Thank you, everyone, for joining us today. It's my pleasure to be introducing Tenet Healthcare. Tenet is one of the largest providers of hospital services as well as ambulatory surgery centers. Presenting today, we have Saum Sutaria, Chairman and CEO, as well as Sun Park, who's the CFO, and Will McDowell from IR. And I think Will's gonna make a couple of comments first.
Sure. Thanks, Kevin. Good morning, everyone. In the course of our conversation today, we may make some forward-looking statements. In the context of those statements, I would suggest you refer back to our cautionary statement in our most recent earnings release and SEC filings. With that, I'll turn it over to Saum for some opening comments.
Thank you, Will. Thanks, Kevin, for welcoming us. Good morning, and appreciate your interest. Last few months, we've spent a lot of time talking about some of the things we've done in the marketplace with the portfolio, et cetera. So rather than rehash that, and we may touch on that in Q&A, let me just make a few comments about how I see the future. First of all, we've deleveraged the company materially. We like where our leverage is right now, and in the next comments about how we see a leverage ratio target for the future in order to create some clarity for investors and others who have interest, and that's very much top of mind. The second thing is, we see a tremendous opportunity with our ambulatory platform.
You know, we're in this unique space of innovation and ambulatory care growth, which creates a significant amount of value and savings for the system, but it's also unique in the sense that it's value-based care that actually creates value for shareholders, which we don't see as much of today. Site-based savings is critical in our environment of generating more efficient and satisfying surgical services for the future, and we like the fact that we have the leadership position in that marketplace. Our acute care hospital portfolio has been pared and is more focused. We like where the portfolio is, and as we look forward, we plan on testing additional investments in that segment to accelerate growth. Our physician platform is growing and building. We think we've built something that attracts high-quality, productive, entrepreneurial doctors, and we plan on growing that environment in the future. And finally, Conifer.
Conifer has been an incredibly valuable asset. In an environment where complexity has plagued revenue cycle companies, we've stayed focused on the basics, collecting cash across the board at a very, very high rate, and we are now returning the organization to top-line growth coming out of the pandemic. So we're very excited about what Conifer will contribute to the company over the next few years. There are a few things that really won't change as we look forward. Those are our commitment to being a meritocracy for talent, a data-driven organization that is very focused on return on capital, return on invested capital, and a clear partnership with our physicians in order to deliver better value for our patients. Those foundations and the discipline we've established will not change in this coming environment. As we've demonstrated, we're very committed to that.
All right, great. I guess I think one of the things that everyone's still trying to get a handle on right now is the general backdrop for utilization. How would you guys describe... You know, do you believe that utilization is kind of normalized? Are we still kind of below the long-term trend line? Everyone tries to go back to 2019 and trend forward and kinda, is there continue or are we kind of back to normal growth ex-expectations?
Yeah, Kevin, let's break it down between the two segments. The ambulatory surgery segment, obviously, last year had far above our annual guidance. And we really think that the recovery or the deferred care that was probably out there is done. We're returning to a more normal growth algorithm at USPI, and as we've indicated, we see growth building through the year, given the very difficult comps from prior year. The most important thing from a growth standpoint in the ambulatory business, from my point of view, is not numbers, it's acuity. It's acuity and net revenue per care, acuity business, because that's where the value is created for the system. And all of our investments are very much dedicated, especially on an organic basis, into building those programs in our centers. I think the acute care side has more recovery to go.
I anticipate that this year and even part of next year, in recovery in the acute care segment, probably over time, a heavier mix of government, especially Medicare, returning into the environment, more fully. And also, you're still filling that unfortunate, you know, demand hole that was left from all of the premature mortality that occurred due to COVID upfront rather than over a longer period of time. So as more people age in to that higher utilization or last five years of life, we'll see that recovery, would continue, you know, somewhat five years after 2021 into the 2025-ish timeframe.
And so I guess for the last few quarters, you guys have been talking about, you know, labor costs being high, particularly, temp labor costs being high, and then it's come down, and you said, well, now it's come down to a point where potentially it makes sense to kind of reinvest in labor to try and grow volumes again. I mean, how much, how much of where volumes are today is a function of you active business lines versus economically, it didn't make sense, but it's starting to make sense, and we can maybe now start to see some of that recapture?
