Tenet Healthcare Corporation

Greetings and welcome to the Tenant Healthcare second quarter 2023 earnings conference call and webcast. After the speaker remarks, there will be a question and answer session for industry analysts. You may press star one at any time to be placed into question queue. Tenant respectfully asks that analysts limit 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 afternoon, 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 Tenant's second quarter 2023 results, as well as a discussion of our financial outlook. Tenant Senior Management participating in today's call will be Dr. Sam Sattoria, Chief Executive Officer, and Dan Kinselemi, Executive Vice President and Chief Financial Officer. Our webcast this afternoon includes a slide presentation which has been posted to the investor relations section of our website, tenanthealth.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. Tenant 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. With that, I'll turn the call over to Sam.

Thank you, Will, and good afternoon, everyone. Before we get into this quarter's results, I'd like to start by extending a warm welcome to Sun Park, who has joined us for this phone call. Sun will become our Chief Financial Officer following Dan's retirement. He has more than 25 years of finance experience and an impressive track record of delivering positive results in the healthcare industry. Most recently, he was responsible for the commercial and operational finance for all of AmerisourceBergen's business units. The CFO transition at Tenet is actively underway and supported by our broader leadership team. I look forward to the impact of Sun's leadership as we continue to execute on our strategic priorities. Now let's turn our attention to the results that I'm pleased to present for the second quarter. In the second quarter, we reported net operating revenues of $5.1 billion and consolidated adjusted EBITDA of $843 million, which translates into an attractive 16.6% margin. Robust volumes and effective cost control drove attractive results and strong free cash flows. And our adjusted EBITDA is about 53 million or 6.7% better than the midpoint of our guidance range. We produced another very strong quarter in USPI with 370 million of adjusted EBITDA, which represents 16% growth over second quarter 2022. Same facility cases grew 6.6% and adjusted EBITDA margins remained robust. Orthopedics volumes were strong with total joint replacements in the ASCs up over 12% over second quarter 2022, coupled with ongoing strength in GI, urology, and ENT. Net revenue per case improved nearly 3%. Looking ahead, the tailwinds that support ambulatory surgery demand recovery and growth are evident in the current environment. These tailwinds include an active but aging population. patients proactively seeking more convenient access to procedural care, a recovering healthcare ecosystem looking for lower sites of care, and ongoing innovation in ambulatory surgery care delivery. These factors collectively create a strong foundation for continued growth. As the leader in this space, USPI is well-positioned to capitalize on these opportunities. We continue to attract and retain high-quality physicians, which is translated into growth in overall physicians performing procedural care in a USPI facility. We continue to expand high acuity service lines while delivering high patient and physician satisfaction through operational excellence. This has enabled strong volume growth from servicing new physicians as well as deferred demand. It is worth noting that GI case growth has been particularly strong so far this year. We see evidence of both deferred care and also expansion of care for the under 50-year-old patient population from recent guideline changes, which we believe should be a source of ongoing and expanding demand over time. During the quarter, we successfully expanded our reach