Tenet Healthcare Corporation (NYSE:THC) Q2 2023 Earnings Call Transcript

Tenet Healthcare Corporation (NYSE:THC) Q2 2023 Earnings Call Transcript July 31, 2023

Tenet Healthcare Corporation beats earnings expectations. Reported EPS is $1.44, expectations were $1.25.

Operator: Greetings and welcome to the Tenet Healthcare Second Quarter 2023 Earnings Conference Call and Webcast. After the speaker remarks, there will be a question-and-answer session for industry analysts. [Operator Instructions] I’ll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin.

Will McDowell: Good afternoon, everyone, and thank you for joining today’s call. I am Will McDowell, Vice President of Investor Relations. We’re pleased to have you join us for a discussion of Tenet’s second quarter 2023 results, as well as a discussion of our financial outlook. Tenet’s senior management participating in today’s call will be Dr. Saum Sutaria, Chief Executive Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer. Our webcast this afternoon includes a slide presentation, which has been posted to the Investor Relations section of our website tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management’s expectations based on currently available information, actual results and plans could differ materially.

Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today’s presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. With that I’ll turn the call over to Saum.

Saum Sutaria: Thank you, Will, and good afternoon, everyone. Before we get into this quarter’s results, I’d like to start by extending a warm welcome to Sun Park, who has joined us for this phone call. Sun will become our Chief Financial Officer, following Dan’s retirement. He has more than 25 years of finance experience and an impressive track record of delivering positive results in the healthcare industry. Most recently, he was responsible for the commercial and operational finance for all of AmerisourceBergen’s business units. The CFO transition at Tenet is actively underway, supported by our broader leadership team. I look forward to the impact of Sun’s leadership as we continue to execute on our strategic priorities. Now let’s turn our attention to the results that I’m pleased to present for the second quarter.

In the second quarter, we reported net operating revenues of $5.1 billion and consolidated adjusted EBITDA of $843 million, which translates into an attractive 16.6% margin. Robust volumes and effective cost control drove attractive results and strong free cash flows and our adjusted EBITDA is about $53 million or 6.7% better than the midpoint of our guidance range. We produced another very strong quarter in USPI with $370 million of adjusted EBITDA, which represents 16% growth over second quarter 2022. Same-facility cases grew 6.6% and adjusted EBITDA margins remained robust. Orthopedics volumes were strong with total joint replacements in the ASCs up over 12% over second quarter 2022, coupled with ongoing strength in GI, Urology and ENT. Net revenue per case improved nearly 3%.

Looking ahead, the tailwinds that support ambulatory surgery demand recovery and growth are evident in the current environment. These tailwinds include an active but aging population. Patients proactively seeking more convenient access to procedural care. A recovering healthcare ecosystem looking for lower sites of care and ongoing innovation in ambulatory surgery care delivery. These factors collectively create a strong foundation for continued growth. As the leader in this space, USPI is well-positioned to capitalize on these opportunities. We continue to attract and retain high quality physicians, which has translated into growth and overall physicians performing procedural care in a USPI facility. We continue to expand high acuity service lines, while delivering high patient and physician satisfaction through operational excellence.

This has enabled strong volume growth from servicing new physicians, as well as deferred demand. It is worth noting, the GI case growth has been particularly strong so far this year. We see evidence of both deferred care and also expansion of care for the under 50 year old patient population from recent guideline changes, which we believe should be a source of ongoing and expanding demand over time. During the quarter, we successfully expanded our reach by adding 12 new centers. Among this impressive new portfolio our three single specialty GI centers in Ohio, bringing our total to 12 in the state. Additionally, two of our new facility openings were focused on orthopedics and de novos in Michigan and Florida. We are also encouraged by the high level of de novo activity in our pipeline.

With more than 30 centers currently in syndication stages or under construction. This demonstrates momentum in our expansion efforts and further strengthens our growth prospects. USPI’s future is bright and our capital deployment into this business will continue to grow and develop this portfolio. Turning to our Hospital segment. We generated $388 million of adjusted EBITDA in second quarter 2023. Acuity remained strong with revenue per adjusted admission up 4% over second quarter 2022. On a non-COVID basis, same-store admissions were up 5%. Our workforce continues to grow and stabilize. We’ve successfully reduced turnover and nurse hiring has accelerated and shown improvement. As a result, we reduced contract labor cost during the second quarter of 2023 to about 4.3% of SW&B.

