Q2 2022 Tenet Healthcare Corp Earnings Call
Greetings and welcome to the Tenet healthcare second quarter 2022 earnings call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded its now my pleasure to introduce your host Mr will Mcdowell Vice President of Investor Relations. Thank you Sir you may begin.
Yeah.
Good morning, 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 Tennant's second quarter 2022 results as well as a discussion of our financial outlook.
Tenant senior management participating in today's call will be Ron written Meyer Executive Chairman, Dr. <unk>, <unk>, Chief Executive Officer, and Dan can sell me 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 tenet health Dot com.
Listeners to this call are advised that certain statements made during our discussion today are forward looking and represents managements expectations based on currently available information actual results and plans could differ materially.
Tenet is under no obligation to update any forward looking statements based on subsequent information investors should take note of the cautionary statement slide included in today's presentation as well as the risk factors discussed in our most recent Form 10-K, and other filings with the Securities and Exchange Commission.
With that I'll turn the call over to Tom.
Alright, Thank you Willa and good morning, everybody. This quarter. We are once again pleased to deliver strong results based upon our continued disciplined management through a challenging market and previous and the previously disclosed cyber attack.
We generated enterprise net operating revenues of $4 6 billion and consolidated EBITDA of $843 million.
USPI delivered impressive EBITDA growth of approximately 15% excluding cares Act grants.
Volumes were consistent with 2019 pre pandemic levels.
We remain convinced that the demand for our ambulatory surgery services will recover consistently above pre pandemic levels when COVID-19 prevalence declines.
Our hospitals performed very well in a complicated environment.
On labor, despite the challenging environment in contract labor rates and utilization, we manage to a modest reduction in overall <unk> as a percentage of net revenue from the prior year.
We will continue to employ a disciplined cost management practices, while focusing on building back the high acuity volumes at the heart of our strategy as this new Covid wave runs its cycle.
In the midst of these challenges we are pleased to have ratified a three year agreement with the California Nurses Association on a new contract that includes eight of our California hospitals. We appreciate the collaboration to support our nurses and maintain uninterrupted patient care and coming to a resolution quickly.
The partnerships, we have with the unions that represent our employees have resulted in approximately 50 successfully negotiated agreements since the onset of the pandemic.
Okay.
Disruption from the cyber attack clearly added significant pressure on volumes and earnings in April and May.
We estimate this incident had an unfavorable impact of approximately $100 million on adjusted EBITDA during Q2.
We filed an insurance claim and continue to insist on full payment from our insurance companies.
Unfortunately, the speed at resolving this is slow.
But we are committed to driving this to a reasonable and appropriate resolution as quickly as possible.
Importantly, this attack should be considered one time impact our systems have been rebuilt and we have restored network operations.
As such that we typically do not discuss individual monthly results. It is important to note that we saw a significant recovery in June which we believe creates optimism about the second half of the year.
June patient acuity was strong relative to April and May and we saw growth in high acuity service lines, including cardiovascular neonatal and spine.
We also saw improvement in our surgical admissions outpatient visits and outpatient surgical visits and hospital adjusted EBITDA. Excluding grant income improved significantly in June compared to April and May.
Conifer delivered mid single digit revenue growth and margins were strong at 27, 9%.
We continue our focus on multi shore recruitment and adding scale in our global business Center.
Activities are an important component of our ongoing work to expand margins on a sustainable basis.
We continue to revitalize our sales efforts and have seen a significant increase in opportunities with our point solutions for new and existing clients and.
In fact <unk>.
<unk> with new clients that we are pursuing have more than doubled in the last year.
In addition, conifer will extend point solution services to USPI to further enhanced ambulatory revenue cycle performance.
As you can see we are continuing to deliver results across each of our businesses.
Based on our enterprise performance year to date and our confidence for the balance of the year. We are once again reiterating our full year 2022, adjusted EBITDA guidance range of $3 375 to $3 $5 75 billion.
We believe this is competitively attractive as an outlook and reflective of our business diversification and the ambulatory surgery and cloud segments, which are relatively insulated from the contract labor exposure as well as our disciplined management in the hospital segment.
I would like to spend a few minutes discussing <unk> in more detail.
Our work to accelerate investments in this high growth area continues unabated.
We now own 100% of Uspi's voting shares after acquiring Baylor, Scott and white equity position in USPI for approximately $400 million.
At the end of the second quarter.
This transaction does not impact our collaboration with our esteemed partner in the Dallas Fort worth market, which we have enjoyed for over 20 years.
Joint venture with Baylor remains one of the largest surgical facility JV is in the country that will work together to continue to grow.
USPI is the preferred operating partner for both physicians and health systems as our teams deliver market level strategic planning operational excellence and scale based advantages that are unmatched.
We are the leader in the highly fragmented ambulatory surgical space with approximately 7% market share.
We see significant runway towards expansion of our footprint and expect to have 575 to 600 afcs in place by the end of 2025.
