Tenet Healthcare Corporation (THC) Earnings Call Transcript & Summary

So yes, I think big picture, as big of a priority as M&A for USPI, so is continue to invest capital into our hospital business, right, focusing on higher acuity strategies, service lines, those products and service lines and capabilities in each market that Saum was saying before, it make us a critical part of the overall care negotiations and the value we offer to the communities. So that's going to continue. If you kind of look at our recent trend lines, I think it's fair. We've accelerated our capital expenditure in the hospital, especially if you kind of normalize for the divestitures we've done over the last 2, 3 years. Part of that has been 3 new hospital builds, 3 or 4 new hospital builds that we've done and completed over the last 3 or 4 years. But if you look at our guidance this year of about $700 million to $800 million of CapEx, the vast majority of that is for the hospital space and that is continuing that activity. The other thing that I'd point out is, part of the reason that we've been able to be resilient this year from an earnings standpoint in the hospital space in the face of exchange headwinds and other things has been the CapEx investments that we made over the last 2 to 3 years that have resulted in additional growth and contribution. So all those things, I mean, I think we've seen the value. As we go forward, we always look at it market by market, but we think in the face of exchange and then potentially OBBBA changes, we still think our markets are very investable. There's a lot of service lines that we can still invest in. So we'll keep it in there.

Yes. And I think when you talk about the high acuity strategy and making it specific to the hospital, I guess, are there things that you'd highlight as sort of the top areas to prioritize investment over the next couple of years to keep the high acuity strategy moving forward with specific regards to the hospital?

Well, one, when people are in an environment where either for themselves or people around them, there's dislocation in their coverage. And we are admittedly in an environment where there's some population -- it's in dislocation. There's some population that may be more stable, et cetera. Like our focus is on ensuring that we are successfully investing in and looking at market share opportunities in things that are indispensable or less elastic, as I like to say, right? So obviously, our work in the emergency department, including capital there, trauma programs, there's still a huge need for high-quality neonatal care and associated obstetrics programs. Of course, we're now operating in markets where, generally speaking, compared to our past portfolio, our risk factors in those areas have diminished significantly. Our investments in broad-based and expansive cardiovascular programs, including the addition of structural heart capabilities in every one of our -- most -- everyone pretty much of our markets, neurosurgical capabilities, complex spine. There's an array of services where you just kind of over time, broaden that playbook. And because a lot of our foundation is built off of services like trauma and other things where you need to have the coverage to support a high-quality trauma program you build off of the specialists that you need for that coverage to start to build elective tentacles in those programs. And so that it helps to balance the utilization for those doctors from that perspective. And that's kind of how we build out our markets. And we couple that with obviously very active willingness, given our focus in high acuity of being a receiving hospital for transfers when patients need that in a very open way that helps to support what we're doing from a high acuity perspective. And again, we found that demand is less elastic. It supports consistent growth in revenues and our ability to grow margins and is not dependent upon counting every widget of volume in the way that we kind of proceed in each market.

Got it. Okay. That's helpful. And then to kind of expand a little bit on the competition point of view and the market share point of view. I guess do you feel like competitive dynamics have changed at all as you like study your markets? Like I think there's obviously questions out there, whether the material upswing of sort of Medicaid supplemental dollars or maybe 340B economics and to not-for-profits are maybe helping them catch up in terms of making investments. I guess have you noticed anything like that as you study?

I mean other than the exchange subsidy headwind, there's a lot of theoretical proposals out there that could affect the economics of the markets and our competitors that haven't necessarily come to be yet, right? But certainly, everybody is concerned about those things. I mean if I were to highlight one thing from our perspective in our markets, USPI is highly instructive because even though around about 5% of our ASCs are actually tethered or near Tenant hospitals and such a broad strategy. But the concept of having appropriate ambulatory access points in our markets has been something we've been focused on for the last 4 or 5 years. And I think as pressures come in the industry, if some of these things were to come true, the general response in the industry is often to hold on to things tighter, more employment, more control more. And in order to combat that, if that's not your mindset because our mindset is to allow independent physicians to succeed and work with physicians on a more constructive basis in employment where necessary for scalability and other things is to provide and own more outpatient access points in our markets. So in every one of our markets, we're looking at those opportunities. We're looking at investments in that -- we're looking at partnerships because we want to create an outpatient access environment that makes it easier for those patients to access our inpatient environment when they need it, either on an emergent or elective basis. And that is a bit of a shift in the market, right? If you think about post-COVID, you could just grow out of that COVID environment that shut things down without being as deliberate about all of your multifactor outpatient access points. That environment is changing a bit where you have to be very thoughtful of those things now on a broader basis.

Got it. That's helpful. And then when you look at the acute care [ at hospital ] portfolio, obviously, you had a bit of a stretch there. We were able to do separate really interesting and financially helpful transactions. I guess, would your expectation be at this point that your portfolio is likely to be more stable moving forward? Or do you think there could still be some opportunities to maybe refine it a little bit further opportunistically?

And there are always opportunities to take a look at things. It very much depends on the portfolio and an opportunity. We're very happy with the portfolio we had. And as Sun said, we find the portfolio investable for growth at this stage, and that's what we're focused on.

