Tenet Healthcare has joined fellow for-profit HCA Healthcare in raising its 2023 guidance thanks to a strong first-quarter performance and signs of persistent volume recovery, especially across its high-margin ambulatory surgery business.
“Across our businesses, a post-pandemic environment is taking shape—COVID admissions are down, a wider range of acuity is returning to the hospitals, deferred [gastrointestinal] procedures are returning and our workforce is starting to stabilize,” CEO Saum Sutaria, M.D., told investors during Tuesday morning’s earnings call. “We have anticipated this for some time and our strategy, operating efficiency and capital discipline enable us to deliver attractive performance in this environment.”
Tenet reported net income of $143 million ($1.32 per share) from continuing operations as well as a 5.8% year-over-year bump in net operating revenues, to just over $5 billion, during the first quarter.
The Dallas-based chain’s latest numbers are an increase over the reported $139 million in net income and $4.7 billion in net operating revenue during the first quarter of 2022. They also represent a sequential improvement over the $102 million net profit and $4.9 billion net revenue of the fourth quarter of 2022.
Tenet executives said the numbers justified raising the full-year 2023 adjusted interest, taxes, depreciation and amortization (EBITDA) guidance by $50 million to a range of $3.21 billion to $3.41 billion. Guidance for net operating revenues also rose by $100 million for a range of $19.8 billion to $20.2 billion as net income rose $38 million to a range of $458 million to $623 million.
These numbers were a bit conservative for analysts on Tuesday’s call who felt that the first quarter’s numbers—assuming there are no concerns about sustaining the volume recovery—should have warranted a higher adjustment. Regardless, Tenet’s stock is now trading about 5% higher in the wake of the earnings release, even after seeing a slight bump late last week following similar strong numbers from contemporary HCA Healthcare.
“There’s really no reason that I see looking forward at this point that [our momentum] should change,” Sutaria said in response to a question on the guidance and volumes. “Look, we’re pleased to have delivered a good quarter and we’re pleased to have raised our guidance at this point in time. We’re optimistic about the future and we’ll revisit [the guidance] as we look forward depending on what the results look like.”
United Surgical Partners International, Tenet’s ambulatory business segment, led the charge with 21.4% year-over-year adjusted EBITDA growth. Same-store revenues grew 9.3% over the prior year’s first quarter while case volume rose 7.9%.
The company’s push to buy up ambulatory surgery centers continued with three added centers during the quarter. Tenet also plans to maintain a $250 million annual investment in ambulatory mergers and acquisitions, Sutaria said.
“As I've said before, the continued migration of procedural services into the ambulatory setting is a sustained and significant tailwind for our business,” Sutaria said. “Growth in our active physician population, as well as higher acuity service line expansion, especially [gastrointestinal], urology, [ears, nose and throat] and orthopedic cases drove the first-quarter volume strength. We are pleased to have our organic growth initiatives gaining traction and bearing fruit.”
Across Tenet’s hospitals, the company reported 6.7% same-hospital adjusted admission growth compared to the prior year’s quarter and 4.3% same-hospital admission growth. Of note, non-COVID admissions grew 14% year over year.
Total hospital costs have also improved for the company, landing 2.7% lower per adjusted admission compared to the first quarter of 2022 (when excluding the impact of a $69 million gain on medical office sale).
Labor expenses played a key role here thanks to continued nurse hiring and reduced reliance on contract labor, Sutaria said. Consolidated salaries, wages and benefits expenses landed at 45% of first-quarter 2023 revenue (compared to 46.2% in the fourth quarter of 2022 and 46% in the first quarter of 2022) while contract labor comprised 6% of first-quarter 2023 SW&B (compared to 7.3% in the fourth quarter of 2022 and 6.8% in the first quarter of 2022).
“We are expecting some additional moderation as we move through the year,” Chief Financial Officer Dan Cancelmi told investors. “But as we've said when we released our guidance in February for this year, we are not expecting our contract labor to get back to pre-pandemic levels. Certainly, that won't happen this year.”
Strategically, Tenet is continuing to expand high-acuity specialty services and shift more low-acuity procedures to USPI centers, Sutaria said. The strategy is so far being rewarded by steady case mix index growth since 2019 (on a non-COVID basis).
“All in all, our hospitals have had a nice start to the year,” Sutaria said.
Executives said they were also pleased with the performance of revenue cycle services subsidiary Conifer, which saw 3.8% external client revenue growth and a 26.9% adjusted EBITDA margin.
Together, Tenet’s businesses generated $214 million of free cash flow despite the first quarter “oftentimes [being] our softest cash flow-generating quarter due to certain annual working capital requirements,” Cancelmi said. That money will help Tenet maintain its planned capital expenditure across USPI and its hospitals while repurchasing shares and “evaluating further opportunities” to restructure debts, he said.
Tenet operates 61 acute care and specialty hospitals along with roughly 110 other outpatient facilities. Its USPI business operates or has ownership interests in over 465 ambulatory surgery centers.
In 2022 the company reported $19.2 billion in net operating revenues and $410 million in net income attributable to the company.
Tenet executives said their rosy outlook on recovering healthcare service demand across the industry was supported by last week’s numbers from HCA Healthcare, which reported its own 4.1% year-over-year revenue bump. Executives at the 180-hospital chain also cited “momentum that we’re seeing in the market” from the fourth quarter of 2022 to the first quarter of 2023 as they justified raising projections for the remainder of the year.