Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

Hello, everyone. Thanks so much for joining our BofA Healthcare Conference. My name is Joanna Gajuk. I cover health care facilities and managed care at BofA. And now it's my pleasure to host this session with Tenet Healthcare, who's one of the largest health care system operators with a growing and pretty big ASC platform. So we're going to talk about that. And today with us, we have Will, who's going to introduce the speakers and have some introductory remarks, I guess, first.

Sure. Thanks, Joanna. And today, obviously, from Tenet, my name is Will McDowell, Vice President of Investor Relations here with Saum Sutaria, our Chairman and CEO; and Sun Park, Executive Vice President and CFO. And just in the course of our conversation today, we'll be making some forward-looking statements. In the context of those statements, I suggest you refer back to our cautionary statement within our most recent earnings release as well as SEC filings. And with that, I'll turn it over to Saum for some opening comments.

Yes. Thank you, Will. And Joanna, thank you, of course, for having us and hosting us. Happy to be here. Just a few comments to kick the session off. And I think probably more importantly than anything else, I just want to reiterate, we're in a period of time with strong momentum in many of the things that we're doing in the organization. I want to reiterate, even with the news from yesterday, which I'm sure we'll get into, our priorities right now in the organization are focused on growth, capital deployment, expansion opportunities in accretive service lines, cost control across the board, as I indicated on our last earnings call, and obviously, our M&A agenda at USPI, in particular, where we continue to see a healthy pipeline of ASC opportunities in the marketplace, no differently than we have seen before. We remain very constructively engaged in the discussions in Washington, as you can imagine, and increasingly at the local level and at the state level as many of the issues begin to filter out into the more local environment. But I'd reiterate again that our priorities are very much running the business as opposed to spending our time circling about or flailing about on various sorts of contingency plans or opportunities that we may need to search for. We just don't think we're there yet. And there's so much opportunity in running the business right now that that's our focus. So hopefully, that's helpful context as well.

No, thank you. And that was my intention to start on the core because yes, there's a lot of uncertainty. We can talk about that a little bit. But -- but yes, let's start with the ambulatory surgery center platform, to your point, a lot of M&A, but maybe let's talk about first the core, right? Like what's the growth outlook for this industry? Kind of how do you see it, I guess, this year and into kind of next couple of years? And what are the main drivers there?

Yes. I mean the ambulatory surgery business has a tremendous amount of growth opportunity as you're aware. I mean this is a long generational almost tailwind that this industry has in terms of the ability to innovate and move things into a lower-cost care setting, better service levels and very, very safe and effective surgery. So the most fundamental driver, when you think about legacy ASCs, where there's still a lot of tailwind of growth from just demographics, gastroenterology, ENT, ophthalmology, all of those sorts of areas where you continue to have innovation that drives and expands what you can do there, sometimes even in acuity. But the real innovation in the ASC sector right now is all about taking riskier, higher acuity surgeries and building the protocols to do them in an ambulatory surgery environment from an HOPD or even a hospital inpatient environment, right? And so the broad range of orthopedics, the broad range of, over time, spine work, as we've talked about bringing bariatrics into an environment where the cost of doing that surgery in an ASC makes it highly competitive and in fact, in many people's math, much more affordable and with a better return than some of the pharmaceutical therapies that are available right now. Robotics, we're north of 150 non-orthopedic general surgical type of robotic opportunities that we have in our ASCs, and we continue to build and expand on those opportunities, growing our vascular footprint, vascular, meaning peripheral vascular as well as cardiac and over time, beginning to pilot protocols in electrophysiology. So there's a lot going on with respect to creating capacity and also the right protocols to do these kinds of things in an ambulatory environment. As you get into higher acuity stuff in the ambulatory environment, the risk goes up, the patient risk goes up and other things. You've got to do it in the right way. The risk of things like medical malpractice and other things when you have higher acuity cases can be much more substantial than if you're simply doing a colonoscopy or whatever the case may be. So we're very deliberate about these things, but very active in migrating as much as we can all of our partnerships to be considering higher acuity procedures in the ASCs is where the sustainability will be in this industry.

Right. And maybe we can also reflect a little bit on Q1 results. And I always wonder, is there something else that's happening because I guess we're seeing some different commentaries from payers and providers and an inpatient versus outpatient. So can you kind of give us a sense of how you're thinking about inpatient versus outpatient growth? And is there also something to be said about, I don't know, whether people defer because they think there things changing in terms of macro and such or they actually pull forward some volumes? Or is there something to be said about those implications for your volumes in the near term?

