Tenet Healthcare Corp (THC) 2021 Q4 法說會逐字稿

Good morning. Welcome to Tenet Healthcare's Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions) I'll now turn the call over to your host, Mr. Dan Cancelmi, Executive Vice President and Chief Financial Officer for Tenet. Mr. Cancelmi, you may begin.

Thank you, operator. Good morning. We're pleased to have everyone join us this morning. Tenet's senior management with me on today's call include Ron Rittenmeyer, our Executive Chairman; and Dr. Saum Sutaria, our Chief Executive 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 Tenet 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.

With that, I'll turn the call over to Ron.

Good morning. Thank you, Dan, and thank all of you for joining us today regarding our fourth quarter earnings and also all of 2021. Before I turn this over to Saum and Dan, briefly, I would like to touch on a few aspects of 2021 and highlight what we believe are fundamental and sustainable changes we've made over the last several years that will continue to carry us forward.

As I stated in my comments in the earnings release, the fourth quarter delivered strong consistent results with adjusted EBITDA of approximately $1 billion for the quarter and very strong cash flows, both ending 2021 above guidance. We closed the significant SCD transaction on another 86 centers, established an exclusive development relationship with their team for the next 5 years and acquired their ASC service group to further muscle build the USPI organization. Additionally, our internal development team also added more than 20 centers. This further solidifies USPI as the market leader, and we are projecting approximately 50% of our earnings to come from this sector of the business by the end of 2023.

Hospital performance, except for Massachusetts due to the strike, which is now settled, performed above expectations across the board, while dealing with a continued covered surge. And Conifer continues a positive delivery of consistent results while expanding its offerings and gaining additional point solution opportunities in the marketplace. When you reflect on the overall Tenet business, it clearly has made a paradigm shift from the end of 2017.

The fundamentals built on an analytical database approach coupled with detailed and disciplined expense management in every aspect of our business have proven our ability to handle volatility effectively. Every hospital group has now achieved positive contribution consistently. USPI should, as we said, continue to represent a larger, more impactful portion of our earnings, and Conifer has improved its margins by over 1,000 basis points in the last 4 years.

Coupled with consistent strong core growth, detailed and objective portfolio management, as represented by the number of divestitures and ambulatory acquisitions we've successfully accomplished supported by a stronger and well-designed balance sheet, the Tenet Enterprise is now positioned to be an organization with multiple consistent sources of revenue, free cash flow, EBITDA growth quarter after quarter looking forward and then year after year.

Having said this, I just have to comment it is somewhat difficult to understand why Tenet remains classified mostly as a hospital company. The recognition of USPI's growing contribution and Conifer's cash flow generation, for some reason, seem lost in the broader question of Tenet being recognized as more than a hospital company. With corresponding dialogues and our multiples remaining caught in this time lapse, it appears that the transition of what Tenet has become and the deleveraging we've accomplished are not fully recognized in the valuation of the company. We believe it's a point of view worthy of consideration.

So with those comments now, I'd like to turn it over to Saum.

Thank you, Ron, and good morning, everybody. I'd like to start off with a personal thank you to our physicians, nurses and staff. Their resolve to deliver high-quality care through the recent surge of Omicron has been nothing short of excellent.

Turning to our release. As you saw in the report posted yesterday, we ended the year with strong results. In Q4, we delivered adjusted EBITDA of more than $1 billion and $877 million, excluding CARES Act funds. This is higher than the midpoint of our outlook and higher than consensus. We also drove a strong company-wide EBITDA margin of 18.1% in the quarter. We continue to manage effectively through COVID.

In Q4, COVID admissions were approximately 7% of the total. While the highly transmissible nature of Omicron had a greater impact on staffing, our operators continue to effectively balance resources and maintain strong COVID safety protocols.

In addition, we remain focused on quality and safety across the portfolio. Serious safety events and hospital-acquired infections declined in the fourth quarter despite the COVID surge. Average length of stay in our emergency departments was reduced given our focus on better patient service and easier access. And finally, USPI surgical hospitals had 0 hospital-acquired infections in the fourth quarter.

Our accomplishments in the quarter and the year reflect a commitment to executing our strategy and a continued positive trajectory for Tenet. At USPI, we acquired interest in or opened approximately 160 facilities since December of 2020. This included the SCD acquisitions, the acquisition of Compass, buy-ups in multiple surgical hospitals in addition to tuck-in acquisitions and de novos.

I want to reiterate a few points about the SCD acquisitions. We anticipate the portfolio of 135 centers from the 2 SCD transactions will have approximately $540 million in EBITDA and $360 million in EBITDA minus NCI at run rate. This is expected to deliver more earnings at a much stronger EBITDA margin as a small portion of the total USPI enterprise than other available surgery comps.