Our dedicated development team is constantly identifying new opportunities such as our recent announcement to acquire ownership in 'twenty two asp's from the United Neurology Group, United Neurology is one of the largest urology practices in the country.
We recently closed the transaction, which has well established and new afcs in key markets like Maryland, Colorado and Arizona.
The deal is an investment of roughly $100 million and we expect to drive the EBITDA less NCI multiple below five times within the first few years.
Partnering with larger physician practice platforms remains an important diversification and growth strategy.
<unk> is one of a growing number of strategic partnerships, we have in place with payback and independent Msos, where physicians are looking for highly a highly capable ASC partner.
Through these collaborations we help independent physician groups unlock growth in their centers, while maintaining their independent consistent with our historical practice, but now we're doing it at scale.
Our ability to deliver operational excellence and synergies makes us a very attractive operator.
We also continue to foster strategic partnerships with health systems, some of which build on successful relationships that span many years.
One such example is an LOI, we recently signed with the Providence Health system to expand our relationship with whom we have been JV partners since 2004.
We intend to invest more than $200 million in ambulatory M&A, each year and have a robust pipeline to comfortably support that level of investment.
All in for the past quarter, we acquired or opened seven facilities not including the <unk> deal I already mentioned we.
We continue to be active in the construction of new centers originating from our USPI development team and separately from our STD partnership pipelines.
We currently have about 20 centers that are in active syndication or under construction.
The ambulatory surgery business is it's a highly capital efficient business model with capital needs that are a fraction of what we see in the hospital business as we continue to scale, our ambulatory capabilities, we expect to drive substantial growth in free cash flow for the enterprise.
Before I pass the call over to Dan to discuss our results in more detail I'd like to leave you with a few thoughts.
Whether we are in a favorable or a tough operating environment. We are building value for our stakeholders through business diversification and a commitment to disciplined execution.
Three months ago, we reported strong results during a challenging Q1 that saw significant inpatient and outpatient disruption from Covid cases.
At that time, we maintained full year guidance for adjusted EBITDA and free cash flow.
During the second quarter, we have witnessed our stock price fall by more than a third continue to see COVID-19 related staffing disruption and experience soft utilization in April and May partially due to a cyber attack.
Despite these unplanned obstacles our team has again delivered solid operating results and maintained guidance for adjusted EBITDA and free cash flow for the full year.
Our portfolio mix and strong execution underlying these results.
Right now we are operating in the same challenging environment that everyone faces in health care services, but we are executing successfully using the data driven operating platform. We've created it is driving strong financial results, but at the same time it is improving quality for patients continuing to generate value for payers.
Efficiencies that support affordability.
On labor while contract labor costs remain elevated we are managing our resources, well importantly, and to reiterate both USPI and conifer, which represent about half of our adjusted EBITDA are relatively insulated from these issues.
As you heard we're very bullish about where we are with USPI now on 100% of Uspi's voting stock a move which we believe is in the best interest of our shareholders and our company given the compelling growth run rate runway ahead.
We are reaffirming our full year 2022, adjusted EBITDA guidance range of $3 375 to $3 $5 75 billion.
We believe Tennant continues to present, an attractive opportunity for investors given the ongoing business diversification in the USPI and conifer as well as the <unk>.
Very strong management of our hospital segment.
Even now, but surely as we progress towards 50% of the company's EBITDA coming from USPI. We believe the conditions for a material premium to a hospital only valuation would be fair and appropriate.
And with that Dan will now provide us more details on the financial results, Dan I'll pass it to you.
Thanks, Tom and good morning, everyone, let's start on slide three we produced a resilient financial results in the second quarter. They were above the midpoint of our guidance range. Despite the adverse impact of the cyber security attack as well as the continuing inflationary wage and labor availability pressures providers across the IND.
History are facing.
All three of our business segments performed well despite the challenging environment.
We generated consolidated adjusted EBITDA was $843 million.
Our results were supported by continued high patient acuity and very effective cost control.
To reiterate what Tom mentioned, our Labor management was strong is there a consolidated SWM because as a percentage of revenue were 20 basis points lower than last year. Despite the severe labor pressures and the cyber incident.
Our second quarter EBITDA included two large items that were not included in our guidance that essentially offset each other.
The first item is an approximately 100 million adverse impact to adjusted EBITDA that we previously announced in June in our hospital business from the cyber incident.
This impact includes the loss patient volumes and revenues due to the business interruption.
And incremental costs incurred to remediate the incident.
Importantly, we have found insurance claim through these losses and we have ample coverage.
While we expect to recover insurance proceeds in the future. We have not included in our 2022 guidance any insurance proceeds in the back half of the year.
We did receive $5 million of proceeds in the second quarter.
We have a sufficient coverage and we will record proceeds in earnings when received and disclose that in a transparent manner.
The other large item not anticipated in our second quarter guidance.
Was that we earned $94 million of grant income in the quarter.
Again, these two items essentially offset each other.
