Tenet Healthcare Corp Q4 FY2022 Earnings Call

Good morning. Welcome to Tenet Healthcare's Fourth Quarter 2022 Earnings Conference Call. After the speaker's remarks, there will be a question-and-answer session for industry analysts. I will now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin.

Good morning, everyone, and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's fourth quarter 2022 results, as well as a discussion of our financial outlook. Tenet senior management participating in today's call will be Dr. Saum Sutaria, Chief Executive Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our website tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide in today's presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. With that, I'll turn the call over to Saum.

Thank you, Will, and good morning, everyone. To kick us off, I want to thank all of our physicians and caregivers for their commitment and attention to our patients' needs throughout 2022. Three years into the pandemic, I continue to be inspired by the people I meet who have chosen to forge ahead and find their calling in health care. Second, I want to take a moment to acknowledge three of our leaders who have announced their retirements this year. Roger Davis came to Conifer in 2020, planning to transition to become the CEO of a spun-out independent company. Roger has been a selfless leader acting upon the opportunities to improve Conifer's technology, point solutions, AR operations, and global footprint with Conifer remaining a part of Tenet rather than advancing his own personal goals. For that, we will always remember his leadership as a role model in the company. Brett Brodnax has devoted over 20 years to building today's USPI. He is a pioneer in ambulatory surgery and a rock star in his field. The relationships he has cultivated with health system partners and doctors will remain a hallmark of USPI, because he has never treated them as his, but ingrained them into the fabric of USPI. He and I jointly selected Andy Johnston to return to the company after gaining additional operating experience outside of the organization and I could not be more pleased with the way the three of us will lead this transition over a full year. And generously, Brett's desire for USPI's success is so strong that he has offered the option for additional time beyond 2023 with us. Dan Cancelmi is approaching 30 years with Tenet, starting as a CFO in a hospital and building his career succeeding in every role he took as he ascended to our company's CFO. At every step, Dan championed his team members, brought the perspective of the leaders in the field to our home office, and relentlessly worked to be solution-oriented to the problems we face. In the last few years he's been instrumental in every aspect of our turnaround efforts, demonstrating his ability to adapt and take a fresh perspective on a company he's known his entire career. He creates value for our shareholders. Dan represents the highest model of integrity in our organization and I'm grateful for his dedication to help onboard a new CFO at Tenet. In the last five years, we've built a model for leadership transitions that are stable and collaborative handoffs and these should be no different thanks to all three of you. With that, let's turn to our 2022 results. In 2022, we recorded net operating revenues of $19.2 billion and consolidated adjusted EBITDA of $3.47 billion, which translates into an attractive 18.1% adjusted EBITDA margin. We finished the year strong and delivered results in the fourth quarter consistent with or slightly above the expectations we set for all three of our businesses, driven by stronger volumes and excellent cost management. For the year, USPI delivered $1.327 billion in EBITDA, with strong margins at 40.9%. Importantly, in 2022, USPI had 4.6% growth in same-facility revenues in the range of our long-term goal of 4% to 6% top line growth. But as we've discussed, the performance in 2022 was not consistent quarter-to-quarter and same-store EBITDA growth was below our expectations. We are pleased that the fourth quarter returned to positive same-store growth and the typical seasonality of strong December volumes that we used to see pre-pandemic. USPI's M&A engine under the Tenet umbrella continues to be an industry-leading differentiator. In 2022, we added 45 centers to the portfolio through M&A and de novo development, in addition to the SCD centers. This was highlighted by our acquisition of 22 facilities in our partnership with the United Urology Group. Turning to our hospital segment. We generated nearly $1.8 billion of adjusted EBITDA in 2022 during a challenging operating environment. Our operators navigated a cybersecurity attack, as well as continued COVID-related pressures. Importantly, we saw a meaningful improvement in clinical quality and patient safety metrics such as a 50% reduction in both MRSA infections and hospital-acquired pressure ulcers. We saw our peak in contract labor expense in September and by December we had reduced that by almost 23%, exiting the year with contract labor below 6.5% of our consolidated SW&B expense. We are confident in our labor management system and we'll continue to adjust as needed for critical patient needs. Over the past year, we have also invested in our workforce with increased pay bonus programs and incremental benefits. Importantly, our nurse retention and recruitment efforts continue to pay dividends, with RN hires up in 2022 over 2021. Retention has improved as well. In the fourth quarter, nurse turnover improved by 22%, compared to the average of the prior four quarters. Finally, Conifer had another strong year, with third-party customer revenue growth of 10%. Adjusted EBITDA margins remained strong at nearly 28%. Conifer's pipeline of sales opportunities remains robust, reflecting the investments that we have made in our commercial capabilities for both integrated and point solution initiatives. Let's transition to 2023 guidance. We are projecting full year 2023 adjusted EBITDA of $3.16 billion to $3.36 billion, which represents an attractive growth rate of 7.2% at the midpoint on a normalized basis. First, in our industry-leading ambulatory surgery business, we