Good morning, welcome to the Tenet Healthcare First Quarter 2023 Earnings Conference Call. After the speakers' remarks, there will be a question and answer session for industry analysts. If you'd like to be placed into question queue, please press star one on your telephone keypad. Tenet respectfully asks that analysts limit themselves to one question each.
I'll now turn the call over to your host, Mr. Will McDowell, Vice President, Investor Relations. Mr. McDowell, you may begin.
Good morning, everyone. Thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's first quarter 2023 results, as well as the discussion of our financial outlook. Tenet senior management participating in today's call will be Dr. Saum Sutaria, Chief Executive Officer, and Dan Cancelmi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation which has been posted to the investor relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information.
Investors should take note of the cautionary statement slide included in today's presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission.
With that, I'll turn the call over to Saum.
Thank you, Will. Good morning, everyone. We're off to a nice start for 2023. Strong volumes support good results in all three business units. USPI's performance continues to accelerate given our focus on organic growth and is ahead of our expectations so far. In the first quarter, we delivered net operating revenues of $5 billion and consolidated adjusted EBITDA of $832 million, which translates into an attractive 16.6% margin. As a result of our strong performance in the first quarter, we are now raising our full year guidance, which demonstrates the confidence we have in our operations. Across our businesses, a post-pandemic environment is taking shape. COVID admissions are down, a wider range of acuity is returning to the hospitals, deferred GI procedures are returning, and our workforce is starting to stabilize.
We have anticipated this for some time. Our strategy, operating efficiency, and capital discipline enable us to deliver attractive performance in this environment. We had a great quarter at USPI with $340 million in adjusted EBITDA, which represents 21% growth over first quarter 2022. Same facility cases grew 7.9%. Adjusted EBITDA margins were strong at 37.6%. As I've said before, the continued migration of procedural services into the ambulatory setting is a sustained and significant tailwind for our business. Growth in our active physician population as well as higher acuity service line expansion, especially GI, urology, ENT, and orthopedic cases, drove the first quarter volume strength. We are pleased to have our organic growth initiatives gaining traction and bearing fruit. Our USPI development pipeline remains active and healthy. We added three new centers in the quarter.
We completed two additional post-transaction buyups in the quarter at multiples unchanged from prior buyups. Progress continues in this area. As previously discussed, USPI's M&A engine under the Tenet umbrella is an industry-leading differentiator. We continue to drive post synergy multiples for many of our acquisitions to below 5x. We intend to invest approximately $250 million in ambulatory M&A each year and have a robust pipeline to support that level of investment. We are also energized by the level of de novo activity in the USPI pipeline with over 25 centers currently in syndication stages or under construction. USPI is the preferred partner for high-quality physicians, as demonstrated by our organic growth and development pipeline. The linkage to our hospital business creates a superior platform of management talent and significant scale benefits.
Turning to our hospital segment, we generated $405 million of adjusted EBITDA in the first quarter of 2023. Same store hospital adjusted admissions grew 6.7%, and ER volumes grew 4.8% over the first quarter in 2022. On a non-COVID basis, same store inpatient admissions were up 14%. Acuity levels remain strong as our case mix index has grown at a 3% compounded annual growth rate since 2019. We continue to expand access to high acuity specialty services across our hospitals and enable access to cutting-edge clinical technologies. In the first quarter, we maintained our focus on cardiovascular, neurosciences, specialty surgical services, trauma, and women's health.
A few examples include a new non-invasive focused ultrasound technology to treat Alzheimer's patients at our Delray Medical Center, certification of our Resolute Baptist Hospital as a Joint Commission Advanced Primary Stroke Center, and the achievement of a level one trauma designation at our Desert Regional Medical Center, which enables us to provide total care for nearly every aspect of injury across a broad region of the Southwestern United States. Our workforce is getting stronger. Investments in 2022 in pay and benefits have reduced turnover, and the pace of first quarter 2023 nurse hiring continues to accelerate. This helped to further reduce our contract labor costs in the first quarter of 2023. All in all, our hospitals have had a nice start to the year. Conifer continues to perform well for its clients and deliver strong margins. Ongoing technology automation and offshoring initiatives support that performance.
