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Presentation

Tenet Healthcare Corporation beats earnings expectations. Reported EPS is $2.68, expectations were $1.58. THC isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Will McDowell: 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 fourth 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; and Sun Park, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management’s expectations based on currently available information.

Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today’s presentation as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. One item that I would like to bring to your attention related to our disclosures is a change in our segment reporting. Effective in the fourth quarter of 2023, we have combined Conifer and the hospital operations into one reportable operating segment, Hospital Operations and Services. This change was made to reflect recent updates to the organizational and management structure of Conifer and hospital operations.

This change has no impact on Tenet’s consolidated revenues, EBITDA, net income, margins or cash flows. The Conifer business will continue to support and expand relationships with existing clients and generate new business, both for comprehensive end-to-end services, endpoint solutions. To ease the transition for investors and analysts, we have included historical financial information under the new segment reporting structure on Page 4 of our fourth quarter 2023 financial supplement. And with that, I turn the call over to Saum.

Saum Sutaria: Thank you, Will, and good morning, everyone. 2023 was an exceptional year for Tenet. We recorded net operating revenues of $20.5 billion and consolidated adjusted EBITDA of $3.54 billion, which translates into an attractive 17.2% adjusted EBITDA margin, underscoring our ability to drive profitability while maintaining our commitment to quality and innovation. We finished the year strong and delivered results in the fourth quarter that were well above the expectations we set. This was driven by continued volume strength as well as cost and utilization management. Each quarter in 2023, we exceeded our performance expectations. As important as our performance in 2023, we advanced our business transformation towards a more profitable value based care enterprise, building a leading specialty care platform and furthering our corporate priorities to position us with lower leverage and enhance free cash flow opportunities looking forward.

Let’s start with USPI, where we had a phenomenal 2023, a year where we finally escaped COVID disruption to the business. USPI generated $1.54 billion in EBITDA, which represented 16.4% growth over 2022 and margins of 40%. USPI had 9.2% growth in same facility revenues in 2023, substantially above our long-term goal of 4% to 6% top line growth. Joint replacement surgeries were up nearly 20% in the fourth quarter and over 15% for the year. Throughout the year, we saw ongoing strength and recovery in GI, urology and ENT procedures. This organic growth was driven by continued expansion of service lines and growth in our population of partnered and affiliated physicians, as well as the fundamental tailwinds of patient demand for safe and convenient surgical care options.

In 2023, we added 30 centers to the portfolio, furthering our goal of creating additional lower cost sites of care for patients and physicians while delivering superior value for our stakeholders. Turning to our hospital segment, we generated $2 billion of adjusted EBITDA in 2023, which represents a 12% EBITDA margin. Acuity remains strong with fourth quarter 2023 revenue per adjusted admission up 6.5% over prior year. Additionally, non-COVID same-store inpatient admissions were up 2.6% in the quarter and 6.2% for all of 2023. Our investments in nurse recruitment and retention have paid dividends as we have strengthened our workforce and effectively reduced contract labor spend throughout the year. By the fourth quarter of 2023, contract labor accounted for just 2.8% of consolidated salaries, wages and benefits, a 62% reduction from fourth quarter 2022.

This best-in-class contract labor cost management performance helped drive strong results in 2023 and we expect to continue to benefit from our operational discipline in the future. In summary, we are very pleased with the performance of our teams in 2023 and believe that we will carry the momentum into the New Year. Let me transition to 2024 guidance. We are projecting full year 2024 adjusted EBITDA of $3.825 billion to $3.485 billion, which is an attractive 7% growth rate at the midpoint on a normalized basis. In addition, during our third quarter earnings call, we said that we would overcome various reimbursement headwinds to grow EBITDA in 2024, which this guidance reflects. First, in our industry leading ambulatory surgery business, we anticipate adjusted EBITDA growth of approximately 9% at the midpoint of our guidance in 2024 based on our expectations of ongoing strength in demand coupled with great visibility into our pricing, 3% to 6% growth in same facility revenue, continuous improvement in our operating efficiency and additional sites of care joining the portfolio.

As we have noted, we believe that in 2023 we saw recovery in demand that included some impact from deferred volume, particularly in GI and ENT services. Our initial assumption for volume growth assumes that volume will build as the year progresses, reflecting the historically high same-store case growth that we saw in the first quarter of 2023. We are very confident in the long-term growth rates of this business. USPI will continue its commitment to expanding its family of lower cost ambulatory surgery centers. We have consistently acquired centers at attractive valuations and achieved post synergy multiples to below five times while improving our quality and delivering a 96.6% overall patient experience score under our management. We intend to invest approximately $200 million to $250 million each year and have a robust pipeline to support that level of investment.

