Tenet Healthcare Corp Q4 FY2024 Earnings Call

Good morning. Welcome to Tenet Healthcare's Fourth Quarter 2024 Earnings Conference Call. After the speaker remarks, there will be a question-and-answer session for industry analysts. Tenet respectfully asks that analysts restrict themselves to one question each. I'll 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 2024 results as well as a discussion of our financial outlook. Tenet senior management participating in today's call will be Dr. Saum Sutaria, Chairman and Chief Executive Officer; and Sun Park, 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 included 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. And with that, I'll turn the call over to Saum.

Thank you, Will, and good morning, everyone. We delivered outstanding performance in 2024 characterized by strong same-store revenue growth, disciplined operations and effective capital deployment. In addition, the year was highlighted by portfolio transactions that have transformed our franchise to be well-positioned for long-term growth with strategic flexibility and from operating revenues of $20.7 billion and consolidated adjusted EBITDA of $4 billion, which represents 13% growth over 2023. Full-year adjusted EBITDA margin of 19.3% improved over 200 basis points from the prior year. Our fourth quarter results were above our expectations driven by continued same-store revenue strength, high acuity growth as well as effective cost management. Our disciplined approach has enabled us to consistently exceed our performance expectations each quarter this year, furthering our track record. I would note that our full-year adjusted EBITDA ended the year over $600 million higher than the midpoint of our initial expectations, driven by strong growth and operational performance. USPI had a fantastic year in 2024. We generated $1.81 billion in adjusted EBITDA, which represents 17% growth over 2023 and adjusted EBITDA margins of 4%. Same-facility revenues grew 7.8% in 2024, another year substantially above our long-term goals. High acuity volume growth was highlighted by total joint replacements in the ASCs, up 19% over the prior year. Importantly, customer service levels in our centers remain quite high as we earned a 96.6 overall patient experience score in 2024. Turning to our Hospital segment. Despite the sale of 14 hospitals during the year, we generated $2.185 billion of adjusted EBITDA in 2024, which represents 9% growth over the prior year. Same-store hospital admissions were up 4.7% as we continue to open up capacity to respond to a strong utilization environment. Acuity and payer mix were strong throughout 2024 and drove a 4.6% increase in same-store revenue per adjusted admission over the prior year. This was an important year for Tenet as we transformed our portfolio of businesses through the multiple high multiple sales of 14 hospitals and related operations, generating $5 billion in gross proceeds and enabling significant balance sheet deleveraging. In addition, we added nearly 70 ambulatory surgical centers to the portfolio in 2024 as we were very active in both M&A and de novo development. Finally, in the past 2 years, we have returned capital to shareholders via share repurchase retiring approximately 14% of our outstanding shares for $1.12 billion since our repurchase program began in the fourth quarter of 2022. Going forward, we plan to be active repurchasers of our shares, particularly at our current valuation multiples. These actions have resulted in a portfolio of businesses that is more predictable, capital efficient and able to operate in a variety of environments with better margins and ample free cash flow for the benefit of shareholders. In summary, we're very pleased with our team's performance in 2024, and we believe that we will carry this momentum into the New Year. Turning to 2025 guidance. We are projecting full-year 2025 adjusted EBITDA of $3.975 billion to $4.175 billion, which is an attractive 7% growth rate at the midpoint on a normalized basis. We anticipate adjusted EBITDA growth at USPI of approximately 8.5% at the midpoint of our guidance for '25 based on our expectation of 3% to 6% growth in same-facility revenue fueled by ongoing strength in acuity, continuing effective operational execution and additional sites of care joining the portfolio. We intend to invest approximately $250 million each year towards M&A in the ambulatory space and the pipeline of opportunities remain strong. We anticipate adding 10 to 12 de novo centers in 2025. Our ability to consistently scale our platform to create additional low-cost sites of care for patients and physicians continues to pay dividends as it improves our overall growth, profitability, capital efficiency and resiliency in this regulatory environment. Turning to our Hospital segment. We are expecting adjusted EBITDA growth of approximately 5.7% on a normalized basis at the midpoint for 2025. This projected growth is going to be driven by 2% to 3% adjusted admissions growth and a strong operating discipline that our team has demonstrated for many years. The Hospital segment's performance will be enhanced by strategic capital deployment service lines and contributions from the new facility. Additionally, as we have noted, we have expanded the relationships that Conifer has with acquirers of hospitals we've sold, and this should contribute to growth in 2025. Finally, we acknowledge that there is currently a great deal of focus on the impact of potential regulatory changes in our space. We have demonstrated an ability to perform well in a variety of operating environments and believe we are differentiated from our peer set as we navigate potential changes going forward. For example, our ASCs operate with freestanding ASC rates, which insulates that important part of our business from potential changes in site neutrality rules. In summary, we had an outstanding year in 2024 and believe that we are in a great position for another strong year in 2025. Our guidance reflects the opportunities before us and the momentum that we carry into the New Year. Our established management team stands ready to execute our focused strategy and deliver value for patients, physician partners and in turn shareholders. And with that, Sun will now provide a more detailed review of our financial results.

