Q4 2020 Tenet Healthcare Corp Earnings Call
[music].
Welcome to Tenet Healthcare Corporation fourth quarter 'twenty 'twenty earnings Conference call I will now turn the call over to Regina Nethery, Vice President of Investor Relations for Tenet.
Thank you.
Pleased to have you join us for a discussion of tenet fourth quarter 2020 results as well as a discussion of our financial outlook for 2021.
Senior management participating in today's call will be Ron Meier, Executive Chairman and Chief Executive Officer from Citabria, President and Chief operating Officer, and Dan can sell me Executive Vice President and Chief Financial Officer. Our webcast. This morning includes an accompanying.
On slide presentation, which has been posted to the Investor Relations section of our website tenet health Dot com.
Listeners to this call are advised that certain statements made during our discussion today are forward looking and represent tenet management's expectations based on currently available information.
Actual results and plans could differ materially Ken This is under no obligation to update any forward looking statements.
Pardon me based on subsequent information investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent form 10-K subsequent form 10-Q filings and other filings with the Securities and Exchange Commission.
With that I'll turn the call over to Ron.
Thank you Regina.
Thank you all for joining us this morning.
I would like to briefly highlight the results of the fourth quarter and then take a few minutes to discuss our current broad thinking on the business units our plans for 2021 and establish the basis for how we see the continuing transformation of the tenet enterprise continuing in 'twenty, one and forward.
Dan will spend time on the details of the fourth quarter in a few minutes.
Did want to highlight a few points worth mentioning as outlined on slide three.
Our overall results for the fourth quarter adjusted EBITDA of 832 million, which excludes grant income and is a $19 million gain from a sale leaseback of a medical office building was notable.
Better than forecast. This performance was achieved while we remained under our Covid surge.
<unk> around Thanksgiving and remains although trending down with us today.
We closed the year with approximately 2700 cases that are active in patients and today. We're at approximately 1900 active in patient cases across our system. Having peaked in January at about 3000 cases, which was actually greater than our July search.
Our hospital segment.
<unk> its budget in the fourth quarter, excluding grant income.
The grant income we received covered losses throughout the pandemic not just the fourth quarter.
And we remain with an overall loss of hospital revenue of approximately $500 million.
Which is not covered in which to date we have absorbed.
We are very appreciative of the grants.
Each has helped mitigate the losses to our system due to COVID-19, allowing us to remain stable and focused on patient needs.
While admissions remain below 2019, driven in large part by the Covid, despite continuing and the reluctance of patients to seek care by delaying it or simply ignoring it acuity remains very strong.
We also benefited from the improvements we've made in managing the segment utilizing database predictive and analytics. The addition of new service offerings ongoing strong cost controls and the additional specialists we've added throughout our hospital system.
Ambulatory equally had a very strong quarter.
Although cases were down due to the pandemic by five 5% our revenue per case improved by 5% driven by improved security.
USPI business performance is recovered in earnings and is pressing beyond the 2019 levels.
And as lower acuity cases return.
Should grow earnings even further.
The cost controls as well as the revenue per case improvements more than offset offset the case laws and we expect the transition to lower acuity cases to follow the pattern set by the vaccine distributions.
We do expect the current activity remain high than in the past overall the combination of solid continued performance with the core of USPI and the addition of the SCD facilities, which have performed very well.
We've continued to make the ambulatory segment, a very strong performer.
Conifer also had another excellent quarter with increased revenues by.
By 33, 6%.
Additionally, revenue from third party clients increased five 2% from the fourth quarter of 2019.
The year to date revenues remained slightly below 2019 due to divestitures from hospitals by tenet and other clients.
And the pandemic impact across all clients Conifer's EBITDA performance for 2020 was very strong and while down four 9% or approximately $19 million their margin in 2020 was 28, 1%, which is the same as 2019.
The cash collection process, very well executed as where the services provided to our clients.
The amount of disruption from the pandemic and the management changes made this a difficult year for managing conifer.
But we are very pleased with the resiliency and their commitment to the entire client base.
Altogether as you can see on slide four we delivered $399 million and net income in 2020, and $3 1 billion and consolidated adjusted adjusted EBITDA.
And what's impressive is the steady improvements we've been making over time and.
And how this has translated to our continued growth, particularly as it relates to EBITDA.
Taking a look at some of the key elements of our balance sheet as outlined on slide five we've made significant improvements.
Today, we have approximately $2 9 billion of secured capacity, which is a significant improvement from the last few years.
We ensured our liquidity was solid during the pandemic and we issued some additional notes as well as expanded our revolver.
We actively reduced our capital budget across the entire system and we benefited from our focus on free cash flow delivering.
Delivering excellent results <unk> focus on cash collections was a significant driver of our free cash flow.
This clearly tied to our decision on the cash cash acquisition of the 45 ambulatory centers from FCB in December and has also strengthened our financial profile and we have announced the retirement of approximately $478 million in depth.
It is important to realize we're very engaged in determining our debt strategy its relationship to our acquisition and divestiture strategy and deciding what actions are best for our shareholders and for the long term stability of the company.
Today, our leverage ratio for the quarter was four seven times and we expect to finish 2021 low five times, despite paying back a large portion of the Medicare advance funds.
These are important milestones in our transformation.
This does not imply that we are satisfied as we will continue to actively evaluate every mechanism possible to improve these measures.
It does mean, we are in a different price than we were at the end of 2017 and our decisions are based on the best possible set of actions driven by data and a deeper understanding that we believe with our board provides the best outcome long term for investors suppliers employees communities we serve.
And most of all our patients our debt trading levels remained very strong and speak to the financial strength that the debt mark debt markets have on our business.
As I mentioned recently at the Jpmorgan Conference and as you can see on slide six over the next three years, we expect the portfolio mix of our hospital segment to move from 53% of the portfolio mix of EBITDA to 35%.
