Good morning, and welcome to Tenet Healthcare’s Second Quarter Earnings Conference Call. All participants are in a listen-only mode until the Q&A session begins. [Operator Instructions] Tenet asks that callers limit themselves to one question to allow for as many people to get through the queue as possible.

I’ll now turn the call over to Tenet’s Vice President of Investor Relations, Regina Nethery..

Thank you. We’re pleased to have you join us for a discussion of Tenet’s second quarter 2021 results, as well as a discussion of our updated financial guidance for the year. Tenet’s senior management participating in today’s call will be Ron Rittenmeyer, Executive Chairman and Chief Executive Officer; Dr.

Saum Sutaria, President and Chief Operating Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes an accompanying 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 Tenet 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, subsequent From 10-Q filing and other filings with the Securities and Exchange Commission. With that, I’ll turn the call over to Ron..

Thank you, Regina, and thank you all for joining us to discuss our second quarter.

Start with as we take a look at our results, I wanted to offer somewhat of a look back on where we are, particularly in the context of what we set out to do as part of our transformation a few years back, and even how that transformation has pivoted considering COVID, other challenges, we have managed through and the opportunities we’ve captured as recently as second quarter.

The cornerstone of our strategy remains our commitment to our four pillars of compliance, quality, service, and safety, which drives consistent improvements resulting in the performance trajectory we have noted for the last several quarters. The results thus far provided a solid first half of this year.

And you can see how we are building a truly unique and diversified operation. Following the strategy, we discuss the last few years.

The results are in line with the strategy, which we have closely followed, whichever resulted in greater diversified EBITDA streams, targeted inflection points for growth, top quality environments for our patients, and the addition of highly skilled physicians covering important and high demand specialties.

The output is greater financial strength with greater cash flow generation and a more agile setting overall at every level of the enterprise. And importantly, we have incorporated community based programs, which are bolstered our ESG commitments, ensuring our sustainability has broad and a strong race going forward.

The second quarter and the first half of 2021 have been better than expected on many fronts. This was largely driven by the continued commitment of our strategy, our extensive use of data and analysis, which have allowed us to trace deviations quickly, take action as needed and thus insured a focus on execution at every level.

We’ve created an environment as COVID cases decreased in which doctors and patients are comfortable coming back to our hospitals and ASCs. And we continue to invest in our service lines and community relationships, which helped ensure a very accessible health system over the last year.

We certainly believe, and the results support that this approach has been successful. We also believe we have more to accomplish to ensure the approach remains a solid part of our foundation going forward. Please realize we’re not claiming any victory.

And we’re not relaxing other than the recognize the trends remain strong and importantly consistent and underscore our commitment to continuing this development and ensure deeper roots are generated system-wide. I would like to take a moment to comment from our perspective on the current COVID situation.

Clearly, the variance coupled with the unvaccinated individuals has resulted in an uptick certain parts of the country.

Our COVID inpatient numbers remain in well roughly 4% of our total cases as of now, and while we’ve seen increases in selected markets, given our experience, we really able to manage through this like we did when we were hit with other ways earlier last year. We have sufficient PPE on hand. We have sufficient capacity across every market and facility.

And we remain vigilant to any changes that occur taking appropriate action to continue to process cases effectively based on current and anticipated conditions. Vaccinations continue to play a crucial role in bringing down the number of COVID inpatients and the number of patients once infected, who become seriously ill.

We continue to support the vaccination rollout on our own employees and the public at large advocating for and communicating the significant benefits of vaccinations and other necessary precautions to everyone in our communities.

In addition, all of our COVID safety protocols remain in place in our field locations and have been highly effective in continuing to ensure staph infection rates remain low. Focusing back now on the second quarter performance, there are several strategic and financial highlights, which deserved some discussion.

As you can see in the numbers, we are delivering a much stronger growth trajectory on the hospital side, in terms of admissions, outpatient visits, ER volumes and surgeries.

In particular, the higher acuity work that we have been focused on with general surgery, cardiovascular, ortho, neuro, et cetera, have been steadily progressing in key markets across the country. For example, last week in El Paso, we announced expansion effort to increase capacity and serving growing needs along the Eastern regions of the city.