anticipate normalized adjusted EBITDA growth at USPI of 11% at the midpoint of our guidance, based upon our expectation of 4% to 6% growth in same-facility revenues, further accretion from the second SCD transaction and continued strong contributions from our M&A and de novo initiatives. Our guidance reflects a healthy 5% organic EBITDA growth rate for this year. Let me address the second SCD transaction in same-facility growth in more depth. The most direct way to characterize the second SCD transaction is that we are behind our expected ramp-up by approximately one year. Recall, unlike the first SCD transaction, where we acquired mature centers and achieved 100% in buy-ups to consolidate and deliver synergies into those centers. The second transaction had a broad range of assets, including many that were early in development. We had some planned buy-ups and center openings that did not happen on our original time line in 2022. The agenda to make progress has not stalled. Since Q3, we have completed six more buy-ups at multiples unchanged from prior buy-ups. We have opened the majority of the de novo centers, with the remaining seven on track to open this year. Collectively, the SCD transactions deliver a total of 135 centers, which have margins of approximately 40% and were acquired for an average multiple under 10 times pre-synergies. Turning to same-facility growth. The continued migration of procedural services into an ambulatory setting acts as a sustained and far-reaching tailwind for our business. Looking back from 2019 to 2022, the same facility business has recovered to pre-pandemic volumes. And at the same time, our net revenue per case has risen by 12.8%, as a testament to our ongoing addition of higher acuity cases. We are also positioned to drive attractive growth in 2023 and beyond. Let's unpack that further given our Q4 2022 same-facility volumes and how we bridge into our 2023 guidance. First, as a foundational element, in 2022, on a same-facility basis, our active physician population grew over the prior year. Second, the impact of Hurricane Ian causing facility closures during the fourth quarter was about 0.3%. Those facilities are now repaired and operational in the current year. Finally, reductions in certain lower acuity services and investment in higher acuity services are still ongoing. For example, in Q4 2022, this impacted same-facility growth by approximately 1.1%. We will continue to seek opportunities for service line acuity enhancements into the future. It is noteworthy that our same facility ASC total joint cases, as one of the highest acuity orthopedic sub-service lines, grew by 13.2% in 2022 relative to 2021. For these reasons, we have conviction in our strategy and we are comfortable with our guidance of same-facility growth returning to 2% to 3% in 2023. Let's turn to our USPI M&A engine, which represents the other critical value driver for Tenet shareholders. For many years, we have consistently acquired centers at attractive valuations and driven post-synergy multiples for our acquisitions to below 5 times. And our latest 2022 vintage is estimated to do the same by the end of year two. We intend to invest approximately $250 million in ambulatory M&A each year and have a robust pipeline to support that level of investment. We continue to be active in the construction of new centers originating from our USPI development team and separately from our SCD partnership pipelines. We currently have 22 centers that are in active syndication or under construction. Adding centers with strong margins, and attractive post-synergy multiples, remains the best use of our cash for investments to enhance Tenet's free cash flow. We recently announced a new development agreement with Providence Health System, a leading innovator in health care services in the Western United States, that will expand our strategic partnership and increase ambulatory access across new markets. We expect this relationship will expand to 15 to 20 centers in the next two years. Stepping back, USPI is among the best examples of value-based care in our industry. Our services are generally 30% to 50% more affordable than similar services delivered in a hospital setting. USPI is the preferred partner for both high-quality physicians and health systems as our teams deliver the full range of management services. The linkage to our hospital business creates an unquestionably superior platform from which to draw talent, operating expertise, and scale benefits. Turning to our hospital segment. We are expecting adjusted EBITDA growth of 4.6% on a normalized basis at the midpoint of 2023. We anticipate this will be driven by 2% to 4% adjusted admissions growth, continued operating discipline, and the expectation for further moderation in contract labor costs, partially offset by increases in employed labor costs. The year-over-year core adjusted EBITDA growth rate for 2023 is higher than our long-term forecast of 2% to 3% annually, because of the tailwinds created by the points I've noted, and also the continued recovery of our Massachusetts market and ramp-up of our hospital in Fort Mill. Our portfolio transformation also continues as we recently reached an agreement for John Muir Health to purchase Tenet's 51% interest in the Santa Ana Regional Medical Center for $142.5 million, slightly above a 10 times multiple. This transaction is expected to be completed in 2023 and subject to regulatory approvals and customary closing conditions. Finally, Conifer is expecting adjusted EBITDA growth of 11% for 2023, on a normalized basis for changes in Tenet’s contract terms and client hospital divestitures, driven by new sales and a continued focus on automation and offshoring activities to realize greater efficiencies in our operations. All in, our full-year 2023 guidance of $3.16 billion to $3.36 billion represents an attractive recovery target that is also respectful of the continued challenges of the current operating environment. Our management discipline has been a hallmark of our success, and we are focused on accelerating efficiencies across our business segments and investing for the future. And with that, Dan will now provide a more detailed review of our financial results.

