Tenet Healthcare Corporation ($THC)

[Audio Gap] conversation with Tenet Healthcare. Presenting today, we have Saum Sutaria, who's the Chairman and CEO; Sun Park, who's the CFO; and Will McDowell from Investor Relations. If you -- I don't know, do you want to start off with some exciting forward-looking statements?

Sure. Thanks, Kevin, and thanks, everyone, for joining us today. In the course of our conversation today, we may be making some forward-looking statements. In the context of those statements, I'd suggest you refer back to our cautionary statement, included in our most recent earnings release as well as other SEC filings. Back to you, Kevin.

All right. Thank you. Yes. So I guess maybe if we're going to start off, I think there's a lot of focus on utilization and volumes. And kind of given all the disruption that kind of happened in Q1 from weak flu, from weather in certain markets, can you talk a little bit about how you're seeing kind of core demand in your markets today?

Yes. No, that's a good place to start. So first of all, I mean, for us, I think this was a pretty straightforward quarter. The volume from the respiratory season in the first part of the quarter in January was obviously lower than what we saw prior year. But sequentially, every month got better. So if January was below expectations, March was above expectations, and the trend line improved nicely. And importantly, for us, like we didn't have a situation where month-to-month, we were trying to climb out of some kind of earnings hole. We flexed appropriately in January. We felt very good about the earnings coming out of the first month. We accelerated going into the second and third month. And obviously, in the acute business, which is what I think you're generally referring to, we ended up outperforming in the quarter. And our SDP environment and other things were pretty clean from that perspective relative to our guide. So we were really pleased coming out of the first quarter with a beat of $50-ish million on that segment and the things we were able to achieve there. Importantly, our new hospitals that we had built and had ramped up in Florida, for example, they're ramping up nicely. So we feel very good about that. Our physician practices, which we monitor very closely, are busy because they're a precursor to what may happen in a hospital down the line. So we feel very good about our physician practices, mostly were specialty-based right, are busy. That's a good sign for USPI. USPI had a good utilization quarter. We grew the acuity. We grew the revenue at the high end of our range. And despite the storms and whatnot, we were able to recover to the point where we had, again, a good quarter that beat our expectations by a little bit and launched us off into the second quarter. So I think we're comfortable with where things stand from a utilization perspective after the first quarter. And I think probably the most important statement related to that is we're comfortable that the algorithm that completes the year to our guidance is intact. And in fact, we feel more bullish about it today than we did at the beginning of the year because of what we've learned in the first quarter about the ability of our operations to deliver what they need to deliver.

Yes. So maybe that's the next place to go to because Q1 had so many moving pieces as far as like the Conifer deal and SDPs and all that. So like when you think about those moving pieces, what do you think the core growth was at Tenet kind of in Q1? And what does that imply kind of for like the rest of the year?

Yes. So we've been getting this question a lot. I mean, I think there were a couple of normalization items, obviously, right? We had the Conifer $40 million in our Q1 this year, and then we had $40 million of out-of-period Medicaid payments in Q1 of '25. So basically offset each other. Once you normalize for that, I mean, the other big change was obviously HICS impact, right? And we talked about it being, let's call it, down about 10%. As a reminder, we sort of thought about the full year impact to be about 20% impact. So certainly better than what we had thought. But I think taking a step back, it's reasonable to think that Q1 was whatever it is, and then it will get worse over the course of the year due to the grace period dynamics and effectuation dynamics and things like that. So I think all that, as Saum said, is within our expectations, and we've accounted for that, and we feel good about being able to manage all that. Your question about core growth, I mean, I think the only context I would add beyond the actual numbers is that our Q1 of '25 was an exceedingly strong quarter. Just to remind everyone, we were at 17.5% margins on the Hospital segment. Offsetting that -- there were some probably some timing amounts between our Q1 and Q2 of last year. So when we take a step back, we're not necessarily focused on the algebra of Q1 versus Q1, Q2 versus Q2, all those things. We take a look at our performance in Q1, how we were able to flex our operating expense management with volume. And as Saum said, if you sort of annualize our current trends, we feel very comfortable about the rest of our guidance.