Third-party revenue was up 3.8% in the quarter. Cash collection performance was strong in the quarter, helping to drive Tenet's days outstanding and accounts receivable down by two days from year-end. Conifer continues to ramp up commercial activities with strong sales pipeline for 2023. Looking forward, we are raising our full year 2023 adjusted EBITDA guidance by $50 million at the midpoint to a range of $3.21 billion-$3.41 billion. Our management discipline, operational excellence, and ongoing investments in talent have enabled a strong start to the year, and we remain focused on accelerating performance across our businesses.
At USPI, strong margins, organic growth tailwinds, and inherent capital efficiencies generate significant free cash flow. Continuing to add centers with strong margins and attractive post synergy multiples remains a great use of cash for investments to enhance Tenet's free cash flow. These cash flows will enable us to further grow, deleverage the balance sheet, and return capital to shareholders in the future.
With that, Dan will provide a more detailed review of our financial results. Dan?
Thanks, Dan, good morning, everyone. Our financial results in the first quarter were strong with our USPI and hospitals adjusted EBITDA and same-store volumes and revenues well above our expectations. In the quarter, we generated consolidated adjusted EBITDA of $832 million above the high end of our first quarter guidance range. Our results were driven by strong same-store revenues and volumes, continued high patient acuity for non-COVID patients, and effective cost control. I'd like to highlight a few key items for each of our segments. Let's start with USPI, which delivered strong growth and continues to provide high-quality care to our patients. In the quarter, USPI produced a 7.9% increase in same-facility surgical cases compared to last year, with strong growth in GI, urology, ENT, and orthopedic cases. Surgical cases were 107% of pre-pandemic levels in the quarter.
USPI's adjusted EBITDA grew 21% compared to the first quarter of 2022, and its margins continue to be very strong at 37.6%. We are pleased with USPI's excellent start to the year. This strong performance is a testament to the attractiveness of the portfolio and value that we provide to our stakeholders. Turning to our acute care hospital business. First quarter, same hospital adjusted admissions increased 6.7% compared to the first quarter of last year, and total same hospital inpatient admissions increased 4.3%, while non-COVID admissions increased 14%. Our labor management continues to be very effective despite the cost pressures, especially temporary contract nurse staffing costs. On a consolidated basis, contract labor costs were 6% of SWMB, a significant decline from 7.3% in the fourth quarter 2022.
Total hospital costs were well managed in the quarter, as these costs were 2.7% lower than first quarter 2022 on a per adjusted admission basis when you exclude the impact in the prior year from a $69 million gain on sale of medical office buildings. SWMB costs per adjusted admission were down 5.4% compared to first quarter last year. Our SWMB costs as a percent of revenue were 45% in the quarter, compared to 46% in the first quarter of 2022, and 46.2% in fourth quarter last year. Our case mix and revenue yield remain strong as we continue our strategic focus on investments in higher acuity, higher margin service lines. Our case mix index in the quarter has grown at a 3% CAGR since 2019, before the pandemic.
Our hospital's first quarter results included $27 million of insurance proceeds received related to last year's cybersecurity incident. As we previously disclosed, our guidance reflected $10 million of these recoveries in the quarter, which were received in January. As a reminder, in the first quarter of last year, we recorded a $69 million gain on the sale of medical office buildings, as well as $31 million of Texas Medicaid revenue that related to 2021. Let's now turn to Conifer, which again delivered a solid quarter. Conifer produced first quarter adjusted EBITDA of $87 million and a strong margin of approximately 27%. Conifer generated 3.8% growth in revenue from external clients compared to the first quarter last year. We're off to a good start to the year in each of our businesses.
Let's review our cash flows, balance sheet, and capital structure. At the end of the quarter, we had $766 million of cash on hand and no borrowings outstanding under our $1.5 billion line of credit facility. We generated $214 million of free cash flow in the quarter. As a reminder, the first quarter is oftentimes our softest cash flow generating quarter due to certain annual working capital requirements, such as our Annual 401(k) matching contributions for our employees and annual incentive compensation payments. Conifer produced a strong cash collection performance in the first quarter, which resulted in a two-day improvement in our days in AR. During the quarter, we repurchased approximately 906,000 shares of our stock for $50 million as part of our $1 billion share repurchase program.
