Hello, everyone. Thanks so much for joining our BofA Healthcare Conference. My name is Joanna Gajuk. I cover healthcare facilities and managed care at BofA. It is my pleasure to host this session with Tenet Healthcare, who's one of the largest healthcare system operators with a growing and pretty big ASC platform. We are going to talk about that. Today with us, we have Will, who's going to introduce the speakers and have some introductory remarks, I guess, first.
Sure. Thanks, Joanna. Today, obviously, from Tenet, my name is Will McDowell, Vice President of Investor Relations here with Saum Sutaria, our Chairman and CEO, and Sun Park, Executive Vice President and CFO. Just in the course of our conversation today, we'll be making some forward-looking statements. In the context of those statements, I suggest you refer back to our cautionary statement within our most recent earnings release, as well as SEC filings. With that, I'll turn it over to Saum for some opening comments.
Yeah, thank you, Will, and Joanna. Thank you, of course, for having us and hosting us. Happy to be here. Just a few comments to kick the session off. I think probably more importantly than anything else, I just want to reiterate, you know, we're in a period of time with strong momentum in many of the things that we're doing in the organization. I want to reiterate, even with the news from yesterday, which I'm sure we'll get into, our priorities right now in the organization are focused on growth, capital deployment, expansion opportunities in accretive service lines, cost control across the board, as I indicated on our last earnings call. Obviously, our M&A agenda at USPI in particular, where we continue to see a healthy pipeline of ASC opportunities in the marketplace, no differently than we have seen before.
We remain very constructively engaged in the discussions in Washington, as you can imagine, and increasingly at the local level and at the state level, as many of the issues begin to filter out into the more local environments. I'd reiterate again that, you know, our priorities are very much running the business, as opposed to, you know, spending our time, you know, circling about or flailing about on various sorts of contingency plans or opportunities that, you know, we may need to search for. We just do not think we're there yet. There is so much opportunity in running the business right now that that's our focus. Hopefully that's helpful context as well.
No, thank you. That was my intention to start on the core, because, yeah, there's a lot of uncertainty. We can talk about that a little bit. Yes, let's start with the ambulatory surgery center platform. To your point, you know, a lot of M&A, but maybe let's talk about first the core, right? Like, what's the growth outlook for this industry? Kind of how do you see it, you know, I guess, this year and into kind of next couple of years? What are the main drivers there?
Yeah, I mean, I, you know, the ambulatory surgery business has a tremendous amount of growth opportunity, as you're aware. I mean, this is a long, you know, generational, almost tailwind that this industry has in terms of the ability to innovate and move things into a lower-cost care setting, better service levels, and very, very safe and effective surgery. The most fundamental driver, if you think about legacy ASCs, where there's still a lot of tailwind of growth from just demographics, you know, gastroenterology, ENT, ophthalmology, all of those sorts of areas, where you continue to have innovation that drives and expands what you can do there, sometimes even in acuity.
The real innovation in the ASC sector right now is all about taking, you know, riskier, higher acuity surgeries and building the protocols to do them in an ambulatory surgery environment from an HOPD or even a hospital inpatient environment, right? The broad range of orthopedics, the broad range of, over time, spine work, as we've talked about, you know, bringing bariatrics into an environment where the cost of doing that surgery in an ASC makes it highly competitive and, in fact, in many people's math, much more affordable and with a better return than some of the pharmaceutical therapies that are available right now. Robotics, we're north of 150 non-orthopedic general surgical type of robotic opportunities that we have in our ASCs.
We continue to build and expand on those opportunities, growing our vascular footprint, vascular meaning peripheral vascular, as well as cardiac, and over time, beginning to pilot protocols in electrophysiology. You know, there is a lot going on with respect to creating capacity and also the right protocols to do these kinds of things in an ambulatory environment. As you get into higher acuity stuff in the ambulatory environment, the risk goes up, the patient risk goes up and other things. You have got to do it in the right way. You know, the risk of things like medical malpractice and other things when you have higher acuity cases can be much more substantial than if you are simply doing a colonoscopy or whatever the case may be.
We're very deliberate about these things, but very active in migrating as much as we can all of our partnerships to be considering higher acuity procedures in the ASCs, where the sustainability will be in this industry.
Maybe we can also reflect a little bit on Q1 results. I always wonder, you know, is there something else that's happening? Because I guess we're seeing some, you know, different commentaries from payers and providers and inpatient versus outpatient. Can you kind of give us a sense of how you're thinking about inpatient versus outpatient growth? Is there also something to be said about, I don't know, whether people, you know, defer because they think there's things changing, you know, in terms of macro and such, or they actually pull forward some volumes? Is there something to be said about those implications for your volumes too in the near term?