Okay. Is there anything else that you would point to just as like anything ramping up through the year or anything that you would say should be getting better sequentially versus just a normal continuation of year-over-year trend each quarter?

Well, I think the first thing is that the growth strategies that we have in place -- again, I think we're referring to acute. The growth strategies that we have in place, including the focus on a high acuity business, where we've put capital behind that makes sense. And we see ourselves continuing to deliver results and expansion of services in those areas. Our, as I said, physician practices and physician affiliations, which in many of these markets have been building, makes sense. As you know, we've stepped up our capital expense in the RemainCo hospital business after our transactions from a couple of years ago. So we feel more confident about the growth opportunities there. So that's a positive. And I think in the fourth quarter call, not the fourth quarter '25 call, we did outline that we had made plans over the course of 2025 for things we would do from an expense reduction standpoint, both what I would describe as traditional levers and more innovative levers with technology, AI and other things. We're executing on those, and those will build over time. It's not like we finished all that in 1 quarter, right? So those will build over time. So again, I come back to -- when we look at the balance of the year and we see obviously going from an algebraic Q1 to Q1 to a 10% full year core growth, right, from '25 to '26, we're more confident now than we were at the beginning of the year that we're on that trajectory, and we see both the utilization and expense opportunity to deliver on that.

Yes. So I guess just talk about the utilization again a little bit more. So when we look at least the public company average volume growth, like Q2 2023 was kind of the peak from a hospital volume perspective, and it's been decelerating. It's back to target. So it's not like we were below target in 2025 per se, but we were back to the long-term averages again. And now we've got some headwinds from a coverage perspective. Like what makes you think that like 2026 could be a normal year from a utilization perspective, we won't see something below that?

Well, let's talk about utilization in the industry as I see it anyway, and then let's talk about Tenet. Because I think probably the most important response I would give to your -- the peak was whatever quarter you said in 2023. That wasn't the peak of our -- Tenet's Hospital segment performance, right? Think about it, right? We've improved margins, improved earnings, grown the business and successfully built stronger platforms since that peak of utilization, right? Because I think -- and this gets to the second part of my answer, which is the strategy which is based not upon chasing volume, but upon high acuity business. And really, what we guide internally to and externally to at USPI is revenue, right? We're looking to grow revenue and grow earnings in a way that improves over time, return on invested capital in the business by being rational about what we're growing and having a more focused strategy. And that strategy coming out of COVID, we said it at your conference 4 or 5 years ago, I think. We're not chasing pre-2019 volumes exact because we believe the market has changed. The benefit of building a platform around patients with multiple chronic illness and high acuity gives us a degree of efficiency between the growing Medicare segment and the multiple chronic illness commercial book and those in Medicaid who have the same sort of medical problems with one set of investments in technology, in physician types, in service lines that we can build and grow more efficiently. And that's how ROIC has improved as the margins have improved. From a long-term perspective -- and it actually goes back to something we started saying here at your conference a number of years ago. Look, we always said that our view was COVID unfortunately caused the mortality of about 1 million to 1.5 million people prematurely that were in the last 5 years of their life. And therefore, there was a demand hole created, and that demand was going to rebuild over 5 years as people got back into the last 5 years of life. And you would have outsized utilization, right? And that's what we've had. And here we are 5 years later, and it's normalizing, okay? So I think that thesis holds. And what have we done over the last 5 years? We've improved the business, but we've also ridden a utilization wave. We always knew that going into '26, '27, '28 and beyond, the algorithm to build and manage earnings in the acute care hospital segment would have to change to a growth strategy and an efficiency strategy at the same time in a balanced way that would grow earnings. And that's why we began to plan and make that pivot in 2025, and now we're delivering on that pivot. And I think that can be very attractive in the acute segment for the next 4 or 5 years. And then, of course, our ace in the hole is that half of our EBITDA is coming from a line of business that's not affected by Medicaid, not affected by the exchanges that much, has significant growth ahead of it in the ambulatory segment. And so the company's progress despite the headwinds can still look good. That's how we're thinking about this long term. I actually think our business diversification, USPI acute, is more powerful and advantageous to us in the next 5 years than it has been the last 5 years, right?