We also have a healthy de novo development pipeline of more than 30 centers currently in the syndication stages or under construction. We believe adding centers with strong margins and attractive post synergy multiples remains the most effective use of our cash for investments to enhance Tenet’s earnings and free cash flow. Turning to our Hospital segment, we are expecting adjusted EBITDA growth of approximately 5% on a normalized basis at the midpoint for 2024. This projected growth is expected to be driven by 1% to 3% adjusted admissions growth and continued operating discipline. Having captured much of the value from contract labor rationalization last year in 2024, we plan to continue to strategically open up capacity to meet growing demand in a number of our markets, leveraging our previous capital investments.

Additionally, our hospitals continue to enhance access to higher acuity services for the benefits of our patients and communities that we serve. For example, our Abrazo Arrowhead Hospital just opened its new neonatal intensive care unit. This state of the art expansion increases our bed capacity to support services for preterm babies and high risk pregnancies by 75% at this facility. We are also particularly excited about the progress of our new Westover Hills Hospital in San Antonio, a project that reflects our strategic and disciplined approach to expansion. We expect that this facility will be completed and begin to serve patients in the second half of 2024. Located in a highly attractive and growing market, Westover Hills is another example of our thoughtful expansion strategy that we have been executing for a number of years.

This 100 bed facility will focus on higher acuity services such as cardiovascular and surgical care for the people in that community. Finally, Conifer recently announced the continuation of our partnership with Dartmouth Health through a new multi-year agreement. Conifer will continue to serve as the exclusive provider of end-to-end revenue cycle management services for Dartmouth Health’s hospitals, physician services and other related entities. We also added a new partnership with Conifer’s value-based care business unit, which will be providing analytics and operational support services for capitated risk arrangements. All in all, our full year 2024 adjusted EBITDA guidance of $3.285 billion to $3.485 billion represents attractive growth following a very successful 2023.

Before I turn the call over to Sun, I’d like to highlight the continued progress that we have made transforming our portfolio of businesses, building upon the highly successful and accretive sale of the Miami hospitals in 2021. In the past few months, we have announced the following transactions that demonstrate our agility in optimizing our businesses. First, the completed $2.4 billion sale of three Coastal South Carolina hospitals and expansion of our Conifer services to Novant Health. Next, the formation of a joint venture with Nextcare [ph], which operates dozens of high quality urgent care locations and a telehealth operation in Arizona. This immediately increases patient access to our network in this geography with low cost sites of care that are complementary to our health system footprint.

And finally, the $975 million sale of four hospitals and related operations in Orange County and LA County to UCI Health that we expect to close in the spring of 2024, subject to customary regulatory approvals, clearances and closing conditions. This deal will also include a contract for Conifer services. It is important to note that these sales were completed at very attractive EBITDA multiples, evidencing the strength of our assets and the quality of care they provide in their communities. Collectively, these transactions will substantially improve our leverage position. On a pro forma basis, proceeds from these recent transactions have the potential to lower our leverage ratios by approximately 0.6 turns, resulting in a debt-to-EBITDA ratio of approximately 3.3 times or 4.2 times on an EBITDA minus NCI basis.

This is on top of post-tax proceeds of $1.1 billion from our Miami Hospital transaction in 2021 that we used to pay down debt. Tenet is entering a new era with a greater proportion of our performance coming from our highly efficient ambulatory surgical business and a reduced debt profile; we are well positioned to continue to expand free cash flow further over time. We are mindful of what got us here in the last five years operating excellence, disciplined capital allocation with a focus on ROIC, an analytics-driven culture and a continuous improvement mindset. As a result, we will have significant financial and capital flexibility to increase shareholder value over the long-term. And with that, I will turn the call over to Sun to provide a more detailed review of our financial results and 2024 guidance.

Sun?

Sun Park: Thank you, Saum, and good morning, everyone. We are very pleased with the strong finish of our fiscal 2023, with fourth quarter adjusted EBITDA coming in well above the high end of our most recent guidance ranges for both the USPI and the Hospital segments. In the fourth quarter, we generated total net operating revenues of $5.4 billion and consolidated adjusted EBITDA of $1.012 billion. For full year 2023, we generated $20.5 billion of total net operating revenues and consolidated adjusted EBITDA of $3.54 billion. These results were driven by strong growth in USPI’s same-store volumes and net revenue per case, strong patient acuity and overall revenue growth in the hospitals and very effective expense controls throughout the businesses, with the management of contract labor costs as a notable example.

Now I’d like to highlight some key items for each of our segments, beginning with USPI, which again delivered strong operating results in the fourth quarter. USPI’s fourth quarter adjusted EBITDA grew 14% compared to last year, and its adjusted EBITDA margin continues to be very strong at 43%. USPI delivered a 9.5% increase in same-facility system-wide revenues compared to fourth quarter of 2022, with same-facility system-wide surgical case volume up by 3.9% and net revenue per case up 5.4%. Turning to our Hospital segment. Fourth quarter same hospital inpatient admissions increased 1%, with non-COVID inpatient admissions up 2.6%. Revenue per adjusted admissions grew 6.5%, demonstrating strong payer mix and continued high acuity levels. Our fourth quarter results also reflect $52 million of favorable adjustments associated with Medicaid supplemental revenue programs in California and Texas.

