Q3 2024 Tenet Healthcare Corp Earnings Call
Before we discuss our third quarter results I'd like to take a moment to acknowledge and pay respect to those impacted by the hurricanes in our company and our peers in those markets and in our partners and suppliers who operate in those regions. The devastation is significant but the energy to recover and rebuild shows the best of the American Spirit rally.
<unk> together in a crisis.
Moving on to our results.
Once again, our performance in the third quarter exceeded our expectations and represents a continuation of consistently strong operating results driven by volume growth and disciplined operations in the third quarter, We reported net operating revenues of $5 1 billion <unk>.
Consolidated adjusted EBITDA was $978 million representing growth of 15% over third quarter 2023, and an adjusted EBITDA margin of 19, 1%.
Uspi's results were once again strong with $439 million and adjusted EBITDA, which represents 19% growth over third quarter 2003.
Same facility revenues grew eight 7% and adjusted EBIT EBITDA margins remain robust orthopedic.
Orthopedic volumes are strong and total joint replacements and the afcs were up 19% over prior year, coupled with the ongoing growth in urology and Gi procedures.
We did opened six new de novo in the quarter, including a new partnership with synergy orthopedics, establishing the largest dedicated muscular skeletal outpatient surgery center in San Diego, California.
De Novo development activity remains an important part of Uspi's growth story, and we have nearly 20 centers currently in syndication stages or under construction.
Turning to our hospital segment adjusted EBITDA was $539 million in the third quarter, representing 11% growth over the third quarter 2023, and importantly, strong sequential growth the strong utilization environment remains.
Same store hospital admissions up five 2% as we continue to open up capacity in a cost efficient way.
Third quarter 2024, our revenue per adjusted admission was up three 3% over prior year, reflecting continued strength in acuity and mix.
We've proven our ability to succeed in tough operating environment, leading the way in 2022, and 2023 and cost management in the aftermath of Covid and now in 2024 with robust demand, where our efficient operating chassis has allowed us to deliver stronger results than expected throughout the year.
As such we are continuing to make significant investments in expanding our network to support growth in our markets over the coming years in July we opened our newest hospital in west over Hills, a rapidly growing area near San Antonio. The hospital is focused on procedural services with state of the art operating rooms, and Cath labs, a large emergency.
<unk> and an entire floor devoted to women's services. Additionally.
Additionally, construction of our next hospital in Port St. Lucie, Florida continues with an opening planned for 2025.
Turning to our full year 2024 guidance, we are once again, raising our full year 2024 guidance to a range of $3 $9 billion to $4 billion based on the fundamental organic outperformance in both of our business units. This represents an increase of $50 million at the midpoint of the range over our prior guidance increased and announced.
At the second quarter call.
We've now raised our adjusted EBITDA guidance by nearly $600 million from our initial expectations. This year clearly we are pleased with our strong performance throughout the year.
Before I turn the call over to Sun I'd like to spend a little bit of time discussing our portfolio transformation.
We completed the sale of our Alabama hospitals on September 30th.
All of the sales that we have executed on have been at high multiples to reflect the operational improvements that we have made to each of these facilities over the last seven years several years.
More importantly, as a result of these sales our current hospital portfolio has an enhanced return profile more attractive geographies for us and our business model higher expected returns on invested capital that should result.
Conifer is retained and in many cases expanded its relationship with the acquirers of the hospitals demonstrating the value we deliver to providers in revenue cycle management.
While our hospitals are well positioned to benefit from a favorable operating environment. We have built a leadership team and a culture of operating discipline to be able to execute and deliver results during more challenging times as well.
The actions, we have taken have enabled us to significantly improve our leverage ratio and we are committed to deleverage balance sheet going forward.
After accounting for the tax payments that are still due on asset sales our leverage ratio on an EBITDA minus NCI basis is around three.
We are very pleased with the deleveraging accomplished to date.
Yeah.
Looking forward, we are well positioned to create value for shareholders through stronger free cash flow generation. Our transformed portfolio provides provides us with a high degree of capital and financial flexibility.
We will continue to deploy capital to.
Enhance growth in our industry, leading ambulatory surgical business through M&A and de Novo development.
Increased capital spending to fuel organic growth.
And return excess capital to shareholders via share repurchase given that we believe are equity continues to trade at attractive multiples.
Relative to the market.
The combination of an established management team, a focused strategy and consistent operations and disciplined capital deployment.
<unk> us to drive significant value for physicians patients and in turn our shareholders.
Sun: And with that Sun will now provide a more detailed view of our financial results.
Sun: Thank you Tom and good morning, everyone.
Sun: Our financial results in the third quarter continued to be strong with adjusted EBITDA coming in well above our guidance range and.
Speaker Change: In the third quarter, we generated total net operating revenues of $5 1 billion.
And consolidated adjusted EBITDA of 978, Million% to 15% increase over third quarter of 2023.
Speaker Change: Our third quarter adjusted EBITDA margin of 19, 1% is up 220 basis points from third quarter of 'twenty three.
Speaker Change: These results were driven by strong same store revenue growth favorable payer mix and effective cost controls.
Speaker Change: I would now like to highlight some key items for each of our segments in the third quarter, beginning with USPI, which again delivered strong operating results.
Speaker Change: Uspi's adjusted EBITDA grew 19% over last year with adjusted EBITDA margin at 38, 5%.
Speaker Change: USPI delivered eight 7% increase in same facility system wide revenues over last year with same facility system wide net revenue per case up seven 6% driven by high levels of acuity and favorable payer mix.
Speaker Change: Same facility system wide cases grew 1%.
Speaker Change: Turning to our hospital segment adjusted.
