All right, great. We're gonna start our next session here with Tenet Healthcare. By the way, I'm Steve Valiquette, the Healthcare Services Analyst here at Barclays. With us from Tenet, we have Dr. Saum Sutaria, company's CEO, also Dan Cancelmi, the CFO, and also Will McDowell from Investor Relations. I think Will wants to make some disclaimers first, and then we'll dive into a fireside chat.
Just briefly, you know, in the course of the conversation today, we'll be making some forward-looking comments. I would suggest you refer back to the cautionary statement, including our most recent earnings release, for any risk factors associated with that. I'll turn it back to you, Steve.
Okay, great. All right, I guess just to kick things off, you guys had some, you know, some nice acceleration in your ASC volume in the fourth quarter versus the third quarter. I think overall, I think, you know, people see a lot of promise in just ASC industry growth overall. I think people are, you know, hoping to see maybe stronger, you know, volume accelerating further for you guys, you know, over the next couple of years or so versus the past couple of years. This question seems to come up a lot, but maybe just to kind of, you know, throw that out there as far as the outlook for any potential acceleration of volume growth within USPI.
Yeah, no, Steve, I appreciate that. I mean, first of all, we too are incredibly bullish about the ASC segment. I mean, there's just such a nice natural tailwind of movement into that environment, especially in our case, you know, USPI has always been at the leading edge of innovation and higher acuity work in the ASC space, which is really where we're focusing our energy. As you know, we were a very large provider of orthopedics care before that. The SurgCenter transactions were incredibly strategic in that they were almost 100% orthopedic, and we really wanna, you know, ensure that we are the unquestionable leaders in that space. As you look forward, I think it's probably the area of most significant growth. Look, USPI has had a pretty consistent track record.
If you go back to Tenet's acquisition of USPI from 2015 to 2022, it's been, you know, consistently between 4% and 6% top line growth, which is what we say looking forward. You know, we were at 4.6% in 2022. The EBITDA performance on that was a little bit disappointing in the end, given some of the things that happened, including with, you know, progress on our transaction integration. As we look forward, we're very optimistic about, you know, not just this year, but the coming years with the ASC business. There's nothing that I would tell you we see right now that would cause us to change our guidance at this point.
Okay. Yeah, certainly helpful. You know, also on USPI, the growth outlook for 2023 I think is pretty strong overall. You know, putting the components for, you know, organic, and some of the, you know, additional openings and everything. Yeah, just coming out of the last quarterly call, just wanna just tackle and confirm that I think the growth will be pretty consistent through a lot of the quarters, throughout 2023, you know, around the 11% growth. I think there might've been some confusion, it might be back end load, but I don't think that's the case. Maybe just to clarify that as far as the, you know, kind of the trend line throughout the year in the context of the full year guidance.
Yeah, Steve, that's right. You know, first quarter, what we said was that USPI's EBITDA would be roughly 22% of its full year guidance in the first quarter. That represents roughly 13% year-over-year growth compared to the first quarter of last year when you normalize for the little bit of grant income was in there last year. 13% growth first quarter and 11% for the full year.
Okay. Yep. That makes it very clear, so that's certainly helpful. Okay, great.
Yeah. Thank you.
Yeah, I guess maybe moving off of USPI for a moment, maybe just on the overall, you know, acute care business. It's certainly one of the, you know, the positives to the industry in 2023 should be some continued recovery in admissions. You know, everybody's comparing that still to the 2019 levels, you know, pre-COVID, and they're trying to normalize for that going forward. I don't know if you're in a position today to talk about how, you know, utilization or admissions are trending so far in calendar 2023, but maybe just if you're able to just, you know, give any color on how things are trending so far, you know, relative to your expectations and your guidance. It's going to be helpful just to get a sense for some of those trends.
No, I appreciate it. I mean, we're not gonna comment inter-quarter on volumes, you know, as I said, with the USPI business, there's nothing that causes me to wanna change my guidance, at this point that we see.
The most important thing I would say about where we're headed from a volume standpoint in the acute care business at Tenet is a continued focus on the high acuity services, both emergent and elective, procedure-based, but also intensive care-based type of work that we've been, you know, putting our energy and capital and physician strategies dedicated towards building, because we think that's gonna be not only the most defensible area, but it's also gonna be an area where, you know, the revenue generated from such strategies, including by the way, trauma programs and rural outreach, patient transfer programs and other things, will generate the kind of net revenue intensity that will help to replace some of the volume that we're not seeing, return from back in 2019.
