Tenet Healthcare beats on higher volumes, strong acuity, modest physician fee growth in Q3

Tenet Healthcare's dual strategy of rapid ambulatory surgical center additions and a shift toward high-acuity hospital care capabilities paid off in the third quarter, with earnings from both sides of the business coming in “well above our expectations,” Chief Financial Officer Dan Cancelmi told investors Monday.

The company reported third-quarter net operating income of $101 million ($0.94 per diluted share), down from the $131 million ($1.16 per diluted share) of a year prior. Net operating revenues for the quarter came in at $5.06 billion, up from $4.8 billion.

CEO Saum Sutaria, M.D., highlighted the for-profit’s “agile approach to managing operating expenses” that have kept Tenet’s supply and labor expenses manageable “without any cost to capacity.”

He also told investors that prior renegotiations of physician contracts during the height of the pandemic held year-to-date professional fee growth to about 15% year over year.

Though that number is expected to grow in the year’s remaining quarter, the increase has been “in line with what our expectations were this year.” It makes Tenet an outlier compared to fellow for-profits HCA Healthcare, Universal Health Services and Community Health Systems—all of which reported last week an unexpected spike in these costs due to implementation of the No Surprises Act.  

“Even back during the pandemic, I made some comments about the fact that we undertook a comprehensive review of every physician service contract in the company to restructure, consolidate, scale services and work with some of our better partners,” Sutaria told analysts Monday afternoon. “And when those weren't available, either due to market penetration issues or competitive issues they may have had, we looked at opportunities to insource.

“So yeah, we understand that these fees are going up. But all year long, and going into next year, we're planning them in in the way we issue guidance,” he said.

On the subject of guidance, executives raised fourth-quarter net operating revenue projections to a range of $5.13 billion to $5.33 billion, as well as adjusted net income to $119 million to $184 million ($1.12 to $1.74 per diluted share). The new full-year EBITDA guidance range of $456 million to $451 million is 5% higher than initial guidance and the third time this year Tenet has increased its projections, Cancelmi noted.

Both revenue and earnings were above analysts’ expectations. Tenet’s stock was up about 3% after-hours Monday evening.

“We believe in the strategy we're pursuing around acuity, capital efficiency, thoughtful management of our capacity for the services we offer and, obviously, the expansion and growth of [our ambulatory business segment],” Sutaria said. “And [Q3’s 17% EBITDA] margin is notable for Tenant as an entity, which I don't think we've seen for a very long time, if ever. So that's really the pathway we're down.”

For United Surgical Partners International, its ambulatory business, Tenet reported $941 million in third-quarter net operating revenues, up year over year from $806 million.

While same-facility surgical cases rose 4.1% year over year, Sutaria highlighted “attractive volume growth in high-acuity service lines, including mid-teens growth in total joint replacements” in ASCs. Tenet also made progress in its USPI portfolio expansion strategy, adding six new ASCs via purchases and a pipeline of more than 30 de novo centers on the way.

Among its acute care hospitals, Tenet’s net operating revenues rose 3.7% year over year, from $3.78 billion to $3.92 billion, due to a combination of higher adjusted admissions and improved pricing yield.

Same-hospital admissions and adjusted admissions rose 0.6% and 0.4% year over year, respectively, though outpatient visits fell 2%, ER visits dipped 0.9% and hospital surgeries fell 0.7%. The company highlighted a 4.5% increase in year-over-year non-COVID inpatient admissions and patient acuity levels that yielded a “strong” revenue per adjusted admission increase of 3.2%, which Sutaria attributed to Tenet’s strategy of prioritizing high-acuity service lines across its markets.

“Our third-quarter results lend further credence to our hospital strategy of being focused on acuity rather than all things to all people,” he said.

Sutaria said Tenet's hiring and retention efforts have produced a “substantial reduction” in contract labor usage to 3.1% of Tenet’s consolidated salaries, wages and benefits expense, “which is the high end of pre-pandemic levels.” The stronger in-house workforce helped Tenet reduce its contract labor utilization without reducing capacity, though “in the fourth quarter as demand rises, it is possible we will invest additional resources to ensure access,” he said.

Together, the two units and Conifer, Tenet’s revenue cycle management services business, have brought in $15.17 billion in year-to-date net operating revenues, up from last year’s $14.18 billion. Net income across the nine months is $367 million, also up from 2022’s $308 million.

Executives said they would hold off on 2024 guidance until Tenet’s next earnings call but generally signaled optimism under analysts’ prodding due to the company’s stable starting point, USPI’s growth trajectory and the tailwinds of recovering labor and industrywide volumes.