In terms of strong expense management, our consolidated SWB was 43% of net revenues in the fourth quarter which was substantially lower than the 46.2% we saw in fourth quarter of 2022, and our consolidated contract labor rate was 2.8% of SWB, a material reduction from 7.3% in the fourth quarter of 2022. On a per adjusted admission basis, fourth quarter Hospital SWB was 160 basis points lower than fourth quarter 2022. These reductions over the course of the year reflect the disciplined approach that we take towards labor management. And finally, fourth quarter medical fees were up $16 million sequentially, and $40 million higher than fourth quarter of 2022, consistent with our expectations. Overall, these costs were up about 15% for full year 2023.

Next, we will discuss our cash flow, balance sheet and capital structure. Our cash flow performance was very strong in 2023, with $1.6 billion of free cash flow for the year. We finished the year with over $1.2 billion of cash, with no borrowings outstanding under our $1.5 billion line of credit facility. During the fourth quarter, we repurchased 1.6 million shares of our stock for $110 million, and for full year 2023, we repurchased 3.1 million shares of our stock for $200 million. Our year-end 2023 leverage ratio was 3.89 times EBITDA or 4.85 times EBITDA less NCI. It is important to note that these ratios do not reflect the $2.55 billion in after-tax proceeds and $190 million of associated tax benefits from our announced divestitures, which collectively will support our goals to deleverage the balance sheet.

Also as of year-end 2023, we have no significant debt maturities until the first quarter of 2026, and all of our outstanding senior secured and unsecured notes have fixed interest rates. In the aggregate, we believe we have significant financial flexibility and cash flow generation to support our capital allocation priorities. Now let me turn to our outlook for 2024. For 2024, we expect consolidated net operating revenues in the range of $19.9 billion to $20.3 billion. Our projected consolidated adjusted EBITDA for 2024 is in the range of $3.285 billion to $3.485 billion. For clarity, these revenue and adjusted EBITDA figures for full year 2024 reflect the completion of the sale of our coastal South Carolina hospitals on January 31, 2024, and it assumes that the sale of our four California hospitals will be completed on March 31, 2024.

Now as we discussed previously, there are a number of items that impact the comparison of our 2023 results to our 2024 outlook, which are outlined on Slide 8 of our investor presentation. Let me summarize the primary drivers as follows: First, we recognized $16 million of grant income in 2023; and second, we recorded income of $34 million associated with cybersecurity insurance proceeds in 2023; third, there are $98 million of headwinds for 2024 arising from the termination of COVID-related government funding programs in 2023, new regulations related to workers’ compensation and personal injury reimbursement in Florida, and changes to health care wages due to the recent minimum wage loss in California; fourth, the closing of our South Carolina hospital sale on January 31st creates a year-over-year EBITDA headwind of $140 million; and finally, our California hospital sale is assumed to create a year-over-year EBITDA headwind of $55 million.

After normalizing for these items, our full-year 2024 adjusted EBITDA is expected to grow 7% over 2023 at the midpoint of our range. Our 2024 outlook assumes continued organic volume growth, strong patient acuity, better than historical contract negotiations and effective cost management, with the specific expectations for additional contract labor savings on a full year basis, partially offset by incremental medical fees. We also assume that we will have contributions from M&A and de novo center openings at USPI given its robust pipeline. In addition, for 2024, we’re also assuming the following: same-hospital admissions growth of 1% to 3%, adjusted admissions growth of 1% to 3%, same facility USPI surgical case growth of 1% to 3% and USPI net revenue per case growth of 2% to 3%.

At a segment level, we expect adjusted EBITDA to grow 8.7% at USPI and 4.5% for our Hospital segment at the respective midpoints of our guidance ranges on a normalized basis. As Saum stated, we believe our guidance range represents attractive growth for Tenet following a very strong 2023. Finally, we would expect first quarter of 2024 consolidated adjusted EBITDA to be in the range of $800 million to $850 million. And we anticipate that USPI’s EBITDA in the first quarter this year will be 20.5% to 22% of our full year 2024 USPI EBITDA guidance at the midpoint. Turning to our cash flows for 2024. We expect free cash flows in the range of $875 million to $1.125 billion, which includes the payment of $635 million in net taxes related to our announced divestitures.

Before these tax payments, this represents $1.635 billion of free cash flow at the midpoint of our 2024 outlook, which demonstrates continued strong performance from 2023 even after the loss of EBITDA from the divested hospitals in 2024. We also note the $635 million of taxes paid is comprised of $825 million of taxes associated with the gains on sales, partially offset by $190 million of tax benefits due to a reduction in interest expense limitations. In addition for 2024, we’re also assuming capital expenditures in the range of $775 million to $875 million, distributions to non-controlling interests in the range of $650 million to $700 million, and our intention to retire the $2.1 billion of senior secured first lien notes due in 2026 in the first quarter of 2024.

