All right, welcome back to the Barclays Global Healthcare Conference. My name is Andrew Mok, I'm the Managed Care and Facilities Analyst here at Barclays, and it's my pleasure to welcome Saum Sutaria, Sun Park, and Will McDowell from Tenet Healthcare. Before we get started, let me take it to Will. I think he has an opening remark.
Sure. Good morning, everyone. I just wanted to say in the course of our conversation today, we may be making some forward-looking statements. I would just suggest you refer back to the cautionary statement in our, earnings materials, in our most recent earnings materials, in that context. And with that, I'll turn it over to Saum for some opening comments.
Good morning, and thank you for having us, Andrew, to you and your colleagues. Pleasure to be here, and, I'll, I'll make very few opening comments, just so that, we can get to all your questions. You know, we had a very strong 2023, and, importantly, beyond the performance, the portfolio transformation and the transformation of our balance sheet is going well. For those of you who recall and have followed the company for a long time, we articulated a set of goals five or six years ago that included repositioning the hospital business to a much higher acuity platform, dedicating capital to expanding and increasing the acuity in the USPI platform, improving the performance of Conifer, both for its clients, its margins, its return on capital, and the ability to introduce and leverage technology and automation, which has gone very well.
We wanted to deleverage the company, which we did do over a number of years, and then finally, as we've talked about more recently, the opportunity to continue to execute our integrated strategy across the business units, and yet at the same time take advantage of the opportunity with very, very high-quality assets that we had built on the hospital side where there were opportunities for transactions that valued the assets in a way that furthered our goals around deleveraging the organization. And we found those opportunities working at it over the last 12-18 months. They happen to be culminating in transactions of assets that may seem like they're all packed together, but this has been a long effort to move down this path the way we have.
We're very optimistic about the future, in terms of what can and should be achieved with the company's portfolio, and in particular, we're very comfortable with the portfolio of assets that we have today looking forward. So with that,
Fantastic.
I'm happy to take questions.
Maybe to start, we can touch on a topic that's been on a lot of people's minds over the last couple of weeks, Change Healthcare. How is Tenet affected by the disruption at Change Healthcare?
Yeah, thanks for the question. And first of all, let me just say, you know, it's obviously quite disturbing that we have a cyber attack on systems that, you know, really, in many ways, form a critical engine of liquidity in the healthcare system, having been through this a couple of years ago. I can imagine what UnitedHealthcare is going through and the state of confusion that can exist in this type of environment. And again, I would just say, first and foremost, it's very disturbing that this kind of thing can happen. For us, Change Healthcare is an important vendor to the company. We utilize it in some but not all of our hospitals, and we do not utilize it at USPI, or in our physician business, but in some of our hospitals.
For us, importantly, the penetration of Change Healthcare's systems did not extend into Tenet's systems. Remember, because of Conifer, we have third-party clients in addition to Tenet, and it's important that it didn't penetrate. And secondarily, you know, two of the most important functions within Change Healthcare's portfolio are the ability to produce clean claims and then the ability to transmit them electronically. Because Conifer's billing edits and proprietary processes are important to us, those systems, for us, were kept on-premises rather than in the cloud, and so they were unaffected. So we've been able to produce clean claims in our environment. The difficulty has been, frankly, submitting them electronically from our standpoint. So we've not had any business operations interruption. It's financial operations, and we'll probably say more about that at the end of the quarter.
Understood. Thank you. Switching to the demand environment at USPI, you delivered strong volumes in 2023 and guided to 1%-3% case growth in 2024. How should we think about that outlook, particularly in the context of the exceptional 2023?
Yeah, you should think about it as, you know, great growth and recovery, post-pandemic. I mean, last year was tremendous. In the first quarter, I think we grew at three times high end of our typical growth rate. While that tempered a bit through the year, it was still well above our normally guided growth rates. Obviously, we had strength in the net revenue as well. So 2023 was a terrific year. We anticipate growth in 2024 as we've guided to. You know, I've said this before. I generally value being incredibly transparent about the fact that if you look back over at least I looked over the last 15 or so years, every time USPI had an incredibly outsized year of growth, usually there would be some tempering of that in the coming year before returning to a normal flow.