by adding 12 new centers. Among this impressive new portfolio are three single specialty GI centers in Ohio, bringing our total to 12 in the state. Additionally, two of our new facility openings were focused on orthopedics and de novos in Michigan and Florida. We are also encouraged by the high level of de novo activity in our pipeline, with more than 30 centers currently in the syndication stages or under construction. This demonstrates momentum in our expansion efforts and further strengthens our growth prospects. USPI's future is bright, and our capital deployment into this business will continue to grow and develop this portfolio. Turning to our hospital segment, we generated $388 million of adjusted EBITDA in second quarter 2023. Acuity remains strong, with revenue per adjusted admission up 4% over second quarter 2022. On a non-COVID basis, same-store admissions were up 5%. Our workforce continues to grow and stabilize. We have successfully reduced turnover and nurse hiring has accelerated and shown improvement. As a result, we reduced contract labor costs during the second quarter of 2023 to about 4.3% of SW&V. With the improving labor environment, we find ourselves in a favorable position to capitalize on our strategic approach to prioritize high-acuity specialty services. We feel comfortable with this level of contract labor and will look to prioritize placement of new hires for targeted capacity expansion aligned with our strategy. It is important to note that our SW&V as a percent of net revenue was 47.3% for the first half of 2019 and is now running 45% year-to-date in 2023. We see this as a validation of our analytics-driven labor management capabilities, continued portfolio transformation, and the higher acuity top line strategy as we recover from the pandemic. It gives us more room to invest, and at the right time, market by market, add capacity as we feel comfortable bringing it online. Our business processes utilize real-time analytics to equip staff, managers, and senior leadership to make data-driven decisions to optimize their areas. This includes workforce productivity, contract labor utilization, inpatient throughput, procedural room utilization, transfer acceptance, and more. The analytics are easily digestible and highly accessible with dashboards and insights integrated into key workflows and care team huddles. We believe that this data-driven operating discipline coupled with our focus on high-acuity service line development will enable our hospital segment to continue to deliver strong results. Conifer continues to perform well for its clients and also delivered strong margins. Ongoing technology automation and offshoring initiatives support that performance. Second quarter EBITDA margins were 26.3%. Conifer continues to focus on commercial activities, especially in patient eligibility services. given the need from the Medicaid redeterminations. Stepping back, I indicated last quarter that our confidence in the ability to turn the various styles on the business and generate predictable results is growing. I like the operating environment right now because it is evolving such that higher acuity focus, effective capacity management, and nimble cost control, all strengths of ours, support improving results in our business. As a result, we are again raising our full year 2023 adjusted EBITDA guidance by $75 million at the midpoint to a range of $3.31 to $3.46 billion. This range represents a $125 million increase over our initial full year guide. In short, we are optimistic about our ability to continue to differentiate our unique business mix and deleverage through strong earnings growth. Free cash flow continues to improve, which provides us flexibility to make necessary investments to enhance our future growth prospects and improve our capital structure. And with that, Dan will now provide a more detailed review of our financial results. Dan?