Thank you, Saum, and good morning, everyone. We are very pleased with the strong finish to the year. In the fourth quarter, we generated total net operating revenues of $5.1 billion and consolidated adjusted EBITDA of $1.048 billion, which represents an adjusted EBITDA margin of 20.7%, up almost 200 basis points from the fourth quarter of '23. For full-year '24, we generated $20.7 billion of total net operating revenues and consolidated adjusted EBITDA of $3.995 billion. These results were driven by strong same-store revenue growth, continued high patient acuity, favorable payer mix and effective cost controls. Now I'd like to highlight some key items for each of our segments beginning with USPI, which again delivered strong operating results. In the fourth quarter, USPI's adjusted EBITDA grew 14% over last year with adjusted EBITDA margin at 42.1%. USPI delivered an 8.6% increase in same-facility system-wide revenues driven by high acuity levels and favorable payer mix. Same-facility system-wide surgical case volume grew slightly over last year. And turning to our Hospital segment. Fourth-quarter adjusted EBITDA was $518 million, with margins up 90 basis points over last year at 13.6%. Normalized for the best hospitals, adjusted EBITDA grew 13% over the fourth quarter of '23. Same-hospital inpatient admissions increased 5% and revenue per adjusted admission grew 0.6%. Our consolidated salary, wages and benefits in the fourth quarter of '24 was 41.3% of net revenues and our consolidated contract labor expense was 2.1% of salary, wages, and benefits, both substantially lower than the 43% and the 2.8%, respectively, that we reported in the fourth quarter of '23. Next, we will discuss our cash flow, balance sheet and capital structure. Our cash flow performance was very strong in '24 with $1.1 billion of free cash flow for the year. This includes the payment of $855 million in income taxes related to our completed divestitures. Excluding these tax payments, this represents nearly $2 billion of free cash flow for the year or $1.3 billion of free cash flow after distributions to non-controlling interests. For full-year 2024, we repurchased 5.6 million shares of our stock for $672 million. We finished the year with over $3 billion of cash on hand with no borrowings outstanding under our $1.5 billion line of credit facility. Our year-end leverage ratio was 2.5x EBITDA or 3.2x EBITDA less non-controlling interests, a substantial improvement over the past year. Reflecting the proceeds that we received from our hospital divestitures as well as our outstanding operational performance. We are very pleased with our ongoing cash flow generation and have a commitment to a deleveraged balance sheet. We believe we have significant financial flexibility to support our capital allocation priorities and drive shareholder value. Let me now turn to our outlook for 2025. We expect consolidated net operating revenues in the range of $20.6 billion to $21.0 billion. Our projected consolidated adjusted EBITDA is in the range of $3.975 billion to $4.175 billion. As a