Q3 2022 Tenet Healthcare Corp Earnings Call
Good morning, welcome to Tenet Healthcare's third quarter 2022 earnings conference call. After the Speaker remarks, there will be a question and answer session for industry analysts if you'd like to be placed in the question queue. Please press star one on your telephone keypad tend to respectfully ask that analysts limit themselves to one question.
I'll now turn the call over to your host Mr will Mcdowell, Vice President Investor Relations. Mr. Mcgough, you may begin.
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 our discussion of Tennant's third quarter 2022 results as well as the discussion of our financial outlook.
And its senior management participating in today's call will be Dr. <unk>, <unk>, Chief Executive Officer, and Dan can sell me executive Vice President and Chief Financial Officer.
A 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 represent managements expectations based on currently available information actual results and plans could differ materially.
And it 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 Sal.
Thank you will and good morning, everyone I'd like to start by taking a moment to remember Ron written by our former executive chairman of <unk>.
Singly passed away Ron had an unwavering commitment to tenant for which he will always be remembered.
This included ensuring a seamless transition and management, which was substantially completed late last year, Ron was a dear friend and colleague to many in our thoughts remain with his family.
Let's turn to the quarter.
Throughout the third quarter, we continued to deliver high quality care for our patients and value for our stakeholders. We delivered favorable results with enterprise net operating revenues of $4 8 billion and consolidated adjusted EBITDA of $841 million in the quarter.
Our operators effectively navigated a significant COVID-19 surge impacting staff availability during the summer continued our recovery from the cyber attack and supported operations throughout Hurricane Ian.
Despite these challenges we exit Q3 with a positive trajectory for the remainder of the year.
USPI demonstrated continued EBITDA growth and strong free cash flow generation in the quarter.
The segment delivered EBITDA growth of 16, 4% over prior year.
We are very pleased with the expanded portfolio, we've built but must acknowledge that we are behind our original 2022 plan for USPI.
Throughout the first half of the year, we were confronted with some of the challenges impacting the segment, but we also had periods where performance met our high expectations early in 2022.
In the third quarter multiple things came together.
<unk> performance did not meet our increasing expectations sequentially through this year. We decided now is the time to reduce our guidance in this segment.
It is important to unpack this because the impact is mostly due to shorter term disruption.
Rather than any change in our future outlook for the segment.
We are also not seeing evidence of recession related in quotes patient demand changes.
In fact, we continue to see ongoing recovery in elective diagnostic procedures.
Such as in Gi and anticipate seasonal growth in Q4 like in previous years.
With that summary, let's go through the unpacking in some detail together.
In Q3, the segment generated approximately 40% EBITDA margins and maintained 100% of pre pandemic volumes.
USPI did not face a significant trail off in business.
Nor a shock that caused the business to fall backwards from its trajectory this year.
In Q4, we are still targeting sequential season seasonal earnings improvement above Q3 of approximately $86 million at the midpoint from.
From $319 million to $405 million.
This is a very attractive business and deserving of the investments we make in it.
Now, let's turn to why the business has not met expectations in Q3.
First and more recently hurricane Ian had a modest adverse impact on 60, USPI centers in Florida, and South Carolina.
The majority of cases have been rescheduled over the next few months, there's still four centers that have not resumed fully normal operations.
Second case cancellations spiked in July to nearly 20% and remained high throughout the summer Covid Spike.
The lingering impact on Covid has impacted staff and physician availability as well as demand from doctors' offices not running at full throughput.
Stepping back if you recall our original assumptions for USPI in 2022, as we have indicated before included minimal impact of Covid in.
And the growth we expected from this segment this year.
Despite this as I noted USPI delivered surgical volumes consistent with 2019 pre pandemic levels.
Recognizing the shortfall to expectations. Each center is currently working through 2023 plans for further growth with no change in the mindset about its strong ongoing recovery from Covid.
We are not changing our assumption that our ASC should target, 4% to 6% organic year over year growth in EBITDA over the long term.
Third USPI has also seen the adverse impact of global supply chain issues, Let me explain.
<unk> centre de Novo developments, which is a rapidly growing and very attractive part of our portfolio expansion strategy.
Been delayed or slow to ramp up.
This includes many of the second.
SCD transaction centers, which were either still in development and or yet to open.
To make this tangible we're dealing with delayed shipments of everything from air handlers to electric switchboards or infrastructure to get these centers open.
Remember each center is a well syndicated physician partnership wanting to fully ramp up their surgical cases.
I want to be clear, we remain confident in the future performance of these centers when they open and a special development team is coordinating with the tenants supply chain leaders to alleviate bottlenecks as quickly as possible.
As an added point the exclusive development agreement with Std's principles to syndicate, new partnerships on the next 50 centers is still on track in year one.
Fourth and finally, the pace of Uspi's consolidating by ups in the SCD centers. After success in Q1, and Q2 has slowed in Q3.
We've worked with the physicians in these centers and there is further opportunity for some of the centers to mature before completing the buy ups and we can deliver our added synergies.
We will not force. These are naturally as the relationship with these physicians is foundational to our ongoing success.
I want to be clear here as well these centers are performing well their earnings are consistent.
