We're hosting Kevin Hammons, President and Chief Financial Officer. In the room here, we also have Anton Hie, Vice President, Investor Relations. Thank you guys very much for being here today.
Ben, thank you for hosting us. Really appreciate it.
Absolutely. Let's maybe talk with the—or we could start with the obligatory policy discussion. Obviously, lots of movement this past week with the House's bill. Maybe you can kind of talk about what you're seeing that's changed. Sounds like there's a lot of motion on work requirements, but just wanted to get your overall view and how it's impacting your thoughts on DPP programs and the like.
Yeah. Overall, I think the bill came out at least where it stands right now. There's still a lot more work to do before it gets through the House and over to the Senate. Coming out more in line with where we expected it to be, which was not near as bad as maybe some had predicted.
I think it appears that there's going to be the DPP programs, at least the ones that are currently in place, as well as there's probably going to be a deadline set in the future for some new ones to come in, that those will continue to operate as they are today. We don't see any real pullback in those. Maybe going forward, some limitation on growth, but we don't see any of them being pulled back. With the work requirements, as you mentioned, it appears that may be something that goes through. I think net net, our view is that would probably be at worst neutral to us, potentially even slightly positive.
Gotcha. Would that just be because of the labor component to it with coming back and helping your staff on the hospital side?
Yeah. Yeah, absolutely. The potential for some folks to actually end up with employee coverage on the insurance.
Gotcha. When we think about the DPP programs and kind of the realm of possibilities through renewals, what do you expect the rate updates on those renewals to look like? It seems like that's an open question. Do you think you'll get commensurate inflation-adjusted rates as those get renewed year to year?
You know, I still think, to your point, I think it is an open question. We do not have a clear line of sight into that yet. I do think, generally speaking, we will probably see an inflationary build on that and keeping in line.
Gotcha. Anything else in the bill that's kind of keeping you up at night, or?
Not at this point. Still waiting to see where it ultimately ends up as it still moves around a little bit. Our view is still, by the time it gets through the Senate, it gets no worse than it is today. I think that's very favorable for the providers. There is a potential that it moderates even a little bit more before a bill actually goes to the President's desk for signature.
Great. Then we can move on to operations a little bit, just kind of recap a little bit of the volume trends that you're seeing. I mean, obviously, one Q was interrupted or disrupted a little bit by the flu. We saw a little bit of noise in there. Kind of what have you seen since?
A couple of things happened in Q1. Certainly, the flu was a little bit of a disruptor. Even after the flu season ended, which was kind of middle part of February, we continued to see some headwinds. It was really driven by a decline in elective surgeries from commercially insured patients.
Our read-through on that is that it is more of an economic decision by your patients because it was that group of patients with high copays and deductibles electing not to have care versus the government-insured patients who continue to come in and have elective procedures. Overall, our inpatient volume was very strong. Not much of a decision. People needed care or coming into the hospital. Our surgeries were down. Our adjusted admissions were right in line with expectations, but surgeries were negative.
I think not only for us, but pretty much across the industry. That negative was driven by the commercially insured and decline in elective procedures. As we think about what consumer sentiment means, and I do not think consumer sentiment has really kind of improved much since the first quarter, I do think that that continues to be a little bit of a headwind.
As we think about the full year, I think what that really does, you may see a little more pullback in the first half with people with commercial insurance. As they meet their copays and deductibles through the year, they will rush to come back, get all the procedures in before it resets again next year. I do think that it has the effect of maybe a little more pullback than normal early in the year, a little heavier business in the end of the year.
Is there anything to call out that's different with this year's commercial and copay reset, maybe given that we're getting past redetermination? Could that be heightening that dynamic this year?
I do not think redetermination—we have not seen much of an impact as a result of redetermination last year. I really do believe that it is more of a consumer sentiment that is driving some of the behavior.