You know, the way I look at this is, over a two-year period, if you look at it that way, it's still gonna be above, most likely, our typical growth rate. So we're, we're really pleased with the growth and development of the business. We're really pleased with the acuity. We had some deferred volumes that we saw last year in, in GI and ENT, but at the same time, as I indicated in prior comments, our higher acuity service lines, orthopedics and other things, grew very rapidly. And as long as that higher acuity business continues to grow, I think we'll have a nice tailwind, of in particular net revenue going into 2024, regardless of the actual where the actual volumes settle out. So we, we feel very good about it, USPI for the for the 2024 year.
Great. Total joints has been a key driver of both volume and pricing strength at USPI over the last few years. How much runway do you think is left on total hips and knees moving to the ASC setting, and how are the first few months of Medicare shoulders and ankles going?
Yeah, obviously, for us, broadly speaking, bone and joint disease in the ASC setting is a really important strategic lever, both in terms of our inorganic priorities and in terms of our organic priorities, including what we're doing vis-à-vis physician recruiting. And as you point out, the growth rates on the largest base of procedures in the freestanding ambulatory setting are still growing rapidly, right? I still am amazed that in a very short period of time, we've become the largest provider of outpatient orthopedic services, essentially, as a single organization in the world, and yet it's still growing that rapidly. So I think that the hospital outpatient environment, which is now covering a lot of these surgeries, still has room to move into the freestanding setting as more and more surgeons become comfortable with practicing in that outpatient setting.
You know, I still would remind the audience that most orthopedics training in the U.S. still does not expose the residents to an ambulatory surgery setting during that five or six year period, and it's usually after they've graduated that they have that opportunity. Obviously, they're doing same-day work in a hospital setting, but, you know, that transition of comfort takes time, but it's also an opportunity for us. We have initiated about a year and change ago, maybe a little bit longer now, actually, programs in upper extremity, shoulder, ankle, surgery that we're scaling up through the system. Some of that, of course, happens with your typical orthopedic surgeons that are multispecialty, but we've also started creating a few pockets where we have centers of excellence, dedicated surgeons to those areas, in order to build the protocols to do that more quickly.
It's less about the surgery, Andrew. It's more about how you actually, especially with shoulders, manage the recovery post-op and get them out. It does require good clinical protocols to do that effectively.
Right. Acuity increases have also been a focus area at USPI. What are you doing deliberately to drive that higher, and what are the implications for volumes and unit revenue increases in that scenario?
Yeah, I mean, the number 1 strategic priority, of course, is what we've talked about, which is in the orthopedics services, right? And the revenue intensity there is because the surgeries are more complex, but they also have associated implants and implant costs, which increase the revenue. We've talked a little bit about other strategic initiatives. Our urology, you know, urology has historically been a 90/10 hospital ASC environment, at least for surgical work. United Urology ventures aim to flip that in the other direction to see if we can move to a position of being 10/90 and build protocols to do that and scale that. We're very pleased with how that's going. That's high-acuity work, that is coming into the ASCs. Despite the GLP drugs, moving bariatrics into the ASCs has been a priority.
You've pointed out shoulders and ankles from that perspective in terms of more complex surgery. Then we're starting to build more protocols in the cardiovascular arena. We do a fair amount of that work in devices today, but you know, again, because of the high predominance of Medicare mix, I think that's gonna be a more cautious growth area for us over time.
Got it. Moving on to the ASC development side, I think you're expecting to deploy close to $250 million in the ambulatory segment this year, about 10-15 de novos to come online. How has the competitive environment for ASC assets and surgeon recruitment changed over the last three years? Any noticeable differences?
Yeah, I mean, you know, the ASC space is getting a lot of interest, you know, not the least of which is because we've made such a significant commitment to it, and others have followed. That being said, our approach to acquisitions, and the discipline around them, we haven't really seen material changes in, for example, entry multiples. You know, obviously, we focus more on post-synergy multiples, as being accretive to the company, but we haven't really seen much in the way of changes, from that perspective. I think we have some advantages. Obviously, our scale, our service line development, our relationships with physicians who prompt other physicians to come and join us, and our ability to, you know, deliver the highest margins in the industry. And I think all of those things attract good partners that we can grow with.