Now I'd like to highlight a few key items for each of our segments, beginning with USPI, which continues to deliver strong operating results.
Uspi's EBITDA grew 15%, excluding grant income compared to last year's second quarter and its EBITDA margin continues to be very strong at about 41%.
And USPI surgical cases, where 100% of 2019 pre pandemic levels, reflecting continued strong performance by the team.
Turning to the hospital business are hospitals delivered another solid quarter, despite the difficult operating environment and the cyber incident that we faced.
Our labor management continues to be very effective despite the pressures, especially the temporary contract nurse staffing costs.
On a consolidated basis contract labor costs were approximately six 2% consolidated <unk> in the quarter, which was down from six 8% in the first quarter of this year.
Again to provide a frame of reference contract labor costs were.
We're about 5% last year, and historically before the pandemic and the 2% to 3% range.
The cyber security incident incident did create pressure on our hospital patient volumes contributing to a five 3% decline in adjusted admissions. However.
However, our case mix index and revenue yield remained strong as we continue our strategic focus on investments and higher acuity higher margin service lines.
Our year to date case mix index.
It was about 15% higher than 2019 prior to the pandemic.
And we're pleased to announce that we recently reached an agreement with Unitedhealthcare to extend our multiyear national contract with them through 2025, covering all of our hospitals ambulatory facilities physicians and other providers.
Let's now turn to conifer, which also delivered a nice quarter.
Conifer produced revenue growth of 4% over last year.
And importantly revenue from external clients grew 14%.
And conifer continued to produce strong EBITDA margin of about 28%.
Let's now move to slide 10, and review, our cash flow balance sheet and capital structure items, we continue to maintain more than sufficient cash resources.
Available liquidity under our $1 5 billion line of credit facility.
As of the end of the quarter, we had approximately $1.350 billion of cash on hand, and no borrowings outstanding under our line.
We generated $248 million of free cash flow in the quarter before the repayment of the pandemic related Medicare advances.
We received two years ago.
As we pointed out in our release, we now own 100% of Uspi's voting stock having acquired the remaining 5% interest.
As previously held by Baylor, Scott and white for $406 million.
I do want to point out it's important to remember that the 406 million represents the equity value of it.
Business not the enterprise value.
This amount will be paid by us over the next three years with monthly payments of about $11 million.
On an interest free basis.
We're really pleased and increased our ownership in this high performing asset now rather than in the future as we believe the value of this 5% interest would have significantly increased given uspi's growth strategies and opportunities.
As a result of this transaction, we will stop recording 5% Noncontrolling interest expense related to USPI earnings.
Beginning in the third quarter.
Accordingly, our annual earnings are expected to increase about 25 million or more going forward.
As a result of the elimination of this NCI expense.
As we previously discussed in the second quarter, we were able to issue $2 billion of six <unk> secured notes due in 2030, we used those proceeds to early retire 175 billion of debt that was due next year. It had an interest rate of six and three quarters.
We now have no significant debt maturities for the next two years until July 2024.
And we still have about $2 billion of secured debt borrowing capacity available if needed.
As a result of our continued growth and focus on deleveraging.
Our leverage ratio at the end of the quarter was little under four.
And if you think back to 2017 significant improvement when the leverage ratio was about six times.
We have strengthened our balance sheet over the past several years and retired or pushed out maturities, which gives us ample financial flexibility to support our growth initiatives.
Let me now turn to our outlook for this year.
As Tom mentioned, we are reaffirming our adjusted EBITDA outlook.
Of $3 billion $475 million at the midpoint of the range.
And again as I mentioned before we have not assumed in our guidance for the back half of the year any recovery of insurance proceeds from the cyber incident.
We also provided various updated guidance assumptions in our release, namely for hospital patient volumes and revenues.
And the hospital business, we lowered our assumptions for inpatient admissions and adjusted admissions, primarily reflecting the impact of the business interruption from the cyber incident.
Continuing COVID-19 prevalence as well as the volume impact due to our disciplined approach and the management capacity and volumes, depending on the incremental marginal labor costs.
From a cash flow perspective, we continue to target another strong year of free cash flow generation was about $1 5 billion at the midpoint, excluding the repayment of the Medicare advances and deferred payroll taxes.
Our free cash flow generation has improved substantially over the past several years and we expect to continue to drive strong free cash flows while executing on our growth plans.
As we've talked about before these cash flows provide us with significant financial flexibility to effectively deploy capital for the benefit of our shareholders.
Our capital deployment priorities have not changed.
First we plan to continue allocating at least $200 million of capital annually to grow our USPI surgery Center business.
To enhance our hospital growth opportunities, including the continued focus on higher acuity service offers offerings.
Third evaluate further opportunities to retire debt or refinance debt.
And finally, possibly.
Next year and beyond evaluating a share repurchase program, depending on market conditions and other investment opportunities.
And with that we're ready to begin the Q&A operator.
Thank you at this time, we'll be conducting a question and answer session. 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.