Speaker Change: Adjusted EBITDA grew 11% with margins up 180 basis points over last year at 13, 5%, excluding the divested hospitals adjusted EBITDA in our hospital segment grew 24% of our third quarter of 2003.
Speaker Change: Same hospital inpatient admissions increased five 2% and revenue per adjusted admission grew three 3% again, demonstrating favorable payer mix and continued high acuity levels.
Speaker Change: Our consolidated salary wages and benefits were 43, 3% of net revenues in the quarter and our consolidated contract labor expense was two 2% of SWM be both substantially lower than the 45, 2% and three 1% respectively that we reported in third quarter of 2003.
Next we will discuss our cash flow balance sheet and capital structure we.
Speaker Change: We generated $829 million of free cash flow in the third quarter and as of September 30, We had $4 1 billion of cash on hand with no borrowings outstanding under our $1 5 billion line of credit facility.
Speaker Change: We repurchased 795000 shares of our stock for $124 million during the quarter and year to date, we have repurchased five 6 million shares for $672 million.
Speaker Change: As Tom mentioned, our leverage ratio as of September 30 was two two times EBITDA were two eight times EBITDA less NCI a substantial improvement from year end, reflecting the proceeds that we received from our hospital divestitures as well as our outstanding operational performance.
Speaker Change: Let me now turn to our outlook for 2024.
Speaker Change: For 24, we now expect consolidated net operating revenues in the range of $26 billion to $28 billion.
Speaker Change: $100 million lower at the midpoint versus our prior expectations due primarily to the sale of the Alabama hospitals.
Speaker Change: We are raising our 2024, adjusted EBITDA outlook range by $50 million to $3 $9 billion to $4.01 billion.
Speaker Change: Reflecting the strong fundamental performance of our businesses, partially offset by the impact of the sale of our Alabama hospitals.
Speaker Change: At the midpoint of our range. We now expect our full year 2004, adjusted EBITDA to grow 12% over 23 or 20% when taking into account the impact of reduced EBITDA from divested facilities.
Speaker Change: Yeah.
Speaker Change: At USPI, we have narrowed the range of our expected 24, our adjusted EBITDA to $1 76 to 180 billion.
Speaker Change: And in the hospital segment, we are raising our 2000 <unk> adjusted EBITDA outlook range by $50 million at the midpoint to $2 one four to $2 two zero billion.
Speaker Change: Turning to cash flows we now expect free cash flows in the range of 975 million to one to two 5 billion.
Speaker Change: This range includes the payment of about $875 million and net taxes related to our completed divestitures, including the recent Alabama transaction.
Speaker Change: Excluding these tax payments. This represents one $9 $75 billion of free cash flow at the midpoint of our 24 outlook or one $2 billion to $5 billion of free cash flow less NCI, an increase of $50 million over prior expectations.
Speaker Change: As we've said before the continued improvement in our cash flow performance has helped us deleverage our balance sheet, while making disciplined investments in our business and delivering value for our shareholders.
Speaker Change: Now I'd like to spend a minute discussing 25.
We are still conducting our business planning processes and evaluating key assumptions and therefore, it's premature at this point for us to provide specifics on 25 guidance.
Speaker Change: We do want to give you some context for our current thinking about next year.
Speaker Change: First of all there are two normalizing items that I would call out we.
We have reported $113 million of adjusted EBITDA in 2024 from facilities that we have divested and that will not recur in 'twenty five.
Speaker Change: In addition, we have reported $74 million of out of period favorable adjustments from supplemental Medicaid programs in Michigan and Texas in 2024.
Speaker Change: More than offsetting these two items at a consolidated level.
Speaker Change: We expect continued growth in same store volumes in effective pricing some potential additional revenue from Medicaid supplemental programs and continued strong operational efficiencies and disciplined cost controls.
Speaker Change: We also anticipate further contributions from recent investments and partnerships in the hospital segment as well as from an M&A and de Novo development within USPI.
Speaker Change: We look forward to completing the planning process and sharing guidance with you for 25% in February of our earnings call.
Speaker Change: And finally as a reminder, our capital deployment priorities have not changed first we will continue to prioritize capital investments to grow USPI through M&A.
Speaker Change: We expect to invest in key hospital growth opportunities, including our focus on higher acuity service offerings.
Speaker Change: Third we will evaluate opportunities to retire and refinance debt.
Speaker Change: And finally, we'll have a balanced approach to share repurchases, depending on market conditions and other investment opportunities, we consider our equity to be very attractive at the multiples at which a trades and see this as an opportunity to drive value for shareholders with our attractive free cash flow profile.
Speaker Change: In conclusion, we're extraordinarily pleased with our strong performance in 'twenty four and the significant progress we have made with our portfolio transformation.
Speaker Change: We are confident in our ability to deliver on our increased outlook for 2024, as we remain focused on providing patient centered care in the communities we serve.
Speaker Change: And with that we're ready to begin the Q&A operator.
Speaker Change: Thank you.
Speaker Change: This time, we'll be conducting a question and answer session.
Speaker Change: To ask a question. Please press star one on your telephone keypad.
Speaker Change: As a reminder, we ask that you please limit to one question.
Speaker Change: Hey, confirmation tailwind of Kate Your line is in the question queue. 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, one moment, please while we poll for questions.
Speaker Change: Our first question comes from Josh Raskin with Nephron Research. Please proceed with your question.
Josh Raskin: Hi, Thanks, just a couple of quick clarifications I think the ASC segment guidance for USPI and implies a drop sequentially in EBITDA that would obviously be seasonally very unusual. So I'm just curious if there's anything to call out there and I think cash flow. If you could just tell us what the total total tax payments and <unk> are going to be.