In a range of our expectations and they are continuing to ramp up.
As we are a substantial minority owner in these centers, we do participate in this strong performance, but not yet at the consolidating equity ownership levels. We originally anticipated.
Service line improvement continues to be important to our earnings growth at USPI.
Similar to what we have done in a data driven way and the hospital segment, we continue to focus our business and the afcs towards higher acuity service lines.
For example, the continued growth in our orthopedic and spine business at the end of Q3 now represents 20% of our total volume.
Our focus is on net revenue intensity and margin expansion more so than only case volumes in some of these markets.
I'll give you one example to illustrate the point.
At an ASC facility in Tennessee, we have seen a 25% decline in volume.
On a year to date basis, but we have had an overall increase of 46% and net revenue per case and growth the growth in the EBITDA of 10% because we replaced high volume low acuity cases with higher acuity orthopedic cases.
I hope the transparency about the segment is helpful and gives you a basis for the strength of our conviction in USPI.
Turning to inorganic growth at USPI, our M&A pipeline is very strong we remain committed to tenants portfolio diversification strategy into ambulatory surgery with a baseline intention of $250 million of M&A and de novo investments each year.
We completed our acquisition of 22, United Urology groups centers in the third quarter, which adds well established in new <unk> in key markets like Arizona, Colorado and Maryland in.
In Q3, we added 32 centers to the portfolio across 10 States and advanced de Novo development for 15 additional centers currently under construction.
Adding centers with very attractive margins and post synergy multiples remains the best use of our cash for investments to enhance tennant's free cash flow in.
In total this year, we have added 45 centers in this 2022 vintage has an estimated average year to multiple below five times.
We are optimistic about uspi's performance in the fourth quarter and into the coming year.
As I indicated our assumptions this year about COVID-19, primarily impacting only our hospital segment and generally not our USPI segment, just didn't play out that way.
The team is focused on organic growth increase in higher acuity services in M&A like.
Like in previous years, we are starting to see the seasonal demand for surgical care increase in Q4 and are adjusting our operations to accommodate that demand.
Our track record in this business is very strong and very long and our conviction behind the strategy is unchanged by year of short term challenges.
Let's turn to our hospital segment, which generated $432 million and adjusted EBITDA in a challenging environment.
In July we had an increase in COVID-19 admissions and procedure cancellations.
But more importantly during July with the Omicron Serge.
Nearly 10% of our clinical staff in the hospitals were out at some point in the month due to Covid.
These dynamics led to compressed patient volumes in July and for US increased our procurement of contract labor staff, which impacted the quarter.
Our management of contract Labor utilization has been very strong during the last two years, but in Q3, it rose to seven 4% of consolidated SW B from six 2% in Q2.
However, our teams immediately made data driven labor productivity improvements and clinically appropriate length of stay reductions, which kept our total SW be as a percent of revenue in line with pre pandemic levels and importantly demonstrated sequential reductions in the months of the quarter such that we.
Stood at 42, 6% of net revenue in September .
The point being operating discipline through the challenges we face as a continued strong point of our management approach.
Our operators adapted quickly to the volume challenge from July and hospital patient volumes improved sequentially during the quarter.
We exited September with adjusted admissions nearly 6% higher than the prior year.
Long term fundamentals in our workforce are as important as our short term management strategies.
We are also apply to data driven and streamline approach to staff recruitment and retention and we welcomed over 2000 additional nurses many of them new graduates to our care teams in the third quarter alone.
Which will benefit us.
Over the coming quarter and year.
We remain focused on enhancing high acuity services across our hospital portfolio and our year to date case mix index has grown at a remarkable 4% CAGR since pre pandemic in 2019.
This is the result of continued clinical program development and capital deployment and cardiovascular Neurosciences General surgery neonatal care in trauma.
To share just a few examples we added cast an EP lab capacity in Palm Beach introduced the latest cardiac valve technology and Phoenix expanded our robotics program in San Antonio and begin significant NICU enhancements and El Paso.
Additionally, we opened the Piedmont Medical Center Fort Mill in South Carolina in September .
It's off to a great start our dedicated team designed built and staffed the 100 bed state of the art facility amidst COVID-19 on time and on budget.
Hospital provided emergency procedure on women's care for over 1000 patients in its first few weeks. This is a great example of our commitment to providing high quality specialty care closer to home in growing communities.
Turning to conifer conifer continues to demonstrate top line growth.
Conifer delivered 6% revenue growth, including third party customer growth of almost 10% with a strong 27% margin in the quarter.
We continue to maximize opportunities through automation and offshoring to improve the effectiveness and efficiency of conifer services.
We remain pleased with conifer's strong performance on cash collections coding quality and other key metrics for our clients.
Conifer's track record for performance, coupled with the reinvestment in commercial effort is gaining traction in the marketplace.
For tenet conifer's cash performance enhanced our liquidity by over $100 million compared to our target for the quarter.
Our sales pipeline is up over 85% from prior year as our investments in commercial capabilities mature.
As an example, conifer recently won a competitive new five year contract to provide physician revenue cycle services to the Sinai Medical group in Chicago.