Yeah, well, there's a couple of things to address in that. Let's start with Q1, and then we can talk about, you know, kind of consumer consumption patterns and things. Q1 was a, you know, it's a great quarter for USPI. I mean, we're continuing to do what we've reliably done, which is grow the acuity, reflect that in the revenue growth that we're showing. Volumes were essentially on a same store basis, flat. We went through some of the numbers of, you know, double-digit growth in our high acuity things.
Obviously, you know, we talked a little bit about some of the low acuity stuff that we continue to, you know, appropriately and gently in the partnerships because they're joint venture partners with the doctors, you know, look to move into other settings or at least create some capacity by moving some of that business into other settings to allow higher acuity work to come on board. That strategy is working. I mean, if you notice, the revenue growth has been consistently ahead of our guidance for the last couple of years. The growth algorithm, you know, that we have out there of kind of 3%-6% top line growth, I mean, if you look back at the history of USPI on a same store growth basis, well over a decade, we're, you know, just north of 6%.
That, by the way, is, you know, it's a testament a bit to our strategies and a bit to your first question around the fact that there is just a cyclical and generational tailwind that is going to move things into a lower-cost setting from a surgical procedure standpoint. Because of the high acuity work that we're doing in the ambulatory setting, we're realizing success in our payer contracting strategies, right? Because there's a value equation there that's beneficial to the insurer, whether government or private, by getting expensive things into a lower-cost setting. The more we do that, the more successful we are at working with our payer partners at having better escalators and things of that nature that play into the future in what we can do. Of course, that for us is the flywheel, right?
That's how we present a differentiated value proposition to physician partners, that if you partner with USPI versus others, you're going to get more immediate benefit in the types of things that we can bring, but also ongoing benefit based upon our ability to do these procedures safely and negotiate better rate structures over time than perhaps other organizations may be able to do. That's kind of how the ecosystem fits, you know, fits together from that perspective. Look, the short answer on the consumer side is that we're not seeing any changes yet. You know, we were joking a few minutes ago about, I don't know, for every year that I come here, the casino looks slow compared to, and, but, you know, I don't know, maybe the discretionary income that affects casinos is different than affects ASCs so far.
We're not seeing any impact of that right now in the business, not that we can discern anyway.
Right. And you alluded to this, you know, changes you're making in your ASC business, de-emphasizing the lower acuity, making space for the higher acuity. I guess that was one of the items you called out in terms of the impact to volumes, but also to rate, right? That's positive to rate, right? I guess, you know, it was 9% growth in Q1, right? Is this kind of sustainable growth rate when we're thinking about rate in ASCs, or is there some dynamics we should consider going forward?
I mean, obviously our guidance is our guidance, but, you know, we've been performing ahead of guidance. You know, we have a lot of confidence that this strategy has more runway.
I guess with this shift, you know, lower acuity to high acuity, you know, is there a way, I know you do not give volume guidance, right? You only talk about revenues for that particular reason. Is there a way to think about this being like a headwind to volumes, but then benefit to pricing? Is there a way to quantify it or, you know, want to go that route?
Yeah, I mean, what we talk about, when we talk about pricing, we're obviously talking about case acuity and pricing, right? That the pricing obviously has a government and a commercial piece. You know, the volumes obviously are heavily dependent on the type of volume, right? I mean, one of the things that people don't spend a lot of time looking at externally, because I think probably none of us provide this type of information, but we certainly look at it internally, is how are we doing in terms of revenue and profitability per minute of OR time?
You know, am I really, you know, I'm not going to get into, I mean, we give our guidance the way we give our guidance for a reason, because we've actually realized that it's probably the most important driver of profitability, return on investment, and also, as I described, this kind of flywheel of having more attractive reimbursement and also therefore a more attractive value proposition to the physicians. If we focus on the revenue, focus on the acuity, and give new physicians a chance to come into the ambulatory environment that haven't done so, it gives us more growth opportunities, which is what we're really after. We're not going to change the way we break down that algorithm necessarily, but I appreciate the try.
It's, you know, it's that reason we do that, because we've realized that that's probably the more important metric to be focused on in the ASC industry.
Right. Given the favorable backdrop for the entire industry, is it getting more competitive in ASCs in terms of either partnering with physicians or buying out any kind of dynamics worth noting?