Our cash flow performance has improved substantially over the past several years, and we continue to demonstrate the ability to generate this cash flow while also deleveraging our balance sheet, maintaining investments in our business and executing on key growth plans. We expect this performance to continue in 2024, which will create additional opportunities to delever and grow our business. And finally, as a reminder, our capital deployment priorities have not changed. First, we plan to allocate $250 million of capital annually to grow USPI. Second, we expect to invest in key hospital growth opportunities, including our focus on higher acuity service offerings. Third, we will evaluate opportunities to retire and/or refinance debt and finally, a balanced approach to share repurchases, depending on market conditions and other investment opportunities.

And with that, we’re ready to begin the Q&A. Operator?

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Operator: Thank you. [Operator Instructions] Our first question comes from the line of Cal Sternick with JPMorgan Chase & Company. Please proceed with your question.

Cal Sternick: Good morning and thanks for the question and congrats on a really strong 2023. I want to dig into the 1% to 3% case growth for USPI. It sounds like demand is still strong and this is more of a comp headwind just given the strong growth in 2023. Is that the right way to think about it? Or is there anything else in terms of mix or demand that’s influencing your 2024 outlook? And then if you could also give some color on the level of demand you’re anticipating across categories like ortho, cardiac, GI and some of the others, just compared to what you saw in 2023 that would be really helpful?

Saum Sutaria: Yes. Hey it’s Saum. Thanks for the question Cal. No, your interpretation is right. I mean we anticipate continued strong growth in the ambulatory surgery segment. I mean, 2023 was a very strong year, and it was across service lines, as I pointed out, GI, urology, ENT, orthopedics, ophthalmology. I mean we had strength across the board. We had physician additions across the board. Total joint surgeries grew significantly in the fourth quarter, even above what we were running during the course of the year. So we feel very good about that going forward. Yes. Look, I would say that first of all, the comp in the first quarter is really, really strong based upon the recovery we saw. And we’re very analytically driven in the way we look at this.

I mean our GI positions over the course of 2023 performed more than 15% more procedures than they did in the prior year as individuals. That’s a pretty big leap and we think it’s sustainable. I mean, one of the things that we’re doing with some of our more innovative GI physician group partners is focusing on how we hardwire our operating efficiency in the ASCs to allow them to be more productive on a sustainable basis going forward so that, that recovery volume, whatever proportion of that may be becomes their norm. And that’s a really, really good lesson learned from 2023, about our ability to actually deliver case volumes at that high level of productivity. The fact is, if you look back over time, long periods of time, 15, 20 years, when you have notably strong growth years, you often have just based on comps some slightly lower volume rates.

But look, we’ve developed a pattern now of being mindful of what we see in the environment. But if the business outperforms raising our guidance just like we did in 2023, if in fact, it’s warranted. Again, I’m very optimistic about 2024, and there’s really no other way to interpret that other than what we just talked about.

Cal Sternick: Great. Thanks.

Operator: Our next question comes from the line of A.J. Rice with UBS. Please proceed with your question.

A.J. Rice: Thanks. Hi everybody. Obviously, the headlines around the last couple of divestitures grabbed some headlines. Maybe I thought I’d ask you about two aspects of that. The price tags on the deals, I know these are growth areas once you’re selling these hospitals, but seem unusually high by historic standards. Is there any dynamic in the marketplace that you see that non-profits are bringing to bear. I don’t know whether it would be their ability to implement a 340B program or something like that that’s causing them to be willing to pay these relatively high valuations? And then second to that is your national strategy of contracting hospitals getting the leverage of both hospitals and the surgery centers, do you think there’s any issues with divesting hospitals that would lessen your ability to get the pricing you want on the surgery centers? Or that’s not really a question mark.

Saum Sutaria: Yes. A.J. Thanks for the question. Look, on the first point, I would say that – and I can’t put myself in the shoes of not-for-profit health system partners who are looking to acquire assets, but what I would say is that these two transactions demonstrate that the work we’ve done over the last five years to generate high-quality, well-performing, solid, quality safety service hospitals with a higher-acuity procedure-based platform can generate a premium because it’s a lot of work to get them into that position of not only having a high degree of profitability, but also having a quality service profile that’s attractive from a starting standpoint. So they’re high-quality assets. The other factor, of course, would be that these assets are coming forward in as multiple assets in a market, which, again are relatively rare.

And our point of view is that we recognize that value and we hold out for that type of value in order to ensure that we’re doing the right thing from the standpoint of our capital structure and shareholders. Remember, we’ve said all along, we’re very comfortable operating the entirety of this portfolio and doing well with it, and we still are, that doesn’t change. On your second question, all of our divestiture activity that we would entertain would be consistent with our strategy of remaining very high on the list of being a value-based care contributor to the stakeholders, whether government or private pay that engage with our system. And that’s definitely the case based upon our lower-cost ambulatory profile. It’s also definitely the case based upon the very desirable high-quality acute care assets that we have.