reminder, there are two normalizing items that I would call out when comparing our '25 adjusted EBITDA to the prior year. First, we reported $114 million of adjusted EBITDA from facilities that we divested in '24 and will not recur. Additionally, we reported $74 million of out-of-period supplemental Medicaid payments in Michigan and Texas in '24. After normalizing for these items, our '25 adjusted EBITDA is expected to grow 7% at the midpoint of our range. Our '25 outlook assumes continued growth in same-store volumes and effective pricing as well as strong operational efficiencies and disciplined cost controls. Additionally, we anticipate further contributions from recent investments and partnerships in the Hospital segment as well as from M&A and de novo center openings at USPI. In addition, we are also assuming the following: same-hospital admissions growth of 2% to 3% and adjusted admissions growth of 2% to 3% and for USPI, same-facility revenue growth of 3% to 6%. On a normalized basis, we expect adjusted EBITDA to grow 8.5% at USPI and 5.7% for our Hospital segment at the respective midpoints of our guidance ranges. Our outlook also assumes $35 million of net revenues from the Tennessee supplemental Medicaid programs. About one-third of this increase is related to the second half of '24 and is expected to be recorded in the first quarter of this year. Finally, we would expect first quarter 2025 consolidated adjusted EBITDA to be in the range of 24% to 25% of our full-year consolidated EBITDA at the midpoint. We anticipate that USPI's EBITDA in the first quarter of this year will be 21% to 22% of our full-year USPI EBITDA at the midpoint. Turning to our cash flows for '25. We expect cash flow from operations in the range of $2.5 billion to $2.85 billion, capital expenditures in the range of $700 million to $800 million resulting in free cash flows in the range of $1.8 billion to $2.05 billion. In addition, we're also assuming distributions to non-controlling interests in the range of $750 million to $800 million which would result in free cash flow after non-controlling interests in the range of $1.05 billion to $1.25 billion. And finally, as a reminder, our capital deployment priorities have not changed. First, we'll prioritize capital investments to grow USPI through M&A. Second, we need to invest in key hospital growth opportunities, including our focus on higher acuity service offerings. Third, we will evaluate opportunities to retire and/or refinance debt. And finally, we'll have a balanced approach to share repurchases depending on market conditions and other investment opportunities. Given our attractive free cash flow profile and current valuations, we plan to be active repurchasers of shares in 2025. In conclusion, we had an outstanding year in 2024 with effective operational execution, robust growth and a transformed portfolio of business. We're confident in our ability to deliver on our outlook for '25 and continue to drive value for patients, physician partners and shareholders. And with that, we're ready to begin our Q&A.