Yeah. And then just on the rate side, kind of anything in terms of acuity mix on your inpatient surgeries or other dynamics to call out that's kind of impacting you there?
Sure. Acuity, medical acuity is actually up or was in Q1. Surgical acuity was also up in Q1. With the decline in surgeries and the increase in inpatient medical procedures, that proportional between the two ended up diluting our overall acuity mix because your medical acuity is typically lower. Whereas historically, we've run about a third surgeries and two-thirds medical cases. In Q1, it was more like a quarter surgeries and three-quarters medical. There was an overall dilution to acuity, but individually, each of them improved.
Gotcha. If we could maybe move over to labor performance, still looks like you were having really strong cost controls on the labor side. Wage rates appear to be progressing in line with your expectations. Maybe you can give us kind of an overview there.
Sure can. Average hourly wages increased about 3.5% in Q1. We guided to 3.5%-4%. We were able to offset that really through productivity gains in a number of different areas. Our overall salaries and wages as a percentage of net revenue did not increase in the quarter.
I think we managed to do that very well. In line with expectations, I think with the average hourly rate being at the low end of our guide range to start off the year, that puts us in a pretty good spot. As we see some additional increases come throughout the year, we'll be able to maintain that well within our guidance.
Gotcha. Some of these efficiency gains on the labor side, are these resulting from any specific initiatives, Project Empower, or any of those types of things?
They absolutely are. There are a couple of initiatives that we've put in relative to our new ERP. One, we've moved all of our back office functions into a shared service environment, which is much more efficient in pulling those positions out of the hospitals, doing those all centrally. We've been able to gain some leverage on the labor force to do that.
We've also put in, as part of the ERP, a new scheduling system that functions integrated with the HR component of the ERP. It allows the nurses to do scheduling on their mobile devices, clocking in, clocking out, planning their schedules.
It allows nurses to schedule partial shifts, which has been both a big kind of satisfier to the nurse staff, makes it easier on them, and gives us better insight because you do not have hospitals doing scheduling or departments doing scheduling on paper where no one else can see it. Now we have much better insight. We can begin to align the schedules with patient schedules and surgical schedules to become more efficient in how we are staffing.
Is this kind of flowing through to benefits and retention at all?
Absolutely. Our retention rates have continued to improve. We're probably, with the nurses' RN retentions, in the high teens right now, but that's significantly improved over where it was a couple of years ago. I would say we're probably slightly below or slightly better than industry average in terms of retention. Turnover rates in high teens, not retention high teens, but turnover rates in the high teens.
Gotcha. Is there any indication that you're seeing yet this consumer sentiment or fears over future economic headwinds bolstering the nursing labor pool at all yet, or is that?
Haven't seen it really impact the nurse labor pool. We've had a shortage of nurses for 25-plus years. Continuing to see improvement, the work we've done with Jersey College and I think our recruiting efforts, we've also moved all of our recruiting into a centralized function as opposed to doing recruiting locally at each hospital.
It's allowing us to cast a wider net and take advantage of our footprint being across many of the Sunbelt states where people are moving to Arizona, Texas, Florida, Tennessee have been pretty favorable over the past few years, people moving from the East Coast and West Coast, leaving some of the higher tax jurisdictions for lower tax jurisdictions. Recruiting, kind of with that in mind, I think we've benefited from that and taking advantage to be able to recruit nurses from other areas of the country.
Moving to other operating expenses, your professional fees, I just wanted to kind of get the thoughts there. Some of your peers have talked about a little bit of an acceleration in the first quarter. Just wanted to see what you're seeing there.
Continues to be a pain point for us. Over half of our medical specialist fees are anesthesia. We are also seeing an uptick in radiology fees. We guided to an increase between 8% and 12% for the year. First quarter, our professional fees were up 9%, so in line with kind of our expectations.