Yeah, Kevin, I mean, you have to put this in the long-term context of what we've been trying to do with the company. The acute care portfolio, not just the portfolio, but the operations, if you go back five, six years, needed a significant amount of restructuring, right? It wasn't just whether we kept or disposed of assets, it was also the service matrix that we were deploying in each of our assets. The pandemic allowed us to accelerate that transition, right? And so we've been very clear, we're not chasing 2019. What we're chasing-... same as in the ASC business, in the acute care business is a high acuity, emergent and elective platform built around specialists that drive profitability. If you look at the outperformance of our hospitals relative to our expectations, we're absolutely convinced that strategy works.
I think for us, as the portfolio has become more even across the country for us, we now have a bunch of investable, more investable markets, including those that were slower to recover from COVID, where we can begin to add capacity back. We'll do it thoughtfully. We'll do it diligently. It's not gonna be a massive opening that occurs with a bunch of costs that's allocated to it without an obvious source of demand. But we do see that as a potential accelerant over time. You know, in the first quarter, 4 and change %. You know, that's pretty significant, again, above what our guidance was. So we do see those opportunities to add capacity back.
How long does that take? Is that the situation of the beds are there, so it's just about investing in nurses, or does it mean recruiting doctors? Does it mean building out things and that this is a multiyear dynamic?
Yeah, it's a combination of staffing, the right physician capacity, the right technology for the service lines. Again, I think we plan on adding that capacity back, what I would describe it, rather than a quarter or two.
And, I guess when we think about just volume trends in general, there's been a lot of focus about how utilization started the year, end of the quarter, you know, you know, has gone into April, a lot of focus on the calendar and how things have gone in. So, like, how is April shaping up? Is it looking the way you would have thought off of the March calendar impacts? How many comments-
Yeah, I mean, I'm not gonna comment on the second quarter. Look, what I would say is that Easter happens every year, okay? That doesn't mean that everybody plans for it perfectly in the way this happens, but let's not make Easter and the calendar an excuse for, you know, something that happens every year. We were really pleased with what we saw in the first quarter, and I'm pleased at the demand environment that we see today.
Okay. And then, you know, we've talked a bit about around the asset portfolio pruning that you've done on the hospital side. The commentary from here sounds like you're... Are you done with it, or is it—is that not necessarily the takeaway from what you've been saying?
Yeah, I mean, we were happy with the portfolio before the asset transactions, right? Because we believed we could invest and grow in those, in those assets. But they did have the one. There were two things that came together. One was strategically, over a longer period of time, we didn't think that in our business model, the return on capital in those markets would be as good as in other places. And obviously, the second component of it is we had put a lot of work into improving them over the last five years, so we expected a premium price that would materially contribute to our deleveraging if we were going to be sellers. So if you think about our portfolio today, we're happy with our portfolio today. I think the marketplace understands the conditions for sale if there are additional assets that potentially could be sold.
I guess if you think about that pruning, I mean, to your point about the leverage today, I guess, like, when leverage is 4.5, and you could get assets at 14x-16x EBITDA, that's a great transaction. It's deleveraging. When your leverage is 3.5, does it make the same sense to sell, even if the multiple is good, if deleveraging is not a priority, what do you do with that capital, like?
Yeah, I mean, one of the, one of the really nice things about Tenet today is that we are a diversified company with other investment opportunities outside of the acute care market. So while we believe that allocating more capital, for example, on a per-bed basis and other things into the acute care market, gives us the opportunity to test more accelerated growth in the acute care market as we come out of the environment we've been in over the last five years. Remember, we have to measure all of the investments we make against returns in the ASC business or the Conifer business. So we believe there's. I mean, it's an incredibly fragmented market. We're a small portion of that market. We're on the right side of the value equation. We believe that capital can be allocated into that environment when opportunities arise.
You know, if you look at what we did in the first quarter, we proved that, right? I mean, we invested more than our entire annual allocation because we saw the right opportunity.
Yeah, so maybe it makes sense to talk about the surgery centers, which are, you know, increasingly the growth story here. What was it about the first quarter? Was it just happenstance that all these deals came together? Was there, is there something going on in the marketplace that, or your, you know, deal sourcing that allowed that to happen, and how should we think about deals for the rest of the year?
Yeah, we, I mean, all these deals coming together in the first quarter was a bit of happenstance. I mean, both the hospital transactions, the ASC acquisitions, some of these had been in the works for, or negotiations or whatnot, for 18 months. And, you know, they happened to come together, not to the happiness of many of the members of our team, given how much had to happen in the first quarter, as you can imagine. But, you know, we were pleased to get them done and get them done in the right way. You know, I don't think... Obviously, it's not practical to have quarters where that many things transact at the same time. But from an ASC standpoint, what I would tell you is that we're really happy with the pipeline that we see looking forward.