So our point of view is that we will remain consistent with our stated strategy on the portfolio, but we also will continue to put effort into making sure that we are delivering solid value for our payer stakeholders, again, both government and private.

A.J. Rice: Okay. Sounds good.

Saum Sutaria: Thank you.

Operator: Thank you. Our next question comes from the line of Brian Tanquilut with Jefferies. Please proceed with your question.

Brian Tanquilut: Hey good morning guys and congrats on the quarter. Saum, just to follow up on the divestiture question, right? I mean this seems to be more opportunistic than not in terms of the assets that you’ve sold. So how are you thinking about maybe longer-term leverage targets or your willingness or interest to look for other opportunities, such as South Carolina and Southern Cal?

Saum Sutaria: Yes, they’re – both of these opportunities we’re opportunistic as you say, we were not in the marketplace looking for those, although as I just mentioned to A.J., we have a strategic sense of what we would entertain at what values. And again, we remain opportunistic. But most importantly, we remain committed to the portfolio that we have and running it at a high quality with solid earnings from that standpoint that we can deliver. So I mean, I’m not sure how to answer the question on a go-forward basis other than to say we have demonstrated thoughtful divestiture activity in a way that remains consistent with our strategy and enhances not just our leverage position, but our belief in our ability to generate free cash flow going forward.

Brian Tanquilut: Okay. Thank you.

Operator: Thank you. Our next question comes from the line of Justin Lake with Wolfe Research. Please proceed with your question.

Justin Lake: Thanks. Good morning. Appreciate all the detail and consolidating Conifer, I think was a good idea. I appreciate that, too. The – my questions were, one, the bigger question is just that there’s been some discussion out there that ahead of the two-midnight rule, a bunch of hospitals might have tightened up how they report observation versus inpatient? Curious if you’ve seen any of that internally? How have you prepared? Did you see any benefit this year? What do you think the benefit is next year? And then just a quick numbers question, how many de novo openings this year? Do you expect – I apologize if I missed that previously. Thanks.

Saum Sutaria: Thanks Justin. Well, obviously, we’re very cognizant of the impact of CMS’s commentary on the two-midnight rule, Medicare Advantage is very important to us and being a good partner to our Medicare Advantage health plans and also our medical groups and organized medical groups that participate in Medicare Advantage is something we actually are quite focused on operationally because we are focused on delivering good throughput. We only admit patients through the emergency department when appropriate. We have high standards for that. So we end up being in a position where being focused on MA is important. Now look, we also believe strongly that when people are in the hospital and are sick enough and their condition warrants it based upon the admitting physician’s judgment to be inpatients versus an alternative outpatient-based status that is the appropriate thing to do.

And we very much agree with the guidance from CMS that that should be tightened up. So operationally, we’re focused on it. Remember, we also, through Conifer, have the ability to focus on it for us and our clients in terms of ensuring that we have the appropriate documentation in order to defend that position. So we’re going to keep at that. We haven’t quantified any potential upside from that, although we have considered it, obviously in our guidance, but we haven’t specifically called out anything from that perspective. The de novo number for 2024, I’d have to — yes, I’d have to go take a look at an exact number, but it’s north of 10, potentially approaching 15. I’m sorry that I don’t have an exact number for you.

Justin Lake: Thanks.

Operator: Thank you. Our next question comes from the line of Kevin Fischbeck with Bank of America. Please proceed with your question.

Kevin Fischbeck: Great, thanks. I just wanted to dig in a little bit into the view about the Hospital business guidance for 2024. Were you talking about 4.5% normalized performance and 3.6% organic growth there, which seems a little bit low based upon – it looks like you’re looking for a pretty solid volume growth as you get pricing. But based solid volume growth, I view that labor is going to continue to improve, I’m just trying to figure out if there’s any other offsets that you’re already kind of backing out the rate pressure and labor changes in there. I would have thought that number would have been higher than the 3% to 4%.

Saum Sutaria: Yes. Hey Kevin, it’s Saum. Let me start. Look, I think a couple of points that I made. First of all, we had an outstanding year in the hospital segment. As you know, every quarter, we exceeded our expectations there. Look, for us, I mean, we took a lot of the benefit from contract labor reduction in 2023. Now don’t get me wrong, there’s an annualization effect that will improve in the coming year. The volume strength was also very good during the year. And so I think that we believe that we’ll continue to see acute care recovery in 2024, like we saw in 2023. And if we’re able to open up capacity effectively to service the demand that we want, which again is consistent with our high acuity strategy, I think that’s what gets us to the upper end of our guidance, right?

It’s really the volume potential there. And then we’re mindful of the fact that there are some things in the operating environment to think about. We did very well, but did have cost increases in 2023 in medical fees. We’re anticipating some impact of that again, but we think manageable and in the guidance from that perspective. Sun, I don’t know if you want to add anything.

