Tenet Healthcare Corp Q4 FY2020 Earnings Call

Welcome to Tenet Healthcare Corporation's Fourth Quarter 2020 Earnings Conference Call. I will now turn the call over to Regina Nethery, Vice President of Investor Relations for Tenet.

Thank you. We're pleased to have you join us for a discussion of Tenet's fourth quarter 2020 results as well as a discussion of our financial outlook for 2021. Tenet's senior management participating in today's call will be: Ron Rittenmeyer, Executive Chairman and Chief Executive Officer; Saum Sutaria, President and Chief Operating Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer.

Thank you, Regina, and thank you all for joining us this morning. I would like to briefly highlight the results of the fourth quarter and then take a few minutes to discuss our current broad thinking on the business units, our plan for 2021, and establish the basis for how we see the continuing transformation of the Tenet enterprise continuing in 2021 and beyond. Dan will spend time on the details of the fourth quarter in a few minutes. I did want to highlight a few points worth mentioning as outlined on slide three. Our overall results for the fourth quarter adjusted EBITDA of $832 million, which excludes grant income and includes a $19 million gain from a sale leaseback of a medical office building, was notably better than forecast. This performance was achieved while we remained under a COVID surge that started around Thanksgiving and remains, although trending down with us today. We closed the year with approximately 2,700 active inpatient cases, and today we're at approximately 1,900 active inpatient cases across our system, having peaked in January at about 3,000 cases, which was actually greater than our July surge. Our Hospital segment achieved its budget in the fourth quarter excluding grant income. The grant income we received covered losses throughout the pandemic, not just the fourth quarter. We remain with an overall loss of hospital revenue of approximately $500 million, which is not covered, and to date, we have absorbed. We are very appreciative of the grants that have helped mitigate the losses to our system due to COVID, allowing us to remain stable and focused on patient needs. While admissions remain below 2019 levels, driven in large part by the COVID spike continuing and the reluctance of patients to seek care by delaying it or simply ignoring it, acuity remains very strong. We also benefited from the improvements we've made in managing this segment, utilizing data-based predictive analytics, the addition of new service offerings, ongoing strong cost controls, and the additional specialists we've added throughout our hospital system.

