Okay, perfect. All right. Good morning, everyone. Thanks for joining us. I'm Steve Baxter, the Healthcare Services Analyst here at Wells Fargo. We're very pleased to have Tenet Healthcare with us this morning. As you likely know, Tenet operates a network of ASCs, acute care hospitals, and a revenue cycle management business. From the company, we're happy to have CEO Saum Sutaria, CFO Sun Park, and Will McDowell from Investor Relations. Thanks again for being here. I think we're going to start maybe by throwing it to Will for a cautionary statement.
Yeah, thanks, Steve. Good morning, everyone. A pleasure to be with you today. Just in the course of our conversation today, we may be making some forward-looking statements. In the context of those statements, I would suggest you refer back to our cautionary statement included in our most recent earnings release, as well as recently filed FTC filings. With that, I'll turn it over to Saum for some opening comments.
Hey, thank you, Will, and thanks for having us. I appreciate the opportunity here today, mid-year, mid-Q3, really, in terms of where we are. We feel a great deal of confidence in the business. I would reiterate our earnings guidance for the year, including the raise that we put out after Q2 in both the EBITDA, free cash flow, and our M&A guidance for USPI. We're pleased with the way we are progressing through this year. In particular, from an operations standpoint, the margin expansion has been notable and significant, in particular consistent with our high-acuity strategy, which I'm sure that we'll get into. We're also very pleased that, from a more fundamental standpoint, the balance sheet remains strong, leverage sitting just above three times EBITDA minus NCI, which we're very happy about as we look forward.
I think as we get into a variety of things related to policy and whatnot, we're pretty engaged in those topics. I think there will be a lot to talk about from that perspective.
Okay, that's great. Thank you for those comments. If we were to kind of think about, you know, obviously you had a very strong start to the year, as you mentioned, the EBITDA guidance and the free cash flow guidance have both, you know, come up a lot at this point. As we kind of separate things a little bit between maybe, you know, Medicaid supplemental payments, which are kind of a discrete item in some ways, I know that that's not always how the companies think about them. What we'd call maybe like the core performance, how would you characterize if we kind of strip out the moving parts on the Medicaid figures? What's gone right in the first quarter, in the second quarter? What's driven the outperformance that you've seen so far year to date?
Yeah, Sun, you may want to comment on the proportion of the guidance increase, but, you know, primarily this was on organic performance.
Yeah, like you said, we did have about $100 million, a little over $100 million, of out-of-period Medicaid supplemental payments in addition to our kind of baseline that contributed to about a third of the raise. That said, the majority of the raise was based on core operating performance, strong volumes, strong acuity in the hospital space, obviously strong operating expense controls, and then the same parallel back from the USPI space as well.
Okay, that's great. As we look at the improved profitability you saw in the first half of the year, obviously it is a big positive. I think one thing that definitely, I think people are trying to reconcile a little bit, is the performance on volumes as we moved from the first quarter into the second quarter, where across the industry, and I guess you guys were no exception, volumes were a little bit weaker in the second quarter. As you guys have had a chance to continue to step back and study the second quarter and the trends in the first half, how would you frame the second quarter's performance and what that could mean as we think about the balance?
Yeah, I mean, the primary framing for our second quarter was excellence in operations, right? I mean, I think the important thing about our acute care business is the ability to generate earnings, or in this case, even beat our expectations in our earnings, regardless of what in that window the volume picture looked like in that quarter. That's very important because there are two things related to that, and I kind of alluded to this in my opening comments. The high-acuity business is less elastic, right, and less subject to demand variation. The ability to bring that business in, protect capacity for that business in particular, helps us generate more consistent earnings.
That may be different than the industry at large, but for us, that's a very important component of how we generate earnings in what we're doing and also the role that we play in the communities in which we exist. That's one piece of the puzzle. The second piece of the puzzle is just the ability to be nimble in our expense management. We demonstrated this back during COVID, in particular with labor management during that period of time when volumes were very, very erratic and in some ways fluctuant from month to month and year to year with COVID. Even now, as you look at the first and second quarter, the difference between those two, our ability to drive expense management in order to generate more predictable earnings continues to be proven out.