Yes. I mean, that's definitely one of the things we like about Tenet right now. But I guess just to stay on the hospital side before we pivot to the USPI side, you talked about deemphasizing low acuity stuff, focusing on the high acuity stuff. What should we be thinking about? What service lines are we talking about here as far as where the investment is and where the growth is going to be for you guys?

Yes. I mean, broad-based cardiovascular, significant amount of work in neurosciences, both stroke and degenerative neurological disease, surgical and medical, significant expansions in robotic surgery and what's happening there, cancer surgery, especially with the incidence of a number of types of things post-COVID that we've seen escalate are important activity in interventional radiology labs and other things, the delivery of not just diagnostics, but therapies in that market. We're investing in that. Those are the types of services that we're focused on. In addition to like trauma and like the traditional high acuity, right?

Yes. Okay. And then you mentioned that the exchange subsidies were kind of running at about half of what you thought they might be in Q1. Is that your experience? Or is that what you were accruing to? Because I know there's a lot of questions about the paid premiums as far as Q1 goes. So how are you thinking about that?

Yes. That's the experience we saw in our admissions in our mix, as well as what we saw in our revenue impact as well. And just because we've gotten some questions on these as well, just to kind of say it here. We take very careful assessment of all of our payer groups, obviously, including exchange in the last quarter, and we feel we're very appropriately reserved from a revenue basis. So I think our metrics are pretty parallel between admissions and revenue.

Okay. And then when you think about that impact, did it change at all through the quarter? Like you talked about Q1 being lower and then ramping through the year. Like did you see a ramp through the quarter? Or is that...

Yes. So on a volume basis, we talked about that. From an exchange basis, we looked -- I don't think there were any discernible patterns that we could really point out. We'll obviously find out more as we get into Q2.

Okay. And then when we think about USPI, which is a unique business for you as far as how big it is a part of your business versus your hospital competitors. The shift to outpatient has been this thing we've been talking about for a long time now. In some cases, you could argue it's been going on for 20-plus years. Like, where are we in the shift to outpatient? Everyone loves their baseball analogies. What inning are we in?

Yes. Well, I mean, I don't think -- like it's almost -- baseball analogies, I'm not sure anybody has ever gotten -- we've been perpetually in the like third or fourth inning, right? I mean -- I actually think the next 20 years, we're going to see the same thing. It's just going to be higher acuity work in the ASCs. You have to think about the market this way, which is that you have traditional service lines in the ASCs that continue to grow because of population demand and other things, but there's also a lot of replenishment work you have to do in those traditional service lines. As doctors retire, you bring new ones on, et cetera. And so the growth comes mainly from a demographic perspective, right? Then you have new service lines or newer service lines in the ASCs that are still ramping to their full potential in orthopedics, in spine, in robotic surgery, in urology. And so the reason we spend a lot of our time disproportionately in those areas, there's lots of new doctors you can bring into the ASC environment in those areas, right, that have never been there before. And that creates a different opportunity to grow versus some of the high-volume but low acuity quick type of procedures that used to dominate in our ASCs. And so that shift is really important because what that shift is doing aside from short term, strategically giving us a better base of earnings and a better value proposition for the payers because that work comes out of hospitals, it's giving us a runway to grow new doctors in an ASC business. Whereas if we were traditional service lines only, you spend more time replenishing than you do growing, if that makes sense.

Yes. No, it definitely does. Yes. So I guess maybe thinking about it that way, when you think about those lower acuity, the GI [ ortho ] penetration from a doc perspective, like where is that versus like an ortho or a cardio?

Yes. Very different, right? Very different for ambulatory gastroenterologists who have, whatever, 5 to 10 years of practice because they've earned enough to be able to buy into an ASC. Many of them have ASC affiliations already, right? Whereas in orthopedics or in spine or in other areas, you have a lot of doctors that can still enter the market. Both are great parts of the portfolio, but they require different work and different thinking. And as you think about building for the future, you can't take one at the expense of the other. You have to do both.