We expect it to continue to be a pain point. I think there is a shortage of physicians out there in those specialties. We did, in the fourth quarter, insource a large market with anesthesiology. That has gone very well for us. It took us a quarter to kind of really get up and running. That has gone very well for us, looking at some other markets that we can insource and hire, employ some of those anesthesiologists.
On the radiology side, we're really looking at some technology solutions, which there's more opportunity for technology solutions in the radiology space, either using remote readings, using AI. We're looking at some opportunities to use some of that to help mitigate some of the cost increases.
On the anesthesiology side, is the decision to insource more kind of locally driven, market by market, or is that just a broader initiative that you're pursuing piecemeal, or how do we think about that?
It is somewhat of a broader initiative in the sense that we have hired some expertise in that area to be able to run anesthesiology practices and manage that locally. In terms of decisions about where we employ that strategy, it's a market by market decision.
I just wanted to talk about supply cost. Obviously, tariffs have been a topic of discussion lately. You've mentioned that you have some pretty good visibility consistent with your other members of the Health Trust TPO. Maybe kind of refresh us on what you're seeing there. If anything has really changed in your outlook since we've seen kind of a little bit of a pullback in the tariff concerns.
Yeah. We feel really good about where we're at. We've not seen any increases relative to tariffs at this point. We have price protections out there through our GPO contracting. The majority of those contracts are three-year contracts. Now, thinking about probably a third of those expire each year, a year from now, you could potentially see some vendors looking for price increases if tariffs are in effect.
In the near term, we feel good about the protections we have in place. We also have the leverage of the GPO. As they do think about price increasing, how much of that actually flows through to us, I think will be a little more limited. Maybe an unintended benefit of having put in our ERP is it will make it much easier for us to move market share.
If we do run into situations where a vendor is trying to increase pricing, now that we have complete visibility over the entire enterprise of what's being purchased, how much it's being purchased, and we're actually making those purchases centrally as opposed to each hospital doing their own purchasing, we can move market share much more quickly. In many of these supply areas, it's a pretty competitive environment.
We think we could probably find someone and be able to mitigate any cost increases. As time passes, I think we're also seeing maybe a little less pressure on the tariff side as some of the deals get struck. We're seeing it's not going to be as bad as maybe some had anticipated.
Gotcha. I'm going to move along on to some of the development activity you guys have done, particularly with the physician practice expansions and some other outpatient care sites that you've put in place. Kind of how is that development going? Kind of how are you thinking about capital allocation to those types of initiatives?
Going very well for us. Maybe most recently, I'll speak to a couple. We acquired 10 urgent care centers in the Tucson market in the fourth quarter, adding on to the seven that we already had in that market, but expanding that footprint through an acquisition of Carbon Health. Those have gotten up and running and contributing probably quicker than we expected.
That's been very helpful as another access point for us. We continue to invest in expanding some of our ASC footprint with a couple of ASCs this year already that we've opened and probably will target five to eight new ASCs this year. We've got a couple of additional freestanding emergency departments that are in flight and will be opening up this year. Continuing to invest, probably half of our capital will be kind of growth capital.
We do not have any large inpatient projects ongoing right now. The majority of that growth capital will be kind of service line oriented or access point oriented versus over this past year in 2024. We had two pretty large inpatient projects. We had the patient tower in Knoxville, Tennessee that we opened up at the end of Q1, and then a patient tower in Foley, Alabama that we opened up in Q4. Both of those are fully open now, up and running, beginning to get filled up. Those were more expensive kind of inpatient where we had capacity constraints in those markets. We are adding beds. Now we are focused on some more outpatient.
What is the timeline on that Foley and Knoxville plan in terms of getting them fully ramped and occupied?
Yeah. They probably are fully ramped 12-18 months.
Okay. Gotcha. Just continuing on the investment front, in terms of inpatient capabilities, I know we've seen this outpatient migration. We seem to backfill with higher acuity capabilities. Any kind of investments in particular that you're targeting for your inpatient surgical or otherwise oncology or any other capabilities that you're focused on?