Josh Raskin: And then just my real question would be could you just talk about changes or any changes that you're potentially seeing from managed care or behavior.
Okay.
Speaker Change: There's three questions there so let's let's handle them.
Speaker Change: Why don't we.
Speaker Change: Start with the I don't think Thats accurate on the USPI point, so, let's just try to clarify that first.
Speaker Change: And the tax payments and I'll talk about managed care.
Speaker Change: Yes, Josh this is sun for USPI EBITDA.
Speaker Change: We reported $4 39 in Q3, and our guidance currently implies $500 million at the midpoint for USPI in Q4.
Speaker Change: What we see each year of Q4 upswing.
Josh Raskin: In terms of tax payments Im sorry, I was looking at growth rates I screwed up the question sorry about that.
Josh Raskin: Okay. Thank you.
On tax.
Josh Raskin: As we put in our investor presentation.
Josh Raskin: $875 million of total deal payments for the year of which we expect to pay about $700 million.
Josh Raskin: In Q4.
Josh Raskin: In addition, with our kind of standard other tax payments.
Josh Raskin: Josh on the managed care side.
Speaker Change: Keep the comments limited to what dialogue has been around.
Speaker Change: Two topics one is just.
Speaker Change: The impact of the two midnight rule and particularly in the Medicare advantage space and secondly, I think there's been discussions about the impact of.
Speaker Change: Managed care denials.
Speaker Change: When it comes to two midnight I think.
Speaker Change: The process of adopting fully adopting the guidance on the two midnight rule.
Speaker Change: In the Medicare advantage market is is what I would describe is still underway I don't think its been fully adopted.
Speaker Change: And.
Speaker Change: <unk>.
Speaker Change: At least for us.
Speaker Change: We have seen probably somewhere between 50, and 100 basis points contribution to our overall admissions growth, but certainly short of and with more work.
Speaker Change: Then there should be if the two midnight rule is fully adopted and I guess at some level that goes back to this issue of disputes in denials and other things I mean again I can only speak about us where.
Speaker Change: We're very disciplined and clean and compliant in the way that we document and code in and I do think that.
Speaker Change: If you look at the last few years the amount of activity that we've seen in the industry increasing administrative costs on.
Speaker Change: On both sides for payers and providers related to disputes and denials has gone up.
Speaker Change: In somewhat of an extraordinary way and it's it's certainly frustrating if youre sitting on this side.
Speaker Change: Of of of that activity and at the same time.
Speaker Change: We have made the right investments.
Speaker Change: And.
Speaker Change: Have the right capabilities and processes inside of conifer for us and our clients to have mitigated that impact relative to what's been happening in the industry, but.
Speaker Change: At some point.
Speaker Change: There has to be a solution to this because it's it's really just wasted administrative time.
Speaker Change: And cost.
Speaker Change: And Josh This is John again, sorry, I think you also asked about USPI revenues sequentially.
Speaker Change: So Q3 was $11 39 for USPS revenues in our guidance implies about $1 25 in.
Speaker Change: In Q4, so sequentially flat.
Speaker Change: I think two things one is we didn't change our USPI guidance. So we opted to.
We both the EBITDA and revenues.
Speaker Change: As they were and then second we also see as you know a pretty strong EBITDA margin increase in Q4.
Speaker Change: Again, historically and we expect we expect the same so those are kind of the two pieces for the revenue and EBITDA.
Speaker Change: And look I know.
We have been more fortunate in our ability to plan and recover.
Speaker Change: Given given what happened from the Hurricane standpoint.
Speaker Change: We had 148 facilities impacted and at some point shutdown only one of them at this point is still shut down and.
So what we have done we are confident that we will work on bringing back that business in the fourth quarter were.
Speaker Change: Confident that the margins will improve and we've we've committed to our guidance for the year that we raised last quarter for USPI and we're going to keep it for the fourth quarter and therefore, the full year from what we raised in yes, it might make the numbers look slight.
Speaker Change: Slightly a little wonky, there, but realize that we did have impact but at the same time. We've made a decision that we think our operations will recover to the point, where we'll be able to meet that guidance.
Perfect. Thanks.
Speaker Change: Our next question comes from Ben Hendrix with RBC capital markets. Please proceed with your question.
Ben Hendrix: Great. Thank you very much I was wondering if you could provide a little bit more detail on your 2025 comment specifically around growth in SaaS volumes.
Ben Hendrix: Next year is that.
Ben Hendrix: <unk> to which you see those continuing to kind of outpace historical trends is there any moderation.
Ben Hendrix: Assumed in there and just your general thoughts on that momentum. Thank you.
Speaker Change: Yes. Thank you. Good good question for 25, we continue to see a strong demand environment.
As we've talked about before we do believe that the demand recovery, especially in the hospital segment.
Speaker Change: Around the country.
Speaker Change: <unk> continues.
Speaker Change: As as kind of the replacement of the early mortality that occurred from Covid.
Speaker Change: In that demand environment than we do.
Speaker Change: Don't know when thats going to slow down.
Speaker Change: To a more normal range, but currently we still see that robust demand environment and at the same time, we've spent the year working on cost efficiently expanding our capacity in order to accommodate that volume so that we're not doing it with expensive.
Speaker Change: With expensive contract labor, which really is a testament to our work in <unk>.
Speaker Change: <unk> recruiting.
Speaker Change: That we have done this year through many of the terrific relationships formed with with schools around the country.
Speaker Change: And so I don't I.
Speaker Change: Can't sit here today, and say that we're forecasting some kind of a decline as we look forward I mean, as we think about our operations.
Speaker Change: Moving from the fourth quarter to the first quarter, we're not thinking about them differently at this point.
Speaker Change: Thanks.