At this time, we will conduct a question-and-answer session. As a reminder, we ask that you please limit yourselves to one question. Our first question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

So looking at Tenet’s sort of in the last few years, the biggest change has been the cash flows and your deleveraging. Your cash flow guidance for this year is up 90% year-over-year or nearly $1 billion more cash flow from operations. So looking at your cash flow guidance for this year after non-controlling interests, it's about $1.15 billion at the midpoint. If we pull out $250 million for M&A, it's about $900 million left to deploy with a leverage at sort of 3.2x EBITDA less non-controlling interests. Can you refresh us on what your ideal target leverage ratios are? And should we be modeling the rest of that going to share repurchases at this point?

Hi, Peter, it's Saum. First of all, I appreciate reiterating the improvements that we've made in generating free cash flow from this business from operations. It's obviously been a very important part of our goal over the last few years and getting to this point probably earlier than we thought. We're very comfortable with the leverage that we operate at today. And importantly, it gives us significant strategic flexibility with respect to the business, both in terms of activity that we may pursue in growing and scaling USPI, as I noted in my comments, but also from the perspective, especially, as I said, at these valuation multiples in terms of share repurchase. And both Sun and I noted that we would plan to be active repurchasers of our shares at these multiples. It makes complete sense. We don't have debt coming due for a couple of years, right? I mean, so we're not in any situation of urgency there regardless. And I think the return on share repurchase at this point would be higher anyway. So, our thinking is relatively clear about that in the coming years. Obviously, we need to continue executing operationally with the track record that we've built to generate that free cash flow. But as we've talked about in the last couple of years, we've really hardwired our approach there. The last thing I would point out in addition to what I said about USPI in my comments is that USPI does not have a tremendous amount of Medicaid exposure. So when you think about the utilization of our cash flows and regulatory risk that may be out there, the reality is half our EBITDA is generated in the segment that isn't really facing risk from any scenario out there related to Medicaid programs, and that's very helpful. It's very different than it might have looked 5 or 6 years ago. So we feel confident about the valuation opportunities for the company.

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

Can you maybe spend a minute on just the volume environment that you're seeing today? Obviously, 2023 and 2024 were pretty strong years, some of that just recovery and normalization post the pandemic. Where do you think we're at from a volume perspective today? And how do you expect volumes to progress throughout the course of the year?

We expect the volume environment to remain strong as we move into 2025. There have been no noticeable changes in trends from December 31 to January 1. The coverage and employment environments look positive, and the demographics in the areas where our portfolio is positioned are also favorable. Additionally, we have been able to expand our capacity in a cost-effective manner, and we're approaching this in a thoughtful way. Our guidance reflects this optimistic outlook, and we feel confident about entering 2025.

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

Congrats on the quarter. Maybe, Saum, as I think about your comments on Medicaid and USPI, just curious how you're thinking about the risk overall for the company from all the political headlines that are out there? And what the Republic are trying to do with changes to health care policy and what you're doing to prepare for that just for that potential change, whether it's Medicaid or health insurance exchanges across both business lines.

A few things. So I mean, first of all, the fundamental underpinnings of success in an environment with any kind of uncertainty in our view is operating discipline in what we do, right? And the other important underpinning is having a clear understanding of the economics of our business internally, meaning we understand clearly our service lines, our markets, etc., that may have greater dependency or less dependency upon certain types of supplemental payments where, for example, the strength in the exchanges has contributed to earnings, etc. So the combination of the operating discipline and the insights about the business probably give us an opportunity to manage and pivot as needed depending on what happens. You're right. The segments are different. I mean, we've taken the opportunity over the past few years to create resiliency in USPI by making sure that the ambulatory surgery centers as a part of USPI are on freestanding rates, the Medicaid exposure is minimal in that business, and that's very helpful from that perspective. And the exchange business there has had less impact than it has on the acute care segment in terms of the exchange growth from that perspective. So from a USPI perspective, look, this is all about an important tailwind of moving things into a lower-cost setting in an expensive portion of the health care industry, which is surgical care, right? And doing so in a way where we're constantly increasing the acuity of the work at USPI because it creates more value for the purchaser. On the acute care hospital side, I think it's important to continue to search for efficiencies that allow us to generate margins. We always talk about the concept of Medicare profitability, right? Can you generate margins on Medicare reimbursement in order to have a metric out there for efficiency goals that you would create because it's important to be able to operate in that type of environment? Specifically on the acute care side, the number one adaptive action today is helping the regulators understand the importance that these programs provide for basic access for people that wouldn't otherwise have access to care. And that's really important because if that shapes or is a factor in shaping policy, I think that what comes out of that policy will likely be manageable for us and something that we can get behind. I'm not sure that right now taking a bunch of actions to restructure the business is the right thing to do. I think there's a very strong case to be made that many of these things are really critical to providing access, and it happens to be that access is also being provided in states with voters that really matter to this administration, and that's an important supporting factor as well.

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

When I look at the ASC case mix from '23 to '24, it doesn't look like there are significant mix changes. We actually see MSK down 1 percentage point in ophthalmology, up 1 percentage point, but you're increasing acuity significantly to the point where you're seeing high single-digit same-store revenue growth without meaningful case growth. So can you speak to the types of cases driving acuity higher because it's not obvious from the case mix disclosures?