I think that, you know, chasing the exact mix that we had in 2019 looking forward probably doesn't make a whole lot of sense, and we're not spending a lot of time doing that. What we focus our energy on is really looking at our, you know, consistent improvement in performance in non-COVID acuity growth, as we look forward. You know, look, if lower acuity business starts to come back into the hospital, and that may affect, you know, what Dan would call kind of mathematical acuity, case mix index, that's fine. In, in our environment, at our level of efficiency, you know, that's gonna help spread fixed costs.
Strategically, what we wanna do is be at the top of that pyramid and earning more than our fair share in our markets of that kind of work because that's what we think is gonna drive our acute care business longer term.
Yeah, we're optimistic about our hospital volumes. This year, we're anticipating 1%- 3% admissions growth and 2% - 4% adjusted admissions growth. Listen, our fourth quarter hospital admissions, adjusted admissions, they were up 2.9%, and our non-COVID admissions were up over 4%. We like the trends we're seeing. We're optimistic about this year.
I guess moving on to the topic of staffing and labor expense. Still pretty topical for investors around all this as well. I think, you know, again, kind of setting the stage around that. I think everybody expects, generally speaking, for some of those trends to improve in 2023 versus 2022. Maybe you could just talk about, again, you know, anything that you can opine on as far as how that's tracking relative to your expectations so far this year. You know, you guys are pretty good about giving some metrics around that. Just, you know, given the contract labor as a percent of total SWB, I think that was between 6%-6.5%, you know, exiting 2022. Maybe just an update on how that's progressing.
No, that's right. We were around 6.4% in December. That's despite the winter volume surge of respiratory illness that we saw, which in the case of December and January, really weren't overwhelming for the hospitals at this point in time. You know, we're confident in our management approach. We still believe continuing to run contract labor tighter than what we might see around different parts of the industry makes sense and being thoughtful about the capacity that we're opening up and not opening up from that perspective. I would say that, you know, so far, 2023 is trending pretty much like we would expect. Rates are coming down modestly from where we were back in, you know, the October-November timeframe of last year.
That's a good thing, as they should. I think, you know, increasingly, as in particular, some of the not-for-profit industry, which has started to post some very challenging financials. As they release labor, it'll create some more liquidity in the marketplace, which will help with those rates on a short-term basis. You know, medium to longer term, this is gonna get solved much more through adequate hiring, relationships with nursing schools that we've built. We're doing a lot from the standpoint of what I would describe as more rebuilding our workforce rather than just trying to manage, you know, the marginal cost of the most expensive workforce. The agenda shifts in 2023 towards that, while we continue our management approach on contract labor.
Okay. Not to get too granular in all of this, but as far as the rates coming down, that's obviously talking about the, you know, the temp agency staff. As far as the, what you're having to pay, you know, for full-time, employee hires on the nursing side, there's some inflation there obviously versus where that was previously, but how's that tracking relative to your expectations?
Yeah. We've been taking the savings from contract labor reductions.
Right
And reinvesting a portion of those into our full-time staffing, and we're gonna continue to do that. Obviously, the economics are much more attractive. It's better for the overall employee base. So we're gonna continue to do that. We are anticipating further moderation in our contract labor rates this year. We're not anticipating we get back to pre-pandemic levels, which was roughly 2%-3% of our SWB. You know, we landed last year, roughly 6.9%, as Saum mentioned. We exited the quarter in December at 6.4%, so we do anticipate some moderation this year.
In terms of the overall, you know, the full-time employees, you know, historically, you know, wage rate increases typically in the 2%-3% range, depending on the market conditions. You know, obviously last year, the increases that we provided to attract and retain employees, was a little bit more than that. I'm not saying that's all behind us, but I would say this year we will continue to have, you know, some wage increases a little bit above, you know, what we would normally see in the industry.
Okay, great. Okay, maybe jumping on to another topic here. Just around, you know, supplies and other expenses. It seems like, across some of the hospital operators, there's been some mixed commentary around levels of inflation, you know, on supplies overall. Maybe just give us an update on, you know, how these costs are trending, for you guys. Is there anything to be mindful of, you know, for that kind of exiting 2022 and into 2023, that might be helpful as well?
Well, let me just say overall, to start with, that, you know, without question, there's pressure in all of the non-labor cost categories. It just hasn't mimicked the kind of pressure that we've seen on the labor side, right? Just start there. For us, you know, we began in late 2018, early 2019, a pretty comprehensive review, which we accelerated at the beginning of the pandemic of all of our both commodity physician preference, supply relationships and our purchase services contracts. You know, we've been working on making changes in what was a little bit more of a decentralized environment in Tenet as those contracts came up over, you know, most of these things can be two to three year type, maybe even longer in some cases, relationships.
