After weathering a few years of COVID-19 interruptions, hospitals are now riding a wave of strong demand for acute care services.
Second-quarter earnings from several major health systems have outlined year-over-year gains across several patient volume metrics. Industrywide data reports have outlined a similar demand recovery trend, as well as the accompanying revenue gains.
But the recovery can’t and won’t last forever, warned Tenet Healthcare CEO Saum Sutaria, M.D.. Once hospitals and health systems have made it to the other end of the upturn—likely sometime after 2025, he predicted—it’ll be the organizations that grew their service lines or expanded their capacity without increasing their cost base “as aggressively” that find long-term success.
“While the industry is benefiting from a lot of this demand—and probably some of the financial benefit from the expansion of the exchanges … due to redetermination—ultimately, the discipline around operating efficiency when you end up in a normal demand environment is what’s going to allow you to grow earnings,” the CEO said Wednesday at the 2024 Wells Fargo Healthcare Conference. “That has always been the case in this industry, and I think it will always be the case.”
Tenet’s hospital portfolio has been in the midst of a multiyear realignment. The company has sold off several hospitals outside of its core markets while building out its local care networks and prioritizing high-acuity, high-margin procedures and specialties.
Sutaria said that Tenet and “a few other operators” in the industry have spent the past few years “putting discipline into the operations in a very data-driven way” to the point where it’s “hardwired into the company.” This includes the company’s human resources, as those hired or promoted are expected to buy into Tenet’s system of disciplined spending, he said.
“It’s nice to be able to say that from a few years ago, when that wasn’t the case,” Sutaria said in reference to Tenet’s retooling. “So because of that, as we look out to the future over the next one, two, three, four years, we are starting to be more comfortable with some of the long-term investments in the segment to help grow and build the earnings.”
Tenet is coming off an “exceptional” 2023 of 7.2% net operating revenue growth and $611 million net income. After issuing what Sutaria described Wednesday as “a pretty bold earnings target,” the company upped that range last month after its results through the second quarter “significantly exceeded our expectations [due to] volume and revenue growth as well as sustained fundamentally strong operating performance.”
Sutaria wasn’t ready to take his foot off the gas, noting that within the hospital segment the company is much happier with its trimmed portfolio and “comfortable” with its costs and contract labor utilization. Though the changes mean that comparisons to last year’s numbers are “a little bit weird,” the executive stressed that Tenet’s “deliberate” decision to leave behind some of its adjusted admissions in favor of its high-acuity investments so far looks to be paying off.
Within United Surgical Partners International, the high-margin ambulatory surgical center segment that has become Tenet’s bread and butter, Sutaria again addressed the difficulty of comparing performance to last year’s unusually strong numbers.
He stressed that while some of last year’s volume spike reflected post-COVID recovery, some of this year’s numbers reflect more organic growth, “so we feel great about it.” Acuity has also continued to improve year to year, helping the segment beat earnings expectations.
All the while, Tenet continues to grow its share of the market, having tallied interests in 520 ASCs as of June 30 via a combination of acquisitions and de novo openings. But, while Tenet’s balance sheet has grown substantially thanks to hospital sales, Sutaria said the company doesn’t feel any pressure to become more aggressive in its ASC acquisition strategy.
Invoking again the mindset around hospital operations, he said Tenet has “developed a disciplined process around diligence and evaluation of deals we’re going to do. I would not say that, because of the change in flexibility with respect to our balance sheet, that we plan on eliminating or somehow eroding the discipline that we’ve developed in the M&A environment for USPI."
Two-midnight rule, ACA exchange disenrollments
Asked about the Centers for Medicare & Medicaid Services’ “Two-Midnight Rule,” which went into effect this year and requires patients who are at a hospital across two midnights to be billed as inpatients, Sutaria said that any questions on its impact should be directed at plans’ rather than providers, as the latter is still taking care of patients either way.
“You know, I still struggle to see that it’s a large or material, quantifiable benefit [to Tenet’s finances],” Sutaria added. “I’m sure it’s slightly positive, right? But it’s not something that we’ve really quantified as being largely or materially positive.”
More impactful for Tenet are enhanced subsidies and volumes from Affordable Care Act exchanges, which are up 60% year over year in the second quarter and represent about 6% to 7% of Tenet’s total enterprise revenue.
Sutaria, who is also serving as chair of the for-profit hospital lobbying group Federation of American Hospitals, said that political efforts to limit the number of people receiving care through the exchanges will have ramifications beyond health systems’ bottom lines.
“On principle, it is not a good thing to take away coverage from people that rely on that coverage for the healthcare they have … because that fragments their care,” he said. “I understand we’re benefiting from redeterminations economically. As it turns out, it’s still not a good thing … and I think that principle probably should be well understood by everybody who’s going to have to make a decision on this.”
Sutaria noted some confidence in winning over policymakers to this mindset, as many of those who are currently enrolled in an exchange plan also make up a sizable voting bloc.
“They are younger than the average commercial participant, but they’re still in that young, middle-aged voter, American citizen category, just to be blunt about it,” he said. “These are highly relevant individuals whether you’re in a blue state or a red state, and I think it’s going to take people time to come around and understand who this population is.
“I think as that progress is made by the industry in helping to educate the politicians about what is going on with these exchanges, we’re likely to see a softening of perspectives here that help maintain coverage for this population,” he said.