I don't know that it's getting more competitive in any way. I don't, I guess I'd have to understand what you mean by more competitive. I mean, if you look at it from the perspective of how we buy assets and at what prices we buy assets and those sorts of things, it's not really changing that much. I think that as new specialties come online in the ASCs, obviously there's always a lot of other entities that try to give attention to those MSOs and other things that are out there. If anything, some of the more traditional MSO space is consolidating, not expanding and becoming more competitive, right? I mean, if you look at GI, for example, that MSO environment is consolidating more than it is, more than it is, you know, evolving new competitors.
Yeah, I don't know that from our standpoint, from a transaction perspective, we see it as any more competitive. The players in the industry are changing. I mean, the fact that a lot of these MSOs have been bought up by large medical distributors, that's a change in the industry. How will they dedicate capital to the environment to continue to build and grow? That may change because their economic interests are different than standalone MSO businesses, and we'll have to evolve along with that.
Maybe switching gears a little bit, because at the beginning, right, we mentioned the uncertainty, you know, in D.C., there's a lot of different topics we can talk about. Maybe first, you know, the other day, reconciliation bill, I guess the proposed version from House came out. Any high-level thoughts about, you know, what's included, what's not included, and how this could, I guess, translate to Tenet in terms of the impact?
Yeah. Look, the most important reaction that we have to what was put out there is at least based upon, you know, what one might call market wisdom of it being a lot worse. It was not as bad as I think the market was expecting. We, by the way, have the same reaction when we think about ourselves. We look at what was released as a starting point to negotiate back from rather than have it become more aggressive. I mean, that's the reality of where we are. And there's, you know, multiple stopping points here. Look, there's a lot of sophisticated polling that's being done in the industry right now.
The results from all of the pollsters, no matter what side they're on, could not be clearer that with a wide margin, 20-30+ points, voters for the current administration do not favor Medicaid cuts and even more strongly do not favor cuts to the exchanges in terms of the tax subsidies as a mechanism to pay for tax cuts writ large. That's largely because these voters understand their family's P&L, and they understand that at, you know, modest levels above federal poverty, say 100%-200%, the benefits to them and their family of these programs are multiples of what the tax benefit would be from an income tax standpoint. They're very vocal about that.
You know, we think we have a very good position in terms of having important voter sentiment aligned with the notion that these programs are critical to basic healthcare access. We just will keep reiterating that message to stakeholders that are contemplating what they do with the reconciliation bill. As you know, you still got the Senate here to deal with this, right?
Right, right. There could be still some pushback. I guess the one thing we saw in that version, at least, was that, yeah, there was nothing specifically going after the State-Directed Payment Program. That was good, right? Sort of kind of grandfathering the programs that are already in place. I guess that was good. One thing was work requirements, right? Which doesn't sound like, you know, Medicaid is not really a big payer for you, especially on the ASC side, right? That wouldn't really be impactful if that was happening, right?
Right. I mean, it's important to our hospital business, but obviously we don't see a lot of Medicaid demand in our ASC business. The relative exposure of the exchange business in the ASCs is also a lot lower than the hospital business. It's important to our hospital business, of course, in terms of the work we do there. You know, look, the grandfathering of existing programs was a very important message. If you think about the message that I delivered at the beginning of this or even on the last earnings call around our priorities, if you get into the details of some of what was in the reconciliation bill, many of these policies that they're talking about don't take effect until 2028, 2029, right? I mean, our focus is on running the business, not providing 2029 guidance at this point, right?
I mean, if you see my meaning in that, and it's a very important mindset to be thinking that way and not trying to predict where this is going to go over that period of time. In 2029, you're talking about a different administration by the time we get there.
Right. Maybe switching to the hospital business, I guess, that you guys operate, can you talk about, broadly speaking, you know, how would you characterize the volume backdrop today? You know, are you back to normal? I guess you guys have been exiting a lot of services for, you know, the reasons we can talk about, and now it seems like you were opening it. The question is obviously like how much more there is, right, in terms of reopening the capacity to kind of return to maybe where you were before COVID?
Yeah. Again, I've been very clear about this again and again. I'm not chasing the past, and I'm certainly not chasing getting back to something. What we're doing in terms of opening capacity in markets where we had constrained it significantly because of the contract labor environment that existed a few years back is bringing that capacity back online. Some of that capacity is being dedicated to our current service line priorities, not what they might have been five or six years ago. That is our strategy. High acuity, continue to build surgical specialty programs, ensure that we have open access for emergent care, be the receiver of choice for especially the rural environment today, which struggles to get recapitalized in the industry where they need access to higher level specialty care for emergencies.