With the improving labor environment, we find ourselves in a favorable position to capitalize on our strategic approach to prioritize high acuity specialty services. We feel comfortable with this level of contract labor and we’ll look to prioritize placement of new hires for targeted capacity expansion, aligned with our strategy. It is important to note that our SW&B as a percent of net revenue was 47.3% for the first half of 2019 and is now running 45% year-to-date in 2023. We see this as a validation of our analytics driven labor management capabilities, continued portfolio transformation, and the higher acuity topline strategy, as we recover from the pandemic. It gives us more room to invest and at the right time market-by-market, add capacity as we feel comfortable bringing it online.

Our business processes utilized real-time analytics to equip staff, managers, and senior leadership to make data driven decisions to optimize their areas. This includes workforce productivity, contract labor utilization, inpatient throughput, procedural room utilization, transfer acceptance, and more. The analytics are easily digestible and highly accessible with dashboards and insights integrated into key workflows and care team huddles. We believe that this data driven operating discipline coupled with our focus on high acuity service line development will enable our hospital segment to continue to deliver strong results. Conifer continues to perform well for its clients and also delivered strong margins. Ongoing technology automation and offshoring initiatives support that performance.

Second quarter EBITDA margins were 26.3%. Conifer continues to focus on commercial activities, especially in patient eligibility services, given the need from the Medicaid redeterminations. Stepping back, I indicated last quarter that our confidence and the ability to turn the various styles on the business and generate predictable results is growing. I like the operating environment right now, because it is evolving such that higher acuity focus, effective, capacity management, and nimble cost control, all strengths of ours support improving results in our business. As a result, we are again raising our full year 2023 adjusted EBITDA guidance by $75 million at the midpoint to a range of $3.31 billion to $3.46 billion. This range represents a $125 million increase over our initial full year guide.

In short, we are optimistic about our ability to continue to differentiate our unique business mix and deleverage through strong earnings growth. Free cash flow continues to improve, which provides us flexibility to make necessary investments to enhance our future growth prospects and improve our capital structure. And with that, Dan will now provide a more detailed review of our financial results. Dan?

Daniel Cancelmi: Thanks, Saum, and hello, everyone. Our financial results in the second quarter were strong with USPI and the hospitals adjusted EBITDA, same-store volumes, and revenues above our expectations. In the quarter, we generated consolidated adjusted EBITDA of $843 million above the high end of our second quarter guidance range. Our results were driven by strong same store revenues and volumes, high patient acuity, and effective cost control. Now I’d like to highlight a few key items for each of our segments. Let’s start with USPI, which delivered strong growth and continues to provide high-quality care to our patients. In the quarter, USPI produced a 9.8% increase in same facility net operating revenues compared to last year, with case volumes up 6.6% and net revenue per case up 2.9%.

We saw strong growth in GI, urology, ENT, and orthopedic cases. USPI’s adjusted EBITDA excluding grant income grew 16.4% compared to the second quarter of last year and it’s margin continues to be very strong at 39.2%. We’re pleased with continued strength of USPI’s performance, which is a testament to the attractiveness of the portfolio and the value we provide to our stakeholders. Turning to our acute care hospital business. Second quarter same hospital adjusted admissions increased 3.2% compared to the second quarter last year and total same hospital inpatient admissions increased 3%. While non-COVID admissions increased 5%. In fact, year-to-date, non-COVID admissions are up 9.2% over last year. Our labor management continues to be very effective despite the cost pressures, especially contract nurse staffing costs.

On a consolidated basis, contract labor costs were 4.3% of SW&B in the second quarter, a significant decline from 6% in the first quarter this year, 7.3% in the fourth quarter of last year, and 6.2% in the second quarter last year. Our consolidated SW&B costs as a percent of revenue were 45% in the quarter compared to 45.8% in the second quarter last year. And our case-mix and revenue yield remained strong, as we continue our strategic focus on investments in higher acuity, higher margin service lines. And our case mix index in the quarter has grown at a 3% CAGR, since 2019 before the pandemic. Let’s now turn to Conifer, which again delivered a solid quarter. Conifer produced second quarter adjusted EBITDA of $85 million and a strong margin of approximately 26%.