Our physician revenue cycle services help entities address the complexities providers are facing with payment models expanded network coverage and other regulatory changes.
Based on our enterprise performance year to date and the realities of the challenges we faced in the second half of this year. We're now guiding to full year 2022, adjusted EBITDA guidance range of $3 $3 75 to $3 $4 75 billion.
Quarter after quarter each of our businesses has demonstrated disciplined management and the ability to navigate unforeseen challenges I am confident in our team to continue to deliver strong results.
Our consistent operating performance and deleveraging over the last few years has led to an increase in free cash flow generation.
This has enabled us to deploy capital strategically to strengthen our operations and grow our ambulatory business.
As we have discussed before and now our board has authorized a share repurchase program of up to $1 billion.
Our ability to generate free cash flows an underappreciated part of our story and we see our current valuation is compelling.
We are pleased that our strong free cash flow enables us to efficiently return capital to shareholders, while maintaining our commitment to grow the ambulatory business and further deleverage the balance sheet.
And with that with that.
Dan will provide us more details on our financial results.
Thanks, Tom and good morning, everyone, let's start on slide three.
Given our improved free cash flow generation and a significant reduction in our leverage over the past several years and our belief there is future upside in our equity value, we announced a $1 billion share repurchase program that we will start executing on.
Our free cash flow provides us with the capital flexibility to balance share repurchases with investments to grow the business.
And debt retirement.
I'll discuss capital deployment in more detail in a few minutes.
As Tom mentioned, our financial results in the third quarter were impacted by significant COVID-19 related challenges.
<unk>, the continuing inflationary wage and labor availability pressure providers across the country are facing.
In the quarter, we generated consolidated adjusted EBITDA of $841 million a quarter got off to a slow start due to the impact COVID-19 had on their patient volumes and staff availability, however, our volumes and labor trends strengthened considerably throughout the quarter.
Our results.
We're supported by continued high patient acuity and effective cost control.
Our operators did a good job responding to the labor challenges as our consolidated <unk> cost as a percentage of revenue were only 60 basis points higher than the second quarter of this year, despite more difficult labor pressures.
There were two items that were not included in our guidance, which helped earnings in the quarter.
First we recognized $54 million of grant income.
As a reminder, we are able to recognize grant income as a result of lost revenues.
And incremental costs due to COVID-19.
And the second item is a $45 million gain on the sale of a large portion of our interest in certain assets of the healthtrust GPO, we have an affiliation with.
Now I'd like to highlight a few key items for each of our segments, beginning with USPI, which continues to deliver strong results, although not up to our high expectations.
USPI is adjusted EBITDA grew 16% compared to last year and its margin continues to be very strong and approximately 40%.
USPI surgical case volumes were 100% of 2019 pre pandemic levels and flat compared to Q3 last year.
As Tom mentioned USPI results have also been impacted by Covid related challenges. However, we continue to deliver overall results that are strong in terms of margins and cash flows.
Turning to our acute care hospital business, our labor management continues to be effective despite the cost pressures, especially contract nurse staffing costs that are temporary.
On a consolidated basis contract labor costs were approximately seven 4% of consolidated <unk> in the quarter, which was up from six 2% in the second quarter and six 8% in the first quarter.
Covid related factors in the impact of the availability of our staff created pressure on our hospital patient volumes contributing to a 0.7% decline in adjusted admissions.
However, adjusted admissions did increased three 4% sequentially from the second quarter.
Also pay hospital patient volume strengthened significantly throughout the quarter.
Our case mix index and revenue yield remains strong as we continue our strategic focus on investment in higher acuity higher margin service lines.
Our year to date case mix index has grown at a 4% CAGR.
Since prior to the pandemic in 2019.
Let's now turn to conifer, which delivered a solid quarter.
<unk> produced revenue growth of 6% over last year, and importantly revenue from external clients grew nearly 10%.
Conifer generated adjusted EBITDA of $90 million, representing growth of 6% over third quarter last year and continued to produce strong EBITDA margin of 27%.
Yeah.
Let me now turn to our outlook for the rest of this year.
We have tightened the range for the year and reduced the midpoint $50 million to $3 billion $425 million.
At the segment level, we have increased the outlook for adjusted EBITDA for the hospital segment by $25 million and the midpoint at the midpoint in the range and we reduced the EBITDA outlook for USPI by $75 million, reflecting the various impacts at some previously discussed.
I do want to mention that our Q4 guidance does not assume any insurance proceeds associated with the cyber attack.
Based on our year to date results. We have also provided various updated guidance assumptions in our press release, including volume assumptions in the narrowing of certain ranges given we're heading into the last quarter of the year.
Before we turn to cash flows and liquidity lets turn to slide seven.
I'd like to spend a minute to provide some context for the jumping off point for 2023 EBITDA outlook.
I want to call out the following items that will impact the comparison of our 2022 results.
To 2023, when we issue our guidance next year.
First $154 million of grant income recognized so far this year as a result of lost revenues related to the pandemic.
Second an unfavorable impact of about $100 million this year from the cyber security attack.
Next a 16 $9 million gain this year from the sale of medical office buildings in the first quarter.
And the $45 million gain from the sale of our interest in GPO assets that I mentioned earlier.