USPI operations continue to perform at a high level during the quarter. Due to the continued COVID surges, patient scheduling, cancellations and physician and staff availability were all affected. Despite this, USPI delivered sequential month-over-month growth through the fourth quarter. USPI had a 4.4% year-over-year increase in the same-facility system-wide surgical cases and a 3.2% net revenue increase per case, resulting in a strong 7.7% year-over-year net revenue growth.

The segment ended the year with a quarterly EBITDA margin of 46%, excluding grants, up from 44.7% in the fourth quarter of 2020. Our Hospital segment outperformed again in Q4 with nearly all markets exceeding our expectations. This was supported by high patient acuity from continued investment in clinical technology and service line enhancements. In Q4 as an example to demonstrate the resilience of our business, our non-COVID medical and surgical discharges increased 3% over prior year. Our operators maintained active cost management, making real-time adjustments using our analytics platform to optimize staffing, length of stay and capacity utilization. This, once again, helped us maintain good performance in our labor costs while maintaining the high standards of quality I described before.

Conifer also had strong performance and another quarter of margin enhancement. We continue to modernize Conifer's technology offering and globalize Conifer's operating model to deliver results. We also signed new clients and renewals for revenue cycle management and value-based care services. Our 2021 results reflect the commitment to continuous improvement developed over the past several years. We raised guidance 3x and outperformed the midpoint of our guidance and midpoint of consensus.

We have deployed over $2.5 billion in capital investment at USPI since December of 2020, scaling USPI to be the leading ambulatory surgery platform. We also welcomed over 3,400 physicians to USPI's medical staff and started approximately 90 new high-acuity service lines. We anticipate strong returns from the high-caliber investments we've made. We also increased investments to expand high acuity care in our hospital markets. We're expanding capacity in Palm Beach and El Paso, and we remain on track to open our hospital in South Carolina in the summer of 2022.

We also announced 2 exciting new developments in San Antonio and 1 in Phoenix to meet the growing health care needs of those communities. Additionally, we continue to foster an ecosystem of high-quality physicians supporting advancements in neurosciences, cardiovascular and surgical services. Looking ahead, we expect continued growth in 2022 with adjusted EBITDA outlook midpoint of $3.475 billion. This represents a 6% increase from 2021, excluding grant income.

Let me outline a few key priorities in our 2022 plan. Year-over-year core growth in USPI's adjusted EBITDA, excluding grant income and excluding the SCD acquisition, is projected to be a healthy 11.8%. This reflects our optimism that as the Omicron wave subsides, we will be able to return the normal demand at USPI as we've demonstrated after previous COVID surges.

We are continuing to integrate the SCD portfolio and complete physician buy-ups. These are on track to proceed throughout 2022, and we guide to approximately $140 million in adjusted EBITDA for the year as an estimate on the current portfolio of 86 centers closed and the timing of buy-ups for the portfolio acquired in December of 2021. There is no change in our run rate estimates despite the 6 centers excluded from what we provided at deal closing. These new centers are performing very well.

We have integration management capabilities in place to successfully realize the anticipated synergies. Year-over-year, core growth Hospital segment adjusted EBITDA is projected to be 3.3%. As COVID subsides, we expect returning to a more normal but not completely normal operations in labor market. Our teams will remain focused on recapturing postponed care and continuing to advance our high acuity service lines.

We will continue to deploy capital and execute strategic investments across our business segments. This is supported by a well-balanced offensive capital plan with a focus on accelerating clinical technology enhancements across our hospital markets. We have a robust portfolio of external spend reduction initiatives that will improve our supply and purchase services spend over the next few years, while we also continue to actively focus on labor management.

Conifer's adjusted EBITDA growth is projected to be 2.8% for 2022. We plan to continue to automate and offshore activities to realize further efficiencies in our operations. As Ron discussed, Conifer's margins have improved over 1,000 basis points over the last 4 years, and it continues to be a productive part of Tenet. We continue to evaluate market conditions, opportunities for growth, the impact of COVID on the business and the interest rate environment as it relates to Conifer's overall positioning as a part of our total enterprise. It is a topic we review frequently with our Board of Directors.

Finally, I will reiterate the resiliency we are building into Tenet's business. Our balance sheet is in better shape. Our secured debt capacity and line of credit insulate us from a somewhat more volatile high-yield market. And we continue to improve our free cash flow generation, which our diversification into the ambulatory surgery segment will continue to support over time.

Underpinning this, we will continue to build an environment focused on motivated talent, analytics-based insights and strong ethics and compliance with the goal of maintaining a positive trajectory for Tenet.

