Tenet Healthcare Corp (THC) 2021 Q3 法說會逐字稿

Good morning, and welcome to Tenet Healthcare's Third Quarter Earnings Conference Call. I'll now turn the call over to Tenet's Vice President of Investor Relations, Regina Nethery.

Thank you. We're pleased to have you join us for a discussion of Tenet's third quarter 2021 results, as well as a discussion of our financial outlook. Tenet's senior management participating in today's call will be Ron Rittenmeyer, Executive Chairman; Dr. Saum Sutaria, Chief Executive Officer; and Dan Cancelmi, Executive Vice President and Chief Financial Officer.

Our webcast this morning includes an accompanying 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.

Thank you, Regina, and thank you all for joining us to discuss the third quarter. As you can see in the results we posted, it was a very, very strong quarter company-wide. Performance, which continues to be driven by database decision-making, has continued to provide consistency in every business segment.

Our year-to-date results continue ahead of our expectations, and as a result, for the third time this year, we're raising the midpoint of our adjusted EBITDA guidance by $100 million to reflect the continued strong year-to-date performance we have achieved. And what we believe is a positive trajectory for the remainder of the year.

This reflects the foundational strengths we have invested in over the past few years, and as these are established across the enterprise, supports the success -- continued success of the ongoing transformation.

What we achieved in the third quarter is notable along many dimensions but particularly given the significant surge of COVID cases in many of our markets. And while we have actually begun to see a reduction in cases, I mean, our peak was clearly pushing up closer to 2,000, today, we're still at about 700-plus cases across the company. But even given the continued peaks -- or not the continued peak but the continued improvement, we continue to cycle through these peaks and valleys of the pandemic, and we continue to navigate the challenges of various variants.

We are consistent in applying the learnings from each event and have been successful in expanding this important information quickly and effectively across all markets. Our operators have done really a great job dealing with these rapid changes, adapting and adjusting their go-forward paths. The associated expenses have obviously increased, driven by the greater number of cases, but our approach has been very effective in managing these impacts efficiently across all impacted markets.

We've done very well in ensuring appropriate PPE availability along with other supplies by tightly managing our supply chain and anticipating where and when we need to increase inventories in our warehouses and our locations. Also ensuring the right level of staffing by balancing needs and adjusted schedules and maintaining a continued vigilance on safety. Our True North has been sticking to our strategy that encompasses ongoing service line depth, capacity expansion, adding and working with quality physicians, remaining conscientious about efficiency gains, investing in ambulatory and maintaining a very strong commitment to quality.

All of these foundational areas have been consistent over the past few years as we transformed the overall company and remain focused on our strategy, which is consistent and has shown to be very effective.

Across the portfolio, we're pleased with the consecutive quarters of improvement in outperformance being driven in our hospitals. In addition to disciplined expense management, we're seeing higher patient acuity both in mix in our hospitals and at USPI. We've also broadened our network of top-quality physicians, which we believe is a sign of the quality and safety of our care environment and our effective management of the pandemic.

USPI has continued to identify important partnership opportunities with some notable transactions in recent weeks. These deals bring us together with experienced surgeons across multiple specialties, giving us deeper scale or a new market entry point with a runway for growth. And Conifer continues to achieve solid margins, executing against their plan and finding opportunities for future expansion through the point solution model.

We had a few additional items of note during the quarter from an enterprise perspective. We completed the sale of our 5 Miami area-based hospitals and related operations, very significant. We also took the proceeds from that divestiture to repay $1.1 billion of our outstanding debt and lower future interest payments by $50 million.

As you know, in August, we announced promotion of Saum to Chief Executive Officer and my role to remain as Executive Chairman of the company and of the Board. This decision by the Board was made to ensure our transition period allowed a smooth and effective period where we could continue the collaborative relationship that has made the transfer -- made Tenet a success over these last few years.

I can honestly report today that we have continued to operate as an effective team as Saum steps actively into the role of CEO without the slightest slippage in performance. We will continue to work closely together and have the opportunity to maintain this approach for at least the next 14 months that will make this transition truly a success.

So with that, I'll turn it over to Saum, our CEO, to share his perspective on the quarter. Saum?

Thank you, Ron, and I'll echo those comments. I'm very pleased with how the enterprise performed in an environment that remains challenging but full of opportunity. Despite the COVID spike in the quarter, our operations remain disciplined and focused. This performance demonstrates that we are building upon the momentum of earlier quarters, and we did, in fact, outperform in Q3.

Hospital segment performance was excellent, and substantially all of our groups exceeded our expectations in the third quarter. Margins were strong at 12.3%. Despite the COVID surge, these volumes represented just under 10% of the admissions in the quarter, below levels we have seen in prior COVID spikes.

The most substantial challenge in the market today is in the area of clinical staffing. Our operations, supported by real-time analytics, continue to mitigate these cost pressures. In turn, this allowed us to focus on better patient care with strong length of stay management and a staffing process matched to acuity.

Contract labor costs were stable from prior quarters that also had COVID spikes despite a much tougher labor market. We made active decisions to rebalance and optimize capacity based on available patient demand matched to service.