Yes. No problem. I mean just to clarify, the Orthopedics line item has a lot of things in there. That's why we call out the highest acuity work in joint cases, for example, which is where you have the hips, knees, obviously, the shoulder expansion, that's where the acuity is actually growing. I mean, remember, when you look at certain low acuity procedures that we may do in ASCs, the revenue per case is an eighth or ninth of a single joint case from that perspective. So, I mean, we're doing exactly what we wanted with the business, which is we're growing the acuity, we're growing the net revenue per case, and we are reducing exposure to high-volume, low-revenue cases. In some cases, things that could also be done in offices that further strengthen the resiliency and value of what USPI is building. So that orthopedics line item has a lot of things in there from high acuity to low acuity cases, and it's the reason we call out the really high acuity work. That's a fundamental driver of the net revenue per case strength, which you're seeing.

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

Could you provide some insights on the numbers? You mentioned Tennessee as a benefit, and the $35 million in Michigan will present a one-time challenge. Excluding those issues, what is the year-over-year assumption for the core DPP dollars in your guidance? Additionally, what are your expectations for exchange growth in your markets, particularly in exchange volume growth within that guidance?

Hey, Justin, it's Sun, and thanks for the question. Regarding supplemental payments, we did refer to some one-time events. Additionally, in fiscal '24, we still had some residual value from hospitals that were sold off during the year, mostly in Q1. There are a few dynamic factors at play, but in fiscal '24, we noted approximately $1.16 billion in Medicaid supplemental payments. For '25, our guidance anticipates a figure similar to that. You mentioned the Tennessee one-time payment, but excluding that, our performance has been fairly consistent year-over-year. Concerning the exchange, as we've indicated before, total admissions and revenues from the exchange population were significant growth contributors in 2024. We believe that will persist, aligned with Saum's earlier comments on the overall volume environment. The renewal cycle appears to have had a positive impact. We'll observe how much this translates into actual admissions. While we don't expect the same 40% to 50% growth we experienced in '24, the environment remains strong. For instance, our long-term strategy has consistently focused on being part of broad networks from a contracting perspective, which bodes well for '25.

Our next question comes from Benjamin Rossi with JPMorgan Chase. Please proceed with your question.

So just cross-supplies were seen under some pressure here as a percentage of revenue with that category increase in about 100 bps year-over-year to 18.3. How would you characterize your current supply dynamics exiting the quarter? Is there anything discrete occurring within there? Is this largely a byproduct of your push in the higher acuity? Just curious where you're seeing that number settling out in the steady state during 2025.

Ben, yes, I think it's what you said on the latter piece. It is just kind of part with our acuity strategy. So the supplies will go up as a percentage a little bit in Q4. But over the year, we've been pretty well balanced, and we expect it to be, again, balanced in '25.

Next question comes from Joanna Gajuk with Bank of America. Please proceed with your question.

So on the guidance element, and both are same-store revenue 3% to 6% right, that seems to be sort of more like a normalized growth because clearly, you grew very nicely in '24, almost 8%. So is it just conservatism? Could it maybe also break down volumes versus pricing that's included in that range?

Hi, it's Saum. I want to highlight a few things. First, based on our experience with USPI, we have examined a decade's worth of performance data, and we typically expect same-store growth rates to be in the range of 4% to 6%. Historically, we've performed closer to the 6% end of that range, especially in recent years. For the past year, we experienced a growth rate of 7.8%, following 9.2% the previous year, which indicates that we are significantly above our long-term averages for USPI. Our guidance reflects a return to these long-term growth expectations. Year-over-year performance can vary; for instance, 2023 saw substantial volume growth, while 2024 is showing increased acuity and intensity. Looking ahead to 2025, we plan to continue shifting towards higher acuity procedures. I mentioned earlier how the revenue intensity for these cases is increasing, as well as our operational efficiency in the operating rooms and the expansion of these programs to more centers, with robots now in almost 150 of our locations nationwide. While our guidance aligns with our historical average, we are currently performing at a level well above that.