We also expect this segment to continue to provide higher quality of earnings from the higher acuity acuity cases, we expect based on our expansion of specific specialty service lines and our focus on the chronically ill patients.
We are continuing our strategy of trimming the hospital portfolio of assets that we believe do not fit our strategy.
Memphis as an example was an opportunity and we decided not to press back on the FTC's decision.
Given the potential Memphis, we are equally pleased to have it in our portfolio there.
There are others. However, we are equally there are others. However that we should consider and we will continue to act accordingly.
When we make these decisions we do so thoughtfully.
And within the transformational envelope, we have created a very active part of our strategic platform and process.
Again, so we're clear we're not on a selling campaign.
But we remain active in selection and decision based on several attributes tied to alignment of our markets to our overall goals.
We also expect USPI to continue to expand its footprint. We plan to continue with de Novo placements tuck in acquisitions as well as considering large actions that are available and justified.
We have successfully completed the recent SCD buy and to date remain extremely pleased with performance and the opportunities. These units have added to our portfolio.
We also added over 3500, new physicians on staff across USPI.
And included 73, New service line starts in 2020.
We expect the portfolio EBITDA mix of this segment to increase from 33% to 50% or greater going forward.
These are the stats and the progression of our business. We are investing in and plan to continue to ensure it remains a leader in its category.
Our presence in the global business Center has also proven to be very successful with.
We developed this additional business unit during the pandemic and staff trained and deployed most of the associates during the lockdown in the Philippines.
Design remain the design remains to provide 24 seven support to the entire organization and.
And we have been successfully growing and operating it since February 2020.
<unk> has proven invaluable across our system as we can process and react in shorter timeframes with quicker response, providing our field teams with efficient and effective information that ensures they can execute their roles successfully.
The Jpmorgan presentation, we noted the plan to double the number of associates by 3002.
<unk> hundred 3000 by the end of 2021 and 5000 by the end of 2023.
These individuals perform many revenue site cycled task for conifer across all of their portfolio offerings.
Perform many tenet tests like payroll accounting audit support and marketing.
We will expand these offerings and the others in the coming months and we see a path to provincially potentially provide these services to other clients. Since we've proven they are effective and the value of a 24 hour operation and providing support is truly significant.
So before I hand, this over to Dan to focus on the quarter guidance in other important areas I'd like to discuss conifer move to slide seven.
The decision on the future of conifer was a debate long before I took over as chairman and CEO what.
When I first spoke at Jpmorgan in January 2018.
Clearly stated we're going to initiate a process to determine the viability to sell conifer.
We spent the greater part of the year engage with potential buyers, whose offers we're at the low end of our expectations and frankly, we're not a reasonable return for our shareholders.
2018, we remained true to our commitment and spent significant time focused on the best pathway.
At the same time, realizing the value contained in conifer had not yet been realized we made significant improvements not distracted by a potential sale or another alternative.
We ran conifer to succeed and not to be taken by another party at a loss to tenant and thus to our shareholders.
<unk> were a $74 million improvement in EBITDA in 2018, and a margin that win from 17, 7% to 23, 3%.
In every case on a single party was interested in paying for the improvements improvements or even acknowledging they were sustainable.
And then research potential merger candidates, which proved not effective and determined the best potential course of action was a tax free spin.
We announced the tax free spin in July 2019, and set a timetable of late second quarter 2021. Our plan was used the time to address what we believe were caps necessary to close before spin would be successful.
Included new leadership.
Assessment of the tenant contract that needed to be renewed determination.
Determination of how we could reignite the growth trajectory that had really been stagnant for a couple of years and a clearer assessment of the overall technology, including the current use of outsourcing.
Conifer ended 2019, with an improved EBITDA of approximately $386 million and a 28, 1% margin, which substantiated our improvements were sustainable and our decision was correct not to accept that buyers would not include these improvements to be valued in a potential sale.
We entered 2020 with a strong start in conifer and we believed it was a clear path forward. We also initiated startup of the global business Center began to place approximately 600, new associates in the center, which covered conifer and tenant activities that we began to relocate.
By late February we entered the pandemic.
<unk> was forced to trim its teams to begin to move call center personnel to home where possible.
Our entire focus turned to cash collection.
And maintaining the various administrative services they provided to ensure hospitals continued to function properly.
The Philippines also went into a lockdown, but we were able to hire train and initiate work with 1000, new associates in and around Manila.
They are up to speed quickly and provided much needed support during these very hectic days we.
We are proud of how quickly and effectively the whole conifer team reacted to support our hospitals and other clients and ensure patients receive the attention they need it.
We also hired a new CEO for conifer in December 2020, and were fortunate to find someone who had a solid background a clearer vision on growth and performance. He understands the business and is engaging in developing the pathway for growth and service to our clients.
From summer of 2020, we also added a new CFO and the COO client services, both individuals bring experience in their respective areas and we're going to be additive to our new CEO muscle building. The leadership during COVID-19 was difficult, but our results have been excellent and we're really excited about these additions were in.
Aligning our priorities to develop credible point solutions that are ready to take to market.
We realized the development of the GBC also offers the opportunity to potentially create another offering for conifer that could be taken to selected clients focused on their administrative areas that are fully functional in the GBC supporting tenants field operations and expanding as a live case study.
These new offerings will be a strong addition overtime to conifer's portfolio as we develop and implement them using the tenant experience as a roadmap.
And as we return attention to the expired tenet contract. We've also determined there were opportunities potentially move tenants mid cycle business support the conifer during 2021.
The tenant contract is close to being finalized it's an arm's length and fully negotiated commercial agreement designed to be between two fully independent companies.
Previously I stated we remain on track for the spin in late Q2 early Q3, and while we continue to make solid progress on this front. The reality is after we reviewed the number of open issues, we must complete many driven by delays in Covid, we realized a rush to spend the spin the business in the next few months was simply not.
The rate decision.
We have work remaining on the growth plan, including the re launching of the point solutions potential movement of the other tenant business day conifer as well as the new agreement been in place continued discussions to further develop new opportunities and existing opportunities with common spirit.