Yes. Well, there's a couple of things to address in that. Let's start with Q1, and then we can talk about kind of consumer consumption patterns and things. Q1 was a great quarter for USPI. I mean we're continuing to do what we've reliably done, which is grow the acuity, reflect that in the revenue growth that we're showing. Volumes were essentially on a same-store basis, flat. We went through some of the numbers of double-digit growth in our high acuity things. Obviously, we talked a little bit about some of the low acuity stuff that we continue to appropriately and gently in the partnerships, as the joint venture partners with the doctors look to move into other settings or at least create some capacity by moving some of that business into other settings to allow higher acuity work to come on board. And that strategy is working. I mean, if you notice, the revenue growth has been consistently ahead of our guidance for the last couple of years. The growth algorithm that we have out there of kind of 3% to 6% top line growth. I mean if you look back at the history of USPI on a same-store growth basis, well over a decade, we're just north of 6%. So -- and that, by the way, it's a testament a bit to our strategies and a bit to your first question around the fact that there is just a cyclical and generational tailwind that is going to move things into a lower-cost setting from a surgical procedure standpoint. Because of the high acuity work that we're doing in the ambulatory setting, we're realizing success in our payer contracting strategies, right, because there's a value equation there that's beneficial to the insurer, whether government or private, by getting expensive things into a lower-cost setting. So the more we do that, the more successful we are at working with our payer partners and having better escalators and things of that nature that play into the future in what we can do. And of course, that for us is the flywheel, right? That's how we present a differentiated value proposition to physician partners that if you partner with USPI versus others, you're going to get more immediate benefit in the types of things that we can bring, but also ongoing benefit based upon our ability to do these procedures safely and negotiate better rate structures over time than perhaps other organizations may be able to do. So that's kind of how the ecosystem fits together from that perspective. Look, the short answer on the consumer side is that we're not seeing any changes yet. We were joking a few minutes ago about, I don't know, for every year that I come here, the casino looks slow compared to -- and -- but I don't know, maybe the discretionary income that affects casinos is different than affects ASCs so far. So we're not seeing any impact of that right now in the business, not that we can discern anyway.

Right. And you alluded to this changes you're making in your ASC business, deemphasizing the lower acuity, making space for the higher acuity. So I guess that was one of the items you called out in terms of the impact to volumes, but also to rate, rate that's positive to rate, right? And I guess it was 9% growth in Q1, right? So is this kind of sustainable growth rate when we're thinking about weight in ASCs? Or is there some dynamics we should consider going forward?

Well, I mean, obviously, our guidance is our guidance, but we've been performing ahead of guidance and we have a lot of confidence that this strategy has more runway.

And then I guess with this shift lower acuity to high acuity, is there a way -- I know you don't give volume guidance, but you only talk about revenues for that particular reason. But is there a way to think about this being like a headwind to volumes but then benefit to pricing? And is there a way to quantify it or you want to go that way?

Yes. I mean when we talk about pricing, we're obviously talking about case acuity and pricing, right? And that the pricing obviously is a government and commercial piece. And the volumes obviously are heavily dependent on the type of volume, right? I mean one of the things that people don't spend a lot of time looking at externally because I think probably none of us provide this type of information, but we certainly look at it internally is how are we doing in terms of revenue and profitability per minute of OR time. So am I really -- I'm not going to get into -- I mean, we give our guidance the way we give our guidance for a reason because we've actually realized that it's probably the most important driver of profitability, return on investment and also, as I described, this kind of flywheel of having more attractive reimbursement and also, therefore, a more attractive value proposition to the physicians if we focus on the revenue, focus on the acuity and give new physicians a chance to come into the ambulatory environment that haven't done so, it gives us more growth opportunities, which is what we're really after. So we're not going to change the way we break down that algorithm necessarily, but I appreciate the try. But it's that reason we do that because we've realized that, that's probably the more important metric to be focused on in the ASC industry.

Right. And given the favorable backdrop for the entire industry, is it getting more competitive in ASCs in terms of either partnering with physicians or buying out? Any kind of dynamics worth noting?