You know, we have very much a do not say no policy on making sure that we're accessible for those patients, regardless of the payer mix, as a way of continuing to build on our specialization in high acuity work. Obviously, it's working, you know, both in terms of our capital discipline, ability to utilize capacity, and, you know, as you've seen steadily, the hospital segment's margins continue to improve even beyond what one might attribute to some of the expansion in State-Directed Payment programs over the last few years. That's good. You know, with the hospital business having strong demand right now, we'll continue down that path. I think we've been relatively clear about this with respect to the portfolio changes we made without giving necessarily a lot of deep statistics about it.
We find the markets that we remain in more investable for us in our business model than the ones that we divested. You know, we did not end up having to divest in the course of deleveraging markets that would negatively impact both our network contracting strategies, but they also ended up being the ones where we believe that our business model, we can invest more capital on a unit basis in order to grow the business. That is a good thing for us.
Right. And I guess talking about volumes, Q1 was pretty good, right? Adjusted admissions 2.9%. So, you know, is there anything you can tell us about, you know, how this quarter is progressing, whether there are any trends? Because obviously there are some headlines today in the morning from payers. So that's why I figured I should ask you whether there's anything, any comment on the April trends.
Yeah, no comment on Q2. Look, we're happy with the demand environment, you know, that we're in. Our most important thing is to be able to service that demand environment with the discipline of doing it without seeing an excessive amount of cost that deteriorates the margins that we can earn. I mean, there is an importance to being able to manage costs when revenues are shrinking. Like we saw during COVID and, you know, did, and there is an importance to managing our growth in a similarly disciplined way. This is for us, you have to understand this is all about what we've hardwired in the company now, right? I mean, it's one thing if we're having to manage it all centrally.
It's a totally different thing when we can now do this in a mechanism that's hardwired as part of what everybody should expect from Tenet from an operating perspective. That's why we're really happy right now that we're accommodating this growth and maintaining and growing our margins without having to do a bunch of, you know, top corporate level cost cutting, you know, in order to do that.
Right. Maybe let's talk about the margins in hospitals. I guess there was also a good result there. I guess SWE ratio improved. Maybe you can talk about the labor trends and kind of, you know, where you see the wage growth here, retention, you know, turnover metrics and such.
Yeah, I would say in general, as we said in the earnings call, labor environment is very stable, very manageable, whether we're talking about our ability to retain and hire, whether you're talking about base wage rate growth, or whether you're talking about premium labor, contract labor. I mean, I think all those things, number one, external environment is fairly stable. Number two, we're able to manage it very effectively as Saum just said. I think, you know, without any big change in kind of internal external environment, I mean, I think, you know, we feel pretty confident about, you know, what we're seeing, the trends we're seeing right now versus what we think the rest of the year will be. You know, and then it becomes kind of what Saum mentioned.
I mean, we have the opportunity to invest again in the disciplined way into a little bit more, whether it's contract labor, whether it's a little bit more SWB overall, if it means, right, the right return on EBITDA. So, you know, whether do we stay at our current levels, do we, you know, float up a little bit because we're investing into our markets and into positive EBITDA growth, that you may see that, right? Certainly. I think overall it's a very, it's a quite stable and manageable environment.
Because you mentioned the contract labor, it was interesting that you were talking about the fact that you are reopening the capacity, right? It sounds like you did not really have to rely on contract labor as much. Is that also a reflection of, yeah, stable market? You have access to, you know, fully employed nurses that you do not have to rely on contract labor.
That's right. Or hiring a full-time labor. You know, that's what you want to do. Obviously in the management tightly. Contract labor is sort of the additional lever on top. You know, at this point we're at 2% of SWB, which is even at the low end of, you know, even pre-COVID, right? You know, yeah, we'll use contract labor when we need to, but, you know, obviously we want to leverage our full-time staff.
Is it fair to say that at this point labor is no longer a constraint to volume? That could be also another explanation where volumes are pretty good in the hospital setting because, you know, at some point there was a constraint, like you were saying, you were almost forced to close down some services because of the labor availability now, right?
I guess I would say that I'm not sure that I can comment for the industry if that's your question. I mean, for us, we're not viewing labor right now as a constraint to growth in our environment. Yeah. It's a good question in the overall industry, but I'm not sure I can definitively say that for everybody. Yeah.