Since the inception of the program in the fourth quarter last year, we have repurchased approximately 6.8 million shares, or about 6% of our then outstanding shares, for $300 million at an average price of about $44 per share. Our March 31st leverage ratio was 4.19x EBITDA, slightly up from 4.1x at year-end 2022. As a reminder, we have no significant debt maturities until the third quarter of 2024 and have approximately $1.6 billion of secured debt borrowing capacity available if needed.
Let me now turn to our outlook for this year. As Saum mentioned, we are raising our 2023 adjusted EBITDA outlook by $50 million to $3.21 billion-$3.41 billion, or $3.31 billion at the midpoint, reflecting the strong start to the year. This $50 million increase includes a $20 million raise for USPI and a $30 million raise for our hospitals. We now expect non-operating revenues to be in the range of $19.8 billion-$20.2 billion. We expect full year adjusted diluted earnings per share from continuing operations to now be in the range of $4.92-$6.09.
Regarding our second quarter outlook, we expect consolidated adjusted EBITDA to be in the range of $765 million-$815 million. We anticipate that USPI's EBITDA in the second quarter at the midpoint will be approximately 23%-24% of our full year 2023 USPI EBITDA guidance of $1.465 billion at the midpoint of our range. Turning to our cash flows for 2023. From a cash flow perspective, we are targeting another strong year of free cash flow generation and now expect free cash flow in the range of $1.1 billion-$1.35 billion for 2023, an increase of $25 million over our previous expectations. Our free cash flow generation has improved substantially over the past several years.
We have significantly reduced our leverage and pushed out debt maturities, and we expect our business to continue to drive strong cash flows while executing on our growth plans. As we've mentioned previously, these cash flows provide us with significant financial flexibility to effectively deploy capital for the benefit of shareholders. As a reminder, our capital deployment priorities have not changed. First, we continue planning on allocating approximately $250 million of capital annually to grow our USPI surgery center business. Second, enhancing our hospital growth opportunities, including the continued focus on higher acuity service offerings. Third, evaluating further opportunities to retire and/or refinance debt. Finally, share repurchases, depending on market conditions and other investment opportunities.
With that, we're ready to begin the Q&A. Operator?
Thank you. We'll now be conducting a question and answer session. As a reminder, we please ask that you limit yourselves to one question. If you'd like to be placed into question queue, please press star one at this time. Our first question today is coming from Brian Tanquilut from Jefferies. Your line is now live.
Good morning, guys, congrats on a good quarter. I guess my question is just how much improvement do you think you have left to bring down temp labor? I know you're reinvesting some of that in wages for your permanent employees, as we think about temp labor and maybe SWMB as a whole, what do you think is the remaining opportunity for that embedded in your guidance and even as we look into next year? Thanks.
Hey, Brian, it's Saum. Good morning. We do expect some additional moderation in our contract labor spend as we move through the year. The operators have done a really phenomenal job managing this. It's obviously a very difficult environment. Our recruiting and retention measures have been improving, which is helping to mitigate some of the incremental costs associated with contract labor. We, you know, we are expecting some additional moderation as we move through the year. As we've said, when we released our guidance in February for this year, we are not expecting our contract labor to get back to pre-pandemic levels, certainly. That won't happen this year.
Thank you. Next question is coming from Pito Chickering from Deutsche Bank. Your line is now live.
Hey, good morning, guys. Thanks for taking my questions. A great quarter. For guidance, you beat the midpoint of the first quarter guidance by $57 million. You raised 2Q by $50 million above the street, but only raised the full year by about $50 million. Just curious, should we read sort of into the implied back half of the year guidance reduction? Is this conservatism something that the street was missing? Simply, you know, did the street misunderstand the seasonality for sort of the back half of the year versus first half of the year?
Hey, Pito, it's Dan. Good morning. No, you shouldn't read into anything of that. Listen, we were off to a good start to the year. You know, we beat by $57 million and, you know, we've raised our guidance by $50 million. We're optimistic and, you know, we're encouraged by the trends that we've seen, and, you know, that shouldn't read anything into it.