The new project to be carried out over the next year and a half. We’ll include the addition of 30 telemetry units, third cath lab, equipped to provide a higher level of care for patients with stroke symptoms, enhanced capacity to the NICU and continued efforts to expand trauma services and robotics.

San Antonio, we will soon move forward on our plans to build a new medical campus as the city continues to expand. This multi-phase project is slated to begin later this year and will include medical office buildings and ASC, an acute care hospital with a potential for additional medical and retail entities in the future development phases.

We plan to invest in critical services, including cardiovascular, maternity and surgical care at a scale that is commensurate with the needs of that area. Oncology is another area of focus.

As we recently announced a new affiliation between Memphis based Saint Francis Healthcare and world-class West Cancer Center and Research Institute, which is an independent, comprehensive cancer center.

The project will include a new cancer urgent care center at Saint Francis, the first of its kind in the area, as well as a specialized hospital within our hospital with dedicated oncology beds and an investment in the latest treatments. All staffed by professionals, trained in cancer care.

In addition, Saint Francis has the largest number of surgical robots in one location in the Mid-South, which the surgeons of West Cancer will use to perform minimally invasive surgeries that can lead to shorter hospital stays and faster recoveries.

Our commitment to attracting and retaining quality physicians remains a critical element of our growth strategy, that efforts expands multiple service lines across our hospital portfolio and especially in USPI.

For example, in Palm Beach, we’re completing the build out of a large physician group focused on general surgery with specialization of care and a team environment to best serve the larger community.

In Phoenix, we have a highly talented group of physicians and are build more cardiology group, and we’ve been working to significantly expand their in market presence. In Palm Springs, we’re building a top quality multidisciplinary orthopedics and foot surgery, spine and trauma group.

And with USPI, we’ve added more than 570 physicians joining our medical staffs during this quarter, bringing the number now that have joined to 1,100 year-to-date. These are only a couple of examples and there’s more to come.

Together, with the investments I mentioned earlier on expansions, these activities are actively supporting our current performance and we see a long runway in front of us. Finally, focusing on our hospital portfolio, as you know, we recently announced the sale of our Miami-based hospitals, which is compelling for several reasons.

We received an attractive multiple for the transaction from a credible and experienced buyer who will support the continued development of these facilities. Conifer remains the revenue cycle provider post-sale.

Florida remains a very important part of our portfolio as our five Palm Beach hospitals, which continue to grow and improve, couple was more than 40 Florida Ambulatory assets, ensures a very strong viable network in our continue – in this continually growing area.

This is supported by our successful physician recruitment efforts in the state and specifically in the greater Palm Beach market. As we focus investments on procedural care modernization program – programmatic service line development, market branding, and overall expansion to meet current and future community needs.

Strategically, the Miami transaction also continues the objective of diversifying our EBITDA further to our ambulatory segment, which we project to be approximately 43% or so by the end of the year. Our hospital portfolio is now positioned as the number one or two in 70% of our markets. And with the Miami sale that number will edge higher.

Now let’s take a minute and move the USPI. USPI had a very good quarter in line with our expectations. And the mix of business continues to be weighted towards higher acuity cases in comparisons to 2019. The integration of SCD facilities has been going well. And in terms of other development activity, we added four facilities to USPI in Q2.

We continue to pursue the same type of opportunities we spoken about previously. And we have a healthy and strong pipeline that we’re working to deploy. That includes USPI’s traditional three-way model, as well as a greater two-way opportunities, both of which foster direct collaboration between USPI and local physicians.

And we are continuing our historical strong efforts on developing de novos in which we handle all aspects from syndication the first patient. Organic growth opportunities continue to remain substantial throughout the balance of the year and beyond USPI. USPI has in-house a very advanced service line and development team.

And in the second quarter, for example, we added 25 new starts for service lines across the range of specialties, bringing that total to 45 year-to-date. We also remain a leader in musculoskeletal surgery, and the depth of our platform across other types of procedures keeps expanding.

Allowing our facilities continue to hit important milestones, servicing the needs of their respective communities. Quality remains a cornerstone of Tenet’s overall mission as a company, and USPI given its more intimate patient experience, continues to set a high bar in this area.

USPI’s patient experience results have again earned important recognition in the last year. For example, all but one of our eligible surgical hospitals are into four or five star rating in the most recent age gaps survey. Let’s take a minute and talk about Conifer.