As I've said, we've now hardwired this into the enterprise in a way where we can rely on it. My characterization of Q2 was it was a strong quarter.
Appreciate that. As we, you know, again, I know there are obviously going to be quarter-to-quarter variations in volume trends, and I think everyone appreciates that that's followed the business for a long time. It would look like the second half of the year is expected to be a bit stronger than maybe the first half was when you look at the guidance for adjusted admissions, same store in the hospital business. I guess how are you guys thinking about that at this point in time? Is there any kind of discrete drivers of that that we should kind of think about?
Yeah, I mean, one thing I would say is that just based upon Q2, we've not changed our demand forecast or our algorithm for how we're thinking about driving business in the second half of the year, right? I mean, if anything, after Q2, of course, we went back and took a look at all of the things we could control: throughput, left without being seen, the ability to move patients through the house, et cetera, et cetera. Our operations were solid. I don't think there was anything particular in a market or an operating parameter or anything else. There is nothing about the demand environment that's obviously changed in one region or another to drive that.
From our perspective, we're very focused on continuing to do the things that will drive earnings, including with the increased guidance that we've put in for the year, which again, I would just tell you, we feel confident and reiterate today.
Okay, great. As you mentioned in your lead-in comments, obviously a lot of focus on policy at the moment. The most near-term thing potentially in terms of the timing perspective would be the enhanced exchange premium tax credits and whether they're extended. Obviously, it's very hard to predict that. We'd love to first just get an update on where you are in the engagement process around trying to advocate for that and what you're hearing there. Additionally, I know there's been, again, it's a difficult item to size, I'm sure. As you think about it, as we get closer to the actual event, what do you think the company would need to see or to be prepared to potentially actually help us think about what the exposure could look like there?
Yeah, let's spend a few minutes on this because I think it is the most important topic from a policy standpoint that exists in the near-term environment anyway. I think, you know, if you think about the last time that we spoke publicly to now, the conversation, and I think many of you have noted this, has really shifted towards the importance of figuring out a pathway to extend the premium tax credits for a variety of reasons, which we'll go into in a second. I think that shift is very positive. I think the range of outcomes has broadened, right? This used to be a discussion of yes versus no. Now it's a discussion of yes with what vehicle, yes with what new terms and conditions, yes, how does it play into what was done in the OBBB to reduce quote unquote fraud, waste, and abuse within the program.
There is an increasing understanding among the majority party that this is politically very important. I look at this two ways beyond the industry in terms of what's driving that change today. First of all, this is a private sector solution, right? We're sitting in Massachusetts where the exchanges were actually developed by Republican Mitt Romney, which is what the Obamacare exchanges were modeled after. There are really two things driving this from what we can see. The first is a recognition that the value of the premium tax credits to individuals below 400% of federal poverty level is equal to, or in most cases, significantly greater than the benefit of the tax relief that was provided in the OBBB. What does that mean?
In simple terms, what that means is essentially that without the extension of those credits, the talking point that the OBBB tax cuts becomes a benefit for the wealthy rather than for all citizens actually becomes a reality if you're somebody who's sitting on the exchanges. That's an important point in terms of the midterm elections. The second thing that's interesting and is growing in the narrative is how important these exchange premium tax credits seem to be for small businesses. I looked at this before. There are on the order of 16 million small businesses in the United States with under 50 employees. The traditional definition would be under 500, but under 50 where you don't have to statutorily provide health insurance. They employ roughly 30, 35 million people in the U.S. every year.
If you think about the primary federal subsidy to small business that exists today, it is the small business tax credit, the tax incentive, the QBI, right? The average small business in America turns out of that size generates no more than $100,000 in net income that's taxable. When you take a 22% average tax rate and then take a 20% benefit on that, you're talking about a benefit of around $4,000 or $5,000. If those businesses ended up having to provide insurance coverage to their employees, that would run on the order of $8,000- $9,000 per employee per year. If you think about it, the enhanced exchange premium tax credits are the most significant federal subsidy to the competitiveness and employment vehicle in small business today.
