All right. Awesome. Thanks everyone for being with us today. Really pleased to have Tenet Healthcare with us for this chat. As I'm sure you know, Tenet operates ASCs, acute care hospitals, and a revenue cycle management business. With us from the company, we are pleased to have Saum Sutaria, Chairman and Chief Executive Officer, Sun Park, Chief Financial Officer, and then Will McDowell from Investor Relations. Will, I understand you wanted to say something before we get started, so I will flip it to you, and then maybe we will get right into it.
Yeah. Thanks a lot, Steve, and thanks everyone for joining us today. In the context of our conversation today, we may be making some forward-looking statements. In relation to these statements, I would suggest you refer back to the cautionary statement within our most recent earnings release as well as other SEC filings. I will turn it back to you, Steve, for question-and-answer.
Great. Well, thanks again so much for being here. Maybe a good place would be just to start right off the top going into USPI. Obviously, you have spent a great deal of time kind of familiarizing Wall Street and the investment community with the high acuity strategy. I guess as you take a step back, maybe give us a minute or two, kind of state of the union, like where does the high acuity strategy sit today? What are some of the key milestones that you have achieved in that business over the past couple of years, and how are you thinking about the further kind of growth and expansion of this business over the next couple of years?
Yeah, no, happy to do so. It is very nice to see robotics behind us, because that's obviously one of the key thrusts in terms of the high acuity strategy. Look, if you look at the ambulatory surgery space today, there are obviously plenty of growth and refreshment opportunities in some of the longer, more traditional service lines. There's also a tailwind in the industry moving things out of hospital-based or just more acute-based settings into the freestanding outpatient setting.
That transition isn't as simple as simply having reimbursement in place or an inpatient-only list. It takes appropriate infrastructure, technology, physician training, clinical protocols, and so we really focus on that with respect to our ability to move things into that high acuity setting, whether that be bone and joint care, spine care, robotics. We've recently re-upped a significant robotics partnership to continue to build and grow in that environment. We've talked in the past about urology.
We've been building different models in the cardiovascular arena to try and look at that market, which is a longer-term opportunity, as we've always said. The ability to bring new physicians, new procedures, new innovation into the ASC setting will continue to fuel growth in the sector over time. So our focus is on revenue growth. We've been very clear about our focuses on revenue growth, supported by acuity growth, the margin structure being obviously something we've done a very nice job of preserving, both with scale and efficiencies, and throughput in the ASCs. Then we have an active inorganic strategy that is complemented by a de novo strategy with new syndicated partnerships.
If you look at all the discontinuity and everything going on in healthcare services right now, in this business, we're just laser focused on running our strategy and our playbook and our advantages in the market, et cetera, because we're not really very much affected by much of what else is going on. We're pleased with how things have gone in the last couple of years, and we're certainly pleased with our ability to build and grow the number of assets this year so far.
Yeah. Great. Okay, we'll touch more on that. I guess when you think about what are really going to be the most important couple of service lines and what you need to do to kind of distinguish yourself as a provider of choice in those areas, I guess, where do you think you'll be investing the most over the next couple of years?
In the ambulatory surgery business?
Yes, through USPI.
The largest growth opportunity is still building and growing the bone and joint opportunity in that space. There is just so much more from a hospital outpatient department based perspective that can move. There are so many more centers and markets that have those opportunities that exist. There are physicians in settings where they have an opportunity to migrate cases at a higher volume with good case selection. If I were to name a single opportunity for the next two to three or four years, I think that is it from a high acuity perspective along with the things I mentioned before, supporting that environment.
Got it. As you think about maybe the demand environment more broadly in the ASC space, I guess, how would you characterize it? Obviously, it is a little harder to judge purely just based on cases we know do not directly translate directly to demand in your market. So using your case growth is not always the most apt way to do it. I guess, how do you think about the healthiness of demand and maybe what you are seeing to the extent there is any impact from the consumer that is playing out or not as you see it?
Well, from a case perspective, we do focus on seeing longer-term trends and ability to grow high acuity. We do report on orthopedics, for example, and how that is going and there is a reason that we report on that and actually spend time internally strategically thinking about it, because that is what is going to drive revenue growth in the business. It is what is going to diversify the service mix. It is what is going to add acuity. It obviously creates value for any payer, government or private, which helps to keep us in our in-network strategy with our payer partners in that area and have the annual multi-year contracts that provide us with appropriate escalators in that space to continue to build and grow the ASC business, which is obviously very attractive from a value-based standpoint.