Overall, we were very pleased with our performance in the second quarter. Let’s now review our cash flows, balance sheet, and capital structure. At the end of the quarter, we had $934 million of cash on hand and no borrowings outstanding under our line of credit. We generated $466 million of free cash flow in the quarter and $680 million so far this year, bolstered by Conifer’s strong cash collection performance. As previously announced, in the second quarter, we issued $1.35 billion of secured notes that mature in 2031. We used the proceeds from the notes to early retire $1.345 billion of our then outstanding secured notes that were due next year. We now have no significant debt maturities until 2026. And we have approximately $1.6 billion of secured debt borrowing capacity available if needed.

Our June 30th, leverage ratio was 4.14 times EBITDA compared to 4.1 times at year end 2022. Also during the quarter, we repurchased approximately 580,000 shares of our stock for 40 million as part of our $1 billion share repurchase program. Since the inception of the program last year, we have repurchased approximately 7.4 million shares or about 7% of our then-outstanding shares for $340 million at an average price of about $46 per share. We believe our strong free cash flow generation and capital deployment actions will continue to provide us ample financial flexibility to support our growth initiatives. Let me now turn to our outlook for this year. As Saum mentioned, we are raising our 2023 adjusted EBITDA outlook by $75 million to $3, 385 million at the midpoint of our range, reflecting our continued strong performance.

This $75 million increase includes a $45 million raise for USPI and a 30 million raise for our hospitals. Additionally, we now expect net operating revenues be in a range of $20.1 billion to $20.5 billion, an increase of $300 million. We’ve increased our assumptions for growth in hospital inpatient admissions and adjusted admissions. Additionally, in the USPI, we’ve increased our assumptions for same facility surgical case growth to 5% to 6% for 2023, a 200 basis point increase over our prior expectations. Our increased full-year EBITDA guidance absorbed an approximately $15 million headwind from recently passed legislation in Florida, which among other things reduced worker’s compensation and personal injury reimbursements. Regarding our third quarter outlook, we expect consolidated adjusted EBITDA to be in the range of $775 million to $825 million or $800 million at the midpoint.

And we anticipate the USPI’s EBITDA in the third quarter at the midpoint will be approximately 23% to 24% of our full year 2023 USPI EBITDA guidance of $1,510 million at the midpoint of our range. Turning to our cash flows for 2023. From a cash flow perspective, we expect net cash from operating activities to increase $50 million over our prior expectations and are reinvesting this amount back into our business in the form of higher capital expenditures to fuel future growth. As a result, we continue to expect free cash flow to be in the range of $1.1 billion to $1.35 billion for this year. Our free cash flow generation has improved substantially over the past several years and we expect our business to continue to drive strong cash flows, while executing on our growth plans.

Our improved cash flow provide us with significant financial flexibility to effectively deploy capital for the benefit of shareholders. 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. Second, enhancing our hospital growth opportunities, including the continued focus on higher acuity service offerings. Third, evaluating further opportunities to retire and/or refinance debt and share repurchases depending on market conditions and other investment opportunities. And with that, we’re ready to begin the Q&A. Operator?

Q&A Session

Operator: [Operator Instructions] Our first question today is coming from Steve Valiquette from Barclays. Your line is now live.

Will McMahon: Hi guys. Will McMahon on for Steve. Congrats on the roughly 7% in the USPI. Just kind of a quick question on the $45 million full year guidance raise there. In the past, you’ve kind of told us what portion you expect. So what do you think it for that for 3Q and then kind of on the back of it pretty sizable increase for the full year against the normalized growth rate for EBITDA? Can you just give us a little more color on what’s driving the outlook and maybe anything on payer mix specifically in the outpatient setting to call out? Thanks.