I think as you combine that with the politics, you'll see some polling work released this week from the very respected Fabrisi Award Group looking specifically at Texas and Florida that will show that the Republican backing among voters and the exchanges overlaps incredibly significantly. The number one issue that you see in particular among small business owners, which are three times likelier than the average voter to have voted for the administration today, support the extension of these credits. Why? Because of the simple math I just gave you related to how important it is to their small businesses. I think there's momentum building in the dialogue that is helping the environment understand the importance of these premium tax credits well beyond the healthcare industry. I think that's what's probably creating more momentum to continue these subsidies.
Okay, that's great. You know, I guess there is a world where it can be hard to strike these deals at times and the company will have to plan for contingencies if that's not the case. What do you think you would need to know to estimate what the potential impacts would be? You could be facing a scenario where you're going to need to put out some kind of estimate about this at some point in the next few months.
Yeah, I mean, you'd need to understand timing. You'd need to understand what's happening to the subsidies. You'd need to understand what enhancements and alternatives that are available, ICRA and other things would be made in particular for small businesses. You would probably need to have some understanding of what the moving parts and pieces will look like with respect to the pricing of the products on the exchanges over time. There has been some discussion of regulating price increases there. There's also been some discussion of increasing cost sharing, meaning reducing out-of-pocket for consumers as a part of this policy. I think when all of that becomes clear, which in one way, shape, or form, it's going to relatively soon, it becomes a lot easier to estimate what we think the impact of that will be.
Okay. To move a little bit onto the Medicaid side of things, obviously, you know, this year's benefit in, you know, from some of the increased Medicaid supplemental payments, which is good to see. There's been a lot of focus around, you know, whether some previously submitted applications were going to be able to get across the finish line and maybe get grandfathered in under some of the policies that we've seen with the One Big Beautiful Bill Act. I guess, what's the latest thinking on, you know, the opportunity set there in front of the companies? That's still something that you think of as a material potential contributor over the next couple of years before we start to think about, you know, any of the provisions that start in 2028? I guess, like, is there a different thought process now?
I think three things. One is, listen, I mean, first of all, all of our guidance has assumed none of the new programs other than that Tennessee piece were approved, right? I think we've been clear about that again and again. Anything that does get approved that's going to increase these programs potentially from the applications submitted will only be a net benefit even beyond what we've already done for the year in terms of our guidance. I think it also lays the foundation or a new baseline going forward. It seems like we're seeing feedback and approvals and back and forth. We've certainly heard about a lot of back and forth between CMS and the state of Florida around their submission. We have, and you guys have seen the reports, Texas, that appears to have or be close to a confirmation of an increased program size.
It feels like this is moving forward from the perspective of CMS taking and sorting through all of these various applications. If, in fact, the trend line continues, this looks like it could be a potential benefit to the baseline. The other thing I would say is that the components of the OBBB that touch Medicaid state-directed payment programs have been pushed out, all the way into the early part, really the very end of 2027 and early 2028. It's really hard to tell what's going to be implemented and actually executed upon at that point. We're not doing a whole lot of planning from that program.
One thing I would reiterate, in our markets where there is a significant Medicaid population to take care of, including with some of the supplemental payment increases that we have seen that we reported as quote one-time items, many of those are based upon work we do organically to grow that business, right? At our cost structure, we welcome this business into our hospitals. Some of the increases that we see in these state-directed payment programs are based upon our work, our services, our receiving high-acuity Medicaid transfers that is based upon actual growth of the business and then growth in our market share, of course, of those payments. We expect to continue doing that and executing upon that as we go forward.
Okay. Just on the hospital, I guess capital side of things, the company's created a lot of value through asset sales over the past few years. Do you feel like at this point in time you've executed on the possible there and you now have the right set of assets in the hospital business, or do you think there's potential for more of this over the next several years?
Yeah, I mean, I would answer this question the same way. After every asset sale we did, I said I was happy with the portfolio, right? We're happy with the portfolio and we'll leave it at that.