Thanks, Ron, and good morning, everyone. I'll begin this morning with slide 8. Our net income in Q4 was $414 million compared to a loss of $3 million last year. Our adjusted EBITDA in the quarter of $832 million excluding grant income was significantly better than our pandemic-revised internal forecast notwithstanding the surge in COVID in our markets. Our Q4 EBITDA excluding grants was better than the consensus estimate of $773 million at the time we previewed our Q4 results in January, even if we exclude a $19 million gain from the sale of a medical office building and a $9 million bankruptcy bad debt recovery in Q4 that we disclosed. As you can see from the chart, our fourth quarter EBITDA has grown quite a bit over the past several years. Q4 2020 EBITDA was 4% higher than last year and 20% higher than Q4 2018, even though volumes were substantially lower due to the pandemic. This strong performance was due to continuing solid cost management, investments in new service lines, and very high patient acuity cases, which contributed to historically high net revenue per case growth. Including grant income of $446 million, our fourth quarter EBITDA was $1.278 billion. In our third quarter Form 10-Quarter, we did disclose that we anticipated recognizing approximately $100 million of grant income in the fourth quarter. However, as we previewed in January, the additional grant income is primarily attributable to the revised guidance and the Consolidated Appropriations Act enacted in December for determining loss revenues and the ability to transfer grant funds received among subsidiaries within a hospital system that are most impacted by the pandemic. The grant income we recognized in 2020 was approximately $500 million less than the amount of loss revenues we incurred due to the pandemic. However, we appreciate the funding and the revised guidelines as they help healthcare providers partially mitigate the impact of the pandemic. From an earnings per share perspective, our US GAAP EPS in Q4 was $3.86 versus a loss of $0.03 in Q4 2019. Turning to slide 9, you'll see we produced $334 million of EBITDA in the month of December excluding grants compared to $259 million in November and $239 million in October, demonstrating strong sequential growth throughout the quarter. Particularly encouraging was the fact that the month of December results excluding grants was about $15 million better than our pre-pandemic budget despite substantially lower volumes due to COVID. We are pleased with the performance of each of our business units during the quarter. Beginning with the Hospital segment, although COVID case surged in all of our markets, our Hospital business achieved its original EBITDA budget for the quarter even when you exclude grant income. This strong performance was primarily attributable to a commercial payer mix; more favorable-than-aggregate volumes; very high patient acuity as our case mix index increased 11% year-over-year; and continuing effective cost management which helped mitigate the impact of incremental expenses from the pandemic such as higher temporary labor, premium pay, and PPE costs. Turning to our USPI platform, the ambulatory business continued to perform very well, as USPI outperformed our expectations for the quarter. Surgical volumes for the quarter were 95% over 2019 levels despite a difficult year-over-year comp, as we produced over 3% growth in Q4 2019. Our Conifer business also delivered a strong quarter, producing EBITDA of $111 million compared to $94 million in Q4 2019, a growth of 18%. Conifer's results exceeded their original budget, and its favorable performance was attributable to continuing cost efficiency actions as well as the receipt of $9 million related to receivables we had to fully reserve in 2019 due to a client's bankruptcy. Next, let's turn to Slide 10 where we present our monthly volume statistics during the quarter. Despite another surge in COVID cases, hospital volumes held steady compared to Q3. Our USPI surgical volume trends improved slightly, recovering to about 95% of 2019 levels. As we've discussed in the past, more complex and emergent procedures have recovered from the pandemic at a stronger pace than less critical lower acuity care. Our COVID inpatient cases were approximately 11% of our Q4 hospital admissions, compared to about 10% in the third quarter. Slide 11 summarizes the actions we've taken this past year to improve our financial position, including Conifer's improved cash collection performance, issuing $1.3 billion of notes to enhance our liquidity during the pandemic, refinancing $2.5 billion of debt that eliminated any significant debt maturities until June of 2023, and we increased our line of credit capacity by $400 million. The sale of the medical office building for $60 million in December and the anticipated sale of our urgent care business by the end of the first quarter this year for about $80 million provides us approximately $140 million of additional liquidity. We're also going to retire in the first quarter $478 million of 7% debt with cash on hand that will save us about $33 million of interest annually. Based on our performance during the year and the various actions we've taken, we've reduced our leverage to under five times adjusted EBITDA at year-end, coming in at 4.7 times compared to 5.3 times at December 2019. Let's now turn to Slide 12 and discuss cash flows during the quarter and the year. This slide is an analysis we've been presenting since the beginning of the pandemic to demonstrate we have not been burning through cash from operations. For the year, we generated approximately $1.2 billion of free cash flow when you exclude the Medicare advances we received and the deferred company payroll tax match under the stimulus legislation that will