Still, there are significant numbers of opportunities, high-quality assets in orthopedics and other things. Remember, we have 30 de novo in the works and scaled and planning to open over the next couple of years that will add to our growth platform.
... Yeah, and so, on the when you think about the surgery center growth, you know, you mentioned that a lot of the growth is going to be driving high acuity services. I think that, like, the market always has a little bit easier time understanding volume growth than they do pricing growth, because pricing growth sometimes has one-time things in it.
Yeah.
You know, and so when we think about, like, that, that growth, we should think about volume, how much we think about pricing, how much we think about the core pricing, and then how much we think about acuity and, and shift driving it. Like, what's the way to think about that going forward?
Yeah, I mean, one thing I would say is that, you know, we have historically, as I said, been very data-driven about why we believe 4%-6% on a basis plus M&A is viable for USPI, because we see a 10-year track record, right? More than 10-year track record of that. The problem is it's lumpy, right? There are years that outperform, there are years that... But if you look at it from a compounded annual growth standpoint, it's pretty consistently, in that risk, tends to be 2%-3% volume, 2%-3% net revenue per case, which is a combination of price and acuity. If you look at what we're doing with the business today, we're focused more on acuity and growing that acuity than we are the case volume, right?
Because I always give the example, as we move lower acuity stuff, one hip or knee replacement, in the same time, you do eight or 10 pain procedures. But we're going to make that trade every time that it makes sense to do so, and that's why you see in the first quarter, for example, and we are basically flat from a volume perspective on a 9% quarter the prior year, but 6% and change increase in our net revenue per case, which is more than double what we guided to. So I would say we're also still understand how our portfolio at USPI is evolving, which will allow us to refine that guidance over time.
I guess, you know, there's one thing about the no-no promise that the next 10 years will be the same. So, like, when you think about what is lining up and driving that high acuity shift over the next 10 years, like, what are the things that we should be focusing on as kind of saying, "Okay, I can see visibility into that?
I mean, we still believe orthopedics is the number one growth opportunity across the board, spine associated with that. You know, we're innovating in areas like urology and robotics in particular. We've got over 100 robotics programs in our ASCs today. That's in the ASC environment. As we build de novos, our capital plans and physical infrastructure planning is designed to accept robotics in that environment now on a go-forward basis. So we think there's a lot of opportunity there, as we look ahead.
And how do you capture that? I mean, I guess there's a lot of opportunity now for, you know... For years now, there's been more surgery centers than there are hospitals, right? And so physicians have options. How do you, how do you bring those physicians in? How do you convince them that USPI is the place to go versus somewhere else?
Well, I mean, the number one thing is you have to be good stewards. I mean, these are joint venture businesses, right? You got to be good stewards of their resources, run the centers well, make it efficient for them, make sure that the patients have a good experience. And, you know, look, for many doctors outside of their house, this is probably the largest investment they're going to make into an ASC and the ongoing capital needs in an ASC. As you get into higher acuity ASCs, the capital cost for those ASCs goes up because of equipment. As you get into robotics, the capital cost goes up. The doctors have to contribute to that. So you got to treat that investment they're making, it's a big investment for their family, and generate a good return.
USPI succeeds in the marketplace because we generate the best returns, not only for ourselves, but for our partners. And that's how doctors come, especially high-quality groups, come to us.
And so when you think about how you drive those returns, what is it that drives the returns? Is it your pricing? Is it your purchasing on supplies? Is it... Like, what-
It's across the board. I mean, it's everything you would think of in, you know, running a healthcare operation. It's, you know, better supply costs, higher throughput, a detailed understanding of the operations from an efficiency staffing standpoint. Frankly, it's solid compliance and regulatory, so the centers don't have to be shut down for whatever reasons. It's rapid recovery. You think about the states we're in, and we often have centers that are impacted by weather or other things. We get them up and running very, very quickly. And of course, related to that is being able to bring all of these centers into our national managed care network, so that patients can access our centers without fear that their insurance, without fear that their insurance won't be applicable in our environment. That's really critical.
One thing to remember, our ASCs are all on freestanding rates. We do not have site neutrality risk in our ASC environment, and that's critical because there's a lot of HOPD ASCs out there, in the environment, some of which also are partially out-of-network. We bring everything in-network and onto freestanding rates with respect to our ASCs.