You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
So that we may respond to as many questions as possible. We ask that you. Please limit yourself to one question each.
Our first question comes from the line of a J Rice with credit Suisse. Please proceed with your question.
Hi, everybody and.
Congratulations on navigating through a tough environment pretty well.
We all have to ask you about puts and takes for next year I'm going to ask you about that for the back half of the year.
Your implied guidance I think at the midpoint would be something like 800 million in EBITDA for the third quarter, which would be sequentially down from both the second quarter and the year ago period, and then in the fourth quarter at something like $944 million of EBITDA and <unk>.
That would be a step up.
Is this.
Mainly a return to <unk>.
Seasonal patterns are there other things that are puts and takes that you'd call out that would give you comfort, particularly for the fourth quarter, but for the back half of the year as you as you.
Think about where youre sitting with guidance for that period.
Hey, a J, it's Dan let me, let me address that in terms of your your points about the guidance in the back half of the year, we do anticipate some seasonality in the third quarter, which is not unusual in the business.
So when you're thinking about the Q2 earnings moving forward sequentially to Q3 of about $800 million.
Comfortable.
With that with that estimate.
And then as you move to the fourth quarter historically.
Quarter is seasonally much stronger not only for hospitals, but more importantly for uspi's businesses.
People meet their deductibles and try to get procedures in by the end of the year. So we're anticipating strong ramp on the USPI side from Q3 to two.
Q4 as well.
Okay.
Oh year over year is that is that move the needle much for you thinking about that fourth quarter in particular.
<unk>, absolutely the transaction the sdd transaction from.
We completed last December that's also part of.
The year over year growth.
Okay, alright, thanks, a lot.
Thank you. Our next question comes from the line of Whit Mayo with SBB Securities. Please proceed with your question.
Hey, Thanks, maybe for summer Brett, but you guys have alluded in the past and maybe even more specifically on this call to a lot of the investments that youre, making in the U S. P I and maybe I'm referencing more a lot of the efficiency and the productivity initiatives can you maybe just elaborate a little bit more on the specificity of what you're doing or are these.
Changes to the edge program anything that's just an extension of that any any color would be helpful.
Brad why don't you take that and all I can comment further if needed.
Yeah, Hey, Whit this is Brad Yeah, I mean.
I think it is an ongoing effort for us to continue to refine our edge philosophy and our edge program. So certainly we've we've continued to build that program and that philosophy since the company was founded.
22 years ago. So I don't think its a change in terms of a strategy at all but a refinement of our overall edge processing continued enhance it just over a period of time as we learn more and as we benchmark good facilities against better facilities and continue to drive important performance that way.
Okay.
Okay. Thanks.
Yeah.
Thank you. Our next question comes from the line of Justin Lake with Wolfe Research. Please proceed with your question.
Thanks, a couple of numbers questions here first could you give us a little more color in terms of the impact and how you sized it.
101 billion on the I T issue cost and revenue in March and all of that lost revenue.
On the commercial Todd shopping side, you've mentioned, the United contract I'm not sure you want to give us a specific data point, but how are you seeing commercial contracting for 2023.
In terms of rate increases relative to what you would see previously so maybe give US you know the last two to three years of contracts and what you think 'twenty three is going to look like versus renewals are going to look like versus those last two to three years.
Hey, Justin it's Dan good morning.
In terms of the impact of the cyber.
Incident, as we pointed out the.
Approximate impact to EBITDA was about $100 million.
In the quarter in terms of the breakdown between lost revenues.
And incremental costs incurred.
No we haven't.
Put out specific numbers for each of those.
But I would tell you that.
Vast majority.
Of that $100 million relates to loss volumes lost revenues.
Yes, we did incur incremental cost as well.
The remediated.
And in terms of your managed care point, obviously, we were pleased to extend our multiyear contract with United.
In terms of we're not obviously not going to get into specific terms related to the contract.
But.
I would say there is we get questions a lot about hey are you guys going to get rate increases from the plans to cover of CPI of eight or 9%, we don't see that happening but listen.
We believe the contract we just entered into a gives us long term visibility into our pricing we have annual escalators in the contracts.
We're pleased with the terms of the arrangement.
In terms of overall going into next year and beyond obviously every conversation, we're having with plans inflation environment is obviously top of mind in the United States.
Something that we.
We take into consideration when we are negotiating the terms.
Overall, where do we think rates will be.
What we really have talked about in the past as well.
See you know rate increases three.
Three four.
5% type of range.
But.
That's about all I'm going to comment on specifics.
Thank you. Our next question comes from the line of Peter Chickering with Deutsche Bank. Please proceed with your question.
Hey, good morning, guys I'm going to follow up on <unk> question, just from a different angle theres a lot of noise with the hospitals are this quarter due to cyber security and a bit of noise from COVID-19.
And USPI. So can you walk us through a little more detail. The trends you saw in June and what gives you sort of confidence around sort of the third quarter guidance that you provide us and feel free to give any commentary around how July is trending versus June and then on the revenue reduction for guidance, how much of that was coming from cyber security versus producing revenues that back half here.