Conifer continues to deliver strong margins remain on track with our growth plans and we made some opportunistic hires at all levels as our pipeline has begun to expand. We are in the middle of a more targeted and efficient tech transformation to Conifer as well as the Global Business Center, both defining and accelerating our innovation roadmap.

Technology as an offering has moved to the forefront and become one of our main strategic pillars. And we recently hired a new Chief Technology Officer at Conifer who advanced these efforts significantly. Operationally, we continue to deliver strong cash collections on behalf of our clients at Conifer over the last year.

And we remained very pleased with that performance. So in closing my remarks, the second quarter was a very tangible example of how clear and direct business fundamentals properly adjusted for the situations we face result in sustainable performance. We are a data driven real-time analysis company, who properly executes on a consistent trajectory.

And when you reflect on the last year, our results have been consistent and directionally aligned with our strategy and above all transparent. So with those comments, let me now turn it over to Dan for discussion of a quarter in greater depth and discuss our guidance.

Dan?.

Thanks, Ron, and good morning, everyone. Let’s begin on Slide 6. Following a strong first quarter, we produced another very good quarter as we generated adjusted EBITDA in the quarter of $834 million, which was $109 million better than the midpoint of our expectations.

Consistent with the themes in the first quarter, each of our three business units delivered solid results in the quarter. Our hospital and ambulatory volumes improved across the board, patient acuity remain strong and cost continued to be well-manage, all of which contributed to a sequential margin improvement in all three of our businesses.

Looking back to the second quarter of 2019, our consolidated adjusted EBITDA this quarter represents a compounded annual growth rate of about 12% and our adjusted EBITDA margin increased 170 basis points, excluding grants.

As a result of another strong performance in the quarter and some additional grant income, which was not forecasted, we increased our 2021 outlook for the second time this year, which I’ll discuss further in a few minutes. Let’s now turn to Slide 7, which provides more detail about the performance of our individual business segments.

I’ll begin with our hospitals, which produce another very strong quarter. Substantially, all of our 20 hospital markets exceeded our expectations for the quarter, including 14 markets that exceeded our internal EB forecast by more than 10%.

Surgical volumes, ER visits and outpatient visit volumes, during the quarter, returned at a faster pace in patient acuity remained at higher than normal levels and pricing yield remained strong as well. Our case mix index in the quarter was about 10% higher than the second quarter of 2019.

These positive trends were further supported by our continuing cost control initiatives to yield further operating efficiencies, to help mitigate the impact of incremental cost pressures as a result of the pandemic, such as elevated temporary contract labor and PPE costs.

Our hospital adjusted EB margin excluding grants was 10.9% in the second quarter, which was 50 basis points higher than in the first quarter of this year and 150 basis points higher than the margin we reported in the second quarter of 2019.

As a reminder, our hospital margins do not include the results of our very strong margin ambulatory business, which has reported separately. Turning to our ambulatory business, USPI continues to deliver on its value proposition, providing high quality care and a consumer friendly, low cost environment, while producing attractive financial results.

USPI generated EBITDA of $295 million in the quarter, which included $20 million of grant income. USPI’s EBITDA in the second quarter, excluding grants represent a compounded annual growth rate of about 15% looking back to the second quarter of 2019.

Surgical volumes this quarter recovered to 100% pre-pandemic levels, patient acuity and revenue yield remained strong and cost continue to be well-managed. USPI’s EBITDA margin, excluding grants of 41.4% was 190 basis points higher than the second quarter of 2019.

Also we anticipate approximately 43% of our consolidated adjusted EBITDA in the second half of 2021 will be from our USPI business, demonstrating further progression toward our goal of approximately 50% by 2023.

Turning to our revenue cycle management business, Conifer generated $90 million of adjusted EBITDA and continued to deliver strong margins of 28.2%, which was 50 basis points higher than the first quarter.

Also Conifer’s cash collection performance for our hospitals continues to be an important contributor to our strong cash flow results so far this year. Let’s now look at volume for the quarter on Slide 8.

Our hospital and ambulatory volumes improved significantly in the quarter compared to last year due to the dramatic impact on volumes in Q2 last year due to the pandemic. And as I mentioned earlier, volumes rebounded stronger across the board compared to pre-pandemic levels in 2019.

