All right, I think we're ready to get going on the next presentation. We're very pleased to have Tenet Healthcare with us. We have from the company, Saum Sutaria, Chairman and CEO, Sun Park, EVP and Chief Financial Officer, and Will McDowell, Head of Investor Relations. We're gonna do a little bit of Q&A, but I think Will wanted to make a couple comments to start off.
Good morning, everyone. Thanks for joining us today. Just, in the course of our conversation today, we may make some forward-looking statements. I would suggest in the context of those statements that you review our cautionary statement, which is included in our most recent earnings release and SEC filings. Thank you, A.J.. I'll turn it back over.
No, that's great. Thank you guys for coming. It's been quite a year. We're 11 months into it now. Just maybe to kick off and level set for everyone, what are some of the positives you would have us take away from the year and where, if any, have there been challenges?
Yeah, thanks. It has been quite a year. It feels like some of the transactions that we executed at the beginning of the year were, you know, years ago at this point, given how much has happened. But, you know, this has been a big year for Tenet Healthcare in total and for our business units, with the culmination of many of our multi-year efforts and strategies coming together. I feel like, you know, the core operations agenda and our shift in the operating model that we've been making over the last five, six years has really paid off well in the company so that we can rely on that, especially our data-driven culture in terms of how we're running the operations in order to make better, faster decisions in the operations. The acuity strategy that we've been after for a long time is playing out nicely.
We've been able to add capacity this year, given all of our efforts over the prior two or three years in bringing contract labor down and doing it as a reasonable expense. That's allowed us to expand margins in the core business in both of our key business units. Obviously, long term, one of the critical objectives for Tenet Healthcare was to delever the company. We were able to execute on the basis of transacting markets that we spent five or six years improving transactions at attractive enough multiples and yields on a post-tax basis to allow us to deleverage the company significantly and bring a degree of stability to our future and ability to invest. Our ambulatory surgery business has grown tremendously.
We've executed on and recovered from a number of things that we had going on in our transactions from a couple of years ago, added to that another platform that's performing ahead of our expectations and continued our normal course M&A and operations agenda. And as I said, in a business that performs incredibly well, have expanded, you know, significantly even on those margins. And then finally, you know, Conifer has a number of growth opportunities in front of it, not the least of which are resulting from longer-term and expansion opportunities post our transactions, which is a terrific validation of the results that Conifer can generate within our system and others that people have seen. So, you know, we're very optimistic looking forward.
I mean, we're in a good utilization environment, A.J., but even in a tough environment from an operational perspective, we've developed a lot of confidence in what we can do from 2022 and 2023, and so we're very optimistic about the future.
No, that's great. Well, one of the storylines this year has certainly been the volumes and the strength of volumes. I know there's been some expectation we might even see some tapering off in the back half of the year, but that doesn't seem to have materialized. Certainly, there's return of seniors to the healthcare system, maybe lessening impact of the early mortality that caused by COVID. What are some of the factors you think are driving the fact that we've seen strong volumes? You guys seem somewhat optimistic that we'll see that continue into next year.
Yeah, I think that's right. I mean, our long-term thesis on this, you know, I've repeated a long time going back to 2021 timeframe that with all of the early excess mortality, it would create a demand hole that would be filled, and that may have been the simplest way to look at what the impact of COVID mortality would be, and generally speaking, when you have a lot of expenditures in the last five years of life, you would imagine that demand hole would fill actuarially over a five-year period, and we're kind of in that process, and I mean, simple math would indicate that that should continue into 2025. I think the business units behave differently. You know, the ambulatory surgical business unit, a lot of that pent-up demand, I think came back pretty quickly.
You know, what's driving the growth there is our acuity strategy, but also some of the expansion of indications, in particular in GI and other things that we've seen. The acute care business is slower to recover, of course, and we've been much, much more careful in our strategy of what we want to recover from that standpoint, again, along the lines of our high acuity strategy. That demand has been strong. It continues to be strong. It is strengthened through the year. Coverage because of employment remains strong. Medicare utilization recovering. Access programs due to funding for Medicaid have increased the people's ability who participate in that market to expand capacity to allow that access to flow better into the healthcare system. When you put all that together, you know, it is a favorable demand environment right now.