Thanks, Tom, and hello, everyone. Our financial results in the second quarter were strong, with the USBI and the hospitals adjusted EBITDA, same store volumes, and revenues above our expectations. In the quarter, we generated consolidated adjusted EBITDA of $843 million above the high end of our second quarter guidance range. Our results were driven by strong same-store revenues and volumes, high patient acuity, and effective cost control. Now I'd like to highlight a few key items for each of our segments. Let's start with USPI, which delivered strong growth and continues to provide high-quality care to our patients. In the quarter, USPI produced a 9.8% increase in same-facility net operating revenues compared to last year, with case volumes up 6.6% and net revenue per case up 2.9%. We saw strong growth in GI, urology, ENT, and orthopedic cases. USPI has adjusted EBITDA, excluding grant income, grew 16.4% compared to the second quarter of last year, and its margin continues to be very strong at 39.2%. We're pleased with continued strength of USPI's performance, which is a testament to the attractiveness of the portfolio and the value we provide to our stakeholders. Turning to our acute care hospital business, second quarter, same hospital, adjusted admissions increased 3.2%, compared to the second quarter last year, and total same hospital inpatient admissions increased 3%, while non-COVID admissions increased 5%. In fact, year to date, non-COVID admissions are up 9.2% over last year. Our labor management continues to be very effective, despite the cost pressures, especially contract nurse staffing costs. On a consolidated basis, contract labor costs were 4.3% of SWMB in the second quarter, a significant decline from 6% in the first quarter this year, 7.3% in the fourth quarter last year, and 6.2% in the second quarter last year. Our consolidated SWMB costs as a percent of revenue were 45% in the quarter, compared to 45.8% in the second quarter last year. And our case mix and revenue yield remains strong as we continue our strategic focus on investments in higher acuity, higher margin service lines. And our case mix index in the quarter has grown at a 3% CAGR since 2019 before the pandemic. Let's now turn to Conifer, which again delivered a solid quarter. Conifer produced second quarter adjusted EBITDA of $85 million and a strong margin of approximately 26%. Overall, we were very pleased with our performance in the second quarter. Let's now review our cash flows, balance sheet, and capital structure. At the end of the quarter, we had $934 million of cash on hand and no borrowings outstanding under our line of credit. We generated $466 million of free cash on the quarter and $680 million so far this year, bolstered by Conifer's strong cash collection performance. As previously announced in the second quarter, we issued $1.35 billion of secured notes that mature in 2031. We used the proceeds from the notes to early retire $1.345 billion of our then outstanding secured notes that were due next year. We now have no significant debt maturities until 2026, and we have approximately $1.6 billion of secured debt borrowing capacity available, if needed. Our June 30th leverage ratio was 4.14 times EBITDA, compared to 4.1 times at year-end 2022. Also during the quarter, we repurchased approximately 580,000 shares of our stock for $40 million as part of our $1 billion share repurchase program. Since the inception of the program last year, we have repurchased approximately 7.4 million shares, or about 7% of our then outstanding shares, for $340 million at an average price of about $46 per share. We believe our strong free cash flow generation and capital deployment actions will continue to provide us ample financial flexibility to support our growth initiatives. Let me now turn to our outlook for this year. As Saul mentioned, we are raising our 2023 adjusted EBITDA outlook by $75 million to $3,385,000,000 at the midpoint of our range, reflecting our continued strong performance. This $75 million increase includes a $45 million raise for USPI and a $30 million raise for our hospitals. Additionally, we now expect net operating revenues to be in the range of $20.1 billion to $20.5 billion, an increase of $300 million. We've increased our assumptions for growth in hospital inpatient admissions and adjusted admissions. Additionally, at USBI, we have increased our assumption for same-facility surgical case growth to 5% to 6% for 2023, a 200 basis point increase over our prior expectations. Our increased full-year EBITDA guidance absorbed an approximately $15 million headwind from recently passed legislation in Florida, which, among other things, reduced workers' compensation and personal injury reimbursements. Regarding our third quarter outlook, we expect consolidated adjusted EBITDA to be in the range of $775 million to $825 million or $800 million at the midpoint. And we anticipate the USBI's EBITDA in the third quarter at the midpoint will be approximately 23% to 24% of our full year 2023 USBI EBITDA guidance of $1,510,000,000 at the midpoint of our range. Turning to our cash flows for 2023, from a cash flow perspective, we expect net cash from operating activities to increase $50 million over our prior expectations and are reinvesting this amount back into our business in the form of higher capital expenditures to fuel future growth. As a result, we continue to expect free cash flow to be in the range of $1.1 billion to $1.35 billion for this year. Our free cash flow generation has improved substantially over the past several years, and we expect our business to continue to drive strong cash flows while executing on our growth plans. Our improved cash flows provide us with significant financial flexibility to effectively deploy capital for the benefit of shareholders. As a reminder, our capital deployment priorities have not changed. First, we plan to continue allocating approximately $250 million of capital annually to grow our USPI Surgery Center business. Second, enhancing our hospital growth opportunities, including the continued focus on higher acuity service offerings. Third, evaluating further opportunities to retire and or refinance debt and share repurchases, depending on market conditions and other investment opportunities. And with that, we're ready to begin the Q&A. Operator?

