven't even looked at it carefully. Look, on the tariff question, I'm going to back myself out entirely from some depth in the exchanges and just say, I don't honestly have a good interpretation of what they plan on doing and what the interpretation or impact on our business would be at this point. So I'd probably just punt that one.

Yes. That's fine. I think it's sort of an open-ended question and may never even be something we have to answer, but people might get asked about it. So let's talk about USPI for a little bit. Hip and knee replacements moved from inpatient only a couple of years back, most recently, ankle and shoulder replacements also moved to the list eligible for ASCs. How far along in the transition do you think we are with some of these products? And how much more of a tailwind might there be as we look out?

Yes. Well, I mean, a few things there. First of all, I think, as I've said, this is not a cannibalization event. The market is expanding. And that's important to understand. Any time you get into this kind of lower cost, better service setting the market expands. There's obviously some business that comes out of hospitals. From a hospital outpatient-based department standpoint, I think we're 1/3 to halfway in terms of what's moved. I also don't think all of it's going to move just because of comorbidities and other things that require an acute care hospital. I think that, as I've said before, one of the gating factors is just getting younger surgeons comfortable in an ASC environment. Most of them don't ever get trained or most of them during their training don't get any exposure to an ASC. And I think as people gain comfort there, that will grow in terms of the opportunity there. We're still growing almost 20% year-over-year. And I mean we're the biggest in this space, and we're still growing at that rate multiple years in a row. So we feel very good about the ability to expand and continue to build this. And look, hips and knees are obviously the biggest driver of high acuity orthopedic volume. I mean they dwarf the ankles and the shoulders piece. But those are important growth vectors for us this year, too.

Okay. And as you think about the development pipeline, I know you had mentioned at one point that the large acquisition from the first quarter was weighted to a relatively lower acuity specialties. Is the specialty mix trend up over time, gave us a little bit of flavor? Is that just specific to that deal or do a lot of the de novo start out with a lower acuity specialty mix that you can then move up over time?

Yes. So a few different things there, A.J. I mean, one, in the acquisition or the set of assets that we acquired at the end of the first quarter, there was a heavier GI and other things as part of that. Actually, interestingly, one of the things, of course, we bring to the table is our business development and service line resources. So adding other higher-acuity service lines to those centers is one of the reasons that I think we had interest from those physicians. So that work has begun. Remember, we still acquire and deploy significant capital, a goal of $250 million a year in addition to that and that is much more focused on higher acuity type of assets, including our de novos have a much more -- a much stronger bias towards orthopedic centers and other things. So obviously, that will continue to build and expand our opportunities there. And then finally, on your question of specifically when you open de novos. If they're orthopedic focused de novos, you start with -- you tend to start with the mix you're going to end up with, right? It's more of the volume that ramps as they open up in different physicians come in and you get the operation going. But you do tend to start with the same mix, similar mix, what you're going to have.

And with the strength in improvement in the balance sheet leverage, I've been asked about this notion that maybe you could accelerate the pace of adding particularly the USPI. Any thoughts on that? Are there deals out there? Would you look at a bigger deal? That's also been a question we've been asked about.

Sure. I mean, look, in the Ambulatory Surgery space, we follow the entire market all the time. And if you really look at our history over the last 5 or 6 years, we've obviously deployed on average more than twice what we say we're going to deploy because of the larger transactions. So I would just kind of let our actions speak for what we might be willing to do. Our discipline with respect to our diligence processes, the assets that we want to bring into USPI, our ability to deliver synergies, our belief in the partnership being a high-quality set of physicians won't change. And so as I've said before, we see a lot more things than we actually agreed to do because of that.

Okay. Maybe just a couple of questions on the hospital portfolio. Obviously, you've gone from 61% a year or so ago down to 49% in the portfolio. How is that affected the portfolio. I know you tend to contract on a national basis with payers. Is there -- are you stronger because you have the ones you've gotten rid of or the -- or less so? Are you -- when you think about the metrics and growth and revenue per adjusted admission and underlying growth, is that enough to move the needle on how you think about your ability to get those metrics to your targets?