Yeah.
Okay.
Well, let me let me start and then maybe we can get into some of the specifics, but first of all to reiterate what.
What I was saying on the.
On the first part of the earnings call, we saw a substantial recovery when we got back to normal operations.
In our hospital business the cyber event didn't have material impact at all on USPI. So this was primarily a hospital segment base effect with a little bit on conifer.
And.
That recovery was strong on virtually all the dimensions.
That drive the business I mentioned, a number of them and so that gives us a lot of confidence as we look to the back half of the year.
And that's in an environment, where from the beginning of the second quarter to the end of the second quarter.
As you know the Covid activity.
Has risen.
So that's that's also a good thing that we continue to see that strength.
In the hospital segment from that perspective.
On conifer.
The disruption from.
From the cyber attack.
As I said, a small part of the effect.
But importantly, they're ongoing cost improvement initiatives offshoring initiatives and.
Growth runway provide margin expansion opportunities and just earnings expansion opportunities and then finally at USPI.
We're pleased that we're sitting at roughly 2019 of pre pandemic levels of volume look I think as Covid has two effects. There. One is you get some increase in cancellation rates.
And the second thing is.
Physicians offices are not running at full throughput that can have a little bit of a downstream effect. So we're actually really happy that the business showed the strength that it had and as we get through this COVID-19 wave I think we're going to see even strengthening demand in that in that area, obviously as Dan pointed out the seasonal effects.
<unk> in the fourth quarter is as critical to the ramp.
Yes, Peter in terms of.
Our confidence in Q3 and the revenue guide.
To date, our revenue guide a couple of things on that in terms of.
As we pointed out the hospital business really strengthened.
In June and as we saw during the quarter contract Labor also monitor moderated.
So that's obviously a positive sign and so when we think about the back half of the year that gives us it gives us more optimism obviously in.
In addition to USPI, we fully believe it's going to continue to grow.
The revenue guide that.
You pointed out the guide down.
It really relates to several things one the cyber incident is certainly a big part of that.
But also we need to think about the back half of the year based on the volume trends that we saw.
In the first quarter and second quarter as well as how we've been managing.
And our operations and looking at.
The marginal cost of certain volumes.
And weather.
Those marginal cost.
Economically it makes sense.
Two.
Step for those volumes, we've obviously taken that into consideration in our revenue guidance in the back half of the year, but we're managing through that and maintaining our overall earnings guidance.
Great. Thanks, so much.
Yes.
Yeah.
Thank you. Our next question comes from the line of do you think that's where that with Citi. Please proceed with your question.
Oh, great. Thanks. So so you alluded to this expectation for continued demand development for USPI, but I'm wondering if you're seeing any pressure on cancellations or otherwise.
Or perhaps re prioritizing their discretionary income spun just given the high inflation backdrop.
Color or commentary on that would be very helpful. Thanks.
Yes, it's a good question.
I would tell you that.
We look very carefully at the mix of cases, we're seeing within the business, we feel comfortable that the impact that we see small impact that we see from a cancellation standpoint is mostly related to COVID-19 activity in the background as opposed to a more fundamental shift in demand.
<unk> or consumer preference and we feel comfortable with the demand that we're seeing even in some of the what I would describe as lower acuity type of.
Procedures within the within the platform and so I don't see at this point any evidence.
That is obvious.
That there are more fundamental shifts in demand affecting the USPI business.
We're pleased with that today.
Hey, and so I'm, the only thing I would add and you alluded to it.
In the second quarter. We also saw a nice recovery of some of the lower acuity cases, such as E&P in ophthalmology and GI there were really slower to recover.
From the pandemic, so that was actually a good sign.
Great. Thanks.
Thank you. Our next question comes from the line of Josh Raskin with Nephron Research. Please proceed with your question.
Alright, thanks, good morning.
On the Labor front I'm curious do you get a sense that you are employed.
Nurse workforce stabilizing that theyre not seeking as many of these travel tours. This we'll call them.
Or do you think theres, a new normal where nurses may be more willing to travel than they have in the past right they've been exposed to what they've seen it now maybe that continues at elevated levels relative to pre pandemic and then could you just give us a sense of where your hourly base rates are for nursing staff relative to where they were maybe a year ago or even to <unk>.
Years ago.
Hey, Josh.
A couple of things one is we are pleased with the efforts that we're putting in.
Both in terms of recruiting overall.
The impact that's having and Theres new graduate recruiting based upon a lot of the nursing school relationships that we've formed over the past year anticipating this challenge.
I don't know, whether it's the new norm in terms of the rates of of nurses desiring to travel.
Not feel that.
Price elasticity in that and.
So the traveling rates are higher now than they were pre pandemic, but the rates are still high.
And that is that as those price points are.
Data points from the standpoint of what traveling nurses are earnings come back towards normal.
We think that probably the market will normalize somewhat.