Thanks, Saum. And good morning, everyone. We were very pleased with how we finished the year, with fourth quarter adjusted EBITDA excluding grant income, coming in at or above the midpoint of our guidance ranges for all three of our businesses, driven by renewed same-store volume growth for USPI, strong same-store adjusted admissions growth in our hospital business, and lower levels of contract labor exiting the quarter, all of which gives us momentum as we begin 2023. In the quarter, we generated consolidated adjusted EBITDA of $897 million, which included $40 million of grant income. Our performance reflected strength in volumes and improved management of labor costs. Additionally, our results were supported by continued focus on high acuity service lines. Now I'd like to highlight a few key items for each of our segments, beginning with USPI, which delivered strong operating results. USPI's fourth quarter adjusted EBITDA grew 18.7% compared to last year excluding grant income and its EBITDA margin continues to be very strong at 43.6%. Surgical case volumes were 101% of 2019 pre-pandemic levels. Also, USPI delivered a solid 2.3% increase in revenue per case and surgical cases were 70 basis points higher than fourth quarter 2021 on a same-facility basis. For the full year, USPI produced case volume growth of 2% and net revenue per case growth of 2.5%. We continue to be pleased with the strong margins and cash flow generated by our ambulatory business. Turning to our acute care hospital business. Fourth quarter same-hospital adjusted admissions increased 2.9% over the fourth quarter of 2021 and total same-hospital inpatient admissions increased 50 basis points, while non-COVID inpatient admissions increased 4.3%. Our labor management continues to be very effective, despite the cost pressures, specialty temporary contract, and our staffing costs. On a consolidated basis, we exited the year with December contract labor at 6.4% of consolidated SWMB providing us momentum as we move into 2023. Total hospital costs were well managed in the quarter, as these costs were 3.1% lower than the fourth quarter of 2021 on a per adjusted admission basis. SWMB costs per adjusted admission were up only 50 basis points compared to the fourth quarter of 2021, despite more severe labor pressures this year. Our case mix index and revenue yield remains strong, as we continue our strategic focus on investments in higher acuity, higher margin service lines. Our 2022 CMI has grown at a 4% CAGR since 2019. Turning to Conifer, which again delivered a solid quarter. Conifer produced fourth quarter EBITDA of $90 million with a strong EBITDA margin of about 28%. For the year, Conifer resumed top line revenue growth of about 4% and revenue from external clients increased 10%. Next, let's review our cash flow, balance sheet, and capital structure. As of the end of the year, we had $858 million of cash on hand and no borrowings outstanding under our $1.5 billion line of credit facility. We generated $321 million of free cash flow for the year or $1.329 billion before the repayment of about $1 billion of Medicare advances and deferred payroll taxes related to the pandemic that were received or deferred in 2020. All of these advances and deferred taxes have now been repaid. During the fourth quarter, we repurchased approximately 5.9 million shares of our stock for $250 million. Our December 31 leverage ratio was 4.1 times EBITDA, consistent with year-end 2021. As a reminder, we have no significant debt maturities until the third quarter of 2024 and have approximately $1.8 billion of secured debt borrowing capacity available if needed. We have strengthened our balance sheet over the past several years and retired or pushed out debt maturities, which we believe provides us ample financial flexibility to support