Slowing volume recovery from pandemic-deferred care won't hold Tenet back, CEO says

Though the utilization bump from pandemic-deferred care is reaching its tail, Tenet Healthcare executives say the system still expects to grow its earnings by sticking with its high acuity care strategy and increasing capacity within its pruned acute hospital segment.

Speaking Tuesday at the Bank of America Securities 2024 Health Care Conference, Tenet CEO Saum Sutaria, M.D., acknowledged that the company’s ambulatory surgery center segment, United Surgical Partners International, enjoyed a bump in volumes last year as patients booked their postponed procedures.

That recovery “is done,” bringing the segment back to a “more normal growth algorithm” that may not drop any jaws when compared to the prior year’s numbers.

However, “the most important thing from a growth standpoint in the ambulatory business, from my point of view, is not numbers—it’s acuity and net revenue per case. … That’s where value is created for the system. All of our investments are very much dedicated, especially on an organic basis, in building those [acuity and per case net revenue] programs in our center.”

Case in point for the executive came during the first quarter’s volume and net revenue per case numbers. The company’s volumes were “basically flat” against the prior year, but net revenue per case more than doubled Tenet’s guidance with over a 6% year-over-year increase.

“We're going to make that trade every time,” he said.

Tenet has been building up USPI’s footprint in recent years via a combination of center purchases and de novo openings. It added dozens to its tally in the first quarter alone, though Sutaria said the spike came from coincidental timing of deal closures rather than any adjustment to its multiyear acquisition strategy.

The story is somewhat different within the company’s hospital segment, where Sutaria said the care deferments and volume recovery are still playing out.

“I anticipate that this year, and even part of next year, we will continue to see utilization recovery in the acute care segment—probably over time a heavier mix of government, especially Medicare, returning into the environment more fully,” Sutaria said during the session.

“Also, you’re still filling that unfortunate demand hole that was left from all the premature mortality that occurred due to COVID upfront rather than over a longer period of time,” he continued. “So, as more people age into that higher utilization, where in [their] last five years of life, we’ll see that recovery increase.”

The acute hospital portfolio, ultimately, has a similar platform goal to USPI—high acuity emergent and elective procedures built around specialists to drive profitability, Sutaria said. The company has been realigning its hospital portfolio to reach that goal, a process that was accelerated during pandemic disruptions, and more recently sold off a fair portion of its facilities when it found appealing valuations on the auction block, he said.

Pandemic hurdles and other operating headwinds, like high labor costs, also had Tenet either stalling or intentionally reducing inpatient capacity among many of its hospitals. Clear signs of pent-up demand in recent quarters’ volumes numbers, stabilizing labor and increasing reimbursement are now starting to shift the calculus in capacity expansion’s favor.

“As the portfolio has narrowed and as reimbursement has become more even across the country, for us, we now have a bunch of more investable markets, including those that were slower to recover from COVID,” Sutaria said. “We can begin to add capacity back. We’ll do it thoughtfully; we’ll do it diligently. It’s not going to be a massive opening that occurs with a bunch of costs that’s allocated to it without an obvious source of demand. But we do see that as a potential accelerant over time.”

Sutaria specifically called out Tenet’s hospitals in southeast Michigan as “an incredibly investable market” that was previously constrained by limited reimbursement.

Tenet reported $2.15 billion ($21.38 per diluted share) of net profit during its most recently closed quarter with widespread strong volumes and revenue growth. The system bumped its 2024 earnings outlook by an extra $215 million, though this was more a reflection of “structural changes” like the net revenue increases tied to changes in Michigan’s Medicaid managed care program.