Scaling up the GBC, which is a critical linchpin and settling the new management into a cadence that would allow us to make this move seamlessly.
We know there are opportunities in new third party contracts and growth new lines of business and financial outsourcing and the GBC expansion.
We also know the areas we are not fully closed due to the distraction and delays of Covid.
As such we believe it is prudent to take an additional 12 months from Q2 2021 to prepare conifer for a highly successful and sustainable spin.
We have proven for the last three years, the conifer as a very valuable asset and is adding value to our shareholders every day.
We believe the decision.
As in the company and shareholders best interest to successfully spin conifer maximizing the value of the importance of this business unit.
We expect 2021 will be a solid year for conifer and we expect the changes we outlined to improve the stability and scope of the business are truly value enhancing.
And necessary.
Yes.
Remember conifer is a 28% margin business.
Which has demonstrated sustainable performance.
Conifer is still positioned for a strong apples to apples EBITDA growth of 9%, excluding the projected $35 million re contracting with tenet in the $9 million a recovery in 2020.
So with that let me turn this over to Dan who can discuss more details in the quarter and our guidance and then I'll have a few closing comments Dan Thanks, Ron and good morning, everyone. I'll begin this morning with slide eight.
Our net income in Q4 was $414 million.
Compared to a loss of $3 million last year.
Our adjusted EBITDA in the quarter of $832 million, excluding grant income was significantly better than our pandemic revise internal forecast notwithstanding the surge in COVID-19 and our markets.
Also our Q4 EBITDA, excluding grants was better than the consensus estimate of $773 million at the time, we previewed our Q4 results in January.
Even if you exclude a $19 million gain from the sales of medical office building and a $9 million bankruptcy bad debt recovery in Q4 that we disclosed.
As you can see from the chart, our fourth quarter EBITDA has grown quite a bit over the past several years.
Q4, 2020, EBITDA was 4% higher than last year.
And 20% higher than Q4, 2018, even though volumes were substantially lower due to the pandemic.
This strong performance was due to continuing solid cost management investments in new service lines and very high patient acuity cases, which contributed to historically high net revenue per case growth.
Including grant income of $446 million, our fourth quarter EBITDA was one $207 8 billion.
And our third quarter form 10-Q, we disclosed that we anticipated recognizing approximately $100 million of grant income in the fourth quarter.
However, as we previewed in January the additional grant income is primarily attributable to the revised guidance and the consolidated Appropriations Act enacted in December for.
For determining loss revenues and the ability to transfer grant funds received among subsidiaries within a hospital system that are most impacted by the pandemic.
The grant income we recognized in 2020 was approximately $500 million less than the amount of loss revenues, we incurred as a result of the pandemic.
However, we appreciate the funding and the revised guidelines as a help health care providers, partially mitigate the impact of the pandemic.
From an earnings per share perspective, our U S. GAAP EPS in Q4 was $3 86.
Versus a loss of <unk> <unk> in Q4 2019.
Turning to slide nine Youll see we produced $334 million of EBITDA in the month of December excluding grants compared to $259 million in November and $239 million in October demonstrating strong sequential growth throughout the quarter.
Particularly encouraging was the fact the month of December results, excluding grants was about $15 million better than our pre pandemic budget, despite substantially lower volumes due to COVID-19.
We are pleased with the performance of each of our business units during the quarter.
Beginning with the hospital segment, although Covid cases surging in all of our markets. Our hospital business achieved its original EBITDA budget for the quarter.
Even when you exclude grant income.
This strong performance was primarily attributable to a commercial payer mix more favorable in aggregate volumes.
Very high patient acuity as our case mix index increased 11% year over year and.
And continuing effective cost management, which help mitigate the impact of incremental expenses from the pandemic such as higher temporary labor premium pay and PPE costs.
Turning to our USPI platform the ambulatory business continued to perform very well as USPI outperformed our expectations for the quarter.
Surgical volume for the quarter were 95% of 2019 levels. Despite a difficult year over year comp as we produced over 3% growth in Q4 2019.
Our conifer business also delivered a strong quarter, producing EBITDA of $111 million.
Compared to $94 million in Q4 2019.
Growth of 18%.
Conifer results exceeded our original budget and its favorable performance was attributable to continuing cost efficiency actions as well as the receipt of $9 million related to receivables, we had to fully reserve in 2019 due to a client's bankruptcy.
Next let's turn to slide 10, where we present, our monthly volume statistics during the quarter.
Despite another surge in Covid cases hospital volumes held steady compared to Q3 or.
Our USPI surgical volume trends improved slightly recovering to about 95% of 2019 levels.
As we've discussed in the past more complex and emergent procedures have recovered from the pandemic at a stronger pace than less critical lower acuity care.
Our COVID-19 inpatient cases, or approximately 11% of our Q4 hospital admissions compared to about 10% in the third quarter.
Slide 11 summarizes the actions we've taken this past year to improve our financial position, including Conifer's improved cash collection performance issues.
Issuing $1 3 billion of notes to enhance our liquidity during the pandemic.
Refinancing $2 5 billion of debt that eliminated any significant debt maturities until June of 2023.
And we increased our line of credit capacity by $400 million.
Also the sale of medical office building for $60 million in December and the anticipated sale of our urgent care business by the end of the first quarter this year for about $80 million.
Provides us approximately 140 million of additional liquidity.
We're also going to retire in the first quarter $478 million or 7% debt with cash on hand.
That will save us about $33 million of interest annually.
Based on our performance during the year and the various actions we've taken we've reduced our leverage to under five times adjusted EBITDA at year end coming in at four seven times.
Compared to five three times at December 2019.
Let's now turn to slide 12, and discuss cash flows during the quarter and the year.
This slide is an analysis analysis, we've been presenting since the beginning of the pandemic to demonstrate we have not been burning through cash from operations.