our growth initiatives. Let me now turn to our outlook for this year. Our projected consolidated adjusted EBITDA for the year is in the range of $3.160 billion to $3.360 billion. As we have discussed previously, there are a number of items that impact the comparison of our 2022 results to our 2023 outlook, which are outlined on slide 7 of our investor presentation. Let me summarize them. First, we are assuming consolidated organic EBITDA growth at the midpoint of approximately 6% over 2022, after normalizing for various items that I'll discuss shortly. The organic growth is anticipated to be driven by stronger ambulatory and hospital volumes, lower levels of contract labor and other cost efficiencies, negotiated commercial rate increases, and continuing investments in hospital higher acuity service lines. Second, we anticipate the USPI will drive $65 million of organic EBITDA growth, which is about 5% growth. This organic growth coupled with approximately $78 million of additional earnings related to USPI's acquisition and development activities, is anticipated to result in normalized EBITDA growth of about 11% for USPI. Third, we anticipate year-over-year EBITDA growth of about $100 million due to the estimated impact of the cyber attack on our hospitals last year and an additional $10 million of earnings from proceeds related to the attack that we received this year. No other insurance proceeds for this matter have been assumed in our 2023 guidance. There are also several other items impacting our 2023 EBITDA guidance compared to last year, many of which we previewed on our third quarter earnings call. First, we recognized $194 million of grant income in 2022 related to the pandemic. Our guidance for 2023 does not assume any noteworthy amount of grants this year. Second, we realized $114 million of gains on asset sales completed in 2022. Next, there was $31 million of Texas Medicaid supplemental funding revenue, related to 2021 that we recognized early last year when the program was approved. Also, there are various revenue reductions this year that total almost $200 million for reimbursement changes substantially related to the pandemic, the 340B outpatient issue and the ACA that are detailed at the bottom of the slide. Finally, our 2023 guidance assumes a $14 million reduction in EBITDA due to our planned sale of the San Ramon facility that we announced last month and a $27 million reduction in Conifer's EBITDA this year due to transition contract expirations related to the sale of our former Miami Hospitals and CHI's divestiture of certain Iowa facilities. After adjusting for these items, our 2023 outlook represents year-over-year normalized consolidated EBITDA growth of 7.2%. A few additional assumptions related to our outlook. We are assuming 2023 same-hospital admissions increased 1% to 3% and adjusted admissions increased 2% to 4%. COVID admissions of approximately 3% down from 6% in 2022 same-facility USPI surgical cases are projected to increase 2% to 3% and USPI's net revenue per case is also projected to increase 2% to 3%. Another assumption I want to mention is that we are revising the rates and scope of services under the revenue cycle contract between Conifer and our hospitals. The revised contract continues to be on a commercially reasonable basis, is anticipated to result in an approximately $40 million EBITDA reduction for Conifer this year and its corresponding $40 million increase in our hospital segment EBITDA. This has no net impact on consolidated revenues, EBITDA, or margins. Finally, we would expect first quarter 2023 consolidated adjusted EBITDA to be $775 million at the midpoint of our range. And we anticipate that USPI's EBITDA in the first quarter this year at the midpoint will be approximately 22% of our full year 2023 USPI EBITDA guidance.