Okay. If we think about capital and the improved free cash flow profile of the company, it seems like you have much larger ability to invest than maybe the company has had historically. I think as we look at, you know, try to benchmark maybe CapEx as a percentage of revenue and kind of compare that across the peer set, I think one thing that investors maybe have struggled with historically is kind of contrasting the company's commitment to the high-acuity strategy and maybe what could be perceived as like a lower level of capital investment. Now that you have more ability to invest, do you think you have the right amount of hospital CapEx or do you think there's more opportunity to deploy CapEx over the next few years into the business?
To answer the question directly, and then maybe you can talk a little bit about the numbers. I don't, you know, I think the folks that know the company, you say investors, but investors, analysts, et cetera, know the company, know that very clearly over the last six or seven years, we've taken market share, increased profitability, significantly improved return on invested capital, expanded capacity, opened multiple new hospitals with whatever you're calling the metric of CapEx per bed. I'm not sure how to answer the question of there's concern. I think demonstrably the business has improved significantly with the CapEx per bed that we are spending. I will say that one of the nice things about the divestiture program is that we were able to divest markets where we didn't think the return on invested capital would be as good going forward in our business model.
That may not be true for the folks who picked up the assets. For us, if you look at our capital expenditure, despite having sold that roughly $5 billion of revenue in that business, the CapEx is actually up. The CapEx per bed is going up with the portfolio that we feel comfortable with investing for the future.
Yeah, I had a couple more points. Looking back, obviously, in 2024, we spent more in CapEx than we did in 2023, despite the divestitures that happened in 2024, just as an example. That's number one. Number two, if you look at our overall enterprise, right, Conifer Health Solutions and USPI are very capital efficient, right? If you look at percentage of revenues as the metric you're talking about, we have to focus on the hospital piece where the vast majority of our CapEx dollars go. As we look forward, it's tough to kind of compare dollars to dollars over a year. There are the divestitures. We've also had several big hospital builds that we've completed over the last three, four years. Going forward, I think the most important point is we still believe our portfolio, to some point, is very investable, number one.
Number two, to the extent we dial up or dial down our CapEx investment in any particular year, we have the cash flow and the balance sheet capability to dial that for the right return and the right optimization profile versus having to debate availability.
Okay. It seems like your ability to invest, I think, is a bit more clear than I'm sure the local market competitors might see. Some of the uncertainty out there and maybe have to think about pausing plans until there's greater clarity. It seems like you have the luxury of that not really being as much of an issue for the company. Do you feel like there could be an opportunity to pull forward investments that could drive market share over the next couple of years?
Yeah, I mean, we're doing that already. If you think about our capital planning and the guidance we've given, we're doing that already. Again, our view is we feel that the cost structure of the asset base that we've built on the hospital side is absolutely competitive in every market that we're in, in a way in which we can invest behind it and focus on growth strategies. Even this year, we're pulling forward some capital expenditure on clinical technologies and other things that would help from a growth perspective, and that's good. On the USPI side, of course, we and the entire industry see the tailwind there that exists, including some of the policy things that may come down the line that will support that business. Our ability and interest in putting capital behind that business is very high.
As we've indicated, the pipeline is strong and we've taken our M&A guidance up for the year. We feel very good about that from a capital expenditure standpoint. If you come back to some of the underlying uncertainties around the policy, remember, look at what we've done operationally. Our planning for resiliency in 2026 has not only begun, but is starting to become tangible for what we may want to do. We're looking at an aperture with the mindset of, depending on what happens in the policy environment, what's under our control to execute on so that we can keep investing in the business as aggressively as we have been, right? This is our opportunity as a more efficient operator to use the challenging environment to build and grow the business as we look ahead to 2026 and beyond. That's kind of the mindset that we're taking.
One of the reasons we feel more optimistic about this, regardless of where the environment goes, is we have a lot of structural advantages we can take advantage of in a market that might face some reimbursement challenges or might not.
Got it. Okay. Before moving on to USPI, from the hospital side of the business, maybe just spend a minute talking about costs in the business and how things like labor and supplies and whether you've seen pressure from professional fees moderate at all or factors like that.