As they've come up, we've been negotiating, consolidating vendors, and probably in some ways, managing our demand in a lot of those areas. What that's helped us do overall is mitigate some of the pressures because those opportunities existed at Tenet when the environment was a little bit more decentralized from a decision-making standpoint than the way we operate today. You know, when you talk about mixed commentary, I do think there are pressures in non-labor costs. I don't think they're going away. I think they're more significant than they've been in the past. We also see opportunities in our business to try to offset some of what we see in the macro environment.
Yeah, that's right. You know, in terms of supplies, specifically, Steve, you know, obviously, we have, in addition to some of the items that Saum mentioned, we have a relationship partnership with HealthTrust. They've obviously entered into various, longer term contracts, which has helped. You know, the pressure on supplies has been, you know, somewhat mitigated. You know, clearly the most significant inflationary pressure for us has been on the temporary contract labor side. That's not to say there hasn't been cost increases in like construction materials, and other items, you know, not surprisingly, you know, I'm sure you've heard other companies talk about, some pressures on, you know, physician, support or subsidies.
You know, as Saum mentioned, we're managing through that and we've done a really good job managing costs over the past several years, and we fully expect to be able to continue to do that.
Okay, great. Yeah, actually one other question on labor, as long as we brought it back to that for a second here. I think investors always wanna hear more about. This goes back to the USPI side of the business, as far as the arrangements with the surgeons, as far as direct employment versus more just a contractual affiliation. Just curious, if you wanna maybe just spend a, you know, a little more time talking about that dynamic. Again, you know, it certainly helps your margin profile, but I guess people wonder, you know, does that play any role in the, you know, the volume trends? I just wanna make sure, you know, are there any shifts going on within those, contractual affiliations with the surgeons within USPI?
Well, there's a multifactorial answer to that, so let me unpack it a little bit. First of all, by generating the industry's by far best returns in our ASC partnerships, we're able to support physicians remaining independent, more so than other platforms that exist, okay. When you're generating a return that's, call it a 35 %+ EBITDA margin at that level, the returns the physicians get from that investment are often substantive enough where they don't need to look in an area for subsidy from a health system to be employed, okay. That's, I mean, USPI materially does not employ physicians. And we have partnerships with those physicians. Sometimes they're joint venture partnerships where they're equity owners in the centers.
Sometimes those physicians are part of groups that may have some equity ownership, but they also participate in our centers without being equity owners, but they're future potential equity owners. I look at it a little bit differently, which is the ability to generate those returns mitigates the impact. I mean, I always find it amusing when people talk about what does it mean to be an independent operator of surgery centers. Tenet has really nothing to do with those centers from a hospital standpoint other than having a national contracting platform. The reality is USPI is probably most capable of supporting physicians remaining independent because of the returns we generate. When you have independent physicians, you know, you obviously rely on them refreshing their practices in order to see growth.
I would say legitimately over the last couple of years during the pandemic, any small business, physicians included, have been more careful about how they've replenished. You know, are we gonna bring on another surgeon or are we gonna try to manage what we've got and not take on that additional cost? One of the things we're optimistic about, given the ability to add physicians we saw in particular in late 2022 and what we hear from our physician groups in 2023, is they're returning to a growth mode. You're right, we ought to see some of that slow downstream. It's one of the reasons we have more confidence this year in returning to our normal type of volume growth that we've seen over many, many years from that standpoint.
On the employment side and the impact of the employment side, USPI has partnerships with sort of the leading brand name health systems, over 50 of them. Again, because the types of returns we generate for the physicians and the health system partners are so good, in many cases, those health systems will employ physicians as part of their own strategic network, and they allow them to practice in our centers without USPI necessarily being exposed to the cost of employment. Those health system partnerships prove very strategic in those markets because where there is a need for employment, they cover that strategic initiative on behalf of the partnership. That's very helpful to us, so that employment doesn't become a major headwind for the USPI business in those cities.
Okay, great. That's helpful, just to give that extra color on that. Maybe a final question around USPI. This kinda ties into a balance sheet question as well. You've done a pretty good job, you know, improving the balance sheet, getting the leverage down to around four turns, somewhere in there. Yeah. Just curious whether you're still focused on, you know, further deleveraging or because of the opportunity, you know, in just the ASC business overall, you know, where do you stand as far as, you know, potentially being more aggressive on acquisitions, you know, relative to what kind of the numbers you talked about previously as far as, you know, the targets around expenditures on the USPI expansion?