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

Saum, I would ask maybe on where you're at with managed care content. I know we've been in a period where you've been getting toward the high end of historical rate updates to pay for some of the labor challenges in the last few years. Is '25 a year in which you'll still type of dynamic? Maybe where are you at in terms of signing up contracts? And then also on the managed care side, any update on thoughts about denial activity, prior authorization challenges and other term changes that you're dealing with?

Yes, let's address those in reverse order. I would say that the circumstances remain consistent with what we've experienced before. There's a continual struggle regarding administrative costs associated with processing claims that likely could be reduced, but understandably, both parties have their perspectives on this matter. More importantly, from our viewpoint, the work Conifer does in minimizing initial disputes and achieving very low denial rates is crucial. Our expertise in collaborating with payers, as well as handling situations adversarially when necessary, while maintaining solid documentation, coding that is compliant, and efficient revenue cycle operations, has made a significant impact. We are observing a discrepancy in our lower denial rates compared to the industry average concerning initial disputes, which is positive as it indicates we are successfully generating appropriate cash flow from our efforts. Sun, perhaps you would like to share your thoughts on the managed care aspect?

A.J., for your first part of the question, as we've said historically, we are continuing to see commercial rates increases in the 3% to 5% range and some of the contracts have been at or slightly above the high end of that range as respect to the inflationary pressures that you've mentioned. So I think the overall situation there is pretty consistent. And then in terms of contracting, going to '25, we're over 90% contracted for '25 and probably about over 50% contracted for '26 as well. So we have great visibility into '25 and beyond.

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

I wanted to come back to the same-store hospital volume guidance for 2025. I appreciate you're still expecting exchange growth inside of that number to some degree. I would also love to hear any quantification you can offer about how much hospital capacity you'll have online in 2025 compared to 2024. Trying to break out that 2% to 3% and maybe think about what's the market-level growth inside of that compared to how much of it is coming from capacity.

Yes, Stephen, it's obviously both. I mean, the majority of that is the market-level demand that we're seeing versus the selective markets in which there's still capacity that we're bringing online, but it is a contributor, which is why I called it out before. We haven't quantified what that looks like between the two numbers, but it is both and the majority of it is market-based demand across the board. Some of this is also related to the service line choices which have been highlighted, the things that we're doing that are taking care of people with multiple chronic illnesses that continue to grow in prevalence are continuing to create more demand than perhaps certain types of lower acuity work, which may be coming out of hospitals in our environment, and so that's really how we think about it in terms of the growth rates. Yes. Look, it's been a very busy year in the acute care environment. And as I said, I think the most important thing we're taking into the year from a mindset perspective is, we're not seeing changes in the demand patterns. That it was a comment to Jamie's question earlier, we're not seeing changes in the demand pattern right now and so I mean, I'm not going to go forecasting what we may see in the later part of the year, but we're not seeing that right now.

Our next question comes from Michael Ha with Baird. Please proceed with your question.

Just a quick clarification first and then my real one, and apologies if I missed it, but your USPI at 3% to 6% growth guide, what's the volume versus pricing split on that? And then my real question, I'm sorry to add one more question on policy. And I understand USPI is minimal Medicaid exposure but the hospital and maybe taking a different approach just given all the news flow, NIH cuts or just potential focus on Medicaid administrative cuts. If those were to implement those cuts, it might not be overly impactful, but still perhaps a couple of percent of overall Medicaid spend. So I'm curious to hear your view if that were to happen, how do you think states might react? What's your view on the likelihood that states might potentially slow that Medicaid cut down to provider rates and impact kind in hospitals more broadly?