I don't know that it's getting more competitive in any way. And I don't -- I guess I'd have to understand what you mean by more competitive. I mean, if you look at it from the perspective of how we buy assets and at what prices we buy assets and those sorts of things, it's not really changing that much. I think that as new specialties come online in the ASCs, obviously, there's always a lot of other entities that try to give attention to those MSOs and other things that are out there. If anything, some of the more traditional MSO space is consolidating, not expanding and becoming more competitive, right? And if you look at GI, for example, that MSO environment is consolidating more than it is evolving new competitors. So yes, I don't know that from our standpoint, from a transaction perspective, we see it as any more competitive. But the players in the industry are changing. I mean the fact that a lot of these MSOs have been bought up by large medical distributors, that's a change in the industry. How will they dedicate capital to the environment to continue to build and grow, that may change because their economic interests are different than stand-alone MSO businesses, and we'll have to evolve along with that.

And maybe switching gears a little bit because at the beginning, right, we mentioned the uncertainty in D.C., there's a lot of different topics we can talk about. But maybe first, the other day, reconciliation bill, I guess, the proposed version from House came out. So any high-level thoughts about what's included, what's not included and how this could, I guess, translate to Tenet in terms of the impact?

Yes. Well, look, the most important reaction that we have to what was put out there is at least based upon what one might call market wisdom of it being a lot worse. It wasn't as bad as I think the market was expecting. We, by the way, have the same reaction when we think about ourselves. We look at what was released as a starting point to negotiate back from rather than have it become more aggressive. I mean that's the reality of where we are. And there's multiple stopping points here. Look, there's a lot of sophisticated polling that's being done in the industry right now. And the results from all of the pollsters no matter what side they're on, could not be clear that with a wide margin, 20, 30-plus points, voters for the current administration do not favor Medicaid cuts and even more strongly do not favor cuts to the exchanges in terms of the tax subsidies as a mechanism to pay for tax cuts writ large. And that's largely because these voters understand their family's P&L, and they understand that at modest levels above federal poverty, say, 100% to 200%, the benefits to them and their family of these programs are multiples of what the tax benefit would be from an income tax standpoint, and they're very vocal about that. So we think we have a very good position in terms of having important voter sentiment aligned with the notion that these programs are critical to basic health care access. And we just will keep reiterating that message to stakeholders that are contemplating what they do with the reconciliation bill. And as you know, you still got the Senate here to deal with this, right?

Right, right. So there could be still some push up. But I guess the one thing we saw in that version at least was that there was nothing specifically going after the state directed payment program. So that was good, right? And sort of kind of grandfathering the programs that are already in place. So I guess that was good. One thing was work requirements, right, which doesn't sound like Medicaid is not really a big payer for you guys, especially on the ASC side, right? So that wouldn't really be impactful if that was happening, right...

Right. Well, I mean, it's important to our hospital business. But obviously, we don't see a lot of Medicaid demand in our ASC business and the relative exposure of the exchange business in the ASCs is also a lot lower than the hospital business. But it's important to our hospital business, of course, in terms of the work we do there. Look, the grandfathering of existing programs was a very important message. If you think about the message that I delivered at the beginning of this or even on the last earnings call around our priorities, if you get into the details of some of what was in the reconciliation bill, many of these policies that they're talking about don't take effect until '28, '29, right? I mean our focus is on running the business, not providing 2029 guidance at this point, right? I mean if you see my meaning in that, and it's a very important mindset to be thinking that way and not trying to predict where this is going to go over that period of time. in 2029, you're talking about a different administration by the time we get there.

Right. So maybe switching to the hospital business, I guess, that you guys operate. Can you talk about broadly speaking, how would you characterize the volume backdrop today? And are you back to normal? Because I guess you guys have been exiting a lot of services for the reasons we can talk about and now it seems like you were opening. So the question is this, like how much more there is, right, in terms of reopening the capacity to kind of return to maybe where you were before COVID?

