Tenet Healthcare banks $123M profit in Q2 thanks to 'robust' ASC, inpatient volumes

Tenet Healthcare beat the Street in the second quarter, reporting Monday $123 million in net income thanks to higher volumes and revenues across its ambulatory care segment.

The major for-profit system’s $1.44 adjusted diluted earnings per share from continuing operations was above the market’s $1.25 consensus, while the quarter’s $5.08 billion net operating revenue came in about $170 million over the consensus estimate.

The numbers are also a step above the second quarter of 2022, during which Tenet reported a $38 million net profit and $4.64 billion in revenue.

Year to date, the company now stands at $10.1 billion in revenue and $266 million in profit, both up from the first half of 2022’s $9.4 billion and $177 million.

“Robust volumes and effective cost control drove attractive results and strong free cash flows,” Tenet CEO Saum Sutaria, M.D., told investors Monday evening during an earnings call.

As a result, Tenet again raised its adjusted EBITDA guidance for the full fiscal year by $75 million at the midpoint, for a range of $3.31 billion to $3.46 billion. The majority of that bump, $45 million, reflects an increased outlook for Tenet’s ambulatory business segment, United Surgical Partners International, while $35 million would come from Tenet's acute care hospitals, Chief Financial Officer Dan Cancelmi told investors.

Net operating revenue outlook also rose by $300 million at the midpoint, now ranging from $20.1 billion to $20.5 billion. The company raised assumptions for hospitals’ inpatient admissions (now 2% to 4% year-over-year growth) and adjusted admissions (now 2% to 4.5% year-over-year growth) as well as for USPI’s surgical cases volumes (now 5% to 6% year-over-year growth) and net revenues per surgical case (now 2% to 3% year-over-year growth).

The company’s stock rose nearly 2% Monday after hours with the release of the earnings numbers.

“In short, we are optimistic about our ability to continue to differentiate our unique business mix and deleverage through strong earnings growth,” Sutaria said. “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.”

USPI led the strong quarter with a 22.2% year-over-year increase in net operating revenues, to $942 million. Same-facility surgical cases in the segment were up 6.6% and fueled a 9.8% rise in same-facility net patient service revenues.

Sutaria specifically highlighted the segment’s orthopedics volumes, noting that total joint replacements in ambulatory surgery centers grew 12% year over year. Gastrointestinal case growth has also “been particularly strong so far this year” with “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,” Sutaria said.

More broadly, the CEO said broader industry and population trends are likely to drive continued growth across USPI’s business.

“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,” Sutaria said. “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.”

Tenet’s hospitals also enjoyed a solid quarter with 7.6% year-over-year net operating revenue growth. Here, the company credited a 3.2% rise in same-hospital adjusted admissions as stronger pricing pushing same-hospital net patient service revenue per adjusted admission up 4%.

COVID admissions dropped from 3% of total admissions in the second quarter of 2022 to 2% in the most recent period, while non-COVID inpatient admissions increased 5% year over year. Emergency room visits (inpatient and outpatient) increased 0.4% from the prior year, though outpatient visits and hospital surgeries were down 1.3% and 0.1%, respectively.

Of note, executives said the company has made strides in managing a tough labor market.

Salaries, wages and benefits now represent about 45% of Tenet’s net revenue six months into 2023, as opposed to about 47.3% in 2019, before the pandemic, Sutaria said.

The company has also trimmed contract labor spending down to 4.3% of salaries, wages and benefits expense in the most recent quarter, down from 6% in the first quarter, 7.3% in the fourth quarter of 2022 and 6.2% during the second quarter of 2022, Cancelmi said. Sutaria added that Tenet is “comfortable with this level of contract labor” and will now be prioritizing strategic capacity expansions with new hires going forward.

“We see this as a validation of our analytics-driven labor management capabilities, continued portfolio transformation, and the higher acuity top-line strategy as we recover from the pandemic,” Sutaria said. “It gives us more room to invest and, at the right time, market by market, add capacity as we feel comfortable bringing it online.”

The strong quarter and an expected $50 million increase in 2023 cash flow will “provide us with significant financial flexibility to effectively deploy capital for the benefit of shareholders,” Cancelmi said. That strategy, he said, will continue to prioritize about $250 million per year toward USPI’s growth, focusing on higher acuity service offerings within the hospital segment, evaluating opportunities to retire or refinance debt, and buy back the company’s shares.

Tenet’s results join fellow for-profits HCA Healthcare and Universal Health Services in painting a quarter of recovering patient volumes. Those companies similarly increased their 2023 guidance and said they expect volumes to stay strong as patients return to healthcare providers for COVID-deferred care.