have to be repaid over the next two years. The $1.2 billion of free cash flow compares to $563 million in 2019, which is growth of over $600 million. The strong cash collection performance by our Conifer team was a key contributor to the significant year-over-year increase in our free cash flow. We currently have sufficient cash resources and available liquidity under our $1.9 billion line of credit. At year-end, we had over $2.4 billion of cash on hand and no borrowings outstanding under our line. Turning now to our 2021 guidance. Slide 13 provides a walk-forward of our 2020 EBITDA to the midpoints of our expectations for this year. Although there are various uncertainties as to how the pandemic will impact us this year, we believe we have sufficient visibility and confidence as to how our business will perform during the ebbs and flows of the pandemic to enable us to provide investors an outlook of our projected results this year. On this slide, we point out various EBITDA puts and takes in 2021 compared to last year. USPI's acquisition and de novo development activity will add approximately $240 million of EBITDA, including the SCD centers acquired, and we anticipate a year-over-year increase in hospital admissions and USPI surgical cases compared to last year of about 5% and 18% respectively, which will also be a key driver of EBITDA growth in 2021, as well as continued cost actions. Compared to volumes in 2019, we are projecting hospital admissions and USPI surgical cases will be about 93% and 101% of 2019 volumes. While we are encouraged by the recent decline in COVID cases and the distributions of vaccines across the country, our volume estimates incorporate the possibility that the variant strains of the virus could result in the volume recovery not necessarily being linear during the year. Although we would expect that as more vaccines are provided, our volumes and results could strengthen as we move through the year. Other important points about our guidance include that our hospital net revenue per adjusted admission and per surgical case will moderate this year as lower acuity procedures continue to recover. We anticipate $45 million of additional revenues related to the Arizona Medicaid program. As we discussed on our third quarter call, Medicaid funding for providers throughout the state increased over 30% as a result of the new supplemental program that went into effect on October 1st last year. We will have a few headwinds this year. The Medicare sequestration 2% revenue reductions are scheduled to be restored effective April 1st, which will result in a revenue decline of about $46 million. We recognized a $19 million gain from the sale of the medical office building in December that will obviously not repeat this year. The other item I want to mention on the slide is that we are revising the pricing and scope of services under a new revenue cycle contract to be finalized between Conifer and our hospitals. The new contract, once finalized, is anticipated to result in a $35 million EBITDA reduction for Conifer this year. The previous contract between Conifer and our hospitals was implemented many years ago, and these revisions appropriately reset the rates and scope of services going forward, which will continue to be on a commercially reasonable arms-length basis. On slide 14, we provide our 2021 EBITDA outlook for our three business segments compared to 2019. The portion of our EBITDA mix from our USPI business is expected to be over 40% of the total enterprise compared to about 33% in 2019. Before the USPI acquisition in 2015, our ambulatory business represented less than 5% of enterprise-wide EBITDA. It's a phenomenal growth story. Conifer is expected to generate growth of 9% excluding the Tenet contract adjustment and the bad debt recovery I mentioned earlier. As for cash flows in this year, we anticipate generating free cash flow of about $1.2 billion and adjusted free cash flow of $1.325 billion this year before taking into consideration the repayments we'll make in 2021 of approximately $700 million for the Medicare advances and the deferred company payroll tax match. Our anticipated free cash flow of $1.2 billion minus expected cash NCI payments of $470 million results in positive cash flows of approximately $730 million or about $7 per share. While we will have to repay the $700 million of Medicare advances and deferred payroll taxes this year, we already have sufficiently reserved for that amount in our balance sheet cash. The recurring underlying free cash flow generation of our business has significantly improved over the past several years, and we have sufficient liquidity to continue to support growth initiatives such as continuing to invest in the core business, in addition to supporting growth initiatives in our faster growth higher-margin ambulatory business. With respect to the Medicare advance payments we received in 2020 in our Hospital segment, we anticipate that over $500 million will be repaid by us throughout 2021 via claim payment offsets beginning in April. We are exploring the possibility of early paying $500 million in a lump sum prior to April rather than repaying the amount over the last nine months of the year through claims payment offsets. This will require the approval of HHS. We'll keep you posted on this. In summary, we are very proud of everything that our employees were able to accomplish in 2021 amid an extremely difficult environment. We believe the numerous actions taken over the past several years position us well for the continued successful growth this year and beyond. With that, I'll end by saying that our strong performance is due to the steadfast dedication of our patient caregivers and employees throughout the enterprise. I'll now turn the call back over to Ron.