Right. Which is good. Good to hear that. Okay. Now talking about the other part of the equation when we were talking about margins. Maybe let's discuss a pricing outlook. First on commercial, right? Where are these rate updates now? You know, are you seeing any changes to, you know, when you negotiate with these managed plans in terms of their, you know, response to giving you these rate updates? Can you maybe give us some stats? Like are you still tracking, you know, mid-single digits rate updates with commercial plans and how you're thinking about, say, 2026 and so on?
Yeah, I would say in terms of stats, I mean, I think we're still seeing the same thing generally, you know, 3%-5% rate increases, you know, for the most part. For 2025, we're virtually fully contracted. Even for 2026, we're about 70% at this point. So really good visibility. And then I think we're making good progress in 2027. So I think from a baseline stats basis, we're, you know, we're doing well. It shows up in, I think, our net revenue per adjusted admission. You know, we were at 2.8% in Q1. So pretty solid. I think more broadly, you know, look, I think we always say this. These conversations are always tough. These are negotiations between, you know, our payers who have, you know, things that need to consider versus, you know, Tenet. We bring a lot of assets, service lines, important value to the table.
You know, I don't know that the, you know, the details that you talk about may be different, but the overall theme of these negotiations are pretty consistent. I think, you know, we remain confident in our ability to both get reasonable pricing as well as the network. Again, you know, we bring Tenet and USPI, the hospital and ambulatory to these negotiations. As Saum mentioned, it's a big value driver when you're able to move, you know, high-priced procedures from acute into ambulatory environment. I think all those things are telling us for us.
In terms of these details, that would be interesting to hear whether you're seeing any, you know, increase, I guess, number of denials or changes to like prioritizations or anything kind of in the outside of the rate.
I wouldn't say there's anything new incremental. I mean, there's always a high level of activity that we have to push back and perform for those things, right? That's where Conifer adds a lot of value for Tenet.
Would you say maybe on the flip side, is there any, you know, anything that you can do contractually to kind of improve these terms around denials or prioritizations, or is it hard to fight with these guys?
Let me answer your question this way, which is because rather than getting into the specifics of the negotiations with the different plans, I would say that in an environment with policy uncertainty, the mindset of providers who are willing to look and provide predictability long term and reduce friction with the health plans and some of the health plans who would like to have predictability over a three to four year period and also reduce the friction in their costs regardless of the policy uncertainty, so that if there are changes in reimbursement that occur due to policy uncertainty, both sides can go into their own organizations, control what they can control, manage their expenses, but allow predictability in the relationship is a good way in our view to work with the health plans today. Right?
We're not thinking about this from the perspective of we're so worried about what's going to happen from a policy perspective that we're unwilling to engage in long-term relationships with the plans so that we can hold somebody up next week if we have a policy shock that comes from Washington . We'd rather have the predictability. We'd rather work with them on things that reduce friction. There are many of the plans that are coming around to that form of thinking right now as well. That's where we're finding matches to think about a longer term, you know, multi-year relationship despite the uncertainty coming out of the policy world. Because then we can control what we can control, but the relationship is solid over time. For us, it's required adjusting.
Obviously, we could have thought about that and come to a different mindset, which is we're so nervous about the policy uncertainty and our ability to manage the operation that we're going to only sign short-term deals, for example, in this space. We're not thinking that way. Because our strategy from our perspective in what we're doing in a narrowed number of hospital markets, the ambulatory strategy, which has a nice growth runway and tailwind behind it, and what we're doing to grow our services business at Conifer, we don't think they change based upon those policy uncertainties. We are better off having stable relationships with our health plan partners. That's how we've thought about it. I don't know if that gives a little bit more strategic insight into how we're progressing on these discussions than, you know, we're working on certain terms and conditions, for example.
I know we ran out of time, but I have to ask you about free cash flow because I guess, you know
We're talking about that.
and, you know, balance sheet and leverage is down, free cash flow up. Kind of walk us through your thought process around deploying the capital.
Yeah. I mean, and I think it's a parallel to what Saum just mentioned about despite the policy uncertainty, we feel our businesses, whether it's share repurchases or our M&A and CapEx strategies, it's still very investable. You know, we may have a little more discipline, a little more higher hurdle rates that we think hard about. At the end of the day, we will invest back into our business, again, whether it's through share repurchases or CapEx M&A. That's driven by our balance sheet right now, to your point, in a very strong leverage position, as well as our free cash flow generation. I think we all saw in 2023 and 2024 really positive improvements in free cash flow generation after NCI even. Our guidance and our Q1 performance suggests that we'll continue to do that. We're very good about that.
Great. Thank you so much, everyone. Thanks so much. Thank you.
Thank you for having us.