Thank you. Now we'll be conducting a question and answer session. As a reminder, we ask that you please ask one question, then return to the queue. If you'd like to be placed into question queue, that's star 1 on your telephone keypad. To be removed from the queue, please press star 2. Our first question today is coming from Steve Ellicott from Barclays. Your line is now live.

Hey guys, Will McMahon on for Steve. Congrats on the roughly 7% at USPI. Just kind of a quick question on the 45 million full year guidance raise there. In the past, you've kind of told us what portion to expect. So what are you thinking for that for 3Q and then kind of on the back of it, you know, pretty sizable increase for the full year against the normalized growth rate for EBITDA. Can you just give us a little more color on what's driving the outlook and maybe anything on payer mix specifically in the outpatient setting to call out? Thanks.

Yeah, this is Dan. In terms of USPI's guidance for the rest of the year, as I mentioned in my remarks, you may not have heard of them, we're anticipating that USPI's Q3 EBITDA would be roughly 23 to 24 percent of the full-year EBITDA guide of $1.510 billion. So that's how we're looking at Q3, and obviously, you know, Q4, Q4 is typically seasonally stronger, and we're still anticipating that. Business has performed incredibly well so far this year with very strong volume growth. The expense management has also been very tight, combating a lot of the inflationary pressures that are out there, and so we're pleased with the results so far, and And that's resulted in us increasing their guide by $45 million.

Thank you. The only other thing I would add to that, because you specifically asked about the mix, we feel very good about both the case mix and the payer mix in the recovery and growth this year.

Thank you. Our next question is coming from Jamie Perse from Goldman Sachs. Your line is now live.

Oh, thank you. Good afternoon. I was hoping we could spend a few minutes on just the surgical volumes in the quarter for the hospital segment. They're obviously very strong for USPI, but I've been a little bit surprised with the trends in the hospital segment. I think you guys were down about 10 basis points, and outpatient actually looked a little bit weaker than inpatient there. So can you just, you know, maybe give us a little bit of color on what you're seeing there, and more importantly, how we should think about the outlook for surgical growth, just given some of the comments you made around backlog recovery. I know those were probably a little more tied to USPI, but still, I would think there'd be some tailwinds there. So any color on that topic would be really helpful. Thank you.

Yeah, my comments on the backlog and recovery were really meant to address a more fundamental examination we did of the GI service line recovery and growth at USPI. And we're actually happy to be able to report that while some of it appears to be deferred care, a substantial amount of it appears to be new demand stimulation that we're seeing, both in terms of physicians that are ramping up and the ability to expand the service line into the new population supported by the guidelines that's younger and obviously with most of them, if not all of them, being commercially insured. So I think that's a positive tailwind there. Look, on the hospital side, I think you guys are aware that we have taken an approach where we've been very thoughtful about our capacity. I think that this is nothing more than a little bit of a mix towards medical versus surgical admissions given the capacity. we were willing to open. Obviously, we were still very focused, as you can tell from our results on the labor side, we were still very focused on bringing down our utilization of expensive contract labor at this point, even with rates moderating still expensive and getting that into a target range that we feel comfortable with on an ongoing basis before we began any type of capacity expansion. You know, we do face some tradeoffs at times between what we see coming in medically, especially through the emergency department, and a bit of capacity from a surgical standpoint in the acute care hospitals. Again, we're still managing to a capacity-constrained environment. And that's probably a little bit of what you saw. Look, we feel pretty good about our surgical and our procedural mix investments in the acute care hospitals. There will be some ups and downs as the quarters go from a recovery standpoint, but if you really follow us and you follow our acuity and net revenue intensity, that's really what we're focused on because we think that's going to help generate the best margins over time.

And, Jamie, when you look at overall our inpatient revenues on the hospital side on the same hospital basis, You know, they were up roughly 8%. Patient revenues were up year-over-year about 6%. And it was ahead of our expectations. So we were very pleased with how the hospitals performed overall during the quarter.

Thank you. Next question is coming from Pito Chickering from Deutsche Bank. Your line is now live.

Hey, good morning, or good afternoon, guys. I just take my questions. For guidance looking at both hospitals and ESPI, it looks like That modeling case growth and the submissions to normalize in the back half of the year, I guess the math here also is that you did about a 5% same-story submission in the first half of the year, which implies about 2% for the back half. And for USPI, you did about 7.2% case growth, which implies about 104% of the back half of the year. Are you seeing anything to be conservative about the normalizing case growth, or is it simply conservatism? And if these current volumes remain, will they be upside to your guidance? in any color in July.