Thanks, Dan. In summary, I just want to hit a couple of points. We had a solid Q4 in 2020. I think we've responded incredibly effectively in the quarter to the spikes we had in response to the overall pandemic. Our performance improvements are sustainable, and we believe they will carry us forward. The Hospital segment is performing very well across all major areas. USPI continues to provide sustainable and positive trends with greater opportunities to expand further, and that's where our focus is. Conifer remains a very strong performer. We have an opportunity to, as hopefully, the pandemic winds down, really get aggressive about the growth portfolio and develop a stronger team overall. The spin is viable and it is still going to occur, with a slight delay of a year. But in the grand scheme of things, that is not a big delay because it will give us an opportunity to get past COVID and be prepared to do this in a much more effective manner. So net, we're pleased with the results we've delivered, and we are very proud of the teams throughout this entire company that have performed. It has simply been outstanding. So with that, operator, we'll turn it over to open for questions.

Thank you. Our first question comes from Kevin Fischbeck with Bank of America. Please proceed with your question.

Hi, Kevin.

Hey, thanks. I guess, I wanted to dig into your guidance on hospital volumes. It's kind of interesting to me that from the outpatient visit perspective, you're going in Q4 at the low end. It doesn't really seem to be assuming a lot of ramp or improvement there, and even the inpatient number doesn't seem to be assuming improvement, I guess. Are you thinking about volumes getting back to normal? I mean, in a straight line, it seemed like your volume guidance would be a little bit low much less, if there was pent-up demand particularly, if you're talking about 2019, where you think the years of population growth demand might actually overall be higher. So is there anything to think about there as far as your view? Could you put a little bit of color on timing of volumes? But anything you're thinking about there or the economy impacting volumes or I don't know, I just – it seems like it's a conservative outlook.

Yeah, good question. Saum?

Hey, Kevin, it's Saum. There are a few things impacting it. First of all, we are still in the middle of a winter COVID surge at this point across the country. Obviously, it's affecting a number of our markets. As you know, throughout the pandemic, we've put a lot of effort into ensuring we have adequate capacity so that we could simultaneously maintain access for patients to surgical and other procedural care they need, given all the chronic illnesses people have, as well as accommodate the COVID-related volumes. As we look forward, we had a few thoughts in mind. First of all, in the midst of this uncertainty, we've guided towards improved volumes in 2021 relative to what we look back at as a 2019 year. But there's still a range of uncertainty around that because we don't know exactly how the COVID situation will evolve. We don't yet know if the COVID vaccines will be effective all the way into next winter. We really don't know the answer to many of those questions. We're obviously pushing appropriately to continue our strategy of expanding services for patients with chronic illness and, in particular, the higher acuity strategies that we have been pursuing all along. In the fourth quarter alone, I mean, we opened up and expanded a significant cardiac surgery program at our Children's Hospital in Michigan, and we expanded robotics programs in three or four markets. We received stroke certification at three hospitals. As you know, that's a very important designation going forward in terms of how stroke care will be administered based upon EMS runs. So we are continuing to progress on those strategies. But we are careful right now, because of the COVID activity, about what that volume picture could look like for the whole year. From an outpatient perspective, the biggest factor driving our guide upwards, but not a return to 2019 type of volumes, is really the emergency department outpatient visits which have slowed. We've talked about this before. If schools and sports and other things open up, the categories that have had the most decline in demand, the types of sports injuries kids need for either respiratory illness or other things that begin to come back, that will make a big difference. And again, we just don't have any way to predict right now into the middle and the end of the year what will happen. We have not made any major adjustments to our volume projections based on predictions around the macro economy and/or enrollment status. So, again, a lot of detail there just so that you have a sense of where we are. But we've been thoughtful and conservative about these projections. The most important point to note, by the way, is that we are bullish on our ability to generate earnings even with those volumes due to our cost control and focus on high acuity.

That's helpful. Thanks.

Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Good morning, guys. Question here on capital deployment. CapEx as a percent of revenue is trending a tad higher in the last few years. Are you guys finding better ROI for CapEx investments, or did the cash flow generation simply provide more ability to invest? And also on capital deployment, with the retirement of the 7% notes, most of your debt is pretty reasonably priced. How should we think about free cash flows going forward to M&A versus debt reductions? And as we delever in the next few years, is it primarily to EBITDA growth? Thanks so much.