Our ongoing initiatives in managing supplies and purchase services costs also continue to yield benefits. We remain focused on executing our strategy of delivering high acuity services on both an emergent and elective basis. I want to spend a few minutes highlighting some items of note from the quarter.

Emergency department volumes continue to improve. Surgical procedures saw an uptick from the prior year on an absolute basis. Cardiac interventions are recovering back to 2019 levels. And we were able to perform elective procedures in our hospitals even during the COVID spikes across our markets.

During the past few months, we've also been accelerating investments to remain ahead of service in our demands. This includes: robotic expansion in over 20 hospitals supporting general surgery, cancer services and bone and joint programs; expanded procedural room capacity in multiple markets, including Palm Beach and Phoenix; enhanced inpatient capacity for new services in multiple markets, including San Antonio and El Paso; and expansion of trauma accreditations, most recently at one of our hospitals in the Coachella Valley.

We strengthened our employed physician network with new additions to established groups in cardiovascular, neurosciences and orthopedics. We also realigned reputable physicians, including the establishment of a large general surgery group in Palm Beach. While some broader supply chain challenges remain within selected clinical equipment and technology orders, we are well positioned to respond and manage, given the actions that we took early on.

Overall, based on our multiyear journey of improving performance in our hospitals, I feel our platform is adapting well to higher acuity and proving that it is flexible to accommodate returning volumes in the ER as well as the ups and downs of COVID.

Let me transition to USPI. USPI continues to deliver results with high margins and produce strong cash flows. Volumes in Q3 of 2021 increased to 101% of 2019 levels. And it's also important to note that this metric has sequentially improved each quarter of this year. We are encouraged by the fact that net revenue per case is almost 10% higher than 2019, demonstrating that our higher acuity services are showing an even enhanced growth rate.

Orthopedics, for example, saw growth rates up 22% compared to a year ago. In Musculoskeletal Care, we have completed more than 535,000 procedures to date, and joint replacement surgeries have more than doubled from prior year. Meanwhile, our focus on efficiency at USPI has led to EBITDA margins that are approximately 100 basis points better than the third quarter of 2019.

Despite this performance, the COVID surge during the quarter did impact select markets. We saw an increase in cancellations with the COVID spike and some deferral of care as doctors' offices slowed a bit. The impact of this was felt mostly in states with stronger lockdowns on the 2 coasts, while in other markets such as Texas and Florida, volumes grew ahead of our expectations. As with prior recoveries, we expect to capture deferred care over the following quarters.

Our 2021 USPI plan was originally built assuming no COVID this year after the early January, February spike, and that simply hasn't been the case. The business is performing very well on all dimensions. We continue to complement our existing USPI medical staff with new doctors. We've added a total of 1,700 new physicians to date, including roughly 580 in the third quarter. It's important to note that these are independent physicians choosing to come and work at our facilities.

Our acquisition pipeline remains active as we partner with physicians and health systems in attractive markets. The SCD acquisition from the end of last year has gone smoothly and surpassed all of our major milestones of integration. This includes the acceleration and increase in our expectation of synergies. In addition, since the initial announcement last December, we've continued to augment the portfolio with a handful of other SCD facilities to increase scale in some of our markets.

Outside of that, last week, we announced the signing of a definitive agreement with Compass Surgical Partners to acquire their interest and management responsibilities in 9 ASCs. This is a competitive process in which USPI was a selected partner. The potential for value creation is attractive as we expect we can drive the EBITDA less NCI multiple under 5x by year 3, demonstrating the compelling cash flows we expect to deliver from this deal.

There are many other great things about this deal, but in particular, the partnerships we are forming with the 125 independent surgeons who are well regarded for their expertise, predominantly in high acuity procedures. Roughly 60% of the case mix is coming from musculoskeletal surgery, including a focus on spine and total joints. The remainder of that mix is distributed among our typical ambulatory service lines.

The transaction includes 5 ASCs in Tampa, extending our presence as the leading provider of lower-cost surgical care options in the state of Florida with 48 facilities. We are also increasing our presence in North Carolina with 3 high-quality centers and forming partnerships with some of the largest musculoskeletal practices in the state. North Carolina is a CON state, and the portfolio offers an immediate opportunity to provide access to services in the community in a market that has a higher barrier for entry. We believe there are attractive opportunities to expand our presence further in that state.

And finally, the transaction also adds another site to our platform in Texas, which is our largest state for ASC operations. Importantly, the Compass transaction expands USPI's strategy of acquiring and growing well-established facilities. It also supports our expertise in buying centers, which are more in the start-up and earlier stages of development, as we can accelerate the ramp-up process and deliver operating efficiencies in a shorter period of time. In fact, 6 of these 9 centers either opened within the last year or are expected to open before the end of this year. Altogether, this strategy further cements USPI as the partner of choice for physicians and health systems in ambulatory surgical operations.

Shifting to Conifer. As we spoke about several months ago, Conifer leadership has been focused on the growth pipeline through a point solutions model, further building out the sales force and investing in technology.