Yes. And then when we think about that business you mentioned, I think everyone right now is thinking ortho is still a big driver, but maybe it's getting towards -- is it getting towards the end of the inning analogy? And then is cardio ready yet? It wasn't -- it seems -- like people talk about cardio, but it also kind of seems like that's maybe a harder lift in some ways. So how do you think about that trend?

First of all, I think there's a lot of growth opportunity in orthopedics. And even in just hips and knees, let alone shoulders and ankles and other things, the inpatient-only list is evolving. I think there's opportunity in all of those areas. But just frequency-wise, there's still more opportunity in growing hips and knees. And even at our scale, we're still reporting very attractive growth rates in those areas. It tells you there's demand if you can build the right platform for the doctors to work in. Cardiac is, as you know, for, again, multiple years and probably here as well, I've said I don't think this is going to be transformative over the last 5 years. It hasn't really been, and there's reasons for that. I mean, many of the doctors are employed by health systems. It's a heavy Medicare predominance. It's expensive to build those ASCs because you have to have a cath lab and a C-arm and all of the radiation protection. It's different than just buying some colonoscopy units or whatever, right? So the math on the economics is a bit different. It will grow. It will grow more slowly. We're heavily invested now in really building out unique EP models to bring more EP into the ASC setting. We're partnering with some manufacturers on that to really design a good model, and we're excited about that. But it's going to be a multiyear build.

Yes. And then can you talk a little bit about your acquisition strategy? You guys have already earmarked $250 million for deals. What do you look for when you look for M&A within USPI?

Yes. I mean, we're looking for very good physician partnerships, ones that are looking for healthy growth rather than cashing out. We're looking for doctors that will work with the type of quality, safety compliance protocols that we expect. Our complication rates in our ASCs are much, much lower than industry average. We take that seriously. And one, doctors that want to be in network with payers, right? We are insistent that we're in network with payers. And we contract on a freestanding ASC basis, not getting into HOPD and other sorts of things in the ASC business. And those types of things, when you combine it with the high acuity focus, we're bringing -- that's how we tend to be deploying our energy with our development team.

Yes. Actually, can you just -- I want to have you say that again, the second part because I get the question a lot about site neutrality because I think that there's a conception among some that, oh, you're a U.S. -- you're a hospital company and you've got surgery centers, that must mean you have a lot of site-neutral exposure. Can you just talk about your site-neutral exposure?

We have no site-neutral exposure. Every one of our ASCs is on freestanding rates today. I mean, I really -- maybe there's 1, I don't know, but I'm not even sure there's 1. So I think all of our ASCs are on freestanding rates today. And of course, we do have surgical hospitals within the USPI portfolio. So they have some site neutrality risk. But remember, with site neutrality, at least my opinion, surgery is not the first area. Imaging, lab, those sorts of area. Well, these specialty surgical hospitals, they don't do a lot of that work. And I'll add to this by making the comment about Tenet on the acute side. Our business model at Tenet is not focused on driving HOPD work, right? I mean, we're not a large employer at scale of primary care that then is driving business into an HOPD diagnostics environment. We use freestanding diagnostics where we own things like imaging and other things. They're generally in the freestanding arena. And so as an entity, we have, I think, less site neutrality exposure than one might assume because of our business model choices on the acute side and because of our contracting strategies on the ASC side.

Okay. That's perfect. And I guess as far as the inpatient-only list, because you have a hospital business and a surgery center business, like how do you think about the puts and the takes as far as that shift goes?

I mean, yes, you're going to win some and you're going to lose some, but the upside is on the ambulatory side, right? I mean I'm just saying, like I don't -- you can't fight that. You have to have a strategy in the acute care hospitals -- that is our belief, you have to have a strategy in the acute care hospitals that's focused on enough acuity that really drives the success in that market such that the siphon of certain low acuity things doesn't disrupt your hospital success strategy. That's why -- that's another reason we're focused on that high acuity business. Right? Because it's -- that's not moving outpatient.

Yes. So actually, just to go back to the M&A commentary, what do you think as far as multiples go? It sounds like you've got a very particular criteria. It sounds like these are great assets. What's the pressure on multiples right now?

On the ASCs?

ASCs, yes.