Thank you. We will now begin the question-and-answer session. Our first question comes from Kevin Fischbeck with Bank of America. Please go ahead with your question.

Thank you for the insights on the USPI side and the expectations for improvement. However, I would appreciate more detail regarding the analysis of what occurred in 2022 and the reasons for being a year behind on the second part of the transaction. How much clarity do you have on the normalization process? What went wrong, and what gives you confidence in the improvements this year? Will you be approaching future deals or new developments differently? Thank you.

Hey, it’s Saum. Just quickly touching on that, I think it ties back to my earlier comments about the variety of centers we acquired, many of which were at much earlier stages of development. Some were just breaking ground. When you combine that with the disruption from COVID affecting physician practices, which slowed down the ramp-up of centers, along with the supply chain challenges we faced in getting them open with the right equipment and infrastructure on time, it created a perfect storm for a great set of assets. As we noted, the performance at the center level for the more mature ones was solid. However, looking at everything together, our initial assumptions did not account for that level of disruption, and it simply did not unfold as we expected. That's why I wanted to be clear; we are a year behind expectations, but we still feel very positive about the portfolio.

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

Hey. Good morning, guys. I was wondering if you could just spend a minute on what's in guidance for reimbursement, particularly on the commercial side. What kind of success are you getting in renegotiating contracts? And what visibility does that give you in terms of the rate update you'll see over the next two to three years, the contract duration?

Hey Jamie, it's Saum. Good morning. We believe we're in a very good position from a health plan contracting perspective, where essentially fully contracted this year about 95% and in terms of the negotiated terms and provisions we negotiate contracts for all of our facilities, hospitals, USPI facilities, and our physicians on a national basis with the national plans and on a statewide basis for the Blues. So we feel very good where we're at. We get asked a lot about in terms of percentage increases. And are we having conversations about given the inflationary environment, we absolutely are. We talk about rate increases typically in the 3% to 5% range, and some more recent negotiations. We've, obviously, been discussing the inflationary aspects and I think we've been making progress on that too. So we feel really good where we're at from a contracting perspective.

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

Thanks. Good morning. I wanted to ask another question on USPI. I appreciate all the detail. Dan said, I think 22% of EBITDA for the year in the first quarter that looks like it's up about 6% year-over-year, if I'm measuring that correctly versus 11% for the year. So what's driving that? What do you think is going to drive the significant ramp through the year to get to 11%? And then just quickly on NCI it looks like it's up a lot year-over-year materially faster than growing faster than EBITDA. Can you walk through the driver of that? I assume, it's at least partially due to the buy-ups. Thanks.

Hi, Justin, it's Dan. Let me address – let me hit the second one, the point about the NCI. Our NCI expense assumption for the year, when you look at it on a – we refer to it as sort of like a flow-through basis EBITDA minus NCI. It's roughly 64% anticipated for this year, which is consistent with prior years. 2022 is roughly 65%. So the flow-through is really consistent between the year. You're right. There is – obviously, as some buy-ups are completed that can have an impact too. But the flow-through in aggregate is very consistent from year-to-year. In terms of the first quarter, we obviously laid out our first quarter assumptions on a consolidated basis $775 million at the midpoint and your point about USPI being 22%. Keep in mind, as USPI moves through the year fourth quarter is typically seasonally the strongest quarter for USPI, so we feel comfortable with where we've set our guidance at this point.

Okay. But the seasonality wouldn't be impacted on a year-over-year basis then I would just say my right that it's up 6% in the first quarter, but 11% for the year. And if so what drives the ramp through the year to get to the 11%? Thanks.

Yeah. Again, we feel comfortable with the growth. Obviously, the percentage can move around a bit depending on various factors. But we – again, we feel good with where we set guidance for the first quarter as well as full year.

Our next question is from Ann Hynes with Mizuho. Please proceed with your question.

Hi. Good morning. Thank you. I just want to focus on surgery center organic revenue growth of 3%. You did give some detail on the call backing into it, it would be 4.3% and 1% being the reduction of lower acuity services. Can you tell me what inning you are in that process? How much of a headwind to growth? Is that – will that be next year? And also is there anything else that you think is currently impacting the company's ability to get back to that mid-single-digit growth target and maybe other things you're doing to achieve that in 2023? Thanks.