Great. Thanks so much.
Thank you. Next question is coming from Justin Lake from Wolfe Research. Your line is now live.
Hey, guys. Thanks for the question. This is Austin on for Justin. Really strong quarter on the volume side, both in USPI and the hospital. Just curious, you guys had kinda talked previously, some service line flexing in the hospitals and then some COVID-driven interruptions in USPI. You know, were any of those still present in, the 1Q year, or are we kind of at a clean comp going forward? Thanks.
Hey, it's on the hospital side, you know, as Dan was just talking about with the prior, one of the prior questions, as the contract labor rates come down, and I indicated a little bit in my comments, you know, it opens up the ability to improve access for services. You know, the demand, we know the demand has been there. It's always been a bit about whether that demand at scale was serviceable with very high contract labor costs. I think in particular, as the contract labor rates come down, it makes it easier to make decisions about utilizing contract labor versus the full-time labor from the perspective of opening up that hospital capacity to take in more volume.
Obviously imperative in that is that we continue to have discipline in our overall cost structure. Productivity, length of stay, things that we've talked about for the past few years during the pandemic, continuing to remain focused on that so that we can generate strong margins as we open up the capacity, even if some of the work that returns is lower acuity. On the USPI side, I'm really pleased with the volume strength. You know, we've talked over the last two, three quarters about things that were going on in the business, certain types of low acuity business that we were strategically and otherwise, having reductions in that affected it. This quarter demonstrated growth in the services that we want to grow. Strong return of GI services. Orthopedic strength was strong. And in particular, I've commented about pain before.
The volume strength is not coming from pain. That business was flat year-over-year. This isn't a volume recovery based upon, you know, kind of, so to speak, engineering certain service lines that we were, you know, dampening our interest in, but it is actual strength in many of the areas. I think most importantly, breaking through significantly the pre-pandemic volume levels is a really important marker for USPI and the ASC industry because it suggests that there will be strength going forward.
Thank you. Next question is coming from Calvin Sternick from JPMorgan. Your line is now live.
Yeah. Hey, good morning. I wanted to ask about some of the SCD two centers and how the integration's progressing there. I know you had talked about the slower physician bias last year and the ramping of some of the de novo and developing centers. Just curious how that's trended so far, just to sort of understand some of the progress. Thanks.
Yeah. No, good question. Good update. As I indicated, the buyups continue. The progress in the buyups continue at multiples that, you know, are not changed from any of the prior multiples, so, you know, that's good. And the centers that were in development, you know, as I kinda described them, somewhere from the point of having broken ground to just having opened, we expect all of them from that original transaction number two to be opened up this year, and that's a good thing. You know, those partnerships are still strong and intact. So I think we'll see, you know, positive movement. Like I said, you know, last time, we're about a year behind the original plan, but the original plan is still the original plan.
Thank you. Next question is coming from Kevin Fischbeck from Bank of America. Your line is now live.
Great. Thanks. Just wanted to ask about, you know, your views about the volumes in the quarter. It sounds like the volumes were stronger than we were looking for. It sounds like maybe they were even stronger than you guys were looking for. Is there something that you would point to as to why, you know, all of a sudden 2023 is the beginning of this volume, you know, rebound? Just maybe to go back to that earlier question about the guidance, because it is kind of you raised for the beat, it sounds like it's conservatism. Is there any reason to believe, either based upon how volumes progressed through Q1 or so far in Q2, that these higher volume numbers wouldn't persist?
This is Saum. A couple of things. I think the volume strength, at this point, we really, you know, we really have our information and what we've read, you know, publicly about HCA's information. I think there is, you know, some industry recovery going on as we kinda enter this post-COVID, post-pandemic anyway, environment where people are getting more comfortable returning to healthcare. We know that from our physicians' offices, they're now all pretty the ones that we employ and run are now all running at full throughput, in the outpatient environment. Obviously, that helps to create demand. I think that we've, in our case, gotten much more effective and efficient with our ER throughput and operations, across the board.