Daniel Cancelmi: Yes, this is Dan. In terms of USPI’s guidance for the rest of the year, as I mentioned in my remarks, you may not have heard them. We’re anticipating that USPI’s Q3 EBITDA would be roughly 23% to 24% of the full year EBITDA guide of $1.510 billion. So that’s how we’re looking at Q3. And obviously, looking on pushes into Q4. Q4 is typically, seasonally stronger and we are still anticipating that business has performed incredibly well so far this year with very strong volume growth, the expense management has also been very tight combating, a lot of inflationary pressures that are out there. And so we’re pleased with the results so far and that’s resulted in us increasing their guidance by $45 million.

Will McDowell: Thank you.

Saum Sutaria: The only other thing I would add to that, because you specifically asked about the mix. We feel very good about both the case-mix and the payer mix in the recovery and growth this year.

Operator: Your next question is coming from Jamie Perse from Goldman Sachs. Your line is now live.

Jamie Perse: Thank you. Good afternoon. I was hoping we could spend a few minutes on just the surgical volumes in the quarter for the hospital segment. There are obviously very strong for USPI, but I got a little bit surprised with the trends in the hospital segment. I think you guys were down about 10 basis points and outpatient actually looked a little bit weaker than inpatient there. So can you just maybe give us a little bit of color on what you’re seeing there, and more importantly, how we should think about the outlook for surgical growth, just given some of the comments you made around backlog recovery. I know those were probably a little more tied to USPI, but still I would think there’d be some tailwinds there. So any color on that topic would be really helpful. Thank you.

Daniel Cancelmi: Yes, my comments on the backlog and recovery we’re really meant to address a more fundamental examination we did at the GI service line recovery and growth at USPI and we’re actually happy to be able to report that while some of it appears to be deferred care, a substantial amount of it appears to be new demand stimulation that we’re seeing both in terms of physicians that are ramping up and the ability to expand the service line into the new population supported by the guidelines. That’s younger and obviously with most of them, if not all of them being commercially insured. So I think that’s a positive tailwind there. Look, on the hospital side, I think you guys are aware that we have taken an approach where we’ve been very thoughtful about our capacity.

I think that this is nothing more than a little bit of a mix towards medical versus surgical admissions, given the capacity we were willing to open. Obviously, we’re still very focused, as you can tell from our results on the labor side. We were still very focused on bringing down our utilization of expensive contract labor at this point, even with rates moderating still expensive, and getting that into a target range that we feel comfortable with on an ongoing basis before we began any type of capacity expansion. So, we do face some trade off sometimes, between what we see coming in medically especially through the emergency department, and a bit of capacity from a surgical standpoint in the acute care hospitals. Again, we’re still managing to a capacity constrained environment.

And that’s probably a little bit of what you saw. Look, we feel pretty good about our surgical and our procedural mix investments in the acute care hospitals. There’ll be some ups and downs as the quarters go from a recovery standpoint, but if you really follow us and you follow our acuity and net revenue intensity, that’s really what we’re focused on, because we think that’s going to help generate the best margins over time.

Saum Sutaria: And Jamie, when you look at overall our inpatient revenues on the hospital side – the same hospital basis, they were up roughly 8%, outpatient revenues were up year-over-year about 6%. Like there was ahead of our expectations, so we are very pleased with how they – hospitals performed overall during the quarter.

Operator: Thank you. Next question is coming from Pito Chickering from Deutsche Bank. Your line is now live.

Pito Chickering: Yes, good morning or good afternoon, guys. Thanks for taking my questions. For guidance looking about the hospitals in the USPI, it looks like that the modeling case growth and just admissions to normalize in back half of the year. I just guess the math here, profitable – you did about a 5% same-store designation in the first half of the year, this implies a 2% for the back half. And for USPI, you did about 7.2% case growth, implies about – is under 4% of the back half of the year. Are you seeing anything to be conservative about the normalized case growth or is it simply conservatism, and if – this current volumes remain, would there be upside to your guidance and any color on July?