Speaker Change: Yeah.
Speaker Change: Our next question comes from AJ Rice with UBS. Please proceed with your question.
Hi, everybody. Thanks, maybe.
AJ Rice: Yes, Josh this approach one clarification and then one question clarification being around the 1% USPI same facility volume growth. That's a step up from the first half, but you sort of alluded to it maybe there was a little bit of impact from Hurricanes in there just wondering if it was and I know long term you have.
Transition youre, making towards higher acuity.
AJ Rice: Seizures that is helping on the revenue per case hitting a little on the volume side are you still in the midst of that and what's the path to get back to 2% to 3%.
Speaker Change: I just wanted to ask on your capital deployment at thanks for.
Speaker Change: Laying out the priorities there, but obviously you're at a point, where you've got strong free cash flow now your debt's down to a pretty low level. So flip around the discussion away from paying down more debt, let's say is there any opportunity to.
Speaker Change: Accelerate the pace of development.
Speaker Change: Development in USPI to consider accelerating the buyback pace or even consider possibly a dividend or a larger deal out there.
AJ Rice: Yeah, Thanks, a J.
Speaker Change: Just just in terms of the the clarification.
Speaker Change: Case in point.
Speaker Change: As we said at the beginning of the year given the extraordinary comps from 2023, we thought we would move into positive volume territory later in the year and Thats kind of the pattern that you've seen right from Q1 Q2 Q3, we'll see what happens with Q4.
Speaker Change: Given the point that I made in the prior prior question.
Speaker Change: Related to the.
Speaker Change: The hurricane impact and yes, we continue to focus on growing higher acuity, which drives net revenue per case.
Speaker Change: It also drives extraordinary value.
Speaker Change: In the system from a overall lowering the cost of care standpoint, and and we continue to look for opportunities.
Speaker Change: Where those transitions can happen in an orderly fashion.
To migrate certain lower acuity higher volume type of activities.
Speaker Change: Out of the ASC is I think that will continue for the next couple of years.
Speaker Change: As we had said from the beginning it was a multiyear.
Speaker Change: Land to kind of move move some of those things out.
Speaker Change: You are right about capital deployment, obviously, we're very cognizant.
Speaker Change: Of the free cash flow generation looking forward one clarification, obviously, given the cash we have on our balance sheet.
Speaker Change: We've de Levered, but the debt paydown opportunities are still ahead of us, which sun and team will we'll structure in very much the right way. The second point I would make is despite our guidance. If you look at our history for the last five or six years, even before being in this position we've deployed more than our 200 to 250 quote unquote.
Speaker Change: <unk>.
Speaker Change: In capital in the USPI, given the larger deals that we've done including the.
Speaker Change: The deal that we did in the first quarter of this year for 45.
Speaker Change: <unk> plus what we've done otherwise and so we continue to believe accelerating spend at USPI is.
Speaker Change: The single most accretive thing to creating value.
Speaker Change: Within within the company and of course as I noted in my comments and Sunday and his.
Speaker Change: We have in fact.
Speaker Change: Accelerated relative to the trend over the last few years, given our deleveraging and cash positions our ability to return value back to shareholders. So we I think theyre very consistent your points are very consistent with our comments.
Speaker Change: With the helpful added nuance that we have the flexibility to be more proactive and aggressive on each one of those dimensions at this point looking forward.
Speaker Change: Okay. Thanks, a lot.
Speaker Change: Our next question comes from Stephen Baxter with Wells Fargo. Please proceed with your question.
Stephen Baxter: Yeah, Hi, Thanks, I wanted to ask another one about the fourth quarter I guess the hospital earnings cadence is a little different this year than we probably wouldnt expect it usually hospital EBITDA generally up in the fourth quarter versus the third quarter. It seems like you guys are guiding to a bit of a different cadence. So just wondering if you could help us bridge that and if there was anything unusual in the third quarter, either positive or negative in the hospital business.
Speaker Change: Would you be keeping in mind. Thank you.
Speaker Change: Your son can go through the numbers, but look first of all I think it's a very small change I mean, we have a divestiture in there.
The biggest thing and the second thing is just from a seasonality standpoint.
Speaker Change: Less pronounced in the hospitals, then you would see in the USPI ambulatory surgery business, but look there's a range there for a reason with upside to the range and let's look at the trajectory of this year.
Speaker Change: It is obviously our goal on what may be a bit conservative there.
Speaker Change: To continue to outperform but I don't know if you want to address specific numbers.
Speaker Change: Yes, a little bit I think Steve.
Stephen Baxter: Last year, if you kind of look at our quarterly progression. Our Q4 was up but if you recall, we had about a $52 million out of period Medicaid from California in tax that we called out.
Stephen Baxter: Once you kind of normalize for that it was fairly steady throughout the quarters. This year. If you look at our quarterly progression, we again had.
Stephen Baxter: Obviously, the HRA from Michigan outer period piece in Q1.
Stephen Baxter: We also called out a out of period 30 million from Texas in Q2, so there's a bit of.
Stephen Baxter: But that's from that.
But we think our Q4 guidance, it's pretty consistent with our overall commentary on.
Stephen Baxter: Good margins.
Stephen Baxter: Very well managed operating costs and a good demand environment.
Stephen Baxter: And then the last part of your question.
Stephen Baxter: In Q3, we did not have any out of period or kind of one time things that we were calling out.
Stephen Baxter: Thanks for your question.
Stephen Baxter: Yes.
Speaker Change: Our next question comes from Ann Hynes with Mizuho. Please proceed with your question.
Ann Hynes: Good morning. Thank you can you remind us.
Speaker Change: No just the supplemental payment amount.