No, same. I mean I don't think we've seen a substantial change in the multiples. Of course, we focus on the post-synergy multiple more than we do the acquisition multiple. Some places, we can do better than others when we improve supply costs or improve throughput or bring them in network into the plans. So internally, we think that way. But we're not seeing multiple -- we haven't really seen multiple changes in the acquisition environment for the assets we're buying for many, many years. It's really been in a generally stable range.

Yes. Your Q1 deal flow is pretty strong, like -- so should we expect then, the $250 million to be kind of a low number? Or is that just timing, when things come together?

Yes. I mean, it's -- obviously, it's always lumpy quarter-to-quarter. But yes, you're right that we would, of course, based upon Q1, love to target a higher number for the year, right? I mean, as long as there are assets with the characteristics I described earlier and opportunities that are there, and we have a pipeline that can support it, no question, we would continue to build and grow above the guide, if that's what it ends up being.

Yes. So I guess one of the questions that I've had about the company is just the cash balance. Like -- it just seems like you've got a lot of cash there. You've had it for a little while. Are you trying to signal something? Like, is there something we should be thinking about from a larger transaction perspective or capital deployment? And why not -- your debt is now callable. Why not take down the 27-plus tranches?

Yes. So first of all, I think from a debt management standpoint, that's on the menu, right? And I think we're focused on a couple of things. One is just making sure our annual debt, either repayment or refinancing stacks, there's no one big year where we're under pressure, right? We did some of that when we pushed out some of our unsecured in '28 to a much later period last time. So those are kind of the longer-term strategies we're focused on. And then there's -- the interest rate environment right now is volatile, unpredictable, whatever word we want to use, right? So I fully expect as we get closer to the maturity date, we'll make appropriate decisions on whether we pay down debt or not. And if you look at our near-term debt stack, the interest rates on those instruments are actually pretty good, right? They're from a different generation of financings. They're in the 4% and 5% range. So with cash on balance sheet versus that, post-tax basis, it's actually pretty -- it's not enough to really make a huge difference. So we'll make the appropriate decisions there. On the cash balance side, you're absolutely right. We're in a very strong cash position. We're generating a lot of free cash flow after NCI. This year, we're expecting about $1.7 billion free cash flow after NCI. We also have a lot of cash still coming from the Conifer transaction over the next 2, 3 years. So a couple of things. One, our cash position right now isn't meant to signal some sort of -- we're hoarding our acorns for something, right? We fully recognize that our shares at current multiples are -- we feel highly undervalued. So we're going to be aggressive, repurchase of our stock. As Saum said, there's -- USPI M&A is always priority #1 for us from a capital allocation standpoint, all those things. So I think over a course of reasonable time over multiple quarters, if you take a look back at us a year from now, 1.5 years from now, you'll have seen us utilize our balance sheet in a good way. On a monthly basis, on a quarter-over-quarter basis, it may look like we're carrying a cash balance in a certain period. So -- but our longer-term strategy on capital allocation is -- hasn't -- one, hasn't changed. And then two, I think we can -- we have a lot more flexibility.

Yes. So I guess maybe just remind us all. So debt leverage targets that you have?

We haven't publicly talked about a specific leverage target, but we're sitting at 2.8x EBITDA less NCI. We're very comfortable operating in that range. And certainly, we could flex up and down several half turn off of that and still be in a very comfortable position. So we're good with where we are.

Yes. Is there -- I mean, all the capital has -- I'm trying to think. I guess you've built maybe a hospital, but like pretty much all the capital has been towards the USPI side of things. Like would you be buying hospitals? Is there -- or is that just not the focus for the company?

No, no. We spend capital in our hospitals for both maintenance, IT and strategic initiatives every year, right? I mean -- and so there is a significant CapEx that goes into the -- maintaining a very strong Hospital segment, which is obviously very important to maintaining a very strong USPI. So there is capital that goes in there. Yes, M&A capital on the Hospital segment has not been high. We haven't really been in the acquisition market for hospitals that way. I mean, if opportunistically, something were to come up that's a natural extension of a market that would be accretive to us, we would, of course, look at it. Look, we've proven the ability to buy things, integrate them and make them perform. We do that reliably, right? And we have a process that we run from an integration. So we're not afraid of it. But there hasn't really been a need to. We have built a few hospitals, as you point out, and those are doing very well. That's important because that hasn't always been the case with the company, but it is happening consistently with the hospitals that we've built. They're doing well. And so if there are natural extension opportunities on big market positions we have where there's population growth, commercial population growth, we would examine them for expansions, but in targeted type of builds, right? They're specialty hospitals, almost.