For the year, we generated approximately $1 2 billion of free cash flow when you exclude the Medicare advances, we received and the deferred company payroll tax match under the stimulus legislation that will have to be repaid over the next two years.
The $1 2 billion of free cash flow compares to $563 million.
In 2019, which is growth of over $600 million.
The strong cash collection performance by our conifer team was a key contributor to the significant year over year increase in our free cash flow.
We currently have sufficient cash resources and available liquidity under our $1 9 billion line of credit at year end, we had over $2 4 billion of cash on hand, and no borrowings outstanding under our line.
Turning now to our 2021 guidance.
Slide 13 provides a walk forward of our 2020 EBITDA to the midpoint of our expectations for this year.
Although there are various uncertainties as to how the pandemic will impact us. This year, we believe we have sufficient visibility and confidence as to how our business will perform during the ebbs and flows of the pandemic to enable us to provide investors an outlook of our projected results. This year.
On the slide we point out various EBITDA puts and takes in 2021 compared to last year.
Uspi's acquisition and de Novo development activity will add approximately $240 million of EBITDA, including the SCD centers acquired.
And we anticipate a year over year growth in hospital admissions.
And USPI surgical cases compared to last year of.
Of about 5% and 18% respectively will also be a key driver of EBITDA growth in 2021 as.
As well as continued cost actions.
Compared to volumes in 2019, we are projecting hospital admissions and USPI surgical cases will be about 93% and 101% of 2019 volumes.
While we are encouraged by the recent decline in Covid cases, and the distributions of vaccines across the country.
Our volume estimates incorporate the possibility the variant strains of the virus could result in the volume recovery not necessarily being linear during the year.
Although we would expect that as more vaccines are provided our volumes and results could strengthen as we move through the year.
Other important points about our guidance include our hospital net revenue per adjusted admission and per surgical case will moderate this year as lower acuity procedures continued to recover.
We anticipate $45 million of additional revenues related to the Arizona Medicaid program.
As we discussed on our third quarter call Medicaid funding for providers throughout the state increased over 30% as a result of the new supplemental program that went into effect on October one last year.
We will have a few headwinds this year the Medicare sequestration, 2% revenue reductions are scheduled to be restored effective April one, which will result in a revenue decline of about $46 million.
Also we recognized $19 million gain from the sale.
Medical office building in December that obviously won't repeat this year.
The other item I want to mention on this slide is.
Is that we are revising the pricing.
And scope of services under a new revenue cycle contract to be finalized between conifer and our hospitals.
The new contract one finalize is anticipated to result in a $35 million EBITDA reduction for conifer this year.
The previous contract between conifer and our hospitals was implemented many years ago and these revisions appropriately reset the rates in scope of services going forward.
Which will continue to be on a commercially reasonable arm's length basis.
On slide 14, we provide our 2021 EBITDA outlook for our three business segments compared to 2019, the portion of our EBITDA mix from our USPI business is expected to be over 40% of the total enterprise compared to about 33% in <unk>.
19.
Before the USPI acquisition in 2015, our ambulatory business represented less than 5% of enterprise wide EBITDA phenomenal growth story.
Conifer is expected to generate growth of 9%, excluding the tenant contract adjustment in the bad debt recovery I mentioned earlier.
As for cash flows and into this year, we anticipate generating free cash flow.
Of about $1 2 billion.
And adjusted free cash flow of 1.325 billion.
This year before taking into consideration the repayments will make in 2021 of approximately 700 million for the Medicare advances and the deferred company payroll tax match.
Our anticipated free cash flow of $1 2 billion.
Minus expected cash NCI payments of 470 million results in positive cash flows of $730 million approximately or about $7 per share.
While we will have to repay the 700 million in Medicare advances and deferred payroll taxes. This year, we already have a sufficiently reserved for that amount in our balance sheet cash.
The recurring underlying free cash flow generation of our business has significantly improved over the past several years and we have sufficient liquidity to continue to support growth initiatives.
Such as continuing to invest in our core business in addition to supporting.
Both initiatives in our faster growth higher margin ambulatory business.
With respect to the Medicare advance payments, we received in 2020 in our hospital segment.
We anticipate that over $500 million will be repaid by us throughout 2021 via claim payment offsets beginning in April.
We are exploring the possibility of early paying $500 million in a lump sum payment prior to April.
Rather than repaying the amount over the last nine months of the year through claims payment offsets. This will require the approval of HHS, we'll keep you posted on this.
In summary, we are.
Very proud of everything that our employees were able to accomplish in 2021 amid an extremely difficult environment.
We believe the numerous actions taken over the past several years position us well to continued successful growth this year and beyond.
With that I'll end by saying that our strong performance is due to the steadfast dedication from our patient caregivers and employees.
Throughout the enterprise.
I'll now turn the call back over to Ron Thanks, Dan.
In summary, I guess I'll just hit a couple of points, we had a solid Q4 and 2020.
I think we've responded incredibly effectively in the quarter to the spikes, we had and generally to the overall pandemic. Our performance improvements are sustainable we've proven that and we believe they will carry US forward Hospital segment is performing very well across all major areas USPI continues to provide.
Good sustainable and positive trends with greater opportunity to expand further and Thats, where our focus is.
Conifer remains a very strong performer.
And we have an opportunity to know as hopefully the pandemic winds down really get aggressive about the growth portfolio and develop a stronger team overall spin is viable it is still going to occur slight delay of the year, but in the scheme of things that is not a big delay because.
It will give us an opportunity to get past COVID-19 and be prepared to do this in a much more effective manner. So net.
We're pleased with the results we've delivered and we're very proud of the teams throughout this entire company that have performed and as performance has simply been outstanding so with that operator, we'll turn it over to open for questions.
Thank you that tenet management team is now ready to take your questions.
If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if you'd like to remove your question from the queue.
Can I ask that you please limit yourself to one question.
One moment, please while we poll for questions.
Our first question comes from Kevin Fischbeck with Bank of America. Please proceed with your question. Thank.