When you think about the amount of deals that you've done, you know, a couple of years ago, we had the SCD transaction, which kind of ramped up slower than what you were thinking about. I mean, when you look at these deals that you've done, is there anything about physician recruiting that you're kind of banking on or expecting, or is there any theme to the deals that you've done that we should be thinking about? I think about integration risk, I guess, for-
Yeah, it's a good question. I mean, SCD was a large chunk of centers, right? I mean, it stressed the system, let's be honest. Our assumptions about how quickly we would integrate- you know, 100 and whatever it was, 80-something centers, were probably a bit aggressive.
2%-4%, 3%-4% range. So it's something that we can work with, on a basis. And to Saum's point earlier, we can make the right investments in our staff, in the right opportunities. And we already touched on, you know, contract labor as well, that we, you know, we feel it's stable, and it's been, you know, at the 2% to 2.9%, 3% range for a while now, for 10 at least.
Okay, and then I guess maybe going back to the earlier question I asked about volumes. You know, it's interesting because we look at HCA's volumes in Q1, they're 10% above 2019 levels. Like, UHS is, like, 5% or 6% above 2019 levels. You guys are 12% below 2019 levels, and that is, and due to the focus on the business lines that have the most profitability. But how much of that delta is, are things that could make sense today that just didn't make sense two years ago, three years ago, when labor was out of whack? I mean, like, how should we think about quantifying that opportunity?
Yeah, well, I think, I mean, for us, the nice thing is that's potential upside, right? So you gotta, you gotta step back and think about it in a couple of different ways. First of all, we did a lot of restructuring and capacity constraint of case mix index rose more than anybody in the industry, right? So it was a very different strategy that we employed. Why did we do that? The market exposure that we had kind of two groups of markets, one that were just tight shutdowns during COVID, and others that were, for lack of a better description, more open. And I'm not sure we saw differences in outcomes between the two for patients, but we definitely saw differences in demand, utilization, and comfort with practicing.
So we chose to constrict capacity in a number of markets from a contract labor standpoint and therefore, a bed volume standpoint. We optimized acuity, and then actually, as we optimized acuity and staffing and our cost structure, the profitability rose materially of the book of business, right? Which again, I go back to our hospitals, you know, keep outperforming. I mean, a few years ago, we said that we were gonna be 50/50, you know, in our earnings, ASCs and, and the rest of the, and the rest of the company. And we've made assumptions at that point in time, what we thought our hospital earnings would be this year. We're so far ahead of that on the hospital side, that it continually makes that a challenge.
A good problem to have, but we've learned a lot about how to get this hospital portfolio to have... Now, we've had some things in the environment change, reimbursement, et cetera, that gives us opportunity to open up more capacity in some of those more constrained markets on capital, right? Achieving fair reimbursement in a place like Michigan, for us, as the primary safety net provider for all of Southeast, Southeast Michigan, makes that an incredibly investable market for us, like many of our other states, which before we didn't have as much strategic flexibility. So we, we understand what opportunities that may create for us.
Yeah. I guess when we think about, you mentioned that, you know, there's been some reimbursement changes. You've gotten some of the payments in some states, you know, the exchanges have been, you know, quite strong. I mean, how do you think about election risk? Like, what, what would happen if subsidies went away, you know, in 2026? Like, is that a meaningful part of the, the business? Would that be more of an impact on volumes or be more an impact on margins? How do we think about that?
I'll just maybe give a little bit of a ballparking of the exchange piece, and then Saum can comment more qualitatively on the election risk. You know, I think we've heard a lot about the exchange volume. As we've sort of said, in Q1, we saw about a 57% increase in our exchange admissions, so it's significant, right? At least on a baseline, if you look at the Q1 piece. To put that into context, exchange volumes, admissions represent about 5%-6% of our total admission volume. So while in a quarter, in a year, when it goes up significantly, you know, we notice it, and it's meaningful for our numbers.
I think in the broader sense of our total hospital business, you know, that 5%-6% hopefully helps put a little bit of context on it, even if, you know, the subsidies go away and you see some x% price elasticity-related reduction in exchange volume.
Yeah, I mean, more qualitatively, I mean, probably from an economic standpoint, the number one thing that I worry about is what the potential impact of the exchange subsidies be. There's more being written about that right now, about price elasticity and what impact it could have on enrollment, if those subsidies were to entirely disappear. But, you know, when it's 5% of your business... And remember, Tenet had taken a very proactive strategy of not only being in as many networks as we could, but being reasonable about how we price them commercial minus rather than Medicare Plus. So we like the position we're in. We believe in the marketplace. We don't think the marketplace is going away, but if it contracts a little bit, that's probably the number one thing, at least from an economic standpoint, that I worry about.