Great. In your first year as CFO, what are your early impressions of the business, and what additional value do you think you can bring to the organization? It seems like Tenet has picked up the pace of their hospital divestitures in recent months.
Yeah, so as Saum mentioned, you know, it's been a transformation of the portfolio. It's taken several years to get through, and it's left us, I think, Tenet in a real important inflection point. Listen, I mean, I think the transactions have significantly de-leveraged the company, obviously, but we've also organic from an organic cash flow generation standpoint have also improved there as well. We had a very strong year last year. We expect similar performance this year and onwards while continuing to invest in our business. So I think what I'm really struck by is the opportunity that lies before us with that. You know, our capital allocation strategy, Saum just mentioned, investing in USPI inorganically, $250 million a year on average, investing in our hospital high-acuity strategy, continuing to de-leverage the company, and then a balance approaching share repurchases.
Those were, is, and will continue to be our capital allocation priorities. If you take a step back and say, "Well, how do you execute on those, you know, over the next months, over the next quarters, over the next years?" I think there's a real opportunity there to advance value for Tenet. So that's really what all of us, me included, will be focused on.
You recently announced the two California hospitals and Adventist as part of the divestiture. If you characterize, I think, the first two deals with Novant and UCI as opportunistic, would you characterize these latest transactions similarly?
Sure. I mean, I think there, as I've said from the beginning, we're very comfortable with and have been comfortable with the portfolio. You know, this is a high-quality market, and it's an opportunistic transaction that has multiple components to it. I mean, I think the multiples on the asset transaction were very healthy. The continued expansion of our Conifer footprint is very good. I mean, that's a business that, generally speaking, has higher margins than the acute care space but also has better free cash flow yield, right? And so we feel very good about continuing to grow that business as well.
Sticking with the hospitals for a minute, there's been a lot of discussion around the Two-midnight Rule as a potential tailwind for hospitals this year. What's been your experience to date here, and do you expect any benefit from this change in 2024?
Yeah, we're not really assuming any significant benefit from the Two-Midnight Rule. You know, because of our work in Conifer, we have been very active in the space around ensuring appropriate documentation and certainly ensuring appropriate coding and interactions with the plans around disputes and denials related to two-midnight and inpatient status. So, you know, of course, we've redoubled our efforts in those areas. I think this will largely lie in the hands of the plans and how they respond to guidance from the regulators in that area.
Noticed any changes in observations of this? Any comment on historic?
We haven't yet, but I think, you know, we'll probably have more answers six months from now. You know, look, if there are changes, it's not gonna be downside for the organization. It's gonna be upside. And, you know, that's only a positive thing because many of these patients are adequately ill enough to be inpatients.
Speaking of some other changes, you know, there's been some pretty large shifts in payer mix over the last year between Medicaid redeterminations and just overall growth on the exchanges. How do you think this impacts your hospital business over the next 18-24 months?
Yeah, I'll start, and then if you wanna add to it, I mean, I think that, you know, again, we've said that from our perspective, Medicaid redeterminations are probably largely neutral in the sense that you have some exchange growth and probably some growth in the uninsured. I think if you look at the utilization recovery that's occurring, probably on balance, it's adding a little bit more than being neutral, at this point, given the exchanges. But we're following it very carefully. We obviously spend a significant amount of time with our eligibility and enrollment services in Conifer, in our markets, in our clients' markets, helping people get enrolled, where appropriate, into exchanges or re-enrolled into Medicaid, in order to ensure coverage. So, you know, we think we're doing everything we can to ensure that people have adequate coverage.
Obviously, from a downstream perspective, the hospitals will benefit from that.
Yeah, and maybe in a little bit more shorter term, we're really pleased with our overall position with our network, and exchanges. And then as Saum said, yeah, the Medicaid redetermination, there's positives and negative dynamics that could follow. So from our guidance perspective, you know, we're not assuming anything material, one way or the other. But, you know, we'll continue to monitor that very closely.
Great. Moving on to the labor environment, how would you characterize the cost picture related to professional fees and physician subsidies? Has that been tracking in line with expectations? Would you say that situation is largely stabilized at this point?