Next $30 million of Texas, Medicaid supplemental funding revenue related to 2021 that we recognized earlier this year.
When the program was approved.
Additionally, the full year impact next year as a result of Medicare sequestration is expected to be a headwind of about $40 million.
And finally, the unfavorable impact on Medicare related outpatient revenue from the rate adjustment in 2023 associated with a 340 <unk> issue is expected to be approximately $40 million.
However from a fundamental perspective, we anticipate positive tailwind in 2023, including <unk>.
The possible moderation in the rate and utilization contract labor.
Further recovery from the pandemic, which may drive increased volume levels.
Continuing investments in hospital higher acuity service lines.
Cost efficiencies that we anticipate executing on including the transition of additional roles to our global business Center in Manila.
Our new Fort Mill Hospital near Charlotte.
And further improvement of our St Vincent Hospital post strike.
USPI organic growth.
Additional USPI synergies from the SCD transactions and other USPI related M&A activity.
Since we are currently in the midst of our 2023 business planning process. It is premature to provide any specific numbers on those items. So we will provide our full year 2023 guidance on our earnings call in February .
Moving to slide eight let's review, our cash flow balance sheet and capital structure.
As of the end of the quarter, we had approximately $1 2 billion of cash on hand.
And no borrowings outstanding under our $1 5 billion revolver.
We generated $555 million of free cash flow in the quarter before the repayment of the Medicare advances that we received in 2020.
All of these advances have now been repaid.
Year to date free cash flow before the repayment of the advances is almost $1 1 billion.
As a result of our continued growth and focus on deleveraging.
Our September 30th leverage ratio was three nine times EBITDA.
Paired to four one times at the end of last year.
And as a reminder, we have no significant debt maturities until July 2024.
And have approximately $2 billion of secured debt borrowing capacity available if needed.
We have strengthened our balance sheet over the past several years and retired or pushed out debt maturities, which provides us ample flexibility to support our growth initiatives.
Turning to our cash flows outlook for 2022.
From a cash flow perspective, we continue to target another strong year of free cash flow generation.
Approximately $1 4 billion at the midpoint of our guidance, excluding the repayment in 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 cash flows while executing on our growth plans.
As we've previously mentioned these cash flows provide us with significant financial flexibility to effectively deploy capital for the benefit of our shareholders.
As we noted in the earnings release, our board has authorized a $1 billion share repurchase program.
The authorization reinforces the confidence we have in our long term growth plans and the underlying cash flow generation of our businesses and the belief in the upside in our equity value.
As a reminder.
Our capital deployment priorities have not changed.
First we plan to continue allocating approximately $250 million of capital annually to grow our USPI surgery Center business.
Next to enhance our hospital growth opportunities, including the continued focus on higher acuity service offerings.
Third valuate further opportunities to retire debt.
And finally share repurchases.
On market conditions and other investment opportunities.
And with that we're ready to begin the Q&A operator.
Thank you, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad as a reminder, tenant respectfully ask that analysts limit themselves to one question. Each that's one question each of its star one to be placed into question queue.
Our first question is coming from John Ransom from Raymond James Your line is now live.
Hey, good morning.
Just as we think about the hospital bridge, probably say second half of 'twenty three 'twenty two to 'twenty three.
Dan do you have any like quantitative puts and takes.
So think about that at this early stage.
Yeah, Hey, John Stan.
Okay.
Sort of outlined in my remarks.
When we think about next year.
We called out certain items that occurred in.
2022.
As well as items that will.
That come into play next year, including full year of sequestration.
As well as the 340 <unk> issue.
I went through.
Various positive.
Tailwind that we do anticipate next year.
We're in the midst of our business planning process.
So we are not ready we think it's premature at this point to put specific numbers out there for 2023, but again.
Possible moderation and contract labor further recovery.
Covid.
This may drive increased volume levels, and we're going to continue to allocate capital in our hospital.
More complex service offerings.
Cost efficiencies, we've demonstrated a good job over the past several years executing on our cost actions there there's more opportunities to transition additional roles to R. R.
Center in Manila, and we have the new hospital in Fort Mill that just came online and we continue to expect that hospital. It's in a great market and we expect that to continue.
Two.
Evolve and grow from its initial start and drive incremental EBITDA next year as well as our Saint Vincent Hospital.
Post.
The strike in the hospital is is the performance has been improving throughout the year and we expect that to continue.
Into next year and as we also mentioned there is.
Anticipated additional synergies related to the ICD transactions that will continue to grow as we move through next year as well in the <unk>.
Other thing is the M&A activity.
USPI will execute on the pipeline is robust I'm sure, we'll get into some questions on that with Brent and <unk>.
But we we feel very good about the pipeline.
And we feel very good about the type of value that we can bring to the table.
And those type of transactions.
Okay.
Okay. Thanks.
Thank you next question is coming from Stephen Baxter from Wells Fargo. Your line is now live.
Yes, hi, Thank you I was hoping you could just expand a little on your expectations for USPI in Q4, and our normal seasonality is a pretty significant sequential increase can you just confirm that you feel like youre seeing and what you need to see exiting the quarter and in the early part of October at at <unk>.