I would use this as an opportunity to point out that our TRA. The internal tenant resource agency that we run has been a bit of a buffer to help create longer term assignments, even within a travelling environment to help with our own nurse staffing stability.
And that's been a tremendous resource for us throughout this and at a discount.
The overall <unk>.
<unk> rates that you see out there so.
I think this is going to be an important agenda item for at least another year or two and really ensuring.
High degree of execution, and recruiting and retention and creating an environment for doses, where they can seek their career paths that they want and at the same time.
Continuing to manage the contract labor rates down.
We haven't gotten into details on our base wage rates I would just point out that the complication and looking simply at unit rates is that you have to you have to think about that alongside the tenure of the nurses that youre, bringing in that are new and some new grads for exam.
Paul with less tenure would have lower base rates and so so those those.
We think that we're managing the average wage of our hires very well.
Based upon the balance between those items, Dan I don't know if you want to add anything there.
No I think that's right.
We've been very focused on and one of the.
Strategies to reduce the high contract labor spend has been to focus on.
<unk>.
Recruiting of full time employees and and.
That's had a benefit in terms of what we're seeing on the contract labor side, which is heading in the right direction.
Thank you. Our next question comes from the line of Jamie Paris with Goldman Sachs. Please proceed with your question.
Hey, good morning, guys.
We hear a lot about supply shortages things like semi cap contracts mediated other basic supply can you give us a sense of if any of these categories are either there impacting you guys.
Creating any volume bottlenecks on either the USPI side or.
The hospital side are any of these dynamics changing getting getting any easier to manage.
Yes, Jamie.
I would say that.
Some of the some of the specific shortages that you've seen whether it's contrast media or other things.
Given our supplier environment, we did not see a significant impact from those obviously like others, we participated in helping other hospitals.
When they had acute shortages for patient needs.
Bye bye sharing.
In local markets, what we had but we have not we have not seen.
You know what I would describe it as any of those that made kind of headlines.
Become a major issue for US without question there is there still additional expense.
Sitting in the unit cost that manufacturers of various items are putting through and.
There are.
Certainly so I wouldn't necessarily say fully shortages, but there certainly have been delays in shipments and other things, including what I would describe as clinical capital equipment.
Over this period of time, but again this is an area, where we have a well oiled machine to manage our suppliers and supply chain and we have been working through that.
With the manufacturers in many cases directly.
In order to ensure liquidity in that supply chain, such that we don't have any disruption to patient care.
The other thing of course that in this environment you have to do is continue to work on improvements and narrowing the range of suppliers and and offsetting inflationary trends.
Based upon our results on the.
Supplies line, you can see that we have.
This has been a multiyear focus its continued during the pandemic.
And it's been quite successful.
<unk> in the area that pushes into purchase services. So this is an ongoing efficiency agenda.
In the hospital business.
Very much so at USPI.
Okay. Thanks for the color.
Thank you. Our next question comes from the line of John Ransom with Raymond James. Please proceed with your question.
Okay.
Hey, there.
The back half Spi guidance.
I guess fair to the last four quarters.
That'll help there from a volume standpoint.
Could you maybe help with what sort of volume.
Thompson, you're building out back half of it.
I'd also be curious to know.
The orthopedic mix on a same store basis, I mean by all accounts.
Let's shift to our.
It's not.
Yet in your consolidated numbers.
Okay.
That'd be great. Thank you.
John I think I think to your question you were breaking up throughout that.
I think your two questions were about Uspi's second half guide.
And.
In particular orthopedics mix.
In the business. So let me just tackle the latter first which is that <unk>. Obviously is a very very important platform within USPI is the largest provider of outpacing what the predicts we continue to see attractive growth rates in that market and in particular at <unk>.
As Brett described before the width question, we've undertaken a new energy in seeking efficiencies in both the supply chain and in labor management at USPI, largely leveraging the same kind of data and analytics platform that.
That has been well embedded into the hospital side so.
One of the things we haven't talked about yet is the margin expansion at USPI this quarter.
It's been based on both high acuity like orthopedics and.
Additional and new types of efficiencies that we're finding within the business. So we feel pretty good about that orthopedics platform from that perspective.
And as volumes recover the ability to put a lot of that to the bottom line because of the efficiencies.
Dan or Brett you guys want to cover the.
Second half guide yes.
Yes, yes.
Yes.
Hey, John This is Brad So we had just to put it in context, we had $600 million of EBITDA in the first half of 2022. Therefore, our guidance suggest 800 million for the second half at the midpoint that suggest 57% of our EBITDA in the second half, which is a little less on a percent basis than we saw.
In the second half of 2019 so.
We feel pretty comfortable with.
With the percentage breakdown between the second half.
In the first and.
In the first half considering how it looks compared to 2019.
Thanks, so much.
Okay.
Thank you. Our next question comes from the line of Kevin Fischbeck with Bank of America. Please proceed with your question.