Absolutely. Oncology, one, cardiology is probably being a big one. Neurology and in a couple of markets, oncology. We have built out some oncology departments. All of those being a little higher acuity. Those are areas of focus. In some markets, it is orthopedics. We are pretty well covered in orthopedics in most of our markets. I would say cardiology and neurology would probably be the top two.
I want to make sure we spend some time on capital structure, a lot of movement in the capital structure with some refinancing transactions and a call on some bonds. Maybe you can kind of recap what the outlook is and where you think leverage could shake out long term as we get through some of these transactions.
Sure. We exited the year at a 7.4 times levered. In the first quarter, just to recap, we refinanced $700 million of 2027 bonds, pushed them out to 2033. We used our asset sale proceeds and called our 2028 unsecureds, captured some discount on those.
Exiting Q1, really before we got those transactions completed, our leverage was down to 7.1 times. With capturing some discount on paying down the unsecureds, that should help lower the leverage slightly further. We announced the divestiture of another hospital in Texas, which we should close at the end of the second quarter, early third quarter, which if we use those proceeds, which we intend to do to further pay down debt, should take the leverage down a little bit further.
I think we're looking at something easily with a six handle, kind of mid-sixes kind of by the end of the year. If we think about the DPP programs, which we talked about earlier, we had not yet included Tennessee and New Mexico in our guidance. We fully expect those programs to get approved. If they get approved on an annual run rate basis, that's about another $100-$125 million of EBITDA, which will further kind of boost EBITDA and lower our leverage.
That's an interesting point you bring up with the Tennessee DPP. Any overall thoughts on kind of the holdup on the 1115 waiver to this point? It sounds like the funds are approved, but the mechanism still is kind of in question. We've heard there's a lot of activity in Washington over that. Just wanted to get your thoughts on anything structurally in Tennessee that's different that could be kind of the hanging point there.
Yeah. I mean, we fully expect it to be approved. I don't think CMS would have approved the preprint and the structure of the plan had they not intended to continue on with the remaining approvals. The holdup, we knew all along with the change in administration and having an interim director at CMS that they were not going to issue any approvals until you had a permanent director.
Dr. Oz was sworn in over the past month. Since that time, a number of approvals have started to flow through. We've seen a number of other states and other programs be approved. We saw a couple of weeks ago, at least the preprint for Tennessee got approved. In our view, it's just a matter of time for this to kind of work its way through the system and the approval will come.
Good deal. Maybe you can just get back, we just get back to the divestitures. Any other, as you kind of look at your remaining portfolio, kind of where are we in determining what the kind of going run rate portfolio looks like versus other potential acquisitions? Is it more kind of valuation that's driving the decisions? Sounds like you guys have gotten some good double-digit multiples on some of the sales, which is great to hear. What's driving from here, how you think about the going forward platform?
You know, I think we're in the later stages of the private divestiture program. That being said, we'll continue to evaluate markets. Markets change. Market dynamics change from time to time. I think the most recent one that we announced was a good example where a couple of years ago we had some inbound interest. We were not interested in selling it.
Because of some of the changing market dynamics today and the fact that we had actually improved operations in that market, we maximized the value by waiting. I think if we look ahead five years from now, the current operations will be harder to hold on to. I think that turned out to be a very, very good deal for us. We'll continue to evaluate markets in a similar fashion, really extending our horizon out further.
I think the company's really improved in how we do those evaluations and not just looking at current performance, but looking at what performance could be down the road in making those decisions. Is there anything currently kind of on our mind about, hey, we need to move quickly and sell? Probably not. Things could change as we get in and look to where we want to optimize, where we want to make investments. Similarly, opportunities in some of those markets improve as well. We may want to pivot and invest more in certain markets.
Gotcha. I think that brings us right to time. Unless there's any questions from the audience? Thank you very much.
Thank you. Appreciate it, Ben.