That was a big focus area last year that we didn't talk much about. With the staffing shortages, having adequate throughput, having Fast Track setups in our ERs and things to improve that throughput is important to be able to service the demand. Then for us, in particular, I think that as we get into this post-pandemic environment, hospitals are going to naturally be able to hold on to and deliver, when they have put in the right infrastructure, doctors, and technology for higher acuity services that don't have a substitute location to go to. For us, that's an important piece of the recovery puzzle across the board.
Look, the other thing from a Tenet portfolio perspective, as we indicated, our portfolio has a pretty broad range of exposure to states that handled COVID differently, and we always had a little bit more recovery to go in some of the states that were more locked down. I'm pleased to see that we're seeing some volume strength in those in those markets as well. At USPI, I think, there's a couple of things.
One is, you know, we put a lot of focus and reengineered some of our processes, incentives, as well as service line priorities, you know, in the third quarter of last year, third quarter and fourth quarter of last year, going into this year, to focus a bit more on some of the things that we wanted to grow, rather than just some of the things that we were trying to optimize, you know, out as a low acuity service. I think getting that balance right has helped create some momentum at USPI with respect to organic growth. Yeah, there's really no reason that I see looking forward at this point that that should change. You know, I'll just add my commentary to the guidance.
Look, we're pleased to have delivered a good quarter, and we're pleased to have raised our guidance, at this point in time. You know, we're optimistic about the future, and we'll revisit as we look forward, depending on what the results look like.
Thank you. Next question is coming from A.J. Rice from Credit Suisse. Your line is now live.
Hey, everybody. I wanted to just ask about two other areas that haven't been touched on. As you've done your analysis on redeterminations, we're getting sort of different views as to as people roll off of Medicaid, get picked up on public exchanges or hopefully on the commercial rolls, whether that's a neutral event for you guys or a positive, however you factored that into guidance. Any update on your generally on your managed care contracting? I know this year you got a little help, it seemed like from labor rates and labor pressures rather. Is that following through in your discussions for 2024? Do you think you'll get some help on the labor side there in rates for 2024?
Hey, A.J., it's Dan. Let me try to address those. In terms of the Medicaid redetermination, I would say at this point, we haven't seen anything, any substantive impact from the redeterminations, which really just began. I would tell you that we have Conifer in our hospitals. We have dedicated resources to address this as the redeterminations occur state by state. We have communications across the enterprise through all levels of Conifer in the hospitals. We're doing other types of communications like, you know, webpage banners with links to state enrollment websites. We've been going through and revising our, you know, our screening scripts and, you know, re-enrollment questions, you know, updating various resource documents. You know, messaging at registration point of entry.
You know, broader, you know, messaging campaigns across, you know, across our facilities. Also working with, you know, community members, you know, non-Tenet community members out in the community and working with them and tracking some of those statistics. You know, so far, nothing significant, but we think we're on top of it and we're monitoring it closely. In terms of your question in terms of, you know, the guidance for the year is, as we said in February, we haven't assumed any significant, you know, upside or downside from the redeterminations. You know, we think it's premature at this point. Obviously the exchange enrollment statistics were very encouraging.
In terms of the growth, so some of the individuals, who may transition off of Medicaid roles, you would expect that many of those would potentially reach out and, and try to obtain exchange coverage. But again, we haven't factored anything significant into our guidance this year. In terms of, you know, the commercial, you know, contracting, I would say consistent with our previous messages on this, we're-- we think we're very well-positioned, from a contracting perspective. We're essentially, you know, 95% contracted this year, and, you know, around 85% next year. And even the-- in 2025 , a fair amount of our business is already contracted.
Listen, the terms, you know, we've been clear, it's not like, you know, we've been getting CPI type of increases in every contract negotiation. You know, what we have seen, you know, obviously the levels of inflation are top of mind. They always have been, but certainly more pronounced now. The conversations obviously are being held with the plans. You know, I would say, you know, some of our more recent negotiations, you know, it's a little bit better than what maybe we historically would've negotiated.
Okay, thanks a lot.
Thank you. Next question is coming from Josh Raskin from Nephron Research . Your line is now live.
