Tenet Healthcare Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless stated otherwise. Tenet operates Hospital Operations, Ambulatory Care (USPI) and Conifer. At quarter-end, it operated 61 hospitals and USPI held interests in 445 ambulatory surgery centers and 24 surgical hospitals.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net operating revenue | $5.021 billion | $4.745 billion |
| Operating income | $603 million | $648 million |
| Operating margin | 12.0% | 13.7% |
| Adjusted EBITDA (non-GAAP) | $832 million | $888 million |
| Adjusted EBITDA margin | 16.6% | 18.7% |
| Income from continuing operations | $296 million | $279 million |
| Net income attributable to Tenet common shareholders | $143 million | $140 million |
| Diluted EPS | $1.32 | $1.27 |
| Net cash from operating activities | $449 million | $228 million |
Revenue increased 5.8%, while operating income declined 6.9% and Adjusted EBITDA declined 6.3%. Consolidated operating expenses rose 8.5%, faster than revenue. Salaries, supplies and other operating expenses increased; hospital labor expense per adjusted admission improved, but supply and other operating costs per adjusted admission rose. Operating cash flow improved partly because Q1 2022 included $194 million of Medicare advance recoupments or repayments, versus none in Q1 2023. Capital expenditures were $235 million, making operating cash flow less capital expenditures $214 million.
Segment trends: Hospital Operations revenue before intersegment eliminations rose 2.7%; same-hospital revenue rose 2.4%. Same-hospital admissions increased 4.3%, but net patient revenue per adjusted admission decreased 5.2%. Ambulatory Care revenue rose 22.6%, reflecting acquisitions and same-facility growth; consolidated cases increased 23.5%. Conifer revenue was flat at $324 million, though third-party revenue increased 3.8%.
Balance sheet and debt at March 31, 2023: Cash and cash equivalents were $766 million, down from $858 million at year-end 2022. Current assets were $5.869 billion and current liabilities $4.219 billion. Long-term debt was $15.083 billion gross, including $148 million current; the company reported net debt to trailing-twelve-month Adjusted EBITDA of 4.19x. Cash borrowings under the $1.5 billion revolving credit facility were zero, and the full $1.5 billion was available; the company reported compliance with credit and letter-of-credit facility covenants. Debt is predominantly fixed-rate, with note maturities staggered from 2024 through 2031.
Cash used in investing activities was $286 million and cash used in financing activities was $255 million. Financing uses included $134 million of distributions to noncontrolling interests, $50 million of share repurchases and $45 million of debt repayments. Interest paid was $177 million.
Material changes, outlook and commentary
- Management expects 2023 continuing-operations capital expenditures of approximately $625 million to $675 million. It also describes a baseline intention to invest $250 million annually in ambulatory acquisitions and de novo facilities.
- CMS’s proposed FY2024 inpatient payment changes were estimated by Tenet to increase annual Medicare fee-for-service IPPS payments by 3.7%, or approximately $59 million. This is an estimate based on a proposed rule, not a guarantee.
- Tenet’s strategy emphasizes ambulatory expansion, hospital efficiency and portfolio optimization, Conifer growth, and reducing leverage over time. The filing provides no full-year earnings or revenue guidance.
- The company repurchased 906,346 shares for approximately $50 million in Q1 under its $1 billion authorization, leaving $700 million available at March 31, 2023.
- In January 2023, Tenet agreed to sell its 51% interest in San Ramon Regional Medical Center and related operations; completion was expected in 2023, subject to regulatory review and customary conditions.
- Tenet received $31 million of insurance recoveries related to its April 2022 cybersecurity incident; $27 million was recorded in net operating revenue. The incident had temporarily disrupted some acute-care operations and involved exfiltration of confidential company and patient information.
Risks, contingencies and unusual items
- Management cited persistent medical staffing constraints, inflation and supply costs, supply-chain disruption, payer utilization pressure, and risks to patient volumes, service mix and collections. Contract labor expense declined in Q1 but remained above historical levels.
- Managed care payers represented 70.2% of hospital net patient service revenue; the top 10 payers accounted for 64% of managed care revenue. Management estimated a 3% change in managed-care contractual allowances could affect reserves by approximately $18 million. A reasonably likely approximately 3% change in self-pay collection rates could affect receivables by about $11 million.
- Professional and general liability reserves totaled $1.066 billion. Physician and hospital-group guarantees had a maximum potential payment of $207 million, with $187 million recorded as a liability; guarantees of investee obligations had a maximum potential amount of approximately $105 million.
- The DOJ investigation of Detroit Medical Center concerns alleged Stark Law, anti-kickback and False Claims Act issues relating to nurse practitioners and physician assistants during 2006–2017. Tenet reached a settlement in principle in January 2023 and stated it was fully reserved; settlement terms were not specified in the filing text.
- Q1 2023 included $21 million of impairment, restructuring and acquisition-related costs and $4 million of litigation and investigation costs. Q1 2022 included a $43 million debt-extinguishment loss and a $69 million gain on sale of medical office buildings; these affect year-over-year comparisons. Q1 2023 also included $13 million of net gains on facility sales, consolidation and deconsolidation.
- Tenet said the COVID-19 pandemic continued to affect operations to a lesser extent than previously, and noted that actual results may vary with outbreaks, labor availability, reimbursement changes, litigation, collections and other factors. The filing reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether higher volumes and ambulatory growth can offset rising costs and the lower operating and Adjusted EBITDA margins.
- Progress on the San Ramon sale, related proceeds and any effect on results or leverage.
- Cash conversion, accounts-receivable collections and payer allowances; reported AR days were 56.1 versus Tenet’s target of less than 55.
- Execution of the capital expenditure plan and the pace of share repurchases relative to debt reduction and the 4.19x net leverage ratio.
- Final CMS FY2024 payment rules and actual reimbursement effects, including Medicaid and supplemental-program funding.
- Resolution and financial impact of the DMC investigation, cybersecurity-related claims and other litigation or regulatory matters.