Hello, Pito, it's Saum again. I'll begin and then hand it over to Dan. As I mentioned earlier, we are carefully considering our capital investments and the service lines in our hospitals that show potential for growth based on demographics and the chance to enhance profitable services for the community in those areas. Our strategy, which started two to three years ago, to expand our range of services has proven effective, and we have increased confidence now as we review which investments were successful and which ones were not, allowing us to allocate capital toward the higher-return service lines. We are more confident in this approach. Additionally, it has opened up new opportunities at the intersection of our Ambulatory and Hospital business for high-return capital deployment. Beyond the SCD type transactions, Brett and the team have a solid development pipeline, and the opportunities there are expected to grow as we manage these centers exceptionally well. Therefore, as we identify opportunities in our key markets that offer higher returns, we are intentionally making more investments to enhance our portfolio while maintaining a focus on delivering high returns.

Hey Pito, it's Dan. Good morning. Regarding our overall capital allocation and leverage, the growth in earnings will remain a crucial factor in our strategy to reduce debt and leverage. Last night, we announced that we have ample liquidity, which is a positive development. Paying off the 7% notes makes perfect sense, as it saves us over $30 million in interest and enhances our free cash flow. We have other bond tranches available for early retirement; although the rates are reasonable, they can be called at attractive prices. Additionally, we have a 7.5% note tranche that we can eliminate at a fair rate next spring. We're exploring various ways to allocate capital with a focus on decreasing our debt. We'll continue to invest in the USPI Ambulatory business, with our guidance indicating $150 million to $200 million for M&A activities. As we did with the SCD transaction, if the right opportunity arises, we will commit more capital in that area. We are also carefully investing in the Hospital business, targeting higher acuity services in different markets, ensuring that these investments yield solid, risk-adjusted returns.

And Conifer. Also in Conifer. Again, in these point solutions and some of the other things. I think we're doing it thoughtfully and appropriately and very, very focused on data to support the decision-making.

So, to your other point about free cash flow growth. I mean, this year it will be about $1.3 billion before we pay back some of the stimulus monies, and even when you back out the cash NCI payments. So that eats a lot of excess free cash flow, and we would expect that to continue to grow as we move beyond 2021.

Because our earnings are growing. And as we make the shift into the Ambulatory, et cetera, they're growing. So we've changed the profile of the quality of earnings. So anyway, thanks for the question.

Our next question comes from Justin Lake with Wolfe Research. Please proceed with your question.

Thank you. Good morning. I wanted to follow up on your comments about the COVID volumes moderating somewhat in January. Could you provide more insight on that? There seems to be a discussion about how quickly the deferred care might return, especially as COVID appears to be decreasing significantly across the country. I would appreciate any commentary you have on January. Additionally, looking at the bigger picture, how do you perceive this situation? Do you believe there will be a delay before some of that emergency care returns? How much of it do you think is structural? Thank you.

Yes, Justin, it's Saum. We observed that our COVID inpatient volumes in January sometimes surpassed 3,000, which is an increase from July levels. This rise was consistent throughout January but has started to decline rapidly. Currently, volumes are down by at least a third from that peak, which led to capacity constraints during January. However, we have resolved those constraints across all markets and are actively applying our effective recovery strategies to bring back patients. This includes managing access for doctors and patients regarding deferred care, monitoring deferred cases, and reaching out to schedule them promptly. Additionally, we've quickly reopened our operating rooms, providing capacity to physicians who may not regularly utilize our hospitals, allowing them early opportunities to return. We're moving swiftly to address necessary deferred care. During December and January, some states had restricted executive orders that slowed surgical care, but those have now been lifted. It's worth noting that non-COVID emergency room admissions have remained strong into February, while lower acuity visits have seen some hesitation from patients coming back to hospitals. As COVID situations improve, we will work to assure the community that hospitals are safe for these lower acuity cases. On the COVID management front, we successfully managed our length of stay for COVID patients last quarter, which was crucial in controlling costs and alleviating staffing challenges while ensuring patients improved. We're getting better at managing COVID care as we advance into this quarter. This cost management strategy during the COVID surge is an important aspect to highlight.

Thanks.

Our next question comes from Jamie Perse with Goldman Sachs. Please proceed with your question.