Hi. Thanks. Good morning. Just wanted to get back to USPI and that +9% same-store revenue growth number. I was wondering if you could give us some more color on maybe perhaps geographies and whether these were legacy centers or some of the newer ones that are ramping up. Did you give a number for the buyups for the second SCD transaction? Lastly, I hate to keep harping on this guidance, but the guidance for USPI specifically implies a lower growth rate for EBITDA over the next three quarters than what you saw in the first quarter. Any changes to seasonality, anything about that, or just sort of consistent with the overall message on guidance?
Hey, Josh, it's Dan. Let me, let me start. Now, in terms of the guidance, obviously, USPI is off to a great start to the year. We increased the guidance $20 million for EBITDA, strong volumes. We also increased our volume guidance assumptions from 2%-3% to 3%-4%. We're obviously encouraged. Again, as I mentioned to another question, you know, there's nothing to read into this. It's early in the year, and we like what we're seeing. We'll, you know, continue to, you know, obviously reevaluate where things stand at the end of the second quarter and make any guidance changes if appropriate. At that point in time, the USPI business continues to generate incredible margins.
We're very pleased with the start to the year.
Thank you. Next question is coming from Ann Hynes from Mizuho Securities. Your line is now live.
Hi, thanks. I just wanna talk about the No Surprise Billing Act. Is that having a negative impact on surgery volume at USPI? You know, some data that I've seen and checked suggests that maybe anesthesiologists aren't making as much money, so they're gravitating more towards inpatient or outpatient departments because the reimbursement is higher. I guess, is this having an impact? If so, what do you think it is on the drag on volumes?
Just a couple of comments there. I'm not sure that I'm not sure I could credibly answer that question with data. It's an interesting question and something that we'll look into to see if we can identify any trends there. What I would say is that the pressures that we've talked about before in the staffing arena for, you know, hospital-based or ASC-based physicians, in particular in anesthesia, is certainly an area that's requiring a lot of work. I mean, you know, your commentary about the activity and revenue intensity for anesthesiologists in hospitals versus ASCs, is certainly true. Again, remember, our payer mix in the ASCs is significantly better, and that creates a draw to the ASC environment, in particular in our ASCs, the way they're set up.
While there's some pressure there, we're managing through it. You know, again, I would have to say that we'd have to take a look at the data more carefully to answer your question in any kind of statistically relevant manner. It hasn't bubbled up as a major driver of the volume issues that we saw, in particular last, you know, last year in the third quarter.
All right, perfect. Then Dan, I know, you upped free cash flow guidance, which is good. Can you remind us, do you have any share repurchase or incremental debt repayment in guidance at this point?
No. No additional share repurchases are assumed in the guidance. That was consistent with how we started the year with our guidance.
Okay, great. Thank you.
Sure.
Thank you. Next question is coming from John Ransom from Raymond James. Your line is now live.
Hey there. Kind of an in the weeds question because all the good ones have been asked. If we look at kind of the rest of the year on USPI, and you look specifically at revenue per procedure? Yeah, what's going on there in terms of rate versus just mix? I mean, we assume there's some natural lift as you get more ortho and less pain, but if you could kind of help us understand what's going on in that line item, that'd be great. Thank you.
Yeah, no, John, I appreciate it. That is still a good question, so appreciate it. Listen, I think there's a couple of things, you know, as I indicated, and I think we talked about this a bit before, but maybe not as specifically. You know, there are certain areas of healthcare services that were deferred or more actively deferred. I think in our ASC business, in particular, you know, we saw a dampened utilization of procedures that might have preventative value, and in particular in the Medicare population. For us, in general, that's a good sign that it's coming back, even if there's some impact on the net revenue per case. Ultimately, as the ASCs become fuller, we'll get benefit from capacity utilization. We had prepared for this a bit.
We weren't sure when it was gonna come back, to be honest. We'd prepared for this a bit by looking, like we would in an acute care hospital environment for efficiencies within our ASCs, that would help to maintain our margins. We've been focused on knowing that this business is gonna come back, knowing that some of the mix, would be a little bit more challenging, and doing the preparatory work to ensure that we maintain our margins, by finding efficiencies in advance of it coming back. It happened to come back a bit, you know, this quarter. I think, again, I think that's a good sign.