All of those things fit together in terms of how we think about the future revenue, margin, sustainability of contracting platform growth in the ASC business.
I guess in terms of policy tailwinds, obviously things like phasing out the inpatient-only list gets a lot of attention. The first tranche has a pretty heavy focus on MSK. Some of the latter tranches seem like they have much more of a heavy focus on cardio. I guess, how meaningful is that to help accelerate some of the transition from a volume perspective to you guys?
Well, let us just think about this comparatively. In an industry where so much of the recent regulatory activity has not been overtly favorable to the broader sector, having half of our business where virtually everything that comes out from a regulatory perspective is a tailwind or a benefit to the business or will help grow and diversify the business over time, it is terrific, right? Because it takes a platform that we have with an array of healthcare services and has half of the earnings in an environment that we are heading into that has a very, very nice growth runway ahead of it. I very much think that is helpful to us.
Okay. It seems like you are running a bit above pace this year in terms of the inorganic component of the business. Maybe just update us on what you are seeing there and what is exciting to you from an investment point of view at the moment.
Yeah, look, USPI's reputation in the marketplace is so strong from an operational perspective, from a value add perspective, these days from the perspective of making single specialty centers, multi-specialty centers. Doing the kinds of things that help to build and grow the business for our physician partners in a constructive manner. Those capabilities are harder to find, because of the array of services that we are capable of providing in our ASCs, that it provides a very nice runway of growth in the marketplace. Our ability to buy and integrate assets has not been subject to inflationary pressure
in terms of the multiples we are paying. Our ability to add value based upon bringing centers into network, bringing on supply chain savings and other things, has been very significant. So the returns we are generating just reinforce that m essaging with the doctors that, hey, you go with USPI, yes, you're going to play by a certain set of rules in terms of management compliance and other things. Hopefully, they're high quality. But you're also going to get a tremendous amount of benefit from that activity.
Okay.
I think that reputation's just spreading.
Yeah, I guess to build on that, I guess how would you characterize the deal environment more broadly, valuation, how competitive, or the assets that you're looking at?
Like I said, the valuations have been in similar ranges. We have not experienced significant inflationary pressure there.
Yeah.
Our ability to add value, if anything, is better over time than it was. The competitive environment, the ASC space generates a lot of interest. I wouldn't say the competitive environment is any more intense, maybe even a little bit less intense, interestingly, today than it was a few years ago, as different assets have less access to cash and other things to pursue M&A.
Yeah, I guess, is that characterized by either hospitals maybe putting less capital towards developing ASCs and competing with you to keep things in network? Or do you say that's maybe characterized by private equity and maybe third-party ASC developers?
I don't know. It varies market to market.
Okay.
I would just say that our impression and our deals, especially because we are competing for the A quality assets, the environment has not become more competitively intense.
Okay
Because there has just been less organized activity or available cash in some of the organized companies to be as aggressive in pursuing M&A in the ASC space. We have been a beneficiary of that.
Okay. Would you say there is, as you look out, especially as your balance sheet is a lot different than it was a couple of years ago, opportunities potentially to do larger deals? Maybe not as large as the SCD transactions you did going a few years back, but maybe something that is a step above, like a tuck-in transaction?
Yeah. General answer is absolutely yes. If you look at our cash flow generation, if you look at our leverage profile, the room we have to flex within all those parameters, I think it is very flexible. I think, a couple of years ago, we did the Covenant transaction. I think that is a good example of a medium-sized asset that we have been able to tuck in, generate all the synergies, and get to a very productive steady state. So those types of transactions are, I think, very feasible.
Okay.
Yeah.
Obviously, you guys have done a really nice job of improving margins across the whole business. I guess, as you look out at the next couple of years and focusing on USPI specifically, we'll have more of a hospital-focused conversation in a little bit. I guess, what do you think of as the key margin opportunities and key cost opportunities that are still in front of you in that business?
Well, with USPI, obviously building and growing the acuity, because the reimbursement environment would be more favorable there.
