Tenet Healthcare's Q1 volumes, ASC additions, divestment proceeds are music to investors' ears

Despite his company’s recent flurry of hospital divestitures, Tenet Healthcare CEO Saum Sutaria, M.D., told investors Tuesday that the company is poised to “essentially replace” the pretax earnings of the offloaded facilities thanks to the company’s above-expectations first-quarter performance and the dozens of ambulatory surgery centers it added during the same period.

The for-profit reported this morning $2.15 billion ($21.38 per diluted share) of net profit during the first quarter, of which $1.87 billion reflected after-tax gains from the closed sales of nine hospitals (three in South Carolina, six in California).

Removing those left the company with adjusted earnings per diluted share of $3.22—close to double the market’s consensus estimate.

But separate from its businesses’ strong revenues, volumes and margins, Tenet also announced that it would be adjusting its fiscal-year 2024 earnings outlook by an extra $215 million.

Per Chief Financial Officer Sun Park, the adjustments come exclusively from “structural changes” such as more than $200 million of incremental net revenues tied to Michigan’s Medicaid managed care program and smaller amounts related to the ASC acquisitions and two of the hospitals sold in California.

In other words, “we are not addressing … the underlying organic outperformance in our business units during Q1 in our increased guidance, at this stage,” Sutaria told analysts on Tuesday’s earnings call. “We are early in the year. We are very pleased with the demand we are seeing in our network, and we will address this component of our expectations for the full year in the future.”

The executives also noted that the $4 billion gross proceeds from the hospital sales helped the company retire $2.1 billion in debt (reducing annual interest payments by $102 million), repurchase $278 million worth of common stock and funnel $450 million of capital toward its “top priority” of expanding the high-growth, high-margin ambulatory business in the first quarter alone.

Investors welcomed all of the above with open arms. Tenet’s shares were trading for over 11% above open shortly after the earnings call—a contrast from the market activity seen last week after fellow for-profit system HCA Healthcare shared above-expectation volumes and revenues but declined to adjust its forecast.

Across its full business, Tenet reported $5.37 billion in first-quarter net operating revenues, a 6.9% year-over-year increase that outpaced consensus estimates by over $200 million. Cash flows from operating activity increased 30.5% year over year to $586 million.

The hospital segment—which after the quarter’s dealmaking now covers just over 50 acute and specialty care hospitals—saw net operating revenues rise 6.2% year over year due to a combination of higher admissions, improved pricing and a favorable shift in payer mix executives said stemmed from Medicaid redetermination. On a same-hospital basis, net patient service per adjusted admission rose 8.8% year over year, thanks again to pricing and payer mix as well as continued focus on high-acuity service lines.

Executives said they were pleased with improvements in contract labor costs and noted that medical specialist fees, while up about 9% to 10% year over year, were about flat compared to the fourth quarter of 2023. Sutaria also noted that Tenet’s revenue cycle management business, Conifer, is benefiting from agreements made during the hospital sell-offs to continue providing services for their new owners.

United Surgical Partners International, the ambulatory business unit, grew its net operating revenues 9.9% year over year, and its same-facility surgical net patient service revenues by 6.4%.

The company also continues to move forward with its rapid growth strategy for USPI, which now counts over 535 centers as of the end of the quarter.

“We are pleased to deploy capital to provide more lower cost access points to the communities in which we operate that also generate very attractive returns," Sutaria said.

The executives waived off an “expected” same-facility surgical case decline of 0.4% as a tough comparison over last year’s deferred care bump. Instead they opted to highlight broad increases in acuity and payer mix as well the growth of specific service lines—joint replacement surgeries, for instance, rose 21% over the prior year.

Looking across both business units, Sutaria told analysts that Tenet’s “operational discipline” has helped the company post strong margins amid its multiyear transformation into “essentially a new company.” This week’s numbers have also given Tenet’s leadership more confidence that 2023 wasn’t “a one-time rebound year” for volumes and revenues.

“Fundamentally, the first quarter gives us a great sense of relief,” he said. “We’ve established that there is strength, and the tailwinds for this business are real.”

Tenet is coming off of a self-described “exceptional” 2023 in which the company grew its 12-month net operating revenues 7.2% to over $20.5 billion and net income by nearly half to $611 million.

The volumes and revenues boosts it reported for the first quarter have been a consistent trend across its public for-profit contemporaries Universal Health Services, Community Health Systems and HCA Healthcare.