In September, we were pleased to enter into a new multiyear service agreement with Providence Health System. Under the terms of the agreement, which began in September, Conifer will provide select AR services for 45 hospitals in 6 states. We're looking forward to this partnership, which will allow us to support the hospitals primarily in the area of aged, small balance inventory revenue cycle management. It's also a great example of our point solutions model that provides an entry point to share our broader range of Conifer capabilities.

Conifer's operating performance remained strong through Q3, delivering materially in line with EBITDA expectations. Despite significant issues with COVID in the countries where our offshore operations are located, Conifer's team has adapted and productivity remains high in a mixed work from home or office model. And we have imported vaccine through appropriate channels to support building immunity in our international workforce. We also remain on track with the activities for Conifer's spin-off.

At the enterprise level, our collaboration in the new leadership structure is working well, and we are fully focused on executing our strategy.

And with that, I'll turn it over to Dan to review our financial results and improvements in capital structure after the successful closing of our Miami transaction.

Thanks, Saum, and good morning, everyone. Our third quarter results continued to demonstrate our ability to manage through the challenges associated with the variation in COVID cases from quarter-to-quarter while keeping the safety of our patients, physicians and employees at the forefront.

We generated net income from continuing operations for our shareholders of $448 million in the quarter compared to a net loss of $197 million in last year's third quarter. We produced adjusted EBITDA of $851 million, excluding $4 million of grant income, which was $126 million better than the midpoint of our guidance for the quarter, with very strong outperformance by our hospital business complemented by solid results for both USPI and Conifer.

Our strong hospital results were driven by high patient acuity, a favorable payer mix and cost control. Despite continuing external cost pressures due to the pandemic, such as temporary labor rates and PPE costs, our hospital operators are partially mitigating these pressures with disciplined real-time labor management, other cost actions, and a focus on growth of higher acuity, higher margin services.

Our consolidated adjusted EBITDA margin in the quarter, excluding grant income, was 17.4%, an improvement of 380 basis points compared to last year's third quarter and 100 basis points improvement sequentially compared to the second quarter of this year. The key driver of this margin growth was our hospitals, which produced margin improvement of 450 basis points compared to last year's third quarter and 140 basis points sequentially compared to this year's second quarter.

As you can see on Slide 6, based on our strong performance this year, we have generated compounded annual growth rates each quarter in the range of 9% to 15%, excluding grant income. Based on our continuing outperformance, we are increasing our 2021 adjusted EBITDA outlook for the third time this year, which I'll discuss further in a few minutes.

Let's now look at the performance of our individual business segments as detailed on Slide 7 and our volumes on Slide 8. As you'll see on Slide 7, grant income was not a meaningful factor this quarter in our hospitals or ambulatory facilities. As Ron and Saum pointed out, the Delta variant did impact us in the quarter as COVID admissions accounted for about 10% of our hospital admissions in the quarter compared to about 4% in the second quarter.

Despite the increase in COVID cases and the seasonal nature of the third quarter, our hospital still produced sequential EBITDA growth of about 11%. As I mentioned earlier, the strong hospital performance is attributable to high patient acuity, favorable payer mix, and cost control.

In fact, our case mix index for the quarter and year-to-date is about 11% and 13% higher than the same periods in 2019 due to our focus on higher acuity service lines and the impact of the pandemic.

Turning to our ambulatory business. USPI continues to deliver stellar margins of about 41%. Surgical cases as a percent of 2019 volumes improved in the quarter despite us seeing an increase in cancellation rates in Q3, as Saum mentioned, due to the pandemic.

Turning to Conifer, we were pleased that they continued to produce strong margins, about 27% in the third quarter. On Slide 8, we provide specific detail on our volumes compared to recent quarters. Despite the spike in COVID cases, our volume performance was encouraging compared to pre-pandemic levels, particularly when you look at the volumes in the third quarter compared to the last spike in COVID cases in the first quarter of this year.

Let's now turn to Slides 9 and 10 to discuss our liquidity and cash flows. You can see our liquidity remains strong. Our cash on hand at the end of the quarter of about $2.3 billion was slightly higher than June's balance of approximately $2.2 billion. We also again ended the quarter with no borrowings outstanding on our $1.9 billion line of credit. Our cash flow generation continues to be encouraging as we generated $321 million free cash flow in the quarter or about $500 million before the anticipated repayment of Medicare advances we received last year.

So far this year, we have produced $857 million of free cash flow or almost $1.2 billion before the repayment of Medicare advances. Also, as Ron mentioned, we repaid $1.1 billion of debt in September with the proceeds from the sale of our Miami hospitals, which will save us approximately $50 million of annual interest in the future.

From a leverage perspective, we ended the quarter with a leverage ratio of about 3.5x, quite an improvement from 6.4x if you go back 4 years ago to the third quarter of 2017. Even if you normalize this leverage ratio for the grant income we recognized in Q4 last year, the ratio would be about 3.93x using our projected full year 2021 EBITDA of $3.3 billion.

Let's now turn to Slide 11 and review our updated 2021 EBITDA guidance. Similar to last quarter, this slide shows the key factors that have contributed to us raising our 2021 adjusted EBITDA outlook each quarter this year. As you can see, we've raised the midpoint of our guidance by $100 million each quarter. Our adjusted EBITDA outlook for 2021 is now projected to be $3.3 billion at the midpoint, which is $300 million higher than our original outlook at the beginning of the year.