Yeah.
Because again, we're taking things out of much higher cost settings in the USPI. You can generate better reimbursement. The second is asset utilization in the centers.
Yeah.
Continuing to increase the asset utilization. For us, that's OR utilization, productive OR utilization time. I talk about this somewhat, I won't dwell on it, but the idea that you're doing a high acuity procedure that takes 90 minutes versus trying to do five procedures where you have to turn over the room five times and you have a bunch of idle time, that actually matters in the way you are generating asset utilization in an OR, and that is one of the drivers of our strategy. That is the second thing. Then the third is just continuing to make sure we have the discipline of applying the things that we do from a scale perspective in cost management at USPI, right?
Even though it is a much more distributed retail outlet type of business, there are ways in which to think about that cost, or there are ways we can utilize our shared services in the Tenet Global Business Center. I think we have alluded to in the past, we have inside of USPI, a scaled revenue cycle capability or company, really, that provides a lower cost to collect with better collections, continuing to expand that. We shouldn't shy away in the USPI business just because it is a higher margin business from applying those scale opportunities to improve margins, and we don't shy away from it.
Exactly
From that perspective.
Okay. Maybe to pivot to the hospital business for a little bit. One thing that stands out is that the cash flow and the leverage profile of the company has improved, is that the past couple of years in particular, you have been able to take up CapEx to closer to 5% of revenue. I think before 2022, the average over a course of a few years was more like 3.5%. So a pretty big increase in your ability to put growth capital into the business. Because how should we think about some of the things that have been targeted as a result of that incremental cash flow, and what the return profiles you are targeting are?
Yeah. I think big picture, as big of a priority as M&A for USPI is, so is continuing to invest capital into our hospital business, right? Focusing on higher acuity strategies, service lines, those products and service lines and capabilities in each market that, as Saum was saying before, make us a critical part of the overall payer negotiations and the value we offer to the communities. That is going to continue. If you look at our recent trend lines, I think it is fair, we have accelerated our capital expenditure into hospitals, especially if you normalize for the divestitures we have done over the last two, three years. Part of that has been three new hospital builds, three or four new hospital builds that we have done and completed over the last three or four years.
But if you look at our guidance this year, about $700 million- $800 million of CapEx, the vast majority of that is for the hospital space, and that is continuing that activity. The other thing that I would point out is part of the reason that we have been able to be resilient this year from an earnings standpoint in the hospital space, in the face of exchange headwinds and other things, has been the CapEx investments that we have made over the last two, three years that have resulted in additional growth and contribution.
All those things, I think we have seen the value. As we go forward, we always look at it market by market, but we think in the face of exchange and then potentially OBBBA changes, we still think our markets are very investable. There is a lot of service lines that we can still invest in. We will keep doing that.
Yeah, and I think when you talk about the high acuity strategy and making it specific to the hospital, I guess are there things that you would highlight as sort of the top areas to prioritize investment over the next couple of years to keep the high acuity strategy moving forward with specific regards to the hospital?
Well, one thing, when people are in an environment where, either for themselves or people around them, there's dislocation in their coverage, and we are admittedly in an environment where there's some population that's in dislocation, there's some population that may be more stable, et cetera. Our focus is on ensuring that we are successfully investing in and looking at market share opportunities in things that are indispensable or less elastic, as I like to say. Obviously, our work in the emergency department, including CapEx there, trauma programs, there's still a huge need for high quality neonatal care and associated obstetrics programs. Of course, we're now operating in markets where, generally speaking, compared to our past portfolio, our risk factors in those areas have diminished significantly.
Our investments in broad-based and expansive cardiovascular programs, including the addition of structural heart capabilities in every one of our, most every one, pretty much, of our markets, neurosurgical capabilities, complex spine. There's an array of services where you just kind of over time broaden that playbook. Because a lot of our foundation is built off of services like trauma and other things, where you need to have the coverage to support a high quality trauma program, you build off of the specialists that you need for that coverage to start to build elective tentacles in those programs. So that it helps to balance the utilization for those doctors from that perspective, and that's kind of how we build out our markets.