Confidence in that and then broadly some of the capacity constraints you've talked about just confirm that you don't see that as a rate limiting factor to achieving that normal seasonality. Thank you.
Hey, Stephen this is Brad yes. So if you think about the midpoint of the range that assumes two 8% volume improvement in Q4 year to date, we're at two 5% and as you noted we do expect to see some.
Some <unk>.
Significant not significant but a nice surge in Q4 as we typically do.
We've also been kind of hovering around 100% of 2019 volumes all year. The two 8% implies a 101% of 2019 volume. So we feel good about being able to get to that being able to get to that in Q4 and to your point, we are starting to see the signs of some <unk>.
Improvement in case volumes as we entered into October heading out of the second half of October .
Yeah.
Thank you. Our next question is coming from Justin Lake from Wolfe Research. Your line is now live.
Thanks, Good morning, I, just wanted to talk about inflation and one of your peers brought about Brazil or the.
Significant.
Certainly going into 2023.
Anything you can point out to us in terms of what Youre seeing for instance on supply inflation. Some of the other factors Besides labor and bad on Labor you talked about contract labor being a benefit for the year can you talk a little bit about what your typical salary wage and benefit per adjusted admission trends are within your normal kind of algorithms.
Yes, I think one of your peers are 2% to 3%.
Typically.
And do you think contract labor I know thats going to be a tailwind next year do you think a big enough.
The tailwind to offset labor inflation being a little more muted on the on the permanent side.
Basically asking are you do you think labor is going to be a tailwind overall when you layer in that contract levels.
Thanks.
Yes, Justin it's Tom So let me, let me start with those in.
In sequence.
The first part of the question related to inflation in supplies infrastructure et cetera.
Look we have we have face those but we have also since the beginning of the pandemic organized ourselves to consolidate vendors and at the same time find offsets in our purchase services and.
Improvements in our supply contracting efforts on especially on many of the kind of physician preference items that are consistent.
With our own.
High acuity based strategy and obviously on commodities, we maintain a high degree of compliance with respect to purchasing through our GPO, which gives us additional benefits and thats across.
The hospitals, the physician business and USPI.
That standpoint, so there's no question about the fact that there is an inflationary effect in in those areas, but we've been working actively to mitigate that impact.
Over time.
Second the second part of your question relates to contract labor in base wages and.
Ill focus I think you were focused.
Primarily on the hospital segment.
So theres a few things there one.
Our nurse hiring that I mentioned is very important because it does over time change with the relationships that we've built in our communities with the nursing schools change the mix of nurses and the overall wage mix of nurses as we bring new grads into the environment and that's just not for nursing it's for all.
<unk> all frontline frontline staff the second the second thing from that standpoint is that.
While it is not complete.
Our approach to making.
Wage adjustments whether through our highly predictable at this point.
Union contracts or in our other markets has largely been factored in.
To our approach in 2022 going into 2023, so we're not anticipating a large number of much more significant base wage adjustments in our workforce outside of the norm and so I would be very comfortable and consistent with the kind of <unk>.
<unk> that you described look on contract labor.
This this is obviously.
An area, where it's highlighted in Q3, but our contract labor performance as a percentage of our <unk> has been significantly below.
What I think we have seen broadly in the industry and it has been because we've had a very deliberate strategy of being thoughtful about where the marginal revenue would overcome the cost structure in our hospital facilities in order to manage our margins appropriately through this kind of staffing Craig.
<unk> and we're going to continue to do that.
We have made assumptions going into Q4 that we will moderate.
On contract Labor. The fact is that contract labor rates have not come down this year. The way we anticipated back in our February guide, that's there's no way to escape that in terms of the labor rates, but we've tried to offset it as I indicated with a strong productivity management and length of stay management.
In order to mitigate our use of contract labor and we feel very good about our disciplined use of contract labor. Despite the increase in Q3.
And the ability to get control of that going forward.
Thank you. Our next question is coming from Whit Mayo from SBB Securities. Your line is now live.
Yeah.
Hey, Thanks, good morning.
Maybe on the USPI for a second I think you guys called out a 20% spike in the cancellation rate can you just remind us what a normal cancellation rate is within the quarter and maybe what the impact was specifically on the case growth from those cancellations and <unk>.
Also how much has been rescheduled and maybe just refresh us on the physician recruiting efforts and how youre tracking this year. Thanks.
Hey, with the spread yes to answer your first question. So normal normal cancellation rate for US is around 15, 15% 15 plus percent so to see a cancellation rate of 20%, that's a pretty significant increase and as you know.
The cancellation rates during COVID-19 have been anywhere from 16% to 20%. So actually 20%. When you go back to 2020, so to see it at that level was pretty.
Significant for us Fortunately.
It came down sequentially month over month.
As it relates to your question I'd say I think you are kind of getting too.
Where we've seen volumes headed.
Going kind of going into the future.
And also what impacted volumes in Q3 so.
If you think about.
Q3, 2021 on a same store basis, we saw volume increase of six 8%. So it was a pretty it's a pretty difficult comp.