I'll now turn it over to Dan for a more detailed look at our financial results and our 2022 outlook.

Thanks, Saum, and good morning, everyone. To echo Ron and Saum's comments, I'm very pleased with how we finished the year with fourth quarter adjusted EBITDA, coming in well above our expectations. Our outperformance was particularly notable given the many challenges we faced, including the spike in COVID cases due to the Omicron variant and the continuing inflationary wage and labor availability pressures providers across the industry are facing.

For the fourth quarter, we generated a consolidated adjusted EBITDA of $1.017 billion, which was $183 million or 22% better than the midpoint of our Q4 guidance. Even excluding the $140 million of grant income we earned in the quarter, our consolidated adjusted EBITDA was $877 million or $43 million higher than the midpoint of our guidance.

For the full year '21, we produced consolidated adjusted EBITDA of $3.483 billion, an 11% increase over 2020 and a beat of $183 million compared to the midpoint of our most recent guidance. As a reminder, we raised our guidance 3x during 2021 based on our outperformance each quarter and we outperformed again in Q4.

Our strong results for the year were driven by high patient acuity, a favorable payer mix as well as very effective cost control. In fact, our consolidated SW&B costs in Q4 as a percentage of revenue was lower than Q4 2020, about 45% in Q4 '21 compared to 45.3% in Q4 2020. Also, our consolidated EBITDA margin for 2021 was 17.9%, an improvement of 510 basis points compared to our 2017 margin of 12.8%.

I'd also like to highlight a few key items for each segment, beginning with USPI. USPI delivered a solid 3.2% increase in surgical revenue per case in the quarter. And surgical cases were 4.4% higher than Q4 2020. Q4 cases were 100% of pre-pandemic levels despite the impact of COVID. And USPI's adjusted EBITDA margin, excluding grant income continues to be very strong at 46.2% for the quarter, which was 150 basis points higher than Q4 2020.

Turning to our Hospital business. Our hospitals delivered another very good quarter. Our labor management continues to be extremely effective. Our case mix index remains strong as we continue our strategic focus on investments and higher acuity, higher margin service lines. Our non-COVID admissions were up 1.7% compared to Q4 '20. And our Hospital adjusted EBITDA margin, excluding grant income for Q4 improved about 200 basis points compared to full year 2019 before the pandemic. It really was a great year of performance for our hospitals as substantially all of our markets significantly outperformed our expectations.

Turning to Conifer. They also had another good quarter and produced $355 million of adjusted EBITDA for the full year and a strong margin of 28%.

Moving to Slide 11. Our cash flow, balance sheet and capital structure position us very well to continue our growth momentum. Our cash flow generation in '21 was strong even as we began repaying Medicare cash advances and made the first installment payment of the deferred company payroll taxes from 2020.

We generated free cash flow of $910 million in the year or $1.55 billion, excluding the repayment of $640 million of Medicare advances and deferred payroll taxes. We continue to maintain more than sufficient cash resources and available liquidity under our line of credit. At year-end, we had about $2.4 billion of cash on hand and no borrowings outstanding under our revolver. Also, our year-end leverage ratio was about 4x EBITDA compared to about 6x EBITDA at the end of 2017.

Let me now turn to our outlook for 2022. Slide 14 in our presentation provides a walk forward of our adjusted EBITDA from '21 to our projections for '22 on a consolidated basis and by business segment. Our projected consolidated adjusted EBITDA for '22 is $3.475 billion at the midpoint of the range. This outlook represents year-over-year core consolidated growth of 6.2% as described on the slide, including almost 12% core growth in our USPI surgery center business.

Let me mention a few other assumptions related to our 2022 outlook. We are not assuming we earn any grant income this year. We expect to achieve future annual cash interest savings of approximately $53 million once we retire our 7.5%, $700 million of senior secured notes in Q1 that we announced in our release. Our 2022 adjusted EPS is approximately $6.46 per share at the midpoint of the range.

As we mentioned in our release, our EPS this year does include a headwind of about $0.50 per share related to a change in the IRS interest expense limitation regulations. As many of you are aware, certain Texas Medicaid supplemental funding has not yet been approved by CMS. The state is working with CMS to resolve this and our outlook assumes the funding is approved this year. However, we have not included any of this funding revenue in the first quarter as we're assuming it is approved in the second quarter or later in the year, which is when we would recognize the revenue. This funding for us is approximately $75 million annually.

As you'll see on Page 11 of our release, compared to 2021, we're assuming that 2022 hospital admissions are flat to up 2%, hospital adjusted admissions increased 2% to 4%, and USPI surgical cases increased 3% to 4% and USPI net revenue per case increases 2.5% to 3.5%. Again, those are growth increases compared to 2021, not 2020, as we received a few questions about that disclosure in the release last night.