Daniel Cancelmi: Well, no color on July. But the – I mean, I think you’ve hit on some important points. I mean, first of all, even as you described normalize, I mean, the full year guidance on USPI volumes is still ahead now of what we think. The long-term trends would look like and obviously, if the volumes are stronger, the chassis has proven. Just like in this quarter and the first quarter, it can certainly outperform expectations from an earnings standpoint. And look I think the biggest thing to think about here is Q4 seasonality tends to be pretty robust at USPI and we see no reason to believe that that’s going to be any different this year. But 6%, 7%, 7.2% as you point out, you mean, that’s pretty significant growth and I think it’s prudent to look ahead in a much better than normal year.

But also ensure that we’re thoughtful about what we’re seeing from a volume perspective that we can really truly predict looking-forward. The same thing on the hospital side, Q4 tends to be stronger there is not as seasonal in its variation as USPIs, but it is somewhat seasonal somewhat driven by different things including respiratory illness and other things and I think again – I think the guidance reflects their above. Our optimism about the business and also some planning around adding capacity back-in if we can maintain the contract labor environment and labor cost environment the way that we finally got it to where we’re comfortable.

Saum Sutaria: Yes, the only other thing I’d add Pito is, I was – in the back half of the year, we’re assuming at the midpoint admissions grow about 2.4% roughly. And you know, in the third quarter last year, COVID admissions were roughly 6% of cases and roughly 4% in the fourth quarter. We’re not expecting the same level of COVID volumes, obviously, in the back half of this year at this point. But again, the volumes performance has been very good on the hospital side and overall the hospitals have outperformed our expectations.

Operator: Thank you. Next question is coming from Justin Lake from Wolfe Research. Your line is now live.

Justin Lake: Thanks. Appreciate it. Just a couple of numbers questions. First, physician outsourcing has been a hot topic. And certainly, it looks like your other operating costs were up a bit. Just curious, what’s going on there. Maybe you can give us a ballpark estimate of what that physician outsourcing costs or physician costs are within that other operating as a percentage? And then just lastly on your payer mix on the hospital side. Given you include managed Medicaid and Medicare and there, love to hear just a pure commercial number and how that look year-over-year? Thanks.

Saum Sutaria: I’ll take the first one. Dan, you want to take the second one. So just a few thoughts on the physician outsourcing and hospital based physician staffing costs have been an area of focus for us. We’ve talked about them since the pandemic began and have been a focus for us over that period of time. Not surprisingly, there’s pressure in the industry based upon some of the reimbursement and market discontinuities that those entities have faced. But this isn’t something new, right. So our – I mean, if you look forward our guidance, in both of our care delivery segments, takes into account and our robust increase in guidance takes into account, what we think will happen with respect to costs in that line item. So yes, there is cost pressure there, we also work on mitigating that by improving utilization of the physician resources that we have by consolidating and combining service lines where possible.

And certainly, with our work with some of our preferred partners in that area, they’re growing their market share with us, because they provide better opportunities for us to partner. And selectively, because of our contracting strategies, including outpatient, we’re selectively able to insource where needed seamlessly in order to manage our expense base there. So I do think this is an important area, but it’s not – at least my recollection is it’s not new and we’ve been managing it for some time.

Daniel Cancelmi: And Justin on – from a payer mix perspective, the payer mix in the quarter really consistent with this – the first quarter, continues to remain attractive from a commercial perspective with in-and-outpatient volumes tracking, stronger than the aggregates inpatient, outpatient volumes and the revenue yield has been very good as well, so we’re satisfied with the payer mix trends.

Operator: Thank you. Next question today is coming from Kevin Fischbeck from Bank of America. Your line is now live.

Kevin Fischbeck: Great, thanks. I wanted to go into your point about temp labor now being at a point where you can kind of invest in growth. Is there some way to quantify kind of where admissions or volumes might be, if you had forced – I’ve just kind of frame, how much volume is deferred volume and then when we think about – it sounds like there’s a staffing aspect to it, which might be shorter term and there is a CapEx aspect to it, maybe longer-term. So let’s just kind of think about – how to think about that volume recovery and whether it’s right to think that volumes could be above average, if you’re able to staff and grow the CapEx you’re talking about. Thanks.