Speaker Change: Q3, this year versus last year and heading into 2025, and you called out $187 million of even though you would have to come out of a cab.
Speaker Change: I believe you said, yes.
Speaker Change: Can you just confirm that you think you can offset that and I think you said, partly because of some of the Medicaid programs that start strong volume growth and maybe highlight what you think the incremental Medicaid payments in 2025.
Speaker Change: Hey, Ann.
Speaker Change: <unk>.
Speaker Change: Year to date in 'twenty, four we will be at about almost $900 million of Medicaid supplemental fees year to date.
The comparisons 23 becomes little bit trickier, because of all the divestitures and same store hospital metrics. So we can maybe work with you offline.
Speaker Change: On that and then yes in my commentary, we called out $113 million plus another $74 million from hospital divestitures and an out of period Medicaid payments that we believe currently at this stage that we can more than offset it.
Speaker Change: At a consolidated level through all the various things that we discussed.
Speaker Change: On your question about supplemental payments for next year I think it's too early to have specific comments, we're all aware of potential new programs in certain markets that we're all monitoring closely and we're awaiting final decisions.
Speaker Change: So, we'll obviously update as we find out more about that thanks for your question.
Speaker Change: Thanks.
Speaker Change: Our next question comes from Michael Hall with Baird. Please proceed with your question.
Michael Hall: Alright, thank you.
Speaker Change: As to your hospital average length of stay.
Michael Hall: I think it's the first time you can clear below five days number three years I was wondering if you could talk about what it will take to operational and get back to.
Michael Hall: Sort of pre Covid for level, you expect the timeline, how we should think about the earnings benefit of hospital segment growth and margin expansion and then in terms of the <unk>.
Michael Hall: In patient admissions.
Michael Hall: Wondering if you could sort of parse out the choices that shrink.
Michael Hall: The durability of that going forward. Thank you.
Speaker Change: Well on the length of stay piece I. Appreciate you are calling out the improvements that we've made this has been our initiatives and length of stay management, which started in.
Speaker Change: In our new fresh form in 2022, and 23 in order to manage contract labor excess contract labor costs have continued.
In this environment, because we think it's important and we're pleased with the results we're getting there, but I would make a comment similar to kind of my comments in the past about we don't spend a lot of time trying to chase the exact mix in volume that we had pre COVID-19 I mean same thing's true and length of stay right.
Speaker Change: As our acuity goes up.
Speaker Change: You would expect length of stay to increase a bit from pre COVID-19 acuity levels, and therefore lengths of stay that were a bit lower so.
Speaker Change: Our fundamental driver strategically in the business is to continue to build our high acuity business.
Speaker Change: Which we think is uniquely suited and sustainable to get to your second point from a demand standpoint durable.
Speaker Change: In terms of inpatient admissions and within the context of taking care of those patients appropriately we look to optimize length of stay relative to metrics that are out there like geometric mean and other things look on the broader comment I will just echo what I said earlier in the call, which is we're pleased with.
Speaker Change: The demand environment today, we feel positive about it looking forward.
Speaker Change: And even into 2025 as I said I don't we're not planning differently for the first quarter next year versus the last quarter of this year in terms of a robust demand environment.
Speaker Change: Environment, we're not we're not seeing signs or signals that we should stop looking to add capacity selectively in markets.
Speaker Change: Where that demand could be serviced on.
Speaker Change: And an appropriate cost structure et cetera, So I feel I feel pretty good about that the inpatient and hospital base demand strength is really it's.
Speaker Change: Both emergent and we're seeing.
Speaker Change: Nice success in some of our critical.
Speaker Change: Service lines cardiovascular and other <unk>.
Speaker Change: In particular specialty surgical areas so.
Speaker Change: The drivers are both emergent and elective business Payor mix, obviously has been very helpful. This year.
Speaker Change: Driven driven very much so by commercial and.
Speaker Change: Even more significantly by exchange strength and that goes to not only the market, but our contracting strategy, which has been very inclusive of being in a broad range of exchange networks.
Speaker Change: Our next question comes from Peter Chickering with Deutsche Bank. Please proceed with your question.
Peter Chickering: Hey, good morning, Michael commissions continued to outpace certain limitations. So how durable do you think that is or is it just has a medicaid but can you hear me.
Peter Chickering: And do you think thats.
Peter Chickering: Normalize next year as comps get easier and then.
Speaker Change: Congratulation on the Hurricanes.
Speaker Change: Talked about the facilities impacted can you quantify revenue impact from hurricanes in the fourth quarter. Thank you.
Speaker Change: Yes, Peter we're going to have to ask you to repeat the first question in a second but.
Speaker Change: I would just you know.
Speaker Change: Rather than spending time.
Speaker Change: <unk>.
Speaker Change: The details of the Hurricane impact like we had 148 centers affected we've got all but one running we're expecting fourth quarter higher acuity better mix, therefore, better margins and were maintaining our commitment to our guidance that we raised at the end of the second quarter. The first question got either the can.
Speaker Change: <unk> or something it was a little bit jumbo do you mind repeating that one more time for us.
Speaker Change: Yes, you bet apologies I'm in a hotel room medical conditions continued to outpace surgical admission this quarter.
Speaker Change: How durable is that or do you think as you get past Medicaid Redetermination do you think thats simple mission to accelerate next year as comps get easier after this year.
Speaker Change: Keith urban determination.
Speaker Change: Yes got it okay, well, yes, the medical admissions are reflective of two things obviously, one is just <unk>.
Speaker Change: Our continued commitment to emergency Department excellence in terms of services wait times, and receiving ability from that standpoint, including how we manage our house.
Speaker Change: To avoid our facilities ever being on diversion as a commitment to the community. We also have improved our ability to receive transfers from other hospitals for sick patients intensive care patients, which result in medical admissions oftentimes.