Hey. Good morning, guys. I wanted to follow up a little bit on the volume assumptions you're making. You're assuming a lower revenue per adjusted admission this year, 3% to 5% lower is your range. I just wanted to tie that back to how you're thinking about volumes. I assume there's lower acuity care in your model coming back. But it doesn't seem like the pressure you're assuming for revenue per adjusted initiatives commensurate with the volume or slight volume increases you're seeing. Maybe just talk about those two variables and how you're thinking about both.

Good morning, Jamie, it's Dan. Regarding pricing, I want to clarify a few points. The expected 3% to 5% decline in net revenue per adjusted admission mainly reflects our anticipation of lower acuity volume returning. Additionally, from a commercial standpoint, we have excellent visibility into commercial pricing, with over 90% of our commercial business contracted this year. We previously mentioned and still forecast rate increases of 3%, 4%, or 5% based on acuity levels. For Medicare pricing, there is nearly a 2% year-over-year increase for inpatient services and about 3.5% for outpatient services. In terms of USPI, Medicare rate updates are just slightly over 2%. The overall pricing is based on negotiated rates with government payers, and we have strong visibility here, which makes us optimistic. However, the metric is influenced by our assumption of lower acuity business returning, which affects the overall calculations. Despite this, we remain confident in pricing across the board, including by service line and market.

Okay, great. Thanks for the color.

Our next question comes from Frank Morgan with RBC Capital Markets. Please proceed with your question.

Thank you and good morning. I have a higher-level question. I'm interested in your guidance regarding the end of the sequester and other programs from the previous bill. What are you hearing or seeing from the Biden administration about their COVID relief bill? Do you think any existing programs, such as sequester relief or DRG payment add-ons, could be extended under this new legislation? Also, regarding cash flow, you mentioned the cash flow from operations and the CapEx, which I believe you estimated at $600 million to $700 million. You highlighted Conifer as a significant contributor to that. Can you clarify what portion of that amount, whether it's half or a quarter, can be attributed to Conifer? I would appreciate any insights you can share. Thank you.

There are two questions here. Regarding the administration, I don't think we can predict all your concerns about what you asked. If we could, we would be in a much better position than we currently are. We just don't know. We spend a considerable amount of time trying to sort through the information coming out. However, there is a lot of uncertainty surrounding vaccine distribution, the situation with COVID, and how quickly the changes to the plans are occurring. There are also other issues that haven't been fully addressed yet, which prevents us from having a clear understanding. Nevertheless, our government affairs team, which is very capable, is actively working on these matters and collaborating with relevant entities. All I can say at this point is that we will provide more information later, but I prefer not to make any guesses about it.

Yeah. Hey, Frank. In terms of as I mentioned in my remarks when you consider the cash NCI payments to our minority partners predominantly in our ambulatory business, we're going to generate free cash flow of about $700 million, which provides again a lot of optionality. I would tell you that the key drivers of it except for the aggregate net cash generation anticipated by the business Conifer is a big part of that. They did a great job in 2020, really driving improved cash collection performance in the midst of the pandemic and in the midst of incredible hurdles and obstacles. We expect that to continue. We were very impressed with how the year closed out from a cash perspective. We've got to do better, and we know that. We're going to continue to drive on that. But, yeah, Conifer will be a big part of that in terms of helping us to continue to enhance our free cash flow generation.

Our next question comes from Whit Mayo with UBS. Please proceed with your question.

Thanks. Just have two quick ones here. Looking at the portfolio mix that you outlined for 2023 on slide 6, does the 35% coming from acute contemplate additional divestitures? And does the 50% from USPI contemplate any larger than normal acquisitions? And the last question I have is; I think you have one last put call outstanding on USPI with Baylor. Is that something that we should be considering for 2021? Thanks.