You know, Medicaid redeterminations obviously are proceeding, and look, in the short term, we're now obviously finally seeing economic benefits from that. I stand by my statements that ripping insurance out of that many people's hands is not a good thing, and it, it's not a good thing for the industry, let alone the communities. As the Medicaid populations drop in some of those areas, remember, supplemental payments are tied to that. So right now, you see the benefit of the exchanges. If supplemental payments drop in the future, that's a little bit of a headwind, but I actually think based on the volumes that we're seeing and the demand environment we're seeing, we don't really forecast that right now, which is why we haven't said much about it.
And again, I think Medicare still has some room for utilization to come back to where it was on a pre-pandemic basis. So, you know, you're just kind of adjusting as you go for the ride.
We talked a little bit about the portfolio pruning throughout the conversation today, but are there negatives that you think about when you sell hospitals? I think the market seems to be concerned that that could hurt either your pricing, either at the hospital level or the surgery center level. Could it hurt the purchasing that you buy supplies at? Is there any negatives that you think about when you think about, "Should I be getting out of this hospital system or not?
Yeah, sure. I mean, obviously, we've been pretty clear about our strategic criteria for divestitures, and we don't think it has a material impact on any of the, any of the factors that, at least the assets we've sold, any of the factors that you just described. Look, in particular, with supply chain scale, in, you know, physician preference items and other things, even as the hospitals downsize a little bit, as USPI grows, you know, our aggregate volume of purchasing and orthopedics equipment or other things, you know, will grow over time. And to the extent we can manage that appropriately with a good degree of standardization and other things, we think we can do fine from that standpoint.
Okay. And then, on the leverage side of things, you know, I think the market certainly has been applauding leverage. I think part of- a good part of the valuation improvement that you've seen over the last, you know, six months has been that, that deleveraging focus, the improvement that that leads to from a free cash flow perspective. You know, I, I guess, when you think about leverage, how do you think about it? There's the debt to EBITDA, there's debt less NCI. Like, are you, are you focusing on one metric over the other as kind of where the target is, and how should we think about where those numbers are today versus where they should be?
Yeah, so I think, you know, we're transparent with both metrics, but inside, internally, when we speak with you all, when we speak with investors, et cetera, you know, we focus on the EBITDA, the EBITDA minus NCI ratio, right? And we currently at 3.5x. And as Saum said, hopefully, later this year, we can be more specific about our internal views on target ranges and where we see, where we want to be longer term. And the last thing I would add is, you know, we try to also make that a part of our internal decision process as well. So as Saum said, we have opportunities now to leverage our capital, whether it's in our existing businesses or other opportunities. And we link that to our leverage target, E minus NCI.
Okay. And then I guess maybe the last question. You mentioned at the beginning, the surgery center volume, you kind of expect to ramp as the year goes on, as comps get easier. Is it just as simple as comps, or is there something else? You mentioned 30 de novos. Like, are there de novos opening, or is there anything else that you would point to that kind of would give you visibility in, in volumes ramping as the year goes on other than just the comp?
Yeah, look, I think the number one thing that one could have been concerned about coming out of last year was that a large proportion of the care was truly one-time deferred, in which case you would have seen a material drop-off in volumes at the beginning of this year, especially in the early first half of the year, where the comps were very tough. That just didn't happen, right? I mean, essentially, the volumes were flat to prior years. So that's good from the standpoint of what we're doing overall. Remember, we had at least 60 basis points-ish of headwinds from things that we were moving out of the environment that were low acuity, and we're going to continue doing that. I'm not worried about that.
We've got to reposition and continue to reposition this portfolio for the future, for higher acuity. And the net revenue per case strength is really, really critical to that. Here's the thing: in the ASC business, you got to think about this as a multiyear journey. There is a tailwind in this business for growth and procedure migration over the next 5-10 years that makes the ASCs an incredibly attractive asset for the company, not only to invest capital in because of its organic potential, but also to invest capital in from an inorganic standpoint because of the material advantages that we have with respect to generating synergized multiples that are very attractive on those acquisitions. So we see this as a long-term benefit to the company and the shareholders to continue to put capital into that segment.
All right, great. That's all we have time for. Thank you very much.
Thank you.
Thank you, Kevin.
Appreciate it.