We couple that with obviously very active willingness, given our focus in high acuity, of being a receiving hospital for transfers when patients need that in a very open way. That helps to support what we're doing from a high acuity perspective. Again, we've found that demand is less elastic.
It supports consistent growth in revenues and our ability to grow margins, and is not dependent upon counting every widget of volume in the way that we kind of proceed in each market.
Got it. Okay, that's helpful. To expand a little bit on the competition point of view and the market share point of view, I guess, do you feel like competitive dynamics have changed at all as you study your markets? I think there's obviously questions out there whether the material upswing of Medicaid supplemental dollars or maybe 340B economics into not-for-profits are maybe helping them catch up in terms of making investments. I guess, have you noticed anything like that as you study
Other than the exchange subsidy headwind, there's a lot of theoretical proposals out there that could affect the economics of the markets and our competitors that haven't necessarily come to be yet, right? But certainly everybody is concerned about those things. If I were to highlight one thing from our perspective in our markets, USPI is highly instructive because even though round about 5% of our ASCs are actually tethered or near Tenet hospitals, it's such a broad strategy. But the concept of having appropriate ambulatory access points in our markets has been something we've been focused on for the last four or five years. I think as pressures come in the industry, if some of these things were to come true, the general response in the industry is often to hold onto things tighter.
More employment, more control, more. In order to combat that, if that's not your mindset, because our mindset is to allow independent physicians to succeed and work with physicians on a more constructive basis in employment where necessary for scalability and other things, is to provide and own more outpatient access points in our markets. So in every one of our markets, we're looking at those opportunities, we're looking at investments in that, we're looking at partnerships because we want to create an outpatient access environment that makes it easier for those patients to access our inpatient environment when they need it, either on an emergent or elective basis and t hat is a bit of a shift in the market, right?
If you think about post-COVID, you could just grow out of that COVID environment that shut things down without being as deliberate about all of your multifactor outpatient access points. That environment's changing a bit, where you have to be very thoughtful of those things now on a broader basis.
Got it. That's helpful. When you look at the acute care and hospital portfolio, obviously you had a bit of a stretch there, where you were able to do several really interesting and financially helpful transactions. Would your expectation be at this point that your portfolio is likely to be more stable moving forward, or you think there could still be some opportunities to maybe refine it a little bit further opportunistically?
There are always opportunities to take a look at things. It very much depends on the portfolio and the opportunity. We're very happy with the portfolio we had, and as Sun said, we find the portfolio investable for growth at this stage, and that's what we're focused on.
Okay. Within the hospital business where you obviously report Conifer, I guess I should be thinking about the key opportunities for Conifer. Obviously, going through a relatively major change with everything going on with CommonSpirit Health. How do you think about the potential of the business for the next couple of years and specifically trying to mitigate some of the drag that the CommonSpirit Health contract could otherwise generate for the company?
Yeah. I guess there may be a P&L drag in the short term, but we're still incredibly pleased with the transaction and the yield for Tenet on the transaction. By any measure, it's highly accretive. Look, I think there's two things going on. This year is a transition year.
We're very focused on making sure that transition goes as smoothly as it possibly can. It takes two to do that, and so we're focused on doing that with, obviously, a long-term client of Conifer's over time, working together to do that. That's a lot of activity, which will result in the opportunity to then pivot the business and do other things. We've already started doing a set of things that help to improve the efficiency, improve the exposure to offshore capabilities that we've built, improve the ability to deliver more with AI. We're already doing that. If there's a place where that's accelerated, it's Conifer-
Yeah
In this period of time. So I would expect our cost to collect and value proposition in the market to only get better and better from that perspective. Then once this transition's done and we're through with all of that activity, which by the way, happens by the end of this year completely-
Yeah
We're much more free to go back to the market with what we have built, just like we've done with the exchange arena, where we started planning a year ago to execute.
Our work and planning and that ability to improve the cost to collect is already underway. We should be able to take that to market in the early part of the new year.
Okay. Yeah, maybe just to expand on that a little bit, it does, to your point, seem like there would probably be the most opportunity for a structural improvement in cost in this part of the business, really relative to anything else inside of your portfolio. How do you think about the longer-term opportunity to really change the cost structure at Conifer?