Speaker Change: From outlying hospitals.
And so we're not we're not surprised by that I mean this is again fundamentally these priorities are part of our strategy to continue to build and grow high acuity elective and emergent care, including in the medical cases, I would also point out that.
Speaker Change: Medical admissions not just surgical admissions have been pretty strong in the commercial environment, including for exchange participants and.
Speaker Change: Of course that raises the question of both the exchange growth impact, but also some utilization benefit that comes from exchange New exchange participants picking up more attractive coverage.
Speaker Change: Alright, great, Thanks, guys and nice quarter.
Speaker Change: Our next question comes from Justin Lake with Wolfe Research. Please proceed with your question.
Justin Lake: Thanks, Good morning.
Justin Lake: Just a quick follow up on 25, just want to make sure I heard correctly that with all the puts and takes in the headwinds.
Justin Lake: In terms of year over year.
Do you still expect to grow EBITDA year over year and then my real question is on leverage now that you've completed the deals I was wondering if you could share a target leverage ratio.
Justin Lake: To get to once you deploy the capital and if you aren't ready to share that now any thoughts on when you might be able to communicate that.
Speaker Change: Yes, Justin just two real quick answers the first is <unk>.
Speaker Change: Yes, I think SUNS comments that we expect to more than offset.
Speaker Change: Normalized numbers and we will go through a full description.
Speaker Change: Of the puts and takes obviously when we provide provide guidance, but at this stage our work indicates that we should more than offset that.
Speaker Change: We're not ready to I mean I think.
Speaker Change: My comments in the leverage.
Speaker Change: Section around we are pleased with where we are from a leverage standpoint is probably the most that we're going to say at this stage rather than having a formal guidance number.
Speaker Change: <unk>.
Speaker Change: But I think you can read into that that we're pleased.
Speaker Change: We're pleased with where we are.
Speaker Change: From that standpoint, and again are my commentary on debt Paydown.
<unk> stands which is working through the best ways to do that.
Speaker Change: This is something that we're actively in the midst of doing.
Speaker Change: Our next question comes from Joanna <unk> with Bank of America. Please proceed with your question.
Speaker Change: Hi, good morning, Thanks, so much for taking my questions.
Speaker Change: Follow up on capital deployment comments around that.
Speaker Change: The AUC acquisition any commentary there in terms of multiples or is there more competition not less.
Speaker Change: You know what.
Speaker Change: And they're paying for these days when it comes to multiples and are there still larger assets to be acquired them. It sounds like maybe there won't be there, but the other question I guess on the guidance for this year. The hospital revenue guidance was reduced by $100 million call. It the mid point.
Speaker Change: Synthesis that Alabama hospital shell, but also higher I guess same store inpatient admissions and I don't want when you have the hurricanes again, but just to make sure. It was there any impact from hurricanes in.
Speaker Change: Florida.
Speaker Change: Thank you.
Speaker Change: Alright, we will split up the questions here.
Speaker Change: <unk>.
Speaker Change: The ASC business capital deployment.
And really the question being about multiples.
Speaker Change: I would just step back in <unk>.
Speaker Change: Remind the audience, we're focused on our post synergy multiples.
Speaker Change: And because of our ability collectively in the organization to drive to better management more efficiency.
Speaker Change: Network inclusion supply chain efficiencies et cetera, we often are able to buy assets and reduce the effective multiple within the first couple of years.
Speaker Change: From that standpoint, and we're again, we're focused on what the effective multiple is.
At the end of that period, rather than what we're paying for it now.
Speaker Change: Actually speaking, we have not seen changes in the purchasing multiples.
Speaker Change: Of any note.
Speaker Change: Recently I know this question comes up from time to time, we have not seen any.
Speaker Change: Any type of changes and so we are consistently guiding to the same pre and post.
Speaker Change: Acquisition multiples that we have in.
Speaker Change: In the past and that's a good thing.
Speaker Change: In terms of the availability of attractive high quality assets.
Speaker Change: That are choosing to become part of the part of the USPI portfolio.
Speaker Change: Do you want to cover the hospital Hurricane Hey, Joanna on our hospital revenues.
Speaker Change: We still believe.
Speaker Change: Good good demand environment, good pricing environment high acuity, all those things that we've talked about our Q4 revenue guidance.
Speaker Change: The reduction is primarily driven by the divested hospitals and we don't we don't have any material impact and therefore any hurricanes.
Speaker Change: Yes.
Okay.
Speaker Change: Our next question is from Whit Mayo with Leerink partners. Please proceed with your question.
Speaker Change: Thanks.
Whit Mayo: I'm just curious with the size of the acute care portfolio, obviously much smaller than in the past how are you thinking about the.
Underlying infrastructure and costs that you need to support the business going forward and I had just one other quick one you didn't call out any of the ongoing.
Whit Mayo: Accretion to conifer from the hospital sales is offset in 25. So just was hoping you could address that thanks.
Speaker Change: Okay, one more time, the second part of that the offset.
Speaker Change: Well the accretion that you are getting to conifer from the hospital sales considering you don't eliminate the earnings in the reporting going forward.
Speaker Change: Got it on ongoing offset as we think about 25.
Speaker Change: Right, yes, Okay got it.
Speaker Change: So.
Speaker Change: Let's start with the size of the acute care portfolio.
Speaker Change: <unk>.
Speaker Change: Obviously, it's been reduced in.
Speaker Change: We.
Speaker Change: We would typically on an ongoing basis make adjustments obviously to the corporation from that perspective remember in the period. After divestitures, we tend to have transition service agreements that support the divested hospitals for a significant period of time and so the way.