Yeah, well, no color on July, but the, I mean, I think you've hit on some important points. I mean, first of all, even as you described normalized, I mean, the full year guidance on USPI volumes is still ahead now of what we think the long-term trends would look like. And obviously, if the volumes are stronger, the chassis has proven that just like in this quarter and the first quarter, it can certainly outperform expectations from an earnings standpoint. And so, you know, look, I think the biggest thing to think about here is Q4 seasonality tends to be pretty robust at USPI, and we see no reason to believe that that's going to be any different this year. But, you know, 6%, 7%, 7.2%, as you point out, I mean, that's pretty significant growth, and I think it's prudent to look ahead in a much better than normal year, but also ensure that we're thoughtful about what we're seeing from a volume perspective that we can really truly predict looking forward. Same thing on the hospital side. Q4 tends to be stronger there. It's not as seasonal in its variation as USPI, but it is somewhat seasonal, somewhat driven by different things, including respiratory illness and other things. And I think, again, I think the guidance reflects there both our optimism about the business and also some planning around adding capacity back in if we can maintain the contract labor environment and labor cost environment the way that we've finally got it to where we're comfortable.

And the only other thing I'd add, Peter, was, you know, I'm listening in the back half of the year, we're assuming at the midpoint, you know, admissions grow by 2.4% roughly. And, you know, in the third quarter last year, COVID admissions were roughly 6% of cases. And, you know, roughly, you know, 4% in the fourth quarter. We're not expecting the same level of COVID volumes, you know, obviously in the back half of this year at this point. But, you know, again, the volumes performance has been very good on the hospital side. And overall, the hospitals have outperformed our expectations.

Thank you. Next question is coming from Justin Lake from Wolf Research. Your line is now live.

Thanks. Appreciate it. Just a couple numbers questions. First, you know, physician outsourcing has been a hot topic and certainly looked like your other operating costs were up a bit. Just curious what's going on there. Maybe you can give us a, you know, ballpark estimate of what, you know, that physician outsourcing costs or physician costs are within that other operating as a percentage. And then just lastly on your payer mix on the hospital side, Given you include Medicaid and Medicare in there, I'd love to hear just a pure commercial number and how that looked year over year. Thanks.

I'll take the first one, Dan. You want to take the second one? So, Justin, just a few thoughts on the physician outsourcing and hospital-based physician staffing costs have been an area of focus for us. We've talked about them since the pandemic began. and have been a focus for us over that period of time. Not surprisingly, there's pressure in the industry based upon, you know, some of the reimbursement and market discontinuities that those entities have faced. But this isn't something new, right? So our, I mean, if you look forward, our guidance in both of our care delivery segments takes into account and our robust increase in guidance takes into account what we think will happen with respect to cost in that line item. So yeah, there's cost pressure there. We also work on mitigating that by improving utilization of the physician resources that we have by consolidating and combining service lines where possible. And certainly with our work with some of our preferred partners in that area, they're growing their market share with us because They provide better opportunities for us to partner. And selectively, because of our contracting strategies, including outpatient, we're selectively able to insource where needed seamlessly in order to manage our expense space there. So, you know, I do think this is an important area, but it's not, you know, at least my reflection is it's not new and we've been managing it for some time.

Yeah, and Justin, from a payer mix perspective, the payer mix in the quarter really consistent with the first quarter continues to remain attractive from a commercial perspective with in and outpatient volumes tracking stronger than the aggregate inpatient, outpatient volumes. And the revenue yield has been very good as well. And we're satisfied with the payer mix trends.

Thank you. Next question today is coming from Kevin Fischbeck from Bank of America. Your line is now live.

Great. Thanks. I wanted to go into your point about temp labor now being at a point where you can kind of invest in growth. Is there some way to quantify kind of you know, where admissions or volumes might be if you had, you know, full staff, just to kind of frame how much volume is deferred volume. And then when we think about, you know, it sounds like there's a staffing aspect to it, which might be shorter term, and there's a CapEx, you know, aspect to it, which may be longer term. So let's just kind of think about how to think about that volume recovery and whether, you know, it's right to think that, you know, volumes could be above average if you're able to staff and grow out the CapEx you're talking about. Thanks.