Well, I think the opportunity to improve the cost structure at Conifer, again, lies in more automation, more utilization of our captive that we own the Tenet Global Business Center because we have built very reliable capabilities there that work in the Tenet account. We want them to work in multiple accounts. For more complex workflows, the ability to simplify them or at least make them more reliably predictable with AI reduces the variability in what we are doing. We are seeing that already. I do not think we should think about this as kind of an arming up with these, and then the other side is going to arm up. The reality is that the payment adjudication process costs too much for everybody.
Even if all sides, quote, "arm up" with automation and AI and other things, we are still bringing the amount of cost and waste that goes into adjudication of claims down in total.
Yeah.
That is good. There is more to reinvest in healthcare services from that perspective. Then it is about actually building the right set of algorithms and rules engine in between to improve yield. I do not think there is anything negative about bringing the overall cost structure
Of course.
for both sides of the industry down in terms of what it costs to adjudicate a claim.
Totally.
We are obviously doing that on our side.
Got it. Okay. Just to look at the results that the hospital business has put up year to date, obviously been quite impressive, like raising your guidance even without the help of incremental Medicaid dollars. Very impressive. I guess, how do we generally think about the drivers of the outperformance versus your expectations? If we were to think about volumes versus payer mix, versus acuity, versus costs, what's the biggest bucket or two about what's going better year to date for the company?
I don't think there's a rank order. I think all four, five, six of those dynamics have applied. Year after year, I think we've shown the ability to grow our acuity, keep our payer mix strong, and then have operating discipline around expenses around it. So that's been kind of the core model. Obviously, coming into this year, we've all talked about it many times.
We saw the exchange headwinds being an incremental headwind and planned for that, prepared for that, a long time ago, with additional efficiency initiatives. Finally, the third leg was what I mentioned before, investing CapEx over the last 2, 3 years to generate new sources of growth. So I think all those have worked for us. If you look at our margin profile, if you look at the acuity change versus our margin improvement, it's certainly the operating expense savings have been
Yeah
I think very valuable. So we look for that to continue. The second thing is probably, again, on the OpEx side, it's really both things. It's the continued discipline around labor productivity, length of stay management, those kind of blocking and tackling things. They've been just as important as some of the additional more technology and AI-based things that we've done. Short answer would be all of the above.
Okay, fair enough. Yeah, the cost side was going to be where we went next. SWB, I think, was down 1% year-over-year on a per a basis. I guess, again, a lot of that probably comes down to length of stay management. I guess, maybe help us think about the durability of that level of performance. Obviously, underlying wage inflation is still something that you're dealing with. I guess, how do you think about maybe both of those dynamics, I guess through the balance of this year, and maybe any early thoughts on, we're seeing some slowdown in the data in terms of acute wage inflation. Do you feel like you're seeing any of that start to materialize in your markets as well?
Yeah. I would say in general, our labor situation's been very stable, and that's been the case for the last several years, right? It's no secret that with nurses and other healthcare providers, there is a general shortage in general for the industry, right? But even with that, we've been able to keep our wage rates very stable and then manage also contract labor. Now it's at 2% or so of SWB.
Then, the third component is professional fees. Admittedly, they've been growing materially, but at 10% growth that we were seeing this year, it's still very manageable and fits within our overall guidance framework. I think all those things are good.
That being said, in terms of what's left, it's tough to get, for example, contract labor down below 2%.
Sure.
It's tough for, in our industry, labor wages, general wages to go below 2%- 2.5%, right? A lot of what we'll have to do is manage, again even more productivity, even more efficiency in the construct. Because the other thing we decide to do on a market-by-market basis also, we could invest a little bit more of SWB to generate EBITDA, and that's perfectly fine for us.
Got it. Maybe then to pivot it a little bit to the exchange dynamics, obviously it seems like, compared to peers perhaps, we're tracking much more in line with your initial expectations, so that's good to see. I guess just remind us how you're thinking about the exchange dynamics going into the back half of the year. Then I guess the other question out there is just really for the exchange volume that remains in the system, it does seem like at least in some markets, there's been a pretty material shift to Bronze type products with higher cost sharing, higher deductibles. Do you feel like you have your arms around collectibility there? How long do you feel like you need to know that you feel good about the assumptions you've made on that part of the business in particular?