As Tom alluded to we did feel the lingering effects of COVID-19 on staffing and physician availability and the cancellation rates that you referred to as well as obviously the impact of.
On our <unk> from from Hurricane yen and just just from Hurricane Ian we saw probably anywhere from 2003 hundred to 2500 cases that were lost.
In September Fortunately, we've rescheduled large majority of those cases in Q4.
Also getting to your point around physicians I think in our conversations with physicians the story for their offices is similar to ours.
It relates to.
Practice volumes being right around pre COVID-19 levels, and the expectation or the exception I would say to that is ortho.
Ortho and Gi.
Specialties that are slightly outpacing 2019 volume levels, but I would say most are optimistic most of the physicians are optimistic that once we get past.
The trailing impacts of Covid, then we will see more of a recovery.
And their offices, which will obviously translate into surgical volume over time.
All said, we do believe that we will get back to normal growth rates as the physician offices recover.
And as we continue to build out to your point, our professional sales force.
Which we have been doing and that professional sales force continued to collaborate.
Collaborate excuse me with our operators.
To develop and execute very center specific.
Sales plans and of course, as we implement new higher acuity service lines across the portfolio as Tom mentioned Thats.
A significant part of our growth story.
As it relates to improving not only our acuity, but also our volume trends. So we've implemented 70, new service lines. So far 70, plus new service line. So far this year and we have another 150.
And the pipeline that we will implement in Q4 and in 2023.
Thank you. Our next question is coming from <unk> Chickering from Deutsche Bank. Your line is now live.
Hey, good morning, guys. Thanks for taking my questions I know, you're not giving 2023 guidance, but there's a lot of noise, obviously in <unk> and <unk> within USPI segment. So as we think about 2023 has anything changed with USPI growth algorithms. You said that the pipeline remains strong and believe that Afg's starts are growing 46%.
Range. So if history is a guide this would be sort of 10% M&A plus 5% organic you are looking at our guidance that would imply a 980 of EBITDA less NCI is.
Is that how we should we still be thinking about it or is there any change there. Thanks so much.
Hey, Peter it's in good morning.
As we mentioned.
We still believe strongly in our ability to drive organic growth.
As well as the ability to execute on M&A whether.
It's straight M&A or de Novo development in terms of specifically for next year.
As I mentioned, it's premature for us to put numbers out there at this point.
But we have not changed at all our belief.
And the growth opportunities for USPI, it's a great business, great margins, great cash flow generation.
And we believe we have competitive advantages when we engage in M&A. When there is a competitive process based on the value that we can bring to the table. So we do believe the pipeline is robust.
And.
So it gives us a lot of optimism as we think about 2023 and beyond certainly the.
The results this year.
For USPI.
Necessarily at the level that we assumed at the beginning of the year and through the second quarter.
Covid certainly has had.
More significant impact.
USPI doing than we anticipated and some went through.
The other various points.
In terms of the reforms, but.
The results are still strong they are just not up to the level that we expected.
Okay, and just a follow up on the on the organic side of things Paul mentioned, the scripts or 46% of growth.
At this point Youre still feel so comfortable that thats, the right growth growth rate for 2003.
As I mentioned when we get.
Our February call Peter will provide specific volume assumptions.
Next year for USPI.
Great. Thanks, so much.
Thank you next question is coming from a J rice from credit Suisse. Your line is now live.
Hi, everybody.
Just to drill down a little further on the Q3 results.
I think in the prepared remarks.
Saying that.
July was where you saw a lot of this hit on the quarantine clinicians I guess.
Drove you to to take on these travelers.
<unk>.
Temp staff.
A lot of those assignments are 12 weeks, so I'm wondering.
By the end of the quarter did you have excess travel nurse supply that you're relative need and does that just basically roll off and how much of a tailwind would that be for the fourth quarter and then also.
Related to this on USPI I know you're also calling.
Quarantine issue as the main issue I think last year with Delta.
Some procedures that were being traditionally done on inpatient got pushed to outpatient because people didn't want to get the surgery in a facility that was full with COVID-19 patients Im wondering.
Have you looked at how much you're flat year to year trend Enel and USPI was driven by the fact that maybe last year was somewhat elevated in the.
And this year is just more normal as inpatient seems to be showing some recovery on the surgery side, maybe just see if you can.
Comment on those.
Yes, Hey, Jed So let me take the hospital side first on the contract Labor question.
You are right that as we saw that effect through July .
Our staff in the hospital business.
We did we did end up procuring more contract labor to cover that and Youre right. About these are generally 12 week cycles. So we're kind of hitting the end of those cycles right now and that's why we were going through the process of a moderating what.
What we had procured from that standpoint, I mean, just to Dimensionalize. This.
That rate of our staff in particular in July being out because we keep a careful account of this.
Is three to four times, what we see when there is not.
Covid impacting the staff.
So for US it was material and.
And I am sure Theres variance state to state of what happens there, but it did it did cause us as I indicated to increase our procurement of contract staff in order to maintain the service lines that we prioritize being open and again I would reiterate we've been very disciplined about where we place contract labor. So the fact.
We increased our utilization of contract labor you can rest assured was based upon our belief that we wanted the volume that we were seeing as we go into Q4, just like in the USPI business. The hospital business also has some degree of seasonality to.