Hi, it's Saum. I want to clarify that I don't view this as a hurdle to growth. Our main goal is to improve acuity and focus on net revenue growth as well as profitability from higher-end services. While case counts may be a challenge, they don't detract from our efforts to build and grow. We're primarily addressing the lower-end services in the ASC setting, which we plan to transition over time. We will keep seeking those opportunities. Regarding your question about USPI's progress, I believe it's a valid one. We're confident in our guidance for this year due to the expected slowing of impacts from our strategic initiatives and reductions related to migrations we experienced in 2022. Although we may consider other transition opportunities in the future, we anticipate a slowdown, which is why I mentioned it as a key factor in our 2023 guidance.

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

Hi, everybody. Thanks for all the detail on USPI. I might pivot over to labor. If you're saying in December contract labor was about 6% of total SWB. Is that a good run rate that you're taking into 2023 with guidance on where you think that would be? And then I know your experience with contract labor throughout 2022 was a little different in pattern than some of the other public peers. How much of a tailwind gross basis would that represent if you're 6% or whatever the number you're thinking it will be for 2023 versus what you spent on contract labor in 2022? And then finally, have you incorporated any of that into your outlook, or are you sort of holding that out in case you need it for the permanent labor?

Hi, A.J. It's Dan. Good morning. In terms of contract labor - contract labor peaked as a percent of SWB in September. And as we move through the quarter it declined sequentially each month. And we exited with December at 6.4%. As we move into this year, we have assumed some further moderation this year in our contract labor spend, obviously, net of full-time employment costs because I mean what we're really focused on is replacing contract labor to the greatest extent possible with employed colleagues. And so we – obviously, we've been focused on now. We're going to continue to do that as we move through this year. And so, yes, we have built some moderation in aggregate contract labor into our guidance this year.

So overall, are you incorporating some of that on the permanent side?

Yes. We've obviously taken into consideration the incremental investment with our employees when we think about the reduction in contract labor it obviously will be replaced by some form of employed costs, right?

Our next question is from John Ransom with Raymond James. Please proceed with your question.

Hi. Just a little confused about the cyber issue. How do we think about that last year versus this year in terms of a good guide to organic growth?

Hey John, it's Dan. So, obviously, in terms of the EBITDA, we've sized that approximately $100 million and we did receive insurance proceeds in January of $10 million and that is reflected in our guidance this year. But we have not reflected any additional insurance proceeds in our guidance this year. Obviously, we're working that with the insurance carriers, but we have not assumed any additional proceeds. Obviously, in terms of the impact on volume, it did have an impact on volume. And we obviously took that into consideration when we built our volume assumptions for this year.

Just remind me what was the total that you collected last year from insurance?

Total was about $10 million in terms of the net impact on the profit and loss statement. However, that amount was included in the net $100 million figure.

I see. So, in other words, just to be clear, it's about a $90 million good guide if we think about the organic growth help this year.

Well, no, we view it as $100 million. That's what we put on the slide. Again the cyber estimate that was an estimate and it took into consideration some of the insurance proceeds that we received.

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

Hi, thanks. Just first a clarification. I think the baseline that you guys were talking about last quarter was about $3.15 billion in EBITDA for 2022. And now it's $3.03 billion. So, I'm just curious what changed in the baseline assumption? And then my real question I was interested in the comment that Saum made around value-based care and USPI. I'd be curious if the build-out of your ASC portfolio in the past couple of years has changed anything with respect to those contracts on a national or state level with the Blues with the big payers. And specifically, are they looking at ways to move more volumes to ASCs? And how is that sort of impacting your negotiations?

Hey Josh, it's Dan. Let me address the funding reductions compared to what we discussed on the call in October. Firstly, we recognized an additional $40 million in grant income this quarter; by the end of the third quarter, that amount was approximately $154 million. We concluded the year with $194 million. At that time, we didn't have clear visibility on when some of the pandemic supplemental funding for the Medicare 20% add-on and the additional FMAP funding would occur. However, now we know when the public health emergency is expected to end, and we have better visibility on how the FMAP will be reduced throughout the year. These are the main differences.

Yes, this is Saum. Regarding the second part of your question, this emphasizes the importance of our ongoing focus on higher acuity services in the ambulatory surgery setting. Compared to hospital costs, this setting offers a highly attractive option for value-based care initiatives. I can't think of another setting that matches the efficiency of ambulatory surgery centers when considering alternative cost structures. We recognize this as appealing not only to commercial payers but also to government payers due to the work we do and our ability to maintain high patient satisfaction and safety. As we progress in innovating higher acuity services, our ASC business, particularly in USPI, will increasingly be regarded as a true value-based care enterprise.

