IDN offloads regional hospital assets, invests in ASCs and soars in Q1.
June 2024 – The Journal of Healthcare Contracting
Dallas-based Tenet Healthcare Corp. (NYSE: THC) reported first quarter net operating revenues of $5.37 billion, beating the consensus of $5.15 billion, and adjusted its fiscal year 2024 earnings outlook by an extra $215 million.
This while the company sold select hospital operations like two California hospitals for $550 million to Adventist Health in March and the University of California agreed to buy four hospitals from Tenet for $975 million in February. It has entered into a revenue cycle services partnership with Adventist Health.
But it’s positioned to replace the pre-tax earnings of those sold facilities and others, according to Chairman and CEO Dr. Saum Sutaria, due to its outperformance in the first quarter as well as adding multiple ambulatory surgery centers (ASCs) to its portfolio. Tenet operates in two segments – acute-care hospitals and ASCs. And ASCs are valued more highly than hospitals.
Investing in ASCs
The gross proceeds from the hospital sales helped Tenet retire billions in debt, repurchase $278 million worth of common stock and direct $450 million of capital to its ambulatory business unit, United Surgical Partners International (UPSI), which grew its net operating revenues by almost 10% year over year.
According to New York-based investment manager Steamboat Capital Partners, Tenet began selling regional hospital assets at after-tax valuations above what investors use on a pre-tax basis because it was frustrated that the market wasn’t giving enough credit for almost half of Tenet’s earnings coming from ASCs.
Dr. Sutaria says the valuations were a recognition of Tenet’s work over a half decade to focus hospitals on high-acuity procedures generating strong profits. That offers an attractive base to build an expansion upon, he said. Packaging these hospitals with surrounding complementary sites that offer low-acuity cases and direct other consumers to the hospitals has allowed Tenet to be more opportunistic with its divestitures.
Meanwhile, its subsidiary USPI is on pace to meet its goal of 575 to 600 ASCs by 2025. It added about 30 ASCs in 2023 via M&As and de novo opens, and 45 more in the first quarter of 2024. It now has interests in over 500 ASCs, and it plans to spend about $250 million in 2024 on M&As and de novo investments.
Dr. Sutaria says Tenet is in a new era with a higher proportion of its performance generated by ASCs. UPSI reported $995 million in first quarter revenue, while adding 32 service lines year to date – all while Tenet sold nine hospitals in California and South Carolina during that same quarter. The company expects to report approximately $5 billion in the second quarter and over $20 billion in full year revenues.
Is a larger trend emerging?
Large health systems like Tenet continue to realign their portfolios. Tenet was the most active in the first quarter but Quorum Health, CommonSpirit Health and Ascension each had two divestitures in the quarter, while HCA Healthcare had one. Approximately 40% of the first quarter transactions included portfolio realignments, according to Kaufman Hall.
The first quarter saw 20 announced transactions, representing the strongest first quarter for the industry since Q1 2020. But while there may be signs of industry performance stabilizing, it may not be enough to ensure long-term sustainability. Kaufman Hall reported that 40% of American hospitals continued to lose money into 2024 and the healthcare advisor anticipates continued financial headwinds to be a significant factor in M&A moving forward.
The 20 transactions featured four mega mergers including:
- Tenet’s sale of four California hospitals to UCI Health.
- New York-based Northwell Health acquiring Connecticut-based Nuvance Health.
- University of Minnesota acquiring M Health Fairview University of Minnesota Medical Center.
- Health Assurance Transformation Corp. (HATco), a subsidiary of venture capital firm General Catalyst, acquiring Summa Health System.
It’s a slow but steady climb out of the pandemic as total transactional revenue for the first quarter was near a historical high of $12 billion, driven by the four mega mergers. The 20 transactions exceeded the number of transactions in the first quarter of 2021, 2022 and 2023 and more transactions are anticipated in 2024 than in previous years.
Financial pressures will drive most transactions as many hospitals will continue to see tight margins in 2024 and about 28% of the 65 announced hospital M&As in 2023 were driven by hospitals in financial distress. Meanwhile, health systems in good financial standing could seek mergers to stay competitive in the changing landscape.