I also want to mention our outlook for the first quarter of this year, assumed consolidated adjusted EBITDA will be $750 million at the midpoint of the range as disclosed in the release. This guidance reflects an assumption of the impact of the increase in COVID cases so far this year due to Omicron and the unknown timing of when certain elective cases will be scheduled or rescheduled. Also, as I mentioned earlier, we are not assuming any of the Texas Medicaid supplemental funding is recorded in Q1.

From a cash flow perspective, we are targeting another strong year of free cash flow generation of $1.558 billion at the midpoint, excluding the repayment of Medicare advances and the deferred payroll taxes. I did want to point out that we anticipate our income tax payments this year will be about $150 million higher than 2021, due in part to the change in the interest expense limitation rules that I mentioned and the fact we expect to fully utilize the remainder of our federal net operating loss carryforwards this year.

Our cash flow generation has improved substantially over the past several years and the final repayments of about $1 billion in aggregate for the Medicare Advances and deferred payroll taxes will be made this year. Assuming about $1.5 billion of free cash flow as a foundation to build upon in 2023 and beyond, we believe this and our capital structure, including about $3 billion of currently available secured debt capacity and no borrowings outstanding under our line provide us a lot of flexibility as we think about future capital deployment options.

We plan to continue allocating capital to grow our surgery center business, enhance our hospital growth opportunities including the continued focus on higher acuity service offerings, evaluate opportunities to retire and refinance debt depending on market conditions, and possibly in 2023 or beyond, evaluating share repurchases depending on market conditions and other investment opportunities. And with that, we're ready to begin the Q&A. Operator?

(Operator Instructions) Our first question comes from Kevin Fischbeck with Bank of America.

Okay. I wanted to go to the comment, I guess, that Saum made about the outlook for labor. I think you talked about labor returning back towards normal, but not being normal as COVID recede. Can you talk a little bit about where you expect -- or I guess what you're seeing right now as far as labor growth or wage growth and kind of where you expect that to shape up and stabilize? How should we think about that heading into 2022 as we get started in '23?

Yes. Thanks for the question. I think that we're still in the throes of this current COVID surge. And so labor rates are higher than you'd otherwise like them to be, in particular, for contract labor and then the shortages of staff that Omicron has created because the staff have been affected by Omicron just exacerbates that. And that's a pretty -- I mean that's unique relative to what we saw with Delta or other COVID waves.

And so I think the -- what we anticipate is that by the end of the first quarter, assuming that there are no more COVID surges that come up with new therapies available and other things that affect hospitals so substantially, we ought to see the labor market start to normalize a bit. And it's a combination of both the rates and the stability of the staff that we're really looking for.

I mean during the surges, the rates become the biggest issue. As the surge goes away and we refocus our energies on building the business back and managing to capture things that may have been deferred or delayed. Obviously, the availability of staff becomes the paramount issue at that point and being able to get that staff in and retain them at that point. So that's kind of how it looks. I think it'll be the end of the first quarter before a real read on what the impact will be for the rest of the year.

Our next question is from Pito Chickering with Deutsche Bank.

If you could give us a bit more color on the first quarter guidance. What are you guys seeing at this point on surgeries rebounding back as COVID cases decline? As you look at your OR scheduling for February, are we seeing a similar rebound to what we saw during the first quarter of 2021?

It's Saum again. I think it's a little bit early to say. The COVID surge, it's declining, I mean the new incidents of cases, but it's still actually pretty high. I mean relative to before this surge, we're still sitting at 4x the number of inpatients that we had. So I'm a little bit cautious about projecting forward. We still have states like Massachusetts that have elective surgery bans or, effectively, elective surgery bans. So we've -- some have suggested we may be a little bit cautious in our Q1 guidance, but there's a lot going on right now, both from a regulatory perspective and an Omicron perspective.

Now that being said, we have put a premium on making sure that we are allocating staff into the service areas that we think are most important to remain open from an access standpoint. And as, obviously, an acute care hospital organization that's focused on higher acuity service lines, we're putting a premium on allocating staff to operating room ICU and other places that we think it would be important to maintain access.

We feel very good about our outpatient surgery volumes in the hospitals, for example, at this stage of the game. And it's just a result of how we're allocating staff. Let me ask Brett to comment a little bit further on USPI.

Yes. Thanks, Saum. No, on the USPI side of things, very consistent with what Saum shared. Obviously, in January, we did see the impact of Omicron in terms of volume and in terms of staffing. But we are starting to see that subside a little bit going into February and starting to see the schedule book up at the end of February and going into March.

Okay. And then a follow-up question on the margin side. Excluding sequestration, you're guiding Hospital margins to be increasing year-over-year despite a very strong comp from COVID in 2021. I guess besides the labor dynamic, how should we think about margins as it relates to the favorable commercial mix you've had with the high acuity mix today as if the mix turns more into government and in the lower acuity settings.

Pito, it's Dan. Yes, listen, we feel obviously very good about our margin improvement in our hospitals over the past several years, as I mentioned in my remarks, 200 basis points improvement, about. And that's what we're continuing to focus on, driving improved margins.

Obviously, this year, the sequestration obviously does have an impact on a year-over-year basis. But we would continue to focus on growing the higher acuity and higher margin services. That's been an area of focus and it's going to continue to be an area where we allocate capital. And we think that's -- will be beneficial.

That's in addition to all the other cost management initiatives that we've been focused on over the past several years, whether it's in the supply chain side or in our other operating expense line where we've been going through renegotiating contracts, terminating contracts if we don't get the right terms. There's more to do there. As we've talked about, we've been transitioning roles to our global business center in Manila. That's going well and there's more to do there. And listen, we think we're well positioned from a contracting perspective, too, whether it's supply chain or with insurance plans.

Our next question comes from Sarah James with Barclays.

So just to kind of follow up on the questions of the moving pieces. You guys gave us a lot of detail around the bridge from '21 to '22. And there are large portions of it that are under your control, like what you guys are doing with supply expense and your strategy on labor. So I'm wondering if you can give us some insight on how you think about the seasonality first half versus second half compared to a normal year compared to last year, just how you see some of the moving pieces that are under your control seriously now.

Sarah, it's Dan. I think I caught it, it was sort of hard to hear. But I think your question relates to how we view seasonality this year maybe versus other years. Certainly, starting the year off, obviously, as we've mentioned, we have seen an increase in COVID cases so far this year, even compared to the end of December, and there was an elevated cases in December as well. So that's -- we've taken that into consideration.

There's some math be related to some items that we won't be able to recognize in all likelihood in Q1 that I pointed out, the Texas funding. But we're assuming that, that comes back and it gets approved and we'll recognize that later in the year. So that will impact the timing of the earnings as we move through the year, depending on when it ultimately gets approved.

But as COVID cases wane and assuming we don't have another big spike, we think as we move through the year, there will be growing earnings second, third, fourth quarter. Now third quarter is typically seasonally somewhat softer than the other quarters. So you need to take that into consideration. But also -- we fully expect the fourth quarter to be very robust. That's typically the strongest quarter for our ambulatory business. And so that's how we're viewing this year from this sequential basis.

Great. In your negotiations with the payers, are you seeing any recognition of the current labor environment come into play as you think about price escalators in future years?

I don't think we want to get into specific negotiations with payers. The only thing I would say is there hasn't been any material changes in terms of negotiations.

Our next question comes from Justin Lake with Wolfe Research.

Wanted to follow up on a couple of the moving parts for '22. Specifically, you gave us a lot of detail on sequestration. I'm curious about the benefit you saw you had in '21 from the extra COVID bump that 20% plus HRSA payments and how you're thinking about those and what's built in for 2022 assumptions?

Justin, it's Dan. Let me take that one. For our assumptions in our guidance this year for COVID cases, let's start with that. It assumes COVID cases for the full year will be roughly 5% or less. First quarter could be a little bit north of that, depending on how this ultimately lands. But so we are assuming that there are -- the level of COVID case is, not at the same level as 2021 when it was about 8% or certainly not 2020, but we are assuming, again, 5% or less of total admissions.

In terms of the funding, as I pointed out in my remarks, we are not assuming any grant income in our guidance. Any of the -- if there's additional funding, we'll have to evaluate whether we earn it. But right now, we're not assuming that. In terms of your other point about the Medicare add-on, the 1 thing I would say is that with that funding, comes a lot of incremental costs, not only for caring for those patients. There -- the expenses associated and the length of stay is typically longer and the costs are higher. So if those cases start to come down, then presumably, the expenses associated with those cases also come down. So again, I think that's sort of a high level of how we're viewing this year from that perspective.

Okay. And anything on HRSA dollars, how much did you get in 2021? And what do you expect then for 2022?

Well, it's the same thing there. Those -- that reimbursement is for patients who have COVID. And that funding -- as that funding dissipates, they -- also those -- presumably those cases also would no longer be there. There is a question as to how long the funding will be there. We've continued to receive funding, at least so far this year. And we'll see where that ultimately lands this year. Again, it'll be depending on available funding as well as the level of cases, obviously.

Our next question comes from Josh Raskin with Nephron Research.

Trying to figure out sort of long-term sort of base for earnings and sort of within the 2022 guidance, how you're thinking about the net impact of COVID. I've heard a couple of things. So I understand 5% of total volumes, et cetera. But I'm trying to weigh sort of those admissions and treatment against the typical pause that you've seen in utilization and sort of what the totality of the impact of COVID is on Tenet overall? And do you think this -- that pause in utilization that you tend to see with surges will be less impactful in the future as Tenet just continues to get better and better at managing through it?

It's Saum. Let me attempt to address that, which is projecting. I mean, I'm cautious because it projects forward in understanding of what types of variance may emerge. And that's where Omicron, I think, surprised us a bit relative to Delta in terms of the nature of its clinical course, right? It's been more of a broad infection, not as severe, but based upon the number infected, it drove hospitalizations up again in a way that we might not have expected.

So here are a few things I would say. One is the therapies that have become available to treat COVID even on an outpatient basis, if those drugs are available from a supply chain standpoint, that will probably reduce hospitalizations going forward. In my view, that's probably among the primary things other than the vaccinations, which have been, by far, the most impactful things in reducing COVID hospitalizations and mortality. The new drugs are probably the second most impactful things that will reduce the impact of COVID in the hospital environment. So at some point, I think we're going to return to a world where COVID hospitalizations become like other respiratory illnesses that we end up seeing that affect the hospitals, probably to some extent, becoming seasonal as well, just like the flu from that standpoint.

Dan's -- the point that Dan makes is really important. The way we have set up ourselves and just kind of the hospital industry to take care of COVID has involved adding a lot of cost to do that, right? It's significant isolation expenses, et cetera, et cetera. And -- the question becomes, when this becomes -- can you take care of COVID as a more regular respiratory virus infection that ends up in the hospital without all of those extra costs over time? And that'll probably help manage the ongoing impact of the COVID expenses on the hospitals. I mean, that's really where we have to get to.

The other big point I would make is as COVID dissipates, there is an unknown about when utilization in the sector will return to normal like pre-COVID levels. Is it going to spring back immediately? Or is it going to take some time for those cases to come back? We obviously are making an assumption into 2022 that those other non-COVID cases will spring back partially as a result of utilization and demand and partially as a result of our strategies. And that's why we're tracking those non-COVID volumes carefully as I described.

Okay. And I understand it's an impossible question, I guess, at this point. But just -- it doesn't sound like COVID necessarily a big impact one way or the other. It sounds like yes, you see the increase in volumes and revenues, but there seems to be a lot of cost against that. Am I reading your comments right, Saum, that net-net, COVID's not a big impact on the totality of $3.5 billion of EBITDA?

For 2022, it's not -- I mean, it's not. It's -- the cases are declining. Dan's guided to less than 5% is what we're assuming. And a lot of what it will take to deliver on the $3.475 billion is our strategies in the hospital segment and the ASC segment, delivering the kind of growth that we've described and then the ongoing efficiency initiatives that we have at Conifer.

Our next question is from A.J. Rice with Credit Suisse.

Conifer sounds like that the base case is probably no longer a spin sometime this year. It sounds like it's an ongoing evaluation. I just wanted to see if you could clarify that a little more and what you're thinking on maybe change in that direction slightly is?

And then I'm sympathetic with Ron's comments at the very beginning that you've created a lot of value seemingly in the USPI operation, the ambulatory business in the market has been slow to give you credit for, and I'm sure private equity guys and other guys are unnoticeable about the opportunities potentially at your current valuation with that, and also even your leverage gains. Is your view on that, that you're just going to let time pass and -- as you prove out the SCD transaction upside and so forth that hopefully the market recognize it? Or do you have any sense of urgency that maybe we need to look and figure out ways to unlock the value that we believe we've created more near term?

Well, this is Ron. I'll talk about Conifer. But separately, we think we've already unlocked the value in terms of the performance and the returns we've had. We're not out there looking for other vehicles or other ideas at this stage. I mean the company is performing well. We think there's still more for us to do and we'll keep doing it. I think our focus is more on how do you keep a valuation back dated when, in fact, we've had consistent year-over-year, month-over-month, quarter-over-quarter performance that would suggest that are -- not suggests but proved that what we said is true.

And all -- the only comment I was really trying to make was, at some point, the thought process has got to leap forward and especially when you have other surgery centers valued at unbelievable -- these high numbers, and our numbers don't reflect any of that. It just makes no sense. So let me just stop there on that.

Conifer, look, we're not going to answer the question what's the plan today. We spend a lot of time on this and have spent a lot of time. I always go back to the same statement. 2018 at JPMorgan, we agreed to do this because the Army was at the door. And our performance did not support ignoring it. Today going ahead, we haven't ignored the Conifer asset by any means, 1,000 basis points. I can't imagine a lot of companies that wouldn't feel good about that, especially given the size of Conifer.

But clearly, COVID has slowed us down in terms of the accomplishments we wanted to make with Conifer, partially because you can't be out in the marketplace selling at the same level. We've really been working on the IT side of it and building that up, which we're making great progress on. And we've changed out management a couple of times looking for the right mix of leadership and down in the organization. We've also thinned out that organization, and we've moved a material amount of it offshore, which should have been done earlier, but it wasn't.

So when I look at Conifer as a business, it is a very good business. Now spinning it out, yes, I mean, we've talked about doing that. But at the same time, it's had balance between what does the spin give us as a company and our shareholders versus if there's more to do, will we have a greater value asset for the years out? So I mean, that's the debate, and that is the focus. Then you've got the market conditions, interest rates going up, other types of things going on that you got to balance into this.

And look, this isn't my decision on an earnings call to make a call. This is a board-level decision. And we've got advisers and the Board looking at this, and we're -- we've been talking about it. We have a Board meeting at the end of the month. I mean, at some point soon, we're going to have to make a call what we really think is the best decision. But I would tell you that decision is not final. And yes, there's items in question that need to be resolved.

And there's things that we need to fully debate and think about. And we have people working on that type of analytics. And also, if you go back 4 years, our analytical strength was -- I don't want to say it was nonexistent. It wasn't very good. Today, we've got a very strong analytical group. Couple that with the advisers we're using, we feel very good that we will come out with the right answer or at least the answer for x number of years going forward.

Look, we're a public company. I've said this before, nothing is forever, right? I mean, ultimately, everything is for sale and everything is what it is, and we're going to continue to do the stuff we're doing. So it's a long way to try to answer your question, but I just can't give you a definitive answer.

(Operator Instructions) Our next question comes from Jason Cassorla with Citi.

Great. Most of my questions have been asked already. But maybe could you delve into trends around payer mix in the quarter? And how sustainable those trends are going forward? Or maybe what the puts and takes are to payer mix as we think about '22? Just to that point, does '22 guidance assume any consideration around the resumption of Medicaid redetermination at this point?

Jason, it's Dan. Yes, payer mix, in the quarter, was pretty consistent with what we saw pretty much throughout the entire year. Commercial trends, more favorable than our overall aggregate trends. And some of that makes sense given the concern of certain individuals to seek care unless it's absolutely necessary. So no major change in payer trends in the quarter compared to what we were seeing throughout the year and, really, the back half of 2020 as well. And that sort of position, we took that into consideration when we were developing our guidance for this year, although we do anticipate some of the lower acuity cases recover stronger than they have so far. So that'll have some impact on the mix. But the trends in the quarter were not surprising, and they were pretty much consistent with our expectations.

Our next question is from Brian Tanquilut with Jefferies.

I guess my question is for Brett. As I think about total joint performance across USPI, both in the legacy businesses and the SCD assets, how should we think about the opportunity to embed the SCD skill set, so to speak, into USPIs, ASCs? We've heard one of the commercial payers to flag a 55% shift in joint replacements to outpatients. So just trying to figure out how you can harness that opportunity and expand it across the portfolio and how you think -- how much opportunity do you think is left.

Brian, thanks for the question. This is Brett. And look, I mean, we have continued to experience significant growth in our total joint business. I mean, you think about for the year, and as Saum mentioned this, we added 89 new service lines across the portfolio in 2021 and a significant number of those related to total joints. Just to put that into context with some numbers, total joints in Q4 showed significant improvement, growing 146% over prior year and 130% year-over-year growth for 2021.

And so I think in any context, those are pretty significant growth rates. Obviously, SCD does a great job, has historically done a great job in expanding their total joint footprint. And of course, we're going to continue to learn from them and vice versa in terms of how we expand, not only in total joints, but expand across a wide variety of higher-acuity specialties, including spine, including cardiac.

So we'll continue to learn from one another as we integrate their business into ours. And obviously, with our 5-year partnership with SED, we'll continue to work together as they build out their portfolio and partner together on a go-forward basis with essentially everything they do from a development perspective over the next 5 years.

Can I -- let me just add 1 other point to that, which is that just remember the strategy working with SCD and Orthopedics was very deliberate. I mean, USPI's core platform in Orthopedics was already the leader in the ambulatory surgery space. So our ability, with Brett and team, to build and grow in the orthopedics, bone and joint pain and other related spaces is not limited to the portfolio of centers that we've recently partnered with in SCD. It's the whole portfolio. And that's why we think this aspiration that we had of being the unquestionable leader in outpatient orthopedic surgery, including innovating and adding new procedures in the USPI environment has been very important strategically to where USPI is headed.

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

Just had a quick one to follow up on Justin's earlier question. Is it possible for you to quantify kind of what you had received in 2021 in total from the COVID-related subsidies, 20% add-on, the sequester relief and HRSA? And then kind of what do you have baked in the guidance at least from a magnitude perspective and directionally for 2022?

Ben, it's Dan. We haven't put a specific number out there for the Medicare add-on or HRSA. I would -- here's the thing. The funding, yes, it's been very helpful. Let's take HRSA, for example, very helpful for patients who otherwise would be uninsured. But it's Medicare reimbursement for patients that we're providing care for. And again, the cost profile for caring for those type of patients is higher than a typical admission. And so yes, the funding's there, but also the costs are there. So it's not necessarily a matter of the funding goes away and then -- but the cases are still there. We certainly hope that's not the case. But we'll ultimately have to wait and see in terms of where the funding ultimately lands.

So I would tell you that we get the question a lot. The HRSA funding is approximately -- for 2021, was approximately $75 million. But again, there's cost you just -- you can't assume that, okay, the revenue goes away and that's a massive headwind. We certainly hope that's not the case.

Our next question is from Whit Mayo with SVB Leerink.

Okay. Two really quick ones. First, just a clarification on the SCD disclosures. What's the difference in the old guidance of $175 million and the $140 million that you're guiding to now, I wasn't clear. And then if you could give us an update on the Baylor put call.

Whit, it's Dan. In terms of the difference between the $175 million and the latest estimate of $140 million. Keep in mind, when we announced the deal in November, we were targeting 92 centers based on subsequent due diligence. We made a determination not to invest in 6 of those centers. So that's a fairly large portion of the difference. And then the other thing too is based on -- as we learned further information on timing of buy-ups. That also was a factor in updating the estimate.

More importantly is the fact that our overall fully ramped consolidated EBITDA estimate from the portfolio, which is 6 centers smaller than originally planned. It's 86 versus 92. We still feel very comfortable with our overall fully ramped estimate of $275 million fully ramped. So even though the 6 centers aren't there, we think long term, years 3 to 4, we will still achieve $275 million.

And in terms of the -- your other question about the Baylor USPI call put well, obviously, when we get to the point of finalizing that, we will disclose that. I'd say there's nothing really to add at this point.

Our next question is from John Ransom with Raymond James.

How many ASPs do you think you'll end up consolidating this year through buyout versus unconsolidated at the start of the year?

John, just to clarify, are you asking vis-à-vis the latest SCD transaction?

Yes, how many centers do you think you'll buy up this year to get to a majority position?

So John, we've accomplished well over -- well, about 16 year-to-date and we expect to do another 30 this year -- 30 plus this year.

Does that get you to your end goal? Or is there more to do after the end of this year?

It gets us to our estimate, our expectations, I think, over time. If you go past 2022, we'll end up consolidating more of the portfolio than that. As you know, there's a total of 86 facilities, but quite a few of those facilities that are part of the 86 are, yes, less than a year old and some of them are still under development. So when you go into 2023, 2024, we'll consolidate -- we'll end up consolidating more of the portfolio as those centers mature.

Our next question is from Andrew Mok with UBS.

CapEx in the quarter accelerated meaningfully to $300 million. Can you help us understand where you allocated the growth CapEx in the quarter? And how do you view the runway to expand higher acuity service lines within your hospital portfolio?

Well, I mean, the runway to continue making the -- I mean, this is a longer-term strategy for us, right? And it was 1 that we haven't stopped. So it obviously has multiple prongs capital infrastructure expansion, but very thoughtful. Clinical technology is probably the heart of it and getting the right complement of caregivers to be able to deliver essentially high acuity services in a community hospital-based setting, that's really the foundation of what we're trying to do.

And there's plenty of runway there. I mean the cardiovascular, neurosciences, surgical suite of procedures are all growing and developing. And it's also true at USPI. I mean, we stay on top of the number of things that are being innovated in an ambulatory setting and then we work to create the right environment for that to happen safely. So we think there's a lot of room to continue along with this technology and service evolution that's going on in the high acuity space. The other thing about high acuity is you have to be focused on medical cases, not just surgical cases as well. And obviously, that's more of a hospital-based priority.

Okay. Operator, We're going to have to end it now. Thanks -- thank you so much, everyone, for joining us today.

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