Well, I don't think it was ever unstable for us, first of all. I, I think, you know, we, we did spend a lot of time beginning in 2021 initiating a review of all of our physician service contracts and putting in place some longer-term agreements, some, put together multiple service lines in order to, reduce the need for subsidies, and also putting in some contractual terms that would allow us to mitigate the need for subsidies as the pandemic recovery occurred. In other words, volume, improved, and that, of course, improves revenue for the people that are engaged in that activity, and, and that should reduce the need for subsidy. And so, I think for us, I, I, I personally still consider what we've guided to in an 8%-10% increase in cost this year to be a very significant number.
But that being said, it's in our guidance, and we've managed it over the last couple of years. Look, the physician service market has been a bit turbulent and for a lot of reasons. And I don't think that I think it's manageable, but I think it's still in the environment. You know, I think the nursing labor side in particular, look, I'm a big believer that our strategy was the right strategy, which was to, as rapidly as possible, bring down the cost of very, very high contract labor, at first through appropriate capacity constraints, which helped us reposition our services and our hospitals towards higher-acuity things. It was a structural change that we need we wanted to make anyway.
And then, you know, through 2023, utilizing our nursing school relationships that we built through the pandemic to really ramp up our hiring, and the two of those allowed us to bring down contract labor very rapidly. And I still think that was the right decision as opposed to maintaining high, high levels of contract labor. You know, now we have, I think, a better problem to solve, which is, as utilization recovers, how do we strategically add capacity back online where we want to? And if that takes a little bit of contract labor to do as you smooth out the workforce, I think we're okay with that.
How would you compare that marginal cost of labor versus kind of the existing labor?
Oh, it's still high. If you mean contract labor prices?
Yes, the marginal cost of labor for the additional.
It's still high. We're not at pandemic peaks, obviously, but it's still high relative to pre-pandemic.
Understood. Speaking of cost reduction efforts, I think a lot of hospital systems are testing out ways to deploy artificial intelligence. The opportunities that Tenet see or does generative AI present for the company, can you share any interesting use cases for the business?
Yeah, so it's interesting because, you know, we've talked over the last five years about one of the strategic underpinnings from a capability standpoint that we have been engaged in, in the company, has been to build a very robust analytics space. Right? We've talked about it again and again and again. Some of that has utilized AI for years, Gen AI being a little bit different, and I'll come to that in a second, but the ability to use artificial intelligence to make predictive, better predictive choices around what we do has helped us manage our labor. It's helped us manage supply variability. Frankly, it's probably most active in helping us manage in our payments arena in Conifer because we ingest lots of data from different systems in different states, and we understand patterns before they become evident.
And we use that to improve our documentation and coding and various other things. So I would say that in the business operations, on the cost management side, I would say in the revenue cycle operations, we see a lot of potential there. We've put good governance around it in the company and with the board. And we have not really utilized any platforms yet that are directly patient-facing, from that standpoint. Probably the initial areas where we're looking at, in particular, Gen AI has to do with our employed physician business and supporting them in making their documentation, in particular, you know, all of the administrative burden more efficient, giving them more time to see patients. That probably is where I would say our first real foray into something that touches clinical is going to be.
But we're cautious about, you know, broad-based deployment and direct patient touch, at this point with Gen AI.
Great. Maybe shifting back to the capital deployment here in the last minute or so. I think a few years ago, you laid out a long-term target to get to 575-600 facilities by 2025. How would you frame that target now?
Well, it's a real target. I mean, I don't, you know, we're, we're of course, our focus is quality assets and, and scaling in quality assets. We're very disciplined about due diligence, and we're still moving, you know, we're still moving in that direction. But trust me, we're not gonna chase, you know, a set of assets just to hit a target from that standpoint. You know, our, our, our real objective in making that estimate was to outline that we believe that the business would reach a position where the EBITDA generation between USPI and our hospital and associated services business, which is where we place Conifer, would get to about 50/50. And we're, we're kinda getting there, right? And that, that's a really important, really important metric for us.
From there, as we look forward over the next five years, we'll start to set some new goals about what we can do, in particular, in growth and the ambulatory business looking forward.
Great. Well, we're just about out of time, so why don't we wrap it there? Thank you, everyone, for joining, and please enjoy the rest of the conference.
Thank you very much.