Okay. Okay. You had an, on the third quarter conference call, a number of things you called out that we should consider normalizing as we think about the leaping off point in, 2025. I think there was a hundred, $113 million of reported EBITDA that won't be, there next year because of, divestitures, some out of, program payments for Michigan and Texas or out of period payments, and, and all. Anything else we should take into account as we think about a jumping off point or how should we think about the move from 2024 to 2025?
Yeah, I would say those are kind of the technical adjustments that we would make on a 2024 baseline, just, you know, by virtue of timing and divestitures, and then, you know, obviously there are lots of puts and takes that's inherent in our various businesses that, you know, obviously we're still in the planning process to kind of add those all up and we'll provide more details when we give guidance, but, you know, maybe I'll just separate kind of those technical pieces versus the business operational puts and takes that we'll go through.
Okay. And do you think when it's all said and done, you'd be looking at some level of growth from 2024 to 2025?
Yeah. In our Q1 earnings call, we said we will, you know, we'll be more than offset those technical adjustments.
Right.
You know, strong demand environment, pricing, operational discipline. We talked about some supplemental potential payment growth, as well as some strategic activity in our hospitals and USPI. So I think with all those, our current view is that we should be able to do that.
Okay, and go ahead.
Yeah. The only thing I would add to that, A.J., is, you know, from our point of view, when we look at it, including for 2025 and even where we are now, look, our objectives when we think about this long term are clear, right? We've in total, Tenet Healthcare is now a very attractive total margin business, right? The margins have improved tremendously. The leverage has improved tremendously. And obviously the growth rates at which we want to operate should improve. I mean, and so when we put that picture together, our purpose is to make sure that, you know, the community understands this is a highly investable business over the long term, not only because of the business units that we're in and the tailwinds that exist in some of them, but also just the fundamentals as we look forward.
I think that's, that's what our 2025 commentary was built upon is that optimism about where we're headed.
And it sounds like, as Sun mentioned it again today, the incremental, you might, you think there may be some incremental supplemental payment opportunities. What specifically are things you call out, anything you call out there that you're watching carefully?
Yeah, I'll say in general, these supplemental payments have been very durable, very, very meaningful. As he said about creating access. So I think long-term environment for these are very positive still. You know, our commentary until next year, again, there are a lot of details to work through, but I'll give like Tennessee as an example, the new program that they're contemplating in Tennessee. I think we're all well aware of it and monitoring it. And that's something that we're putting into our calculus. Now, you know, we'll see by the time we give guidance what the final activity or the decision either happens or not, and we'll you know, communicate off of that.
I was hoping you would tell us that it's already happened and have it today, but.
I was hoping you'd tell us.
Yeah, exactly, and you call out continued efficiencies on the cost management side. What would be, is there a way you can crystallize that so we can picture where there's still some opportunities there?
I mean, operationally, from our standpoint, obviously contract labor being a big extraordinary expense through COVID has come down quickly and nicely, and we've sustained that. You know, I've probably commented a few times that I had a little bit of concern that contract labor would go up as we added back capacity to accommodate volume this year. That hasn't happened so much because we've been able to scale up our nurse hiring through our nursing school relationships, but also not just new grads, but beyond that. So that's actually been managed pretty well from my standpoint. You know, labor efficiencies, obviously in terms of our staffing, are always an important opportunity. Length of stay management is always an important opportunity.
We're still in the process of; it's an ongoing process for us now, constant renewal and renegotiation of our entire purchased services book, which we now have more or less full control of, especially on preference items and other things as we begin to consolidate. Share is pretty important to us, and then there are efficiency opportunities, efficiency and yield opportunities that continue to present themselves, which do impact earnings from our work in the revenue cycle.
Yeah. You mentioned some of the work you're doing on the labor front with nursing schools and so forth. Your biggest peer actually went out and bought one of those. I've heard discussion about that there could be other of those opportunities out there to purchase. Would you guys ever consider something like that? Or how is the relationship with nursing schools evolving? Do you see more interest on their part?
Yeah, look, I mean, I think there are multiple strategies that can be effective in aligning with nursing schools. From our standpoint, you know, we have found great success in being engaged in our communities, one by one in supporting the nursing schools, especially because many of the graduates stay local.