Sun Park: Yes. Saum. Just on your last point, I would also add on the medical fees, we did see about 15% total increase in fiscal 2023. For 2024 we are assuming some moderation in the rate of growth here. So our 2024 assumption is in the 8% to 10% range for net fees.

Operator: Thank you. Our next question comes from the line of Whit Mayo with Leerink Partners. Please proceed with your question.

Whit Mayo: Hey thanks. Good morning. I just was curious on how you feel about the target for 575 to 600 centers for 2025 you need about 15 centers a year over the next two years to get there, about a 20% increase. So I just wanted to take your temperature on how you’re feeling about that target? Thanks.

Saum Sutaria: Yes. Thanks Whit. I mean, first of all the pipeline is very robust at this stage and healthy, inclusive of both single centers and platforms that have multiple centers within it, a good mix of acuity across different services, meaning orthopedics and other things. In addition so look, I mean the 575 to 600 is a range that we put out there as a target by that standpoint. One of the things that we’re going to be disciplined about is we’re going to do good deals, high-quality assets, attractive multiples, not overpaying and ultimately being able to deliver earnings growth in those facilities and organic growth in those facilities in a way that we got it. So we’re not going to chase a number, but our pipeline at this point makes me feel good about the fact that if things come together the right way, we could reach that target by the end of 2025.

Whit Mayo: Yes. Thanks.

Operator: Thank you. Our next question comes from the line of Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Ben Hendrix: Hey. Thank you very much. Your ambulatory net revenue per surgical case outlook, 2% to 3%, seems consistent with what we think of longer-term steady-state growth, just wondering if there’s potential for upside there from continued acuity migration within the same-store base? Or is acuity something you’re pursuing through just more through a function of new development? Thank you.

Saum Sutaria: Yes. Hey a couple of thoughts, yes. I mean 2% to 3% is kind of our long-term estimate. We have, obviously, as I indicated somewhat purposefully a very high degree of visibility into our managed care pricing and obviously, the Medicare pricing for 2024. The acuity and mix potentially represents some upside there. If you think about 2023 where we saw a lot of recovery in GI and ENT cases, even a relative mix shift could impact the acuity in 2024. And that’s got pluses and minuses associated with it, right, if the mix shifts from that perspective. But strategically, our plan is to continue to increase our high acuity services. Look, we’re also mindful of the fact, and we don’t spend a lot of time talking about it anymore, but we are still doing some work to move slightly higher volume, very, very low acuity work out of our ASCs into other settings in order to make room for higher acuity, we’re doing it in a more measured way than we perhaps did in 2022, but we’re still doing it.

And so that also presents upside if we’re successful in refreshing those partnerships. But we think that will serve us well for the longer term.

Ben Hendrix: Thank you.

Operator: Thank you. Our next question comes from the line of Josh Raskin with Nephron Research LLC. Please proceed with your question.

Josh Raskin: Thanks. Good morning. I want to stick with USPI. Can you speak to the revenue per case growth in the ASC segment that we saw in 4Q? It seems like the same-store revenues were more case-driven earlier in the year. So I’m just curious if 4Q was higher acuity cases or mix related as you were just talking about? And then I’m just curious relatedly, are there any differences in the trends on the same-store is relative to those that have been acquired or newly consolidated versus those that you’ve had a little bit longer? I’m thinking about some of the SCD assets that may not have been as mature and thinking about as those move into the same-store revenue number, is that going to keep that sort of total same-store revenue number growth higher?

Saum Sutaria: Yes. Hey, Josh, thanks for the question. Let me start with your second question and then pass over to Sun for the first one. I don’t think we see a major difference across the board. I mean, there look – there’s a lot of centers, obviously, some are more mature than others, and it’s a portfolio, right. So some are off, of course, there’s a bell curve, and some are growing faster than others, of course, from that standpoint. But I wouldn’t necessarily say or break it down by particular segments. I think the most important segmentation in 2023 was that you could clearly see the GI only centers grew faster than others on average. But the growth was pretty strong in segments beyond GI, but it was definitely faster in the GI only centers. That’s probably the most obvious trend that I’ve noticed. Your first question…

Sun Park: Yes, thank you, Saum. Hey, Josh, this is Sun. Thanks for the question on the net revenue per case. In the ambulatory space in Q4 of 2023, I think you’re right, we did see elevated net revenue per case, it was about 5.4% higher than the previous Q4 in 2022. But if you take a step back and look to the rest of 2023, those rates were a little bit lower, right. So that for fiscal 2023 overall, our NRPC was about 3.4% higher than 2022. So I think it’s partly what Saum mentioned, mix of different procedures, gastro, ortho, some of the other ones, and I don’t know that I would read too much more into that. And then, as we said, our guidance for fiscal 2024 assumes a 2% to 3% range, which compares reasonably well to the 3.4% that I just mentioned for all of fiscal 2023.

Josh Raskin: All right. Thanks.

Operator: Thank you. Our next question comes from the line of Sarah James with Cantor Fitzgerald. Please proceed with your question.