Hi, Kevin.
Thanks, I guess I wanted to dig into your guidance on hospital volumes.
It's kind of interesting to me.
From the outpatient visit perspective here.
Got it.
In Q4 at the low end doesn't really seem to be assuming a lot of <unk>.
Ramp of improvement there, even given the important number.
Doesn't seem to be assuming the improvement I guess are you thinking about volumes getting back to normal and you're going to be a straight line. It seemed like your volume guidance would be a little bit low much less it thereby.
Bad debt demand you talked about 2019, where do you think.
Yes, it's a.
Population growth demand might actually.
Overall, the higher so there is there anything to think about there as far as <unk>.
Your view you can put a little bit of color on timing of volumes, but anything youre thinking about there or the economy impacting volumes.
I guess it seems like it's been conservative out Jeff Good question, Hey, Kevin It's Tom.
There's a few things impacting it first of all.
We are still in the middle of <unk>.
A winter Covid surge at this point.
Across the country and obviously its affecting a number of our markets.
As you know throughout the pandemic, we've put a lot of effort into ensuring we have adequate capacity so that we could simultaneously.
To maintain access for patients to surgical and other procedural care they need given all the other chronic illnesses people have as well as accommodate the COVID-19 COVID-19 related volumes.
As we look forward, we had a few thoughts in mind first of all in the midst of this uncertainty we've guided towards improved volumes in 2021 relative to what we look back at 2019 year, but theres still.
A range of uncertainty around that because we don't know exactly how the COVID-19 situation will evolve we don't yet know if the COVID-19 vaccine COVID-19 vaccines will be effective all the way into next winter, we really don't know the answer to many of those questions. We're obviously pushing.
Appropriately to continue our strategy of expanding services.
For patients with chronic illness and in particular, the higher acuity strategies that we have been pursuing all along.
In the fourth quarter alone.
We opened up.
And expanded a significant cardiac surgery program and our children's hospital in Michigan, We expanded robotics programs in three or four markets. We received we received stroke certification.
At three hospitals as you know that's a very important designation going forward in terms of how stroke care.
We will be administered based upon EMS rod. So we are continuing to progress on those strategies, but we are we are careful right now because of the COVID-19 activity about what that volume picture could look like for the whole year from an outpatient perspective the biggest.
Factor drew.
Driving again, our guide upwards, but not a return to 2019 type of volumes is really the emergency department outpatient visits which have slowed and we've talked about this before if schools and sports and other things open up the categories that have had the most decline in demand.
The types of sports injuries kids.
Kids needs for either respiratory illness, or other things that begin to come back that will make a big difference and again, we just don't have any way to predict right now into the middle and the end of the year what will happen. We have not made any major adjustments to our volume projections on the basis of.
Predictions around the macro economy.
Our enrollment status so again.
A lot of detail there just so that you have a sense of where we are but we've been we've been thoughtful and conservative about these projections most important to note by the way is we are bullish on our ability to generate earnings even with those volumes.
As because of our cost control and focus on high acuity.
Okay. That's helpful. Thanks.
Our next question comes from Pedro Chickering with Deutsche Bank. Please proceed with your question.
Okay.
Good morning, guys question here on capital deployment.
Capex in center revenue was trending a tad higher at in the last few years are you guys finding better ROI for Capex investments or does the Catholic generations simply provide more.
The ability to invest and also on capital deployment with the retirement of the 10% notes most of your debt is pretty recently be price. How do we think about free cash flows going forward through M&A with debt reductions and as we delever in the next year or is it primarily through EBITDA growth. Thanks, so much.
Hey, Peter It's Tom again, I'll start off and then pass it to Dan.
In line with the comments that I just made we are we continue to be thoughtful about the capital investments in the service lines and the hospitals that we think have growth potential based upon the underlying demographics and an opportunity to create better and more profitable service lines for.
For the community in those markets. So yes, we are.
Our.
Our strategy that began two years or three years ago to move towards that range of services.
<unk> has played out pretty well and we have more confidence now being able to look back at which investments worked in which investments maybe didn't work, where we can deploy that capital into which service lines with with higher returns. So we do have a greater degree of confidence.
In that it is also obviously generated a set of opportunities for us at the intersection of our ambulatory and hospital business in terms of high return capital deployment. We as you know we're beyond the SCD type transactions.
Brendan the team have a very robust development pipeline and the activities and opportunities. There we will only grow given our ability to manage these centers and a best in class and a best in class way so.
What I would what I would say is that.
As we find those opportunities in our priority markets that have a higher return.
We have been deliberate deliberate about making more investments that will strengthen our portfolio and have the discipline of delivering high returns.
Hey, Peter outs day, and good morning.
In terms of.
Overall capital allocation.
And leverage obviously the earnings growth will be continue to be a key driver of this strategy to delever as well as reducing outstanding debt in totality and this was we took a step forward when it was on last night, when we announced that.
We have sufficient liquidity.
The 7% notes, we think it makes all the sense in our world to retire that saves us interest over $30 million improved free cash flow. We do have other tranches that are out there that we could retire.
The rates aren't bad.
But they are callable at reasonable reasonable prices and we also have a seven 5% no tranche that next spring we can take out.
And at a reasonable rate so.
We're looking at a lot of areas.
Options in terms of how to deploy capital from a standpoint of reducing our debt listen we're going to continue to allocate capital to obviously.
The USPI ambulatory business.
The guidance, we have in here assumes 150 200 million.
Of M&A type of activity, but as we demonstrated with the SCD.
Transaction.
The right opportunity out there, we'll invest more capital in that side of the business. We're also investing capital very diligently with very good returns.
With returns that we think are appropriately risk adjusted in the hospital business on growing higher acuity type of.
On the services.
And in various markets, so conifer and cooling conifer and conifer unit. These point solutions some of the other things. So I think we're doing it thoughtfully and appropriately and very very focused on data to support the decision making.
So to your other point about free cash flow growth I mean, this year there'll be about $1 3 billion.