Right.
You know, I think people forget though the scale is different. We actually have a nursing school of our own in San Antonio that has the ability to do a lot of, you know, virtual education as well. There's a decision point there about how much and how actively to scale that up versus what we have today, which is a core of what they do today, which, you know, is really more on a local in-person basis, so I mean, I think for us, the number one driver of the decision-making is our operational need. You know, we're not looking to get into the nursing school business, so to speak, but we have various abilities to actually scale up there if we want to.
Okay. Okay. I didn't know where we would be when we set the conference up and knowing the political landscape, but I guess we know pretty well what it looks like for next year. Obviously, there's a lot of details on policy to be worked out with, but maybe any quick takeaways that you have that, where you would focus? I mean, people ask about Medicaid, they ask about public exchange, Medicare, a number of things. Any high-level comment? Then I want to ask you about a couple specific areas.
Sure. Well, I mean, I think it's good for all of us that we have the stability of knowing what the result is rather than sitting here today, still wondering what the results may be and any ensuing chaos from that perspective and the impact on the economy that we would have. Look, we're pleased. I mean, in the end, the market seems to have spoken that there is a belief that this demand environment, the earnings potential of at least our business and where this may head has a degree of stability associated with it and some trust. I'm taking away as trust and obviously responsibility that comes with that to manage the business through this environment. We can get into individual.
Yep.
Issues as you want, but that's my takeaway. And, you know, it.
Yep. I think the main question we get is around the public exchange.
Yes.
And that has been a tailwind the last couple years for the industry, particularly once the enhanced subsidies have got in. It's been a tailwind for the managed care guys. It's a little harder to know how much of those incremental volume was young healthies that aren't showing up at the hospital anyway. But as you guys have looked at it, and maybe you'll be drilling down more, what do you think about the potential for those enhanced subsidies to go away at the end of 2025? And would that, does that create a meaningful headwind, not so meaningful? How do you think about that?
Yeah. Well, a couple of things. Let's just talk about the policy first and we can get into a little bit of our business. So first of all, I think from a policy standpoint, this has been the most meaningful individual topic that has come up through the election. And obviously because it requires an act of legislation to deal with it, it raises, you know, it rises in importance relative to something that could simply be regulated by the administration. Look, the summary that I would give at this point about the exchanges is that the exchanges have grown. I mean, we're talking about 21, 22 million people who rely on their coverage from these exchanges. Now, remember, the individual mandate was struck down. There was a concern that you'd have to force people into the exchanges, quote unquote, with the mandate.
And the individual mandate being struck down, the market has spoken and has grown the exchanges. Now, obviously the subsidies have helped drive some of that, but I do think that you have a material amount of people covered. You know, you look at the population in the exchanges. I mean, I go look at Texas, Florida, Georgia, and the two Carolinas, which is 50% of the enrollment in the exchanges. And more importantly, together, they're almost 50% of the growth we've seen since the extension of the subsidies and Medicaid redetermination. You know, and if you start to penetrate and dig into that, you find all kinds of interesting things. You know, there were about 1.4 million members at the inception of the exchanges that were small business entrepreneur employed individuals.
That number is more than tripled to be close to a fifth or more of the people on the exchanges, right? These are again, hardworking citizens. And, you know, one will go through, and I'm sure various stakeholders will go through and understand their voting patterns. But if you start to look at who these people are in the states they're in, this is an important part of the electorate for the administration and many of the people in Congress that just won. And so I think there's going to be, you know, naturally a thought process here. And, you know, people chatter a lot about, well, there'll be this trade or that trade for tax policy, this, that, or the other thing.
But I think fundamentally the importance of this coverage mechanism for people at those levels of federal poverty has established itself without an individual mandate in a pretty important way. So look, we expect to engage constructively in this discussion about the importance of the exchanges in the coverage environment.
So is the way to think about it that it's, there's just too many moving parts at this point to try to estimate what, you know, the impact would be on a Tenet or on the hospital industry generally if those enhanced subsidies would go away or is there any way to give a guesstimate?
Well, you know, we can talk a little bit about how much of our revenue.
Okay.
It is, but I, I mean, let's be clear, right? This is an important issue because if they go away, it's not helpful.
Right.