Saum Sutaria: Yes, Kevin. I think it’s been a couple of thoughts. I mean, I think the CapEx and infrastructure constraints are really minimal. There may be certain service lines, where our current physician capacity or particular areas of the hospital in services we’ve invested in are bit full. But in general, I would not say that we have physical capacity constraints to be able to grow. It’s more about the service lines that we want to be in. From a labor standpoint, I mean 4.3%, the blended number across our portfolio, obviously, and it’s a little bit different market-to-market in terms of what we’re doing. What we really and therefore the ability to take market share, if that’s where the growth is – is really something we’re selective about based upon both the service lines and the payer mix that we service in those markets.

So in some of our markets, we’re already investing and adding capacity and feel pretty good about the results. In other markets, we’re a bit more cautious based upon the underlying mix or case mix that we tend to see in that area. But in all cases, as time goes on, if contract labor costs and premium labor costs continue on the path of normalizing, we think, we’ll have additional room for volume growth as we look forward. Finally, you asked the question about how much is really deferred. My general view has been on the acute-care side, not much of it is really deferred care. I mean, it’s different than maybe what others are seeing, I’m not really sure. But at least for us, I have not really seen or viewed patterns that suggest to me a large fraction of what we’re seeing right now and the acute care side is deferred and somehow going to be one-and-done.

Operator: Thank you. Our next question is coming from Calvin Sternick from JPMorgan. Your line is now live.

Calvin Sternick: Yes, thanks for the question. I had a question on the geographic mix. Were there any that stood out as sort of particularly strong in the quarter and you’re seeing a rebound in maybe some of the markets that were slower to recover initially? And then just on USPI, can you give an update on the M&A pipeline and some of the physician buy-ups from SCD too. Just wondering if any – if there’s any sort of impact on how physicians are thinking about potential buyouts just given the strong volume environment.

Saumya Sutaria: Yes. Just taking them in reverse, I’ll take the first one, the first – the second one if you want to take the first one. Look, nothing to report out of the ordinary on the SCD buy-ups like we mentioned last time, those are on track with our expectations this year. And while we’re at it, just the de novos that we’re going to open that were delayed are all on track this year as well. And obviously, that’s been a contributor to an overall very, very strong first half of the year for USPI.

Daniel Cancelmi: Yes. Calvin, in terms of the geographic markets or areas from a hospital perspective. What I would say — I’m not going to get into like specifics about each geography but what I would say is the volume growth that we’re reporting is not primarily due to certain geographies that have reopened at a slower pace than others. So it’s not like the Florida and Texas markets are not big contributors to this performance. And it’s being driven by some of the other markets, whether California or Michigan. The markets are performing well, and these volume trends are not because there’s one or two markets that just reopened slower and that’s what’s driving all this growth. That is not the case.

Operator: Thank you. Your next question is coming from Whit Mayo from Leerink Partners. Your line is now live.

Whit Mayo: Hi, thanks. Good afternoon. Just back on the physician staffing point or the question. Are you seeing any changes in anesthesia coverage at USPI? Meaning are we seeing groups ask for increase subsidies? Are you seeing any disruption on volumes in any markets from the dislocation with these groups? I know you said it’s manageable so, but I just – I guess I’m trying to kind of unpack maybe what’s sort of new relative to USPI.

Saum Sutaria: Yes. This is a little bit like the contract labor discussions that we have. It’s just – it’s sort of not – the issues on the hospital side are so much more significant than anything we see on the USPI side because the mix is good, and it’s just a different environment to operate in. And so the magnitude of that effect that USPI is so much lower than the challenges that are being faced on the hospital side with respect to anesthesia staffing.

Operator: Thank you. Our next question is coming from A.J. Rice from Credit Suisse. Your line is now live.

A.J. Rice: Hi, everybody. Just maybe talk about two other areas you haven’t mentioned – some are saying they’re seeing some of the benefit from all the growth we’ve seen on the public exchanges or marketplaces, whatever you want to call them. I’m going to hear you talk about what your strategy has been with respect to marketplace for a while. What – are you – do you feel like you’re in the most contract there? And how much is that? I assume that’s being booked in the managed care line, but I just want to confirm that and how much of a tailwind does that provide year-to-year for you? And then, on the same lines, obviously, there’s the question of Medicaid redeterminations. You’ve got a couple of markets that tend to be a little heavier Medicaid. Are you – what do you see in early days there? Are you actively involved in getting people reverified? And is there upside because some of those people may end up on the exchanges for you there?