Before we pay back some of the stimulus monies.
And even when you back out the cash NCI payments, so that's pretty a lot of <unk>.
Excess free cash flow and we would expect that to continue to grow as we.
Moving beyond 2021, because our earnings are growing and as we make the shift into ambulatory et cetera that are growing so we've changed the profile of the quality of earnings so anyway.
Thanks for the question.
Our next question comes from Justin Lake with Wolfe Research. Please proceed with your question.
Thanks, Good morning wanted to follow up on you mentioned some comments that you have seen COVID-19 volume as mentioned moderate a little bit from January wanted to see if you could give us any color. There I think there's a debate out there in terms of.
How quickly.
The deferred care might come back as Covid, obviously seems to be moderating pretty significantly across the country. So would love to hear your kind of any commentary you can give us on January and then just bigger picture. How do you kind of see that do you think there is a delay before some of that EUR comes back how much do you think is structural.
Hey, Justin.
So a couple of things I mean, as we noted our our COVID-19 volumes in January exceeded.
Given day 3000 in patients, which is higher than where we were.
In.
In July and it was it was the sustained increase.
Over over the months of January and it has started to come down and come down rapidly.
It's down by at least a third of that peak at this point, which obviously for US has put us in a situation where there might've been some capacity constraints in January.
We're free of those capacity constraints and all of our markets at this point and actively engaged in in the same recovery playbook that we've used twice before very successfully and bringing patients back that by the way includes.
The approaches that we've taken to really quickly managing access for doctors and patients for deferred care, including the monitoring of cases that were deferred and re engaging with their offices to get those scheduled very very quickly. In addition, because we've been able to open up our operating rooms quickly we've been.
<unk>.
Capacity there to physicians.
That may not be utilized as of our hospitals full time, but theyre looking for places to bring their patients and we've been able to offer them the opportunity to come back in.
Earlier, so from a procedural standpoint.
We're moving very very quickly to address the deferred care.
Debt that patients need one of the unique things about kind of the December January timeframe was that some states did have.
Softer executive order type things that that slowed down care.
Surgical care, a little bit those have all been lifted at this point.
The deferred ER care I would point out a couple of things one is that the admissions through the ER have been strong continue to be strong through January on a non COVID-19 basis, and our strong going into February what's really slower or the lower acuity.
Is it that patients have been a little bit nervous about coming back to the hospitals and I think.
As Covid dissipates, we'll do the work to to begin to convince the community that the hospital as a safe setting for those those lower acuity cases.
And while we're on the Covid topic I'll make one other point about the cost management and Covid management that we've put into place.
Last quarter I mentioned that we had noted that both for our contract labor perspective, and a patient day capacity perspective that length of stay in the Covid patient environment had increased.
Because of the acuity and illness, they're one of the things that drove the fourth quarter results from a cost containment standpoint, as we successfully.
From that period of time forward managed our length of stay.
Very well on the Covid Covid side, and we maintained our performance on the non COVID-19 side that help to create capacity alleviate some of the staffing challenges.
And also get patients healthier further so we're getting better at the management of the Covid care.
Even as we look into this quarter with all the Covid that we have I think it's a pretty important cost management point from a COVID-19 standpoint.
Net debt is important to address.
Thanks.
Okay.
Our next question comes from Jamie <unk> with Goldman Sachs. Please proceed with your question.
Hey, good morning, guys I wanted to follow up a little bit on the volume assumptions Youre, making you youre, assuming a lower revenue per adjusted admission this year.
At three 5% lower in your range and I just wanted to tie that back to how you're thinking about volume day I assume net lower acuity care in your model coming back.
It doesn't seem like the pressure youre assuming for revenue per adjusted admission is commensurate with the volume.
Slight volume increase that Youre seeing maybe just talk about those two variables and how youre thinking about both.
Hey.
Jimmy It's Dan.
Morning.
In terms of pricing.
Say a couple of things first.
The overall metric that you you mentioned, 3% to 5%.
Decline in net revenue per adjusted admission I mean that is largely it's a function of the fact that theres going to be lower acuity volume coming back that's our expectation at this point I would tell you.
But the core base right. So let's go through by payer.
From a commercial perspective, we have very good visibility into commercial pricing.
We have over 90% of our commercial book of business under contract this year.
We've talked in the past and it continues to be the same we would expect.
Rate increases, 345% and I know it depends on acuity as well.
Medicare pricing on the inpatient side.
About almost 3% year over year increase on the outpatient side Medicare is actually about three 5% and.
From a USPI perspective, the Medicare rate updates or but little over 2% as well so.
The aggregate pricing is.
Negotiated rate basis.
Government payers as is very solid we've got strong visibility into that and we feel very good about it that as a metric.
Is it being impacted we are assuming that in our lower acuity business does come back and they did some it's a math exercise. It does have an impact on the overall metric, but we feel really good about the pricing and not only in aggregate, but by service line by market et cetera.
Okay, great. Thanks for the color.
Our next.
Question comes from Frank Morgan with RBC capital markets. Please proceed with your question.
Thank you and good morning, I guess I'll ask more of a higher level question here I'm curious.
Your guidance includes the runoff of the sequester and some of the other programs under the previous stimulus Bill, but I'm just curious.
What are you hearing or seeing out of the bad administration their COVID-19 relief deal is there.
Is it your belief that any of these existing programs like sequester relief DRG payment add ons any of those.
A possibility of that.
Actually being extended under this legislation.
And then just back to the cash flow question.
I'm curious.
If you do factor in the cash flow from ops in the Capex from the NCI I think you said six or $700 million.
But you also said you called out conifer several times as being a big contributor to that so I'm just curious of that net number that six or $700 million number.
Would you attribute half that the contractor a quarter that any kind of color. There I'd appreciate it. Thank you.
Alright, so there's two questions there from the administration look I don't think we have a crystal ball to answer all your questions.
About that you just asked about the administration, if we did we.