You know, our independent physician partners' offices running at full throughput, similar to what we're seeing with our employed physician practices, if that happens across the board, I think that'll be a nice tailwind. You know, it'll give them the confidence sometime this year to maybe recruit new partners to their practice and continue to grow their own businesses, which, again, will represent some long-term tailwind in our partnerships with them at USPI. I think this is a good cycle to be in, even if some of the mix and other things in the short term will be a bit more challenging. We'll stay focused on the margin performance.
What I take from that is a big colonoscopy quarter, is what I'm hearing from you. Is that, is that the way you think about it?
Thank you. Next question is coming from Sarah James from Cantor Fitzgerald. Your line is now live.
Thank you. I was hoping you could walk us through how you think about margin evolving as we start to come out of the off of the peak of labor shortage. How much, you know, margin leverage can you really get from scale as you're able to staff up? How do you think about some of the payer rate increases possibly flowing through to margins?
Hey, Sarah, it's Dan . Good morning. You know, listen, obviously, you know, we've strengthened our margins significantly over the past several years, not only through USPI, but the hospital margins as well, and we're very mindful of that. You know, as additional volumes are treated and cared for, you know, given the efficiency of our hospital platform, we think there's opportunities for margin expansion. You know, obviously the USPI's margins are phenomenal, you know, anywhere, depending on the quarter, from the high- 30s to 40% territory. Yeah, certainly, adding, you know, additional volumes can help in terms of, you know, given, you know, at least on the hospital side, there are certain fixed costs.
We, you know, we can take on additional volumes and be profitable with it and have a nice margin associated with it. The operators is very, have done a really just a phenomenal job during, you know, the past several years and, you know, in driving efficiencies in an incredibly, you know, highly inflationary and challenging environment. You see it in, you know, our cost statistics, clearly. You know, in terms of, you know, commercial pricing, as I mentioned earlier, you know, we feel very good where we're at from a contracting perspective.
You know, more recent negotiations, you know, we've been able to negotiate rates with, you know, annual escalators that are a little bit higher than, you know, historically we may have negotiated. We feel good about where we're at from a contracting perspective.
Thank you.
Thank you. Next question is coming from Ben Hendrix from RBC Capital Markets. Your line is now live.
Hi, thank you very much. Certainly appreciate the sequential color on improvement in agency cost and SWMB. Could you talk a little bit about how that impacted inpatient capacity constraints, specifically? Your peer HCA noted a decline in rate of admission declines as a percentage of inpatient volume. I'm hoping you can give us an idea of how that has trended for the acute segment and how you see that progressing this year, given your labor strategy. Thank you.
This is Saum. I mean, I think probably as I indicated before, I think probably the most important marker that we look at is the contract labor rate. I mean, we're building up our workforce. We've been focused on that for over a year. It has been slow going. It's improving quarter over quarter over quarter, which is a good thing in terms of recruiting and retention. You know, ultimately, the structural shortages in the market from a labor perspective haven't just disappeared, you know, as we move from 2022 to 2023. Contract labor is still an important resource. But as those contract labor rates begin to normalize, you can use that contract labor more freely to open up capacity.
you know, for us, the math equation, if you will, on where we open up capacity and how varies a bit because our markets are in different stages of recovery, different kind of cost structures, even different contract labor rates that we face in different markets. We kind of take that market by market. I think part of the volume strength that you saw in Q1 reflected the fact that we, as we indicated, opened up access to some of our services a bit more than we had in the past. That's good 'cause it's not only testing whether the demand is there, but it's also our ability to service it at healthy margins. you know, that ended up being a good test for this quarter, so we'll keep pushing on that.
We are also very focused on trying to drive contract labor unit rates back towards pre-pandemic levels. Though they won't get all the way there, perhaps, we're driving in that direction this year.
Thank you.
Thank you. Next question is coming from Andrew Mok from UBS. Your line is now live.