These volume trends demonstrate notable improvement from the trends in the first quarter of this year. Let’s now turn to Slide 9 and review cash flows and liquidity. We continue to be in a strong liquidity position. We ended the quarter with about $2.2 billion of cash on hand and no borrowings outstanding on our $1.9 billion line of credit.

We generated $123 million of free cash flow in the quarter or about $275 million before the repayment of over $150 million of Medicare advances we received last year at the outset of the pandemic. Year-to-date, we’ve produced $536 million of free cash flow or about $688 million before the Medicare advance repayment.

As we previously discussed, we began to repay the advances as scheduled in April this year. Our leverage ratio at the end of the second quarter was 4.17 times adjusted EBITDA and 4.86 times adjusted EBITDA minus NCI expense.

Also we refinanced $1.4 billion of notes during the quarter, which will result in $13 million of future annual cash interest savings and we realized over $100 million of cash proceeds during the quarter from the sale of our urgent care centers, a medical office building and some other property.

Let’s now move to Slide 10, which highlights key cash flow sources and uses during the quarter.

We’ve provided this information since the beginning of the pandemic to illustrate that we’re generating net positive cash flows, when you exclude non-routine cash received or used related to stimulus funding and cash inflows and outflows from non-routine transactions, such as early retirement of debt, acquisitions or assets sales.

Turning to Slide 11, let’s review our updated 2021 guidance. This slide shows the key factors that have contributed to us raising our 2021 adjusted EBITDA outlook twice this year.

As you can see on the slide, we raised our guidance $100 million after the first quarter, due to our strong performance and grant income that we were able to recognize, which was not assumed in our original guidance.

Similar to the first quarter raise, we are again increasing our 2021 guidance, primarily as a result of our outperformance in the second quarter.

The other item to call out is that we are assuming the sale of our Miami area hospitals will be completed during the third quarter, which will result in about $55 million of earnings being removed from our previous guidance.

Our adjusted EBITDA outlook for 2021 is now projected to be $3,200 million at the midpoint, which is $200 million higher than our original outlook at the beginning of the year.

Since we are assuming that the sale of our Miami hospitals will occur on August 1 this year, we removed approximately $22 million of Miami EBITDA from our Q3 EBITDA outlook an approximately $167 million of revenue.

After normalizing for the Miami sale, the midpoint of our Q3 EBITDA is slightly above the current EBITDA consensus for Q3 and the midpoint of our revenue outlook for Q3 is also in line with the current consensus for Q3.

For the last five months of the year, we removed $55 million of EBITDA from our outlook due to the planned sale and we removed about $418 million of revenue from our outlook due to the planned sale.

Listen, that’s a lot of numbers, but we believe it’s important to point out, our Q3 guidance is in line with current Q3 consensus after you normalize for the planned sale of Miami hospitals.

And to reiterate, we’ve raised our full year 2021 guidance for the second time this year with our full year EBITDA midpoint, now $200 million higher than the start of the year. We also provided various updated guidance assumptions in our press release for volumes, revenues and EPS.

I want to point out that our updated outlook includes a pre-tax book gain of about $400 million for the anticipated sale of the Miami hospitals, but this gain is not – it’s not included in our adjusted EBITDA or adjusted EPS guidance.

As for cash flows for the year, at the midpoint, we anticipate generating free cash flow of about $1,275 million and adjusted free cash flow of $1,400 million this year at the midpoint. Before taking into consideration, the repayments we anticipate making in 2021 of approximately $700 million for Medicare advances and the deferred payroll tax match.

While we have – we will have to repay the Medicare advances and the taxes this year, we have already sufficiently reserved for that amount in our balance sheet cash.

Free cash flow for the year of $1,275 million before the repayments of the advances and the taxes, less expected cash NCI payments of $470 million results in positive net cash flows of about $800 million this year. Also, I wanted to mention our income tax payments for 2021 are anticipated to be approximately $150 million.

The increase in expected tax payments in the back half of the year is due in large part to about $50 million of federal and state taxes related to the gain on sale of our Miami hospitals.

I do want to remind you that utilization, net operating loss carry forwards from the two most recent years are limited to 80% of taxable income for 2021 tax filing purposes.

The underlying free cash flow generation of the company has significantly improved over the past several years and we continue to maintain sufficient liquidity to continue to invest in growth opportunities.

Our strong second quarter results together with our ongoing enhanced operational execution, increases our confidence that we are on the right strategic path and our ability to deliver consistent results.

Before I turn it back over to Ron, I want to thank and say how proud we are of all of our patient caregivers and their colleagues in non-clinical roles across the company. Their teamwork and level of devotion continues to be exceptional.

Ron?.

Thanks, Dan. I really don’t have any other closing comments. I think we’ve covered the lot up front here. So I think we ought to just move to questions in the time remaining.

So, operator?.

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question today is from Pito Chickering of Deutsche Bank. Please proceed with your question..

Good morning, guys. So I guess one question here. Can you talk a little bit more about the normal 3Q seasonality? What do you guys assuming in your guidance versus 2019. And importantly, kind of what have you seen in June and July in any sort of color on or scheduling in August? Thank you so much..

Hey, Pito. This is Dan, good morning. Couple of things on that, from a sequential standpoint, from the second quarter or the third quarter, when you look at our numbers in Q2 versus our – midpoint of our outlook for Q3.

The one element that results in a sequential decline in the EBITDA is due to the sale of our Miami hospitals that’s planned on August 1. So that’s about $22 million of EBITDA. And then we have assume some normal seasonality patterns with Q3 being somewhat softer than historically with Q2 looks like. So that has been embedded in our Q3 outlook..

And then any color on June and July and/or scheduling for August..

Hey, Pito. It’s Saum.

June and July, June looks, and the numbers was strong and we had improvement through the quarter and we feel very good about where July looks now on a forward-looking basis as well across the hospitals and USPI from a surgical and procedural standpoint, in addition to just general admissions and continue positive trends in the outpatient and emergency department areas..

So then, is it fair to say that the seasonality that you’re assuming is more maybe conservative versus what you’re actually seeing in the marketplace today?.

Well, we’re assuming Pito is, there is – we’re assuming there is some typical seasonality impact in the third quarter. Listen, the business units were running very well. I think that’s pretty evident. And we’re very confident. We obviously raised our outlook for the second time this year. And we feel good.

We have obviously increases our confidence as we think about the back half of the year..

Right. Thanks so much..

Thanks..

The next question is from Justin Lake of Wolfe Research. Please proceed with your question..

Thanks. Good morning. Couple of things on the ambulatory side, first, can you give us an idea of how things progress through the quarter as you saw it kind of ramp up for the quarter, do a 100% of 2019. And then what you’re thinking in terms of versus 2019 for the rest of the year and then secondly, the sale of the Miami facilities the proceeds there.

Can you give us an idea of how you’re thinking about deploying that in terms of, are there – do you see a pipeline out there of ambulatory deals that will help you get to that 50% number you’re talking a bit out versus potential debt pay down. Thanks..

Hey, Justin. It’s Saum. So as I indicated on the hospital side and the USPI side, we saw a nice progression through the quarter in terms of our volume surgeries in the USPI portfolio specifically, I’m sorry, if that wasn’t clear. It’s both for the hospitals and the USPI surgical portfolio that strengthening continues.

And the comments about feeling good about July and our bookings looking forward included both business units as well..

Justin, in terms of the anticipated proceeds from the sale of the Miami hospitals, we – what we’ve been talking about and what we’ve been thinking about internally is, obviously, there’s a couple of different alternatives. There we have some debt that’s – that can be called at a reasonable premiums.

We continue – we will continue to look at investment opportunities in the ambulatory business, as well as the – in the hospital portfolio in terms of continuing to make investments to grow our higher acuity service lines in our markets..

Yeah. But as far as, is there a robust pipeline, there’s a robust pipeline in USPI. But like all things, it’s a function of price and timing. And we are very active, like, we always have been and obviously we’re not going to disclose that activity in nouns and verbs, but the reality is we’re very active. We’re always on the hunt.

We have people who do it full time and are very good at it. So the proceeds, first, we got to get them. I always believe you ought to have it first before you decide and tell people where you’re going.

And then the second point is, there is obviously opportunities to pay down selected debt if we wanted to do that and then go get fresh money if we wanted to use more debt. So I think we have a lot of opportunities here, where we’re heading in that expect. But it’s really reinvesting in the company, I think is our biggest objective at this point. So….

Got it. Thanks..

Yes..

The next question is from A.J. Rice of Crédit Suisse. Please proceed with your question..

Hey, AJ..

Hi, everybody. Just maybe I’ll ask about the labor markets. I know we’ve got some crosscurrents, where some of the premium rates paid to cover COVID surges are sort of abating. But it sounds like there’s still a pretty tight supply.

Can you give us a sense of what you’re seeing in terms of turnover rates, wage increases, other vacancy rates, whatever in the labor market and just how you’re thinking about the rest of the year from that perspective..

Hey, AJ, it’s Saum. Thanks for the question. And first of all, as I’ve said before, this is a challenging time for all caregivers and we are very focused on ensuring that we have a safe high quality environment of care, not only for our employees and caregivers, but also for our patients.

That dictates that we need to be very thoughtful in partnership with our caregivers to think about how we manage our staffing and what is clearly a tight market nationally.

And so our approach to this has been to balance our core staff with additional and incremental staff that we have contracted with to bring in from a contract labor standpoint, as well as putting in place incentives for our existing staff, who may choose or want to work additional hours in the hospitals.

And if you look at what we have accomplished in this area based upon good, safe productivity management, partnering with our caregivers to think about length of stay improvement opportunities, which by the way is better for patient safety. And also at the same time reduces the demand for contract labor. Those strategies have been effective.

Despite the market tightness, we have remained consistent and have not had increases on a relative basis for contract labor in our numbers. So we feel like we’re managing this very actively, very tightly, but in a way that is partnered with our caregivers and focused on quality and safety.

And we will continue to do that going forward through the balance of this year..

Okay, great. Thanks..

The next question is from John Ransom of Raymond James. Please proceed with your question..

Hey, good morning. Just wanted to ask about Conifer, as your multiple has improved, and yes, just the asset continues to do well in terms of your own business and generate high margins and high cash.

Has there been any retaking that may be keeping Conifer at the end might be the best way to go versus trying to spin it up?.

This is Ron, John. I would say that, look, we’re still on the pathway that we’ve announced publicly and that’s the pathway we’re going to keep on at this point. Obviously, we don’t live in a bubble, so we always have new thinking and new looks and new discussions.

But the reality is we’re committed to the pathway that we’ve stated and all the moves we’re making are directionally in that direction. So, I mean, we – I don’t know how to answer that, I’ll tell you that, we’re going down the same path, if something would change, we will obviously discuss that.

But as of right now, I would say, that the company is openly committed to the statements that we’ve made in the past. And I don’t see any need to change it at this point..

Okay, thanks..

The next question is from Jamie Perse of Goldman Sachs. Please proceed with your question..

Hey, good morning, guys. I wanted to see if I could get you to talk about what you’re seeing in different regions in the country. You’re obviously in Texas, Florida, California, if you could come in on some of those markets, Michigan. And Dan, you called out some geographies, where you’re outperforming from an EBITDA perspective as well.

So, again, just wondering if you can comment on what you’re seeing regionally, both from volume perspective and what’s driving EBITDA outperformance in certain markets..

Yes. Hey, Jamie, it’s Saum. It’s a really good question, because as you know, not all parts of the country are opening up at the same pace and the same manner. And in addition, the impact of COVID was not exactly equal through the country. So yes, we do have a portfolio. We have a portfolio of states and markets that are operating differently.

Probably the most important signals from my perspective is we think about the strength of the business and the comments we’ve made is that the markets that have been most open have performed very, very well.

And if you think about the averages that we’ve put out there, we don’t report market specific volumes or market specific earnings, but if you think about the portfolio and the markets that have opened up have been more open or have opened up more quickly. You can safely assume that our performance is above average there.

And in the states that have been slower have had more of a prolonged lockdown or have had perhaps in some cases, some more difficulties with vaccination in urban areas and things like that. They’re probably a little bit behind the average. We feel great about the month-to-month improvement in the volumes.

And we feel very confident about the fact that our highest performing markets are performing well above our expectations given the recovery. And so that means over time as the economy recovers more fully, we actually expect the full portfolio to continue to move in that direction of being ahead of anything that we saw in 2019..

And if I could just follow-up on that comment for one second, if you think about the level of openness that you were describing, did that – did the delta between areas of the country that were more and less open.

Did that change much across the month of the quarter? In other words, was it more similar by the end of the quarter than at the start of the quarter?.

No, I don’t think – I mean, I think, look, most places are opening up a bit more all the time. But the delta between some of those areas still remains. I mean, it’s not – what I mean, the difference in their recovery path still remains..

It’s incremental. It always incremental, right, in terms of how we move forward, so..

The next question is from Josh Raskin of Nephron Research. Please proceed with your question..

Hey Josh..

Hi, thanks. Hey guys, good morning. So USPI volumes you mentioned are back to pre-pandemic levels for the full quarter, maybe even trending slightly above, I guess later in the quarter.

So do you expect USPI volumes to exceed those 2019 levels in the second half? And I guess if so, is that just continued movement of sort of that pipeline of pent-up demand? Where do you think this has something to do with patients and providers just being more interested or feeling better about care in an outpatient setting? And then if I could just sneak in any impact on the changes of the inpatient only procedures rule..

Yeah. Hey Josh, it’s Brett. So yes, couple things, I would say that we saw in 2020, as you probably heard, we saw the addition of 3,700 new physicians in our portfolio last year.

And some of that a good part of that quite honestly was a result of physicians determining that, they had a preference for a lower cost setting in the ambulatory environment either they did specifically as physicians or their patients did. So we saw quite a bit of physician additions to our portfolio last year.

As a result of that, we’re seeing that in 2021, as well as you heard from Dan and Ron, we’ve added over 1,000 physicians to the portfolio so far this year. We think that will continue as we enter into the second half of the year. In addition to that, we’re – we’ve significantly increased the number of new service line additions to the portfolio.

And that’s some of the higher complexity business, such as spine and ortho and total joints, which approved over a 100% quarter-over-quarter. So again, I think combination of all those things results in that’s feeling really good about the second half of the year from the volume perspective and outpacing the volume that we saw in 2019.

As it relates to CMS’s guidance over the last couple of days, I would say that for us, that’s going to be quite honestly a slight net positive as opposed to a negative. We only saw about 130 procedures representing $100,000 to $200,000 that will be impacted that on the ASC side.

On the flip side, some of the inpatient – the outpatient only procedures that are going to go back to inpatient, there’s actually a nice tailwind, so the net of that for a surgical hospital, so the net of that is actually going to be a positive for USPI and 2022..

Interesting. Thanks..

The next question is from Kevin Fischbeck of Bank of America. Please proceed with your question..

Great. Thanks. Just wanted to follow-up maybe on the volume commentary, I guess specifically we are seeing COVID start to rebound in certain markets.

Is there anything that you’re seeing today about the core utilization in those markets where COVID is spiking versus the return of volume in markets where it’s not?.

Hey, Kevin, it’s Saum. No. At this point, while the COVID inpatient cases have increased a little bit, there’s been no impact on our ICU capacity, total hospital capacity, stress on the testing, or frankly even access points to the emergency department and otherwise, we’ve learned how to manage this. The volumes are not really that high at this point.

And so we’re very vigilant about it. We’re making sure that we continue to put back in place all of our care protocols on an active basis locally and nationally. But we’re not seeing any impact on our ability to schedule or even looking forward scheduling other types of elective care..

Okay. So obviously your ability to manage the cross, I mean, to manage the utilization and capacities is not affected yet, but you’re saying that the patient demand, you’re not seeing any downstream, cancellations or issues with your physicians or anything like that volume in..

That’s correct. We’re not seeing any increased either patient demand for cancellations or physician concern leading to cancellations.

One of the things that is different now than in the last spike of course is that in our facilities across the Board, USPI and the hospitals and our physician practices, our vaccination rate of our staff is very, very high. And so that’s led to a pretty significant change in the tone around our ability to manage this.

And then the other thing is, unlike in the rapid sequential phases of the pandemic, starting in early 2020, there’s been a bit of a break with COVID. And so the entire company staff is very well aware of the stockpile of all forms of PPE that are available.

So there are no concerns among staff, physicians, et cetera, about potential shortages that might occur. Now we didn’t have shortages through the pandemic, but of course, people read about them in hospitals, which created some concern.

But I think now people are very comfortable with the fact that all of the available supplies are there with stockpiles of many months of supplies available..

And they’re given our number of patients that are showed up with COVID too. I think some is equally – it’s just not a big enough number across our whole system to have created some of the concerns you’re mentioning at this point..

