Good afternoon. Welcome to Tenet Healthcare's Third Quarter 2023 Earnings Conference Call. After the speaker remarks, there will be a question-and-answer session for industry analysts. [Operator Instructions] I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin..

Good afternoon everyone and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's third quarter 2023 results as well as a discussion of our financial outlook. Tenet's senior management participating in today's call will be Dr.

Saum Sutaria, Chairman and Chief Executive Officer; Dan Cancelmi, Executive Vice President and Chief Financial Officer; and Sun Park, Executive Vice President. Our webcast this afternoon includes a slide presentation, which has been posted to the Investor Relations section of our website, tenethealth.com.

Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information.

Investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. With that, I'll turn the call over to Saum..

Thank you, Will and good afternoon everyone. We continue to deliver strong results in 2023. In the third quarter, we generated net operating revenues of $5.1 billion and consolidated adjusted EBITDA of $854 million. This translates into an attractive, almost 17% margin.

These results were driven by sustained volume growth and effective cost control across each of our businesses. USPI had another very strong quarter with $370 million of adjusted EBITDA, which represents 16% growth compared with third quarter 2022. Same-facility revenues grew 7.9% and adjusted EBITDA margins remained robust.

USPI had attractive volume growth in high acuity service lines, including mid-teens growth in total joint replacements in the ASCs over third quarter 2022. We also delivered ongoing strength in GI, urology, and ENT procedures.

We remain focused on attracting high-quality physicians who choose to practice in our low-cost, high patient satisfaction setting of care. This, coupled with tailwinds from increased patient demand for ambulatory surgery care will support continued organic growth. We also remain committed to scaling our portfolio.

During the quarter, we added 6 new centers, the majority of which were focused on higher-acuity orthopedic services. These included centers in Nevada, Maryland, Texas, and Florida, all with leading regional musculoskeletal specialists. Our acquisition pipeline remains robust with attractive opportunities.

We also have a healthy de novo development pipeline of more than 30 centers currently in the syndication stages all the way to being under construction.

Notably, de novo centers have effective EBITDA multiples in the low single-digits, making them a very attractive use of capital that further advances the site of service value-based care, which USPI uniquely delivers. Turning to our Hospital segment, we generated $401 million of adjusted EBITDA in the third quarter 2023.

Our patient acuity levels remained strong with revenue per adjusted admission up 3.2% over third quarter 2022. Additionally, on a non-COVID basis, same-store inpatient admissions increased 4.5%. Our hospitals continue to enhance access to higher-acuity services for the benefit of our patients.

For example, our Arizona Heart Hospital was the first in Arizona to implant a new device to reduce stroke risk and our Palm Beach Gardens Medical Center expanded its robotic surgical capabilities. We will continue to increase patient access to cutting-edge specialty care across the communities we serve.

Our third quarter results lend further credence to our hospital strategy of being focused on acuity rather than all things to all people. We continue to make significant progress improving nurse retention and accelerating hiring.

This has resulted in a substantial reduction in contract labor usage to 3.1% of consolidated SW&B, which is the high end of pre-pandemic levels. Given our progress in hiring and retention, the reductions in contract labor did not come at the expense of further capacity reductions.

We reached these levels in advance of our own projections through disciplined data-driven processes. We will balance the utilization of contract labor for nurses with our targeted strategies to increase capacity to support patient demand for high acuity services.

In the fourth quarter, as demand rises, it is possible we will invest additional resources to ensure access, continuing to employ the same discipline we have used in contract labor utilization over the past two years. We continue to manage cost pressures from medical fees.

Medical fees, while higher than last year, remained relatively flat from Q2 to Q3 2023. As I noted through the pandemic, we began a process of restructuring our staffing contracts market-by-market, which includes decisions on in-sourcing services where that is most beneficial.

This has helped to mitigate the magnitude of expense increases in our business. Again, as patient demand rises into the winter, we anticipate some increases in costs from our current run rate to ensure access to our specialty services, but this will not change our longer term discipline nor our make versus buy strategy.

Finally, I want to point out that over the last two years, we have successfully settled over 30 labor union contract negotiations. These require a delicate balance between understanding our employees' needs and our ability to have a cost structure to deliver affordable care for our patients.

We will continue with our strategy to balance those two aspects. Before I turn my attention to Conifer, I'll make a few comments about our views on the GLP-1 receptor agonist potential impact on our business. These products are very early in their life cycle of impact.

They have extraordinarily high costs, an expanding list of side effects, patient tolerance issues and concerns about lean muscle loss, which translates into an unknown long-term safety profile. We believe that this means adoption among populations which could benefit is still, and likely to be for some time, low.

Additionally, these products require sustained consumption. The underlying conditions of diabetes or the related root causes of obesity are not cured.

Given this, we see no reason to alter our current focus on taking care of patients with multiple chronic illnesses, and we see no reason to alter our capital plans in moving care into convenient ambulatory settings.

The high acuity strategy in the hospitals is subject to less demand elasticity and the capital-efficient business model we've designed to take care of the most complex needs of patients will endure.

The aging of the population, the growing burden of chronic illness, the population shifts into many of our markets, and the continued impacts of service and technology innovation that occur outside of the pharmaceutical sector provide a significant tailwind for the important role that hospitals and ASCs will continue to play. Turning to Conifer.

Our Conifer business continues to deliver strong margins and provide high-quality services to its clients. This performance has been supported by ongoing automation and offshoring initiatives and third quarter EBITDA margins were over 26%.

We recently renewed our long-standing relationship with one of our larger physician revenue cycle management clients and are slated for additional renewals by the end of the year. Before I turn the call over to Dan, I want to reiterate the strength of our portfolio of businesses and the ongoing performance they have produced.

While we continue to navigate a challenging environment, our strategic focus on higher-acuity services, agile approach to managing operating expenses, and effective capacity management all play a pivotal role in delivering these durable results.

As a result, we are again raising our full year 2023 adjusted EBITDA guidance to a range of $3.365 billion to $3.465 billion. We're still formulating plans for 2024 and we'll take the time to see what a fourth quarter looks like in the post-pandemic environment before getting specific about our guidance for next year.

From a capital deployment perspective, our priorities are consistent; USPI expansion at very attractive post-synergy multiples and investments in the growth of our high acuity strategy in the acute care segment. Those two priorities help to reduce leverage through earnings growth and free cash flow generation.

We maintain an opportunistic balance in this public market trading environment between our desire to pay down debt more directly and the very attractive valuation of our equity.

I will remind you that we have all fixed rate debt and no maturities due until 2026, providing a great deal of predictability relative to other companies that may have a similar level of leverage. And with that, Dan will now provide a more detailed review of our financial results.

Dan?.

Thanks Saum and hello everyone. Our financial results in the third quarter were strong with USPI and our Hospital's adjusted EBITDA well above our expectations. In the quarter, we generated consolidated adjusted EBITDA of $854 million, above the high end of our third quarter guidance range.

Our results were driven by strong same-store revenues and volumes, high patient acuity, and very effective cost control. Now, I'd like to highlight a few key items for each of our segments. Let's start with USPI, which delivered strong volume and earnings growth.

In the third quarter, USPI produced a 7.9% increase in same-facility system-wide revenues compared to last year, with case volumes up 4.1% and net revenue per case up 3.7%. And USPI's adjusted EBITDA grew 16% compared to the third quarter of last year.

Adjusted EBITDA minus NCI expense increased 12% and its EBITDA margin continues to be very strong at 39.3%. We are pleased with the continued strength of USPI's performance as we grow this business, both organically and inorganically in attractive markets across the country. Turning to our acute care hospital business.

Same-hospital inpatient admissions increased 0.6% compared to the third quarter last year, while non-COVID admissions increased 4.5%. In fact, year-to-date, non-COVID admissions are up 7.6% over last year. Our labor management continues to be very effective, especially temporary contract nurse staffing costs.

On a consolidated basis, contract labor costs were just 3.1% of SW&B in the quarter, a significant decline from 4.3% in the second quarter of this year and 7.4% in the third quarter of last year, a year-over-year decline of almost 60%.

Our consolidated SW&B costs as a percent of revenue were just 45.2% in the quarter compared to 46.4% in the third quarter last year and 250 basis points lower than the 47.6% reported in Q3 2019 before the pandemic despite the significant inflationary pressures since then.

Medical fees were flat sequentially compared to the second quarter of this year and were $34 million higher than the third quarter of 2022, consistent with our expectations. Overall, these costs are up 15% year-to-date.

And finally, our case mix and revenue yield remain strong as we continue our strategic focus on investments in higher-acuity, higher margin service lines.

I want to reiterate what we've communicated previously, our hospital strategy has focused on growing higher-acuity volumes, which is working, better margins, stronger ability to manage costs, and more capital-efficient to generate the earnings growth. Let's now turn to Conifer, which again delivered a solid quarter.

Conifer produced third quarter adjusted EBITDA of $83 million and a strong margin of 26.3% and continued its strong revenue cycle performance for our hospitals and its other clients. Now, let's review our cash flows, balance sheet, and capital structure.

At the end of the quarter, we had over $1 billion of cash on hand and no borrowings outstanding under our $1.5 billion line of credit facility. We generated $327 million of free cash flow in the third quarter and just over $1 billion year-to-date, bolstered by Conifer's strong cash collection performance.

Our September 30th leverage ratio was 4.08 times EBITDA. As a reminder, all of our outstanding senior secured and unsecured notes have fixed interest rates and we have no significant debt maturities until 2026.

We believe our strong free cash flow generation and capital deployment actions will continue to provide us financial flexibility to support our growth initiatives and further deleverage the balance sheet. Let me now turn to our increased outlook for this year.

As Saum mentioned, we are raising our 2023 adjusted EBITDA outlook range by $30 million to $3.415 billion at the midpoint of our range, reflecting our continued strong performance. This $30 million increase includes a $10 million raise for USPI and a $20 million raise for our Hospitals.

This is the third time we've raised our EBITDA guidance this year, which is now $155 million or 5% higher than our initial guidance we shared at the beginning of the year. Additionally, we now expect net operating revenues to be in the range of $20.3 billion to $20.5 billion, an increase of $100 million at the midpoint over previous expectations.

Turning to our cash flows for 2023. We now expect free cash flow to be in the range of $1.125 billion to $1.350 billion. Now, I'd like to spend a minute discussing 2024. We are still conducting our 2024 business planning processes and evaluating key assumptions, and therefore, it is premature at this point for us to provide specifics on 2024 guidance.

However, we do want to give you some context for our current thinking about next year.

Our starting point assumes that we will continue to produce organic volume growth in our key service lines, increase patient acuity, benefit from better than historical contract negotiations, and effectively manage costs with a specific expectation for full year additional contract labor savings.

And given the robust pipelines at USPI, we will have further contributions from M&A and de novo development center openings. These factors, in addition to an ongoing post-pandemic recovery for health care services provide tailwinds into next year.

Our starting point also assumes some rather obvious points in this year's results, such as the absence of further grant income and cybersecurity proceeds. In addition, we anticipate completing our sale of the San Ramon Hospital, subject to regulatory approvals.

The termination of COVID-related government funding programs as well as the new regulations related to workers' compensation and personal injury reimbursement in Florida, and health care wages in California represent around $100 million in headwinds in aggregate.

However, thus far in our planning, we expect our earnings growth opportunities will more than offset these headwinds. I would reiterate Saum's point that the current environment for recovery in health care services is positive and we feel well-positioned to continue our success.

We look forward to completing the planning and sharing guidance with you for 2024 in February on our earnings call. We are pleased with our strong performance so far this year and have confidence in our ability to deliver on our increased 2023 adjusted EBITDA guidance of $3.415 billion at the midpoint of the range.

And with that, we're ready to begin the Q&A.

Operator?.

Thank you. We'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from Josh Raskin from Nephron Research. Your line is now live..

Thanks. Good evening. Just a quick clarification, Dan.

When you say earnings growth will more than make up those headwinds, are you just suggesting EBITDA will be up for 2024 and we can figure out magnitude in February? And then my real question just has to do with the ASC segment, specifically seeing same-store growth moderate a little bit, while pricing is picking up, some cases moderate a little bit, while pricing picks up.

So, -- and same-store revenues are still at very high single-digit range each quarter.

Is that simply just more complex cases to the outpatient setting? Is that the focus on higher-acuity specialties or some of the new centers you're opening more multi-specialty? Is there something else in there? And then it sounds like you expect that to persist into 2024.

Is that the sort of run rate that you're seeing in sort of high single-digit same-store revenue growth? Is that a fair assumption for next year?.

Hey Josh, it's Dan. I'll take the first part about 2024 and then Saum will address the USPI points. Yes, we are assuming EBITDA growth in 2024 compared to this year.

Obviously, you just heard some of my remarks outlined some of the various positives as we think about next year, also taking into consideration some of the other items that will go the other way just because the reduction in government COVID funding. We're not anticipating any additional grant income next year or cyber income.

We're obviously still pursuing cyber insurance proceeds. We feel we're certainly entitled to additional proceeds, but we're not -- at this point, we're not going to assume anything for the guidance next year. And as we talked about, in the past, there's some reimbursement headwinds in Florida and then as well as the new wage regulations in California.

So, all those items -- all the headwinds, so to speak, are roughly $100 million in aggregate or in total..

Hey Josh, it's Saum. On the ASC growth, we're obviously quite pleased with continued growth rates well above our long-term projections for the business of 2% to 3% organic growth.

And so while there may be moderation from the first part of the year to the third quarter, it's still incredibly robust growth, so I'm very pleased with that continuing strength. And obviously, we continue to build acuity into our ASCs and see that in the net revenue per case at the same time.

So, we feel pretty good about what the business is achieving right now with so much momentum so far for the full year. And as you know, the Q4 ramp for USPI is real and it's something that we're really interested in seeing and we're well-prepared for as the first kind of post-pandemic Q4 to see how that goes.

We haven't really formulated 2024 guidance on that so I'll defer the 2024 guidance question..

Thank you. Next question is coming from Stephen Baxter from Wells Fargo. Your line is now live..

Yes hi. Thanks. Wanted to ask about the revised guidance and the implied fourth quarter in there. So, for the Hospital segment, it does look like your guidance EBITDA, that's a little bit lower sequentially at the midpoint, especially if we're going to adjust out the incremental insurance proceeds you had in the third quarter.

Normally, we'd expect EBITDA to grow in the fourth quarter as volume picks up. We also understand that your guidance here is a bit better. And then I think you mentioned again like something kind of a wait-and-see approach around Q4 performance post-COVID.

Just wanted to clarify, have you seen something different at this point in Q4? Just trying to understand whether that's more prudence or something you're actually seeing in the results today as we're most through October? Thanks..

Yes. Let me start and I'll pass to Dan.

Just going in reverse order, we're not seeing anything different at this stage, although we are cognizant of the fact that there are lots of reports out there about COVID spreading and the penetration of the vaccine that is supposedly effective against this strain being at somewhere around 7%, I think, in the US population.

So, this is a little bit of post-traumatic stress, right, in the sense that we've been through surprise COVID spikes before. We're hopeful that, that doesn't happen again. We're certainly not seeing evidence of it in our hospitals at this point in time.

But I've said from the beginning of the year and even late last year that we're really looking forward to seeing and digging into a Q4 without COVID to understand how the business and the demand environment performs from that perspective..

Hey Stephen, it's Dan. In terms of the sequential walk from Q3 to Q4, so in -- obviously, looking at our USPI business, we are expecting sequential growth there consistent with what we have seen in the past.

So, we're -- we've -- obviously, the performance has been strong this year, and everything we're seeing so far would suggest we'll see sequential growth in the USPI business. Listen, on the hospitals, there were some items there in the third quarter, whether it's grant income or cyber proceeds, we're assuming they won't be there in Q4.

There will be some additional reimbursement reductions related to COVID funding, in particular, FMAP phasing down further. And then as Saum pointed out in his remarks, we're -- when we think about contract labor, maybe we might invest some more in the fourth quarter, if necessary, to meet the volume demand.

And we also built into our assumptions of some additional medical fees in the fourth quarter..

Thank you. Our next question is coming from Whit Mayo from Leerink Partners. Your line is now live..

Yes, I was just curious on Slide 10 of the PowerPoint presentation.

The 103 new service lines added year-to-date for USPI, just to confirm, does that include de novos from this year? And just any common themes around that? Just is this all joints? Any cardio? Just what are the service lines, maybe how that 103 number compares to the new services last year? Thanks..

Yes, hey Whit, this does not include de novos, service line additions or expansions of services in existing ambulatory surgery centers.

And obviously, consistent with our priorities, what we're looking to do is add higher-acuity services, in many cases, orthopedics into existing centers that may be single specialty but have additional capacity, or if they're multi-specialty centers, that don't have orthopedics work going on in them, looking to add orthopedics in those settings..

Thank you. Next question is coming from Justin Lake from Wolfe Research. Your line is now live..

Thanks. As far as my question, I just want to say I'm not sure if this is Dan's last earnings call, but if it is, it's been a pleasure to work with you and congrats on the retirement. My question is around the surgery center business. So, Saum, a couple of things.

One, there's been some discussion out there that MedPAC is talking about volumes kind of moderating a bit September into October. Just curious if you're hearing that out there, seeing anything in your business that would imply a bit of a slowdown? And then can you flesh out a little bit.

The last time we were together, the -- you did mention the excitement. It feels like there's been a pickup in the M&A pipeline, the de novo pipeline. Maybe give us a little bit of color in terms of how that's shaping up going into next year versus how it's looked the last two or three years? Thanks..

Yes. Hey thanks, Justin. I don't -- I haven't seen the MedPAC report and I'm not going to comment on October or early fourth quarter volumes other than to say, reiterate what I said before, which is this is shaping up to be a terrific year for volume growth at USPI. The M&A environment is consistently positive.

We don't see that we're -- we don't see that there's higher multiples required as centers recover on their own that might have been up for sale over the last couple of years. We have a lot of opportunities in diligence from that perspective.

And at the same time, given where interest rates are, we've actually gone through a process internally of raising our bar on the assessment process that we use, in particular, around the financial returns and the ability to drive the post-synergy multiples down to where we've said they would go.

On the de novo opportunities, those have a lead time, obviously, once you start moving of around 18 months or more. But having this many in the pipeline is great because two things happen from that perspective.

One is that you're usually building new higher-acuity orthopedics-focused centers in markets where physicians haven't really been in the ASC setting before so it's a net increase of activity. And two, by moving things into a lower-cost setting, it continues to enhance the value-based care proposition of USPI.

And we're kind of focused on both of those. So, I feel pretty good about both areas at this point heading into 2024.

Dan?.

Hey Justin, it's Dan. This will be my last earnings call, but thanks for remembering that. I really appreciate that. It's been really an honor representing the company. And I just want to say thanks to all of the company's employees, the physicians, all the caregivers, and our volunteers at our hospitals and facilities.

They really do amazing things every day. If you spend any time at the hospital, you see that very quickly. So, I just want to thank all of them..

Thank you. Next question today is coming from Kevin Fischbeck from Bank of America. Your line is now live..

Great. Thanks. And I guess I'll add my thanks to Dan as well. But I guess as far as my question goes, when you were talking about the potential tailwinds into next year, one of the things you spiked out was the post-pandemic recovery from COVID, providing a good operating backdrop into next year.

I guess where do you think we are today in that recovery? And I guess I'm interpreting that as a volume comment, but if there's something else you would also be specing out not quite back to normal on the cost side or whatever it is.

Would love to kind of get a sense of where we are in that recovery in your view today?.

It's both. I mean -- it's both. It's -- I mean, the volume recovery, especially in the acute care business and related services on an elective basis will continue to grow.

And I think that part of this is, obviously, we had a lot of premature mortality from COVID way back in the beginning, 2020-ish, early 2020 to 2021 and I think as the population continues to age in, despite that premature mortality, we'll see a tailwind of demand.

Now, look, the cost side, whether it be in labor, which is the most obvious or supply chain side still has room to go to normalize.

I mean, our performance this year in the Hospital business has been a combination of volume in the high acuity area that we focused on, but also beating our expectations on how much expensive contract labor we would be able to reduce from the business. And as I said, in this quarter, it came without any cost to capacity because of our hiring efforts.

But I still think there's room -- there's still room to move from a normalization standpoint over the next couple of years. And certainly, that's the basis of the comment for 2024..

Thank you. Next question is coming from A.J. Rice from UBS. Your line is now live..

Thanks. Hi everybody and best wishes, Dan, as well. Have been struggling a lot about managed care on the call. Where are you at with your contracting for 2024 and 2025? I know you've got a lot of national contracts.

What kind of increases are you seeing? Are you still getting some incremental bump for the labor challenges that the industry has faced or is it starting to sort of normalize as you look out for the next year or two in rates, any thoughts there?.

Hey A.J., this is actually Sun Park speaking on. Thanks for your question. And as I've slowly gotten to learn the business here, obviously, managed care is a critical component. Dan mentioned it as part of the tailwind that we do expect to continue to see into 2024.

And then as we've said historically, we do see commercial rate increases kind of mid-single-digits. And I think more recently, we are seeing some rates at or at the high range of that. And I think that reflects the current inflationary environment that we're all seeing. So, I think that's what we'll say. Thank you..

Our next question today is coming from Jamie Perse from Goldman Sachs. Your line is now live..

Hey, thank you. I'll add my congrats and thanks to Dan as well. My question is just on the labor environment. There were some headlines around some union contracts during the quarter. You mentioned it earlier. There's also the California minimum wage.

Just wondering if you can give us an update on what you're seeing broadly with labor, if something structural has changed, if you're thinking about the next few years any different from rate of increase of labor? And then just if you can size anything on the California minimum wage in 2024 and then 2025 once that gets fully implemented? Thank you..

Yes, hey it's Saum. On the California minimum wage piece and the impacts of that that was covered in Dan's commentary around headwinds. We haven't called out what it is specifically. We may do that in the future, but it was kind of covered within that broad category of headwinds.

In terms of ongoing contract negotiations, I'm not going to comment on those, but we're obviously aware of them and deeply engaged in them. And I wouldn't say the environment has changed tremendously.

I did note, we've worked on and settled 30 labor union contract negotiations relatively peacefully over the last couple of years, and we continue to work in good faith on all the contract negotiations we have. Obviously, there are things that complicate that environment in the middle of the wage bill in California being passed.

But that's just something that we're going to work on with our employees and the union and we'll move past that at some point..

Thank you. Next question is coming from Calvin Sternick from JPMorgan. Your line is now live..

Is there any way to quantify how much capacity you've added so far this year? What the impact on volumes has been? And then going to next year when you talk about organic growth, how should we think about order of magnitude from further capacity expansions? And then any color on which markets or service lines are the biggest growth opportunities there? And when we think about California minimum wage, I mean, I think that should be manageable for you guys, but just wondering if that impacts how you think about the capacity expansions in those buckets? Thanks..

Well, so there's a few different things to unpack in your question, but let me start with probably the most salient point around how we think about the hospital capacity. We're very cognizant of the service lines that we have prioritized market-by-market and maintain access for those service lines.

And we have, even through this strategy of reducing our exposure or access, in some cases, in markets because of the contract labor expense. So, through this year, I would say that we have maintained capacity or added a little bit back, but it has not been a significant change in our strategy this year with respect to managing contract labor.

And by the way, the consequence of that is the contract labor reductions have been steady and progressive and now the basis of them has changed from reducing capacity to succeeding in hiring and retention.

So, that's -- and at the beginning of the year, I think we said the basis of the labor environment in 2023 must change, in our view, towards hiring and retention away from capacity reduction. So, we feel pretty good about having achieved that and selectively, as I noted, adding certain service lines.

That's why I try to highlight them in every quarterly update at three or four of our hospitals, service lines that we're adding, where we're adding that capacity and putting that investment to work in things that we believe we'll want to do.

I don't know if -- I think the question was largely focused on the hospitals, but at USPI, we don't have as much of an impact of contract labor impacting our capacity. And so we have continued to expand access in centers across the country as the demand has risen.

And the nice thing is that in a robust demand year, we've proven the ability to staff, staff it appropriately and maintain our margins with the growth that we have been able to deliver this year without creating a bunch of extraordinary expense in contract labor.

So, for USPI, I see the environment differently and we feel like this won't be as significant an issue going into 2024..

Thank you. Next question is coming from Pito Chickering from Deutsche Bank. Your line is now live..

Hey good afternoon. And again, adding the thanks to Dan. It's a pleasure working with you for like all these years. On 2024 commentary, a quick clarification and a question.

For clarification, if you take the midpoint of the guidance of $3.415 billion and pull out $10 million for Ramon and $14 million grant income and $34 million in cyber security, is $3.357 billion the right launchpad for 2024? And then the question is on the $100 million of headwinds you talked about, contract labor year-to-date is about $300 million.

So, if I add another $100 million in the fourth quarter, it's about $400 million of contract labor in 2023. The reduction in the last two quarters there have been about 28% or so.

So, while you aren't guiding for 2024, could we think about contract labor settings -- contract labor savings offsetting those $100 million of headwinds you identified?.

Hey Pito, it's Dan. I'm not going to get into specifics in terms of the guidance for next year and what the launching point is, but we wanted to give you some high-level overview of those numbers. And again, roughly $100 million for the government funding type of reductions and the wage matter as well.

And then grant income, you obviously see the grant income on a year-to-date basis of about $14 million and the cyber income year-to-date is about $34 million. And in terms of Q3 to Q4, as we mentioned a few minutes ago, when we think about the sequential walk from Q3 to Q4 for the hospitals as we talked about.

We'll probably see some additional medical fees sequentially. And we're being cautious and when we think about contract labor in the fourth quarter and whether we need to potentially invest more to meet volume demands..

Thank you. Next question is coming from John Ransom from Raymond James. Your line is now live..

Hey, good afternoon.

On the hot topic in your sector but not for you, professional fees, could you just, in plain and simple English, tell us what professional fee expense looks like for calendar 2023 in your guidance versus calendar 2022?.

Hey John, it's Dan. In terms of our medical fee costs so far this year, they're up around 15% compared to last year. And that's generally -- that's in line with what our expectations were this year. And basically, as we said a couple of times, we do anticipate some additional costs sequentially in Q4..

Dan, is that the same number kind of two or three quarters up 15% or are you expecting it to be higher in the fourth quarter so making it higher for the year?.

It would be -- we wouldn't anticipate going up from 15% in Q3 -- or sorry, Q4..

Thank you. Next question is coming from Ben Hendrix from RBC Capital Markets. Your line is now live..

Thank you very much.

And apologies if I missed this earlier, but I was wondering if you could provide some commentary on growth, specifically within some of the USPI specialties, musculoskeletal, and hips and knees, in particular, how that grew? And then all of the other specialties, I know you've made some investments in urology recently, just how those -- if those areas are growing in line with your expectations? Thanks..

Yes, hips and knees grew in the mid-teens over prior year year-over-year and our collaboration and work with United Urology Group is growing faster than our expectations in terms of when the deal was done. And we continue to have attractive recovery in other areas like GI and ENT.

So the growth is broad-based but the fastest growth is coming in joint surgeries..

Thank you. Next question is coming from Jason Cassorla from Citigroup. Your line is now live..

Great. Thanks. I just wanted to ask about the updated USPI guidance. Just curious on the margins. You have the ranges out there, but the midpoint would suggest slightly lower margins versus where you previously were, stronger revenue than EBITDA dollars.

I guess can you give us an idea on how you're seeing margin progression from the newer de novos and M&A you've done over the past 12 months, maybe against the margin headwinds but bigger gross profit dollars that come with higher-acuity cases as you focus growth there? Just any help there would be great. Would appreciate it..

Well, yes, let me make a couple of comments just contextually. I mean, one is we work to maintain our USPI margins based upon longer term business decisions we make around service lines that we choose to be in, what we think the mix will be with the physicians that we work with, et cetera.

But make no mistake about it, there are many things that we could do to grow the business within that range that may move the margins up or sometimes down a bit, but they're still highly accretive to the business, given the types of post-synergy multiples that we deliver.

So, I just want to provide that backdrop because we focus on a range that we want to be in for the ROIs that we want to have. Now, specifically to your question around service lines, remember, the government mix in different service lines can be different. And obviously, the government mix will have a lower margin.

That doesn't necessarily mean that avoiding the service lines that have a little bit more government mix, like for example, joint replacements or other orthopedic-type procedures is the right answer because they add net revenue intensity.

But when those service lines scale up to their full potential, they meet USPI's margins, right? So, when you're scaling up a new service line and you're running at subscale in 60, 70 centers as you introduce ortho into those centers, of course, the margins will be lower until you get them up to scale.

And you're finally correct to point out that as we increase the number of de novos, obviously, those are operating expenses that are, in our environment, not contributing to the revenue and margin profile of existing centers.

And as we've moved from having a handful three or four de novos to 30, we are obviously cognizant of the fact that we need to overcome those operating expenses to maintain the margins that we've outlined in our range. And the good news is we're doing that. We don't talk about it much because it has not been an issue..

Yes, Jason, the USPI's full year margin for this year is roughly 40%, 39.8%. That's where we're guiding to. In the fourth quarter, we're assuming the margin is close to 43%, 42.8%. So, the margins are incredibly strong at USPI and the business is performing well..

Thank you. Next question is coming from Brian Tanquilut from Jefferies. Your line is now live..

Hey, good afternoon. Dan, thanks again for all the help over the years.

I guess my question, as I think about your comment about medical fees being up sequentially, is that just conservatism or expectations for higher volume? And then maybe for Saum, maybe take a step back, how do you think or judge to make that decision to in-source certain physician groups versus keeping them third-party? Thanks..

Hey just on the first point, I'm not sure I would characterize -- look, the way I would characterize it is what I've said all along this year, which is we are interested in seeing what a fourth quarter looks like post-pandemic for the first time in many years.

You can interpret that as how you want to from your question around conservatism or whatnot. We're being thoughtful in our view about the services that we want to offer and maintain access to as we move into the fourth quarter, and we're doing it in a way in which we would like to maintain strong margins.

Now, I'll point out again, I did it in the very first couple of lines of my statement at the beginning of the earnings call. It's notable that we are reaching the point where we're almost at a 17% EBITDA margin company-wide.

We believe in the strategy we're pursuing around acuity, capital efficiency, thoughtful management of our capacity for the services we offer, and obviously, the expansion and growth of USPI. And that margin is notable for Tenet as an entity, which I don't think we've seen for a very long time, if ever. So, that's really the pathway we're down.

There was a second part of your question which I didn't take down..

It was in terms of the sequential increase that we're assuming from three to four in medical fees. I mean, some of it also relates to, it can be a combination of volume. It can be a combination of contracts we've entered into that we know how the pricing lies out..

Yes. And to your question about in-source/out-source, I mean, our managed care contracting platform is pretty thorough. I mean, we talk about what we do with respect to hospitals and ambulatory surgery centers and other things. But we do maintain active physician service contracts for hospital-based specialties.

And we do have markets in which we have, over the last couple of years, in-sourced, out-sourced -- previously out-sourced work.

Again, I would refer you to even back during the pandemic, I made some comments about the fact that we undertook a comprehensive review of every physician service contract in the company to restructure, consolidate, scale services, and work with some of our better partners.

And when those weren't available either due to market penetration issues or competitive issues they may have had, we looked at opportunities to in-source. So, we understand that these fees are going up. But all year long and going into next year, we're planning them in the way we issue guidance..

Thank you. Our final question today is coming from Sarah James from Cantor Fitzgerald. Your line is now live..

Thank you and I want to echo my well wishes to Dan. I appreciate the comment that you just made about the service contract review, but I think also during the pandemic, Tenet stood out in making investments in technology for efficiency and scheduling.

So, I'm wondering, has that had any impact on your mix of contracted physician labor? And then also, are you seeing any of the incremental pushback on in-patient versus monitoring clarification that some of your peers are in acute?.

Yes. So, on the technology front, I appreciate you remembering that.

I mean, we deployed technologies that assist with scheduling in most of our high acuity like surgical, cath lab, their procedure areas, along with some interesting things that we did even in emergency room access for lower acuity scheduled, but truly emergent care and those have been paying off well.

We've also continued to utilize scheduling technologies in our out-patient specialty practices.

And one of the reasons we do that is it gives us the ability in a data-driven way to track week-to-week volume demand movements in our specialty practices, which we roll up countrywide to understand what's going on in the different specialties because the technology provides an automated source of having that data.

So, yes, I mean, we feel good about those investments. They were not large investments. They're simple, usable technologies that are physician-friendly and we feel pretty good about those. In terms of in-patient/out-patient pressure, I would reframe that into we are concerned with the degree of denial activity that we see from some of the health plans.

We think it's excessive and inappropriate. And we continue to work on our appropriate documentation, both for us and obviously with Conifer for all of our clients in order to push back on the volume of clinical denials on the basis of having excellent documentation and we think that's the right path out of that..

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to Saum for any further or closing comments..

Yes. So, Justin stole my thunder, but I kept this until the end because I was worried Dan might walk out if we thank him too early from this phone call. But I want to thank Dan as well not only for being an outstanding CFO, an exceptional colleague.

But I would tell you, he is the picture of integrity and honesty that's a role model for every CFO that exists in this country. So, thank you, Dan..

Appreciate the kind remarks, Saum..

All right. With that, we'll wrap up. Thank you, everybody..

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today..