Hi, good morning. adjusted admissions were up 6.7% in the quarter and inpatient admissions by about 240 basis points. Can you help us understand what's driving that spread? There weren't any obvious drivers in the outpatient stats that would blend adjusted admissions higher. Thanks.
Yeah, Andrew, it's Dan. It's just a mix of, you know, the intensity of the outpatient volume and the gross revenue in relation to the inpatient side. That's the primary driver there. Obviously, we-- Our volume strength in the quarter was very strong. We're pleased with what we saw, and it was consistent throughout the quarter, which was encouraging too.
Got it. Mix and acuity on the outpatient side was a driver of the strength there.
Yeah, that's a contributor to. As I said, you know, what was encouraging, and not only on the hospital side, but also on the USPI side, the volumes were, generally speaking, strong throughout the quarter.
Got it. Thank you.
Thank you. Next question today is coming from Jason Cassorla from Citigroup. Your line is now live.
Great. Thanks. Just wanted to ask about uncompensated care trends. You know, it looks like bad debt in the quarter was up pretty decently year-over-year. You know, that could be a comp issue, but any color on what drove that bad debt expense higher and just overall uncompensated care up, call it, you know, 12% year-over-year in 1Q? I think that uncompensated care status was up about 10% back in fourth quarter too. Just any color on uncompensated care trends would be helpful. Thanks.
Yeah. Hey, Jason, it's Dan. Listen, I would say, the year-over-year comp is probably more last year, in seeing some lower levels. I would tell you the overall uncompensated care, we think it's been manageable. We've spent a lot of time with our Conifer team and the hospital resources, doing everything possible, for when someone who does not have an insurance, we, you know, we assist them, and we do an incredible job on finding other forms of insurance through our eligibility enrollment program.
Yeah, I wouldn't say you're never concerned about uncompensated care, but, you know, we've the trends are essentially in line with what our expectations were so far this year.
Okay. Got it. Thank you.
Thank you. Our final question today is coming from Stephen Baxter from Wells Fargo. Your line is now live.
Yeah. Hey, thanks for the question. I wanted to ask another one on the ambulatory side. It's a little bit of a longer-term question. I was hoping you could talk a little bit more about, you know, the outlook for ortho procedure growth and the opportunity here over the next couple of years. You know, we've had this massive shift of ortho procedures from the inpatient hospital setting to the outpatient hospital setting compared to where we were pre-COVID. I guess for the ASCs, do you think about this shift as having pulled forward the opportunity there in a meaningful way?
Second, you know, what do you need to do strategically to help migrate these procedures into your ASCs? Thanks.
Yeah. Hey, it's Saum. I mean, I think a couple things. I mean, first of all, you're right that a lot of what used to be done inpatient with a multi-day stay, even if it was a short stay, is turning into hospital-based outpatient surgery. I would say the moment you have something that turns into hospital-based outpatient surgery, there's gonna be a subset of patients that, you know, will qualify in an ambulatory surgery setting. Over time, it'll be more the comorbidities that patients have that determine the site of care rather than the technical nature of the potential procedure and what that recovery will look like, from the standpoint of being able to ambulate and get home, on a same-day basis.
That's really, I think, what will end up determining what the ultimate mix of inpatient, hospital-based outpatient, especially when there's certain comorbidities that one needs to be careful with versus a fully ambulatory ASC outpatient setting. I would tell you that our belief in the ASC setting in this area for much more runway comes from the fact that we continue to see growth in the ASC setting. We continue to see new patients, including Medicare senior patients that are older, being effectively treated in the ASC setting, along with expanding the commercial market. We continue to see physicians coming to USPI wanting to initiate their first, you know, orthopedic de novo work in our centers, either through new center development or joining existing centers. I think there's still demand and runway to go for ASC-based orthopedics.
Longer term, what we're focused on is looking at areas within orthopedics or even spine work that today are very much done in the acute care hospital, and developing clinical algorithms to figure out how to safely do those types of procedures more actively in the ASC setting. In orthopedics, an example of that would be shoulder surgery and, as I indicated, spine surgery. I think we'll see a migration in those areas in a few years as well.
Thank you. We've reached the end of our question and answer session. Ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation.