Tenet's investments in acute care assets paying off with high price tags for hospitals, CEO says

Tenet Healthcare’s push to flesh out acute care hospitals with higher acuity services and in-market support has yielded a secondary benefit for the company—nonprofit health systems willing to pay top dollar for a piece of the pie.

The company recently shared news that its $2.4 billion sale of three South Carolina hospitals to Novant Health had closed and that it had cut a new deal with UCI Health to sell four others for $975 million.

Investors tuning into Tenet's “exceptional” fiscal 2023 earnings call Thursday admitted they were surprised by the “unusually high” price tags the company was able to secure and wondered whether Tenet was shopping around other hospital assets as a result.

CEO Saum Sutaria, M.D., replied that the valuations were a recognition of Tenet’s work over the past half-decade to focus its hospitals on high-acuity procedures that generate strong profits. Being able to do so while demonstrating “solid quality, safety [and] service” offers health systems an “attractive” base to build an expansion upon, he said.

“It's a lot of work to get them into that position … so they’re high-quality assets,” he said.

The hospitals also aren’t being sold off piecemeal. Tenet has been able to pursue the high-acuity procedure focus by building out the rest of an acute care hospital’s market with complementary sites that both handle low-acuity cases and funnel the more appropriate consumers into the hospital.

Packaging these assets and multiple hospitals into a single deal is “relatively rare,” Sutaria said, and has allowed the for-profit to be more opportunistic with its divestitures.   

“Our point of view is that we recognize that value, and we hold out for that type of value in order to ensure we’re doing the right thing,” he told investors. “Remember, we’ve said all along [that] we’re very comfortable operating the entirety of this portfolio and doing well with it—and we still are. That doesn’t change.”

Though Tenet isn’t necessarily planning to make more divestitures, Sutaria said the company will “remain opportunistic” and has “a strategic sense of what we would entertain [and] at what values.” He stressed that the sell-offs will “substantially” improve its leverage position (by reducing leverage ratios by about 0.6) and will not interfere with the company’s portfolio strategy or its value proposition to payer stakeholders.

As for United Surgical Partners International, Tenet’s high-return ambulatory care business, Sutaria said the company is still on pace to meet its target of 575 to 600 centers by 2025. USPI added 30 new centers across 2023 through a combination of M&A and de novo opens, with purchases making up just over half of the total.

Volume, acuity growth drives ‘exceptional’ 2023 for Tenet

As it signaled last week, Tenet came to the table Thursday morning with substantial fourth-quarter and full-year revenue and volume growth.

Net operating revenues for the quarter grew 7.8% year over year to $5.4 billion while net income increased from the fourth quarter of 2023’s $102 million ($0.92 per share) to $224 million ($2.30 per share). Across 12 months, net operating revenues grew 7.2% year over year to $20.5 billion whereas net income rose from 2022’s $410 million ($3.78 per share) to $611 million ($5.71 per share).

Within USPI, which now has interests in 461 ASCs and 24 surgical hospitals, fourth-quarter net operating revenues rose 15.4 % year over year due to a blend of same-facility net surgical case growth, new locations and improved pricing yield. Sutaria said the unit logged a “phenomenal” year with 19% net operating revenue growth, 9.2% same-facility revenue growth, $1.5 billion in adjusted EBITDA and other signs that the business has“finally escaped COVID disruption.”

Within its hospital segment (which now includes Tenet’s revenue cycle management business, Conifer), fourth-quarter net operating revenue grew 6% year over year “primarily due to increased adjusted admissions, favorable payer mix and improved pricing yield,” the company said. Executives also touted fourth-quarter acuity gains, as seen by a 6.5% year-over-year rise in revenue per adjusted admission, and non-COVID same-store inpatient admission growth 2.6% for the quarter and 6.2% for the full fiscal year.

Executives also highlighted Tenet’s work bringing consolidated salaries, wages and benefits (SWB) down from 46.2% of net revenues in the fourth quarter of 2022 to 43% in the fourth quarter of 2023. Contract labor costs in the fourth quarter were also down 62% year over year, to 2.8% of consolidated SWB.

On the other hand, Tenet saw a $16 million sequential increase in medical fees from the third to the fourth quarter, Chief Financial Officer Sun Park told investors. Though “consistent with our expectations,” he said the fees were up by 15% from 2022 to 2023.

Looking ahead, Tenet issued a 2024 full-year outlook that “assumes continued organic volume growth, strong patient acuity, better-than-historical contract negotiations and effective cost management, with specific expectations for additional contract labor savings on a full-year basis partially offset by incremental medical fees,” Park said.

The company is also assuming continued ASC additions for USPI and same-hospital admissions growth of 1% to 3%, adjusted admissions growth of 1% to 3%, same-facility USPI surgical case growth of 1% to 3% and USPI net revenue per case growth of 2% to 3%.

Across the year, Tenet is expecting net operating revenues between $19.9 billion and $20.3 billion, net income between $2.172 billion and $2.417 billion and adjusted EBITDA between $3.285 billion and $3.485 billion.

Responding to an investor’s concern that projected organic growth and performance for the hospital segment “seems a little bit low” coming off a strong 2023, executives said they are anticipating continued, but manageable, increases to medical fee costs during 2024. Sutaria added that the company believes acute care will continue to recover in 2024 similar to 2023, but that Tenet will need to work toward opening up capacity to reach the higher end of its guidance range.

Dallas-based Tenet Healthcare now comprises 58 acute and specialty care hospitals, has interests in over 480 ASCs and surgical hospitals and runs roughly 160 other outpatient facilities. Its stock has traded about 0.75% higher than opening since the earnings released, though shares are still up over 7% since the company shared its M&A and early earnings projections last week.

Tenet’s numbers come after fellow for-profit HCA Healthcare reported a strong 2023 close and projected continued care demand in 2024.