For the economics of the business, right? But we can maybe bound it a bit.
Yeah. I mean, just rough stats on, I think we've been, we've stated this before, from a growth of 60% year- over- year, whether you look at Q, our current Q3 or Q2, and it's been a, as Sun said, a super meaningful driver of growth here. And then on a revenue basis, it's about 6.5%, the exchange population, 6.5% of our total Tenet revenues. So including our other business lines. And just to give a comparator a little bit longer term, you know, back in 2019, it was about 4%. Now, you know, our revenue shape and what's in and what's out is different, but just to give you a little sense of where it was and where it is today. So it is indeed a meaningful part.
Now, to your question, how do you project it out if the subsidies go away? I mean, there are a lot of moving pieces about, well, what does each person do, right, as an alternative? And we can come up with a lot of different scenarios, right?
Right. The only other piece of color I would add to that is that having the diversification of USPI where the exposure to the exchanges is lower than the hospital segment is an important point of diversification. I mean, it's yet another reason why the diversification is a helpful piece of our business.
Right. Right. One, and this is a technical question and if it just has come up earlier, if you have contracts with plans on the exchanges, people are signing up for Silver plans, Bronze plans. Is your rate that you get paid, whether they're Silver or Bronze, because there's one discussion point that says a lot of people to try to hold on to coverage may trade down to Bronze from Silver, if that makes sense, and not just give up the coverage. My understanding is you probably still get paid about the same regardless of what metal tier. You're sort of oblivious to that. It's maybe a network dynamic, but not a rate dynamic. Is that the right way to think about it?
Yeah. I think the moving pieces and parts are more relevant in terms of which products occupy those attractive tiers. So what happens in the exchanges tends to be what you would expect rationally, which is it's hard to differentiate the products. People tend to buy among the cheaper Silver plans. The subsidies and a lot of the math around the pricing and the benefits is based off of those plans. And so the population migrates to those plans. Now, from a plan perspective, we don't run plans, but at the simplest level, my view of it is, you know, there's a lot of strategy in determining how you want to price your plans for how much volume you want to get. And some of that strategy is based upon the rates that you may have with providers that have been negotiated. You're right.
Our rates vary little, vary, V-A-R-Y, very little based upon the actual metallic tier, but they vary based upon the plans that we may be contracted with, and obviously between broad open versus narrow networks.
Right.
Right? And so it is very possible as the downstream recipient who's taking care of these patients that if the membership moves to different products, we may end up with more or less covered lives in our network. We also may end up with more or less in pricing based upon how we're priced in those networks.
Okay. Okay. Interesting.
Yeah.
The other topic, and this is even probably more open-ended, is this issue of tariffs on the supply chain and whether that would have any impact, commodity supplies, some large equipment I know gets sourced out of Europe, Siemens, people like that. Any thought on the ability to respond to that or whether that would even be an issue and how any sense of how much you source from a non-U.S.?
Yeah. I mean, to answer that question specifically on the, on the last question, we have not looked at that carefully. We haven't revealed that obviously, but we haven't even looked at it carefully. Look, on the tariff question, I'm going to back myself out entirely from some depth in the exchanges and just say, I don't honestly have a good interpretation of what they plan on doing and what the interpretation or impact on our business would be at this point.
Right.
So I'd probably just punt that one.
Yeah. That's fine. I think it's sort of an open-ended question and may never even be something we have to answer, but people might get asked about it.
Right.
So, let's talk about USPI for a little bit. Hip and knee replacements, moved from the inpatient only, a couple years back. Most recently, ankle and shoulder replacements, also moved, to the list eligible for ASCs. How far along in the transition do you think we are with some of these products, and how much more of a tailwind might there be as we look out?
Yeah. Well, I mean, a few things there. First of all, I think, you know, as I've said, this is not a cannibalization event. Largely, you know, the market is expanding, and that, that's important to understand. Anytime you get into this kind of lower cost, better service setting, the market expands. There's obviously some business that comes out of hospitals. From an hospital outpatient-based department standpoint, you know, I think we're a third to halfway in terms of what's moved. I also don't think all of it's going to move just because of comorbidities and other things that require an acute care hospital. I think that, you know, as I've said before, one of the gating factors is just getting younger surgeons comfortable in an ASC environment.