<unk> it.
For a variety of reasons and so we.
We would expect our use of contract labor to be better matched perhaps.
With the type of demand that we would see there.
On the USPI side, and I'll pass to Owen here in a second.
With respect to the outpatient side of things.
But especially in the surgical hospitals, but I think there is something to that which is.
In the past inpatients in hospitals have driven further business into the ambulatory setting, including at USPI Hospital inpatient Covid environment has not really been I mean, it's certainly down from what it was Q3 last year in terms of hospital inpatients, it's more just that.
<unk>.
You know the omicron.
Wave kind of hit people on an outpatient basis didn't necessarily make as many people sick on an inpatient basis. So there really wasn't crowding of our hospitals.
That pushed things into the ASC or outpatient surgery segment from that standpoint, I don't know if you want to comment on outpatient surgery USPI.
Whereas you look at the Delta variant last year, we absolutely saw some pockets, where we picked up some additional cases from some of this from some of the acute care hospitals.
And there's places that we did see that we did also see some disruption in our normal business. So on an overall basis. There was probably a slight positive given the acuity we would get from those cases, but overall from a volume perspective, it was generally neutral.
Okay, alright, thanks, a lot.
Thank you next question is coming from Ann Hynes from Mizuho Securities. Your line is ally.
Hi, Good morning, I just have a follow up question on a question that you answered earlier on Labor I think you said you have a large number of our union contracts that have been factored into labor going into 2023.
Post that.
<unk> that youre comfortable with 202% wage increases for that year is that I guess first is that what you said and if it is I guess, what gives you that level of comfort because we're just hearing higher.
<unk> 23, and also could you just.
Just talk about labor per segment like what do you expect increases per segment and then how much of your work for us as Union I It would be very helpful as well. Thanks.
Hey, it's Dan.
Let me.
Just a couple of those points and then.
Some can weigh in as well in terms of the.
The point about the union contracts, obviously with the Union contract.
We have the wages in place next year.
And so we have obviously real good visibility into that.
In terms of.
The non union full time employees.
As we've mentioned over the past several quarters, we have been providing wage increases.
<unk>.
Have been at levels that are higher than the typical level that.
We typically see.
And the 2% to 3% is historically.
Pretty good marker in terms of year over year increase in compensation for the employees.
This year, we've had to increase that in certain cases.
Obviously remain competitive.
The.
<unk> tailwind could come from us.
And by reducing contract labor, which is certainly much much more expensive than full time.
Employee costs.
Even if you are providing a wage increase.
The 2% to 3%.
Area, there is significant savings.
By converting that contract labor.
Two.
Full time employment and Thats what.
The teams have been very focused on doing.
From a recruiting perspective and retention perspective, so that's where when we think about possible tailwind for next year further conversion of contract labor to full time employment would drive.
Noteworthy cost savings year over year.
And in terms of your question about the various segments.
Certainly.
You have seen we will put out the numbers in terms of what contract labor has meant.
Across the portfolio, but from USPI.
Perspective contract labor, although the rates there and utilization has increased.
USPI the amount of contract labor in the USPI business is really insignificant compared to the acute care hospital business, it's less than 10%.
The spend that we see.
<unk> care hospitals.
And the only thing I would add to that is the point I was making.
Earlier was that.
Some of the base wage increases, which may have been above the 2% to 3% level in order to stabilize the workforce and begin to set a platform to reduce contract labor in the future.
Are more built into the run rate as we head into Q4 then.
Our new items for the run rate that will develop some time.
Into 2023.
And.
Point being that we've been thoughtful this year, especially in the last couple of quarters about those type of adjustments where necessary as part of our overall workforce strategy.
And then and you asked a question about unionized labor at least on the USPI side of things we have one one facility.
Now Union.
Unionized labor.
Okay. Thanks.
Thank you next question is coming from Jason <unk> from Citi. Your line is now live.
Great. Thanks, Good morning, just up just around capital deployment priorities, you've laid those out what job which is helpful.
You have that $250 million of M&A and de Novo annual target for USPI, but can you help on how youre thinking about the allocation of the remaining three buckets as a percent of the free cash flow in the near term and how that might change over the longer term, just any color or context around those capital deployment priority or as a percentage of free cash.
<unk> be helpful.
Hey, Jason Stan Let me, let me address that.
Yeah.
Looking at things right now.
Don't believe there will be any.
A material change in our capital deployment priorities other than the fact that we are accelerating.
Deploying capital for share repurchases.
To know based on where the equity is trading we had talked previously that we had intended.
The intended depending on market conditions to evaluate allocating capital for share repurchases beginning in 2023, but given where our equity is trading we've accelerated that.
The board authorized a $1 billion share repurchase program. So again it'll be a balanced approach certainly.
Given where the equity is trading we will begin executing on our share repurchase program.
As I mentioned, the M&A pipeline for USPI is very strong and will continue to allocate capital there and as well as two.
Our hospital business to continue to enhance its more complex service offerings and as well as.
Retiring debt when it makes sense and there's obviously several tranches out there.
We will target.
For debt retirement as well.