Yeah, Kevin, I think just a couple thoughts. I mean, I think the CapEx and infrastructure constraints are really minimal. There may be certain service lines where our current physician capacity or particular areas of the hospital in services we've invested in are a bit full. But in general, I would not say that we have physical capacity constraints, you know, to be able to grow it's more about the service lines that we want to be in. From a labor standpoint, you know, I mean, 4.3% is a blended number across our portfolio, obviously, and it's a little bit different market to market in terms of what we're doing. What we really, and therefore the ability to take market share, if that's where the growth is, is really something we're selective about based upon both the service lines and the payer mix that we service in those in those markets. So in some of our markets, we're already investing and adding capacity and feel pretty good about the results. In other markets, you know, we're a bit more cautious based upon the underlying mix or case mix that we tend to see in that area. But in all cases, as time goes on, if contract labor costs and premium labor costs continue on the path of normalizing, We think we'll have additional room for volume growth as we look forward. Finally, you know, you asked the question about how much is really deferred. My general view has been on the acute care side, not much of it is really deferred care. I mean, it's different than maybe what others are seeing. I'm not really sure. But at least for us, I have not really... seen or viewed patterns that suggest to me a large fraction of what we're seeing right now in the acute care side is deferred and somehow, you know, going to be one and done.

Thank you. Next question is coming from Calvin Sterning from J.P. Morgan. Your line is now live.

Yeah, thanks for the question. I'll ask about geographic mix. Were there any that stood out as sort of particularly strong in the quarter and you're seeing a rebound in maybe some of the markets that were slower to recover initially? And then just on USPI, can you give an update on the M&A pipeline and some of the physician buy-ups from SCD2? Just wondering if there's any sort of impact on how physicians are thinking about potential buy-ups just given the strong volume environment.

Yeah, just taking them in reverse, I'll take the first one, Dan, if you want to take the second one, if you want to take the first one. Look, nothing to report out of the ordinary on the SCD buy-ups. Like we mentioned last time, those are on track with our expectations this year. And while we're at it, just the de novos that we're going to open that were delayed are all on track this year as well. And obviously... that's been a contributor to an overall very, very strong first half of the year for USPI.

Yeah, Cal, and in terms of the geographic markets or areas from a hospital perspective, what I would say, I'm not going to get into specifics about each geography, but what I would say is the volume growth that we're reporting isn't primarily due to certain geographies that, you know, have reopened at a slower pace than others. So it's not like, you know, the Florida and Texas markets are not big contributors to this performance. And, you know, it's being driven by some of the other markets, whether, you know, California or Michigan. The markets are performing well. And these volume trends are not because there's one or two markets that just reopened slower and that's what's driving all this growth. That is not the case.

Thank you. Next question is coming from Whit Mayo from Learing Partners. Your line is now live.

Hey, thanks. Good afternoon. Just back on the physician staffing point or the question, are you seeing any changes in anesthesia coverage at USPI, meaning Are we seeing groups ask for increased subsidies? Are you seeing any disruption on volumes in any markets from the dislocation with these groups? I know you said it's manageable, Sal, but I guess I'm trying to kind of unpack maybe what's sort of new relative to USPI.

Yeah, this is a little bit like the contract labor discussions that we have. It's sort of not, the issues on the hospital side are so much more significant than anything we see on the USPI side. You know, because the mix is good and it's just a different environment to operate in. And so the magnitude of that effect at USPI is so much lower than the challenges that are being faced on the hospital side with respect to anesthesia staffing.

Thank you. Our next question is coming from AJ Rice from Credit Suisse. Your line is now live.

Hi, everybody. Just maybe talk about two other areas you haven't mentioned. Some are saying they're seeing some of the benefit from all the growth we've seen on the public exchanges or marketplaces, whatever you want to call them. I've heard you talk about what your strategy has been with respect to marketplace for a while. Do you feel like you're in most contracts there, and how much is that? I assume that's being booked in the managed care line. But just want to confirm that and how much of a tailwind is that provided year to year for you? And then on the same lines, obviously there's the question of Medicaid redeterminations. You've got a couple markets that tend to be a little heavier Medicaid. Are you, what do you see in early days there? Are you actively involved in getting people reverified? And is there upside because some of those people may end up on the exchanges for you there?