Good morning. Thank you for taking the question. This is actually Joanna <unk> filling in for Kevin today. So just a couple of follow up so you've mentioned Oh, a labor contract labor expenses declined in Q2 versus Q1.
So can you give us I know there was some questions around them.
Oh permanent.
Thanks.
Wages, but can you give us a flavor for where you see that temp labor rates per hour trending either.
In absolute or percentage as you know Q2 versus Q1 and Q4.
And also you mentioned.
Coding.
I see some traction there so any stats you can give us on recruiting and turnover would be helpful. Too. Thank you.
Yeah, do you want to cover that.
Yeah and in terms of either Joanne it's Dan in terms of the contract labor rates.
We did see some moderation.
In the second quarter compared to the first quarter.
And.
We put the stats out there.
We were close to 7% in first quarter and closer to 6% in the second quarter. So.
And that was a that was a mix of not only utilization.
But rates as well.
We think about.
As we move through the rest of the year.
We are anticipating some.
Additional moderation.
But we're not saying, we're going to get anywhere near back to where we were before the pandemic.
Probably you know last year, we were about 5%.
We'll see where we end.
And the year.
But obviously nice.
Nice improvement and so that's obviously heading in the right direction.
In terms of.
Again, we're not going to get into specifics in terms of of rates for full time employees, but as you know some pointed out a few minutes ago.
It all it all depends on the tenure of the clinician that Youre hiring then has an impact on the overall rates on a at least from an average perspective.
But I guess I'm just kind of.
The rate any stats in terms of your turnover in our recruiting efforts in terms of where it's tracking you know percentage wise.
Yes, we're not going to get into specific turnover percentages.
Okay. Thank you so much.
Okay.
Our next question comes from the line of Ben Hendrix with RBC capital markets. Please proceed with your question.
Thank you very much I was wondering to get your.
Are your initial thoughts on the PPS proposed rule.
It's kind of the rate update and then also I know that there was a push several years ago to move kind of that Oh PPS update from a CPI based.
Date to an N B hospital envy, you and I think we're coming up on the last year of a five year period, where it is based on the hospital <unk> and then kind of given that that in the U S, 3% update ourselves lagging, 9% CPI U K.
Kind of implications for maybe CMS moving it back to the CPI based in and how you guys are thinking about about that.
After next year. Thanks.
Hey, Ben It's Dan Let me, let me address that.
I would say that.
The proposed <unk> PPS rule for outpatient services, we're disappointed.
In the rate that was proposed.
And when you.
Even further adjusted for the anticipated impact of $3 40 be adjustment.
There is some alternative rate information provided.
<unk>.
The rate increases.
Almost flat.
We estimate to be about 50 basis points increase after the.
The $3 40, b adjustment, which would be.
$5 million or less in terms of annual increase we believe thats insufficient given the current inflationary environment and obviously, we're working with all the appropriate.
Constituents and making sure.
Our concerns are arrays.
At appropriate levels, but right now.
We're disappointed with the rate update that's being proposed in terms of CMS.
CMS moving often and change in the methodology down the road, we'll see where that plays out we can't make any predictions.
At this point.
Now the one thing I would say that's on the hospital side.
The the rate update on the USPI side.
This is more attractive although we still believe it's insufficient given the current inflationary environment.
We anticipate that that.
Fuel.
Adjustments to.
The rates of based on what's been proposed for USPI that would be approximately $25 million of additional EBITDA.
On an annual basis going forward based on the current proposed rule.
Thank you.
Okay.
Thank you, ladies and gentlemen, as a reminder, we ask that you. Please limit yourself to one question each.
Question comes from Ann.
Ann Hynes Mizuho Securities. Please proceed with your question.
Okay.
Hi, good morning.
I just wanted to focus on the inpatient and outpatient admission trends in the acute care segment.
8% or 5% can you tell us how much is from maybe the cyber security weakness.
How much is from capacity management versus how much is just from maybe a softer demand environment.
Let me I'll start on that it's really unrelated to all three of those components to be quite Frank with you.
We have not.
Disclose a specific.
Number for the impacts related to cyber.
There is there's been lawsuits filed and similar to other pending litigation.
We don't necessarily get into specifics of pending litigation, but I would say that.
We called this out in our release that.
Cyber incident certainly had.
You know a pretty big impact on volumes.
In the quarter.
Your point about how we're managing the business, that's very true as well and that that is having an impact on the aggregate statistic.
And we again took that into consideration when we thought about our.
Our volume assumptions for the back half of the year as well as our revenue assumptions, but again, we're managing through that and maintaining our earnings.
Your other point the third point about you know COVID-19 continuing.
To be there.
I think Thats fair.
Having an.
And impact on <unk>.
Aggregate volumes on the hospital side as well as obviously on the USPI side, but more so on the hospital side. So it's really it's a it's a combination of all three of those components and certainly in the second quarter.
The ciber.
Incident had.
Large impact.
So I guess the reason I'm asking about the capacity management is do you can you just describe law, which capacity wise, you're shutting down and do you expect to open them once you the nursing.