Got it okay. Thanks.
Thank you next question is coming from Kevin Fischbeck from Bank of America. Your line is now live.
Great. Thanks, I guess wanted to ask about labor costs too.
Two different ways I guess the first one is you mentioned that the contract labor has.
Not improve the way that you had expected it to improve as the year goes on are you attributing a 100% of that Delta.
Delta two just how Covid has played out or is there something structural.
It seems to me like everybody is struggling more than they expected.
Round labor this year, which I guess, causing the question how much improvement we should assume into next year and then.
Secondarily around this contract labor improvement.
It seems like that's probably part of the reason why you think volumes might be able to accelerate next year. If we don't get an improvement in the labor market do you believe that.
A headwind.
Or would stop that accelerated volume into next year. Thanks.
Yeah, Hey, it's just just real quickly I mean, I think on the first part of your question.
There are certainly direct and indirect impacts of the environment, we've been in because of the pandemic. There are obvious direct effects. When you have staff that are out and you're procuring more contract labor I mean, that's a very direct effect, but yes. The impact the indirect effect on the workforce, which is I think what you're really referring to as potentially more structural.
Is there as well right I mean, the workforce shortages that we face as an industry and certainly this year are not just due to individual.
Individual COVID-19 spikes in people on quarantine and that that probably more than anything else is the driver of the contract labor rates not coming down the way, we anticipated this year or and really we're assessing that very carefully market by market going into 2023, how we would think about.
That tier to the second part of your question.
If.
The labor market from a contract labor standpoint continues to be turbulent and 2023, we believe.
Our strategy.
Of being disciplined about contract labor utilization, and making data driven trade offs, and where we will open up capacity and where we wont for volume in order to manage and maximize the earnings is the right way to go that's proven to be the case for many quarters on end and just because it wasn't the case.
This.
In Q3, because we had an increase in contract labor is not a reason to question. The successful strategy for a long long period of time, and we will continue to manage it that tightly if necessary through whatever part of 2023. This is still an issue that we face at some point.
That contract labor environment will begin to normalize and mitigate because of new graduates and other things entering the workforce that we're obviously spending a lot of time competitively trying to recruit into our system for the exact reason described which is that we would like to have the ability to alere.
CVA at some of these structural challenges not just react to the short term COVID-19 spike issues.
Thank you next question is coming from Josh Raskin from that front of your line is now live.
Hi, Thanks, a question on the ASC side as well I was wondering if you give us a sense on sort of specific types of procedures that were impacted it sounds like it's more.
Overall facility and physician, yes, COVID-19 hit et cetera, not necessary, but I'd be curious if there was anything that stood out in terms of types of procedures.
There has been any change in competition.
In terms of are you seeing more surgery centers for example in Europe in your markets or a change in the competitors and then sort of lastly, any difference in the centers that have been acquired builds to novo for the last year or so versus ones that were more mature.
Yeah, Hey, Josh.
First related to competition.
The competition has been strong.
For the last several years it continues to be strong.
But as you know we feel like we have a very good value proposition and continue to do very well as it relates to.
Competing with other surgical facility companies not only from an M&A perspective, but.
From an organic growth perspective.
As it relates to specific specialties.
Would say that.
Some of the some of the lower acuity specialties like E&P in ophthalmology.
In Gi that were slower to recover.
As a result of a.
As a result of Covid some of those have started to come back specifically E&P as come back pretty strong.
And the last couple of quarters Gi has come back strong ophthalmology has.
But still as we alluded to earlier there are still only getting back to <unk>.
2019 volume level. So the only the only specialties that have really recovered beyond.
2019 volume levels at this point and I alluded to this earlier, our Gi and <unk>.
In ortho and ortho is only slightly over 2019 volume levels. The one.
Thats.
That's significantly over an insignificant is relative term is Gi, which is about 3% over two.
2019 volume levels, the others again are pretty pretty consistent with 2019, thus far.
Okay.
Thank you. Our final question today is coming from Jamie Paris from Goldman Sachs. Your line is now live.
Hey, Good morning, guys. I was wondering if you could talk a little bit about what youre seeing on the reimbursement side first can you give us your calculation of what you expect Medicare to be up for you specifically next year.
Then on the managed care side, what are you seeing from from your partners. There are you getting incremental price and if so can you just kind of quantify that and overall between those two pieces in Medicaid what do you what do you expect pricing to be up next year.
Hey, Jamie It's Dan let me hit the <unk>.
In terms of Medicare pricing.
<unk>.
Inpatient fee for service side.
The rate increase that went into effect October one.
There's a little less than 4%.
About four 4% based on the final rule in terms of on the outpatient side after you take into consideration.
The $3 40 B.
Adjustment it's.
Medical Medicare outpatient rate update will be pretty pretty close to flat from the commercial health plan side.
What we're seeing.
We like where we're at from a contracting perspective.
We anticipate in terms of moving through next year and beyond as rate increases.
And with some acuity as well.
345% type of territory.
In aggregate some some negotiations a little better than thats, some negotiations or little bit lower than that but in aggregate, that's where we see commercial pricing.
Thank you we've reached end of our question and answer session and ladies and gentlemen that does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.