Yeah, AJ, thanks for the question. Hey, you know, I think it's early days on redetermination, first of all, so we're not really seeing much effect. And I'm glad you raised that because I'll reinforce. Conifer has a best-in-class eligibility and enrollment service, and it benefits us, it benefits our clients, and now, as I've indicated, we're expanding that as a point solution. So we feel very, very good about our ability. to catch and capture eligible patients, whether they're moving from one form of insurance to another, Medicaid to exchange or other, or even from the standpoint of those that may enter the system apparently uninsured but actually do qualify for coverage. By the way, that includes, even in this environment, a lot of new enrollments in Medicaid that we achieved. Our exchange strategy has been very consistent. for many years. We took the approach early on of contracting broadly in the exchanges and doing that on a commercial minus rather than a Medicare plus basis. So we're pleased with the rates and we're pleased with the network access. As narrow networks have opened up, including some ultra narrow networks, there may be some or a handful that we're not in, but they really don't have a lot of lives in them. And so for the networks that are gaining a lot of lives or have a lot of lives, we tend to be very well contracted. It has been a longstanding strategy of the company to be broadly inclusive of exchange patients.

And AJ, the exchange volumes that we care for and the revenues, they are included in in that managed care line that you see that we disclosed. And I would tell you the exchange volumes and revenues are trending very nicely. Overall, it's part of our commercial when we think about our commercial mix. Trends are good.

Thank you. Next question is coming from Andrew Mock from UBS. Your line is now live.

Hi, good afternoon. You've done about $90 million of share repurchase to date and have $660 million of authorization remaining through 2024. You increased the CapEx guide by about $50 million, but curious to hear whether your thoughts around share repurchase have changed and with a better cash flow profile this year. Thanks.

Andrew, this is Dan. No, there's absolutely no change in our views and how we're thinking about share repurchases. We obviously repurchased some additional shares in the quarter. And, you know, we'll continue to look at that in terms of from a capital allocation perspective. As we always say, depending on other, you know, investment opportunities and market conditions, we will certainly continue to, you know, pursue share repurchases. So no change whatsoever from our thinking on share repurchases. We increased our capital guidance additional investments to help drive additional growth substantially in the hospital side.

Yeah, I would echo that, especially on the first point. I mean, as our business strengthens, and in particular, you know, the long-term trends that would support, especially the ambulatory surgery division growing over time as we come out of the pandemic and we still feel that our equity is a very, very compelling investment vehicle as we trade. Even on an EBITDA minus NCI basis, we still traded a discount to some of our peers, whether you look at it by segment or in total. So we very much feel like, you know, that our business prospects have a lot of upside associated with them.

Thank you. Next question today is coming from Brian Tanquillette from Jefferies. Your line is now live.

Hey, good afternoon, guys. Congratulations. Sam, as I think about the revenue for adjusted admission in the hospital, you know, up 4%, pretty strong. How should we be thinking about, you know, your ability to sustain that healthy level, both from an acuity perspective and maybe, you know, some of the contract negotiations with the payers as we look at, obviously, higher than average inflation rates? Thanks.

Yeah, well, maybe Dan and I will both comment. Look, I think the acuity strategy, we still have runway across our markets. And I actually think as we come out of the pandemic, if we continue to focus on expanding our initiatives in that area, we ought to be able to sustain. On a non-COVID basis, our case mix index has been growing at a 3% CAGR since 2019, which in the CMI world is is a very, very strong result. I mean, you know, this has been a strategy pre-pandemic, as you know, that we undertook when some of us joined the company to really reposition Tenant's acute care hospital portfolio. And we've been working at that for a long time and we continue to work at it and think that there will be upside there. And then from a contracting perspective, you know, as we Part of strengthening the attractiveness of our portfolio has been upgrading the reputation and quality of physicians that choose to work in our hospitals, which create a lot of pull among consumers, employers, and other things. And that has definitely been the case. It's been the case pre and post now pandemic. in terms of what we're doing. And that helps our contracting because our hospitals are more desirable from a quality, reputation, and program standpoint than they were five years ago. And as a consequence, you know, if I look at our recent contracting efforts, they're better than what they were, you know, two or three years ago in terms of the kinds of escalators we're able to negotiate because we're more must-have in some ways in the in the networks in the cities in which we operate. So this can be a virtuous cycle, you know, I believe, that will continue for some time.

Thank you. Next question is coming from Jason Casola from Citi. Your line is now live.

Great. Thanks for taking the question. Just wanted to ask why your cash flow on CapEx died. You know, it sounds like you upped both in context for better EBITDA generation this year. Just on free cash flow, you know, done $466 million year-to-date. You've updated free cash flow guide of $1.35 billion. You know, there's an operationally strong fourth quarter to consider. I'm just wondering if there's any timing elements that we should consider as it relates to cash flow and CapEx spend. And then just as a quick follow-up, if there's any one-time items we should be thinking about in the back half of the year on EBITDA like Medicaid, supplemental payments, or otherwise. Thanks.

Yeah, this is Dan Jason. In terms of free cash flow generation, obviously we're pleased with how our performance has been so far this year. Conifer has done a really good job and is outperforming our expectations. So that's very encouraging. Your point about the timing, I would say we still have some tax payments to make in the fourth quarter. that, you know, we wouldn't necessarily maybe see in the third quarter. But, you know, really no substantive, you know, change from our thinking other than, you know, the strong performance so far. And as we mentioned, we made a decision. We're going to invest a little bit more into CapEx this year, $50 million.

Thank you. Next question is coming from Stephen Baxter from Wells Fargo. Your line is now live.

Hi, thanks. This is Nick on for Steve. I was hoping you could provide an update on the performance of the SCD businesses so far this year and where you are in terms of progression to the effective multiples you target for those assets. Thank you.

Yeah, I did that earlier. We're very pleased with the ongoing buy-ups according to plan this year and the opening of the de novos. It's been a contributor to the entirety of USPI's performance this year, which has been strong on both acuity and growth. And as Dan mentioned, also a lot of the work we've done on operations management that has improved margins and strengthened margins as well.

Thank you. Next question is coming from Ben Hendrix from RBC Capital Markets. Your line is now live.

Thank you very much. Appreciate all the color on the growth across USPI case categories, but I don't know if I heard you mention cardio growth. Just want some comments on your degree of focus there and what you're seeing in that area. Thanks.

Yeah, no, of course, we're very attuned to the cardiovascular market in the ASC setting. We perform peripheral and device-based work there today. and very selectively other types of vascular, coronary vascular work. You know, this is an area in which I have consistently voiced caution about how rapidly it will expand. One, because of patient safety and selection issues that still have to be worked out. So we're in the midst of a number of different pilots to work out appropriate safe clinical protocols. I mean, ASCs are small businesses. and a single patient error and associated liability can really do a lot of damage there. So we're very careful and cautious about developing the right set of protocols in that environment if we're going to expand into cardiovascular in a more broad way. The second thing you just have to realize is that, you know, the payer mix, because it's cardiac, tends to be much, much more heavily Medicare than commercial, even if you compare it to orthopedics. which has a lot of commercial activity, and that is going to impact the types of margins that those types of facilities can generate. Now, look, I recognize USPI has got best-in-class margins for the ASC business by far, but part of what you've got to work out is how to do this, build the scale, and do it with margins that are healthy so that the partnership of physicians stays engaged. in building that. So, you know, my view here is that will things move into the outpatient setting in that field? Sure. But I think it's going to be slower and more cautious all around because of the things I mentioned than what some people discuss.

Thank you.

Thank you. We reach the end of our question and answer session, and that does conclude today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.