Yes. And again, I've been very clear about this again and again. I'm not chasing the past, and I'm certainly not chasing getting back to something what we're doing in terms of opening capacity in markets where we had constrained it significantly because of the contract labor environment that existed a few years back is bringing that capacity back online, but some of that capacity is being dedicated to our current service line priorities, not what they might have been 5 or 6 years ago. And that is our strategy. High acuity, continue to build surgical specialty programs, ensure that we have open access for emergent care, be the receiver of choice for especially the rural environment today, which struggles to get recapitalized in the industry where they need access to higher-level specialty care for emergencies. We have very much a do not say no policy on making sure that we're accessible for those patients regardless of the payer mix as a way of continuing to build on our specialization and high acuity work. Obviously, it's working both in terms of our capital discipline, ability to utilize capacity. And as you've seen, steadily, the hospital segment's margins continue to improve even beyond what one might attribute to some of the expansion in state directed payment programs over the last few years. So that's good. With the hospital business having strong demand right now, we'll continue down that path. And I think we've been relatively clear about this with respect to the portfolio changes we made without giving necessarily a lot of deep statistics about it, but we find the markets that we remain in more investable for us in our business model than the ones that we divested. We did not end up having to divest in the course of deleveraging markets that would negatively impact both our network contracting strategies, but they also ended up being the ones where we believe that our business model, we can invest more capital on a unit basis in order to grow the business. So that's a good thing for us.

Right. And I guess talking about volumes, Q1 was pretty good, right? Adjusted admissions, 2.9%. So is there anything you can tell us about how this quarter is progressing, whether there any trends? Because obviously, there are some headlines today in the morning from payers. So that's why I figure I should ask there's any comment on [ APAC ]?

No comment on Q2. Look, we're happy with the demand environment that we're in. Our most important thing is to be able to service that demand environment with the discipline of doing it without seeing an excessive amount of cost that deteriorates the margins that we can earn. I mean there is an importance to being able to manage costs when revenues are shrinking. And like we saw during COVID and did and there's an importance to managing our growth in a similarly disciplined way. This is -- for us, you have to understand this is all about what we've hardwired in the company now, right? It's -- I mean it's one thing if we're having to manage it all centrally. It's a totally different thing when we can now do this in a mechanism that's hardwired as part of what everybody should expect from Tenet from an operating perspective. And that's why we're really happy right now that we're accommodating this growth and maintaining and growing our margins without having to do a bunch of top corporate level cost cutting in order to do that, so...

[ Point ] to that and maybe let's talk about the margins in hospitals. I guess that was also a good result there. I guess SWE ratio improved. So maybe you can talk about the labor trends and kind of where you see the wage growth here, retention, turnover metrics and such.

Yes. I would say, in general, as we said in the earnings call, labor environment is very stable, very manageable, whether we're talking about our ability to retain and hire, whether you're talking about base wage rate growth or whether you're talking about premium labor, contract labor, I think all those things, number one, external environment is fairly stable. Number two, we're able to manage it very effectively, as Saum just said. So I think without any big change in kind of internal, external environment, I mean, I think we feel pretty confident about what we're seeing -- the trends we're seeing right now versus what we think the rest of the year will be. And then it becomes kind of what Saum mentioned. I mean, we have the opportunity to invest again, in a disciplined way into a little bit more -- whether it's contract labor, whether it's a little bit more SWB overall, if it means, right, the right return on EBITDA. So whether do we stay at our current levels, do we flow it up a little bit because we're investing into our markets and into positive EBITDA growth, you may see that, right? Certainly. But I think overall, it's a very -- it's quite stable and manageable environment.

Because you mentioned the contract labor, it was interesting that you were talking about the fact that you are reopening the capacity, right, but it sounds like you didn't really have to rely on the contract labor as much. So is that also a reflection of a stable market, you have access to fully employed nurses that you don't have to rely on contract labor?

That's right and are hiring a full-time labor. That's what you want to do, then obviously, and then manage them tightly. And then contract labor is sort of the additional lever on top. And at this point, we're at 2% of SWB, which is even at the low end of even pre-COVID rates. So yes, we'll use contract labor when we need to, but obviously, we want to leverage our full-time sales.

So is it fair to say that at this point, labor is no longer a constraint to volume? So that could be also another explanation where volumes are pretty good in the hospital setting because at some point, there was a constraint like you were saying, you were almost forced to close out some services because of the labor availability all the...

I guess I would say that I'm not sure that I can comment for the industry, if that's your question. I mean, for us, we're not viewing labor right now as a constraint to growth in our environment. It's a good question in the overall industry, but I'm not sure I can say that for everybody, yes.