Most of them don't ever get trained or most of them during their training don't get any exposure to an ASC. And, you know, I think as people gain comfort there, that'll grow in terms of the opportunity there. We're still growing, you know, almost 20% year- over- year. And we're, I mean, we're the biggest in this space and we're still growing at that rate multiple years in a row. So we feel very good about, you know, the ability to expand and continue to build this. And look, hips and knees are obviously the biggest driver of high acuity orthopedic volume. I mean, they dwarf the ankles and the shoulders piece, but those are important growth vectors for us this year too.
Okay. And as you think about the development pipeline, I know you had mentioned at one point that the large acquisition from the first quarter was weighted toward relatively lower acuity specialties. Is the specialty mix trend up over time? Give us a little bit of flavor. Is that, is that just specific to that deal or do a lot of the de novo start out with a lower acuity specialty mix that you can then move up over time?
Yeah. So a few different things there, A.J.. I mean, one, in the acquisition or the set of assets that we acquired at the end of the first quarter, there was a heavier, you know, GI and other things as part of that. Actually, interestingly, one of the things, of course, we bring to the table is our business development and service line resources. So adding other higher acuity service lines to those centers is one of the reasons that I think we had interest from those physicians. So that work has begun. Remember, we still acquire and deploy significant capital, a goal of $250 million a year in addition to that, you know, and that, that is much more focused on higher acuity type of assets, including our de novos have a much more, a much stronger bias towards, orthopedic centers and, and other things.
You know, obviously that will continue to build and expand our opportunities there. Then finally, on your question of specifically when you open de novos, if they're orthopedic focused de novos, you tend to start with the mix you're going to end up with, right?
Okay.
It's more the volume that ramps as they open up and different physicians come in and you get the operation going, but you do tend to start with the same mix, similar mix what you're going to have.
With the strength and improvement in the balance sheet, leverage, you know, I've been asked about this notion that maybe you could accelerate the pace of adding particularly to USPI. Any thoughts on that or there are deals out there? Would you look at a bigger deal? That's also been a question we've been asked about.
Sure. I mean, look, in the ambulatory surgery space, we follow the entire market all the time. And, if you really look at our history over the last five or six years, we've obviously deployed on average more than twice what we say we're going to deploy because of the larger transaction. So, you know, I would just kind of let our actions speak for what we might be willing to do. Our discipline with respect to our diligence processes, the assets that we want to bring into USPI, our ability to deliver synergies, our belief in the partnership being a high quality set of physicians won't change. And so, as I've said before, we see a lot more things than we actually agree to do because of that. But.
Okay. Maybe just a couple of questions on the hospital portfolio. Obviously, you've gone from 61 a year or so ago down to 49 in the portfolio. How has that affected the portfolio? I know you tend to contract on a national basis with payers. Is there, are you stronger because you have the ones you've gotten rid of or the, or, or less so? Are you, when you think about the metrics and growth and revenue per adjusted admission and underlying growth, is it, is that enough to move the needle on how you think about your ability to get those metrics to your targets?
Yeah. Well, the number one thing I would note is that the ability to contract is based upon the attractiveness of the assets, the desire of, largely speaking, employees covered by commercial insurance in those markets who demand that these assets are in network with the plans that they're doing and the uniqueness of the services and programs that we put into place, right? So I'll address the divestiture question in a second, but if you look at the portfolio that we have retained, those three aspects are strongest in the portfolio that we've retained. Now, in addition to that, we are making investments in growing commercial markets attached to these areas, right?
So suburbs of Charlotte, the west side of San Antonio, the west side of Phoenix, the northern side of Palm Beach County, et cetera, with very focused assets that are attractive where the commercial insurers want high quality assets for members that they're trying to attract based upon the growth and employment in those markets. So the fundamentals of what drive our ability to contract and combine the fact that we have the ability to bring a lower cost platform that's, you know, approaching $8 billion in revenue to the table that pulls cost out of hospitals nationally is a very attractive portfolio. The divestitures. So, you know, if you look at the balance of the divestitures, many of them had a pretty heavy government mix, right?