Yes. There are a few different points to cover. First, regarding our business with USPI, we are maintaining our long-term approach of balancing managed care and volume. However, due to the unpredictable nature of this aspect, we are not providing specific guidance for the year. It's important to note that we have successfully executed our strategy for two consecutive years, focusing on increasing lower volume, high acuity cases. Our consistent quarterly performance demonstrates that we are exceeding our expectations for same-store revenue growth in this area, which is encouraging. Although we experienced some challenges in the past, we’ve corrected our course and are pleased with our current progress. The long-term strategy remains unchanged. In the short term, we are providing revenue guidance that reflects our strong track record. Regarding our policy standpoint, I should clarify that we do not have significant exposure to NIH or NSF indirect grant costs within our academic medical centers and affiliations. While we have considered this aspect in relation to RON grants, it is not a major concern for us. The broader issue of Medicaid policy is significant, and while we cannot predict the future, there is a clear focus on reducing fraud and abuse. Recent Medicaid redeterminations have likely decreased the number of individuals eligible for Medicaid, which is reassuring. We'll need to monitor how this evolves. As for speculation regarding how states might respond, I believe states will be crucial partners in advocating for funding through Medicaid collaborations with the federal government. This funding is essential for ensuring access to care for Medicaid recipients. Currently, reimbursement rates are still below the cost of care, making it a vital consideration. Therefore, the role of the states will be significant in managing this balance.

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

So I know there's some big surgery center assets out there in the market. Can you remind us, given your delivered balance sheet, what your appetite is versus larger scale M&A in the surgery center business?

Hey, Ann, it's Saum. Obviously, I'm not going to comment on any kind of M&A opportunities. We're very aware of everything that's available in the market. We've proven our ability over the last few years to deploy M&A capital both on a single-asset basis and large multicenter asset acquisitions. I would tell you that the first year post our acquisition early last year of the portfolio that we took on went better than we thought it would. So that's good news. As I said early on in my comments, our balance sheet provides us plenty of flexibility to approach things, but look, we're disciplined, we believe in growth businesses, we believe in areas in which we can add value and we have a lot of flexibility given our cash flow generation and valuation multiple to deploy cash for the benefit of shareholders in multiple different avenues at this point.

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

Just to stick on USPI for a second. Are there any new health system partners that we may not be aware of in the last year? I know you've been selective and disciplined with the financial strength of the partners that you want to work with. But I'm just not sure I've had an update or heard an update on anything new relationships with any health systems in some time. And maybe just a broader comment on the de novo activity, the 10 to 12 this year, any of those with new partners? Or are those all existing partners?

Hey, Whit, it's Saum. No, we haven't shared any updates on health system partners or similar matters. Keep in mind that our platform operates effectively with or without partners due to our capability to create contract synergies, managed care, supply chain, and overall management of these assets. We're expanding our portfolio in both avenues, and I don't see that changing. The growth of new assets can happen in various ways—some in existing markets, some in new ones, and some through MSOs that are broadening their physician presence. As I've mentioned before, there isn't a better operator of ASCs to maximize returns from those investments for physicians than USPI. This is another avenue of growth that contributes to our new initiatives. It's a multifaceted growth strategy, and I don't anticipate that really changing in the future.

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

Saum, I predict you'll hate this question, but bear with me. So we've heard from a few folks that the fourth quarter seasonal uptick is not quite what it used to be because just the fact that deductibles have gotten so high, particularly in commercial plans. Do you think there's any evidence of that?

So John, are you referring just care delivery overall or USPI specifically?

I mean in electives, so electives either in the hospital or in the USPI.

Yes, elective work. I may not be able to provide a statistically significant answer, but I would say that the seasonality in the fourth quarter, particularly regarding elective surgery, seems a bit different. Q4 tends to be a more productive quarter, and our asset utilization in the USPI segment does increase during this time, although it's tempered slightly overall. Additionally, it's challenging to determine how much of this is due to the deductibles versus the impact of recent weather events. We haven't fully calculated that aspect, but it's noticeable that the situation feels somewhat different, even though the general pattern remains unchanged.