Let me now preview 2022 for a minute. Although it is premature to discuss our thoughts on 2022 in detail at this point, we do feel confident in our ability to generate continuing consolidated EBITDA growth next year. I do want to mention there are 2 items that will impact our 2022 guidance when we share with you next year. As we've previously discussed, our Miami hospitals sold in August added approximately $75 million of EBITDA in 2021, which will not recur next year.

Additionally, should Congress not act to extend the moratorium on sequestration, we project that would result in approximately $80 million of lower revenues next year.

Obviously, it is difficult to say how the pandemic will impact next year. But as we've demonstrated throughout the pandemic, we have risen to the challenges during each surge and believe we will effectively respond again should we experience similar challenges next year and be able to generate consolidated EBITDA growth. We look forward to sharing more information about next year when we release our fourth quarter 2021 results next February.

Our consistently strong quarterly results, together with ongoing enhanced operational execution, increases our confidence that we are on the right strategic path and in our ability to deliver our projected results.

Before I turn it back over to Ron, I want to thank and say how proud we are of all of our patient caregivers and their colleagues in nonclinical roles across the company. Their teamwork and level of devotion continues to be exceptional. Ron?

Thanks, Dan. Really, I don't have much more to add. It was a very good quarter. I think we've covered the key points and we'll just, operator, open it up for questions, which I think will be more efficient and effective. Operator?

(Operator Instructions) Our first question comes from the line of Jamie Perse with Goldman Sachs.

I wanted to start with the staffing situation. That's obviously on a lot of people's mind these days. Can you give us a sense just across, at license level, scale level, pay level, where you're being the most stressed in the market and also across setting, if there's differences between ICU, ER, operating rooms, that sort of thing? And bottom line, maybe should we be penciling in more wage growth in the model going forward?

Jamie, it's Saum. A couple of things. From a traveling wage perspective, it's really the areas of the ICU, a little bit the ERs and some of the specialty areas like operating rooms and procedure rooms where you don't have as much reserve in the staff where the pressure is highest. But I would say that this past quarter, even though the COVID spike wasn't what we saw back in January, February, the labor market was much more disrupted across the board in clinical staffing, in particular, with RNs.

And that's why I highlighted our work mostly in how we thought about deploying that premium in contract labor as well as length of stay management. I don't think you can overturn the market, you just have to manage the operations.

Okay. And I'm going to ask about the ER volume trends, it rebounded to 97% of pre-COVID levels. That's actually ahead of where admissions and hospital surgeries are versus 2019. There's been some concern that as that low acuity volume comes back, it'd pressure your margins, but that seems to, if we're just looking at 3Q, not happened.

So how should we be thinking about the margin rate going forward as these various types of volumes return to normal?

Yes. I mean, you're right that ER volumes have rebounded pretty quickly. And to the extent there's an analogy to draw between length of stay management, the low acuity work that comes into the ER, at least in our operations in our emergency departments, is handled in fast-track settings so that we minimize the intra-ER length of stay and costs.

And you got to -- I mean, you have to accommodate that, right? I mean, I think we all knew that low acuity work would come back in the ER. And the impact of it is dependent on 2 things, how much low acuity and what's the payer mix. And as that comes back into the fold and becomes a normal part of 2022, we're just going to have to deal with it and manage it and find offsets. I mean, you're right that, that puts pressure on the revenue line on a relative basis, given the cost of staffing today.

All right. Congrats on the quarter.

Our next question comes from the line of A.J. Rice with Credit Suisse.

First, maybe just to ask about the -- I know you're not running for '22 guidance but at least a comment on the Q4 outlook. I think you're -- even if you normalize for the loss of the Florida hospitals, you're looking at EBITDA stepping down $100 million to $120 million or so. Is the assumption just that there's not much COVID volume and it's slow to backfill with the non-COVID?

Have you made any unusual assumptions about labor? Or was there any unusual items in the third quarter, either state payments or other accrual adjustments that maybe won't recur in the fourth quarter. Just give us a little bit more on your perspective because it seems like you're being conservative and that may be the right way to be in this environment, but I just want to get any more color there is on the fourth quarter outlook.

A.J., it's Dan. To your question about whether there's anything unusual that doesn't necessarily repeat, no, there's nothing like that. Here's -- listen, the hospitals turned in a great quarter, and they've been performing incredibly well during the year.

The cost control remains very diligent and tight. Pricing, the yield has been strong, driven by the growth in higher acuity services as well as the pandemic, let's be clear about that, that drives incremental revenue per case, although there are extra costs associated with those cases. We're in a very strong contracting position from a managed care perspective that's also helping on the revenue line.

Listen, we outperformed by over $100 million in the third quarter. And when we look to the fourth quarter, we're not ready quite at this point to declare victory and say we're going to outperform $100 million again in the fourth quarter, but we feel very good about how our hospitals are operating. And when we looked at it, we came in about $125 million ahead of our -- the midpoint of our guidance, about $100 million above the high end of our range. And we thought it was appropriate to increase our guidance about $100 million for the full year. We feel good about how all 3 of the business segments are performing.

Okay. And maybe just a quick follow-up. Congratulations on getting the leverage below 4x. It's been a while, so you're now on a path to have that on a sustained basis, it looks like. With enhanced financial flexibility, I know adding in the ASC businesses and development on that side has been a priority. Do you see that accelerating now that you have more financial flexibility? Are there other priorities for capital dollars going forward?

A.J., just a couple of comments there. First of all, as I indicated, we have not stopped investing through the pandemic in our strategies, which include capital from a high-acuity service line standpoint. That's the first thing. I mean, we're very nimble with deployment of clinical technology, in particular when their service needs in our communities. And that's been an important driver of our growth and, frankly, improvement in margins that we see.

Remember, we do have and have announced a couple of pretty significant market expansion building projects on the hospital side, in particular, in Fort Mill, South Carolina and in San Antonio. So there are important and, from our perspective, very much better vetted capital priorities on the hospital side where we are very happy with the potential returns that we'll get from those.

And then obviously, on the ambulatory side with USPI, we're pleased with the strong pipeline we have. We're confident about how we deploy capital there. And again, I would highlight the nuance in this deal that we announced with Compass Surgical Partners, which is the operating model at USPI is, at this point, so advantaged in our view in the industry that our ability to go deploy capital on both mature centers and centers that are still developing but actually generate returns faster as a better natural owner, that is going to expand the set of opportunities for us at USPI.

And it comes on the basis of the confidence we've built in building an operating model at USPI over the past few years that has taken one that was really good and made it even better. And now that we have that confidence, we're expanding our aperture for the types of centers we go after. And again, I think that's going to allow us to increase the deployment of capital into the USPI segment.

Which is part of our strength.

Yes. And one other point, A.J., on the capital deployment. We have various tranches of debt that we can retire, including $700 million of 7.5% notes that we issued at the outset of the pandemic. So we'll obviously be looking at that. Those are higher interest rate notes, and we could obviously target them in terms of -- from a capital deployment perspective.

Our next question comes from the line of Brian Tanquilut with Jefferies.

Congrats again. Just to follow up, I guess, on the guidance comment you made for 2022 or just how we should be thinking about that.

I guess Dan, if I think of it, am I thinking of it the right way, take out the Miami hospitals and then you think you can grow, if I take out sequester or is that with sequester in there, the $80 million?

No, without the sequestration deferral. Right now, we're assuming that the sequestration deferral will not be extended. We obviously believe it should be. But right now, we're assuming that it will not be. And that would -- as I mentioned in my remarks, that would reduce revenue next year of $80 million. But even with those headwinds, how we're looking at it is we believe we can continue to deliver consolidated EBITDA growth.

Got it. And then Saum, just to follow up on your last comment on the USPI kind of like model, right? So is it right to think that going forward, the focus will be more on the development side, right, pursuing some of these acquisitions that are of centers that are still ramping up, and like you said, it's a natural home for these assets, and we're shifting away from true de novo development.

Is that a good way to think about that where it's a higher -- a quicker ramp and higher ROIC?

No, not at all. I mean -- so what's interesting is the way I described it is, for us, it's broadening the aperture, right? So there are mature centers that obviously, we can deliver synergies and growth into. There are health system partners that we continue to develop centers with, many of which are de novo. There are true 2-way de novo partnerships that are part of our development pipeline. And now we're adding a fourth segment that we have built some confidence in being able to ramp up.

And look, importantly for us, we look at the world from the standpoint of what is the multiple on a post ramp-up and synergy basis? So if it kind of years 2 and 3, we're generating multiples that are below 6 or whatever, that's very attractive.

Brett, you may want to add to some color at all that, how you're thinking about it.

Yes, thanks, Saum. Brian, I would say, to your point, no, our pipeline outside of the acquisitions that Saum was alluding to, both de novos and acquisitions, new health system relationships remains as strong or stronger than it's ever been.

As a result of that, we're actually increasing the number of resources we have on our development team just to keep up with the level of activity we have in the company. And of course, we're very focused on making sure that we're executing against our pipeline going into Q4, but as importantly, make sure that we have as strong a pipeline as possible so that we can deliver on a significant amount of growth in 2022.

We're also chasing quality, higher-quality opportunities.

Absolutely.

Our next question comes from the line of Kevin Fischbeck with Bank of America.

Great. I want to just go back to the labor cost for a minute. I guess you mentioned the shortage that you were seeing. I guess, what are your thoughts, broadly speaking, about what that maybe market backdrop looks like?

Do you expect it to be this elevated for this long? Or do you think that we'll see moderation in labor pressure into next year as COVID wanes?

I'll give you my observation. In the earlier phases of COVID when there were COVID spikes and the labor market was distorted, the impact was short and it correlated with the COVID spike. And so when that spike came and went, the labor market normalized more quickly. That didn't happen during this Delta spike or it hasn't happened yet. We're still kind of living through it.

And as Ron described, despite the COVID cases still being there but being a little bit less than half of what the spike peaked at, the labor market really hasn't improved that much. It did -- it has forced us to go even further in our approach to trying to manage the operations and identify offsets, look at other sources for nursing, think about some longer-term contracts at better rates that we would be able to put in for traveling nurses into certain markets. I mean, you just got to diversify the approach and tighten up the operations.

I'm sure we'll see some inflationary pressure from this prolonged traveling nurse market going into the fourth quarter and next year. I mean, I think our plan is we're just going to accept that and figure out how to manage through it.

Okay. And then maybe just a last question on costs generally and then your ability to price for them. I think it's pretty clear that over time, hospitals can get sufficient rates. But I guess if everyone's worried that inflation is going to start to pick up, that wages are starting to pick up.

How do you think about the potential lag between when you see those pressures and when you're able to get Medicare, Medicaid, and commercial rate updates to reflect underlying cost growth?

Well, let me make one comment and then I'll pass to Dan. One thing that we did at the beginning or kind of March, April of 2020 is we set up our -- what I called our COVID operating model back then. We kind of established different work tracks within the company, one of which was to begin to look at longer-term savings opportunities on the theory that we were going to have to generate more efficiencies because we saw so much volume contraction in the early days of COVID.

And that involved our global business center in Manila. It involved a broader supplies and purchase services agenda, where you know, you can't turn that stuff overnight and other physician staffing contracts and other things where we've just deepened partnerships with fewer vendors. So I think you're right in the thesis behind your question.

For us, that track of work that began back in the middle of 2020 is paying dividends now in '21 and looking into '22 as we re-sign contracts or narrow our vendors with deeper partnerships at better rates. And so we're going to see the benefit of some of that longer-term cost management approach, hopefully, into '22.

Our next question comes from the line of Justin Lake with Wolfe Research.

A couple of things here. First, can you talk a little bit about the headwinds that you talked about in terms of sequestration and the Miami sale or in the hospital business? So do you think you can grow the hospital business in 2022 from an EBITDA perspective?

And then do you -- is there any other offsets to the good that you're thinking about in terms of, for instance, I know you bought some surgery centers recently that could kind of help offset that [$ 150 million] headwind.

Justin, it's Dan. Let me start off on this one. As I mentioned in my remarks, we do believe we can drive consolidated EBITDA growth next year. We're anticipating obviously managing through sequestration being implemented again as well as the loss of the Miami EBITDA. Listen, we feel very confident in the hospital's ability to continue to perform well, control costs. We have a very good visibility into pricing next year from a commercial perspective. 80% of our commercial book is already under contract.

As you've probably seen recently, we just extended our contract with Cigna. We did renegotiate a new contract with United earlier in the year. So we know where we're at from a contracting perspective and we feel really good about that. From a Medicare perspective between in- and outpatient, the rate updates are about 1% to 2%.

Listen, we're going to continue to efficiently manage the business and the focus on and capital deployment into the higher acuity service lines, will help to mitigate some of the pressures from sequestration going back into effect as well as the Miami earnings, not necessarily repeating next year.

The -- as Brett and Saum mentioned, the pipeline for the USPI ambulatory business is strong. The existing business is performing well. We feel confident in the ability to continue to drive organic growth with the net book of business. So we'll obviously share more specific detail in February next year, but that's sort of a high-level summary of how we're thinking about next year at this point.

Okay. So overall, flat to up seems reasonable in the acute business?

I'm not going to comment about guidance by segment, Justin.

Okay, got it. And then the question I've been getting this morning, you've gotten some questions on the fourth quarter. And I think it's reasonable that you're saying, we don't know that the strength of COVID and everything else is going to continue in the acute business from Q3 to Q4.

But it does seem a little bit at odds versus you're talking about and the ability to grow through almost a 5% headwind on EBITDA in your acute business. I'm talking about consolidated now.

But the -- if you're -- I guess, can you explain why you're kind of cautious on Q4 and the continuation of these trends but think that it's not going to present a tough comp and you can grow through it into 2022?

Well, here, let me -- as I mentioned earlier, here's how we looked at the guidance for the rest of the year. We outperformed in the third quarter, $100 million above the high end of our range. When we look at the fourth quarter, listen, we don't know for sure how COVID will evolve and the impact as we move into the winter season.

So as I mentioned, we're not going to declare victory quite yet and say we're going to outperform again in the hospital business by $100 million in the fourth quarter. So we increased our guidance $100 million. We feel that's appropriate at this point in time, but we feel really good about how our hospitals are performing.

Our next question comes from the line of Sarah James with Barclays.

I just want to continue on this topic. I'm trying to understand the stepdown here. So in 3Q, some of your Texas competitors like Scott Baylor, Texas Medical, shut down their elective procedures. You guys did not. Was that a contributing factor to the strength in 3Q?

And is there, I guess, any assumption that it doesn't continue in 4Q? Is that part of the stepdown?

Sarah, it's Dan. Let me start off and then Saum or Brett can weigh in. In terms of that having any significant impact on our facilities, the USPI centers in Texas are performing well and they've been performing well throughout this pandemic time period. And so was there some impact to that? There probably was some. I'm not sure how significant it was. But the USPI centers in this part of the country are doing very well.

Yes. Dan, the only thing I would add is that if you think about our -- on the USPI side, this is Brett, our overall same-store growth was up 6.8% year-over-year, and that represents 13 of our 17 markets reflecting positive case growth over prior year. And then if you dig a little bit deeper into specific markets, DFW, for example, same-store volume increased by 7%. Houston same-store volume increased by 15.2% year-over-year.

So you asked specifically about Texas, just giving you a little bit of color on how those specific markets work, which of course, 2 of our largest really -- actually our 2 largest markets in the company are performing from a growth perspective. Very solid.

Great. And then just reading into your conservatism in guidance in 4Q relating to COVID, does that have implications on what the cadence could look like for '22, so being different than '21, given the COVID pressure might be more in the first half of the year?

It's Dan. We'll have to see. That's obviously a variable, an unknown at this point. We're optimistic that we won't see quite the same type of surges, but we don't know. If you go back several months, I don't think many people thought we were going to experience the surge that we saw in the third quarter.

So that's one of the things. When we think about our guidance assumptions for next year, we obviously are taking that into consideration. As Saum mentioned, from a labor perspective, from a traveling nurse perspective, there likely will be rate pressures continuing into next year.

Yes. The other thing I'd add is I think to Dan's point, it's not just the COVID, it's -- I don't think we ever predicted this variant and how quickly it took hold and whatnot.

So obviously, there's some cost -- one would think about the winter months and be uncertain about where that goes. And then the labor market. As I indicated before, look, we view it as acuity and mix may change into '22. And we've got an operating platform that's going to manage through that. And it's the labor market and then the uncertainty around COVID that we're just thoughtful of because we did not predict delta.

(Operator Instructions) Our next question comes from the line of Josh Raskin with Nephron Research.

I got thrown off by that one question only. So USPI was impacted more by the COVID deferrals, it sounded like in the quarter, but yet you still moved from 100% of pre-pandemic levels to 101% from 2Q to 3Q. So does that mean 4Q or kind of whenever we see a cleaner quarter sort of 4Q to date so far.

Should we be expecting that number to be sort of well ahead of 100% at this point just built on that? And then is sort of thinking about the quality of that 101%, isn't that already significantly better? I feel like there's been a huge increase in acuity and mix has gotten a little bit better as well.

You're definitely right about that latter piece. I mean, at the 101% of 2019 level, with the kind of -- as I pointed out, the net revenue per case and the acuity, the growth in those areas and that mix improvement is terrific. And by the way, that's why we pointed out that despite the COVID surge, the margins continue to improve impressively at USPI. So I agree with that. I don't know, Brett, if you want to comment on the first part or...

Yes. The only thing I would add, Saum, and Josh, good to talk to you. First, it's always worth noting that going into Q4, that is obviously our busiest quarter of the year. And the midpoint of the guidance assumes 32% of our annual EBITDA in this quarter, which is very consistent with prior years. And as Saum mentioned earlier, we're very encouraged by the performance of a significant number of our markets that are in regions that opened up earlier than others.

And we believe some of those markets are an indication of the type of performance we should expect system-wide as other markets reopen to the same level. So we're very encouraged about that. And also, as you alluded to, with the continued increase in net revenue case throughout the year, we expect those trends to continue as well. That's given us comfort with the revenue projections.

Our next question comes from the line of Pito Chickering with Deutsche Bank.

I understand the fourth quarter hospital guidance, but can I ask specifically about how we should think about the, I guess, like acuity durability versus payer mix versus labor inflation for the fourth quarter? And any color on that for 2022?

And just a yes or no question, just to be super clear. Will 2022 EBITDA grow versus 2021?

Pito, it's Dan. So let me get your second question there. Will 2022 EBITDA be higher? That's what I said. We expect to grow consolidated EBITDA from '21 to '22. In terms of your first point about payer mix, acuity levels, et cetera, one of the things that's been pretty consistent this year from a payer mix perspective is the commercial trends have been positive, more positive than the aggregate overall metric. And that's obviously encouraging.

It's also attributable to the fact that some of the service lines that we've been focusing on contribute to that as well. But let's be clear, as we've mentioned many times in the past, some of the Medicare business hasn't necessarily recovered at the same levels as the commercial mix. So we obviously think about that as we move through the fourth quarter and into next year.

The overall acuity, as I mentioned, our case mix up double digits, 11% to 13%, depending on what time period you look at back to, I'm comparing that to 2019, not last year. And so we'll see. I think it's fair to say that we're not going to continue to see double-digit case mix growth in perpetuity. I mean, it's just not -- you know that. So as the lower acuity business does come back, we'll see some moderation in our overall case mix.

Our next question comes from the line of John Ransom with Raymond James.

Dan, I just wanted to understand the math on the sequester headwind next year. If I look at the proposed rule of the 2.8% increase and so plus 2.8% minus 2%, I know there's some other adjustments, but let's just say, for argument's sake, Medicare revenue next year is kind of flat-ish to maybe up 0.5%. Is that really a headwind?

Well, you have the fee-for-service rate update for us is about 1.3% overall. That's our projection. And that adds about $25 million of additional revenue just on the fee-for-service. There would be a corresponding additional lift on the [BMA] or the Medicare Advantage side too. What I was talking about, the $80 million, that's just in isolation, just related to the sequestration impact if the deferral is not extended.

Our next question comes from the line of Ralph Giacobbe with Citi.

Just quickly back to the 2022 commentary. I guess I'm a little surprised you only called out the Miami sale and sequestration headwinds. I guess what about COVID contribution and government funding, including HRSA payments and the 20% add-on? I mean, do you expect that to continue or is it just that rollover of COVID tailwinds this year essentially is going to be totally offset by non-COVID or core all the way back next year?

Ralph, it's Dan. The HRSA funding, if COVID cases continue to be there, we would certainly hope that, that funding would continue. If COVID cases drop off significantly and there's very little COVID, then presumably, you don't necessarily have those patients either because we're just getting that reimbursement for patients who present with COVID.

So we'll see. It's not definitive of whether that funding would continue or not, but we're optimistic and hopeful that it does as we move into next year.

In terms of your other point about the other COVID business, ultimately, the economics on caring for COVID patients obviously depends on the payer mix. Commercial mix is obviously more attractive from an economics perspective than uninsured or government, but we are caring for all patients. And COVID cases, there are incremental costs associated with providing that care.

Our next question comes from the line of Frank Morgan with RBC Capital Markets.

Just a clarification. You have made some comments about looking at changing how you structure your contracts with travelers or agency labor. Just curious if you could provide some more color on what that would look like and what kind of terms you would be looking for?

And then just related to that you mentioned recently negotiated contracts with both Cigna, United. Were those at a point in time where you were able to reflect in that pricing some of this wage inflation you're starting to see?

Well, this is Dan. I'll address the managed care contract negotiations or the new contracts. Listen, we were very pleased to be able to early renew our contracts with both United and Cigna this year. It gives us very good visibility into our contracting positions and service lines focus and what we believe the yield will be over the next several years as we think about how we will continue to manage the business.

I'm not going to get into specific rate increases in those particular contracts, but we were obviously -- we were pleased to wrap up those negotiations and continue to partner with those organizations.

This is Saum. To your first question, the primary example that would maybe help illustrate what I was speaking about, we've had pre pandemic, what we call the TRA, the Tenet Resource Agency, that we've invested now in building up. And what we can do with that is that there are a segment of nurses that seek, let's just call it, more stable type travel arrangements months at a time, et cetera, that we can invest in and bring on board and then deploy into our markets when we have a need.

Obviously, that helps with stability. It helps with -- in a market where the price fluctuation is high, helps to stabilize that, give us a little bit more predictability. So that would be the primary example I would give you.

Our next question comes from the line of Whit Mayo with SVB Leerink.

I got just a quick one, Dan. I just want to make sure I get these numbers right. How much have you repaid, if you want to call it that, on the accelerated payments year-to-date? And what is the expectation this year?

And then also the Baylor put call, have you funded that and is there a number that you can share? And then the last sort of piece of the question is just given some of the cash commitments, should we expect that the cash balance can grow in 2022?

Whit, it's Dan. In terms of the Medicare advances that we've repaid at this point, it's about $350 million in aggregate. And by the end of the year, as we've talked about, between the Medicare advances and paying half of the deferred payroll tax, we will have paid off this year about $650 million to $700 million between those 2 in total.

In terms of the Baylor put, we haven't provided any specifics in terms of a specific dollar amount. We'll obviously having conversations with Baylor and we'll come to certainly a mutually agreeable solution on that and totally fair value for that interest. And we do have intention to exercise 1/3 of their interest and repurchase that from them.

In terms of -- with your other question about specific cash balances next year, I'm not going to get into that. But hopefully, everyone can see that we're generating a pretty strong free cash flow from our business. We are paying back the Medicare advances and the payroll taxes that were deferred last year. But we have that cash on the balance sheet and it's already reserved for. So we would anticipate to continue to generate growth and our free cash flow.

We have time for one last question. Our last question comes from the line of Andrew Mok with UBS.

Great. Thanks for squeezing me in here. I wanted to follow up on some of the labor comments that you have made earlier. I understand that you're managing labor productivity and contract usage well, but it sounds like you're planning for higher underlying wage inflation as well. Can you speak specifically to the trends in underlying wage inflation and what level of wage increases you're expecting as you look ahead to 2022?

It's Saum. Yes, I'm not going to comment specifically. We have union negotiations and other things. I'm not going to comment specifically on those. We have -- over the course of the pandemic, we've settled over 25 different contracts, which play out into the coming years, including 2022. And over the course of the next year or 2, we'll have a few more to work through.

Look, it's -- our nurses are critically important to us. It's the reason that we've worked so diligently in those 25-plus situations to settle fairly and amicably in those contracts, and we'll continue to work towards that in other situations. There's going to be some wage inflation and some wage pressure in that segment.

And also in other clinical frontline segments, that will occur. But again, with good relationships with multiyear arrangements, we think that we can manage through that.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Well, thank you, everyone, for joining us and enjoy your day.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.