Yeah. Hey, Whit, it's Dan, good morning. Yeah, in terms of the mix in driving the ambulatory portfolio to 50% of the enterprise-wide earnings, we will continue to invest appropriately in that business. Whether it's $200 million a year or if the right opportunities are there, we will invest more than the $200 million. We're not going to say there's like one specific transaction that is going to happen and that's what's embedded in there. But we believe that the pipeline is robust and we're going to continue to pursue opportunities that make sense economically. So I would say, generally speaking and as Ron mentioned in his remarks, we'll continue to look at the hospital portfolio. You could see some instances where it may make sense to redeploy some hospital capital into the ambulatory business. So that will be part of the equation.

I'll just add to that. Look, obviously, we're not going to get specific. It's not a good business. I think Tenet had a history of getting specific and then getting hurt, especially on the hospital side. If we reach definitive agreements and there are things we want to announce, we'll announce them. But we are actively looking at everything. We've said that for the last couple of years and I think we've proven that we're doing it. So we're actively looking at hospitals that make sense. Do they fit? Do they not fit? How long would they fit? We have people that spend a lot of time on this. The same on the USPI side, which I think Brett would comment on that. We are very engaged in looking at everything. But you've got to look at price. You've got to look at the market. You've got to consider what you think is going to happen next. So as we get to the point of closing in on something then we'll announce it.

Yeah, as we discussed, related to the put call, Baylor put call in the past. I think we disclosed this in the SEC filings. The first tranche, the put call option with Baylor becomes effective in April of this year. Of course, we'll be discussing that with Baylor and keep the investors updated at the appropriate time. But our assumptions in 2021 assume the status quo on Baylor's ownership in USPI.

Yeah. They're a great partner, and we're very satisfied with the relationship.

Our next question comes from Josh Raskin with Nephron Research. Please proceed with your question.

Thanks. Well, sticking with the ASC side. Does the recent SCD acquisition change the trajectory of either development, or de novo, or M&A in the next year or so? Meaning, does this increase your pipeline potentially accelerate new centers, or are you more concentrated on the integration? And then, sort of last part would be, can you just remind us your strategy and where that's evolved around working with other non-Tenet health systems to develop their ASC footprint?

I will let you continue. I just wanted to mention that our strategy remains the same as what we've previously discussed.

Let me share a few overarching thoughts. This is Saum. First, I want to emphasize that USPI's strong track record in forming successful partnerships with physicians has been vital in facilitating the SCD transaction. The success of this deal has the potential to enhance USPI's unique position that has been established over the last decade in fostering productive relationships with physicians. When we presented the transaction to the market, we highlighted that it also built upon and broadened our existing strategy of fostering two-way partnerships, in addition to our well-established three-way partnerships with various respected health systems across the country. Our efforts in this area are ongoing and are consistently expanding with new partnerships emerging. I believe that increasing the option pool for USPI in two-way partnerships, along with the promising new developments the team has achieved through our work with Tenet, lays a stronger foundation for future growth compared to a few years back. Brett, do you have anything to add?

No, no, Saum, well said. The only other thing, Josh, I would add. I think your point was, are we going to get distracted based on the integration of the SCD facilities when we think about our M&A for 2021? The reality is that we did a significant amount of pre-integration planning prior to closing. As a result of that, the integration is going very smoothly, and we continue to hit key milestones from an integration perspective. So, I don't think that's going to be a distraction. That work stream is moving very well and smoothly. Now obviously during Q4, we spent a lot of time on the SCD transaction. At the same time, we continue to focus on building our pipeline going into 2021. So it's robust for both acquisitions and de novos. As a result of that, I think we're well-positioned to have a strong year from an M&A perspective in 2021. Of course, we'll be building the pipeline for 2022 as well throughout the year.

Yes. I think it's important that we realize our development focus, our integration focus, our operating focus. I mean, they are not mutually exclusive, right? We are operating and we are integrating without regard to slowing down or changing our development focus which is a machine on its own.

Correct. Yes.

Our next question comes from A.J. Rice with Crédit Suisse. Please proceed with your question.