Sarah James: Thank you. As we move past the pandemic, most of the providers have been talking about kind of repricing on the commercial side in the mid-single digit range for hospitals. Can you give us an idea, given the timing of your repricing, how much of that – how much of your book was already at this higher rate in 4Q? How much do you expect to be in the rate for 2024? And is there any aspect of that includes covering some of the unreimbursed physician fees for the third party anesthesiologist. So is that being worked into the rates at this point?

Saum Sutaria: Yes. Hey, it’s Saum. Thanks for the question. Again, in a little bit of reverse order, I mean, obviously, we take into consideration all aspects of inflationary pressures, whether that be contract labor, physician partnerships, supply, I mean, all of it, right I mean into the way in which we approach our negotiations with our health plans. And I mean that – as we’ve indicated in the past, it’s not like somebody’s come forward in the last few years, government or private pay and just offered up CPI, right. But the thing is, we have annual escalators in all of our contracts. We’re mindful of the fact that to deliver value, obviously, we need to have annual escalators given inflation, but it is also partially our responsibility to continue to find efficiencies in our business in order to remain valued partners to our stakeholders, again, both government and private pay.

So that’s how we think about it, and that’s how we’ve been able to expand our margins over this period of time. Look, my view is we’re generally pretty well contracted for 2024, and the bit of tailwind that we see from the recent higher than average contract negotiations should be and is part of our guidance in 2024. And my guess is it’ll flow a bit into 2025 as well, right. And then we’ll see when the next round of negotiations come up, how that goes. It’s really important to understand that part of our strategy in our net revenue per case improvement over time also relies on our ability to continue our acuity of case mix in our hospitals, so that together we’re giving ourselves an opportunity to generate that net revenue per case improvement over time.

And I think the fourth quarter represented a lot of acuity that we saw in the quarter, which is why the number was so attractive. Sun?

Sun Park: Yes, Saum. I would just to confirm kind of what you said, we said, historically we’re seeing commercial rate increases in the 3% to 5% range, and going into 2024, we’re about 90% contracted. I wouldn’t try to segment that too much deeper than that, only to say that those rates are kind of what’s embedded into our 2024 guidance that we provided.

Sarah James: Thank you.

Operator: Thank you. Our next question comes from the line of Pito Chickering with Deutsche Bank. Please proceed with your question.

Pito Chickering: Hey, good morning, guys. On the hospital labor side, what are you guys modeling for full time wage inflation for 2024? And how much more savings can we get from contract labor? And because you’re including Conifer in that segment now, can you tell us what revenue per just admission is guided to be for this year? And is it safe to think about Conifer EBITDA growing faster than hospital EBITDA for 2024?

Sun Park: Hey, Pito, this is Sun. Let me try to take some of those. From a base wage standpoint, obviously, we’ve been managing base wages efficiently overall, as evidenced by our SWB metrics. I would say 2023 was still elevated compared to our historical rates. That’s more in the 2% to 3% range. We are assuming more normalized rates in fiscal 2024 guidance, but probably not fully back to those historical rates yet. I would just add we’re continuing to make investments into our workforce in the right areas on our base wages. And then on contract labor, to your point, I think Saum mentioned earlier, we do still expect some savings from contract labor going into fiscal 2024 guidance. That would primarily be in the first half of 2024, because if you look at our Q3 and Q4 rates of 2023, they were about 3% and 2.8%. So I think the room for improvement in the second half of the year for 2024 is much lower.

Saum Sutaria: And then, I’m sorry, your question on Conifer. Yes, now that we’ve changed our reporting segment methodology. I don’t know that we will provide that level of detail.

Pito Chickering: All right, great. Thanks so much.

Sun Park: Thank you.

Operator: Thank you. Our next question comes from the line of Jason Cassorla with Citi. Please proceed with your question.

Jason Cassorla: Great, thanks. And congrats on the quarter. Maybe a question on cash flow. It looks like you’ll still generate enough free cash flow, less NCI cash distributions to self-fund that $250 million investment target in the ASCs for 2024, even with the tax payment from the divestiture. But I guess moving beyond this year, Tenet should be in a position to generate well north of $1 billion free cash flow, less cash NCI. And you have meaningfully reduced your leverage profile. So I guess as you think about the capital deployment priorities, right. Do you think you’ll be in a position to increase that $250 million ASC target as it does from the divestiture settles down, or how would you frame that? Thanks.

Saum Sutaria: Yes, no, listen, I think the – first of all, the capital allocation priorities in terms of the four categories that we’ve talked about, obviously USPI, again, I can’t emphasize enough, being importantly supportive of our acute care hospital portfolio to maintain them strong and very desirable assets by all stakeholders is really critical to our overall strategy. The deleveraging that we’ve talked about, and then obviously, the share buyback program that we have authorized, all remain absolutely important priorities to us as we look forward. Now, you point out really, it’s a really important point, which is a little bit of my commentary at the end of my prepared comments about we’re entering a new era for us, which is important for us to collectively think about.