Saum Sutaria: Yes, A.J., thanks for the question. I think it’s early days on redetermination, first of all. So we’re not really seeing much effect. And it’s – I’m glad you raised that because I’ll reinforce, Conifer has a best-in-class eligibility and enrollment service. And it benefits us, it benefits our clients. And now as I’ve indicated, we’re expanding that as a point solution. So we feel very, very good about our ability to catch and capture eligible patients, whether they’re moving from one form of insurance to another, Medicaid to exchange or other, or even from the standpoint of those that may enter the system apparently uninsured but actually do qualify for coverage. And by the way, that includes even in this environment, a lot of new enrollments in Medicaid that we achieved.

Our exchange strategy has been very consistent for many years. We took the approach early on of contracting broadly in the exchanges and doing that on a commercial minus rather than a Medicare plus basis. So we’re pleased with the rates and we’re pleased with the network access. As narrow networks have opened up, including some ultranarrow networks, there may be some or a handful that are in, but they really don’t have a lot of lives in them. And so for the networks that are gaining a lot of lives or have a lot of lives, we tend to be very well contracted. It has been a long-standing strategy of the company to be broadly inclusive of exchange patients.

Daniel Cancelmi: And A.J., the exchange volumes that we care for and the revenues, they are included in that managed care line that you see that we disclose. And I would tell you the exchange volumes and revenues are trending very nicely, like overall, it’s part of our commercial when we think about our commercial mix. Trends are good.

Operator: Thank you. Next question is coming from Andrew Mok from UBS. Your line is now live.

Andrew Mok: Hi. Good afternoon. You’ve done about $90 million of share repurchase to date and have $660 million of authorization remaining through 2024. You’ve increased the CapEx guide by about $50 million. But curious to hear what your thoughts around share repurchase have changed and with a better cash flow profile this year. Thanks.

Daniel Cancelmi: This is Dan. No, there’s absolutely no change in our views and how we’re thinking about share repurchases. We obviously repurchased some additional shares in the quarter. And we’ll continue to look at that in terms of – from a capital allocation perspective, as we always say. Depending on other investment opportunities and market conditions, we will certainly continue to pursue share repurchases. So no change whatsoever from our thinking on share repurchases. We increased our CapEx guidance with additional investments to drive additional growth substantially on the hospital side.

Saum Sutaria: Yes. I would echo that, especially on the first point. I mean, as our business strengthens, and in particular, the long-term trends that would support, especially the Ambulatory Surgery division growing over time as we come out of the pandemic, we still feel that our equity is a very, very compelling investment vehicle as we trade even on an EBITDA minus NCI basis, we still trade at a discount to some of our peers, whether you look at it by segment or in total. So we very much feel like that our business prospects have a lot of upside associated with them.

Operator: Thank you. Your next question today is coming from Brian Tanquilut from Jefferies. Your line is now live.

Brian Tanquilut: Hi. Good afternoon, guys. Congratulations. Saum, as I think about the revenue per adjusted admission in the hospital up 4%, pretty strong, how should we be thinking about your ability to sustain that healthy level, both from an acuity perspective and maybe some of the contract negotiations with the payers as we look at obviously higher than average inflation rates? Thanks.

Saum Sutaria: Yes. Look, maybe Dan and I will both comment. Look, I think the acuity strategy, we still have runway across our markets. And I actually think, as we come out of the pandemic if we continue to focus on expanding our initiatives in that area, we ought to be able to sustain. On a non-COVID basis, our case mix index has been growing at a 3% CAGR since 2019, which in the CMI world is a very, very strong result. I mean this has been a strategy pre-pandemic, as you know, that we undertook when some of us joined the company to really reposition Tenet’s acute care hospital portfolio, and we’ve been working at that for a long time, and we continue to work at it and think that there will be upside there. And then from a contracting perspective, as we – part of strengthening the attractiveness of our portfolio, has been upgrading the reputation and quality of physicians that choose to work in our hospitals, which create a lot of pull among consumers, employers and other things, and that has definitely been the case.