Yes. Well, the number one thing I would note is that the ability to contract is based upon the attractiveness of the assets, the desire of largely speaking, employees covered by commercial insurance in those markets, who demand that these assets are in network with the plans that they're doing and the uniqueness of the services and programs that we put into place, right? So I'll address the divestiture question in a second. But if you look at the portfolio that we have retained, those 3 aspects are strongest in the portfolio that we've retained. Now in addition to that, we are making investments in growing commercial markets attached to these areas, right? So suburbs of Charlotte, the west side of San Antonio, the west side of Phoenix, the northern side of Palm Beach County, et cetera, with very focused assets that are attractive, where the commercial insurers want high-quality assets for members that they're trying to attract based upon the growth and employment in those markets. So, the fundamentals of what drives our ability to contract and combine the fact that we have the ability to bring a lower cost platform that's approaching $8 billion in revenue to the table that pulls cost out of hospitals nationally is a very attractive portfolio, the divestitures. So if you look at the balance of the divestitures, many of them had a pretty heavy government mix, right? Or less growth because they were in very, very expensive geographically or land locked, land-constrained environments. The coast of California, Hilton Head Island, et cetera. And so for us to have continued to develop and grow in those markets, it was a different business model that would do that, which wasn't really our business model. I think others have a better business model suited for that. So that's how we've thought about it.

One thing we've gotten questions on, again, relative to the election is, obviously, it's been a pretty tough regulatory environment antitrust wise under the current FTC and there's talk that that may ease up. Do you think we'll see either from your potential to take on deals or from potential for further divestitures an uptick because of a less onerous antitrust environment?

Well, I think largely speaking, the FTC and the antitrust environment will probably change and be more favorable for business in the coming 4 years, right? And I don't know how to interpret, obviously, some of what's happened in this selection there's a degree of populism that also is relevant to anticompetitive agendas that may exist in other in other industries. Look, I don't think in our industry and the degree of fragmentation that we see in our environment that this really affects the USPI side. I mean, remember, the market for USPI services is not ambulatory surgery centers, it's ambulatory surgery centers plus all of the hospitals. And in many cases, the doctor's offices, that -- it's an incredibly expansive market. So while we're a small fraction of ASCs, we're in a much smaller fraction of medical loss ratio, if you want to look at it that way in terms of where the expenditures go. I think you're right. On the acute care side, on the margin, there are probably opportunities that would get less scrutiny going forward.

Okay. I should ask you about the rate update. We had the outpatient ASC final rule come out since you guys reported earnings update of 2.9%. Anything in there a 30 basis point improvement from the proposal. Anything you'd call out there? Or how would you view that?

I mean, I'll start by saying before passing to you, there's not a year. I haven't complained about the rate update. So I'll be consistent about that. I'll complain about the rate update. I don't really offset the inflation that we've seen, but -- and he did.

And I would say the final rates are kind of within our expectations. So nothing notable there. .

Okay. Yes. I do want to come back to your capital position. You're sitting on over $4 billion in cash with the most recent divestitures, leverage is now below 3x, even on a less NCI basis. your next debt maturity several years out, which -- how should we think about priorities? I know you've got the commitment on the ASC business, the $250 million. But how do you think about other things, buybacks, dividends, other opportunities for capital?

Yes, it was nice to see the $4 billion handle on our 10-Q statement. But as we've kind of shared, we have a pretty big Q4 in terms of tax payments, both from our deal activity, gains on those as well as ordinary course of income. So there's some outflows. That's kind of short-term stuff. On a longer-term piece, I think our message is pretty consistent. USPI investments and then also investments to our hospital high-acuity strategy. And then we have a pretty balanced approach to share repurchases as well as not just deleveraging but also actual debt pay down. We did a big $2.1 billion debt pay down this year as well, just as a reminder. And in terms of share repurchases, we've actually been fairly aggressive year-over-year. So if you take this year and to returning value to our shareholders, especially given the multiples that we are seeing, and we feel we're significantly undervalued. So I think as a general philosophy that will continue going forward. Now on a little more tactical basis, you mentioned our next debt expiry of 2027. We'll see in 2025, the interest rate environment, we'll kind of see how for all the topics that we just talked about today, how it develops in the first half of the year. And I do believe at some point, actual debt down will be part of what we work hard on, the timing and how and the tactics of that, I think, is still TBD.

Do you have high cost -- any high-cost debt that would be a potential? I don't remember that there's anything unusual out there. When you start talking about to pay down debt early?

I mean we have a range of kind of between 4% to 6%. But in the -- they're all fixed rate and then in the context of kind of our overall capital structure. I mean, I think they're all pretty manageable. So I think we can be more disciplined about how we chop those down.

Right, right. And I do get asked from time to time about the dividend. Is that -- how do you think about that philosophically?

I mean, philosophically, I look at it and say, given the multiples that we trade at still today, and the opportunity to grow into that it's more capital efficient for us to be looking at share buyback.

Okay. Okay. Well, I think we're winding down on time. So I'm going to -- I probably cut it off there. I think you're probably our best-performing stock across the universe year-to-date. So I'll give you congratulations on that. You can wind down and look forward to hear in further updates. So next up in this room, just let me make sure I give people the next up. But it -- it's Charles River Labs, and I appreciate Tenet participating in our conference again.

Thank you for having us.

Thank you appreciate it.