Right, which is good. Good to hear that. Okay. And now talking about the other part of the equation when we're talking about margins. So maybe let's discuss the pricing outlook. So first of all, commercial, right, where are these rate updates now? Are you seeing any changes to when you negotiate with these managed care plans in terms of their response to giving you these rate updates? And can you maybe give us some stats like are you still tracking mid-single digits rate updates with commercial plans and how you're thinking about, say, '26 and so on?

I would say in terms of stats, I mean, I think we're still seeing the same thing generally, 3% to 5% rate increases for the most part. '25, we're virtually fully contracted. And even for '26, we're about 70% at this point. So really good visibility. And then I think we're making good progress in '27. So I think from a baseline stats basis, we're doing well. It shows up in I think our net revenue per adjusted admission, we were at 2.8% in Q1. So pretty solid. I think more broadly, look, I think we always say this, these conversations are always tough. These are negotiations between payers who have things that need to consider versus tenant, we bring a lot of assets, service lines, important value to the table. So I don't know that the details that you talk about may be different, but the overall theme of these negotiations are pretty consistent. And I think we remain confident in our ability to both get reasonable pricing as well as the network. Again, we bring Tenet and USPI, the hospital and ambulatory to these negotiations. And as Saum mentioned, it's a big value driver when you're able to move high-priced procedures from acute into ambulatory environment. So I think all those things are tailwinds for us.

But in terms of the details, that would be interesting to hear whether you're seeing any increased, I guess, number of denials or changes to like [ prioritizations ] or anything kind of in the outside of the rate?

I wouldn't say there's anything new incremental. I mean there's always a high level of activity that we have to push back and perform for those things, right? And that's where Conifer has a lot of value for Tenet.

And would you say maybe on the flip side, is there anything that you can do contractually to kind of improve these terms around denials of [indiscernible] -- or it is part of with...

Let me answer your question this way, which is because rather than getting into the specifics of the negotiations with the different plans. I would say that in an environment with policy uncertainty, the mindset of providers who are willing to look and provide predictability long term and reduce friction with the health plans and some of the health plans who would like to have predictability over a 3- to 4-year period and also reduce the friction in their costs regardless of the policy uncertainty, so that if there are changes in reimbursement that occur due to policy uncertainty, both sides can go into their own organizations, control what they can control, manage their expenses, but allow predictability in the relationship, is a good way in our view to work with the health plans today. And so we're not thinking about this from the perspective of we're so worried about what's going to happen from a policy perspective that we're unwilling to engage in long-term relationships with the plans, so that we can hold somebody up next week if we have a policy shock that comes from Washington. We'd rather have the predictability. We'd rather work with them on things that reduce friction. And there are many of the plans that are coming around to that form of thinking right now as well. And that's where we're finding matches to think about a longer-term multiyear relationship despite the uncertainty coming out of the policy world because then we can control what we can control, but the relationship is solid over time. So for us, it's required adjusting. Obviously, we could have thought about that and come to a different mindset, which is we're so nervous about the policy uncertainty and our ability to manage the operation that we're going to only sign short-term deals, for example, in this space. We're not thinking that way. Because our strategy from our perspective in what we're doing in, narrowed number of hospital markets, the ambulatory strategy, which has a nice growth runway and tailwind behind it and what we're doing to grow our services business at Conifer, we don't think they change based upon those policy uncertainties. So we're better off having stable relationships with our health plan partners. That's how we thought about it. I don't know if that gives a little bit more strategic insight into how we're progressing on these discussions than we're working on certain terms and conditions, for example.

I know we run out of time, but I had to ask you about free cash flow because it gets balance sheet and leverage is down, free cash flow up. So kind of walk us through your thought process around deploying the capital.

Yes. I mean -- and I think it's a parallel to what Saum just mentioned about despite the policy uncertainty, we feel our business is -- whether it's share repurchases or our M&A and CapEx strategy is still very investable. We may have a little more discipline, a little more higher hurdle rates that we think hard about. But end of the day, we will invest back into our business, again, whether it's through share repurchases or CapEx M&A. And that's driven by our balance sheet right now, to your point, within a very strong leverage position as well as our free cash flow generation. I think we all saw in '23 and '24, really positive improvements in free cash flow generation after NCI even. And our guidance and our Q1 performance suggests that we'll continue to do that. So we feel very good about that.

Great. Thank you so much, everyone. Thanks so much.

Thanks for having us.