Okay. And then within the hospital business, where you obviously report Conifer, I guess how should we be thinking about the opportunities for Conifer, obviously, going through like a relatively major change with everything going on with CommonSpirit. I guess how do you think about the potential of the business for the next couple of years, specifically trying to mitigate some of the drag that the CommonSpirit contract would otherwise generate for the company?

Yes. Well, I don't -- I mean, I guess there may be a P&L drag in the short term, but we're still incredibly pleased with the transaction and the yield for Tenet on the transaction by any measure. It's highly accretive. Look, I think there's 2 things going on. This year is a transition year. We're very focused on making sure that transition goes as smoothly as it possibly can, it takes 2 to do that. And so we're focused on doing that with obviously a long-term client of Conifer over time working together to do that. So that's a lot of activity, which will result in the opportunity to then pivot the business and do other things. We've already started doing a set of things that help to improve the efficiency, improve the exposure to offshore capabilities that we've built, improve the ability to deliver more with AI. We're already doing that. I mean if there's a place where that's accelerated, it's Conifer in this period of time. So I would expect our cost to collect. And value proposition in the market to only get better and better from that perspective. And then once this transition is done and we're through with all of that activity, which, by the way, happens by the end of this year, completely, we're much more free to go back to the market with what we have built. And just like we've done with the exchange arena where we started planning a year ago to execute, I think our work in planning and that ability to improve the cost to collect is already underway. And so we should be able to take that to market in the early part of the new year.

And then maybe just to expand on that a little bit, it does, to your point, it seems like there'd probably be the most opportunity for like a structural improvement in cost in this part of the business really relative to anything else inside of your portfolio. I guess like -- how do you think about the longer-term opportunity to really change the cost structure at Conifer?

Well, the opportunity to improve the cost structure at Conifer, again, lies in more automation, more utilization of our captive that we own in the global business center because we've built very reliable capabilities there that work in the Tenant account. We want them to work in multiple accounts. And then for more complex workflows, the ability to simplify them or at least make them more reliably predictable with AI, reduces the variability in what we're doing. We're seeing that already. And I don't think we should think about this as kind of an arming up with these -- and then the other side is going to arm up. I mean the reality is that the payment adjudication process costs too much for everybody. Even if all sides "arm up" with automation and AI and other things, we're still [ being ] the amount of cost and waste that goes into adjudication of claims down in total, that's good. There's more to reinvest in healthcare services from that perspective. And then it's about actually building the right set of algorithms and rules engine in between to improve yield. But I don't think there's anything negative about bringing the overall cost structure for both sides of the industry down in terms of what it costs to adjudicate a claim, and we're obviously doing that on our side.

Got it. Okay. And then just to look at the results that the hospital business has put up year-to-date, obviously being quite impressive, like raising your guidance even without the help of incremental Medicaid dollars, very impressive. I guess how do we generally think about the drivers of the outperformance versus your expectations? Like if we were to think about volumes versus payer mix versus acuity versus costs, like what's the biggest bucket or 2 about like what's going better year-to-date for the company.

I don't think there's a rank order, right? I think all 4, 5, 6 of those dynamics have applied. Year after year, I think we've shown the ability to grow our acuity, keep our payer mix strong, right, and then have operating discipline around expenses around it. So that's been kind of the core model. Now obviously, coming into this year, we've all talked about it many times. We saw the exchange headwinds being an incremental headwind and plan for that, prepared for that a long time ago with additional efficiency initiatives. And then finally, the third leg was what I mentioned before, investing CapEx over the last 2 years to generate sources of growth. So I think all those have worked for us. If you look at our margin profile, if you look at the acuity change versus our margin improvement, certainly the operating expense savings have been up, I think very valuable. So we look for that to continue. And then the second thing is probably, again, on the OpEx side, it's really both things, right? It's the continued discipline around labor productivity, length of state management, those kind of blocking and tackling things. They've been just as important as some of the additional more technology AI-based things that we've done. So a short answer would be [indiscernible].

Okay. Fair enough. Yes. And the cost side was going to be where we went next. I mean SWB, I think, was down 1% year-over-year on a per AA basis. I guess, again, like a lot of that probably comes down to like the state management. I guess maybe help us think about kind of the durability of that level of performance. Obviously, underlying wage inflation is still something that you're dealing with. I guess, how do you think about maybe both of those dynamics, I guess, through the balance of this year and maybe kind of any early thoughts on we're seeing some slowdown in the data in terms of like acute wage inflation. Do you feel like you're seeing any of that start to materialize in your markets as well?

Yes. I would say, in general, our labor situation has been very stable, and that's been very stable, and that's been the case for the last several years, right? It's no secret that in the -- with nurses and other health care providers, right, there is a general shortage in general for the industry, right? So -- but even with that, we've been able to keep our wage rates very stable and then manage also contract labor. Now it's at 2% or so of SWB. And then the third component is professional fees. Admittedly, they've been growing materially, but at 10% growth that we were seeing this year. It's still very manageable and fits within our overall guidance framework. So I think all those things are good. That being said, in terms of kind of what's left, right, it's tough to get -- for example, contract labor down below 2%. That's tough for -- in our industry, labor wages, general wages to go below to 2.5%, right? So a lot of what we'll have to do is manage again, even more productivity, even more efficiency in the construct. Because the other thing we decided to do on a market-by-market basis also, we could invest a little bit more of [indiscernible] to generate EBITDA. And that's perfectly fine for us.