Yes. And then one of the themes that is capturing everybody's attention is AI. If you think about -- what do you guys think about the opportunity for AI for you, I guess, in each business, if it's a separate opportunity? And then is there anything that people are getting ahead of their skis on as far as what we're all excited about AI, are we too excited on XYZ?

Yes. Well, let me just say that I think there's a dialogue that goes on out there about -- are certain industries or certain companies going to end up being winners or losers from AI. And that's a pretty stark -- winners and losers, right, from AI. And I think for any company or any industry like ours, there is a chance that you're going to win on some things and lose on some things depending on who is applying the AI and how they're applying it. The imperative on us as a management team is to grow our capabilities and expertise to drive the company to become a winner from AI, period. Right? And if that takes different talent or different leadership or different, that is an opportunity we have to capture, and we have to be open to that. Now where are our opportunities? We have a lot of opportunity in Conifer. We've talked about that. I think people understand conceptually, the automation of the payments environment in particular parts of the chain in the revenue cycle that could materially reduce the cost to collect. That is a game changer not only for our own economics, but also since we have a third-party service company, the ability to go to market with a very different value proposition at a cost to collect 1% below what we charge today. That's a significant movement in the industry if we can get there. So we are absolutely focused on that. Then there are things in the -- what I would describe as overhead and corporate function environment. So it's not just overhead, but the things we do in compliance, in accounting, in audit. That because we operate in a much more standardized model, we have the ability to more easily apply these tools, right? So if you just -- the simple concept I think of is you have engineers that have this incredible ability to apply these AI models, but they don't know anything about your business and the workflow and what people do that makes that workflow work. So you have to be able to partner with them to do that. Now if you enter an environment with an engineer and you have 10 markets and you're doing length of stay management 10 different ways in 10 markets, guess what, that engineer is going to have a very hard time helping you. On the other hand, if you're like us, where you've spent years standardizing our workflows in Tenet across almost everything we do, we have more ability to utilize the capacity and intellect of those engineers to help us with our people to build and use those tools. That's why we're seeing some early benefit from doing this. So I gave an example the other day on the call about analytics in Conifer and standardizing and automating some of those analytics using AI tools. Well, we produce the same reports for ourselves internally in every one of our clients. They're not different. So we were able to do that and reduce that cost by 60%. Now is everything going to get reduced by 60%? I don't think so. But the point is that we have to be open to doing that and trying it. And I think the most important thing that we've put in, in the company right now is the governance that allows us to review everything and decide what moves forward, but more importantly, what pilots do you kill early because there is no business case. Otherwise, you spend a tremendous amount of money on pilots that aren't going anywhere. And that governance is important to making this successful in terms of how we deploy AI. And with that, I think we're going to be a net winner from this. And it will build over time.

Yes. And this -- maybe the way you just described that is the answer. But I think when we think about AI, I think one of the powerful things about it is that it is AI. And I think there's a conception potentially that everyone can roll it out and everyone can get the same benefits from it because it will help you get there. And you're arguing that there's a potential comparative advantage you can outcompete the rest of the industry potentially in what you're doing.

Well, I believe that. I think that from what I have seen and experienced and immersed myself in, it is very important to be able to combine engineering capacity with real workflow know-how. And the more the workflow is standardized, it's been easier for them to operate in that environment to help us build tools. Where it's less standard, they, of course, struggle a bit more to help you build that. And I think that, that work that we have done over the last few years, whether it be in Conifer or standardizing our clinical operations or other things or even some of our -- the way our corporate functions work and do audit or compliance around the company will give us more opportunity to accelerate using those tools.

All right. I think that's all we have time for. Thank you very much.

Thank you very much for inviting us.