Speaker Change: We think about those things is that we ought to support those transition to hospitals with our sale partners.
Speaker Change:
Speaker Change: Very thoroughly and no differently than if we were owning them and.
Speaker Change: Not the least of which because we also have some longer term conifer relationships with these folks so out of respect to what we do there we take that job very seriously.
Speaker Change: And again I would just reiterate that we are cognizant of the the opportunity. There overall from that standpoint, obviously there are costs that are simply direct allocations to these markets that go away as part of what we sold I mean, that's.
Speaker Change: Not surprising the chassis certain purchase services contracts and other things.
Speaker Change: <unk>.
Would come down naturally as you would expect with asset sales.
Speaker Change: On the offset Sun.
Speaker Change: Yes.
Whit Mayo: Hey, Whit on conifer, yes, as you noted and as Tom has discussed several times before.
Speaker Change: We.
Speaker Change: We have long term.
Speaker Change: Recycle relationships with a lot of our divested sites.
<unk> 25, we do expect those too.
Speaker Change: Be a benefit to us.
Speaker Change: In terms of actual specifics again, we'll have more information when we give our guidance 25, but that is part of our overall expectations.
Speaker Change: Okay. Thanks.
Speaker Change: Our next question is from Andrew Mok with Barclays. Please proceed with your question.
Hi, maybe if I could just follow up on that last question first I understand that in cases, where you expand the relationship of conifer there would be an incremental contribution to EBITDA, but if you do not expand.
Speaker Change: Our relationship are you, saying that theres still an incremental enterprise EBITDA contribution from those divestitures.
Yes, Andrew Youre.
Speaker Change: Youre right.
Speaker Change: It's the expanded opportunities that were mostly referencing in terms of about 25 factors.
Speaker Change: Yes, and the other thing I don't mind, calling out there is.
Speaker Change: We've talked about some of the expansion opportunities one of them in particular.
Speaker Change: We will be larger than others.
Speaker Change: It will require us to take on a significant amount. So I would think about that almost as a new customer acquisition in terms of what the margin profile would look like.
Speaker Change: For conifer in the.
Speaker Change: In the outside market and again as Sunset, we will put more detail to that.
Speaker Change: As we give 2025 guidance, but we will make investments in order to onboard that business in 2025 before getting to our.
Speaker Change: Overall typical performance with conifer overtime.
Speaker Change: I would say for the rest of the divestitures the expansions that we've done.
Speaker Change: A little bit more straightforward onboard from that perspective, but it is a great story for conifer.
Speaker Change: <unk>.
Speaker Change: These expansions.
Speaker Change: Great. Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Brian <unk> with Jefferies. Please proceed with your question.
Speaker Change: Hey, good morning, guys and congrats on the quarter.
Speaker Change: Thank you for your prepared remarks.
Speaker Change: You talked a little bit about.
Speaker Change: Efficiency opportunity you still see in the business. So as we think about the hospital segment, where margins stand today and with the divestitures that you've done.
Speaker Change: How much runway do you think you have left for margins or is it right to think that 15% segment level EBITDA is about the right spot.
Speaker Change: Well I think without getting into specific numbers I mean from an efficiency opportunity standpoint.
Speaker Change: One of the things that we are focused on including being a little bit different than some others as capacity utilization, especially in high value real estate in the hospitals right.
Speaker Change: Our ability to continue to improve the capacity utilization of our facilities.
Speaker Change: For us represents just to give you. One example represents how we think about that ongoing.
Speaker Change: Efficiency opportunity.
Speaker Change: And.
Speaker Change: So we're not again, our mindset has not whatever the number is to be satisfied with what the margins look like today.
Speaker Change: Obviously ongoing improvements in.
Speaker Change: Labor supplies and other expenses third party purchase services et cetera stabilization of the staffing environment, the physician staffing environment et cetera, all present opportunities.
Speaker Change: Forward.
Speaker Change: To continue to try to optimize the business.
Speaker Change: But I would say that as an example that area of capacity utilization is still an important one to us from the standpoint of finding more efficiency.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Our next question comes from Matthew Gilmore with Keybanc capital markets. Please proceed with your question.
Matthew Gilmore: Hey, Thanks, I wanted to hit on the total joint replacement growth I think you were up 19% this quarter.
Matthew Gilmore: If we look at your disclosures there was sort of an acceleration into the sort of 20% range, starting last year and sustaining so.
Speaker Change: I just wanted to see if you any perspective to share with respect to the sustainability of that level of growth and maybe that how that ties into your development pipeline on the USPI side.
Speaker Change: Well I think that I mean, it's no secret that you know.
Speaker Change: Sometime around 2020, we.
Speaker Change: Even before we made a decision that we wanted to be the unquestionable leaders and outpatient bone and joint care more broadly bone joined spine et cetera, with a full range of outpatient based services.
Speaker Change: We believe and I think what we're seeing is that we can provide those services in a high quality manner.
Speaker Change: At a lower cost than in other settings that I think that the industry has moved pretty heavily towards outpatient based care.
Speaker Change: Some of that care is still in the hospital outpatient based environment.
Speaker Change: Versus in the freestanding environment, we still think there's migration opportunity over the next few years into the freestanding environment, obviously with the burden of chronic illness that we see in the country. Today. There are there are people that will need hospital based outpatient services simply because of <unk>.
Speaker Change: Chronic condition management in and appropriately providing those services, but.
Speaker Change: The reality is with all of these things that move into a lower cost higher service setting, it's not a direct cannibalization the market expands and the market has been expanding for these services. When you can offer it in an ambulatory setting and so we're focused on that more than anything else is continuing to.
Speaker Change: Spanning the marketplace continuing to get.