Well, look, qualitatively, first of all, having a vehicle like Conifer that helps with appropriate patient collections, payment programs, and other things that people can accommodate is very helpful. I would also say that by the time people are in an acute care setting-
Sure
especially if they have multiple chronic illness, they will burn through that co-pay deductibility environment. Obviously, the reduction in demand is not one-for-one with coverage because our business is more focused on the people who consume chronic care.
Sure.
They tend to have a better approach to finding their way to alternative coverage. We help them find alternative coverage in the environment, et cetera. I think having that support system is definitely good. Look, I think the other thing is you have to be prepared to receive the emergency care no matter what.
Obviously, that is a point of intervention where you can work with people that may not have coverage for that episode to help them figure out what else they may be qualified for. In many cases, they do not know.
Sure.
That is another point of intervention where we have now injected Conifer enrollment staff into finding those people and helping them find a solution from that perspective. Look, I think what has happened right now is a dislocation. A lot of people have become uninsured. Over time, we think that that is going to improve, in terms of the coverage, as the people that need it find alternative coverage. Obviously, it has ramped up through the course of this year. First quarter was lower than we thought. I am not sure that the quarterly approach to giving thoughts on that
That's fair.
was as well thought through as it could've been. But it's clear what's happening now, and from our perspective, more importantly than anything else, we planned for the dislocation last year and executed on the things we needed to do to offset it, and that's kind of our mindset for the following year.
Okay. Just again, another policy issue, I guess, coming up over the next couple of years will just be the implementation of Medicaid work requirements and Medicaid expansion population. Just how's the company thinking about that? And to the extent that it seems like, I guess, USPI probably pretty unimpacted by all of this, but just general thoughts on how it impacts both the businesses would be great.
Yeah. Just as a note before we talk about that, USPI has been largely unaffected.
Also
by the exchange piece this year.
Yep.
Even though the numbers are what the numbers are, USPI's exchange demand
Yep
hasn't really been affected that much. Perhaps because it's a lower cost, lower copay environment.
Yeah
It's actually created a shift. We've been surprised at the elective surgery comparison between hospital and USPI. Look, I don't have anything particularly bright to say about the Medicaid work requirement aspects. We all know the history. They've been tried, hasn't worked great in prior iterations. I don't know how it's going to work this time and what impact it'll have. Could there be short-term dislocation and the people that need coverage find other coverage or figure out ways to qualify? Probably. I don't have any great insight into how states are going to do this this time around versus the three or four times it's been tried before where it hasn't been particularly effective.
Okay. Fair enough. One question we are asking all companies is, with really so much focus on AI, I guess, how do you want the investment community to be thinking about the AI investments that you have made to date, what kind of investments might be still in front of the company, and what a couple of the most exciting use cases for your businesses might be over the next couple of years that we will come to learn more about?
Well, there is a tremendous amount of opportunity using AI. Look, I think the more important thing is not the availability of opportunities and ideas. It is having a rigorous ROI framework for what you are going to get out of the investments. There is a cost, right? That cost to the extent you are using any kind of frontier model support, even if it is through a vendor, is real from the cost of tokens and other things that are either passed through or direct. You have to have a very rigorous ROI assumption, and that goes back to what have been the critical margin and growth levers that we have been pulling in the business without AI.
The idea that we are going to invent some new lever that is going to create an opportunity is. I would rather focus on if we care about OR utilization and OR capacity, utilizing tools from an AI perspective that helps my OR scheduling, that is logical to me. If length of stay improvement is a place we have differentiated ourselves in the industry in the last two or three or four years, attempting to automate that complex workflow and provide better, because I know that is critical to efficiency going forward, that is logical to me.
The idea that I am going to get a totally new lever yet is not logical to me from that perspective until I can understand and see that ROI equation and th ats is why I think on the administrative side, on the payment side, there is a lot more enthusiasm for the potential returns because we understand the algorithm that impacts the return on investment there better than in areas where it is more experimental.
Okay.
Yeah.
That is great. Awesome. Thank you so much. I think that is going to be all we have time for, but thank you so much for being here today. We really appreciate the conversation.
Oh, thanks. Thanks for the opportunity.
Yeah, of course.
and putting on a great conference.
Thanks so much. Thank you.