Or less growth because they were in very, very expensive geographically or landlocked, you know, land constrained environments, the coast of California, Hilton Head Island, et cetera. And so for us to have continued to develop and grow in those markets, it was a different business model that would do that, which wasn't really our business model. I think others have a better business model suited for that.
Okay.
So that's how, that's how we've, you know, we've thought about it.
One thing we've gotten questions on again relative to the election is obviously it's been a pretty tough regulatory environment antitrust-wise under the current FTC. And there's talk that, you know, that may ease up. Do you think we'll see either from your potential to take on deals or from potential for further divestitures and uptake, because of a less onerous antitrust environment?
I think largely speaking, the FTC and the antitrust environment will probably change and be more favorable for business in the coming four years, right? And I don't know how to interpret, you know, obviously some of what's happened in this election. There's a degree of populism that also is relevant to anti-competitive agendas that may exist in other industries. Look, I don't think in our industry and the degree of fragmentation that we see in our environment, that this really affects the USPI side. I mean, remember the market for USPI services is not ambulatory surgery centers. It's ambulatory surgery centers plus all of the hospitals and in many cases the doctor's offices that are around. It's an incredibly expansive market.
So while we're a small fraction of ASCs, we're in a much smaller fraction of medical loss ratio if you want to look at it that way in terms of where the expenditures go. I think you're right on the acute care side, you know, on the margin, there are probably opportunities that would get less scrutiny going forward.
Okay. Should I ask you about the rate update? We had the outpatient ASC final rule come out since you guys reported earnings, update of 2.9%. Anything in there, 30 basis points improvement from the proposal? Anything you'd call out there or how would you view that?
I mean, I'll start by saying before passing to you, there's not a year I haven't complained about the rate update. So I'll be consistent about that. I'll complain about the rate update because they don't really offset the inflation that we've seen, but.
He did. I would say, you know, the final rates are kind of within our expectations. Nothing notable there.
Okay.
Yeah. I do want to come back to your capital position. You're sitting on over $4 billion in cash, with the most recent divestitures leveraged now below three times on even a less NCI basis. Your next debt maturity is several years out, which, how should we think about priorities? I know you've got the commitment on the ASC business, the $250 million, but, how do you think about other things, buybacks, dividends, other opportunities for capital?
Yeah, it was nice to see the $4 billion handle on our 10-Q statement as of September 30. But as we've kind of shared, you know, we have a pretty big Q4 in terms of tax payments, both from our deal activity, gains on those as well as ordinary course of income. So you know, there's some outflows. That's you know, kind of short-term stuff. You know, on a longer-term piece, you know, I think our message is pretty consistent. USPI investments and then also investments to our hospital high acuity strategy. And then we have a pretty balanced approach to share repurchases as well as not just deleveraging, but also actual debt paydown. You know, we did a big $2.1 billion debt paydown this year as well, just as a reminder.
In terms of share purchases, we've actually been fairly aggressive year- over- year. If you take this year into returning value to our shareholders, especially given the multiples that we are seeing and we, you know, we feel we're significantly undervalued. I think as a general philosophy, that'll continue going forward. Now, on a more, a little more tactical basis, you mentioned, you know, our next debt expiry of 2027. We'll see in 2025, you know, the interest rate environment. We'll kind of see how for all the topics that we just talked about today, how it develops in the first half of the year. I do believe at some point actual debt paydown will be part of what we work hard on. The timing and how and the tactics of that I think is still TBD.
Do you have any high cost debt that would be potential? I don't remember that there's anything unusual out there when you start talking about trying to pay down debt early.
I mean, we, we have a range of kind of between 4%-6%, but in the, they're all fixed rate and then in the context of kind of our overall capital structure. I mean, I think they're all pretty manageable. So I think we can be more disciplined about how we chop those down.
Right. Right. And, I do get asked from time to time about a dividend. Is that, how do you think about that philosophically versus?
I mean, philosophically, I look at it and say, given the multiples that we trade at still today and the opportunity to grow into that, it's more capital efficient for us to be looking at share buyback.
Okay. Well, I think we're winding down on time. So I'm going to probably cut it off there. I think you're probably our best performing stock across the universe year to date. So I'll give you congratulations on that.
Thank you.
Wind down and look forward to hearing further updates. Next up in this room, just let me make sure I give people.