Yeah, I think we've mentioned, and it's no different now, that it's a stable operating environment overall from an expense standpoint. Labor has been stable for several quarters. We're back to sort of traditional levels in terms of wages. Our contract labor, we're at 1.9%. Professional fees, whilst it has grown year over year, high single digits, low double digits. If you look at our last several quarters, it's been flat sequentially. I think we're seeing positive development there. If you kind of put all that in the other expense, supplies, et cetera, I think they're well managed. If you take all of it together, it's a stable operating environment. It's to the point now where we can, as we said before, dial up our investment and expenses up or down just based on the opportunity.
Okay. Got it. To talk a little bit about USPI, you guys had a strong start to the year. I think the same store revenue growth was a little over 7% in the first half of the year. As you mentioned, the focus on high acuity can make it a little harder for us to just look purely at the volume metrics to assess the level of demand in your markets. I guess as you look at the performance in the first half of the year, how would you characterize it? What are you seeing in terms of the demand trends once you kind of factor in the pivot you're making towards acuity?
Yeah, no, I mean, we're really pleased. Obviously, you know, the business has exceeded our expectations in the first half of the year when you look at that kind of revenue and EBITDA growth. The integration of the assets that we acquired last year has gone well, is going well, and performing very much in line, and in some cases better than our expectations across the board. As the business builds scale, of course, the ability to generate operating leverage in the business is also important. I mean, I think that, you know, if you think about those 50 centers we acquired sometime last year, I'm pretty sure that there's very little left from an overhead perspective that came with that business, right? The ability to drive the operating leverage is an important part of what we can do.
That, of course, enhances our ability to continue to build and grow in the markets that we're in.
On the policy front, I know that there's been a lot of focus recently on potential phasing out of the inpatient only list. I know those procedures don't immediately move because they're not on a list, but in general, how do you think about things like that in terms of demand funnel and improving visibility to growth over the next several years?
I think there's a couple of things. One is the ability to do more things more efficiently and with good outcomes in the ASC setting is clear, right? I think it's been clear for some period of time. I think the innovation and the ability to actually perform those services coupled with physicians having a degree of comfort of performing those services in an ASC setting takes a little bit of time and it's growing. This gets fundamentally back to the concepts that you hear from us and others about the tailwind in this industry that will propel not only the growth in ambulatory surgery, but the growth in the types of services that can be provided in this setting, right?
I am a big believer in the concept that when you really look at what drives efficiency in the healthcare system, you can go down a path of looking at complex risk-based structures, which haven't really worked, or you can look at site of care opportunities, which the reality is those who are in that business are delivering a lot of savings, and it's simpler and it's clearer. I think that that is probably, you know, the path that we'll see policy go more actively. If you happen to be in the ASC business, that'll be very helpful to us.
In terms of just the pipeline of assets, obviously the company's got an annual target for capital deployment in USPI. As you look at the opportunities, how would you characterize what it looks like now, maybe to what it looked like over the past five or ten years, and any changes in kind of competitive dynamics or interest in potentially doing larger versus smaller transactions there?
We've kind of done all of it, right? We do a lot of small transactions. We've done multiple large transactions. We build a lot of de novos. We don't hesitate to put capital behind the business. Our diligence and investment return thresholds or hurdle rates or whatever you want to call them are very well established. Our processes and procedures are clearly generating the types of returns from those acquisitions that we want. For us, more importantly, the strategic positioning around the types of assets that we're buying helps with our higher acuity strategy, which, of course, again, as I said, we believe creates value for those in government or private pay that are actually financing this work and the demand that exists for that work. We don't see a trade-off between what we want to invest here versus other things that we want to do.
Even beyond our investments of capital in the hospital business, the minimal maintenance, but certainly M&A capital that we put into the USPI business, there has been significant free cash generated and is being generated looking forward in the business, regardless of policy, that is going to also open up what has been a very large aperture for the last couple of years, growing this year for returning capital to shareholders through various vehicles. We've been very active there given our view on kind of the opportunity, given the multiples and the valuation. We will continue to do that. We have a lot more flexibility because of the deleveraging of the business.
Yeah, I mean, that was going to be kind of the next question. It sounds like that's the answer. As we think about, I think everyone kind of looks at what you budget for CapEx and you mentioned there's opportunities to maybe do a little bit more, but it sounds like you're pretty happy with where that's at and there's not a big acceleration required. It doesn't sound like there's necessarily going to be a near-term change to the deployment targets for USPI. Is it right to think that especially with where valuation is, that excess cash flow generation beyond those commitments should generally accrue to share or purchase?