We'd be in much better mindset and we are we don't we just don't know.
We obviously spend a lot of time.
Trying to sort through the messages.
That are coming out, but I think there is currently just a lot of cloud cover by the vaccine vaccine distribution.
What's going to happen in Covid, how fast the changes that are being made.
Seemingly every week.
Terms of.
The plan in terms of how they're going to deal with it.
These other noise points I don't think it's totally.
Surface jet enough for us to get a really clear fix but are clearly our government affairs team, which is very good is spending time on that and working with the federation et cetera. So I think all I can say Frank honestly is more to follow.
But.
I don't want to venture a guess to that type of thing.
Dan do you want to talk about the free cash flow questions.
In terms of.
As mentioned in my remarks.
Even when you.
Consider the cash NCI payments to our minority partners predominantly in our ambulatory business now, we're going to generate free cash flow of about $700 million.
Which provides again a lot of Optionality and I would tell you the key drivers of it.
The aggregate net cash generation anticipated by the business conifer is a big part of that they did a great job in 2020.
Really driving improved cash collection performance in the midst of the pandemic in midst of incredible hurdles and obstacles, we expect that to continue.
Very impressed with how the year closed out from a cash perspective.
We got to do better we know that we're going to continue to drive on that but again conifer will be a big part of that in terms of helping us too.
Continue to enhance our free cash flow generation.
Okay. Thank you.
Okay.
Our next question comes from Whit Mayo with UBS. Please proceed with your question.
Thanks.
Step two quick ones here looking at the portfolio mix that you outlined for 2023 on slide six does the 35% coming from acute contemplate additional divestitures and does to 50% from USPI contemplate any larger than normal acquisitions in the last question I have is I think you have.
One last put call outstanding on USPI with Baylor is that something that we should be considering for 2021. Thanks.
Yeah, Hey, when it's Dan good morning.
And in terms of the mix.
Driving the ambulatory.
Portfolio to 50%.
The enterprise was earnings.
[laughter].
We will continue to invest appropriately in that business.
Whether it's $200 million a year or if the right opportunities are there.
We will.
<unk> more than the 200 million I will not going to say theres like one specific transaction, we said that.
It's going to happen and that's what's embedded in there, but we believe that the.
Pipeline is robust and we're going to continue to.
Pursue opportunities that make sense economically so.
I would say generally speaking and as Ron mentioned in his remarks, you know we will continue to look at the hospital portfolio you could see.
Some instances, where it may make sense.
To redeploy some hospital capital.
Into the ambulatory business, so that'll be part of.
The equation.
I'll just add to that look obviously, we're not going to get specific.
It's not good business.
Tenant had a history of getting specific and then getting killed.
On especially on the hospital side so.
We reached definitive agreements and there is things we want things that need to be announced we will announce them.
But we are active we are actively looking at everything we've said that for the last couple of years and I think we've proven that we're doing it so.
We are actively looking at hospitals that makes sense.
At an outfit how long would they fit.
We have people that spend a lot of time on this and the same on the USPI side, which I think Brett from sitting here would comment on that we are very engaged in looking at everything.
But you know you've got to look at price you've got to look at the market you got what you think's going to happen next so as we get to the point of.
Closing in on something then we will announce it and before the other.
Other net I think you just got to look at our track record and realize that.
We are not limited by capital in terms of making decisions relative to USPI. If it makes sense and at the same time, we're not married to any of our systems our systems at the standard on their own.
And have to provide us with returns et cetera that we think we also arent against adding things to our systems I think <unk> I think is a great example of that San Antonio market. We're looking at things I mean, where there is things to do.
Fort Mill net Rocco Fort Mill like this which is right there.
We're building that hospital that small hospital.
Those are valuable additions to our very strong portfolio on the hospital side. So.
We are we are going to continue to be thoughtful about that same accounted for by the way.
There is something we want to add the conifer that makes sense, we'll do it even before it spins.
Our goal is the strength in muscle strength in all of our portfolios.
And then I think you had a question Brett that you were going to debt.
Hope all is well this is Brad yes, as we discussed related to the put call.
<unk> in the past I think we disclosed this from SEC filings. The first tranche of the put call option with Baylor becomes effective in April of this year and of course, we will be discussing that with Baylor and keep the investors updated at the appropriate time, but our assumptions in 2021 assumes the status quo on balers ownership in USPI.
They're a great partner.
We're very satisfied with the relationship absolutely.
Okay. Thanks.
Our next question comes from Josh Raskin with Nephron Research. Please proceed with your question.
Thanks, and sticking with the ASC side does the recent sdd acquisition change the trajectory of either develop magic, Eric de Novo or M&A in the next year or so meaning does this increase your pipeline potentially accelerate new centers or are you more concentrated on the integration and then sort of last part would be can you just remind us your.
And where that's evolved around working with other.
Non tenet health systems to develop their ASC footprint.
But.
Go ahead I was just going to say that our strategy is the strategy. We've talked about yeah. Let me, let me make a couple of high level comments, Josh. This is Simon I'm going to pass it to Brett first of all.
I personally I would step back and say, it's the track record that USPI has developed.
With.
With physicians and building successful partnerships with physicians that actually enabled the SCD transaction that is.
And so therefore, the success of that transaction and what we do with it and it's performing very well so far.
Only strengthen what I think has been uspi's distinctiveness for the better part of a decade or more in terms of its ability to.
Have those kinds of relationships with.
With physicians that are that are very successful. We noted at the time that we presented the transaction to the marketplace that this also expanded again, an existing strategy, but expanded our strategy of two way partnerships. In addition to.
What has historically been a very very strong foundation of three way partnerships with other not for profit <unk>.
Non tenet based health systems with really the most distinctive health system brand names around around the country that work continues it doesn't it doesn't change in terms of the expansion in those partnerships and even new partners that continue to come to the table, but I do think that <unk>.
Increasing the option pool.
For USPI in two way partnerships and the robust pipeline of de novo's that the team has built.