And if you think about on this call and what I’ve alluded to, it has raised the question about where are we thinking about leverage targets which we have not given specifically in the past, what are our capital deployment priorities going to look like and how will they be different? There are some people that would ask, and we certainly would consider, are there enhancements in our capital allocation, into our acute care portfolio, in our more high return markets that we still have with us that make sense. And then obviously, the USPI question of deploying additional capital into that segment, and I think we’ll have more to say about that as the year goes on, frankly. But those things are all on our mind. Look, specifically on USPI, we talk about historically $200 million to $250 million, now closer to $250 million in capital allocation every year.

But the fact is, if you go back over the last five years and just look at what we’ve spent and average it out over those five years, it’s been quite a bit, quite a bit higher than $200 million to $250 million. We will continue to seek opportunities to add high quality ASCs to our platform, and obviously are comfortable going above the $200 million to $250 million if those opportunities exist.

Jason Cassorla: Great. Thank you.

Operator: Thank you. Our next question comes from the line of Stephen Baxter with Wells Fargo. Please proceed with your question.

Stephen Baxter: Yes, hi. Thanks. I was hoping you could talk about your expectations for payer mix in 2024 and how that’s been factored into your guidance. It obviously looks like there’s significant growth coming on the exchanges, so I’m wondering if that’s something you’ve explicitly considered either from a volume growth perspective or inside of your payer mix guidance and kind of how you think about better payer mix could materialize in your guidance range? Thanks.

Sun Park: Hey, Stephen. Good morning. It’s Sun. Thank you for the question. Yes, for 2024, first of all, in 2023, our payer mix remains quite strong, as we said previously, with managed care steady around 70%. And that’s what we’re sort of expecting in our 2024 guidance to stay pretty steady. Your question on the exchange volume, yes, we are tracking that as well, and could potentially be a tailwind or an opportunity in 2024, but we’re not assuming anything material from that in our 2024 guidance.

Saum Sutaria: I mean, the other thing I would say in particular with the exchange growth is that I just would remind the group that we feel pretty good about how well we’re contracted in the exchange environment in the states that we operate in. Both applicable by the way to the acute care portfolio, of course, but also applicable to our USPI platform. So just as a note on that.

Operator: Thank you. Our next question comes from the line of Jamie Perse with Goldman Sachs. Please proceed with your question.

Jamie Perse: Hey, thank you. Good morning. I wanted to get your assessment just of the current ASC landscape in terms of competitive activity and new competition in states as well as on the funnel, just new procedure categories that are moving in, moving off the inpatient only list, and eventually out to ASCs. Just any perspectives on what you’re seeing in the market and sustainability of ASC over the medium term. And then just any comment on if there was a surgical day impact in the fourth quarter? Thank you.

Saum Sutaria: Okay. I’ll leave the surgical day question till the end, because I honestly don’t know. Look, on your first set of questions, a few things. Okay. So, one is that we have been – obviously, we spend a lot of time talking about orthopedics, generally speaking, and obviously, the more traditional things like GI and ENT and things of that nature, ophthalmology. But the fact is, we have been focused on diversification of our platform for a long time. I mean, take as an example, shoulder surgeries. We have had for over a year now, an innovative program that has helped us grow and develop all the protocols for our ASCs, where we do orthopedics, to add shoulder surgery to that. Now, the numbers are not as big as hips and knees, for example, but we’re well prepared to do that.

And part of our physician recruitment strategy has been to focus on physicians with shoulder – interest in shoulder surgeries in the ASC setting. Just as an example, I think you guys are well aware of our urology strategy, where we think there’s a very nice opportunity, especially with high quality groups, to move further into the ambulatory surgery setting. We had been growing and expanding some of our bariatrics capability there, which, again, in the ASC setting, has been reasonably stable despite the GLP hoopla over the last year. And so – and then obviously growing and expanding some of what one might consider vascular or cardiovascular. But in a measured way, as we look forward from that standpoint. So I feel pretty good about the fact that our business development and strategic teams are thinking steps ahead.

From a clinical standpoint, what we want to do. The competitive landscape in the ASC segment is active and intense, and I think that will certainly continue. Look, we think we have a lot of advantages based upon our scale, our physician relationships, our ability to deliver synergies, and also just the consistent, demonstrated operating excellence over a long period of time. And now we add to that what we think is a best-in-class revenue cycle capability that we’ve built inside of USPI, separate from Conifer, inside of USPI, that is starting to do work even for non USPI centers, which is an exciting development. So we’re doing a lot to innovate in that business to continue to maintain our leadership position. So I feel very good about where we are competitively there.

Sun Park: And Jamie, just on your final question. Yes, there was no impact from a surgical day basis on our growth in Q4. It was 3.9% overall case growth.

Jamie Perse: Okay, great. Thank you.

Operator: Thank you. And we have reached the end of the question-and-answer session, and this also concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.