Our next question comes from Steven Valiquette with Barclays. Please proceed with your question.

Good morning, everyone. Referring to the details on slide 10 regarding the EBITDA adjustment for 2022, it appears that the EBITDA margin for the overall company is approximately 15% based on rough calculations. I want to confirm that we're correctly understanding the anticipated EBITDA margin expansion in 2023 compared to 2022. Additionally, is there anything else worth mentioning that could contribute to margin expansion on a gross basis for 2023? Thank you.

Hey, Steve, we were having a hard time hearing you and you were cutting out. I think you were asking about the margins on a normalized basis. When we look at the margins in 2022 versus 2023 projections on a normalized basis in 2022 15.9% call it 16%. And for 2023, it would be roughly 16.3% on a consolidated basis, after you normalize for those various items. So there is some margin expansion and that's obviously will continue to be a focus of ours to continue to expand our margins as we move through the year and into 2024 and beyond. I'm not sure I heard exactly on contract labor. But as I mentioned, we exited the year at 6.4% saw nice improvement. The operators did a really good job managing those costs down and we have assumed some moderation as we move through this year in contract labor that has been reflected in our guidance. So hopefully, that addressed your questions that we were having a hard time hearing you.

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

Hey, thanks. Maybe to ask one more on USPI sorry about this. But what actually did SCD contribute in 2022? That might be helpful. And what do you have in your plan for this year? Do you think you get back to that $140 million target, the $175 million? And then maybe just a quick follow-up. Looking at the bridge, it does strike me as odd that you expect USPI to generate the lowest organic growth of all the segments this year. And the prepared comments sound a lot more bullish and encouraging than maybe the percent that you're guiding to. So maybe just to challenge you a little bit on the 5% number like why that is the right number?

Hey, Whit, it's Dan. Regarding SCD, as Saum mentioned earlier, we are essentially a year behind. For 2022, we anticipated generating about $140 million in EBITDA. You can think of that as our outlook for 2023 as well since we're still a year behind. When it comes to organic growth, we expect USPI's organic growth to be around 5% on a normalized basis. The growth for hospitals, as Saum pointed out, is slightly higher than what we have traditionally projected, primarily backed by improvements in our Massachusetts Hospital and our new facility near Charlotte.

Our next question comes from Andrew Mok with UBS. Please proceed with your question.

Hi, good morning. Hoping you could provide an update on the buy-up activity in the second SCD transaction? How many SCD II buy-ups did you complete in 2022 versus your expectation I think of 30 plus to start the year? And what are you assuming in your guide for 2023? Thanks.

Hey, Andrew, it's Dan. We anticipate some buy-ups in 2023. I would say we have very good visibility into them and we feel very confident in the assumptions we have incorporated into our guidance for this year regarding those expected buy-ups.

And do you have the number that you did in 2022?

The entire number is roughly 35.

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

Thank you for the questions. I have a few inquiries regarding the hospital side. Can you provide the nurse-to-patient ratio for the back office in 2022? Additionally, how do you foresee that changing in 2023? On the same topic, could you share the turnover rate from the latter half of 2022? Also, any insights on nurse recruitment and how it is performing relative to your expectations would be appreciated.

Hey, Pito, it's Saum. We don't report our nurse-to-patient ratio. They're different state-to-state and some states have regulations and others don't. And it really depends heavily on the acuity. I'm not even sure how in an aggregated way one could describe a nurse-to-patient ratio given the differences in ICU, MedSurg, Forest, Telly, et cetera and we don't plan on reporting on that. The second part of your question, it's important obviously I took the time to mention it and I appreciate you're highlighting it. We're very focused on our nurse, but also tech and other important clinical role recruiting and that's been going very well. As I've indicated, our hiring was up on employed staff in 2022 over 2021 and that's accelerating. But at the same time, importantly, because of the investments we've made in the workforce, our turnover rates have come down, which is important from a retention perspective. And I think you could legitimately attribute those reductions to the investments we've made stabilization of the operating environment, coming out of the pandemic surges, the recurrent surges, and also probably a somewhat less desire for nurses to continue on the pace at which many of them are choosing to travel for other assignments. And I think as all of those things help to stabilize the workforce environment in 2023. As Dan noted, we hope to make further reductions in our reliance on contract labor and expect that to moderate through the year. So, it is a very important agenda item as we look forward. I would tell you, one last piece of color on this that, over the past couple of years, I had mentioned a few times, that we have built a lot of relationships at the ground level with nursing schools. And our ability right now to bring on new graduates into our environment, it's better than I've seen in a long time and that's helping. Those investments in relationships that we made over that time, I think will serve us well in 2023.