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

I'm going to stick on the USPI topic. So can you speak maybe to the broader competitive landscape for ASC transactions? Are you seeing more competition, and if you could differentiate between larger sets of assets or even one-offs or even competitors developing de novos in your markets? And then in your prepared remarks, Saum, you mentioned the de novo growth. Is that indicative of more what we'll call sort of organic center expansions as opposed to acquired centers?

Let me start by addressing the de novo development activity, which we believe is essential, and we are focused on scaling it up. This ties into our strategy of moving towards higher acuity ambulatory surgical work, as de novos reflect a significant shift in market value. Typically, these involve building facilities from the ground up and transitioning services to lower-cost settings, providing value for consumers and payers. This focus on de novos is part of our broader value strategy, which may explain the increased activity in this area. Regarding the competitive landscape, I don’t think it has changed significantly. The best way to evaluate competition is to look at the number of centers among different organizations, where some are growing more effectively than others. Our ability to scale in competitive scenarios while maintaining high-quality, profitable centers has been positive, and we review our pipeline annually, which still appears strong for future opportunities.

Our next question comes from Matthew Gillmor with KeyBanc Capital Markets. Please proceed with your question.

I wanted to follow up on the cost management and efficiency comments. The company has clearly made a lot of progress in the last few years, and you noted the salary, wages, and benefits metrics. As you look ahead, are there any areas of particular focus that are going to continue to drive efficiency in 2025 and beyond that you'd highlight for us?

Sure. The cost management agenda remains focused on managing labor, supplies, and purchase services, along with active vendor consolidation and scaling our service lines that have a manageable cost structure. This growth in scale presents opportunities. In the acute care segment, we are pleased with the improvements in various metrics related to cost, labor, overhead, and supplies compared to our industry peers. However, we recognize that we can enhance our asset utilization, particularly when compared to gold standard benchmarks. We are actively working on this as we increase capacity and build volumes in facilities that had capacity taken offline during the pandemic for efficiency reasons. Our global business center has been a major contributor to our cost savings. Over the past four to five years, we have achieved immediate unit cost savings, but significant cash flow was also needed for restructuring and scaling this enterprise. Initially focused on basic tasks within finance and accounts receivable, we've now expanded to 10 to 12 different service lines effectively managed in the global business center, including clinical areas, clinical analytics, and physician credentialing. This evolution is a vital aspect of our efficiency plans moving forward. Now that it has surpassed breakeven cash flow, these savings significantly impact our operations.

Our next question is from Ben Hendrix with RBC Capital Markets. Please proceed with your question.

Hi, this is Mike Murray on for Ben. So ASC total joint procedures grew nicely in 2024. I wanted to hear your expectations for growth in 2025 and beyond. And then cardiology procedures have been the latest slated to drive material growth in ASCs? Can you discuss any early progress there? And when do you see these procedures really accelerating?

Hey, it's Saum. We expect to continue focusing on our orthopaedics line of business moving forward. We're not going to provide specific volume guidance for that segment, but we believe there is a positive trend in ambulatory surgical growth from an orthopedic perspective. This includes our current activities as well as the expansion of procedures that can be safely performed in ASCs. The same applies to cardiac procedures. I've always maintained that there is an opportunity across a range of cardiovascular procedures, but I believe this will progress more slowly than many expect due to important patient safety and payer mix considerations. Additionally, the capital expenditure needed to establish a cardiac center differs significantly from that of other types of ASCs, given the specialized equipment required. This means the upfront investments for physician partners are substantially higher, potentially resulting in lower margin assets. Therefore, for both economic and patient safety reasons, I think this market will develop, but at a slower pace than some might hope. We will continue to be involved as we are now, but we have no intention of rushing the process at the expense of patient safety and quality.

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.