Based upon the integration work that we've done with tenet.
Creates a platform for future growth that is much much more attractive than perhaps a few years ago. Brent I don't know if you know no well said.
The only other thing Josh I would add and I think your point was are we how are we going to get distracted.
Based on the integration of the <unk> facilities, when we think about our M&A for 2021 and the reality is that we did a significant amount of pre integration planning prior to closing.
As a result of that the integration is going very smoothly and we continue to hit key milestones from an integration perspective. So I don't think thats going to be a distraction that work stream is moving very well and very smoothly.
Now obviously during Q4, we spent a lot of time on the FCB transaction at the same time, we continue to focus on building our pipeline going into 2021, so it's robust for both acquisitions and de Novo's and as a result of that I think we're well positioned to have a strong year.
Year from an M&A perspective in 2021 and of course, we'll be building the pipeline for 2022 as well throughout the year.
I think our I think it's important that we realize our development focus our integration focus our operating focus.
Exclusive right I mean, we are operating in we are integrating.
Without regard to slowing down or changing our development focus which is a machine on its own so.
Correct.
One more.
Okay.
Our next question comes from a J Rice with credit Suisse. Please proceed with your question.
Thanks, Hi, everybody May go back to just a couple of things on conifer real quick.
Part of that revenue is.
Tied to claims processing and revenue of the underlying hospital customers, including yourselves into the extent that volumes are down year to year.
Because of the Covid crisis, and the deferrals and so forth.
There could be a potential snapback, just as we return to normal.
And if at all have you factored that into that.
Conifer outlook or is that sort of sit out there is upside.
Potentially if that does play out and then the broader question on conifer.
Going back to Ron's prepared comments, you said that when you embarked on the spin off you guys went out and tested the waters from an acquisition or divestiture standpoint, and people weren't willing to pay you for what you saw as the potential for margin improvement and cost savings. Obviously, it's two years later almost.
At this point are 18 months later in year and you've still got another 12 months to 18 months I Wonder.
Our U laser focused on the spinoff or now that you've actually realized some of that.
Upside as it were.
With it or would you be open to testing them.
Testing the waters again seeing that people pay you for now what you've actually accomplish.
Hey, Jay This is some let me get started and then ill offer Ron and Dan It chance to comment. In addition, your question on the revenues and how that impacts conifer as a very good one.
Not all of our contracts at conifer revenue sensitive.
And so yes, there is some impact there, but it is factored into it is factored into our our guidance remember it's because the services are.
And to end.
The activity that that conifer pursues in the front end mid cycle.
Have a have a substantial effect and return for our clients, including tenet I mean again many of those are less revenue sensitive than others, but to answer your question directly what revenue sensitivity. There is factored into the into the 2020 guidance and before I pass it off the one thing I would say is I mean, we're laser focused on.
On.
Creating value and conifer I mean, we see.
Significant opportunity to expand our services are point solution business for example, in the eligibility or small balance our space has already hit the market we have.
New clients and new expansion that we are in the midst of confirming right now we believe.
Debt that has a fair amount of runway so.
I would I would just think about what we're laser focused on in this period of time is expanding our global business center, expanding our growth trajectory, taking those point solutions to market.
And managing our relationship with our largest customers, where there may be expansion opportunities as they expand their portfolios.
I would just add that look we're a public company.
If somebody shows up with a credible offer thats at the level that we think is appropriate as compared to the levels. We saw in the past realizing that we've proven that.
The company has more growth, which we also still believe that is true.
Then obviously, we consider any I mean, you have to consider whatever comes forward I can't sit here and say, we wouldn't consider things we will.
That's just the nature of the business, but I'm not out looking to do that.
Tom said, we're out trying to stay focused on and getting out of the pandemic getting things back.
There is some reliability and what's happening and going ahead and furthering the growth at conifer and doing the things that I mentioned in my remarks.
So.
I hope that helps clarify.
The answer yes.
That's good thanks a lot.
Sure.
One more one more.
The last question comes from Ralph Giacobbe at Citi. Please proceed with your question.
Hey, Thanks for getting me in.
Can you maybe just discuss the labor line it looks like you've managed it pretty well in the fourth quarter.
Our questions I think of late around higher wages as well as turnover and burn out. So maybe just wanted to understand how you've managed it.
And maybe what's embedded in guidance for 'twenty, one thanks, Hey.
Hey, Ralph it's Dan I'll start and then turn it over to <unk> and <unk>.
Tom was talking before about.
Improvement in contract Labor cost he was he was being modest.
Contract labor costs came down quite a bit and.
In the fourth quarter due to him and his team really managing it appropriately.
So that with that was.
A key driver in terms of our labor management.
<unk> in the quarter.
Yes, Ralph I, the only thing I would add is as I said before I mean, we really took note of the fact that as the Covid surge has happened in both April and July.
And August timeframe, we step back with our operational and our clinical team and identified what were the things that really werent patient care related that were causing us delays in being able to.
Net patients back home or into other care settings that were more appropriate for them.
You can imagine there's a myriad of things there how rapidly we got patients safely out of the ICU are strengthening our relationship with our post acute providers.
Strengthening up some of the things that we needed to do in the home health environment to get patients home.
If that was more appropriate and so thats those things in addition to other things.
It was just an area of focus for us obviously for the right reasons patient care, but the collateral benefit of that is that we provided a bit of relief.
From the tight really tight nursing market.
Look our nurses have done an incredible amount of work.
Day and night heroic.
I can't say that we took all the stress off the situation given how high the COVID-19 environment had gotten but we did our best to alleviate some of that pressure in the markets.
Given the work that they were doing and.
It worked I mean, I think it shows up in the in the line items that you are looking at we have to keep that focus going forward. If there are other COVID-19 spikes.
Alright, okay.
Alright, operator, thank you very much.
Includes our overtime.
Okay that concludes today's conference you may disconnect your lines at this time and we thank you for your participation.