So maybe then to pivot a little bit to the exchange dynamics. Obviously, it seems like compared to peers perhaps, like we're tracking much more in line with your initial expectations. So that's good to see. I guess just remind us how you're thinking about the exchange dynamics going into the back half of the year. And then I guess the other question out there is just really for the exchange volume that remains in the system. It does seem like at least in some markets, there's been a pretty material shift to bronze type products with higher cost sharing, higher deductibles. Do you feel like you have your arms around collectibility there, how long do you feel like you need to kind of know that you feel good about the assumptions you've made on that part of the business in particular?

Well, look, quality -- I mean first of all, having a vehicle like Conifer that helps with appropriate patient collections, payment programs and other things that people can accommodate is very helpful. I would also say that by the time people are in an acute care setting, especially if they have multiple chronic illness, they will burn through that co-pay deductibility environment. And obviously, the reduction in demand isn't one-for-one with coverage because it's -- I mean, our business is more focused on the people who consume chronic care, right? And so they tend to have a better approach to finding their way to alternative coverage. We help them find alternative coverage in the environment, et cetera. So I think having that support system is definitely good. Look, I think the other thing is you have to be prepared to receive the emergency care no matter what. And obviously, that's a point of intervention where you can work with people that may not have coverage for that episode to help them figure out what else they may be qualified for. In many cases, they don't know. And that's another point of intervention where we've now injected Conifer enrollment staff into finding those people and helping them find a solution from that perspective. So look, I think what's happened right now is the dislocation. A lot of people have become uninsured. Over time, we think that that's going to improve in terms of the coverage is the people that need it, find alternative coverage Obviously, it's ramped up through the course of this year. First quarter was lower than we thought. Like I'm not sure that the quarterly approach to giving thoughts on that was as well thought through as it could have been. But it's clear what's happening now. And from our perspective, more importantly than anything else, we planned for the dislocation last year and executed on the things we needed to do to offset it. And that's kind of our mindset for the following year.

Okay. Just again, another policy issue, I guess, coming up over the next couple years will just be the implementation of Medicaid work requirements and Medicaid expansion population. How is the company thinking about that? And to the extent that it seems like, I guess, USPI probably pretty unimpacted by all of this, but just general thoughts on how it impacts both the businesses would be great.

Yes. Just as a note before we talk about that, USPI has been largely unaffected by the exchange piece this year. Even though the numbers are -- what the numbers are, USPI's exchange demand hasn't really been affected that much perhaps because it's a lower cost, lower co-pay environment, it's actually created a shift. But we've been surprised at the elective surgery comparison between hospital and USPI. Look, I don't have anything particularly bright to say about the Medicaid work requirement aspects. Like we all know the history. They've been tried, hasn't worked great in prior iterations. I don't know how it's going to work this time and what impact it will have. Could there be short-term dislocation and the people that need coverage, find other coverage or figure out ways to qualify? Probably. But I don't have any great insight into how states are going to do this, this time around versus the 3 or 4 times that's been tried before, where it hasn't been particularly effective.

Okay. Fair enough. And then one question we're kind of asking all companies is with really so much focus on like AI, I guess how do you want the investment community to be thinking about the AI investments that you've made to date, what kind of investments might be still in front of the company? And what a couple of the most exciting use cases for your businesses might be over the next couple of years that will come to learn more about?

Well, there's a tremendous amount of opportunity using AI. Look, I think the more important thing is the availability of opportunities and ideas. It's having a rigorous ROI framework for what you're going to get out of the investments. There is a cost, right? That cost -- to the extent you're using any frontier model support even if it's through a vendor, is real from the cost of tokens, and other things that are either passed through or direct. And -- so you have to have a very rigorous ROI assumption. And that goes back to what have been the critical margin and growth levers that we have been pulling the business without AI. Like the idea that we're going to invent some new lever that's going to create an opportunity. Is it -- so I'd rather focus on if we care about OR utilization and OR capacity, utilizing tools from an AI perspective that helps my OR scheduling, that's logical to me. If length of stay improvement is a place we have differentiated ourselves in the industry in the last 2 or 3 or 4 years, attempting to automate that complex workflow and provide better -- because I know that's critical to efficiency going forward, that's logical to me. The idea that I'm going to get a totally new lever yet is not logical to me from that perspective until I can understand and see that ROI equation. And that's why I think on the administrative side, on the payment side, there's a lot more enthusiasm for the potential returns because we understand the algorithm that impacts the return on investment there, better than in areas where it's more experimental.

Yes. That's great. Awesome. Thank you so much. I think that's going to be all we have time for. But thank you so much for being here today. We really appreciate the time.

Thanks.