Short answer is relieved and competitively do you think that market share is last year, you can get it back.
Let me just let me make a few comments just to give you color around this and I'm not going to get into specifics. It's different by hospital. There are two things to consider the first is that.
As I've indicated our approach to prioritizing our high acuity services and.
And in particular.
Surgical and procedure based areas.
<unk> to move forward on all dimensions unabated.
And we follow those trends very very carefully to ensure that we are not only maintaining but building market share in those areas and we feel very good about that.
The second thing is that in terms of the capacity management. There is a lot of low acuity or.
Other work.
Often medical in nature that.
Is difficult to staff given the cost of excessive contract labor.
And it's not this isn't about just kind of the marginal revenue and the marginal costs. The reality is that the cost structure needed to staff up to take care of a lot of that volume.
Is significantly more than just the marginal unit cost of one additional nurse.
And we realized that very early in the pandemic and so we have been very deliberate in managing.
Our capacity in a way that is prioritized maintaining open access may.
Sure that our high acuity strategy continues to progress unabated.
And.
As thoughtful about the margin generation in the hospital by not building in excess of cost.
Through.
Staffing up every floor is.
Labor rates come down on the contract side and in particular as more and more traction is built on <unk>.
Tiring of more full time staff in this environment and to the point made earlier travelers decrease will have the ability to open up those units and deliver that volume on a profitable basis, and we will assess that hospital by hospital and do so look I think one important thing to realize about this is this is.
All fundamentally built around the system that we created a few years ago that is real real time analytics driving real time decisions.
Within the system Thats been embedded into the operating model of tenants at this point and that's really important because it's just one of another thing about the fundamental disappointed our operating management that we've put into place over the last four years and.
So I'm not as worried as.
As you indicate about market share in specific areas, but I am very much <unk>.
Following the labor rates carefully to think about when and how to sequentially opened up capacity in a way that it will be profitable.
Thank you. Our next question comes from the line of Sarah James with Barclays. Please proceed with your question.
Thank you I was hoping that you could help us take a step back and think about.
The spread between cost and pricing that you're experiencing in 2022.
How that spread difference.
And.
Because I care. So you can get a senses.
The unique pressure that's happening this year and then given.
But you know the pricing.
If you think about that spread.
We're expanding.
Okay.
Hey, it's Eric Yes.
Yes, let me let me, let me start off on that.
The I would say the.
The primary.
Difference in the pricing and.
Cost trends now versus before the pandemic.
As.
On the cost side the biggest press.
Pressure in this environment has been on the contract labor spend.
By far.
And we called out some numbers.
Earlier, where.
Contract Labor was previously 2% to 3% of our.
SWM B and you know this.
This year, we pushed 7% in the first quarter now it's come off which.
Good to see in the second quarter to about six but.
<unk> significantly higher than.
Before the pandemic.
Listen or there are other inflationary pressures on the expense side sure, but the the contract labor has been the most significant inflationary pressure.
In terms of pricing and so on the revenue side the yield.
I would say I think it's listen as I said earlier.
The current inflationary environment top of mind in every conversation, we're having with plans.
And so we obviously take that into consideration, but again, it's not like the plans are sitting theyre offering a nine 1% because CPI that was just published.
But I would say the we're very pleased with our <unk>.
Insurance contracting.
Positions and we have been in <unk>.
We continue to be in it.
It's been very beneficial for this organization across all of our businesses and.
Our contracting positions provide us a unique competitive advantage, we believe when we're looking at potential M&A.
M&A on the ambulatory side or de Novo development, we're working with potential new partners.
So.
I think again the biggest issue on the expense side has been the contract labor.
Thank you.
Correct.
Our next question comes from the line of Brian <unk> with Jefferies. Please proceed with your yes.
And this is going to be our last question operator.
Yeah. Thanks for squeezing me in Brent just a quick question on just the trends at USPI.
Curious what your thoughts are and saw that deceleration in case growth that we saw in the quarter and maybe if you can give us any color on the trend.
Intra quarter, and what Youre seeing now in terms of any sort of recovery.
Okay.
Hey, Brian It's we're not going to comment on July and into this quarter, but.
Well you know on any of the business units as Dan indicated but.
Go ahead Brett.
Yeah, Yeah, okay.
Hi, Brian I'll, just I'll, just touch briefly on on kind of the volume for the quarter look it was slightly down.
You heard on a same store basis, but were still tracking to 100% of 2019 volume in.
This was with an elevated cancellation rate over prior year.
Primarily as a result of increased Covid activity and I think as Tom mentioned, some physician offices offices simply arent back too.
Pre COVID-19 levels that said our net revenue per case was ahead of plan at three 7%, we managed expenses well.
And group EBITDA, 15% year over year, So we're pretty pleased with the quarter overall.
Okay well. Thank you everyone. We appreciate the questions and have a nice day.
Yeah.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect. Your lines. Thank you for your participation.