It’s been the case pre and post now pandemic in terms of what we’re doing. And that helps our contracting because our hospitals are more desirable from a quality reputation and program standpoint than they were five years ago. And as a consequence, if I look at our recent contracting efforts, they’re better than what they were two or three years ago in terms of the kinds of escalators were able to negotiate because we’re more must-have in some ways in the networks in the cities in which we operate. So this can be a virtuous cycle I believe that will continue for some time.

Operator: Thank you. Your next question is coming from Jason Cassorla from Citi. Your line is now live.

Jason Cassorla: Great. Thanks for taking the question. Just wanted to ask about your cash flow and CapEx guide. It sounds like you’re up both in context of better EBITDA generation this year. Just obviously, cash flow, you done $466 million year-to-date. You updated free cash flow guide of $1.35 billion. There’s an operationally strong fourth quarter to consider. I’m just wondering if there’s any timing elements that we should consider as it relates to cash flow and CapEx spend? And then just as a quick follow-up, if there’s any onetime items we should be thinking about in the back half of the year on EBITDA, like Medicaid supplemental payments or otherwise? Thanks.

Daniel Cancelmi: Yes, this is Dan, Jason. In terms of free cash flow generation, obviously, we’re pleased with how our performance has been so far this year. Conifer has done a really good job. It’s outperforming our expectations. So that’s very encouraging. Your point about the timing, I would say there’s we still have some tax payments to make in the fourth quarter that wouldn’t necessarily maybe seen in the third quarter. But really no substantive change from our thinking other than the strong performance so far. And as we mentioned, we made a decision, we’re going to invest a little bit more into CapEx this year, $50 million.

Operator: Thank you. Your next question is coming from Stephen Baxter from Wells Fargo. Your line is now live.

Unidentified Analyst: Hi. This is Nick on for Steve. I was hoping you could provide an update on the performance of the SCD businesses so far this year and where you are in terms of progression to the effective multiples you target for those assets. Thank you.

Saum Sutaria: Yes, I did that earlier. We’re very pleased with the ongoing buy-ups according to plan this year and the opening of the de novos. And U.S., it’s been a contributor to the entirety of USPI’s performance this year, which has been strong on both acuity and growth. And as Dan mentioned also, a lot of the work we’ve done on operations management that has improved margins and strengthened margins as well.

Operator: Thank you. Next question is coming from Ben Hendrix from RBC Capital Markets. Your line is now live.

Ben Hendrix: Thank you very much. I appreciate all the color on the growth across USPI case categories, but I don’t know if I heard you mention cardio growth. Just want some comments on your degree of focus there and what you’re seeing in that area. Thanks.

Saum Sutaria: Yes. No, of course, we’re very attuned to the cardiovascular market in the ASC setting. We perform peripheral and device-based work there today, and very selectively other types of vascular coronary vascular work. Look, this is an area in which I have consistently voiced caution about how rapidly it will expand. One, because of patient safety and selection issues that still have to be worked out. So we’re in the midst of a number of different pilots to work out appropriate safe clinical protocols. I mean, ASCs are small businesses and a single patient error and associated liability can really do a lot of damage there. So we’re very careful and cautious about developing the right set of protocols in that environment if we’re going to expand into cardiovascular in a more broad way.

The second thing you just have to realize is that, the payer mix, because it’s cardiac, tends to be much, much more heavily Medicare than commercial. Even if you compare to orthopedics, which has a lot of commercial activity and that is going to impact the types of margins that those types of facilities can generate. Now look, I recognize USPI has got best-in-class margins for the ASC business by far. But part of what you got to work out at is how to do this, build the scale and do it with margins that are healthy so that the partnership with physicians stays engaged in building that. So my view here is that, will things move into the outpatient setting in that field? Sure. But I think it’s going to be slower and more cautious all around because of the things I mentioned than what some people discuss.

Ben Hendrix: Thank you.

Operator: Thank you. We reached the end of our question-and-answer session. And that does conclude today’s teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.

Saum Sutaria: Thank you very much.