Thanks. Hi, everybody. I may go back to just a couple of things on Conifer real quick. Part of their revenue is tied to claims processing and revenue of the underlying hospital customers, including yourselves. To the extent that volumes are down year-to-year because of the COVID crisis and the deferrals and so forth, there could be a potential snapback just as we return to normal. To what extent, if at all, have you factored that into the Conifer outlook, or does that sit up there as upside potentially if that does play out? And then the broader question on Conifer, going back to Ron's prepared comments, you said that when you embarked on the spin-off, you guys went out and tested the waters from an acquisition or divestiture standpoint and people weren't willing to pay you for what you saw as the potential for margin improvement and cost savings. Obviously, it's two years later almost at this point or 18 months later and you've still got another 12 to 18 months. I wonder, are you laser-focused on the spin-off, or now that you've actually realized some of that upside is it worth it, or would you be open to testing the waters again and seeing if people pay you for now what you've accomplished?

Hey, A.J., this is Saum. Let me get started and then I'll offer Ron and Dan a chance to comment in addition. Your question on the revenues and how that impacts Conifer is a very good one. Not all of our contracts at Conifer are revenue-sensitive. So yes, there is some impact there but it is factored into our guidance. Remember, it’s because the services are end-to-end; the activity that Conifer pursues in the front and mid-cycle have a substantial effect in return for our clients including Tenet. Many of those are less revenue-sensitive than others. But to answer your question directly, what revenue sensitivity there is factored into the 2020 guidance. Before I pass it off, the one thing I would say is I mean we're laser-focused on creating value in Conifer. I mean, we see significant opportunity to expand our services; our point solution business, for example, in the eligibility or small balance AR space has already hit the market. We have new clients and new expansion that we are in the midst of confirming right now. We believe that that has a fair amount of runway. So I would just think about what we're laser-focused on in this period of time is expanding our Global Business Center, expanding our growth trajectory, taking those point solutions to market, and managing our relationship with our largest customers where there may be expansion opportunities as they expand their portfolios.

And I would just add that look, we're a public company. If somebody shows up with a credible offer that’s at the level that we think is appropriate, as compared to the levels we saw in the past, realizing that we've proven that the company has more growth, which we also still believe is true. Obviously, we would consider – I mean, you have to consider whatever comes forward. I can't sit here and say we wouldn't consider things. We will. That's just the nature of the business. But I'm not out looking to do that. I'm out trying to stay focused on ending - getting out of the pandemic, getting things back where there’s some reliability in what's happening and going ahead and furthering the growth at Conifer and doing the things that I mentioned in my remarks. I hope that helps clarify the answer.

Yes, that’s good. Thanks a lot.

Sure A.J.

The last question comes from Ralph Giacobbe at Citi. Please proceed with your question.

Thanks. Hi, thanks for letting me in. Can you maybe just discuss the labor line? It looks like you've managed it pretty well in the fourth quarter. There's been more questions I think of late around higher wages as well as turnover and burnout. So maybe just want to understand how you've managed it and maybe what's embedded in guidance for 2021. Thanks.

Hey Ralph, it's Dan. I'll start and then turn it over to Saum. When Saum was talking before about the improvement in contract labor cost, he's being modest. Our contract labor costs came down quite a bit in the fourth quarter due to him and his team really managing it appropriately. So that was a key driver in terms of our labor management in the quarter.

Yes, Ralph, I want to emphasize that we paid close attention to the COVID surges in April and the July-August timeframe. Our operational and clinical teams took a step back to identify non-patient care-related factors that were delaying our ability to transition patients back home or to more suitable care settings. We focused on various aspects, including the timely and safe discharge of patients from the ICU, enhancing our relationships with post-acute providers, and improving home health services to facilitate appropriate patient discharges. This focus was primarily driven by our commitment to patient care, but it also helped ease some of the pressures from the extremely tight nursing market. Our nurses have worked tirelessly, demonstrating remarkable dedication. While we couldn't completely eliminate the stress caused by the high COVID environment, we did our best to relieve some of that pressure, and it has had a positive impact on our performance. We need to maintain this focus moving forward in case we experience more COVID spikes.

Okay. All right operator thank you very much. I think that concludes our time.

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