I would say in general, you're seeing that this year, for example, right? Overall, over the long term, we're going to be disciplined about it. If there are additional USPI M&A, for example, we would love to do more. That's obviously the top strategic priorities. The most important part is, we can, it's an and, right? We can do more M&A, we can do more CapEx and continue to be very active in returning funds to shareholders. Where our multiple is today, even after a bit of an improvement over the last several months, we still think it's a very attractive opportunity as an example. We'll be active and appropriate in that activity. As Tom said, as we look forward to the future, again, regardless of the different policy changes, we'll look to continue to be active in different vehicles.
Okay. Yeah. Just a couple like bigger picture questions. I guess you've driven a really strong improvement in hospital margins over the past several years. I guess how do you think about benchmarking where you are today and where maybe these margins could go over time, and if there still are areas for larger efficiencies within the company?
Yeah, no, I mean, of course there are opportunities for improvement. There are, and there are multiple ways to get there. I think our ability to drive share and in particular attractive payer mix, that's been a big part of what's helped improve the margins, our operating efficiencies across our labor supply chain, other expenses in the business, especially our large purchase services environment that we're very disciplined about having a rotation of contract renewal and refreshment that we've put into place helps to drive savings. We're creative in areas like physician service contracts where we link them to our ability to build volumes so that subsidies that may exist can come down or be tempered over time. All of those things I think help.
I've pointed out in the past that an area that we would like to continue to improve on, we may have closed half-ish of the gap in capacity utilization that we see with our hospital side industry leading peer. That's an area that we continue to work on as we build. That said, as I described, we balance that with how we think about the high-acuity strategy and not wanting to put excess capital into lots of med surge towers, for example, when we can be focused on generating the higher margin, higher acuity business that clearly is demonstrating a better return on invested capital. I think fundamentally, we look at the lines of business and we think about elasticity in coming environments. We really believe that the lower elasticity, if you will, in that business lines of business really help us. Predictability is very important for us, right?
If you think about what we're doing and how we're doing it, and we focus on that a lot.
You don't report the Conifer Health Solutions business out separately anymore, but Conifer would love to get a quick update there. I think you've also won some business more broadly for some of the systems that you divested assets to. We'd love to just get a quick update on how Conifer Health Solutions is performing.
Yeah, I mean, the divestitures came with, they took a lot of time largely because there was a lot of diligence going on vis-à-vis Conifer Health Solutions actually. The Conifer Health Solutions business has expanded even beyond the services that were provided to our hospitals that were sold, in some cases, materially expanded and continues to expand. There have been non-divestiture new logos that have been added to Conifer Health Solutions. Look, I'm just pleased that the business is growing again. I mean, our belief was it was very hard during COVID to get out and sell. As I said back then, even there were a lot of things we needed to do to tighten up and improve the point solutions portfolio that we could go out with. Both things have happened and we're starting to see some success on that front. The margins have held.
We have not had margin compression. If you look at it, right, we haven't really, I mean, I know you don't see it directly, but we haven't had margin compression really from our bringing on new clients in what we have done. We feel that that's very good. There's a lot of work and improvements that have gone into further automation, offshoring, and actually a few things that are legitimately AI-driven as opposed to just sort of claiming to be AI-driven. That's helping us. It's helping with workforce productivity on the one hand, and it's secondarily helping, which is making the more, so for example, the metrics that we would put in for how many charts would be coded by a coder or the amount of flow that a typical AR professional would see that they could process, we've increased those metrics.
At the same time, we're using AI more to interrogate all of the details of payer contracts to understand how better to respond to disputes and denials in an automated plus human fashion that's making us more successful. I'm very pleased with the fact that despite the increasing dispute and denial rates, our yield rates have remained very high. Yeah, meaning that it might take work, but we're driving those disputes and denials back to cash for us and our clients. That's really important.
Okay. I think that's about all the time we have, so thank you much for the discussion.
Thank you. Thanks for the time and invitation.
Thanks, Steve. Thank you.