Our next question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

Hey, good morning, guys. Dan thanks for the color on your capital deployment views. But maybe just thinking about the buyback announcement from last quarter and your views on debt pay down as well. Where do you think the right leverage ratio is, or have you set leverage targets? And maybe just to clarify, as we think about buybacks, curious as to your thought or philosophy on using debt at some point to buy back stock, or are we avoiding that altogether? Just want to clarify all these things. Thanks.

We have made significant progress in reducing our leverage over the last four to five years. Back in 2017, our leverage was above six times, and we have since reduced it to about four times. Lowering leverage is a key priority for us. Whenever we make capital decisions, we consider the impact on our margins, free cash flow generation, and ultimately our leverage. This is always at the forefront of our minds, and we will keep seeking opportunities to reduce leverage in the future. Regarding the balance between reducing debt and repurchasing shares, we have four main priorities, one of which is debt reduction along with share buybacks. We evaluate market conditions and other investment opportunities to optimize our capital allocation for the best returns for our shareholders.

Our next question is from Stephen Baxter with Wells Fargo. Please proceed with your question.

On the volume outlook. So on the hospital side, it looks like if you achieve the growth you're targeting. I think you'll be in the upper 80s range compared to the 2019 baseline. I guess how should we think about the volume that you haven't recovered? I guess how much of that do you view as a real opportunity if labor pressure eases and how much do you think could be service lines that might not make sense for the company going forward? And then just on the USPI side, do you think the volume growth on USPI is going to be pretty consistent throughout the year, or do you think maybe that's going to be ramping a little bit throughout the year maybe as the environment continues to normalize? Thanks.

Yes. I'm happy to start, it's Saum. So on the hospital side from a volume perspective, I would say that it really – the year really depends on the assumptions that we've moved past significant disruption from COVID-related activity. Obviously, as the last three years have proven, that can be somewhat hard to forecast. But I think there's a lot of good reasons at this point to believe that that will in fact be the case this year. Even the acuity of the COVID that we're seeing and even during the winter the amount of COVID we saw has come down. It's been quicker to treat easy short stay in and out type of cases with much lower impact on acuity. And importantly for us, given our strategy, it had a lot less effect on disrupting surgical scheduling and other things in the acute care hospital environment. So anyway, that's just I think a good sign overall. Look, in terms of USPI, as I mentioned, we're bridging from an inconsistent quarter-to-quarter set of results in 2022 into 2023 with a very thoughtful, bottoms-up, comprehensive examination of our portfolio. It's – this is really important. We took the time to understand the physician additions, the initiatives, the service lines, et cetera before coming to our guidance and we expect to see more consistency through the year this year than we did in the prior year. And look, if there's a range on the guidance for a reason, if post-pandemic recovery is more attractive, the upper end of the guidance contemplates that. And obviously, we would love to deliver that. So that's what we're working towards.

Yes. And just to add on just in terms of from an earnings perspective is for USPI, as we move through the year, as I pointed out, roughly 22% of the EBITDA for the year will be generated in the first quarter, which is great when you look at the first quarter last year, it's growth of close to 13%, you take into consideration there is some headwinds in the first quarter this year compared to last year related to sequestration the 340B, but still even with some of that there's still nice growth year-over-year in the first quarter. And obviously, the fourth quarter is the strongest quarter for USPI.

We have reached the end of the questions at this time. This concludes today's teleconference. Tenet Investor Relations is available for follow-up questions. You may disconnect your lines at this time and we thank you for your participation.