Speaker Change: Younger and younger orthopedic surgeons, who aren't exposed to asses in their training exposed to ASC is earlier in their careers to show them that this is a very valuable place to practice.
Speaker Change: Got it thank you.
Speaker Change: Thanks.
Speaker Change: Our next question comes from Sarah James with Cantor Fitzgerald. Please proceed with your question.
Sarah James: Thank you ambulatory 2020 guide shifted.
Speaker Change: 240 basis points to be more revenue per case and volume.
Speaker Change: Compared to the Q2 thousand 24.
Speaker Change: Yes.
Speaker Change: We should think about mix going forward with revenue per case.
Speaker Change: Our driver compared to volume given your comments on the durability of trends around commercial mix in migration as well.
Speaker Change: And then just a quick clarification on the year to date.
Speaker Change: What's the mix.
Speaker Change: Ambulatory and hospital, we're just trying to get to that revenue per case.
Speaker Change: Yes. Thanks for the question, we'll split them up again, but I think on the first question.
Speaker Change: Look there's a couple of things here that are important to put into perspective first of all I think that guidance is relevant for the rest of 'twenty four right. We haven't said anything about 25, and how we're thinking about that with respect to our business planning and I understand there's a lot of puts and takes I mean, one of the reasons. We're really pleased with the net revenue per case growth and the acuity growth.
Speaker Change: USPI is because remember we added 45.
Speaker Change: Centers and more than that this year, but that 45 center tranche that was heavily non orthopedic at the beginning of the year.
Speaker Change: And therefore had lower average.
Speaker Change: Net revenues per case than in truly orthopedic dedicated center and yet we haven't gone into that detail because we're not breaking out different segments of USPI, but the.
Speaker Change: The concept is important.
Speaker Change: We are outperforming our expectations in that acuity growth, even as we continue to add centers from especially when they come in large chunks like that from a.
A more modest acuity standpoint, so I would think about the guidance for the rest of 'twenty four we will get to 25.
Speaker Change: But again I would echo the answer.
Speaker Change: <unk> answer to the question about tailwind in this in this.
Speaker Change: Part of the business around we see a healthy long term growth rate and in bone and joint care in SCS.
Yes, Sir Hey, this is John just on your second question I would consider.
Speaker Change: Virtually all of the DPP.
Speaker Change: Amounts related to the hospital segment, just given the different patient mix and.
Payment mix.
Speaker Change: Across the two segments.
Speaker Change: Thank you.
Speaker Change: Our next question is from John Ransom with Raymond James. Please proceed with your question.
John Ransom: Hey, I'm going to take a shot at two and you guys just picking journey since that seems to be the.
John Ransom: What people are doing so the first one.
Speaker Change: When we look at the expansion in the health exchanges this year.
Speaker Change: Can you quantify the effect of that on USPI.
Speaker Change: If any.
Speaker Change: Secondly, Sameer.
Speaker Change: Tom you're probably tired of answering this but are you, saying that on a same store basis in 'twenty five we should expect total state directed payments to increase over 24.
Speaker Change: Are you not quite prepared to say that thanks.
Speaker Change: Yes, we haven't made any forecast for 25 on state directed payments.
Speaker Change: On a relative basis to 24.
Speaker Change: Obviously, if you compare to 'twenty three we would expect that.
Speaker Change: 25% is going to end up being higher than what it was back then but the year over year, we haven't gotten too.
Speaker Change: 23% to 25% step up is obviously more more structural.
Speaker Change: That standpoint.
You want to cover the Hicks.
Speaker Change: Yes sure.
Speaker Change: John.
John Ransom: On Hicks.
John Ransom: The broader trends I think are certainly applicable across hospitals and our ambulatory space.
John Ransom: Haven't really quantified the USPI component of it I do think it is probably smaller relatively speaking impact on an ambulatory versus what we see in hospitals.
John Ransom: And while we're talking about it I can just remind everyone on Q3 for hospitals, we continue to see about a 58% increase in exchange volume.
John Ransom: Year over year for Q3, so it's still very significant for us it's been a benefit to the business all year, especially because of our contracting strategy being inclusive in the networks.
Speaker Change: Thank you.
Speaker Change: Thanks.
Speaker Change: Our next question is from Jamie person with Goldman Sachs. Please proceed with your question.
Speaker Change: Hey, Thank you good morning.
Speaker Change: Can you talk a little bit about the unconsolidated ASC portfolio for a minute just looking for an update on where some of those facilities are at from a development and ramp perspective, and how youre thinking about potential increases in ownership of those facilities going forward.
Speaker Change #100: Yes, Jamie.
Speaker Change #100: We have we haven't we are cutting out of the habit of reporting exact numbers and other things on this as we've kind of gone into a more stable environment. After the 2022 discussion there, but yeah, we continue to have <unk>.
Speaker Change #100: <unk> opportunities, we continue to execute on buy up opportunities with.
Speaker Change #100: The portfolio and.
Speaker Change #100: Yes.
Speaker Change #100: It's a small but at least on a consolidated basis additive.
Additive part of our ongoing work, obviously, sometimes when we do that we unlock the ability to add new business development resources for growth or other types of synergies from that perspective, but yes, it's a small but.
Speaker Change #100: It's not as big an opportunity as it was in the past because a lot of that stuff that's been executed on.
Speaker Change #100: Yeah.
Speaker Change #101: We have reached the end of the question and answer session I would now like to turn the call back over to management for closing comments.
Speaker Change #102: That's all for today. Thank you all very much if you have any follow up questions certainly feel free to reach out to me and thank you very much for joining our call today.
Speaker Change #103: This concludes today's conference you may disconnect your lines at this time and we thank you for your participation.