All right. Great. Thanks..

The next question is from Brian Tanquilut of Jeffries. Please proceed with your question..

Hey, good morning, guys and congrats on the quarter..

Good morning..

I guess my question is just on the ASC, any color you can share with us in terms of what you’re seeing with the SCD assets that you’ve acquired.

And then kind of related to that, as we think about, the opportunities from the ASC rules over the last two years, right with MSK and cardio, how are you positioning to drive growth and expansion in your MSK capabilities? And maybe expanding further into cardio into that ASC?.

Hey, this is Saum. Let me start, and then I’ll pass to Brett. First of all, on SCD, we continue to March forward very much in line with our expectations on the integration of those facilities. We’re not reporting SCD in any way separately from the total portfolio of USPI.

But the strength of those facilities, the quality of those facilities, the physicians that are partnered in those facilities continue to perform very nicely just like the overall USPI portfolio. We’re very pleased with the assets that we received.

And we’re also very pleased with the opportunities we see looking forward to work with those assets to grow and diversify them. So we’re happy all around. Brett can comment more specifically on that.

The second point is, it’s important to just, and I’ll just lay the foundation and pass to Brett, but USPI prior to the SCD acquisition was already the leader in musculoskeletal care on an ambulatory basis. This has really just added to that capability.

And obviously with some of the specific numbers that we put into the slide deck, you can see how rapidly we’re expanding our portfolio in those areas..

Yes. Thanks, Saum. I don’t know how much more I have to add after that answer, but I would say just to echo Saum’s comment, the integration with SCD is going very smoothly. We continue to hit our integration milestones and overall very pleased with how the facilities are operating. There hasn’t really been any significant surprises for us.

And that’s largely, I think a result of the significant level of due diligence that was done on the portfolio prior to closing. As it relates to the second question about MSK, I mean, we’re pulling a number of different levers in order to continue to grow the amount of MSK revenue in our business.

One of which, we’ve talked quite a bit about, and that’s just our service line development activity, a good part of the 45 new service lines that we added in the first half of year.

And the 73 that we added in 2020 were related to MSK specialty type procedures, whether it’s total joint, whether it’s spine, whether it’s other types of high complexity, orthopedic procedures. Just to kind of give you a sense of that, just in Q2 2021, the growth in our total drug business was over 120% over Q2 2020. Spine was up 21%.

And then if you look at some of the other specialties like bariatric is up over a 100%. And we had an ENT procedure that’s relatively new. That was up quite honestly almost a 1,000%, although on smaller numbers. So that’s one lever we’re pulling in terms of increasing the amount of MSK business and that’s our service line development activity.

And then of course, we continue to look for acquisition opportunities with physicians that are driving those businesses that are high quality, great physicians from a reputation perspective, that’s the second lever.

And then of course, the third level is just the amount of de novo activity we have in the MSK space, that will continue to produce nice improvements in MSK revenue quarter-over-quarter. We see for the remaining part of this year as well as next year..

Awesome. Thanks, guys..

Your final question is a follow-up from John Ransom at Raymond James. Please proceed with your question..

John Ransom:.

bringing :.

Hey John, certainly some of the facilities that we’ve divested in the past had higher than the company average in terms of MedMal type of experience. So that that’s been helpful. Listen to the – there’s been positive trends in that area. The costs have been coming down.

And we diligently manage that, not only from a financial perspective, from a quality perspective, a clinical perspective, root cause analysis. So we’ve been spending a lot of time, and there’s a lot of attention focused on it. And we think that’s an opportunity for continued upside as we move into the future..

What’s embedded in your guidance this year versus last year for MedMal..

We haven’t set a specific number, John, just for some obvious reasons. But listen to the – what I would say is, when we put out our 10-Q the MedMal numbers are in – will be in there. But we don’t want to project and at least publicly for some obvious reasons what’s the MedMal cost could be.

But I would just say reiterate the trends have been improved in terms of claims..

Yes. Great. Thanks..

Any other questions?.

There are no additional questions at this time. I’d like to turn the call back to management for closing remarks..

All right. This is Ron Rittenmeyer. Thank you very much. I think we covered everything and of course, we’re available for any follow-up. And so thanks and have a good day. Thank you, operator. We’ll disconnect..

Thank you, sir. This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation..