Good morning. Welcome to Tenet Healthcare's Second Quarter 2024 Earnings Conference Call. After the speaker remarks, there will be a question-and-answer session for industry analysts. [Operator Instructions] Tenet respectfully asks that analysts limit themselves to one question each. I'll now turn the call over to your host, Mr. Will McDowell, Vice President of Investor Relations. Mr. McDowell, you may begin.

Good morning everyone and thank you for joining today's call. I am Will McDowell, Vice President of Investor Relations. We're pleased to have you join us for a discussion of Tenet's second quarter 2024 results, as well as a discussion of our financial outlook. Tenet's senior management participating in today's call will be Dr. Saum Sutaria, Chairman and Chief Executive Officer; and Sun Park, Executive Vice President and Chief Financial Officer. Our webcast this morning includes a slide presentation, which has been posted to the Investor Relations section of our Web site, tenethealth.com. Listeners to this call are advised that certain statements made during our discussion today are forward-looking and represent management's expectations based on currently available information. Actual results and plans could differ materially. Tenet is under no obligation to update any forward-looking statements based on subsequent information. Investors should take note of the cautionary statement slide included in today's presentation, as well as the risk factors discussed in our most recent Form 10-K and other filings with the Securities and Exchange Commission. And with that, I'll turn the call over to Saum.

Thank you, Will, and good morning everyone. Our second quarter performance exceeded our expectations, and extends our track record of consistently strong operating results, driven by fundamental growth and disciplined operations. In the second quarter, we reported net operating revenues of $5.1 billion, consolidated adjusted EBITDA was $945 million, representing growth of 12% over second quarter 2023, with an adjusted EBITDA margin of 18.5%. USPI produced another very strong quarter, with $447 million in adjusted EBITDA, representing 21% growth over second quarter 2023. Same-facility revenues grew 7.1%, and adjusted EBITDA margins remain robust. Orthopedic volumes were strong, with total joint replacements in the ASCs up 23% over prior year, coupled with ongoing growth in urology and GI procedures. Acuity and payer mix were strong. During the quarter, we expanded our reach by adding 11 new centers, including a new partnership with the Florida Orthopedic Institute in three surgery centers that perform over 15,000 cases annually. You may recall that we acquired a larger number of centers in the first quarter of this year. The integration of those centers is on track, and the operating performance of the acquired centers has been in line with our expectations. We continue to be pleased with USPI's de novo development activity with nearly 25 centers currently in syndication stages or under construction. Turning to our Hospital segment, adjusted EBITDA was $498 million in the second quarter of 2024. Same-store hospital admissions grew 5.2% as we are taking advantage of a strong utilization environment by opening up capacity. Second quarter 2024 revenue per adjusted admission was up 5.7% over the prior year, reflecting continued strength in acuity and payer mix. Cost control was excellent. We're making significant investments to expand our network to support growth in our markets. Soon, we will open our new hospital…

Thank you, Saum, and good morning, everyone. Our results in the second quarter continued a positive start to the year with adjusted EBITDA coming in well above our guidance range. In the second quarter, we generated total net operating revenues of $5.1 billion and consolidated adjusted EBITDA of $945 million, a 12% increase over second quarter of 2023. These results were driven by strong same-store revenues, continued high patient acuity, favorable payer mix and effective cost controls. I would like to highlight some key items for each of our segments beginning with USPI which again delivered strong operating results in the second quarter. USPI's second quarter adjusted EBITDA grew 21% over last year, with adjusted EBITDA margin at 39.2%. On a same facility system-wide basis, USPI delivered a 7.1% increase in revenues over last year, with net revenue per case up 6.8%, driven by high levels of acuity. Surgical case volume grew slightly as well in line with our expectations. Turning now to our Hospital segment, second quarter hospital adjusted EBITDA grew 5.3% with adjusted EBITDA margins up 120 basis points over last year at 12.6. Same hospital inpatient admissions increased 5.2% and revenue per adjusted admissions grew 5.7%. Again, demonstrating favorable pair and mix and continued high acuity levels. Our consolidated salary, wages and benefits were 42.5% of net revenues in the second quarter. And our consolidated contract labor expense was 2.6% of SWB, both substantially lower than the 45% and the 4.3% respectively that we had in second quarter 2023. Our second quarter results also include a favorable adjustment of $30 million from additional Medicaid supplemental revenues in Texas related to prior years. Our USPI and hospital segments continue to deliver outstanding performance in the second quarter, reflecting strong fundamental same-store revenue growth and disciplined expense management. Next,…

Thank you. At this time we'll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Brian Tanquilut with Jefferies. Please proceed with your question.

Hey, good morning, guys, and congrats on a solid quarter. I guess my question, as I think about the ASC revenue per -- the revenue adjustment on the same-store side and looking at your adjustment as well on surgical case volume, how should we be thinking about that, is that mostly acuity-driven? And then, maybe as a follow-up to that, how do you think about the runway left to expand joint replacements, 23% growth this quarter, what's the runway there? Thank you.

Hey, Brian, thanks, and appreciate it. On the net revenue per case, yes, I would think of that as a combination of acuity and mix. I mean, a lot of it, obviously as we build higher acuity activity into the ASC portfolio, both in some of the standard service lines by expanding or increasing the range of procedures we perform there, and then obviously in newer segments, like orthopedics, cardiac, urology, et cetera, robotics, you see that type of increase. And the mix has been strong. So, both of those in combination give us a lot of optimism about the ability to sustain net revenue per case increases over prior year. The ASCs are quite busy. Last year was an incredibly busy year. This year is a very busy year from that perspective. But the acuity continuing to increase is a good fundamental marker of strength. I've said this before, my view on the orthopedics area is it is the number one growth vector in this segment for the next, could be five to seven, 10 years. I mean there's just so much more that can be done in expanding the market, but also hospital outpatient-based work that moves into a freestanding setting. So, it's a combination of the two. That's how it's always been in the ambulatory surgery environment. First, you get migration, then you get market expansion with more qualified patients who choose to go into a simpler, cheaper, easier service setting. And I think both of those things will provide a tailwind. So, I continue to believe that the orthopedics arena will dwarf all of the other service opportunities in this area over the next five years.

Thanks, Saum.

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

Great. Thank you, good morning. I just want to ask about supplemental payments. Can you remind us how many states currently have programs, and maybe what is the opportunity, going forward, for states that might not have programs to introduce program or maybe existing states that actually have programs that could have potential for enhancements? Thanks.

Hey, Ann. Thanks for your question. Six of our current hospital markets participate in supplemental programs. And as we all have seen, there is discussions around potential expansions that hopefully will come through pending final approval. I think in your second question about potential enhancements, I would use, obviously, Michigan as a good example. For a long time, Michigan, while participating in the supplemental programs, was under-reimbursing providers for the important accidental care that we provide to this population. Over a long period of effort and lobbying and coordination with the payers, we were finally able to, as you know, this year get approved a enhancement to the HRA program. And that made a significant impact to our economics in that market. Now, as I think Saum had mentioned before, that enhancement this year basically takes us up to an acceptable for average reimbursement rate for the Medicaid population, or a sustainable piece, which enables us to invest in the market going forward which enables us to continue these important services. So, I think that's kind of where we are. Now in terms of other states, I think we feel good about the sustainability of these programs. There's a good mix of, if you will, red and blue states that are providing these programs to, again, support the important access that we provide. So, I think this is a very positive and sustainable piece for the providers.

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

Thanks. Good morning. Wanted to ask about the hospital business, how did it look relative to your estimates in the second quarter or your expectations, I should say, relative to the -- in the second quarter ex of $30 million of unexpected tech, I think with the Florida payment or Texas payment? And looking at the back-half of the year, your implied guidance for the third quarter seems to be about $500 million, which might be up about 25% ex divestitures in the hospital business. Obviously you took up your hospital expectations. Just curious as to what's driving that strong second-half performance, given, by at least my estimates, the second quarter was generally in line ex that $30 million? Thanks.

Yes. Hey, Justin, it's Saum. Look, I think fundamentally, at least you asked relative to our own expectations. The second quarter ex Texas was still strong and above our expectations, and mostly on the basis of strong volumes, success in opening up capacity that we choose to start to open up in the early part of the year, and also really, really good cost control. If you look at it, contract labor was strong. Overall SWB was strong. We felt very good about our supply expenses. And where the supply expenses increased, it was all on the basis of acuity and volume. So, just the fundamentals look very clean. And we still think that, given the mix and the demand that we're seeing, we have the opportunity to build over the course of this year. So, we felt like the guidance that we put forward for the rest of the year should reflect that optimism as we look forward. Every month has been different in the first-half of the year, some months stronger than others, and that's okay. But in totality, the strength in the Hospital segment has been significant. So, when we look at the second-half of the year, we recognized that an individual month may go one way or another, but in totality we feel optimism about the demand that we see, our ability to service it at a very efficient or a good cost structure, and the mix.

Okay.

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

Hey, thanks. Saum, any way to quantify the capacity additions that you guys are adding? You have enough, Saum, as you said. Now you're kind of setting that up. Is it contributing to the growth now? I presume not. And just any way to maybe quantify the number of beds, units, anything to help us think about the amount of capacity that you're going to be adding? Thanks.

Yes. No, Whit, it's a good question. And we haven't done that in the past, partially because for us, the capacity openings tend to be selective in markets that were as we have a diversity of markets that have been lagging a bit in recovery from a COVID perspective. But I would say that if you look at our volumes, this quarter, this past quarter, capacity expansion that we undertook from the first quarter got it staffed up appropriately. Initially, you typically staff these things with a little bit of contract labor and move to permanent labor worked effectively. And so, we're continuing to make those investments in order to support the back half.

Maybe just to follow-up on that, as you think about turning these services back, how different are the service lines today versus what you turned off with COVID? Thanks.

Yes. Actually, most of the service line expansion recovery, however you want to look at it, is less about reinstating things that we may have closed prior. It's more about increasing demand in the areas that we already chose to serve. I mean, decisions that we made to exit service lines, we're not going to revisit those unless there's some more fundamental change in the market. Decisions we made to deemphasize certain things or capacity in favor of acuity or focused acuity are certainly things that we would look at expanding. And so, when you look at the nature of some of that capacity expansion, it tends to be more Med Surg because we feel like we can adequately staff the ICUs, the trauma, the elective higher end surgery effectively and still be able to hire and retain effectively staff to expand in that Med Surg arena. And so, it is oftentimes servicing the same area that we would have been servicing, plus obviously opening up capacity for more throughput in general, Med Surg.

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

Hey, good morning. And I never thought I'd say Tenet with 3.3 turns of leverage. I thought that was going to happen after they fired me years from now. So, congratulations on the rep at deleveraging. My question just if we step back and take the long-term view of the ASC division, the volume numbers have kind of bounced around a little bit for a lot of reasons, mix shift and some decisions you guys have made. But as you look in the out years, what's a good number as we think about sort of the steady state ASC volume growth? Thanks.

Yes. Thanks, John. And appreciate the point on the leverage. And I think probably it's a good thing for me too that we've delevered the company. So, look, our algorithm on the ASC organic growth volumes of long-term 1% to 3% is right. I mean, 2% to 3% is right. This year, obviously, we had started the year 1% to 3% because of the incredible comp from last year, which was multiples above normal. And this is the thing about the ASC business, which is again, if you go back and look and we've done this very carefully over the last 10 to 15 years, both pre and post Tenet being a participant with USPI, the volumes can be lumpy. There are years, where the growth is significantly outperforms the typical range and then there are years where it's at or below the lower end of the range. But from a long-term perspective, it's an incredibly consistent business. And I think the reason for that is the fundamental tailwind of demand of moving things into a lower cost setting in the better service environment that you see there. And the drivers ultimately of that expansion are the ability of course to take what are often single specialty centers that start with more capacity than they need for that specialty and then get them into a hands of a USPI that has expertise and making single specialty centers, multispecialty or taking single specialty and expanding with appropriate clinical protocols via acuity that can be performed in those centers. And so there's a management competency there that's important. And then, of course, as centers mature, the ability to be ahead of the challenge of recruiting and refreshing the medical staff in advance of potential volume declines as all centers mature and being able to renew their kind of ability to build and grow with a new and diversified medical staff. And USPI is really, really good at both of those things. And so, that's why I think we feel good about the long-term volume algorithm at USPI. Obviously, when you couple that with the fact that the reimbursement trends in this area tend to be favorable, regulatory trends increasing the number of procedures that are appropriate for an ASC tend to be favorable, you get more confident in the revenue growth range that we put forward from a USPI standpoint. And then, of course, it's all about cost control and just maintaining the margin profile that we have. And so, then the EBITDA guidance in that range becomes more predictable over a longer period of time. So, long way to maybe say the growth algorithm in this segment, I think, is actually more predictable over the long-term than it is in other health care service segments.

Thanks for that. And then, just as a follow-up, I mean, SCD, long time ago, there were some short-term challenges, you had a lot of de novo sites, you had a lot of recent indications you had to do. Is all of that in the rearview mirror and the de novo sites that you thought you had, did that pan out in terms of opportunity that ended up being bigger or smaller?

The SCD portfolio, in particular, again, it goes back this kind of tailwind in Orthopedics, we feel good about. I would say this, it's sort of it's kind of we don't think about SCD USPI anymore. I mean, it's within our markets. The assets have been distributed into our geographic management model fully with our field operators. So, it's not like there's a separate segment or a separate management team or a separate recruiting pipeline or anything like that. And that we've done more buy ups. I mean, we've stopped sort of reporting on it, so we feel good about the way that that's been integrated. On the de novo piece, that's a good reminder. We should update on that in the future. Yes, we have had de novo centers that have come through that pipeline. I don't know that it's been an average of 10 per year, which is what we estimated before. But I don't think it's been that far from that. We're in the third year, I believe of this arrangement. And we'll update on that more specifically in the future if that's of interest.

[Operator Instructions] Our next question comes from Kevin Fischbeck with Bank of America. Please proceed with your question. Kevin, are you muted? You're live with the speaker.

Sorry about that.

It's okay.

Yes, I was wondering if you could provide some color on your volume outlook. I guess first on the hospital side, you're taking up the inpatient volume number, but not the adjusted admission number. Usually we think about outpatient volume growing at least as well as inpatient volume. So, just trying to understand, obviously, you've outperformed so far year-to-date in that direction, but just trying to understand the drivers to that. And then, second, the lower USPI volume outlook, could you just provide a little more color about what is driving that? Is that just decisions about service lines or is there something else going on driving that? Thanks.

Yes. Let me maybe I'll start with the first and you want to take the second. So, I mean, on the second and we'll come back to the first. Look, as I said, the ASCs are incredibly busy. I mean, last year was a very busy year in the ASCs and in some cases really pushing the envelope on volumes that these ASCs have seen before and we're kind of tracking in that same area. We always thought the volume would build a little bit as the year went on this year, given just given the nature of the comps and the kind of volumes. And we are always cognizant of the fact that ASCs are designed to stretch. That's what the fourth quarter is defined by, right? So our view is even if it may feel busy, you always can figure out how to stretch them given we always do that in every fourth quarter, that we see. I think what's playing out in the ASC industry this year is after a really strong year of recovery, and there was last year, of course, some one-time recovery work that happened, the actual organic growth is just making up for that one-time recovery. And so, we're seeing new cases, new patients, new doctors perform activity in the ASCs. It's replacing some of that one-time growth from the prior year. And therefore, the total numbers are just sort of growing very slowly over prior year. But the ASCs are incredibly busy. And if you look at the margins, they're busy at a level where the operating leverage is actually creating very, very strong margins. The business doesn't have a lot of fixed costs at the center level. And so, when there's that type of throughput, the margins look really good. And they do all this year, which is why we, again, feel good about it. Our recruiting activity that I just described feels strong. And so, again, we think about this long-term and getting back to a normal growth algorithm over the coming year and potentially into next year. So, that's really how I would describe the ASCs. Look, changing the volume guidance at USPI, it's simply a recognition of math. I don't think it's anything more than that, no differently than us taking up the acuity and mix impact in the net revenue per case. The volume and revenue per case guidance still translates into really strong overall revenue guidance. And so, we feel pretty good about that.

Thanks, Saum. And Kevin, on your questions about the hospital piece, so on the inpatient admissions, yes, I mean, we saw 4.2% and 5.2% admissions growth in Q1 and Q2 of this year, respectively. Plus, we are seeing a, again, like we said, a favorable utilization environment. We're working hard to selectively open up capacity and invest. So, all those things, I think we thought it was appropriate to bring up our inpatient admission output for the year up to 3% to 4%. On the adjusted admissions piece, that's where it gets a little bit less predictable with the mix of in and out patient, when we look at our Q1 and Q2 trends, we're in the 1.8% and 2.4% levels for the first two quarters. So, we thought, based on current data, it's appropriate to stay at our 1.3 to -- 1% to 3% range. So, again, it sounds a little bit kind of data and trend driven.

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

Hi, thanks. Good morning. What percentage of revenues for both segments come from patients with exchange-based coverage? And should we assume those patients are generating margins, somewhere between what you earn on a typical commercial or Medicare, maybe even slightly closer to commercial?

So, hey, Josh, it's Sun. I think on the hospital side, what I can tell you is that, we are seeing, continue to see admissions growth on exchange. So, this year, it's about, this quarter, excuse me, is up 62% on exchange admissions. From a revenue perspective, what I have for you here is about 6.5% of hospital revenues is from exchange as a percent of our total consolidated revenues. We can do some algebra and get back to you on what it may be for the hospital side, but hopefully that piece still -- that piece helps. On the USPI side, I mean, I think the increase in exchange volume is there as well, but not as pronounced as it is in the hospitals. And I -- we'll have to get back to you on the revenue proportion in the USPI space.

And margins?

And margins, I think that's, I think it's fair, it's favorable than government-paid programs, obviously. I think what we've said is it's close or comparable, obviously, a little bit less to our book of commercial paired business.

Yes. I mean, the overall exchange acuity is also important, to know. I mean, the exchange volume is up. Overall exchange acuity tends to be lower than, for example, Medicare, but that's probably not surprising to you, but obviously margins are a combination of the revenue contracted rate and the acuity.

Understood. Thanks.

Thanks.

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

Hi, everybody. Thanks. Maybe one point of clarification, and then the broader question, the $300 million raise for the year versus first quarter guidance, how much of that is what you've seen year-to-date? And in your mind, how much are you raising your expectations for the back half of the year? And then my more business question would be on managed care pricing. I know we've been in this period where I think you were getting a little bump or at least toward the higher end of historic trend as they were compensating you for maybe some of the labor pressures and not just you, but the industry. Where are we at in those discussions? Do we have one more year? How much visibility do you have on 2025 at this point in your contract negotiations in the rest of this year, if you could give us some thoughts there?

Yes. Thanks, A.J. So, look on the first point it's a niche comment in more detail. Obviously, as we thought about our guidance and similar to my comments in the first quarter, you kind of have to take the first and second quarter raises together because some of the first quarter raise obviously was forward-looking and not what was booked for the first quarter and the out-of-period increases. So, we can answer the question for the second quarter raise, but from our perspective, you kind of have to take -- and I realize that we've complicated the situation in hopes of in some ways making it clear by separating our guidance raises from first quarter being mostly related to booked and ongoing changes in supplemental payments and then now more cleanly addressing the fundamental outperformance of our business in the second quarter. But both of them had forward-looking components. So, I'll pass that. Just on the managed care, I'll pass that over for more detail in a second. On the managed care side, yes, you're right about that. I mean, I think that -- I would just characterize that, generally speaking, contract negotiations have more or less normalized in terms of the way in which they're working and discussing. I mean, there isn't really as much discussion about highly acute inflation. That being said, contracts that haven't been renegotiated over the last few years, we're still very much in discussions about, the opportunity to catch up, if you will, from what's happened in the last few years from an inflationary perspective.

And just to provide a little more detail on the first piece, A.J., on the $300 million estimating guidance increase, about $200 million I would view as performance in first-half. And then, the $100 million would be projecting that out into the second-half. And then, as Saum said, when we raised guidance in the prior quarter, a big component of that was from our Medicaid HRA payments. If you recall, we raised guidance on that by $209 million, but $88 million of that was recognized in Q1. Some of that was for prior period, but recognized in Q1. And then, the remainder, of that was expected to come through in, Q -- quarter second to the fourth. So, those are the different pieces. Yes.

Thanks.

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

Hi, good morning. Through the first-half of the year, there's a pretty wide spread between your inpatient surgical growth up 4% and hospital outpatient surgical growth down 3%. So, just curious what's driving that spread. I don't think there was anything unusual going on from a comp perspective, but would love more color there. Thanks.

Yes. So, a couple things, I mean, one is, obviously inpatient surgical tends to reflect some of the acuity, both emergent and elective acuity in the programs that we've been focused on building. And so, I would think of it as no more than that. And the inpatient surgical takes up OR capacity, obviously, significantly, and so, for us, obviously, outpatient -- hospital outpatient surgeries, as we've talked about in a more general sense, also have this kind of trend of moving into the freestanding setting, right? And so you got both dynamics going on at the same time.

Is that shift in the outpatient setting accelerating, or is it pretty steady from your perspective?

I don't know if it's accelerating. I mean, we noticed it too. I mean, it's hard to say it's a long-term trend right now in terms of what's going on, especially because you have the confounding aspect of the mix shift, right? I mean, Medicare and Medicare advantage utilization is up. Obviously, the commercial side is strong. The exchange side is even stronger as a subset of the commercial book, et cetera. So, there's a significant payer shift. Medicaid is down a bit. And so, there's a, there's a mix shift going on that confounds it. So, I don't want to draw any long-term conclusions yet on the basis of what we've seen.

Got it. Thanks for all the color.

Our next question comes from Pito Chickering with Deutsche Bank. Please proceed with your question.

Hey, good morning. Thanks for taking my question. Another question on ASC volumes, can you talk a little more about urology and potential for that to provide a multi-year tailwind as robotic procedures move out of the hospital and ASC? And on the other side, can you talk about the interplay between the weaker areas like pain and ophthalmology, or are there other areas that we should be thinking about from a sort of case headwind? And when did this segment stop being a headwind to cervical volumes and ASC?

Yes. Well, a couple of things. I mean, I think, in terms of urology, this is a specialty where it has largely been divided by acute care hospitals and in-office procedures. And so, we're in very early innings of, and really being driven by innovative urologists and their organized groups looking to move some of those surgical procedures into a more freestanding, convenient setting, and our work in that arena, accelerating it by providing good ASC management of higher acuity procedures as part of what they're doing. And so, I think there's a lot of room for not only growth, but also expansion of the range of services that can be offered in the ambulatory surgery setting. You're right, robotics and other things will increasingly be a part of that. And, one of the things, right now we're doing a lot of this work mostly on a single specialty basis in the ASCs. Over time as it grows and penetrates into the marketplace in the next three to five years, I suspect that you'll see it in multi-specialty centers too. But right now, the efficiencies that come from piloting these programs in single specialty centers, seems to make a lot more sense. The ophthalmology business actually these days is strong, partially because of recovery of utilization. It's just not as strong as certain other areas. And remember, with pain procedures, it's not about eliminating pain procedures from the environment. It is about changing the mix to include more invasive and higher acuity type of pain procedures in the ASC setting, so that there's a diverse range of procedures, many of which requires sedation and operating room time and other things versus what could be done in another environment. And so, I don't think that headwind, so to speak, goes away anytime soon because there's a nice mix that exists today. And, we've been focused on trying to either diversify or selectively upscale our acuity in certain places where all we had was low acuity pain. And with the idea that if we weren't able to diversify or move up the acuity chain, we were better off moving up the acuity chain in different service lines. And that's, again, as I said in the past, we will do that in a more measured fashion over time at this stage.

Our next question comes from Jason Cassorla with Citi. Please proceed with your question.

Great. Thanks. Good morning. Maybe a couple more on USPI, I mean, first, you've done a number of acquisitions over the past few years, the 45 earlier this year, the STD transactions and others, the de novo activity that's ramping. Can you maybe help frame the USPI facility mix between the centers that you would consider are running at a fully mature run rate compared to maybe more immature centers that have a bit more EBITDA maturation to be had? And then maybe just as a follow-up, can you just remind us what percent of USPI facilities are in a partnership with an external hospital and maybe just what the pipeline or outlook is for incremental hospital partnerships down the line? Thanks.

Yes. So, I mean both of these areas, I would say, make a few higher level comments. I mean, first of all, our recent M&A including in the first quarter, the objective is always to get these centers fully incorporated into the USPI operating platform integrated with the Tenet systems, supplies, managed care, et cetera, as quickly as possible because you want them to operate under the USPI management framework, which is very effective. So, again, we're not looking to keep them in separate segments from that perspective. Even one-off acquisitions, I mean, we have a separate and disciplined integration process from that perspective. De novos, of course, you have the runway to start them out in setting up the framework over the 18 months that they're built and put them straight into the USPI, straight into the USPI platform. In terms of the percentage of centers that are running at full capacity or not, we don't really disclose that. As I said, my philosophy is the fourth quarter's reminder that you can always stretch the capacity of an ASC for incremental doctors and incremental cases as long as they're performed at high quality with good patient safety. And so, even if we feel busy during the year, again, we remind ourselves that we managed to stretch in the fourth quarter and therefore there's room in these things for growth. A lot of times, it's the nature of the partnership, single versus multispecialty, the different technologies that are needed, expansion of operating room capacity for different types of procedures, nursing capacity that limits instantaneous ability to expand from a growth standpoint.

And Jason, just on the mix with hospital partners, it's around 30% to 40%.

Okay. Our next question comes from Sarah James with Cantor Fitzgerald. Please proceed with your question.

Thank you. Inpatient admissions are running above historical average. How do you think about the sustainability of that? And maybe you can help us with orders of magnitude on the drivers between share gain and growing catchment area versus two midnight, the temporary utilization management suspension by United or capacity increases? Thanks.

Yes, well, I think inpatient utilization is building and growing, primarily because of two fundamental things in the marketplace. One is just the consistent growth in the aging population and especially with respect to those that have chronic diseases. I mean, that trend hasn't stopped. And it's a fundamental tailwind for the hospital sector in my belief, at least into the early part of the next decade, if you just look at the demographics. And then, you have the second issue, which it's kind of the unfortunate consequence that happened with COVID where you had a million premature deaths that actuarially would have in their last five years of life, most of those people would have ended up succumbing to some other disease over a five year period, but they all died up front. And the number is probably even larger than that. And so, what's happening is, I think every year you have more people aging into that, "That last five years of life." So, you would just naturally expect five years of recovery after the beginning of COVID. I mean, that's just mathematically and actuarially seems pretty simple to me to understand. It's a question of how you then as a provider manage your physician, staffing physical capacity in order to service that demand. And I think that's what we're seeing right now. I don't see the utilization dropping over time. I just see it kind of reaching steady state at some point. And then, we build from there mostly just on the population growth side. I do think that there are a few things that are outsized effects currently. And that's primarily, in my view, driven by Medicaid redetermination. And the impact of that Medicaid down, exchange up from a volume perspective, I'm not sure I could quantify it perfectly is less profound than from an earnings perspective because obviously, the reimbursement rates on the exchange book in that conversion are more attractive than what you would have seen on the Medicaid side. And so, it's helping, obviously, improve the earnings profile in the acute care hospitals. We see less of this whole effect, by the way, at USPI. And again, that goes back to why we believe the diversification of our business units. I mean, it was -- I'm purposely looking ahead and frankly looking at the uncertainty in the environment, political and regulatory. I like the diversification of the business units because, the ability to figure out a way to succeed in almost any environment in the next three years, four years, is something we're going to have to figure out how to do.

Thank you.

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

Yes, hey, thanks for fitting in. Just another question on the hospital capacity commentary you're making. Especially when you think about the potential margin impact of the capacity coming back online, it sounds like maybe it's higher acuity capacity than maybe what you idled during COVID. Is that something that comes back online as margin additive, or is it a bit of a drag as you kind of ramp it up and make investments? I just wonder how you think about that. Thanks.

Yes, well, two things. Additional capacity that we bring online, given our ability to manage cost on a marginal basis, we're not going to do it if it's not margin accretive. That being said, in the early phases, months of opening up new capacity, especially if you have to do it, you start out with contract labor and other things until you ultimately recruit and staff up your unit. The margins can grow over time, to where you want them to be, as opposed to what you do instantly. But it's generally not the case that we're saying, oh, let's go find some totally margin diluted, margin negative service and figure out how we might ultimately flip that. And that, again, that's our degree of confidence and whatnot in what we're doing around these service lines in terms of how we think about them, but that's generally our algorithm, is we like to see the incremental volume produce at least a contribution margin up front. I will repeat, I am not, we are not chasing, mimicking 2019. It's not even part of our algorithm to think that way in the acute care business. We have deliberately and permanently shifted our mix in certain ways in our acute care portfolio, and the revenue and margin profile that we're generating suggests that has been a good decision, at least for Tenet's acute care hospital portfolio.

Our next question comes from [Michael Hoff] (ph) with Baird. Please proceed with your question.

Thank you. So, as I think about your first-half margin performance, arguably one of the strongest first-half margin performances in the company's history, if I'm not mistaken, I looked across your metrics, it seems like there's still room to get back to pre-COVID levels on hospital occupancy and average length of stay, which optically, to me appears to provide more line of sight to maybe sustain strength of performance going forward. So, my question specifically in occupancy levels, one of your peers has reached near mid-70s, and as I think about where a tenant is around 50%, how should we think about the directional view of this moving over time? Is there a path to 60s or 70s, and what's necessary to happen in order to accomplish this? And I know you've mentioned adding capacity, but curious to specifically hear your thoughts on occupancy level. Thank you.

Yes, well, I think there's a few things. First of all, I'm not sure those statistics are truly apples-to-apples in the way that we each may define them in terms of how we think about our capacity. I would say that given that our collection of markets, market dynamics and mix are different also than the peer that you reference, we probably take a more measured view of capacity and service lines that we're going to participate in. And so, in some markets, our capacity utilization will be higher than in other markets. So, that's generally how I would answer the question. I will say that as a macro point, we do internally, as we've made so many different changes and improvements in our acute care segment over the last five years in terms of what we've been doing, both strategically, operationally, and how we deploy capital, we definitely take notice of the fact that in this industry, the gold standard here and the way in which they manage capacity, capacity utilization in particular, is a gap between what we have been able to achieve at Tenet and otherwise. And so, that is a constant source of discussion and opportunity for us. So, don't take the comments in the beginning to mean, we're looking for structurally different numbers. I don't know that they're apples-to-apples, but at the same time, we are very cognizant of the fact that we have improvement opportunity, just like we've made improvement opportunities come to fruition in other areas relative to the gold standard peer here in cost control, supply control, et cetera, et cetera.

We have reached the end of the question-and-answer session, and this concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.