Yeah, we absolutely still are very focused on reducing our leverage. Every capital allocation decision we make, we evaluate what it means to our leverage, what it means to our free cash flow, what it means to our margins. Stating the obvious. Listen, we've made a lot of progress over the past five years. Leverage, if you go back then, was, you know, roughly 6x. We exited last year at roughly 4x. We have pushed out maturities, refinanced various tranches, and we've also retired a lot of debt to generate interest savings. Our only noteworthy maturities coming up are in the third quarter of 2024, and there's nothing after that until 2026.
In terms of, you know, we're very focused on continuing to look for opportunities to reduce leverage, through earnings growth and, depending on market conditions, actually retiring debt outright. All of this has helped us improve our free cash flow significantly over the past four or five years. We're anticipating free cash flow of roughly $1.2 billion this year. It enables us to self-fund the M&A and de novo development activity for USPI. We start off the year, you know, targeting roughly $250 million of capital to be allocated to continue to grow the ambulatory platform. The pipeline is very robust, and, you know, we fully expect to deploy that level of capital if the right opportunities are there.
As you've seen past several years, you know, we'll invest more if it makes sense, if the returns are there.
Yeah. I'd just add one other comment to this, which is, you know, not surprisingly, we're very focused on the quality of assets we acquire. We see a lot of opportunities where we may have the ability to deploy synergies, but we don't see them as necessarily quality assets or assets that have long-term strategic potential. We're very careful at this point about how we deploy capital into the USPI business from a growth standpoint. We still believe that there are quality assets out there that would allow us to spend our target $250 million.
The one thing I would say about the business and where we're headed with the business that's important from a leverage standpoint, is that if we can continue to acquire centers at very reasonable multiples the way we do, because the sellers, in particular the physicians, don't necessarily expect the highest multiple up front because they believe that the return USPI will generate for them over time is attractive. Then we can drive those multiples down, you know, below six times or whatever pretty quickly. The more we acquire those types of businesses where you got a 30%+ margin, it costs you 2%-3% of net revenue and maintenance capital to continue to generate earnings.
That's Tenet's best ability to generate free cash flow to ultimately deploy, not only in the self-funding M&A, but excess free cash over time to manage our leverage. So we view the M&A opportunity and the growth of that platform as an important lever for us to not just grow earnings, but use that excess cash to deleverage the company. That's I think that's a very unique position we're in because of the types of margins that we can run in the ASC business so that the cash generation vastly exceeds the capital needs of the business. Obviously different than the acute care business.
Right. Yeah. Okay. Well, that's all certainly helpful. Also maybe just one last thing on the capital deployment and, you know, tying that into the, you know, the, you know, managing the leverage ratio is really just where share buybacks kind of fit into capital deployment as well. Obviously, you've been getting a pretty good bang for the buck on that as far as where the stock's been trading. Just wanna get your latest thoughts around that.
As you know, Steve, the Board approved a $1 billion share repurchase authorization. We invested $250 million in the fourth quarter of last year. You know, we'll continue to. It's a, as they say, it's another tool in the toolbox to allocate capital depending on market conditions and other investment opportunities.
Yep. Okay, great. Okay. Yeah, just finally on CapEx. You know, you know, aside from USPI and some of the de novos and everything there, you know, where else are you allocating CapEx dollars? Maybe remind us again kind of what you're focused on on the acute side as far as CapEx, you know, beyond just the maintenance, but just curious?
I mean, we're largely focused on, you know, expansion of services and very selectively infrastructure in the markets that, you know, we think we have long-term potential in, that are important to our contracting strategy and ultimately where we see good payer mix expansion in new and growing communities. That's really what we're focused on. I mean, our clinical technology environment is pretty solid right now, from the standpoint of being able to produce the type of volume that Dan talked about earlier.
You know, also very selectively, we continue to focus on some of the tools and technology investments that help drive more automation and in particular, predictive AI technology within Conifer that has really helped us continue to be ahead of the trends with respect to the payer-provider interaction on where claims and collections issues are arising. It's an important part of our platform there, and we continue to invest in that.
Okay, great. All right. Well, with that, I think we're out of time. I wanna thank you guys for your time today, and enjoy the rest of the Conference.
Thank you for having us.
Thank you.
Okay.